10-Q 1 cplg-10q_20180930.htm 10-Q cplg-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-38168

 

CorePoint Lodging Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

82-1497742

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

909 Hidden Ridge, Suite 600

Irving, Texas 75038

(Address of principal executive offices) (Zip Code)

(972) 893-3199

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth Company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The registrant had outstanding 59,652,070 shares of Common Stock, par value $0.01 per share as of November 2, 2018.

 

 

 

 

 


 

 

COREPOINT LODGING INC.

FORM 10-Q TABLE OF CONTENTS

FOR THE PERIOD ENDED SEPTEMBER 30, 2018

 

 

 


 


 

 

BASIS OF PRESENTATION

 

On May 30, 2018, La Quinta Holdings Inc. (“LQH Parent” and, together with its consolidated subsidiaries, “LQH”) completed the distribution to its stockholders of all the then-outstanding shares of common stock of CorePoint Lodging Inc. (“CorePoint Parent” and, together with its consolidated subsidiaries, “CorePoint Lodging”), previously a wholly owned subsidiary of LQH Parent, following which CorePoint Parent became an independent, self-administered, publicly traded company. The shares of common stock of CorePoint Parent were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), pursuant to a Registration Statement on Form 10 (the “Form 10”) of CorePoint Parent which the Securities and Exchange Commission (the “SEC”) declared effective on May 8, 2018. As part of the separation, LQH underwent an internal reorganization, after which it completed the separation by distributing all of the then-outstanding shares of CorePoint Parent common stock on a pro rata basis to the holders of LQH Parent common stock in a taxable transaction. We refer to this pro rata distribution as the “Distribution” and we refer to the separation, including the internal reorganization and Distribution, as the “Spin-Off.”

 

Unless otherwise indicated or the context otherwise requires, reference in this Quarterly Report on Form 10-Q to:

 

 

“CorePoint Lodging,” “CorePoint,” “we,” “our,” “us” and the “Company” refer to CorePoint Lodging Inc. and its consolidated subsidiaries, and references to “CorePoint Parent” refer only to CorePoint Lodging Inc., exclusive of its subsidiaries, in each case, after giving effect to the Spin-Off, including the internal reorganization and Distribution;

 

 

“LQH” refers to La Quinta Holdings Inc. and its consolidated subsidiaries and references to “LQH Parent” refer only to La Quinta Holdings Inc., exclusive of its subsidiaries, in each case before giving effect to the Spin-Off; and

 

 

“La Quinta” refers to La Quinta Holdings Inc. and its consolidated subsidiaries, and references to “La Quinta Parent” refer only to La Quinta Holdings Inc., exclusive of its subsidiaries, in each case after giving effect to the Spin-Off, including the internal reorganization and Distribution.

 

1


 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act, which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Risk Factors” in the Company’s Information Statement (the “Information Statement”) included as Exhibit 99.1 to the Form 10 filed with the SEC on May 7, 2018, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

 

risks related to the Spin-Off and the merger of LQH’s management and franchise business with Wyndham Worldwide Corporation (“Wyndham Worldwide”);

 

business and financial risks inherent to the lodging industry;

 

macroeconomic and other factors beyond our control can adversely affect and reduce lodging demand;

 

contraction in the global economy or low levels of economic growth;

 

the geographic concentration of our hotels;

 

inability to compete effectively;

 

our concentration in the La Quinta brand and any deterioration in the quality or reputation of the La Quinta brand or our relationship with the La Quinta brand;

 

our dependence on the performance of La Quinta and other third-party hotel managers;

 

covenants in our hotel franchise and management agreements that limit or restrict the sale of our hotels or impose brand standards;

 

inability to maintain good relationships with La Quinta and other third-party hotel managers and franchisors;

 

delays or increased expense relating to our efforts to renovate, develop or redevelop our hotels;

 

seasonal and cyclical volatility in the lodging industry;

 

effect of severe weather, natural disasters, or other events resulting in property damage or disruption of hotel operations;

 

decreases in revenue without corresponding decreases in expenses;

 

the capital intensive nature of our business;

 

risks resulting from significant investments in real estate;

 

risks posed by our acquisition, redevelopment, repositioning, renovation and re-branding activities, as well as our disposition activities;

 

required capital expenditures and costs associated with, or failure to maintain brand standards;

 

the loss of a brand license at one or more of our hotels;

 

cyber threats and the risk of data breaches or disruptions of our hotel franchisors’, managers’ or our own information technology systems;

 

the growth of internet reservation channels;

2


 

 

 

disruptions to the functioning or transition of the La Quinta reservation system or other technology programs;

 

the cessation, reduction or taxation of program benefits of La Quinta’s Returns loyalty program or our access to it;

 

risks of having a number of our hotels subject to ground leases;

 

unknown or contingent liabilities related to the hotels we may acquire in the future;

 

disruptions to our ability to access capital at times and on terms reasonably acceptable to us;

 

the loss of senior executives;

 

risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor;

 

the results of the audits by the Internal Revenue Service;

 

our substantial indebtedness and related covenant restrictions limiting new indebtedness;

 

risks related to qualifying and maintaining our qualifications as a real estate investment trust (“REIT”); and

 

the significant influence of affiliates of The Blackstone Group L.P. over us.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

 


3


 

 

CorePoint Lodging Inc.

Condensed Consolidated Balance Sheets (Unaudited)

As of September 30, 2018 and December 31, 2017

(in millions, except share data)

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Real estate

 

 

 

 

 

 

 

 

Land

 

$

738

 

 

$

739

 

Buildings and improvements

 

 

2,794

 

 

 

2,706

 

Furniture, fixtures, and other equipment

 

 

382

 

 

 

363

 

Gross operating real estate

 

 

3,914

 

 

 

3,808

 

Less accumulated depreciation

 

 

(1,529

)

 

 

(1,425

)

Net operating real estate

 

 

2,385

 

 

 

2,383

 

Construction in progress

 

 

75

 

 

 

75

 

Total real estate, net

 

 

2,460

 

 

 

2,458

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

64

 

 

 

141

 

Accounts receivable, net

 

 

42

 

 

 

42

 

Other assets

 

 

51

 

 

 

32

 

Assets from discontinued operations

 

 

 

 

 

280

 

Total Assets

 

$

2,617

 

 

$

2,953

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Debt, net

 

$

1,010

 

 

$

992

 

Mandatorily redeemable preferred shares

 

 

15

 

 

 

 

Accounts payable and accrued expenses

 

 

94

 

 

 

65

 

Other liabilities

 

 

6

 

 

 

9

 

Deferred tax liabilities

 

 

 

 

 

213

 

Dividends Payable

 

 

12

 

 

 

 

Liabilities from discontinued operations

 

 

 

 

 

846

 

Total Liabilities

 

 

1,137

 

 

 

2,125

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred Stock, $0.01 par value; 50.0 million and 100.0 million shares authorized as of September 30, 2018 and December 31, 2017, respectively; 15.0 thousand shares and none outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Common Stock, $0.01 par value; 1.0 billion and 2.0 billion shares authorized as of September 30, 2018 and December 31, 2017, respectively; 59.6 million and 66.2 million shares issued as of September 30, 2018 and December 31, 2017, respectively; and 59.6 million and 58.7 million shares outstanding as of September 30, 2018 and December 31, 2017, respectively

 

 

1

 

 

 

1

 

Additional paid-in-capital

 

 

973

 

 

 

1,181

 

Retained Earnings (accumulated deficit)

 

 

503

 

 

 

(144

)

Treasury stock, at cost, 7.6 million shares as of December 31, 2017

 

 

 

 

 

(212

)

Accumulated other comprehensive loss

 

 

 

 

 

(1

)

Noncontrolling interest

 

 

3

 

 

 

3

 

Total Equity

 

 

1,480

 

 

 

828

 

Total Liabilities and Equity

 

$

2,617

 

 

$

2,953

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

 

CorePoint Lodging Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the Three and Nine Months Ended September 30, 2018 and 2017

(in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

230

 

 

$

223

 

 

$

650

 

 

$

644

 

Other

 

 

4

 

 

 

4

 

 

 

13

 

 

 

12

 

Total Revenues

 

 

234

 

 

 

227

 

 

 

663

 

 

 

656

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

 

102

 

 

 

94

 

 

 

287

 

 

 

268

 

Other departmental and support

 

 

33

 

 

 

31

 

 

 

92

 

 

 

89

 

Property tax, insurance and other

 

 

17

 

 

 

16

 

 

 

52

 

 

 

43

 

Management and royalty fees

 

 

23

 

 

 

 

 

 

32

 

 

 

 

Corporate general and administrative

 

 

10

 

 

 

18

 

 

 

73

 

 

 

56

 

Depreciation and amortization

 

 

39

 

 

 

36

 

 

 

115

 

 

 

104

 

Other, net

 

 

3

 

 

 

3

 

 

 

5

 

 

 

-

 

Total Operating Expenses

 

 

227

 

 

 

198

 

 

 

656

 

 

 

560

 

Operating Income

 

 

7

 

 

 

29

 

 

 

7

 

 

 

96

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(17

)

 

 

(12

)

 

 

(48

)

 

 

(36

)

Other income, net

 

 

2

 

 

 

2

 

 

 

6

 

 

 

2

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(10

)

 

 

 

Total Other Expenses, net

 

 

(15

)

 

 

(10

)

 

 

(52

)

 

 

(34

)

Income (loss) from Continuing Operations Before Income

   Taxes

 

 

(8

)

 

 

19

 

 

 

(45

)

 

 

62

 

Income tax expense

 

 

(5

)

 

 

(9

)

 

 

(6

)

 

 

(28

)

Income (loss) from Continuing Operations, net of tax

 

 

(13

)

 

 

10

 

 

 

(51

)

 

 

34

 

Income (loss) from discontinued operations, net of tax

 

 

 

 

 

3

 

 

 

(25

)

 

 

(3

)

Net Income (loss) attributable to CorePoint Lodging

   stockholders

 

$

(13

)

 

$

13

 

 

$

(76

)

 

$

31

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic from continuing operations

 

$

(0.22

)

 

$

0.16

 

 

$

(0.87

)

 

$

0.59

 

Basic from discontinued operations

 

 

-

 

 

 

0.06

 

 

 

(0.43

)

 

 

(0.05

)

Basic earnings (loss) per share

 

$

(0.22

)

 

$

0.22

 

 

$

(1.30

)

 

$

0.54

 

Diluted from continuing operations

 

$

(0.22

)

 

$

0.16

 

 

$

(0.87

)

 

$

0.58

 

Diluted from discontinued operations

 

 

-

 

 

 

0.06

 

 

 

(0.43

)

 

 

(0.06

)

Diluted earnings (loss) per share

 

$

(0.22

)

 

$

0.22

 

 

$

(1.30

)

 

$

0.52

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


 

 

CorePoint Lodging Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Nine Months Ended September 30, 2018 and 2017

(in millions)

 

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

Net Income (loss) attributable to CorePoint Lodging stockholders

 

$

(13

)

 

$

13

 

 

$

(76

)

 

$

31

 

Cash flow hedge adjustment, net of tax

 

 

 

 

 

1

 

 

 

4

 

 

 

3

 

Gain on termination of cash flow hedge

 

 

 

 

 

 

 

 

(3

)

 

 

 

Comprehensive net income (loss) attributable to CorePoint

   Lodging's Stockholders

 

$

(13

)

 

$

14

 

 

$

(75

)

 

$

34

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 


6


 

 

CorePoint Lodging Inc.

Condensed Consolidated Statement of Equity (Unaudited)

For the Nine Months Ended September 30, 2018

(in millions, except per share data)

 

 

 

Equity Attributable to CorePoint Lodging Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional

Paid-in-

Capital

 

 

Retained Earnings

(Accumulated

Deficit)

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Noncontrolling

Interest

 

 

Total

Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2018

 

 

58.7

 

 

$

1

 

 

$

(212

)

 

$

1,181

 

 

$

(144

)

 

$

(1

)

 

$

3

 

 

$

828

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

 

 

 

 

 

 

(76

)

Dividends on common stock ($0.267 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

(16

)

Equity-based compensation

 

 

1.1

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Purchase of common stock (pre Spin-Off)

 

 

(0.1

)

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

Retirement of treasury stock

 

 

 

 

 

 

 

 

214

 

 

 

(214

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedge adjustment, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Gain on termination of cash flow hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

Purchase of common stock (post Spin-Off)

 

 

(0.1

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(3

)

Reorganization and separation from La Quinta Holdings Inc

 

 

 

 

 

 

 

 

 

 

 

 

 

 

739

 

 

 

 

 

 

 

 

 

739

 

Balance as of September 30, 2018

 

 

59.6

 

 

$

1

 

 

$

 

 

$

973

 

 

$

503

 

 

$

 

 

$

3

 

 

$

1,480

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

7


 

 

CorePoint Lodging Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2018 and 2017

(in millions)

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(76

)

 

$

31

 

Adjustments to reconcile net income (loss) to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

119

 

 

 

110

 

Gain (loss) related to real estate casualties

 

 

5

 

 

 

(1

)

Loss on extinguishment of debt

 

 

17

 

 

 

 

Amortization of deferred costs and other assets

 

 

8

 

 

 

5

 

Equity-based compensation expense

 

 

9

 

 

 

12

 

Deferred tax (benefit) expense

 

 

(1

)

 

 

16

 

Provision for doubtful accounts

 

 

1

 

 

 

2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5

 

 

 

(8

)

Other assets

 

 

(11

)

 

 

(9

)

Accounts payable and accrued expenses

 

 

(6

)

 

 

(5

)

Other liabilities

 

 

(2

)

 

 

6

 

Net cash provided by operating activities

 

 

68

 

 

 

159

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, primarily investments in real estate

 

 

(138

)

 

 

(158

)

Lenders escrow

 

 

(15

)

 

 

 

Insurance proceeds related to real estate casualties

 

 

16

 

 

 

5

 

Proceeds from sale of real estate

 

 

6

 

 

 

28

 

Payment of franchise incentives

 

 

 

 

 

(1

)

Net cash used in investing activities

 

 

(131

)

 

 

(126

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

1,060

 

 

 

 

Repayment of debt

 

 

(1,030

)

 

 

(13

)

Debt issuance costs

 

 

(29

)

 

 

 

Issuance of mandatorily redeemable preferred shares

 

 

15

 

 

 

 

Dividends on common stock

 

 

(4

)

 

 

 

Proceeds on termination of cash flow hedge

 

 

3

 

 

 

 

Payment for interest rate cap

 

 

(1

)

 

 

 

Purchase of common stock

 

 

(5

)

 

 

(1

)

Reorganization and separation from La Quinta Holdings Inc.

 

 

(23

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(14

)

 

 

(14

)

Increase (decrease) in cash and cash equivalents

 

 

(77

)

 

 

19

 

Cash and cash equivalents at the beginning of the period

 

 

141

 

 

 

161

 

Cash and cash equivalents at the end of the period

 

$

64

 

 

$

180

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8


 

 

CorePoint Lodging Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization and Business

CorePoint Lodging Inc., a Maryland corporation (“we,” “us,” “our,” “CorePoint,” “CorePoint Lodging” or the “Company”) is a nationwide lodging real estate company, primarily serving the upper mid-scale and mid-scale segments, with a portfolio of select service hotels located in the United States (“U.S.”). We have operated as an independent, self-administered, publicly traded company since May 30, 2018. See discussion below regarding our spin-off on May 30, 2018 and our continuing and discontinued operations.

The following table sets forth the number of owned and joint venture hotels as of September 30, 2018 and December 31, 2017 respectively:

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

# of hotels

 

 

# of rooms

 

 

# of hotels

 

 

# of rooms

 

Owned (1)

 

 

314

 

 

 

40,200

 

 

 

316

 

 

 

40,400

 

Joint Venture

 

 

1

 

 

 

200

 

 

 

1

 

 

 

200

 

Totals

 

 

315

 

 

 

40,400

 

 

 

317

 

 

 

40,600

 

 

(1)

As of September 30, 2018 and December 31, 2017, one and three of the owned hotels, respectively, were classified as assets held for sale.

 

For U.S. federal income tax purposes, we intend to make an election to be taxed as a real estate investment trust (“REIT”), effective May 31, 2018, with the filing of our U.S. federal income tax return for the year ending December 31, 2018. We believe that we are organized and operate in a REIT-qualified manner and we intend to continue to operate as such. As a REIT, the Company is generally not subject to federal corporate income tax on the portion of its net income that is currently distributed to its stockholders.  To maintain our REIT status, we are required to meet several requirements as provided by the Internal Revenue Code of 1986, as amended (the “Code”). These include that the Company cannot operate or manage its hotels. Therefore, the REIT leases the hotel properties to CorePoint TRS L.L.C., the Company's wholly owned taxable REIT subsidiary ("TRS"), which engages third-party eligible independent contractors to manage the hotels. CorePoint TRS L.L.C. is subject to federal, state and local income taxes. Also, to maintain REIT status, we must distribute annually at least 90 percent of our “REIT taxable income”, as defined by the Code, to our stockholders. We intend to meet our distribution requirements effective for 2018 and thereafter as required by the Code.

Our Spin-Off from La Quinta Holdings Inc.

On May 30, 2018, La Quinta Holdings Inc., a Delaware corporation. (“LQH Parent,” and together with its consolidated subsidiaries, “LQH”) completed the separation of its real estate business from its franchise and management business, including the spin-off of its real estate ownership business into an independent, publicly traded company. The spin-off (“Spin-Off”) of CorePoint Lodging was made as part of a plan approved by LQH Parent’s board of directors to spin off LQH’s real estate business into a stand-alone, publicly traded company prior to the merger (“Merger”) of LQH Parent with a wholly owned subsidiary of Wyndham Worldwide Corporation, a Delaware corporation (“Wyndham Worldwide”). For additional discussion of the Spin-Off, the Merger and related transactions, see Note 3 “Discontinued Operations.”

Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, LQH Parent is presented as being spun-off from CorePoint (a “reverse spin”). This presentation is in accordance with generally accepted accounting principles in the U.S. (“GAAP”) and is primarily a result of the relative significance of CorePoint’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Therefore, CorePoint Lodging is considered the divesting entity and treated as the “accounting successor,” and LQH Parent is the “accounting spinnee” and “accounting predecessor” for consolidated financial reporting purposes.

In accordance with GAAP, effective with the closing of the Spin-Off on May 30, 2018, the results of operations related to LQH Parent’s hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of LQH Parent’s hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s consolidated balance sheet as of December 31, 2017 and the consolidated statement of equity for the nine months ended September 30, 2017 has been omitted. Unless

9


 

 

otherwise noted, all disclosures in the notes accompanying the unaudited consolidated financial statements reflect only continuing operations.

Interim Unaudited Financial Information

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with LQH’s consolidated financial statements and notes thereto for the years ended December 31, 2017, 2016 and 2015.

Subsequent to May 30, 2018, the accompanying unaudited condensed consolidated financial statements include the accounts of the Company. The historical unaudited condensed consolidated financial statements through May 30, 2018 represent the financial position and results of operations of entities that have historically been under common control of the accounting predecessor, LQH Parent.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying condensed consolidated balance sheet as of September 30, 2018 and condensed consolidated statements of operations, comprehensive income, cash flows and equity for the periods ended September 30, 2018 and 2017 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, including normal recurring items, necessary to present fairly our consolidated financial position as of September 30, 2018 and December 31, 2017, and our consolidated results of operations and cash flows for the periods ended September 30, 2018 and 2017.

The accompanying condensed consolidated financial statements include the accounts of the Company, as well as its wholly-owned subsidiaries and any consolidated variable interest entities (“VIEs”).  We recognize noncontrolling interests for the proportionate share of operations for ownership interests not held by our stockholders. All intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. These estimates include such items as: Spin-Off related adjustments; income taxes; impairment of long-lived assets; casualty losses; fair value evaluations; depreciation and amortization; and equity-based compensation measurements. Actual results could differ from those estimates.

Reclassifications

Certain line items on the condensed consolidated balance sheet as of December 31, 2017 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 have been reclassified to conform to the current period presentation. These reclassifications had no impact on our net income (loss) or financial position and were made in order to conform to presentations consistent with other REIT lodging companies and reflect the results of discontinued operations. See Note 3 “Discontinued Operations” for additional information.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Investment in Real Estate

Property and equipment are stated at cost less accumulated depreciation computed using a straight-line method over the estimated useful life of each asset. Property and equipment consists of the following, along with associated estimated useful lives:

 

Buildings and improvements

 

5 to 40 years

Furniture, fixtures and other equipment

 

2 to 10 years

 

We capitalize expenditures that increase the overall value of an asset or extend an asset’s life, typically associated with hotel refurbishment, renovation, and major repairs. Such costs primarily include third party contract labor, materials, professional design and other direct costs, and during the redevelopment and renovation period interest, real estate taxes and insurance costs. The interest capitalization period begins when the activities related to the improvement have begun and ceases when the project is substantially complete and the assets are held available for use or occupancy. Once such a project is substantially complete and the associated assets are ready for intended use, interest costs are no longer capitalized. Normal maintenance and repair costs are expensed as incurred.

 

10


 

 

Impairment of Real Estate Related Assets

 

If events or circumstances indicate that the carrying amount of a property may not be recoverable, we make an assessment of the property’s recoverability by comparing the carrying amount of the asset to our estimate of the aggregate undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition.  If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property. 

 

We recorded impairment expense of $1 million for the three and nine months ended September 30, 2017. We did not record any impairment loss for the three and nine months ended September 30, 2018.

 

Assets Held for Sale

 

For sales of real estate or assets classified as held for sale, we evaluate whether the disposition will have a major effect on our operations and financial results and will therefore qualify as a strategic shift. If the disposition represents a strategic shift, it will be classified as discontinued operations in our financial statements for all periods presented. If the disposition does not represent a strategic shift, it will be presented in continuing operations in our financial statements.

 

We classify hotels as held for sale when criteria are met in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that asset. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.

Cash and Cash Equivalents

We classify all cash on hand, demand deposits with financial institutions, and short-term highly liquid investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair market value.

Accounts Receivable

Accounts receivable primarily consists of receivables due from hotel guests, credit card companies and insurance settlements and are carried at estimated collectable amounts. We periodically evaluate our receivables for collectability based on historical experience, the length of time receivables are past due, the financial condition of the debtor, and the general economy. Accounts receivable are written off when determined to be uncollectable and collection efforts have generally ceased. Our insurance settlement receivables included in accounts receivable are recorded based upon the terms of our insurance policies and our estimates of insurance losses. We recognize business interruption claims as revenue when collected and accordingly our accounts receivable do not include any amounts related to estimated business interruption claim recoveries. As of September 30, 2018, and December 31, 2017, the Company had $17 million and $23 million of insurance settlement receivables, respectively.

 

Debt and Deferred Debt Issuance Costs

 

Deferred debt issuance costs include costs incurred in connection with issuance of debt, including costs associated with the issuance of our credit facilities, and are presented as a direct reduction from the carrying amount of debt. These debt issuance costs are deferred and amortized to expense on a straight-line basis over the term of the debt, which approximates the effective interest amortization method. This amortization expense is included as a component of interest expense. When debt is paid prior to its scheduled maturity date or the underlying terms are materially modified, the remaining carrying value of deferred debt issuance costs, along with certain other payments to lenders, is included in loss on extinguishment of debt.

11


 

 

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or pay to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels, which are as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Valuations in this category are inherently less reliable than quoted market prices due to the degree of subjectivity involved in determining appropriate methodologies and the applicable underlying observable market assumptions.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. These inputs cannot be validated by readily determinable market data and generally involve considerable judgment by management.

We use the highest level of observable market data if such data is available without undue cost and effort. 

Derivative Instruments

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

We record all derivatives at fair value. On the date the derivative contract is entered, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“Cash Flow Hedge”), a hedge of the fair value of a recognized asset or liability (“Fair Value Hedge”), or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Cash Flow Hedge are recorded in the condensed consolidated statements of comprehensive income (loss) until they are reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a Fair Value Hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the condensed consolidated statements of cash flows. Changes in fair value of undesignated hedge instruments are recorded in current period earnings.

On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations via use of a statistical regression and hypothetical derivative approach. We discontinue hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is sold, terminated or exercised.

Revenue Recognition

 

We adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, effective January 1, 2018 using the modified retrospective transition method. The information in this section describes our current revenue recognition policies. See “Newly Adopted Accounting Standards” below for additional information related to the adoption.

Our revenues primarily consist of operating lease revenues from room rentals, and, to a lesser extent, restaurants, billboards and cell towers, which are accounted for under GAAP in accordance with lease accounting standards. Room revenue is recognized as earned on a daily basis, net of customer incentive discounts, cash rebates, and refunds.  Revenue related to operating leases with a term in excess of one year are recognized on a straight-line basis over the life of the respective lease agreement.  

Other revenues include revenues generated by the incidental support of hotel operations for hotels and are recognized under the revenue accounting standard as the service obligation is completed.

There was no material impact to continuing operations in our financial statements due to the change in accounting policies for the three and nine months ended September 30, 2018.

12


 

 

Equity-Based Compensation

We have a stock-based incentive award plan for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses in our consolidated statements of operations. We recognize the cost of services received in an equity-based payment transaction with an employee or director as services are received and record either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria. Measurement for these equity awards is the estimated fair value at the grant date of the equity instruments. Dividends related to unvested awards are charged to retained earnings. We recognize forfeitures as they occur.

Income Taxes

We are organized in conformity with, and operate in a manner that will allow us to elect to be taxed as, a REIT, for U.S. federal income tax purposes beginning with our tax year ending December 31, 2018 and we expect to continue to be organized and operate so as to qualify as a REIT. To qualify as a REIT, we must continually satisfy requirements related to, among other things, the real estate qualification of sources of our income, the real estate composition and values of our assets, the amounts we distribute to our stockholders annually and the diversity of ownership of our stock. To the extent we qualify as a REIT, we generally will not be subject to U.S. federal income tax on taxable income generated by our REIT activities that we distribute to our stockholders. Accordingly, no provision for U.S. federal income taxes has been included in our accompanying condensed consolidated financial statements for purposes of determining federal and state income tax expense for the three and nine months ended September 30, 2018 related to our REIT activities.

We are, and will continue to be, subject to U.S. federal income tax on taxable sales of built-in gain property (representing property with an excess of fair value over tax basis held by us on May 30, 2018) during the five-year period following our election to be taxed as a REIT. In addition, our TRS is subject to U.S. federal, state and local income taxes and our REIT may be subject to state and local taxes and non-U.S. income tax on foreign held REIT activities.

Through May 30, 2018, LQH Parent will file a federal income tax return, as well as certain state tax returns where we filed on a combined basis, and foreign tax filings, as applicable.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law. The Tax Act contains several key tax provisions that affected us, including a reduction of the corporate income tax rate to 21 percent effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing tax guidance is still outstanding, we consider the deferred tax re-measurements and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the one year measurement period permitted by SAB 118.

Concentrations of Credit Risk and Business Risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents. We utilize financial institutions that we consider to be of high credit quality and consider the risk of default to be minimal. We also monitor the credit-worthiness of our customers and financial institutions before extending credit or making investments. Certain balances in cash and cash equivalents exceed the Federal Deposit Insurance Corporation limit of $250,000; however, we believe credit risk related to these deposits is minimal. 

Lodging operations are particularly sensitive to adverse economic and competitive conditions and trends, which could adversely affect the Company’s business, financial condition, and results of operations. Geographic concentrations, which potentially subject us to concentrations of business risk, relate primarily to locations of hotels and the revenue recognized in various states within the U.S. We have a concentration of hotels operating in Texas, Florida and California.

13


 

 

The percentages of our total revenues, excluding revenue from discontinued operations, from these states for the nine months ended September 30, 2018 and 2017 are as follows:

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2018

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Texas

 

 

22

%

 

 

21

%

Florida

 

 

14

%

 

 

17

%

California

 

 

11

%

 

 

10

%

Total

 

 

47

%

 

 

48

%

 

Segment Reporting

 

Our hotel investments have similar economic characteristics and our service offerings and delivery of services are provided in a similar manner, using the same types of facilities and similar technologies. Our chief operating decision maker, the Company's Chief Executive Officer, reviews our financial information on an aggregated basis. As a result, we have concluded that we have one reportable business segment.

Principal Components of Expenses

Rooms — These expenses include hotel operating expenses of housekeeping, reservation systems, room and breakfast supplies and front desk costs.

Other departmental and support These expenses include labor and other expenses that constitute non-room operating expenses, including parking, telecommunications, on-site administrative departments, sales and marketing, recurring repairs and maintenance and utility expenses.

Property tax, insurance and other These expenses consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and insurance.

Other, net — These expenses include losses incurred resulting from property damage or destruction caused by any sudden, unexpected or unusual event such as a hurricane or significant casualty. 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.

 

Newly Issued Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), regarding the accounting for leases for both lessees and lessors. In July 2018, ASU 2016-02 was amended, providing another transition method by allowing companies to initially apply the new lease standard in the year of adoption and not the earliest comparative period. The lease standard amendment also provided a practical expedient for an accounting policy election for lessors, by class of underlying asset, to not separate nonlease components from the associated lease components, similar to the practical expedient provided for lessees. The lessor practical expedient is only available if the timing and pattern of transfer are the same for the nonlease and lease components and the lease components, if accounted for separately, would be classified as an operating lease.

 

Lessees will need to recognize on their balance sheet a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, adjusted for any initial direct costs of the lease, lease incentives or early lease payments, where applicable. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line rent expense (similar to current operating leases) while finance leases will result in interest and amortization expense (similar to current capital leases). Classification will be based on criteria that are largely similar to those applied in current lease accounting. The new standard may be adopted using a modified retrospective transition and provides for certain practical expedients. We are evaluating the impact of ASU 2016-02 on our consolidated financial statements, where we believe the primary impact as a lessee will relate to leases where we are the ground lessee.

14


 

 

 

For lessor accounting, our primary activity relates to daily hotel leases, where we intend to adopt the short-term lease exception and record lease revenue as its earned. However, for longer term leases, such as restaurant, cell towers and billboards, under current lessor accounting, a real estate lease could only be a sales-type lease if ownership of the real estate was transferred to the lessee. With the adoption of ASU 2016-02, there will no longer be an exclusion for real estate leases, where the same classification guidance applies as with all other leases. We are currently evaluating how this guidance would apply to lessor classification. If, as lessor, our real estate leases would be classified as sales-type leases, the real estate asset would be eliminated, a net investment asset would be recognized generally equal to the present value of the minimum lease payments plus the unguaranteed residual value and a selling profit or loss recorded. Additionally, only incremental direct leasing costs may be capitalized under this new guidance, which is primarily consistent with the Company’s existing policies.

 

In light of the recently issued lease standard amendment and the new practical expedients, we continue to evaluate the impact of the new leasing standard. We plan to adopt the new standard effective January 1, 2019.

In June 2018, the FASB issued ASU 2018-07, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The Company accounts for its share-based payments to members of its board of directors in the same manner as share-based payments to its employees. Other than to members of our board of directors, the Company does not award share-based payments to any nonemployees. The guidance is effective for periods beginning after December 15, 2018. Early adoption is allowed.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The guidance will apply to our trade receivables, notes receivable, net investments in leases and any other future financial assets that have the contractual right to receive cash that we may acquire in the future. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. Historically, credit losses have not been material to the Company. We are currently evaluating the impact of this guidance on our financial position, results of operations and related disclosures but do not expect the implementation of this guidance to have a material impact on our condensed consolidated financial position and results of operations.

Newly Adopted Accounting Standards

 

Effective January 1, 2018, we adopted FASB Topic 606. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded prior revenue recognition guidance, including industry-specific revenue guidance.  The revised guidance replaced most existing revenue and real estate sale recognition guidance in GAAP. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however, our revenue accounting for incidental hotel revenue will follow the revised guidance. We adopted the new standard using the modified retrospective transition method, where financial statement presentations prior to the date of adoption are not adjusted. Transactions that were not closed as of the adoption date were adjusted to reflect the new standard where we recorded a net reduction to opening retained earnings of approximately $15 million, net of tax, as of January 1, 2018 due to the cumulative impact of adopting ASC 606, which relates primarily to our discontinued operations. The adoption of this statement did not have a material impact on our continuing operations.

 

Effective January 1, 2018, we adopted FASB ASU 2017-05, Other Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 310-20), which requires the derecognition of a business in accordance with ASC 810, Consolidations, including instances in which the business is considered in substance real estate. In cases where a controlling interest in real estate was sold but a noncontrolling interest is retained, we may record a gain or loss related to both the sold and retained interests. The adoption of this standard did not have an impact on our condensed consolidated financial statements, but depending on future transactions, may in the future.

Effective January 1, 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which provides guidance from the SEC allowing for the recognition of provisional amounts in the financial statements as a result of the Tax Act that was signed into law in December 2017. The guidance allows for a measurement period of up to one year from the enactment date to finalize the accounting related to the Tax Act. The Company has applied and continues to apply the guidance in this update within its financial statements.

 

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Effective January 1, 2018, we adopted FASB ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Act from accumulated other comprehensive income into retained earnings. The adoption of this statement did not have a material effect on our financial statements.

 

Effective January 1, 2018, we adopted FASB ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. This update clarifies the changes to terms or conditions of a share-based payment award that require an entity to apply modification accounting. The adoption of this statement did not have a material effect on our financial statements.

 

Effective January 1, 2018 we adopted FASB ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance for evaluating whether certain transactions are to be accounted for as an acquisition (or disposal) of either a business or an asset. This standard is applied on a prospective basis.  The adoption of this statement did not have a material effect on our financial statements.

From time to time, new accounting standards are issued by FASB or other standards setting bodies, which we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently adopted or recently issued standards that are not yet effective have not or will not have a material impact on our consolidated financial statements upon adoption.

 

NOTE 3. DISCONTINUED OPERATIONS

As discussed in Note 1 “Organization and Basis of Presentation,” LQH Parent completed the Spin-Off on May 30, 2018. As part of the Spin-Off closing, LQH Parent distributed to its stockholders all the outstanding shares of CorePoint common stock. Each holder of LQH Parent common stock received one share of CorePoint common stock for each share of LQH Parent common stock held  by such holder on the record date, after giving effect to a reverse stock split, whereby each share of the common stock of LQH Parent (par value $0.01) was reclassified and combined into one half of a share of the common stock of LQH Parent (par value $0.02) (the “Reverse Stock Split”). Immediately following the Spin-Off, pursuant to the terms of the merger agreement, LQH Parent became a wholly-owned subsidiary of Wyndham Worldwide and each share of LQH Parent common stock (after giving effect to the Reverse Stock Split) was converted into the right to receive $16.80 per share in cash (after giving effect to the Reverse Stock Split), without interest. Wyndham Worldwide repaid $715 million of LQH Parent’s debt net of cash and set aside a reserve of $240 million for estimated taxes expected to be incurred in connection with the Spin-Off. Immediately following the Spin-Off, LQH Parent did not own any shares of any class of CorePoint outstanding common stock.

In connection with the Spin-Off, CorePoint entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) in January 2018 and entered into several other agreements with LQH Parent prior to consummation of the Spin-Off. These agreements set forth the principal transactions required to effect CorePoint’s separation from LQH and provide for the allocation between CorePoint and LQH Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint and LQH after completion of the Spin-Off.

Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, LQH Parent is presented as being spun-off from CorePoint as a reverse spin. This presentation is in accordance with GAAP and is primarily a result of the relative significance of CorePoint’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Therefore, CorePoint Lodging is considered the divesting entity and treated as the accounting successor, and LQH Parent is the accounting spinnee and accounting predecessor for consolidated financial reporting purposes.

In accordance with GAAP, the results of operations related to LQH Parent’s hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of LQH Parent’s hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s consolidated balance sheet as of December 31, 2017. Additionally, the financial statement presentation was modified to be more consistent with other REIT lodging companies and reflects the results of discontinued operations.

Because the separation was a spin-off among stockholders, for financial statement presentation, there is no gain or loss on the separation of the disposed net assets and liabilities. Rather, the carrying amounts of the net assets and liabilities of the Company’s former hotel franchise and hotel management accounts are removed at their historical cost with an offsetting amount to stockholders’ equity. In connection with the Spin-Off, the Company recorded a $740 million adjustment in stockholders’ equity. The amount recognized will be adjusted in future reporting periods as the amount recorded is preliminary pending the finalization of various items including the final determination of the tax liabilities associated with the transaction and the settlement of other remaining considerations with Wyndham Worldwide. As these matters are finalized pursuant to the transaction agreements, the Company will

16


 

 

record an adjustment to its cash balance or other working capital accounts with an offsetting amount to stockholders’ equity. Additionally, as the Spin-Off was a taxable spin, Wyndham Worldwide reserved $240 million to cover the tax payment for the spin transaction.  Any residual amount of the reserve in excess of the tax payment will be remitted to the Company. Any related tax payment in excess of such reserve is the responsibility of Wyndham Worldwide with the Company responsible for delivering to Wyndham Worldwide either cash equal to the excess or issuing shares of common stock to Wyndham Worldwide in lieu of cash. Any such shares issued to Wyndham Worldwide would be subject to a registration rights agreement. As these tax valuations are completed and the estimates are refined and finalized, the impact of the reorganization and separation from LQH on stockholders’ equity will be adjusted.

Results of Discontinued Operations

The following table summarizes the results of the hotel franchise and hotel management business which are presented as discontinued operations (in millions).

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

FRANCHISE AND OTHER FEE BASED REVENUES

 

$

 

 

$

42

 

 

$

58

 

 

$

111

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate, general, administrative and marketing

 

 

 

 

 

28

 

 

 

64

 

 

 

86

 

Depreciation and amortization

 

 

 

 

 

2

 

 

 

4

 

 

 

6

 

Total Operating Expenses

 

 

 

 

 

30

 

 

 

68

 

 

 

92

 

Operating Income (Loss)

 

 

 

 

 

12

 

 

 

(10

)

 

 

19

 

OTHER EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

(8

)

 

 

(15

)

 

 

(25

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(7

)

 

 

 

Total Other Expenses

 

 

 

 

 

(8

)

 

 

(22

)

 

 

(25

)

Income (loss) Before Income Taxes

 

 

 

 

 

4

 

 

 

(32

)

 

 

(6

)

Income tax benefit (expense), primarily current

 

 

 

 

 

(1

)

 

 

7

 

 

 

3

 

Income (loss) from Discontinued Operations, net of tax

 

$

 

 

$

3

 

 

$

(25

)

 

$

(3

)

 

The following table presents the carrying amounts of the major classes of assets and liabilities of LQH Parent that were included in assets and liabilities from discontinued operations as of December 31, 2017 (in millions):

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

ASSETS FROM DISCONTINUED OPERATIONS

 

 

 

 

Total real estate, net

 

$

49

 

Intangible assets, net of accumulated amortization

 

 

171

 

Accounts receivable, net

 

 

24

 

Other assets

 

 

36

 

Total Assets From Discontinued Operations

 

$

280

 

 

 

 

 

 

LIABILITIES FROM DISCONTINUED OPERATIONS

 

 

 

 

Debt, net

 

$

696

 

Accounts payable and accrued expenses

 

 

109

 

Other liabilities

 

 

21

 

Deferred tax liabilities

 

 

20

 

Total Liabilities From Discontinued Operations

 

$

846

 

 

In connection with the Spin-Off, CorePoint made a cash payment to LQH Parent of approximately $1 billion (the “Cash Payment”), immediately prior to and as a condition of the Spin-Off. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. Accordingly, concurrently with the closing of the Merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s existing debt.

17


 

 

As permitted under GAAP, the Company has elected not to adjust the condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and September 30, 2017 to exclude cash flows attributable to discontinued operations. As such, the following table presents selected financial information of LQH Parent included in the condensed consolidated statements of cash flows (in millions):

 

 

 

For the Nine Months

Ended September 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

Non-cash items included in net income (loss):

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

4

 

 

$

6

 

Amortization of deferred costs

 

 

1

 

 

 

2

 

Loss on extinguishment of debt

 

 

7

 

 

 

 

Equity based compensation expense

 

 

4

 

 

 

6

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

$

11

 

 

$

18

 

 

 

NOTE 4. INVESTMENTS IN REAL ESTATE

 

During the third quarter of 2018, one hotel was sold for net proceeds of $2 million resulting in a loss on sale of $0.4 million. During the nine months ended September 30, 2018, two hotels were sold for net proceeds of $6 million resulting in a gain on sale of $0.1 million. During the third quarter of 2017, one hotel was sold for net proceeds of $6 million resulting in a gain on sale of $1 million. During the nine months ended September 30, 2017, four hotels were sold for net proceeds of $28 million resulting in a gain on sale of $1 million.

 

Depreciation expense related to buildings and improvements, furniture, fixtures and other equipment was $39 million and $36 million for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense related to buildings and improvements, furniture, fixtures and other equipment was $115 million and $104 million for the nine months ended September 30, 2018 and 2017, respectively.

 

Construction in progress includes capitalized costs for ongoing projects that have not yet been put into service.

 

We have pledged substantially all of our hotels as collateral for the CMBS Loan Agreement (as defined in Note 6 “Debt”).

 

NOTE 5. OTHER ASSETS

 

The following table presents other assets as of September 30, 2018 and December 31, 2017 (in millions):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

 

 

Lenders escrow

 

$

15

 

 

$

 

 

Prepaid expenses

 

 

9

 

 

 

12

 

 

Intangible assets

 

 

5

 

 

 

5

 

 

Assets held for sale

 

 

3

 

 

 

9

 

 

Other assets, primarily hotel supplies

 

 

19

 

 

 

6

 

 

Total other assets

 

$

51

 

 

$

32

 

 

 

Assets held for sale as of September 30, 2018 represent one hotel and approximately 150 rooms. Assets held for sale as of December 31, 2017 represent three hotels and approximately 400 rooms.

As required by the CMBS Loan Agreement, we entered into an interest rate cap agreement on May 30, 2018 with a notional amount of $1.035 billion and a one-month London Interbank Offering Rate (“LIBOR”) interest rate cap of 3.25 percent that expires on July 15, 2020 (the “Interest Rate Cap Agreement”). The Interest Rate Cap Agreement is for a period equal to the existing term of the CMBS

18


 

 

Facility and has a notional amount equal to or greater than the then outstanding principal balance of the CMBS Facility. The Company did not designate the interest rate cap as a hedge.

 

 

NOTE 6.  DEBT

The following table presents the carrying amount of our debt as of September 30, 2018 and December 31, 2017 (in millions):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

Interest Rate as of September 30, 2018 (1)

 

Maturity Date

 

 

 

 

CMBS Facility

 

$

1,035

 

 

$

 

 

One-month LIBOR + 2.75%

 

2020

(2)

Revolving Facility

 

 

 

 

 

 

 

One-month LIBOR + 4.50%

 

2020

(3)

Term Facility

 

 

 

 

 

1,003

 

 

N/A

 

N/A

 

 

 

 

1,035

 

 

 

1,003

 

 

 

 

 

 

Less deferred debt issuance costs and original issue discount

 

 

(25

)

 

 

(11

)

 

 

 

 

 

Total debt, net

 

$

1,010

 

 

$

992

 

 

 

 

 

 

 

 

(1)

One-month LIBOR at September 30, 2018 was 2.26 percent.

 

(2)

After maturity in 2020, includes five extension options of twelve months each at CorePoint’s option subject to certain conditions.

 

(3)

After maturity in 2020, includes one-year extension subject to certain conditions.

Term Facility and Extinguishment of Debt

In connection with the Spin-Off and Merger, on May 30, 2018, we entered into the CMBS Loan Agreement and used the proceeds to repay and discharge existing loans (“Term Facility”).  During the nine months ended September 30, 2018, we recorded a $10 million loss related to the extinguishment of the Term Facility. The loss primarily included the write-off of unamortized debt issuance costs and original issuance discount.

The interest rate for the Term Facility from January 1, 2018 to March 6, 2018, was LIBOR plus 2.75 percent and for the period from March 7, 2018 to May 30, 2018 was LIBOR plus 3.00 percent.

CMBS Facility

On May 30, 2018, certain indirect wholly-owned subsidiaries of CorePoint (collectively, the “CorePoint CMBS Borrower”). CorePoint TRS L.L.C. and CorePoint Operating Partnership L.P. (“CorePoint OP”) entered into a Loan Agreement (the “CMBS Loan Agreement”), pursuant to which the CorePoint CMBS Borrower borrowed an aggregate principal amount of $1.035 billion under a secured mortgage loan secured primarily by mortgages for 307 owned and ground leased hotels, an excess cash flow pledge for seven owned and ground leased hotels and other collateral customary for mortgage loans of this type (the “CMBS Facility”). The proceeds from the CMBS Facility were used to facilitate the repayment of part of LQH Parent’s existing debt. In addition, simultaneously with the closing of the Merger, Wyndham repaid, or caused to be repaid, the Term Facility.

The CMBS Facility bears interest at a rate equal to the sum of (i) one-month LIBOR and (ii) 2.75 percent per annum for the first five years of the term, 2.90 percent for the sixth year of the term and 3.00 percent for the seventh year of the term. Interest is generally payable monthly. In addition, in connection with the Spin-Off, we incurred additional interest expense of $2 million prior to the securitization of the debt.

The CMBS Facility has an initial term of two years, with five extension options of twelve months each exercisable at the CorePoint CMBS Borrower’s election, provided there is no event of default existing as of the commencement of the applicable extension period and the CorePoint CMBS Borrower either extends the current interest rate cap or purchases a new interest rate cap covering the extension period at a strike price as set forth in the CMBS Loan Agreement. No regular principal payments are due prior to the scheduled or extended maturity date. The CMBS Facility is pre-payable in whole or in part subject to payment of (i) all accrued interest through the end of the applicable accrual period and (ii) prior to the payment date in December 2019 a spread maintenance premium and in certain cases third party LIBOR breakage costs. Notwithstanding the above, the CorePoint CMBS Borrowers are

19


 

 

permitted to prepay the CMBS Facility by an amount not to exceed 20 percent of the original principal balance of the CMBS Facility, in the aggregate without payment of any spread maintenance premium and the spread maintenance premium for prepayments after the payment date in November 2019 will be zero.

The CMBS Facility includes customary non-recourse carve-out guarantees, affirmative and negative covenants and events of default, including, among other things, guarantees for certain losses arising out of customary “bad-boy” acts of CorePoint OP and its affiliates and environmental matters (which will be recourse for environmental matters only to the CorePoint Borrower provided that the required environmental insurance is delivered to the lender), a full recourse guaranty with respect to certain bankruptcy events,  restrictions on the ability of the CorePoint CMBS Borrower to incur additional debt and transfer, pledge or assign certain equity interests or its assets, and covenants requiring the CorePoint CMBS Borrower to exist as “special purpose entities,” maintain certain ongoing reserve funds and comply with other customary obligations for commercial mortgage-backed securities loan financings. As of September 30, 2018, the Company was in compliance with these covenants.

At the closing of the CMBS Facility, the CorePoint CMBS Borrower deposited in the loan servicer’s account approximately $15 million in upfront reserves for property improvement and environmental remediation, which funds may be periodically disbursed to the CorePoint CMBS Borrower throughout the term of the loan to cover such costs. In addition, the CMBS Facility lender has the right to control the disbursement of  hotel operating cash receipts during the continuation of an event of default under the loan or if and while the debt yield for the CMBS Facility (generally defined as hotel property operating income before depreciation and corporate general and administrative expenses divided by the outstanding principal balance of the CMBS Facility) falls below 12.33 percent through May 30, 2023 and 12.83 percent thereafter in each case for two consecutive quarters. During such an event, the lender will use the funds to pay all monthly amounts due under the CMBS Facility loan documents including, but not limited to, required ongoing reserves, debt service and fees for the CMBS Facility and Revolving Facility and property operating expenses. Any remaining funds after the payment of such expenses will be held under the control of the Lender in an excess cash flow account and such amounts will not be available to the CorePoint CMBS Borrower until such events are cured, except that, if no event of default is continuing and there is no bankruptcy event with respect to the CorePoint CMBS Borrower, the Lender will make such funds available to the CorePoint CMBS Borrower for the payment of certain expenses, including, among other things, various operating expenses and dividends, and distributions and redemptions sufficient to maintain certain tax-preferential treatment for the CorePoint CMBS Borrower. As of September 30, 2018, the Company was in compliance with these covenants.

Revolving Facility

Also on May 30, 2018, CorePoint Borrower L.L.C. (the “CorePoint Revolver Borrower”), our indirect wholly owned subsidiary and the direct wholly owned subsidiary of CorePoint OP, and CorePoint OP  entered into the Revolver Credit Agreement providing for the $150 million Revolving Facility (“Revolving Facility”). The Revolving Facility will mature on May 30, 2020, with an election to extend the maturity for one additional year subject to certain conditions, including that the maturity of the CMBS Facility be extended to a date no earlier than the maturity of the Revolving Facility. Upon consummation of the Spin-Off, $25 million was drawn on the Revolving Facility and repaid on August 3, 2018.  As of September 30, 2018, no amounts were outstanding under the Revolving Facility and the entire $150 million was available to be drawn by us.

Interest under the Revolving Facility will be, at the option of the CorePoint Revolver Borrower, either at a base rate plus a margin of 3.50 percent or a LIBOR rate plus a margin of 4.50 percent. With respect to base rate loans, interest will be payable at the end of each quarter. With respect to LIBOR loans, interest will be payable at the end of the selected interest period but no less frequently than quarterly. Additionally, there is a commitment fee payable at the end of each quarter equal to 0.50 percent of unused commitments under the Revolving Facility and customary letter of credit fees.

The Revolving Facility contains customary representations and warranties, affirmative and negative covenants and defaults. The Revolving Facility also contains a maximum total net leverage ratio financial covenant and minimum interest coverage ratio financial covenant, in each case, as defined, and tested as of the last day of any fiscal quarter in which borrowings under the Revolving Facility and outstanding letters of credit exceed 10 percent of the aggregate commitments of the Revolving Facility. As of September 30, 2018, the Company was in compliance with these covenants.

The obligations under the Revolving Facility are unconditionally and irrevocably guaranteed by CorePoint OP, and, subject to certain exceptions, each of the CorePoint Revolver Borrower and its existing and future domestic subsidiaries that own equity interests in any CorePoint CMBS Borrower (collectively, the “Revolver Subsidiary Guarantors”). The CorePoint Revolver Borrower’s obligations under the Revolving Facility and any hedging or cash management obligations are secured by (i) a perfected first-lien pledge of all equity interests in the CorePoint Revolver Borrower, all equity interests in any Revolver Subsidiary Guarantor and, subject to certain exceptions, all equity interests in certain CorePoint CMBS Borrowers and (ii) a perfected first-priority security interest in the CorePoint Revolver Borrower’s conditional controlled deposit account.

 

20


 

 

NOTE 7.  PREFERRED STOCK

In connection with LQH’s internal reorganization prior to the Spin-Off, the Company issued 15,000 shares of Cumulative Redeemable Series A Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”), to a wholly owned subsidiary of LQH Parent for cash of $15 million. LQH, through its subsidiary, privately sold all of the Series A Preferred Stock to an unrelated third-party investor immediately prior to the completion of the Spin-Off.

On May 30, 2018, the Company filed with the State Department of Assessments and Taxation of Maryland Articles Supplementary (as amended and supplemented, the “Articles Supplementary”) regarding certain rights of the shares of the Series A Preferred Stock. The Series A Preferred Stock has an aggregate liquidation preference of $15 million, plus any accrued and unpaid dividends thereon. As of September 30, 2018, we pay a cash dividend on the Series A Preferred Stock equal to 13 percent per annum, payable quarterly. If either our leverage ratio, as defined,  exceeds 7.5 to 1.0 as of the last day of any fiscal quarter, or if an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock, we will be required to pay a cash dividend on the Series A Preferred Stock equal to 15 percent per annum. Our dividend rate on the Series A Preferred Stock will increase to 16.5 percent per annum if, at any time, we are both in breach of the leverage ratio covenant and an event of default occurs (or has occurred and has not been cured) with respect to the Series A Preferred Stock. The Series A Preferred Stock are senior to our common stock with respect to dividends and with respect to dissolution, liquidation or winding up of the Company.

The Series A Preferred Stock is mandatorily redeemable by us upon the tenth anniversary of the date of issuance. Beginning on the seventh anniversary of the issuance of the Series A Preferred Stock, we may redeem the outstanding Series A Preferred Stock for an amount equal to its aggregate liquidation preference, plus any accrued but unpaid dividends. The holders of the Series A Preferred Stock may also require us to redeem the Series A Preferred Stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference plus any accrued and unpaid dividends thereon (and a premium if the change of control occurs prior to the seventh anniversary of the issuance of the Series A Preferred Stock). Due to the fact that the Preferred Stock is mandatorily redeemable by us, the preferred shares are classified as a liability on the accompanying condensed consolidated balance sheet as of September 30, 2018. Dividends on these preferred shares are classified as interest expense in the accompanying condensed consolidated statements of operations.

Holders of Series A Preferred Stock generally have no voting rights. However, the Articles Supplementary provide that, without the prior consent of the holders of a majority of the outstanding shares of Series A Preferred Stock, we are prohibited from (i) authorizing or issuing any additional shares of Series A Preferred Stock, or (ii) amending our charter or entering into, amending or altering any other agreement in any manner that would adversely affect the Series A Preferred Stock. Holders of shares of the Series A Preferred Stock have certain preemptive rights over issuances by us of any class or series of our stock ranking on parity with the Series A Preferred Stock.  If we are either (a) in arrears on the payment of dividends that were due on the Series A Preferred Stock on six or more quarterly dividend payment dates, whether or not such dates are consecutive, or (b) in default of our obligations to redeem the Preferred Stock on the tenth anniversary of its issuance or following a change of control, the preferred stockholders may designate a representative to attend meetings of our board of directors as a non-voting observer until all unpaid Preferred Stock dividends have either been paid or declared with an amount sufficient for payment set aside for payment, or the shares required to be redeemed have been redeemed, as applicable.

 

NOTE 8. FAIR VALUE MEASUREMENTS

We had no significant fair value adjustments on a recurring or nonrecurring basis as of September 30, 2018 and December 31, 2017.

The carrying amount and estimated fair values of our financial assets and liabilities were as follows (in millions):

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Carrying

Amount

 

 

Fair Value

 

 

Carrying

Amount

 

 

Fair Value

 

 

 

 

 

Debt - CMBS Facility(1)(2)

 

$

1,010

 

 

$

1,010

 

 

$

 

 

$

 

Debt - Revolving Facility(1)

 

 

 

 

 

 

 

 

 

 

 

 

Debt - Term Facility(1)(3)

 

 

 

 

 

 

 

 

992

 

 

 

1,007

 

Mandatorily redeemable preferred shares(1)

 

 

15

 

 

 

15

 

 

 

 

 

 

 

 

 

(1)

Classified as Level 3 under the fair value hierarchy.

 

(2)

Carrying amount includes deferred debt issuance costs of $25 million as of September 30, 2018.

 

(3)

Carrying amount includes deferred debt issuance costs and original issue discount of $11 million as of December 31, 2017.

21


 

 

 

We believe the carrying amounts of our cash and cash equivalents and lenders escrow approximated fair value as of September 30, 2018 and December 31, 2017, as applicable. Our estimates of the fair values were determined using available market information and valuation methods appropriate in the circumstances.

We estimate the fair value of our debt and mandatorily redeemable preferred stock by using discounted cash flow analysis based on current market inputs for similar types of arrangements. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.

 

NOTE 9. INCOME TAXES

To qualify as a REIT, the Company must meet a number of organizational, operational, and distribution requirements. As a REIT, the Company is generally not subject to federal corporate income taxes on the portion of its net income that is currently distributed to its stockholders. To the extent the Company does not distribute 100 percent of its taxable income for any year in which it has elected REIT status, the Company will be subject to income tax on the undistributed taxable income.  It is the Company’s current intention to adhere to these and all other applicable requirements and maintain the Company’s qualification for taxation as a REIT, including the requirement to distribute its taxable income. If the Company fails to qualify for taxation as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may not be able to qualify as a REIT for the four taxable years subsequent to the year of an uncured REIT qualification failure. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through the Company's TRS is subject to federal, state and local income taxes at normal corporate rates.

The Company recorded a provision for federal, state and foreign income tax expense of approximately $5 million and $9 million for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a provision for federal, state and foreign income tax expense of approximately $6 million and $28 million for the nine months ended September 30, 2018 and 2017, respectively. The provision for the three and nine month periods ended September 30, 2018 and 2017 differs from the statutory federal tax rates of 21 percent and 35 percent, respectively, primarily due to our election to be taxed as a REIT which effectively eliminates the federal and state income tax on that portion of our operations, federal and state income taxes relating to the separation of our franchise and management business that are classified in discontinued operations, and the impact of state income taxes.

 

NOTE 10. EQUITY-BASED COMPENSATION

 

Our 2018 Omnibus Incentive Plan (the “Plan”) authorizes the grant of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), non-qualified and incentive stock options, dividends and dividend equivalents, and other stock-based awards. A total of 8 million shares of common stock has been authorized for issuance under the Plan and 7 million shares of common stock are available for issuance as of September 30, 2018. As of September 30, 2018, we have outstanding time-based RSUs and RSAs, where the award vests over time and is not subject to future performance targets and, accordingly, are initially recorded at the current market price at the time of grant. These time-based awards vest according to each agreement, either in equal increments over the vesting period or at the end of the vesting period (generally three to four years with acceleration in the event of certain defined events), as long as the employee remains employed with the Company.

 

In connection with the Spin-Off, the Company entered into an agreement with LQH Parent to modify all outstanding awards granted to the employees of LQH Parent. The agreement generally provides that, as of the separation, holders of such awards were entitled to receive CorePoint equity-based, time-vesting, compensation awards. Generally, all such CorePoint equity-based compensation awards (except for the LQH Performance Share Units (“PSUs”), as described below) retain the same terms and vesting conditions as the original LQH Parent equity-based compensation awards to which such awards relate. Under the agreement, holders of LQH RSAs and LQH RSUs received restricted shares of CorePoint common stock and CorePoint RSUs.  Holders of LQH PSUs received CorePoint RSAs. The number of shares subject to such converted awards were calculated based on adjustments to LQH Parent’s equity-based awards using the distribution ratio and assumed a majority of the performance-vesting awards vest at target performance levels.  Performance-based vesting with respect to the converted LQH PSUs were removed, and instead the CorePoint equity-based awards will vest, subject to the holder’s continued employment with LQH or CorePoint, as applicable, through the last date of the original performance period (as defined in the applicable LQH PSU grant notice) to which such awards relate, effectively transforming the PSU awards into time-vesting equity awards. Following the Spin-Off, the compensation expense related to these replacement equity-based compensation awards for the employees of LQH after the Spin-Off date is incurred by LQH.  The compensation expense related to these replacement equity-based compensation awards for the employees of CorePoint is incurred by

22


 

 

CorePoint. Dividends related to all of these replacement awards are charged to CorePoint retained earnings on the dividend payment date.

 

For the three and nine months ended September 30, 2018, we recognized $3 million and $5 million, respectively, of equity-based compensation expense in continuing operations. For the three and nine months ended September 30, 2017, we recognized $2 million and $6 million, respectively, of equity-based compensation expense in continuing operations.

 

For the nine months ended September 30, 2018, we recognized  $4 million of equity-based compensation expense in discontinued operations. For the three and nine months ended September 30, 2017, we recognized $2 million and $6 million, respectively, of equity-based compensation expense in discontinued operations.

 

The following table summarizes the activity of our RSAs and RSUs during the nine months ended September 30, 2018:

 

 

 

Number of

Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Unvested at January 1, 2018

 

 

560,015

 

 

$

26.29

 

Granted

 

 

708,923

 

 

 

27.52

 

Conversion of the performance units upon completion of the spin-off

 

 

423,510

 

 

 

27.92

 

Vested

 

 

(478,104

)

 

 

27.16

 

Forfeited

 

 

(28,200

)

 

 

26.99

 

Unvested at September 30, 2018

 

 

1,186,144

 

 

$

27.26

 

 

The amount of unvested RSA and RSU shares as of September 30, 2018 were 1,170,573 and 15,571, respectively. RSAs are included in amounts for issued and outstanding common stock but are excluded in the computation of basic earnings per share.

 

NOTE 11. RELATED PARTY TRANSACTIONS

LQH Parent

As discussed in Note 3 “Discontinued Operations,” CorePoint entered into the Separation and Distribution Agreement in January 2018 and entered into several other agreements with LQH Parent prior to consummation of the Spin-Off. These agreements set forth the principal transactions required to effect CorePoint Lodging’s separation from LQH and provide for the allocation between CorePoint and LQH Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint Lodging and La Quinta after completion of the Spin-Off. These agreements also include arrangements with respect to transitional services to be provided by LQH Parent to CorePoint Lodging. In addition, prior to the Spin-Off, CorePoint Lodging entered into agreements, including long-term hotel management and franchise agreements for each of its hotels, with LQH that have either not existed historically, or that may be on different terms than the terms of the arrangement or agreements that existed prior to the Spin-Off.

In connection with the Spin-Off, CorePoint made the Cash Payment to LQH Parent of approximately $1 billion, immediately prior to and as a condition of the Spin-Off. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. In addition, concurrently with the closing of the Merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s existing Term Facility.

Prior to the Spin-Off and in connection with LQH’s internal reorganization, the Company issued 15,000 shares of Series A Preferred Stock to a wholly owned subsidiary of LQH Parent for cash of $15 million. Immediately prior to the completion of the Spin-Off, LQH sold the Series A Preferred Stock to an unrelated third-party investor. The Company did not participate in the sale and no dividends were paid to LQH Parent prior to their sale.

Other Related Parties

Prior to April 14, 2014, LQH and predecessor entities were owned and controlled by The Blackstone Group L.P. and its affiliates (collectivity, “Blackstone”). As of September 30, 2018, Blackstone beneficially owned approximately 29 percent of our shares of common stock outstanding.  

23


 

 

In connection with the Spin-Off and prior to securitization of the CMBS Facility, approximately $518 million of the aggregate principal amount of our debt was held by Blackstone. During the third quarter of 2018, Blackstone contributed the $518 million loan to a single asset securitization vehicle and invested in a $99 million subordinate risk retention interest issued by such securitization vehicle.  Blackstone was paid all of its share of interest through the securitization date and the additional $2 million in interest. As of December 31, 2017, approximately $82 million of the aggregate principal amount of LQH’s Term Facility was held by Blackstone. In connection with the consummation of the Merger on May 30, 2018, all outstanding amounts under LQH’s Term Facility were repaid in full.

We also purchase products and services from entities affiliated with or owned by Blackstone in the ordinary course of operating our business. The fees paid for these products and services were approximately $1 million and $3 million during the three months and nine months ended September 30, 2017, respectively. The fees paid for these products and services were approximately $1 million during the nine months ended September 30, 2018.

In September 2018, the Company entered into a consulting agreement with Mr. Glenn Alba, a member of the Company’s Board of Directors, pursuant to which Mr. Alba provides consulting services in connection with developing, reviewing and advising on the Company’s real estate and capital deployment policies, strategies and programs. Mr. Alba will receive approximately $8 thousand monthly and reimbursement of all reasonable business expenses incurred on behalf of the Company.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Hotel Management and Franchising Agreements

Management Fees

On May 30, 2018, the Company entered into separate hotel management agreements with LQ Management L.L.C. (“LQM”), whereby we pay a fee equal to five percent of total gross revenues, as defined.

LQM generally has sole responsibility for all activities necessary for the operation of the hotels, including establishing room rates, processing reservations and promoting and publicizing the hotels. LQM also provides all employees for the hotels, prepares reports, budgets and projections, and provides other administrative and accounting support services to the hotels. We have consultative and limited approval rights with respect to certain actions of LQM, including entering into long-term or high value contracts, engaging in certain actions relating to legal proceedings, approving the operating budget, making certain capital expenditures and the hiring of certain management personnel. We are also responsible for reimbursing LQM for certain costs incurred by LQM during the fulfillment of their duties, such as payroll costs for certain employees and other costs that the manager incurs to operate the hotels.  The term of the management agreements is 20 years, subject to two renewals of five years each, at LQM’s option. There are penalties for early termination.

Royalty Fees

On May 30, 2018, we entered into separate hotel franchise agreements with La Quinta Franchising LLC (“LQ Franchising”). Pursuant to the franchise agreements, we were granted a limited, non-exclusive license to use our franchisor’s brand names, marks and system in the operation of our hotels. The franchisor also may provide us with a variety of services and benefits, including centralized reservation systems, participation in customer loyalty programs, national advertising, marketing programs and publicity designed to increase brand awareness, as well as training of personnel. In return, we are required to operate franchised hotels consistent with the applicable brand standards. As of September 30, 2018, 314 of our franchise agreements were with LQ Franchising.

Our franchise agreements require that we pay a five percent royalty fee on gross room revenue. The term of the franchise agreements is  through 2038, subject to one renewal of ten years, at the franchisor’s option. There are penalties for early termination.

In addition to the royalty fee, the LQ Franchising agreement includes a reservation fee of 2 percent of gross room revenues, a marketing fee of 2.5 percent of gross room revenues, a loyalty program fee of 5 percent of eligible room night revenue, and other miscellaneous ancillary fees. Reservation fees are included within room expense in the accompanying condensed consolidated statements of operations.  The marketing fee and loyalty program fees are included within other departmental and support in the accompanying condensed consolidated statements of operations.  

 

Litigation

 

24


 

 

We are a party to a number of pending claims and lawsuits arising in the normal course of business. We do not consider our ultimate liability with respect to any such claims or lawsuits, or the aggregate of such claims and lawsuits, to be material in relation to our condensed consolidated financial condition, results of operations or our cash flows taken as a whole.

We and our hotel manager maintain general and other liability insurance; however, certain costs of defending lawsuits, such as those within the retention or insurance deductible amount, are not covered by or are only partially covered by insurance policies. We regularly evaluate our ultimate liability costs with respect to such claims and lawsuits. We accrue costs from litigation as they become probable and estimable.

Tax Contingencies

Under the terms of the Spin-Off and Merger agreements, we retained any liabilities arising from LQH federal, state or local income tax obligations through tax years ended December 31, 2014. Wyndham Worldwide assumed LQH federal, state or local income tax obligations for LQH tax periods thereafter through and including the Spin-Off date of May 30, 2018.

Additionally, as the Spin-Off was a taxable spin, Wyndham Worldwide reserved $240 million to cover their potential tax payments related to the Spin-Off. Any amount of the reserve related to the spin tax payment will be remitted to the Company with an increase to stockholders’ equity. Any related tax payment in excess of the reserve is the responsibility of Wyndham Worldwide with the Company delivering to Wyndham Worldwide either cash equal to the excess or issuing common stock based on the excess payment amount and the current fair value of the Company’s common stock.  As the income tax returns for the year ended 2017 were recently filed in October 2018, which along with other supporting in-process schedules would serve as the basis for determining the final spin tax payment, the final determination of the reserve amount is not known. However, we believe the eventual resolution of the reserve amount will not be material to the Company’s consolidated financial condition. Any adjustment related to the settlement of the reserve, including the issuance of the Company’s common stock, would result in an adjustment to equity.

We are subject to regular audits by federal and state tax authorities. These audits may result in additional tax liabilities. The Internal Revenue Service (“IRS”) is currently auditing one of our former LQH REITs, and one of our former LQH TRSs, in each case for the tax years ended December 31, 2010 and 2011. As noted above, any obligations related to these tax years are the responsibility of the Company, with no reimbursement or offset from Wyndham Worldwide or any other parties.  On July 7, 2014, we received an IRS 30-Day Letter proposing to impose a 100 percent tax on the REIT totaling $158 million for the periods under audit in which the IRS has asserted that the rent charged for these periods under the lease of hotel properties from the REIT to the taxable REIT subsidiary exceeded an arm’s length rent. After our appeal in November 2017, IRS Appeals returned the matter to IRS Examination for further factual development. There has been no substantive activity on these audits since that date.

We believe the IRS transfer pricing methodologies applied in the audits contain flaws and that the IRS proposed tax and adjustments are inconsistent with the U.S. federal tax laws related to REITs. We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of September 30, 2018, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination. If, however, we are unsuccessful in challenging the IRS, an excise tax would be imposed on the REIT equal to 100 percent of the excess rent and we could owe additional income taxes, interest and penalties, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock. Such adjustments could also give rise to additional state income taxes.

On November 25, 2014, we were notified that the IRS intended to examine the tax returns of the same entities subject to the 2010 and 2011 audit in each case for the tax years ended December 31, 2012 and 2013. As noted above, any obligations related to these tax years are the responsibility of the Company, with no reimbursement or offset from Wyndham Worldwide or any other parties. On August 8, 2017, the IRS issued a 30-Day Letter, in which it is proposed to disallow net operating loss (“NOL”) carryovers originating in tax years 2006-2011 or, in the alternative, tax years 2006-2009, depending upon the outcome of the 2010-2011 examination discussed above. Based on our analysis of the NOL notice, we believe the IRS NOL disallowances applied in the 2012-2013 audit contain the same flaws present in the 2010-2011 audit and that the IRS proposed NOL adjustments are inconsistent with the U.S. federal tax laws related to REITs.  We have concluded that the positions reported on our tax returns under audit by the IRS are, based on their technical merits, more-likely-than-not to be sustained upon examination. Accordingly, as of September 30, 2018, we have not established any reserves related to this proposed adjustment or any other issues reflected on the returns under examination.

Purchase Commitments

As of September 30, 2018, we had approximately $13 million of purchase commitments related to certain continuing redevelopment and renovation projects and other commitments.

NOTE 13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

25


 

 

The following table presents the supplemental cash flow information for the nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

For the Nine Months Ended September 30,

 

 

 

 

2018

 

 

2017

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Interest paid during the period

 

$

63

 

 

$

57

 

 

Income taxes paid during the period, net of refunds

 

 

4

 

 

 

14

 

 

Supplemental non-cash disclosure:

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

 

3

 

 

 

8

 

 

Cash flow hedge adjustment, net of tax

 

 

1

 

 

 

3

 

 

Casualty receivable related to real estate

 

 

5

 

 

 

6

 

 

Dividends payable on common stock

 

 

12

 

 

 

 

 

 

 

NOTE 14. EARNINGS PER SHARE

Basic (loss) earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of the Company’s common stock outstanding plus other potentially dilutive securities, except when the effect would be anti-dilutive. Dilutive securities include equity-based awards issued under long-term incentive plans, as discussed in Note 10 “Equity Based Compensation.”

The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings in periods when we have net income. None of our securities are considered participating securities for the periods presented.

As described in Note 1 “Organization and Basis of Presentation,” on May 30, 2018, LQH Parent stockholders of record as of May 18, 2018, received one share of CorePoint common stock for each share of LQH Parent common stock held after giving effect to the Reverse Stock Split. Basic and diluted net income (loss) per share for the three and nine months ended September 30, 2018 is calculated using the weighted average number of basic, dilutive and anti-dilutive common shares outstanding during the periods, as adjusted for the one-to-two distribution ratio.

26


 

 

The following table sets forth the computation of basic and diluted earnings (loss) per share (in millions, except per share data):

 

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from Continuing Operations, net of tax

 

$

(13

)

 

$

10

 

 

$

(51

)

 

$

34

 

Loss on Discontinued Operations, net of tax

 

 

-

 

 

 

3

 

 

 

(25

)

 

 

(3

)

Net income (loss) attributable to CorePoint Lodging's

     stockholders

 

$

(13

)

 

$

13

 

 

$

(76

)

 

$

31

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic

 

 

58.5

 

 

 

58.0

 

 

 

58.3

 

 

 

58.0

 

Weighted average number of shares outstanding, diluted

 

 

58.5

 

 

 

58.4

 

 

 

58.3

 

 

 

58.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share from continuing operations

 

$

(0.22

)

 

$

0.16

 

 

$

(0.87

)

 

$

0.59

 

Basic earnings (loss) per share from discontinued operations

 

 

 

 

 

0.06

 

 

 

(0.43

)

 

 

(0.05

)

Basic earnings (loss) per share

 

$

(0.22

)

 

$

0.22

 

 

$

(1.30

)

 

$

0.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share from continuing operations

 

$

(0.22

)

 

$

0.16

 

 

$

(0.87

)

 

$

0.58

 

Diluted earnings (loss) per share from discontinued operations

 

 

 

 

 

0.06

 

 

 

(0.43

)

 

 

(0.06

)

Diluted earnings (loss) per share

 

$

(0.22

)

 

$

0.22

 

 

$

(1.30

)

 

$

0.52

 

 

The earnings per share amounts are calculated using unrounded amounts and shares which result in differences in rounding of the presented per share amounts.

 

For the three and nine months ended September 30, 2018, approximately 1.2  million shares and 0.8 million shares, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.     

 

 

NOTE 15. SUBSEQUENT EVENTS

 

On September 19, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the third quarter of 2018. The third quarter dividend was paid on October 15, 2018 to stockholders of record as of October 1, 2018.

 

On November 5, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the fourth quarter of 2018. The fourth quarter dividend will be paid on January 15, 2019 to stockholders of record as of December 31, 2018.

 

 

27


 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with the unaudited condensed consolidated financial statements of CorePoint Lodging and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of the Information Statement, as such risk factors may be updated from time to time in our periodic filings with the SEC. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

For purposes of the following discussion and unless otherwise indicated or the context otherwise requires, “we,” “our,” “us,” “CorePoint” and “CorePoint Lodging” refer to CorePoint Lodging Inc. and its consolidated subsidiaries in each case, after giving effect to the Spin-Off, including the internal reorganization and distribution; “LQH” refers to La Quinta Holdings Inc. and its consolidated subsidiaries; references to “LQH Parent” refer only to La Quinta Holdings Inc. exclusive of its subsidiaries, in each case before giving effect to the Spin-Off; “La Quinta” refers to La Quinta Holdings Inc. and its consolidated subsidiaries; and references to “La Quinta Parent” refer only to La Quinta Holdings Inc., exclusive of its subsidiaries, in each case after giving effect to the Spin-Off.   See “Overview—Basis of presentation” below.

OVERVIEW

Our business

CorePoint Lodging Inc. is a leading owner in the mid-scale and upper mid-scale select service hotel space, primarily under the La Quinta brand. Our portfolio, as of September 30, 2018, consisted of 315 hotels representing approximately 40,400 rooms across 41 states in attractive locations in or near employment centers, airports, and major travel thoroughfares. All but one of our hotels is wholly owned. We primarily derive our revenues from our hotel operations.

Strategic Priorities

 

CorePoint Lodging Inc. is positioned as the only publicly traded U.S. lodging REIT strategically focused on the ownership of mid-scale and upper mid-scale select-service hotels. Our strategic priorities include proactive asset management, value-enhancing investments, disciplined capital allocation, and maintaining a strong balance sheet.

Spin-off from LQH

On May 30, 2018, LQH Parent spun off of its real estate ownership business into an independent, publicly traded company as part of a plan approved by LQH Parent’s board of directors (the “Spin-Off”) prior to the merger (“Merger”) of LQH Parent with a wholly owned subsidiary of Wyndham Worldwide Corporation (“Wyndham Worldwide”).

CorePoint Parent entered into a Separation and Distribution Agreement in January 2018 and several other agreements with La Quinta Parent prior to consummation of the Spin-Off. These agreements set forth the principal transactions required to effect CorePoint Lodging’s separation from La Quinta and provide for the allocation between CorePoint Parent and La Quinta Parent of various assets, liabilities, rights and obligations (including employee benefits, intellectual property, insurance and tax-related assets and liabilities) and govern the relationship between CorePoint Lodging and La Quinta after completion of the Spin-Off. These agreements also include arrangements with respect to transitional services to be provided by La Quinta to CorePoint Lodging.

In addition, prior to the Spin-Off, CorePoint Lodging entered into agreements, including long-term hotel management and franchise agreements for each of its hotels, with LQH that have either not existed historically, or that may be on different terms than the terms of the arrangement or agreements that existed prior to the Spin-Off. The unaudited condensed consolidated financial statements of CorePoint included herein do not reflect the effect of these new or revised agreements for the entirety of the periods presented and LQH’s historical expenses may not be reflective of CorePoint Lodging’s condensed consolidated results of operations, financial position and cash flows had it been a stand-alone company during the entirety of the periods discussed in the “Results of operations” section below. Effective with the closing of the Spin-Off, the results of operations related to the hotel franchise and hotel management business are reported as discontinued operations.

Wyndham Worldwide transition and integration

 

In connection with the agreements entered into with La Quinta, our hotels became a part of the management and franchise platforms of Wyndham Worldwide and we are pro-actively engaged in the related transition and integration. This includes:

 

28


 

 

 

accessing Wyndham Worldwide’s customer network and loyalty platforms to potentially increase market share at a more cost-effective acquisition cost;

 

technology and system integrations for property management, reservation systems and revenue management, which could expand our asset management effectiveness; and

 

gross margin initiatives related to labor, procurement and other service deliveries.

 

We are in regular communication with La Quinta and are actively monitoring our progress. We expect the technology components, which are a part of Wyndham Worldwide’s technology upgrade, to be completed in the first half of 2019. Accordingly, we believe the major components of this transition to be completed during 2019; however, given the dynamics of the lodging sector and ever-changing technology opportunities, the interaction with our property manager will continuously be evolving.

REIT election

For U.S. federal income tax purposes, CorePoint Parent intends to make an election to be taxed as a REIT, effective May 31, 2018, with the filing of its U.S. federal income tax return for the year ending December 31, 2018. So long as CorePoint Parent qualifies as a REIT, it generally will not be subject to U.S. federal income tax on net taxable income that it distributes annually to its stockholders. To qualify as a REIT for U.S. federal income tax purposes, CorePoint Parent must continually satisfy tests concerning, among other things, the real estate qualification of sources of its income, the composition and values of its assets, the amounts it distributes to its stockholders and the ownership of its stock. In order to comply with REIT requirements, CorePoint Parent may need to forego otherwise attractive opportunities and limit its expansion opportunities and the manner in which it conducts its operations. Also to qualify as a REIT, CorePoint Parent must engage a third party manager to operate and manage its hotels. The expense and the restrictions imposed by these arrangements may be greater than those for other REIT and non-REIT hotel owners and operators. See “Risk Factors—Risks Related to our REIT Status and Certain Other Tax Items” in the Information Statement.

Consistent with CorePoint Parent’s intent to elect to be treated as a REIT for U.S. federal income tax purposes beginning with the taxable year ending December 31, 2018 and thereafter, CorePoint Parent intends to make quarterly distributions to its stockholders in amounts that meet or exceed the requirements to qualify and maintain its qualification as a REIT and to avoid corporate level taxation. Prior to making any distributions for U.S. federal tax purposes or otherwise, CorePoint Parent must first satisfy its operating and debt service obligations. Although CorePoint Parent currently anticipates that its estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs to avoid corporate level taxation, it is possible that it would be necessary to utilize cash reserves, liquidate assets at unfavorable prices or incur additional indebtedness in order to make required distributions.

 

Repositioning

 

         In 2016, LQH Parent identified approximately 54 properties that, with the appropriate scope of capital investment and renovation, LQH Parent believed would have the opportunity to re-position within a market, capturing increased occupancy and additional rate while being measured against new, higher quality competitive sets. LQH Parent began execution of an investment plan to invest more than $200 million in the hotels identified in the fourth quarter of 2016, with the start and completion dates for these projects being staggered from 2016 to 2019. The timing of the renovations has been sequenced with the goal of minimizing displacement, and maximizing readiness for peak demand seasons. The capital expenditures related to the repositioning for the first nine months of 2018 was approximately $54 million. As of September 30, 2018, the construction phase of the repositioning effort had been completed for 49 of these hotels.

 

OPERATIONS

Basis of presentation

Notwithstanding the legal form of the Spin-Off, for accounting and financial reporting purposes, the Spin-Off is presented as a reverse spin. This presentation is in accordance with generally accepted accounting principles in the United States (“GAAP”) and is primarily a result of the relative significance of CorePoint Parent’s business to LQH’s business, as measured in terms of revenues, profits, and assets. Further, LQH has been determined to best represent the predecessor entity to CorePoint Parent. Therefore, our historical financial statements presented herein and in our future filings, with respect to periods prior to the Spin-Off, are represented by the historical financial statements of LQH, presenting La Quinta Parent as discontinued operations.

Segment

We have one reportable segment which included 315 properties totaling approximately 40,400 rooms within the United States (“U.S.”) as of September 30, 2018. Our reportable segment is managed discretely and for which discrete financial information is

29


 

 

reviewed regularly by our Chief Executive Officer, who is our chief operating decision maker, to assess performance and make decisions regarding the allocation of resources. Our reportable segment derives its earnings from the operation of owned hotel properties located in the United States.

Ownership

As an owner of hotels, we can capture the full benefit of increases in operating profits during periods of increasing demand or ADR (as defined below). The cost structure of our typical hotel is more fixed than variable, so as demand and ADR increase over time, the pace of increase in operating profits typically is higher than the pace of increase of revenues. Hotel ownership is capital intensive, as we are responsible for the costs and capital expenditures for our hotels. The profits realized by us are generally significantly affected by economic downturns and declines in revenues. See also “—Key components and factors affecting our results of operations—Expenses” below and “Risk Factors—Risks Related to Our Business and Industry” in the Information Statement.

The following table sets forth the number of hotels in our portfolio as of September 30, 2018 and 2017:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Number of Hotels

 

 

 

 

 

 

 

 

Owned Hotels (1)

 

 

314

 

 

 

317

 

Joint Venture

 

 

1

 

 

 

1

 

Total Hotels

 

 

315

 

 

 

318

 

 

(1)

Owned Hotels includes 18 properties that are subject to ground leases; we include these 18 properties as hotels throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. As of September 30, 2018 and 2017, Owned Hotels include one and three hotels, respectively, which met the criteria to be classified as assets held for sale.

The following table summarizes our hotels as of September 30, 2018 and 2017:

 

 

 

As of September 30,

 

 

 

2018

 

 

2017

 

Number of Hotels(1)

 

 

 

 

 

 

 

 

La Quinta Inn & Suites (interior corridor)

 

 

181

 

 

 

178

 

La Quinta Inn & Suites (exterior corridor)

 

 

3

 

 

 

3

 

La Quinta Inns (interior corridor)

 

 

41

 

 

 

45

 

La Quinta Inns (exterior corridor)

 

 

89

 

 

 

92

 

Baymont Inns (exterior corridor)

 

 

1

 

 

 

-

 

Total Hotels

 

 

315

 

 

 

318

 

 

(1)

The hotel designated as assets held for sale as of September 30, 2018 is a La Quinta Inns (interior corridor). Of the three hotels designated as assets held for sale as of September 30, 2017, one is a La Quinta Inns (interior corridor) and two are La Quinta Inns (exterior corridor).

 

Hurricanes

 

During the third quarter of 2017, two major hurricanes made landfall impacting areas serviced by our hotels. In August 2017, Hurricane Harvey lingered over Texas and parts of Louisiana causing widespread flooding and associated damage. In September 2017, Hurricane Irma made its way up Florida’s west coast causing widespread wind damage, flooding and power outages. Many of our hotels in affected areas were impacted by the storms, including property damage, damage to infrastructure surrounding the hotels and business interruption. The storms impacted and will continue to impact in the near term, our revenues, expenses and gains and losses. Hurricanes Harvey and Irma had a meaningful impact on our business in the third and fourth quarters of 2017, as well as the first half of 2018.  

 

During the third quarter of 2018, Hurricane Florence made landfall on the coastal Carolina region of the United States.  The impact of this hurricane had minimal effect on our operations.

30


 

 

 

As of September 30, 2018, approximately 1% of our rooms remain out of service due to hurricane damage. We continue to work closely with our insurance adjusters, claims adjusters and construction staff to bring the affected rooms back online as quickly as possible. Property and business interruption insurance claims will be made as determined through the evaluation process; however, the timing and amount of insurance proceeds are uncertain and may not be sufficient to cover all losses. Capital expenditures will be made in order to restore these hotels to pre-hurricane condition and may be larger than normal due to the scope of the damage. Timing differences have existed and are likely to continue to exist between the capital expenditures and insurance proceeds as reflected in our financial statements.

 

In October 2018, Hurricane Michael made landfall primarily in the Florida panhandle region. The hurricane caused us to close our hotel in Panama City, Florida with total damage currently estimated at approximately $10 million to $15 million. Timing differences are likely to exist between capital expenditures and insurance proceeds.

 

Seasonality

The hotel industry is seasonal in nature. Generally, our revenues are greater in the second and third quarters than in the first and fourth quarters. The timing of holidays can also impact our quarterly results. The periods during which our properties experience higher revenues vary from property to property and depend principally upon location. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. Additionally, our quarterly results may be further affected by the timing of certain of our marketing production expenditures. Further, the timing of any hotel repositioning, acquisitions or dispositions may cause a variation of revenue and earnings from quarter to quarter.

Inflation

We do not believe that inflation had a material effect on our business during the three and nine month periods ended September 30, 2018 and 2017. Although we believe that increases in the rate of inflation will generally result in comparable increases in hotel room rates and operating expenses, severe inflation could contribute to a slowing of the U.S. economy. Such a slowdown could result in a reduction in room rates and occupancy levels, negatively impacting our revenues and net income. Further, to the extent that inflation is correlated with higher interest rates, our borrowing costs on our floating rate debt or new debt placements could be higher.

Key components and factors affecting our results of operations

Revenues

 

Room revenues are primarily derived from room lease rentals at our hotels. We recognize room revenue on a daily basis based on an agreed-upon daily rate after the guest has stayed at one of our hotels. Customer incentive discounts, cash rebates, and refunds are recognized as a reduction of room revenues. Occupancy, hotel, and sales taxes collected from customers and remitted to the taxing authorities are excluded from revenues in our condensed consolidated statements of operations.  

Principal Components of Revenues

Rooms. These revenues represent room lease rentals at our hotels and account for a substantial majority of our total revenue.

Other revenue.  These revenues represent revenue generated by the incidental support of operations at our hotels, including charges to guests for vending commissions, meeting and banquet room, and other rental income from operating leases associated with leasing space for restaurants, billboards and cell towers.

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, and lower consumer confidence 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 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.

31


 

 

Supply. New room supply is an important factor that can affect the lodging industry’s performance. Room rates and occupancy, and thus RevPAR (as defined below), tend to increase when demand growth exceeds supply growth. The addition of new competitive hotels affects the ability of existing hotels to sustain or grow RevPAR, and thus profits.

 

Age and amenities. Newly constructed or remodeled hotels generally will drive higher room rates and occupancy than older properties with deferred maintenance. Similarly, hotels with greater and more current amenities, which are in demand by lodgers, will also be able to achieve higher room rates and occupancy.

Expenses

Principal Components of Expenses

Rooms. These expenses include hotel operating expenses of housekeeping, reservation systems, room and breakfast supplies and front desk costs.

Other departmental and support. These expenses include labor and other expenses that constitute non-room operating expenses, including parking, telecommunications, on-site administrative departments, sales and marketing, recurring repairs and maintenance and utility expenses.

Property tax, insurance and other. These expenses consist primarily of real and personal property taxes, other local taxes, ground rent, equipment rent and insurance.

Management and royalty fees. Management fees represent fees paid to third parties and are computed as a percentage of gross revenue.  Royalty fees are generally computed as a percentage of rooms revenues. In connection with the Spin-Off, we entered into new, long term, management and franchise agreements with significant early cancellation provisions (refer to Note 12 “Commitments and Contingencies” included in the notes to the condensed consolidated financial statements elsewhere in this Quarterly Report on Form 10-Q for additional information).

Other, net. These expenses include losses incurred resulting from property damage or destruction caused by any sudden, unexpected or unusual event such as a hurricane or a significant casualty. 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.

Factors Affecting our Costs and Expenses

Variable expenses. Expenses associated with our room expenses 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. Our management and royalty fees are also primarily driven by our level of gross or room revenues.

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

 

Age. As hotels age, maintenance expense tends to increase. These expenses include more frequent and higher costing repairs, higher utility expenses, increased supplies and higher labor costs. If these costs result in capitalized improvements, depreciation expense could increase over time as discussed above.

 

32


 

 

Key indicators of financial condition and operating performance

We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of this information is financial information that is prepared in accordance with GAAP, while other information may be financial in nature and may not be prepared in accordance with GAAP. Our management also uses other information that may not be financial in nature, including statistical information and comparative data that are commonly used within the lodging industry to evaluate hotel financial and operating performance. Our management uses this information to measure the performance of hotel properties and/or our business as a whole. Historical information is periodically compared to budgets, as well as against industry-wide information. We use this information for planning and monitoring our business, as well as in determining management and employee compensation.

Average daily rate (“ADR”) represents hotel room revenues divided by total number of rooms leased in a given period. ADR measures the average room price attained by a hotel or group of hotels, and ADR trends provide useful information concerning pricing policies and the nature of the guest base of a hotel or group of hotels. Changes in room rates have an impact on overall revenues and profitability.

Occupancy represents the total number of rooms leased in a given period divided by the total number of rooms available at a hotel or group of hotels. Occupancy measures the utilization of our hotels’ available capacity, which may be affected from time to time by our repositioning, property casualties and other activities. 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 hotel rooms increases or decreases.

Revenue per available room (“RevPAR”) is defined as the product of the ADR charged and the average daily occupancy achieved. RevPAR does not include other ancillary, non-room revenues, such as food and beverage revenues or parking, telephone or other guest service revenues generated by a hotel, which are not significant for CorePoint.

RevPAR changes that are driven predominately by occupancy have different implications for overall revenue levels and incremental hotel operating profit than changes driven predominately by ADR. For example, increases in occupancy at a hotel would lead to increases in room and other revenues, as well as incremental operating costs (including, but not limited to, housekeeping services, utilities and room amenity costs). RevPAR increases due to higher ADR, however, would generally not result in additional operating costs, with the exception of those charged or incurred as a percentage of revenue, such as management and royalty fees, credit card fees and commissions. As a result, changes in RevPAR driven by increases or decreases in ADR generally have a greater effect on operating profitability at our hotels than changes in RevPAR driven by occupancy levels. Due to seasonality in our business, we review RevPAR by comparing current periods to budget and period-over-period.

Comparable hotels are defined as hotels that were active and operating in our system for at least one full calendar year as of the end of the applicable reporting period and were active and operating as of January 1st of the previous year; except for: (i) hotels that sustained substantial property damage or other business interruption; (ii) hotels that become subject to a purchase and sale agreement; or (iii) hotels in which comparable results are otherwise not available. Management uses comparable hotels as the basis upon which to evaluate ADR, occupancy, and RevPAR. We report variances in ADR, occupancy, and RevPAR between periods for the set of comparable hotels existing at the reporting date versus the results of the same set of hotels in the prior period.  Of the 315 hotels in our system as of September 30, 2018, 305 have been classified as comparable hotels.

Non GAAP Financial Measures

We also evaluate the performance of our business through certain other financial measures that are not recognized under 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. These measurements are not to be considered more relevant or accurate than the measurements presented in accordance with GAAP. In compliance with SEC requirements, our non-GAAP measurements are reconciled to the most directly comparable GAAP performance measurement. For all non-GAAP measurements, neither the SEC nor any other regulatory body has passed judgement on these non-GAAP measurements.

 

EBITDA, EBITDAre and Adjusted EBITDAre

“EBITDA.” Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a commonly used measure in many REIT and non-REIT related industries.  The Company believes EBITDA is useful in evaluating our operating performance because it provides an indication of our ability to incur and service debt, to satisfy general operating expenses, and to make capital expenditures. We calculate EBITDA excluding discontinued operations.  

33


 

 

“EBITDAre.” The Company presents EBITDAre in accordance with guidelines established by the National Association of Real Estate Investment Trusts (“NAREIT”).  NAREIT defines EBITDAre as net income or loss, excluding interest expense, income tax expense, depreciation and amortization, gains or losses on the disposition of property, impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates.  The Company believes EBITDAre is a useful performance measure to help investors evaluate and compare the results of the Company’s operations from period to period.  EBITDAre is intended to be a supplemental non-GAAP financial measure that is independent of a company’s capital structure.

“Adjusted EBITDAre.”  The Company adjusts EBITDAre when evaluating its performance because the Company believes that the adjustment for certain items, such as reorganization and separation transaction expenses, acquisition and disposition transaction expenses, stock-based compensation expense, discontinued operations, and other items not indicative of ongoing operating performance, provides useful supplemental information to management and investors regarding its ongoing operating performance. The Company believes that EBITDAre and Adjusted EBITDAre provide useful information to investors about it and its financial condition and results of operations for the following reasons: (i) EBITDAre and Adjusted EBITDAre are among the measures used by Company’s management to evaluate its operating performance and make day-to-day operating decisions; and (ii) EBITDAre and Adjusted EBITDAre are frequently used by securities analysts, investors, lenders and other interested parties as a common performance measure to compare results or estimate valuations across companies in and apart from the Company’s industry sector.

EBITDAre and Adjusted EBITDAre are not recognized terms under GAAP, have limitations as analytical tools and should not be considered either in isolation or as a substitute for net (loss) income, cash flow or other methods of analyzing the Company’s results as reported under GAAP. Some of these limitations are:

 

EBITDAre and Adjusted EBITDAre do not reflect changes in, or cash requirements for, the Company’s working capital needs;

 

EBITDAre and Adjusted EBITDAre do not reflect the Company’s interest expense, or the cash requirements necessary to service interest or principal payments, on its indebtedness;

EBITDAre and Adjusted EBITDAre do not reflect the Company’s tax expense or the cash requirements to pay its taxes;

 

EBITDAre and Adjusted EBITDAre do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

34


 

 

 

EBITDAre and Adjusted EBITDAre do not reflect the impact on earnings or changes resulting from matters that the Company considers not to be indicative of its future operations, including but not limited to discontinued operations, impairment, acquisition and disposition activities and restructuring expenses;

 

although depreciation, amortization and impairment are non-cash charges, the assets being depreciated, amortized or impaired will often have to be replaced, upgraded or repositioned in the future, and EBITDAre and Adjusted EBITDAre do not reflect any cash requirements for such replacements; and

 

other companies in the Company’s industry may calculate EBITDAre and Adjusted EBITDAre differently, limiting their usefulness as comparative measures.

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

The following is a reconciliation of our GAAP net income (loss) to EBITDA, EBITDAre and Adjusted EBITDAre for the three and nine months ended September 30, 2018 and 2017 (in millions):

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

Net Income (loss) attributable to CorePoint Lodging

    Stockholders

 

$

(13

)

 

$

13

 

 

$

(76

)

 

$

31

 

 

Interest expense

 

 

17

 

 

 

12

 

 

 

48

 

 

 

36

 

 

Income tax expense

 

 

5

 

 

 

9

 

 

 

6

 

 

 

28

 

 

Depreciation and amortization

 

 

39

 

 

 

36

 

 

 

115

 

 

 

104

 

 

Loss from discontinued operations

 

 

 

 

 

(3

)

 

 

25

 

 

 

3

 

 

EBITDA

 

 

48

 

 

 

67

 

 

 

118

 

 

 

202

 

 

Impairment loss and casualty (gain) loss

 

 

3

 

 

 

3

 

 

 

5

 

 

 

 

 

EBITDAre

 

 

51

 

 

 

70

 

 

 

123

 

 

 

202

 

 

Equity-based compensation

 

 

3

 

 

 

2

 

 

 

5

 

 

 

6

 

 

Spin-Off and reorganization expenses

 

 

2

 

 

 

6

 

 

 

40

 

 

 

15

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

10

 

 

 

 

 

Other (income) expense, net

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

1

 

 

Adjusted EBITDAre

 

$

55

 

 

$

77

 

 

$

177

 

 

$

224

 

 

 

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 operations (“FFO”) attributable to stockholders for a given operating period in accordance with standards established by NAREIT, as net income or loss attributable to stockholders (calculated in accordance with GAAP), excluding depreciation and amortization, gains or losses on sales of assets, impairment, discontinued operations, 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. 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

35


 

 

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: transaction expense associated with the potential disposition of hotels or acquisition of a business, severance expense, share-based compensation expense, litigation gains and losses outside the ordinary course of business, amortization of deferred financing costs, reorganization costs and separation transaction expenses, loss on early extinguishment of debt, straight-line ground lease, casualty losses, and other items that we believe are not representative of our current or future operating performance

NAREIT FFO attributable to stockholders and Adjusted FFO attributable to stockholders are not recognized terms under GAAP, have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP.

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

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

Net Income (loss) attributable to CorePoint Lodging

    Stockholders

 

$

(13

)

 

$

13

 

 

$

(76

)

 

$

31

 

 

Depreciation and amortization

 

 

39

 

 

 

36

 

 

 

115

 

 

 

104

 

 

Loss from discontinued operations

 

 

 

 

 

(3

)

 

 

25

 

 

 

3

 

 

Impairment loss and casualty (gain) loss

 

 

3

 

 

 

3

 

 

 

5

 

 

 

-

 

 

NAREIT defined FFO attributable to stockholders

 

 

29

 

 

 

49

 

 

 

69

 

 

 

138

 

 

Equity-based compensation expense

 

 

3

 

 

 

2

 

 

 

5

 

 

 

6

 

 

Amortization expense of deferred financing costs

 

 

4

 

 

 

2

 

 

 

8

 

 

 

5

 

 

Spin-Off and reorganization expense

 

 

2

 

 

 

6

 

 

 

40

 

 

 

15

 

 

Loss on extinguishment of debt, net

 

 

 

 

 

 

 

 

10

 

 

 

 

 

Other (income) expense, net

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

1

 

 

Adjusted FFO attributable to stockholders

 

$

37

 

 

$

58

 

 

$

131

 

 

$

165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, diluted (1)

 

 

59.6

 

 

 

58.4

 

 

 

59.1

 

 

 

58.3

 

 

 

 

(1)

Share amounts are presented on a diluted basis assuming a positive non-GAAP financial measure. This presentation will differ from our GAAP diluted shares for the anti-dilutive effects when we report a GAAP net loss. See note 14 “Earnings Per Share.”

 

Results of operations

The following table presents hotel operating statistics for our comparable hotels for the applicable periods (1):

 

 

 

 

Three Months

Ended September 30,

2018

 

 

Variance Three Months

2018 vs. Three Months

2017

 

Nine Months

Ended September 30,

2018

 

 

Variance Nine Months

2018 vs. Nine Months

2017

Occupancy

 

 

68.8

%

 

 

10

 

bps

 

 

66.4

%

 

 

-60

 

bps

ADR

 

$

91.56

 

 

 

3.5

 

%

 

$

91.02

 

 

 

4.1

 

%

RevPAR

 

$

63.00

 

 

 

3.6

 

%

 

$

60.42

 

 

 

3.2

 

%

 

(1) 

See definition of comparable hotels in “—Key indicators of financial condition and operating performance—Comparable hotels.” Basis points (“bps”) represents one hundredth of one percent.

36


 

 

Beginning in the second half of 2016, we began enacting several key initiatives designed to further improve our RevPAR performance, including taking steps to enhance consistency of product and guest experience and investing in points of differentiation to encourage engagement with the brand. These initiatives caused incremental expenditures in 2017 and continued into 2018. We expect to incur additional incremental expenditures in the future as these initiatives are implemented.

Three months ended September 30, 2018 compared with three months ended September 30, 2017

The following tables present our overall operating performance for the three months ended September 30, 2018 and 2017, including the amount and percentage change in these results between the periods with discussion of significant variances ($ in millions, non-meaningful percentage changes are noted as “NM”):

 

 

 

For the Three Months Ended September 30,

 

 

Increase/(Decrease)

 

 

 

 

2018

 

 

2017

 

 

$ change

 

 

% change

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

230

 

 

$

223

 

 

$

7

 

 

 

3.1

 

 

Other

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

Total Revenues

 

 

234

 

 

 

227

 

 

 

7

 

 

 

3.1

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

 

102

 

 

 

94

 

 

 

8

 

 

 

8.5

 

 

Other departmental and support

 

 

33

 

 

 

31

 

 

 

2

 

 

 

6.5

 

 

Property tax, insurance and other

 

 

17

 

 

 

16

 

 

 

1

 

 

 

6.3

 

 

Management and royalty fees

 

 

23

 

 

 

 

 

 

23

 

 

NM

 

 

Corporate general and administrative

 

 

10

 

 

 

18

 

 

 

(8

)

 

 

(44.4

)

 

Depreciation and amortization

 

 

39

 

 

 

36

 

 

 

3

 

 

 

8.3

 

 

Other, net

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

Total Operating Expenses

 

 

227

 

 

 

198

 

 

 

29

 

 

 

14.6

 

 

Operating Income

 

 

7

 

 

 

29

 

 

 

(22

)

 

 

(75.9

)

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(17

)

 

 

(12

)

 

 

(5

)

 

 

41.7

 

 

Other  income, net

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

Total Other Expenses, net

 

 

(15

)

 

 

(10

)

 

 

(5

)

 

 

50.0

 

 

Income (Loss) from Continuing Operations Before

   Income Taxes

 

 

(8

)

 

 

19

 

 

 

(27

)

 

NM

 

 

Income tax expense

 

 

(5

)

 

 

(9

)

 

 

4

 

 

 

(44.4

)

 

Income (Loss) from Continuing Operations, net of tax

 

 

(13

)

 

 

10

 

 

 

(23

)

 

NM

 

 

Income from Discontinued Operations, net of tax

 

 

 

 

 

3

 

 

 

(3

)

 

 

(100.0

)

 

Net Income (loss) attributable to CorePoint Lodging

   stockholders

 

$

(13

)

 

$

13

 

 

$

(26

)

 

NM

 

 

 

 

 

 

Revenues

The increase in room revenues of $7 million or 3.1 percent, was primarily driven by an increase in RevPAR at our comparable hotels of 3.6 percent for the three months ended September 30, 2018 over the prior year period. The increase in RevPAR was driven by an increase in ADR of 3.5 percent and an increase in occupancy of 10 basis points. This increase was partially offset by the sale of three hotels between the periods. Excluding the impact of the hotels impacted by hurricanes Harvey and Irma, comparable RevPAR increased 4.7 percent for the three months ended September 30, 2018 over the comparable prior period.

Other revenues at our hotels for each of the three month periods ended September 30, 2018 and 2017 totaled $4 million. These revenues represent revenue generated by the incidental support of operations at our hotels, including charges to guests for vending commissions, meeting and banquet room revenue, and other rental income from operating leases associated with leasing space for restaurants or other retail sites, billboards and cell towers.

37


 

 

Operating expenses

 

 

 

Three Months

Ended September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Rooms

 

$

102

 

 

$

94

 

 

 

8.5

 

 

The variance in rooms expenses was primarily caused by increases in payroll (including salaries and hourly wages) and benefits, sales manager expenses due to additional labor investments across the portfolio, reservation fees, contract labor due to difficulty in hiring, travel agency commission costs due to increased volume driven through third party online travel agencies, hotel supply expense, and breakfast expense. These increases were partially offset by decreases in expense caused by three fewer hotels in the hotel portfolio at September 30, 2018 in comparison to the hotels owned at September 30, 2017.

 

 

 

 

Three Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Management and royalty fees

 

$

23

 

 

$

 

 

NM

 

We did not incur any management and royalty fees prior to May 30, 2018.  On May 30, 2018, in connection with the Spin-Off, we entered into management and franchise agreements for our hotels with La Quinta Management L.L.C. (“LQM”) and La Quinta Franchising LLC (“LQ Franchising”), respectively.  Management fees are computed as five percent of total gross revenue and royalty fees are computed as five percent of total gross rooms revenues. We expect these fees to be a significant variance to prior periods through 2019.

 

 

 

Three Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Corporate general and administrative

 

$

10

 

 

$

18

 

 

 

(44.4

)

 

 

The decrease in corporate general and administrative expenses was primarily the result of increased costs in the third quarter of 2017 associated with pursuing the separation of our real estate business from our franchise and management business. This decrease was partially offset with an increase in expenses in establishing CorePoint Lodging as an independent, publicly traded company.

 

 

 

Three Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Depreciation and amortization

 

$

39

 

 

$

36

 

 

 

8.3

 

 

 

The increase in depreciation and amortization of $3 million was primarily the result of additional depreciation on certain assets in 2018 driven by increases in capital expenditures between September 30, 2017 and September 30, 2018. We had approximately $104 million more in depreciable real estate assets as of September 30, 2018 compared to as of September 30, 2017. In accordance with GAAP, there was no adjustment to depreciable assets as a result of the Spin-Off.

 

 

 

Three Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Interest expense

 

$

(17

)

 

$

(12

)

 

 

41.7

 

 

 

On May 30, 2018, in connection with the Spin-Off, we borrowed an aggregate principal amount of $1.035 billion under the CMBS Facility (as defined below).  The proceeds from the CMBS Facility were used to facilitate the repayment of existing debt. Accordingly, our total debt outstanding for the three month period in 2018 was approximately $44 million higher than the corresponding period in 2017. On May 30, 2018, we borrowed $25.0 million under our Revolving Facility (as defined below) at a rate of one-month LIBOR plus 4.50 percent per annum. On August 2, 2018, we repaid the $25 million amount previously drawn on the Revolving Facility. The deferred financing costs related to the CMBS and Revolving Facility are being amortized over their initial term, which is a shorter period than the prior debt instruments, and accordingly are approximately $3 million higher than the same period in 2017.  Additionally, distributions on our preferred stock classified as interest expense were approximately $1 million for the three months ended September 2018. The increase in interest expense was primarily due to these changes in the structure of the debt facilities.  

38


 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Income tax expense

 

$

(5

)

 

$

(9

)

 

 

(44.4

)

 

The decrease in income tax expense of $4 million is primarily the result of our intent to be taxable as a REIT, which effectively eliminates federal and state income taxes for that portion of our operations. Our income tax expense for the three months ended September 30, 2018 is primarily attributable to our TRS.

Nine months ended September 30, 2018 compared with nine months ended September 30, 2017

The following tables present our overall operating performance for the nine months ended September 30, 2018 and 2017, including the amount and percentage change in these results between the periods with discussion of significant variances ($ in millions, non-meaningful percentage changes are noted as “NM”):

 

 

 

Nine Months Ended

September 30,

 

 

Increase/(Decrease)

 

 

 

 

2018

 

 

2017

 

 

$ change

 

 

% change

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

$

650

 

 

$

644

 

 

$

6

 

 

 

0.9

 

 

Other

 

 

13

 

 

 

12

 

 

 

1

 

 

 

8.3

 

 

Total Revenues

 

 

663

 

 

 

656

 

 

 

7

 

 

 

1

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rooms

 

 

287

 

 

 

268

 

 

 

19

 

 

 

7.1

 

 

Other departmental and support

 

 

92

 

 

 

89

 

 

 

3

 

 

 

3.4

 

 

Property tax, insurance and other

 

 

52

 

 

 

43

 

 

 

9

 

 

 

20.9

 

 

Management and royalty fees

 

 

32

 

 

 

 

 

 

32

 

 

NM

 

 

Corporate general and administrative

 

 

73

 

 

 

56

 

 

 

17

 

 

 

30.4

 

 

Depreciation and amortization

 

 

115

 

 

 

104

 

 

 

11

 

 

 

10.6

 

 

Other, net

 

 

5

 

 

 

-

 

 

 

5

 

 

NM

 

 

Total Operating Expenses

 

 

656

 

 

 

560

 

 

 

96

 

 

 

17.1

 

 

Operating Income

 

 

7

 

 

 

96

 

 

 

(89

)

 

 

(92.7

)

 

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(48

)

 

 

(36

)

 

 

(12

)

 

 

33.3

 

 

Other income, net

 

 

6

 

 

 

2

 

 

 

4

 

 

NM

 

 

Loss on extinguishment of debt

 

 

(10

)

 

 

 

 

 

(10

)

 

NM

 

 

Total Other Expenses, net

 

 

(52

)

 

 

(34

)

 

 

(18

)

 

 

52.9

 

 

Income (loss) from Continuing Operations Before

   Income Taxes

 

 

(45

)

 

 

62

 

 

 

(107

)

 

NM

 

 

Income tax expense

 

 

(6

)

 

 

(28

)

 

 

22

 

 

 

(78.6

)

 

Income (loss) from Continuing Operations, net of tax

 

 

(51

)

 

 

34

 

 

 

(85

)

 

NM

 

 

Loss from Discontinued Operations, net of tax

 

 

(25

)

 

 

(3

)

 

 

(22

)

 

NM

 

 

Net Income (loss) attributable to CorePoint Lodging

   stockholders

 

$

(76

)

 

$

31

 

 

$

(107

)

 

NM

 

 

 

Revenues

The increase in room revenues of $6 million, or 0.9 percent, was primarily driven by an increase in RevPAR at our comparable hotels of 3.2 percent for the nine months ended September 30, 2018 over the prior year period. The increase in RevPAR was driven by an increase in ADR of 4.1 percent, offset slightly by a decrease in occupancy of 60 basis points. This increase was partially offset by the sale of three hotels between the periods. Excluding the impact of the hotels impacted by hurricanes Harvey and Irma, comparable RevPAR increased 5.1 percent for the nine months ended September 30, 2018.

Other revenues for the nine months ended September 30, 2018 and 2017 totaled $13 million and $12 million, respectively. These revenues represent revenue generated by the incidental support of operations at our hotels, including charges to guests for

39


 

 

vending commissions, meeting and banquet room revenue, and other rental income from operating leases associated with leasing space for restaurants or other retail sites, billboards and cell towers.

Operating expenses

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Rooms

 

$

287

 

 

$

268

 

 

 

7.1

 

 

The variance in rooms expenses was primarily caused by increases in payroll (including salaries and hourly wages) and benefits, sales manager expenses due to additional labor investments across the portfolio, contract labor due to difficulty in hiring, travel agency commission costs due to increased volume driven through third party online travel agencies, reservation expense, breakfast expense, and hotel supply expense. These increases were partially offset by decreases in expense caused by three fewer hotels in the hotel portfolio at September 30, 2018 in comparison to the hotels owned at September 30, 2017.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Property tax, insurance and other

 

$

52

 

 

$

43

 

 

 

20.9

 

 

The increase in other property-level expense was primarily due to lower insurance expense recorded in 2017 resulting from prior years estimated insurance loss reserve adjustment. Additionally, property taxes also increased period over period due to higher property tax valuations, for the applicable 2018 tax year.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Management and royalty fees

 

$

32

 

 

$

-

 

 

NM

 

We did not incur any management and royalty fees prior to May 30, 2018.  On May 30, 2018, in connection with the Spin-Off, we entered into management and franchise agreements for our hotels with LQM and LQ Franchising, respectively.  Management fees are computed as five percent of total gross revenue and royalty fees are computed as five percent of total gross rooms revenues. We expect these fees to be a significant variance to prior periods through 2019.

 

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Corporate general and administrative

 

$

73

 

 

$

56

 

 

 

30.4

 

 

The increase in corporate general and administrative expenses were primarily the result of increased transition costs and other non-recurring costs associated with establishing CorePoint Lodging as an independent, publicly traded company.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Depreciation and amortization

 

$

115

 

 

$

104

 

 

 

10.6

 

 

 

40


 

 

The increase in depreciation and amortization of $11 million, was primarily the result of additional depreciation on certain assets in the first nine months of 2018 driven by an increase in capital expenditures between September 30, 2017 and September 30, 2018. In accordance with GAAP, there was no adjustment to depreciable assets as a result of the Spin-Off.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Interest expense

 

$

(48

)

 

$

(36

)

 

 

33.3

 

 

On May 30, 2018, in connection with the Spin-Off, we borrowed an aggregate principal amount of $1.035 billion under the CMBS Facility.  The proceeds from the CMBS Facility were used to facilitate the repayment of existing debt. Accordingly, our total debt outstanding for the nine month period in 2018 was approximately $44 million higher than the similar period in 2017. The interest rate on the CMBS Facility is one-month LIBOR plus 2.75 percent per annum through the initial period. The interest rate on our 2017 debt was LIBOR plus 2.75 percent. For the period prior to the securitization of the CMBS Facility, we incurred additional interest expense of $2 million. Additionally, on May 30, 2018, we borrowed $25 million under our Revolving Facility at a rate of one-month LIBOR plus 4.50 percent per annum, which was repaid on August 2, 2018.  The deferred financing costs related to the CMBS Facility and Revolving Facility are being amortized over their initial term, which is a shorter period than the prior debt instruments, and accordingly are approximately $5 million higher than the same period in 2017.  Additionally, distributions on our preferred stock classified as interest expense were approximately $1 million for the nine months ended September 2018. The increase in interest expense was primarily due to these changes in the structure of the debt facilities.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Other income, net

 

$

6

 

 

$

2

 

 

NM

 

 

The increase of $4 million was primarily due to recognition of the gain from the settlement of our interest rate swap and proceeds from business interruption insurance proceeds, which are recorded as income as collected. Accordingly, there is a gap between the timing of the lost revenue and the recording of business interruption income.

 

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

Loss on extinguishment of debt

 

$

(10

)

 

$

 

 

NM

 

 

Loss on extinguishment of debt totaled $10 million for the nine months ended September 30, 2018 and was attributable to the early repayment of LQH’s Term Facility.

 

 

Nine Months Ended

September 30,

 

 

Percent

change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Income tax expense

 

$

(6

)

 

$

(28

)

 

 

(78.6

)

 

The decrease in income tax expense of $22 million is primarily the result of our intent to be taxable as a REIT, which effectively eliminates federal and state income taxes for that portion of our operations. Our income tax expense for the nine months ended September 30, 2018 is primarily attributable to our TRS.

 

Significant Balance Sheet Fluctuations

        The discussion below relates to significant fluctuations and activity in certain line items of our consolidated balance sheets from December 31, 2017 to September 30, 2018.

        Total real estate increased $2 million for the nine months ended September 30, 2018. During the nine months ended September 30, 2018, we had approximately $119 million in additions to real estate substantially offset by $115 million of depreciation expense in continuing operations.

        Other assets increased $19 million for the nine months ended September 30, 2018. The increase was primarily a result of $15 million placed in lenders escrow related to our CMBS Facility.

41


 

 

        Assets and liabilities in discontinued operations as of December 31, 2017 were primarily composed of balance sheet items associated with our franchise and management businesses, which on May 30, 2018 were removed in connection with the completion of our Spin-Off. See Note 3 “Discontinued Operations” included in the notes to the condensed consolidated financial statements.

        Debt, net increased $18 million for the nine months ended September 30, 2018. The increase was primarily a result of the refinancing of the Term Facility of $1.003 billion and placement of the new CMBS Facility of $1.035 billion, less applicable deferred finance costs related to the new placement.

        Deferred tax liabilities decreased $213 million during the nine months ended September 30, 2018. As a result of the Spin-Off and our intent to be taxed as a REIT, our pre-Spin-Off deferred tax liabilities were eliminated.

        Mandatorily redeemable preferred shares increased $15 million for the nine months ended September 30, 2018 with the issuance in May 2018 of the Cumulative Redeemable Series A Preferred Stock.

        Dividends Payable increased $12 million for the nine months ended September 30, 2018. This increase is due to the Company’s commencement of quarterly common stock dividend payments subsequent to the Spin-Off. The Company declared a common stock dividend of $0.20 per share in the third quarter of 2018 which was paid on October 15, 2018.

Liquidity and Capital Resources

Overview

As of September 30, 2018, we had total cash and cash equivalents of $64 million. Our known liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including corporate expenses, taxes, payroll and related benefits, legal costs, operating costs associated with the operation of hotels, interest and scheduled principal payments on our outstanding indebtedness, potential payments related to our interest rate caps, capital expenditures for renovations and maintenance at our hotels, costs associated with our Spin-Off and the Merger, quarterly dividend distributions, and other purchase commitments.

We finance our short-term business activities primarily with existing cash and cash generated from our operations. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including corporate expenses, payroll and related benefits, legal costs, and purchase commitments for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity and minimize operational costs.

In connection with the completion of the Spin-Off, the Company raised approximately $1 billion dollars in long-term debt and preferred stock. These financings were used to retire debt incurred prior to the Spin-Off and to provide access to additional capital for our future operations. We believe that these long-term financings, plus our potential access to other debt and equity capital as a publicly traded REIT will allow us to fund our long-term strategic initiatives.

As market conditions warrant and subject to liquidity requirements, contractual restrictions and other factors, we, our affiliates, and/or our major stockholders and their respective affiliates, may from time to time purchase our outstanding equity securities and/or debt through open market purchases, privately negotiated transactions or otherwise. Any amounts involved may be material.

In connection with the Spin-Off and Merger, the parties agreed to set aside $240 million as a reserve amount to pay certain taxes that will be due as a result of the Spin-Off and related transactions. CorePoint and its tax advisors are continuing their work to finalize the calculations. We do not believe the eventual finalization will have a material effect on our liquidity.

The following table summarizes our net cash flows for the nine months ended September 30, 2018 ($ in millions):

 

 

 

For the Nine Months Ended September 30,

 

 

Percent

Change

 

 

 

 

2018

 

 

2017

 

 

2018 vs. 2017

 

 

Net cash provided by operating activities

 

$

68

 

 

$

159

 

 

 

(57.2

)

 

Net cash used in investing activities

 

 

(131

)

 

 

(126

)

 

 

4.0

 

 

Net cash used in financing activities

 

 

(14

)

 

 

(14

)

 

 

-

 

 

 

42


 

 

Operating activities

Net cash provided by operating activities was $68 million for the nine months ended September 30, 2018, compared to $159 million for the nine months ended September 30, 2017. The $91 million decrease was primarily driven by higher management and royalty fees, increased corporate general and administration expenses related to the completion of the Spin-Off and the other operating results discussed above. This decrease also includes the effects of timing differences in our various working capital components including other assets, accrued payroll and employee benefits and other liabilities.

Investing activities

Net cash used in investing activities during the nine months ended September 30, 2018 was $131 million, compared to $126 million for the nine months ended September 30, 2017. The $5 million increase in cash used in investing activities was primarily attributable to a $22 million decrease in proceeds from the sale of real estate and the $15 million lender escrow payment related to our new financings, partially offset by a $20 million decrease in capital expenditures and an $11 million increase in insurance proceeds from casualty claims. The change in proceeds from the sale of real estate related to four hotel sales for the nine months ended September 30, 2017, compared to two smaller sales during the comparable period in 2018. As of September 30, 2018, we have identified one hotel held for sale with a carrying value of approximately $3 million. Approximately $80 million of our capital expenditures for the nine months ended September 30, 2018 related to repositioning and casualty replacements. As these projects are completed, we expect our total capital expenditures to decrease.

 

Financing activities

 

Net cash used in financing activities during the nine months ended September 30, 2018 and 2017 was $14 million. The cash used in financing activities during the nine months ended September 30, 2018 was primarily attributable to the financing activity associated with the Spin-Off, including payment to LQH of $23 million related to the Spin-Off and issuance of the mandatorily redeemable preferred shares of $15 million.

 

Discontinued Operations

Effective with the closing of the Spin-Off on May 30, 2018, the results of operations related to the hotel franchise and hotel management business are reported as discontinued operations for all periods presented. In addition, the assets and liabilities of the hotel franchise and hotel management business have been segregated from the assets and liabilities related to the Company’s continuing operations and presented separately on the Company’s comparative balance sheet as of December 31, 2017.

 

In connection with the Spin-Off, CorePoint made a cash payment to LQH Parent of approximately $1 billion (the “Cash Payment”) immediately prior to and as a condition of the Spin-Off. The Cash Payment was to facilitate the repayment of part of LQH Parent’s existing debt. In addition, simultaneously with the closing of the merger, Wyndham Worldwide repaid, or caused to be repaid, on behalf of LQH Parent, LQH Parent’s Term Facility.

Other than as specifically discussed in this section, we do not expect these discontinued operations to have a significant impact on our future liquidity.

 

Capital expenditures

 

During the nine months ended September 30, 2018 and 2017, we made capital expenditures of approximately $138 million and $158 million, respectively. A substantial portion of these expenditures related to our repositioning and casualty replacements. Approximately $40 million of our 2018 activity related to recurring hotel operations.

 

As of September 30, 2018, we had outstanding commitments under capital expenditure contracts of approximately $13 million related to certain continuing redevelopment and renovation projects, casualty replacements and information technology enhancements. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract. We expect to meet these obligations from our operations, insurance claim reimbursements or other funds available to us.

Financing Transactions in connection with the Spin-Off

On May 30, 2018, certain indirect wholly-owned subsidiaries of CorePoint (collectively, the “CorePoint CMBS Borrower”) entered into a Loan Agreement (the “CMBS Loan Agreement”), pursuant to which the CorePoint CMBS Borrower borrowed an

43


 

 

aggregate principal amount of $1.035 billion under a secured mortgage loan secured primarily by mortgages for 307 owned and ground leased hotels, an excess cash flow pledge for seven owned and ground leased hotels and other collateral customary for mortgage loans of this type (the “CMBS Facility”). The proceeds from the CMBS Facility were used to facilitate the repayment of part of LQH Parent’s existing debt. In addition, concurrently with the closing of the Merger, Wyndham repaid, or caused to be repaid, the Term Facility.

Also on May 30, 2018, CorePoint Revolver Borrower and CorePoint OP entered into the Revolver Credit Agreement providing for the $150 million Revolving Facility (“Revolving Facility”). The Revolving Facility will mature on May 30, 2020, with an election to extend the maturity for one additional year subject to certain conditions, including that the maturity of the CMBS Facility be extended to a date no earlier than the maturity of the Revolving Facility. Upon consummation of the Spin-Off, $25 million was drawn on the Revolving Facility and repaid on August 3, 2018.  

In connection with LQH’s internal reorganization prior to the Spin-Off, the Company issued 15,000 shares of Cumulative Redeemable Series A Preferred Stock, par value $0.01 per share (the “Series A preferred stock”), to a wholly owned subsidiary of LQH Parent. LQH, through its subsidiary, privately sold all of the Series A preferred stock to an unrelated third-party investor immediately prior to the completion of the Spin-Off.

 

Accordingly, subsequent to the Spin-Off our primary capital sourcing consisted of our CMBS and Revolving Facilities and Series A Preferred Stock. As of September 30, 2018, we had cash and cash equivalents of $64 million and borrowing capacity under our Revolving Facility of $150 million, a total availability of $214 million. We also believe we have access to other sources of debt and equity capital as a public company in addition to cash generated from our operations.  

 

 

The CMBS and Revolving Facilities come due in 2020. The Revolving Facility provides for a one-year extension option and the CMBS provides for five one-year extension options. We anticipate exercising the extension options or refinancing from other capital sources as the facilities come due. There is no assurance at those times market terms would allow financings at comparable interest rates or leverage levels.

Further, if we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures or refinance all or a portion of our existing debt. Our ability to make scheduled principal payments and to pay interest on our debt depends on the future performance of our operations, which is subject to general conditions in or affecting the hotel industry that are beyond our control. See “Risk Factors—Risks Related to Our Business and Industry” and “Risk Factors—Risks Related to Our Indebtedness” in the Information Statement.

Dividends

 

Dividends are authorized at the discretion of our board of directors based on an analysis of our prior performance, market distribution rates of our industry peer group, expectations of performance for future periods, including actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, dispositions, general financial condition and other factors that our board of directors deems relevant.  The board’s decision will be influenced, in part, by its obligation to ensure that we maintain our status as a REIT.

 

On August 6, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.067 per share of common stock with respect to the second quarter of 2018, which represented an anticipated regular quarterly dividend of $0.20 per share of common stock prorated for the period from completion of the Spin-Off on May 30, 2018 through the last day of the second quarter.  The prorated dividend was paid on September 14, 2018 to stockholders of record as of August 30, 2018, with the aggregate cash dividend paid to each stockholder with respect to shares of common stock held by such holder rounded up to the nearest whole cent.  

 

On September 19, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the third quarter of 2018. The third quarter dividend was paid on October 15, 2018 to stockholders of record as of October 1, 2018.

 

On November 5, 2018, our Board of Directors authorized and the Company declared a cash dividend of $0.20 per share of common stock with respect to the fourth quarter of 2018. The fourth quarter dividend will be paid on January 15, 2019 to stockholders of record as of December 31, 2018.

Cash flow from operating activities for the nine months ended September 30, 2018 was $68 million.  Such cash flow from operating activities includes payments for our Series A Preferred Stock. The cash common stock dividends noted above related to the third and fourth quarters of 2018 represent a quarterly dividend payment of approximately $12 million, or an annual rate of

44


 

 

approximately $48 million. Further, our NAREIT FFO for the three and nine months ended September 30, 2018 was $29 million and $69 million, respectively. Accordingly, we believe our cash flow from operating activities and NAREIT FFO are in excess of our dividends. However, as dividends and other distributions are at the sole discretion of our board of directors there is no assurance of the amount of any future dividends, if any.  (See “Non-GAAP Financial Measures” above for additional information regarding our calculation of funds from operations and a reconciliation to GAAP net income).  

Contractual obligations

Except as a result of the Financing Transactions and the related impact to interest expense as described above under “Liquidity and Capital Resources―Debt―Financing Transactions in connection with the Spin-Off and merger” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018,  which description is incorporated herein by reference, there were no significant changes to our contractual obligations since December 31, 2017 and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual obligations” in the Information Statement is incorporated herein by reference.

Off-balance sheet arrangements

We do not have off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements

See Note 2 “Significant Accounting Policies and Recently Issued Accounting Standards”  to our condensed consolidated financial statements included elsewhere in this report for a description of new accounting pronouncements.

Critical accounting policies and estimates

The preparation of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the condensed consolidated financial statements and accompanying footnotes. 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. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Information Statement describes the critical accounting estimates used in preparation of our condensed consolidated financial statements. 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 impact on financial position or results of operations. There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Information Statement.

 

 

Item 3.

Quantitative And Qualitative Disclosures About Market Risk

As of September 30, 2018, we are exposed to market risk primarily from changes in interest rates, which may impact future income, cash flows and fair value of the Company, depending on changes to interest rates. In certain situations, we may seek to reduce cash flow volatility associated with changes in interest rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We will continue to have exposure to such risks to the extent they are not hedged. We expect to enter into derivative financial arrangements to the extent they meet the objective described above, or are required by the terms of our debt facilities, and we do not use derivatives for trading or speculative purposes.

Interest rate risk

Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve the financing objectives, we currently borrow primarily at variable rates with what we believe are the lowest margins available and, in some cases, the ability to convert variable rates to fixed rates either directly or through interest rate hedges. With regard to variable rate financing, we manage interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities, which to date have included interest rate caps.

On May 30, 2018, CorePoint Lodging completed the Financing Transactions. We are exposed to interest rate risk in connection with the CMBS Facility and the Revolving Facility as the interest on each of the CMBS Facility and the Revolving Facility is floating

45


 

 

rate based on LIBOR. The interest rate on the CMBS Facility is one-month LIBOR plus 2.75 percent per annum through the initial two year period.  The interest rate on the Revolving Facility is one-month LIBOR plus 4.50 percent per annum. In connection with CorePoint Lodging’s entry into the CMBS Loan Agreement, we entered on May 30, 2018 into an interest rate cap agreement with a notional amount of $1.035 billion and a one-month LIBOR interest rate cap of 3.25 percent (compared to one-month LIBOR as of September 30, 2018 of 2.26 percent) that expires on July 15, 2020.

We are exposed to interest rate changes primarily as a result of our variable rate on our outstanding debt. We quantify our exposure to interest rate risk based on how changes in interest rates affect to our cash interest expense. We consider changes in the one -month LIBOR rate to be most indicative of our interest rate exposure as it is a function of the base rate for our credit facilities and is reasonably correlated to changes in our earnings rate on our cash investments. We consider increases of 0.5 percent to 2.0 percent in the one-month LIBOR rate to be reflective of reasonable changes we may experience in the current interest rate environment. The table below reflects the annual consolidated effect (before any applicable allocation to noncontrolling interest or income tax expense) of an increase in the one-month LIBOR to our cash interest expense related to our significant variable interest rate exposures for our wholly owned assets and liabilities as of September 30, 2018 (amounts in millions, where positive amounts reflect a decrease in cash interest expense and bracketed amounts reflect an increase in cash interest expense):

 

 

 

Increases in Interest Rates

 

 

 

2.0%

 

 

1.5%

 

 

1.0%

 

 

0.5%

 

 

 

 

 

CMBS Facility

 

$

(21

)

 

$

(16

)

 

$

(10

)

 

$

(5

)

Interest rate cap

 

 

10

 

 

 

5

 

 

 

 

 

 

 

Total

 

$

(11

)

 

$

(11

)

 

$

(10

)

 

$

(5

)

 

Interest rate fluctuations will generally not affect future expenses related to fixed rate debt, unless such instruments are traded or otherwise terminated prior to maturity; however, interest rate changes could affect the fair value of the fixed rate instruments. Our primary fixed rate instrument is our $15 million Series A Preferred Stock, which has a current dividend rate of 13 percent. As discussed in Note 7 “Preferred Stock”, the Series A Preferred Stock dividend rate may be adjusted if we exceed certain leverage ratios or an event of default occurs. Such changes in the dividend rate are relatively independent of market interest rate fluctuations.

Refer to our Note 8 “Fair Value Measurements” in the condensed consolidated financial statements included elsewhere in this report for further discussion of the fair value measurements of our financial assets and liabilities.

Item 4.

Controls And Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2018, the Company’s management has evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controls objectives. Based upon that evaluation, the Company’s principal executive officer and principal financial officer have concluded that, as of September 30, 2018, the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

Historically, the Company relied on financial controls and resources of LQH to manage certain aspects of its business and report its results.  As a result of the Spin-Off, the Company is in the process of reviewing, revising and adopting policies, as needed, to meet all regulatory requirements applicable to it as an independent, publicly traded company.  In addition, in connection with the Company’s Spin-Off, it entered into a master transition services agreement pursuant to which La Quinta will continue to provide certain information technology, administrative and other services on a transitional basis. The Company will continue to review, document and test its internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that its systems evolve to meet its needs as an independent, publicly traded company.  These efforts may lead to changes in the Company’s internal control over financial reporting.

Other than those noted above, there were no changes in the internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) of the Company that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of the Company.

 

 

46


 

 

PART II—OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

We are a party to a number of pending claims and lawsuits arising in the normal course of business, including proceedings involving tort and other general liability claims, workers’ compensation and other employee claims and intellectual property claims. We do not consider our ultimate liability with respect to any such claims or lawsuits, or the aggregate of such claims and lawsuits, to be material in relation to our condensed consolidated financial condition, results of operations or our cash flows taken as a whole.

We maintain general and other liability insurance; however, certain costs of defending lawsuits, such as those below the retention or insurance deductible amount, are not covered by or are only partially covered by insurance policies, and our insurance carriers could refuse to cover certain claims in whole or in part. We regularly evaluate our ultimate liability costs with respect to such claims and lawsuits. We accrue costs from litigation as they become probable and estimable.

Item  1A.

Risk Factors

There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition from the risk factors previously disclosed in our Information Statement, which is accessible on the SEC’s website at www.sec.gov.

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

Item 3.

Defaults Upon Senior Securities

None.

Item  4.

Mine Safety Disclosures

Not applicable.

 

Item  5.

Other Information

 

None.

 

47


 

 

Item  6.

Exhibits

The following is a list of all exhibits filed or furnished as part of this report:

 

Exhibit

No.

Description

 

 

 

 

2.1

Separation and Distribution Agreement, dated as of January 17, 2018, by and between La Quinta Holdings Inc. and CorePoint Lodging Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form 10 filed on May 7, 2018 (File no. 001-38168))

 

 

3.1

Articles of Amendment to Articles Supplementary of CorePoint Lodging Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018 (File no. 001-38168))

 

 

 

 

10.1

Second Amendment to Loan Agreement and Omnibus Amendment to Other Loan Documents, dated as of July 6, 2018 by and among JPMorgan Chase Bank, National Association and Parlex 4 Finance, LLC, as co-lenders, and CPLG Properties L.L.C., CPLG FL Properties L.L.C., CPLG TX Properties L.L.C., CPLG Bloomington L.L.C., CPLG Santa Ana L.L.C., CPLG Ft. Meyers L.L.C., CPLG St. Albans L.L.C., CPLG Thousand Oaks L.L.C., CPLG West Palm Beach L.L.C., CPLG Charlotte L.L.C., CPLG Acquisition Properties L.L.C., CPLG Fort Lauderdale L.L.C., CPLG Chicago L.L.C., CPLG Garden City L.L.C., CPLG Charleston L.L.C., CPLG South Burlington L.L.C., CPLG Virginia Beach L.L.C., CPLG Islip L.L.C., CPLG Rancho Cordova L.L.C., CPLG Prime Mezz L.L.C., CPLG Wellesley Properties L.L.C., CPLG Portfolio East L.L.C. and CPLG MD Business L.L.C., CorePoint TRS L.L.C., CorePoint Operating Partnership L.P. (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018 (File no. 001-38168))

 

 

 

 

10.2

Consulting Agreement, dated as of September 11, 2018, by and between Glenn Alba and CorePoint Operating Partnership L.P.

 

 

  31.1

Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

  31.2

 

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

 

 

  32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

48


 

 

Exhibit

No.

Description

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

 

49


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

COREPOINT LODGING INC.

 

 

(Registrant)

 

 

 

 

Date: November 6, 2018

 

By:

/s/ Keith A. Cline

 

 

 

Keith A. Cline

 

 

 

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

Date: November 6, 2018

 

By:

/s/ Daniel E. Swanstrom II

 

 

 

Daniel E. Swanstrom II

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

Date: November 6, 2018

 

By:

/s/ Howard Garfield

 

 

 

Howard Garfield

 

 

 

Senior Vice President, Chief Accounting Officer and Treasurer

 

 

 

(Principal Accounting Officer)

 

50