S-4
Table of Contents

As filed with the Securities and Exchange Commission on March 29, 2019

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HILTON DOMESTIC OPERATING COMPANY INC.

(Exact name of registrant issuer as specified in its charter)

SEE TABLE OF REGISTRANT GUARANTORS

 

Delaware   7011   38-4009972

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

7930 Jones Branch Drive, Suite 1100

McLean, Virginia 22102

(703) 883-1000

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

 

 

 

Kristin A. Campbell

Executive Vice President and General Counsel

Hilton Worldwide Holdings Inc.

7930 Jones Branch Drive, Suite 1100

McLean, Virginia 22102

(703) 883-1000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

Joshua Ford Bonnie

Edgar J. Lewandowski

Simpson Thacher & Bartlett LLP

900 G Street N.W.

Washington, D.C. 20001

(202) 636-5500

 

 

Approximate date of commencement of proposed exchange offer: As soon as practicable after this Registration Statement is declared effective.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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 7(a)(2)(B).  ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross Border Third Party Tender Offer)  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered

  

Amount

to be

Registered

  

Proposed

Maximum

Offering Price

Per Note

  

Proposed

Maximum

Aggregate

Offering Price(1)

  

Amount of

Registration Fee

5.125% Senior Notes due 2026

   $1,500,000,000    100%    $1,500,000,000    $181,800

Guarantees of the 5.125% Senior Notes due 2026(2)

   N/A(3)    (3)    (3)    (3)

 

 

(1)

Estimated solely for the purpose of calculating the registration fee under Rule 457(f) of the Securities Act of 1933, as amended (the “Securities Act”).

(2)

See inside facing page for table of registrant guarantors.

(3)

Pursuant to Rule 457(n) under the Securities Act, no separate filing fee is required for the guarantees.

 

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

TABLE OF REGISTRANT GUARANTORS

 

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

Destination Resorts LLC

  Arizona   26-1284226   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Doubletree Hotel Systems LLC

  Arizona   26-1284504   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Doubletree Hotels LLC

  Arizona   26-1284359   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

DT Management LLC

  Arizona   26-1284112   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

DT Real Estate, LLC

  Arizona   86-0594278   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

DTM Atlanta/Legacy, Inc.

  Arizona   86-0803816   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

DTR FCH Holdings, Inc.

  Arizona   86-0506692   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

90210 Biltmore Management, LLC

  Delaware   34-1984747   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

90210 Desert Resorts Management Co., LLC

  Delaware   34-1984753   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

90210 Grand Wailea Management Co., LLC

  Delaware   34-1984759   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

90210 LLC

  Delaware   95-4747695   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

90210 Management Company, LLC

  Delaware   20-4146308   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Andiamo’s O’Hare, LLC

  Delaware   58-2669081   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Blue Bonnet Security, LLC

  Delaware   20-5118750   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Canopy Brand Management LLC

  Delaware   32-0502283   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Conrad International Manage (CIS) LLC

  Delaware   26-1687344   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Conrad Management LLC

  Delaware   26-1101184   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

Curio Brand Management LLC

  Delaware   35-2568431   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Curio Management LLC

  Delaware   82-2416470   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Doubletree LLC

  Delaware   86-0762415   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Doubletree Management LLC

  Delaware   26-1101270   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Embassy Development LLC

  Delaware   74-2479161   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Embassy Suites Management LLC

  Delaware   26-1101036   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hampton Inns Management LLC

  Delaware   26-1101242   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Beverage LLC

  Delaware   36-2058176   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Chicago Beverage I LLC

  Delaware   30-0800929   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Chicago Beverage II LLC

  Delaware   32-0422233   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Chicago Beverage III LLC

  Delaware   61-1724781   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Chicago Beverage IV LLC

  Delaware   90-1028957   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Corporate Director LLC

  Delaware   26-3551072   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Domestic Franchise LLC

  Delaware   30-0948358   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Domestic Management LLC

  Delaware   61-1799414   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton El Con Management LLC

  Delaware   26-3845802   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton El Con Operator LLC

  Delaware   26-3845852   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Franchise Holding LLC

  Delaware   26-1094575   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

Hilton Garden Inns Management LLC

  Delaware   26-1126091   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Hawaii Corporation

  Delaware   99-6011945   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Illinois Holdings LLC

  Delaware   13-0980760   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Management LLC

  Delaware   26-1101130   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton NUS HHS, Inc.

  Delaware   82-0993002   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton San Diego LLC

  Delaware   95-2395937   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Supply Management LLC

  Delaware   95-2502058   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Systems Solutions, LLC

  Delaware   71-0907647   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Worldwide Finance Corp.

  Delaware   46-3492566   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Worldwide Finance LLC

  Delaware   27-4384691   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Worldwide Holdings Inc.

  Delaware   27-4384691   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Worldwide Parent LLC

  Delaware   36-2058176   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Audubon LLC

  Delaware   26-1292055   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Conrad Domestic LLC

  Delaware   26-1211490   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT ESP International Franchise LLC

  Delaware   26-3750733   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT ESP International Franchisor Corporation

  Delaware   26-3750889   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT ESP International Manage LLC

  Delaware   26-3750974   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT ESP International Management Corporation

  Delaware   26-3751149   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

HLT ESP Manage LLC

  Delaware   26-3750936   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT HSM Holding LLC

  Delaware   26-1274784   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT HSS Holding LLC

  Delaware   26-1274883   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT JV Acquisition LLC

  Delaware   26-1276349   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Lifestyle International Franchise LLC

  Delaware   26-3748344   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Lifestyle International Franchisor Corporation

  Delaware   26-3748409   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Lifestyle International Manage LLC

  Delaware   26-3748516   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Lifestyle International Management Corporation

  Delaware   26-3750638   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Lifestyle Manage LLC

  Delaware   26-3748470   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HLT Palmer LLC

  Delaware   26-1211589   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Home2 Brand Management LLC

  Delaware   37-1833534   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Home2 Management LLC

  Delaware   82-4258567   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Homewood Suites Management LLC

  Delaware   26-1101306   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hotels Statler Company, Inc.

  Delaware   36-2550119   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HPP Hotels USA LLC

  Delaware   95-4214076   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

HPP International LLC

  Delaware   95-4198421   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Innvision, LLC

  Delaware   36-2058176   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

LXR Management LLC

  Delaware   82-2437131   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

Motto Management LLC

  Delaware   38-4009972   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Potter’s Bar Palmer House, LLC

  Delaware   58-2669080   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Promus Hotel Services, Inc.

  Delaware   62-1602738   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Promus Hotels Florida LLC

  Delaware   62-1602737   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Promus Hotels LLC

  Delaware   62-1602678   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Promus Hotels Parent LLC

  Delaware   95-4766449   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Signia Hotel Management LLC

  Delaware   38-4009972   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Tapestry Management LLC

  Delaware   82-2422780   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Tru Brand Management LLC

  Delaware   36-4843578   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

WA Collection International, LLC

  Delaware   95-4198421   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Waldorf=Astoria Management LLC

  Delaware   26-1101088   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Florida Conrad International Corp.

  Florida   20-1145249   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Embassy Suites Club No. 1, Inc.

  Kansas   75-1947366   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hotel Clubs of Corporate Woods, Inc.

  Kansas   48-0930357   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Embassy Suites Club No. Three, Inc.

  Louisiana   62-1584888   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

International Rivercenter Lessee, L.L.C.

  Louisiana   20-0384946   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Chesterfield Village Hotel, LLC

  Missouri   36-4207568   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Bally’s Grand Property Sub I, LLC

  Nevada   88-0312339   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

Exact Name of Registrant Guarantor

as Specified in its Charter (or Other

Organizational Document)

  State or Other
Jurisdiction of
Incorporation or
Organization
  I.R.S.
Employer
Identification
Number
  Primary
Standard
Industrial
Classification
Code Number
 

Address, Including Zip Code,

and Telephone Number,

Including Area Code, of

Registrant Guarantor’s

Principal Executive Offices

Conrad International (Belgium) LLC

  Nevada   91-1930238   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Conrad International (Egypt) Resorts Corporation

  Nevada   46-0468464   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Conrad International (Indonesia) Corporation

  Nevada   95-4347974   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Holdings, LLC

  Nevada   88-0096156   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Hospitality, LLC

  Nevada   93-1218323   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Hilton Illinois, LLC

  Nevada   88-0345656   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Peacock Alley Service Company, LLC

  New York   20-3470602   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Washington Hilton, L.L.C.

  New York   36-2058176   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

Embassy Suites Club No. Two, Inc.

  Texas   75-1946866   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000

SALC, Inc.

  Texas   74-2782384   7011   7930 Jones Branch Drive, Suite 1100
McLean, Virginia 22102
Telephone: (703) 883-1000


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MARCH 29, 2019

PRELIMINARY PROSPECTUS

 

 

LOGO

HILTON DOMESTIC OPERATING COMPANY INC.

Exchange Offer for

$1,500,000,000 of 5.125% Senior Notes due 2026

 

 

Offer for outstanding unregistered 5.125% Senior Notes due 2026 (the “outstanding notes”) of Hilton Domestic Operating Company Inc. (the “Issuer”), in the aggregate principal amount of $1,500,000,000 in exchange for up to $1,500,000,000 in aggregate principal amount of 5.125% Senior Notes due 2026 (the “exchange notes” together with the outstanding notes, the “notes”), which have been registered under the Securities Act of 1933, as amended (the “Securities Act”).

The exchange notes will be the obligation of the Issuer and will be guaranteed on a senior unsecured basis by Hilton Worldwide Finance LLC (“Parent”), the direct parent company of the Issuer, Hilton Worldwide Parent LLC (“HWP”), the direct parent company of Parent, Hilton Worldwide Holdings Inc. (“HLT Parent”), the direct parent company of HWP, and each of Parent’s existing and future wholly owned domestic restricted subsidiaries (other than the Issuer) to the extent such entities guarantee indebtedness under Parent’s senior secured credit facilities or certain other indebtedness of Parent, the Issuer or any subsidiary guarantor as described herein.

 

 

We are conducting the exchange offer in order to provide you with an opportunity to exchange your unregistered outstanding notes for freely tradable exchange notes that have been registered under the Securities Act.

The Exchange Offer

 

   

We will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradable.

 

   

You may withdraw tenders of outstanding notes at any time prior to the expiration date of the exchange offer.

 

   

The exchange offer expires at 5:00 p.m., New York City time, on                , 2019, which is the 21st business day after the date of this prospectus, unless extended. We do not currently intend to extend the expiration date.

 

   

The exchange of the outstanding notes for the exchange notes in the exchange offer will not constitute a taxable event for U.S. federal income tax purposes.

 

   

The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be freely tradable.

Results of the Exchange Offer

 

   

The exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. We do not plan to list the exchange notes on a national market.

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

 

You should carefully consider the “Risk Factors” beginning on page 16 of this prospectus before participating in the exchange offer.

Each broker dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired as a result of market making activities or other trading activities.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of the exchange notes to be distributed in the exchange offer or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                , 2019.


Table of Contents

We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus may be used only for the purposes for which it has been published and we do not take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information in this prospectus. We are not making an offer of these securities in any state where the offer is not permitted.

TABLE OF CONTENTS

 

     Page  

FORWARD-LOOKING STATEMENTS

     ii  

TRADEMARKS AND SERVICE MARKS

     ii  

INDUSTRY AND MARKET DATA

     ii  

BASIS OF PRESENTATION

     iii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     16  

USE OF PROCEEDS

     46  

CAPITALIZATION

     47  

SELECTED FINANCIAL DATA

     48  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     49  

BUSINESS

     68  

MANAGEMENT

     83  

EXECUTIVE AND DIRECTOR COMPENSATION

     89  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     115  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     116  

DESCRIPTION OF OTHER INDEBTEDNESS

     119  

DESCRIPTION OF THE EXCHANGE NOTES

     124  

THE EXCHANGE OFFER

     199  

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

     209  

CERTAIN ERISA CONSIDERATIONS

     210  

PLAN OF DISTRIBUTION

     212  

LEGAL MATTERS

     213  

EXPERTS

     213  

WHERE YOU CAN FIND MORE INFORMATION

     213  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including, among others, risks inherent to the hospitality industry, macroeconomic factors beyond our control, competition for hotel guests and management and franchise contracts, risks related to doing business with third-party hotel owners, performance of our information technology systems, growth of reservation channels outside of our system, risks of doing business outside of the United States (“U.S.”) and our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under “Risk Factors” in this prospectus. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

TRADEMARKS AND SERVICE MARKS

Hilton Hotels & Resorts, Waldorf Astoria Hotels & Resorts, LXR Hotel & Resorts, Conrad Hotels & Resorts, Canopy by Hilton, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton, Embassy Suites by Hilton, Motto by Hilton, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton, Home2 Suites by Hilton, Hilton Grand Vacations, Hilton Honors and other trademarks, trade names, and service marks of Hilton and our brands appearing in this prospectus are the property of Hilton and our affiliates.

Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus are without the ® and ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, and trade names. All trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

INDUSTRY AND MARKET DATA

Within this prospectus, we reference information and statistics regarding various industries and sectors. We have obtained this information and statistics from various independent third-party sources, including independent industry publications, reports by market research firms and other independent sources. STR, Inc. (“STR”) and CBRE Hotels Americas Research (“CBRE”) are the primary sources for third-party market data and industry statistics and forecasts, respectively, included in this prospectus. STR does not guarantee the performance of any company about which it collects and provides data. Nothing in the STR or CBRE data should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them.

 

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BASIS OF PRESENTATION

Except where otherwise indicated, financial information included in this prospectus is of HLT Parent and its subsidiaries, including Parent and its subsidiaries (including the Issuer), on a consolidated basis. HLT Parent has no independent operations and has no material assets other than its ownership of 100% of the equity interests in HWP, which, in turn, owns 100% of the equity interests in Parent and consolidates the financial position and results of all of the operating subsidiaries included in the consolidated historical financial statements of HLT Parent included in this prospectus. As a result, the consolidated financial information included in this prospectus with respect to HLT Parent is substantially the same as Parent’s financial information.

On January 3, 2017, we completed the spin-offs of a portfolio of hotels and resorts, as well as our timeshare business, into two independent, publicly traded companies: Park Hotels & Resorts Inc. (“Park”) and Hilton Grand Vacations Inc. (“HGV”), respectively, (the “spin-offs”). HLT Parent did not retain any interest in Park or HGV, but did enter into long-term management and franchise contracts with Park for the portfolio of hotels and resorts held by it at the time of the spin-offs and a license agreement with HGV for the timeshare business. See the section titled “Risk Factors” in this prospectus. This prospectus presents our business and results of operations as of and for the periods indicated, giving effect to the spin-offs, with the combined historical financial results of Park and HGV reflected as discontinued operations.

As used in this prospectus, unless otherwise specified or the context otherwise requires, references to:

 

   

“Hilton,” “the Company,” “we,” “us” and “our” refer to HLT Parent and its consolidated subsidiaries, including the Issuer;

 

   

“ADR” or “average daily rate” means hotel room revenue divided by the total number of room nights sold for a given period;

 

   

“Blackstone” refers to investment funds associated with or designated by The Blackstone Group L.P. and their affiliates, our former majority shareholder;

 

   

“comparable hotels” mean those hotels that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods presented, excluding the hotel properties distributed in the spin-offs; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available;

 

   

“Existing Senior Notes” refers to our outstanding 4.250% Senior Notes due 2024 (the “2024 Notes”), our outstanding 4.625% Senior Notes due 2025 (the “2025 Notes”) and our outstanding 4.875% Senior Notes due 2027 (the “2027 Notes”);

 

   

“HGV Parent” refers to Hilton Grand Vacations Inc., a Delaware corporation;

 

   

“Hilton Grand Vacations” or “HGV” refers to HGV Parent and its consolidated subsidiaries;

 

   

“HLT Parent” refers to Hilton Worldwide Holdings Inc., a Delaware corporation, that is the direct parent company of Parent and will be a parent guarantor of the exchange notes;

 

   

“HWP” refers to Hilton Worldwide Parent LLC, a Delaware limited liability company, that is the direct parent company of Parent and will be a parent guarantor of the exchange notes;

 

   

“Issuer” refers to Hilton Domestic Operating Company Inc., a Delaware corporation, that is the issuer of the exchange notes offered hereby;

 

   

a “luxury” hotel refers to a luxury hotel as defined by STR;

 

   

a “midscale” hotel refers to a midscale hotel as defined by STR;

 

   

“occupancy” means the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period;

 

   

“Parent” refers to Hilton Worldwide Finance LLC, a Delaware limited liability company, that is the direct parent company of the Issuer

 

   

“Park Hotels & Resorts” or “Park” refer to Park Parent and its consolidated subsidiaries;

 

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“Park Parent” refers to Park Hotels & Resorts Inc., a Delaware corporation;

 

   

“RevPAR” or “revenue per available room” means hotel room revenue divided by the total number of room nights available to guests for a given period;

 

   

“RevPAR index” measures a hotel’s relative share of its segment’s revenue per available room. For example, if a subject hotel’s RevPAR is $50 and the RevPAR of its competitive set is $50, the subject hotel would have no RevPAR index premium. If the subject hotel’s RevPAR totaled $60, its RevPAR index premium would be 20%, which indicates that the subject hotel has outperformed other hotels in its competitive set;

 

   

our “hotels” and “rooms” refer to the hotels and resorts managed, franchised, owned or leased by us. The majority of our hotels and resorts are owned by third-party owners;

 

   

an “upper midscale” hotel refers to an upper midscale hotel as defined by STR;

 

   

an “upper upscale” hotel refers to an upper upscale hotel as defined by STR; and

 

   

an “upscale” hotel refers to an upscale hotel as defined by STR.

Defined terms in the financial statements have the meanings ascribed to them in the financial statements.

 

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PROSPECTUS SUMMARY

This summary highlights information appearing elsewhere in this prospectus and may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the information set forth under the heading “Risk Factors” and our consolidated financial statements before participating in the exchange offer.

Hilton

Hilton is one of the largest and fastest growing hospitality companies in the world, with 5,685 properties comprising 912,960 rooms in 113 countries and territories as of December 31, 2018. For nearly 100 years, Hilton has been an innovator in its industry, driven by the vision of our founder Conrad Hilton, “to fill the earth with the light and warmth of hospitality.” Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton; our full service hotel brands, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Motto by Hilton, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. In 2018, we launched two new brands: Motto by Hilton and LXR Hotels & Resorts. See “—Our Brand Portfolio,” for additional information. As of December 31, 2018, we had over 85 million members in our award-winning guest loyalty program, Hilton Honors.

For a description of our business, financial condition, results of operations and other important information regarding us, we refer you to the sections entitled “Business” and “Managements Discussion and Analysis of Financial Condition and Results of Operations” of this prospectus.

Our Competitive Strengths

We believe the following competitive strengths provide the foundation for our position as a leading global hospitality company.

 

   

World-Class Hospitality Brands. Our globally recognized, world-class brands have defined the hospitality industry. Our flagship Hilton Hotels & Resorts brand often serves as an introduction to our wider range of brands, including those in the luxury segment, midscale segment and everything in between, that are designed to accommodate any customer’s needs anywhere in the world. Our brands have achieved an average global RevPAR index premium of 14% for the year ended December 31, 2018, based on STR data. This means that our brands achieve on average 14% more revenue per room than competitive properties in similar markets. The demonstrated strength of our brands makes us a preferred partner for hotel owners.

 

   

Leading Global Presence and Scale. We are one of the largest hospitality companies in the world with 5,685 properties and 912,960 rooms in 113 countries and territories as of December 31, 2018. We have hotels in key urban destinations throughout our key operating regions and 575 hotels located at or near airports around the world. Our global presence allows us to serve our loyal customers throughout the world and to introduce our award-winning brands to customers in new markets. These world-class brands facilitate system growth by providing hotel owners with a variety of options to address each market’s specific needs. In addition, the diversity of our operations reduces our exposure to business cycles, individual market disruptions and other risks. Our robust commercial services platform allows us to take advantage of our scale to more effectively deliver products and services that drive customer preference and enhance commercial performance on a global basis.



 

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Large and Growing Loyal Customer Base. Serving our customers is our first priority. By continually adapting to customer preferences and providing our customers with superior experiences, we have improved our overall customer satisfaction ratings since 2007. We earned 42 first place awards in the J.D. Power North America Guest Satisfaction rankings since 1999. Hilton Honors unites all our brands, encourages customer loyalty and allows us to provide tailored promotions, messaging and customer experiences. Membership in our Hilton Honors program continues to increase, and, as of December 31, 2018, there were over 85 million Hilton Honors members, a 20% increase from December 31, 2017.

 

   

Significant Embedded Growth. We expect to grow through improvement in same-store performance driven by strong anticipated industry fundamentals. CBRE predicts that lodging industry RevPAR in the U.S., where 73% of our system rooms are located, will grow 2.7% in 2019 and 2.2% in 2020. We expect to grow through new room additions, as upon completion, our industry-leading development pipeline would result in a 40% increase in our room count with minimal capital investment from us. In addition, our franchise revenues should grow over time as franchise contracts renew at our published license rates, which are higher than our current effective rates. For the year ended December 31, 2018, our weighted average effective license rate across our brands was 4.9% of room revenue and our weighted average published license rate was 5.6% as of December 31, 2018. We also expect our incentive management fees, which are linked to hotel profitability measures, to increase as a result of the expected improvements in industry fundamentals and new unit growth.

 

   

Strong Cash Flow Generation. We generate significant cash flows from operating activities. During 2018, we generated $1.3 billion in cash flow from operating activities. We believe that our focus on cash flow generation, the relatively low investment required to grow our business, and our disciplined approach to capital allocation position us to maximize opportunities for profitability and growth while continuing to reduce our indebtedness over time.

 

   

Aligned Culture and Organization. As an organization of people serving people, it is imperative that we attract and retain best-in-class talent to serve our various stakeholders. Our purpose-led, performance-driven culture begins with an intense alignment around our mission, vision, values and key strategic priorities. Our President and Chief Executive Officer, Christopher J. Nassetta, has more than 31 years of experience in the hotel industry, leading Hilton for over 11 years and previously serving as President and Chief Executive Officer of Host Hotels & Resorts, Inc. He and the balance of our executive management team have been instrumental in transforming our organization and building a culture that attracts, develops and retains leaders at all levels of the organization who are focused on delivering exceptional service to our customers every day. We rely on our more than 169,000 employees to execute our strategy and continue to enhance our products and services to ensure that we remain at the forefront of performance and innovation in the lodging industry.

Our Business and Growth Strategy

The following are key elements of our strategy to become the preeminent global hospitality company—the first choice of guests, employees and owners alike:

 

   

Expand our Global Network. We intend to build on our leading position in the U.S. and expand our global footprint. We had approximately 19% of the market share of rooms under construction as of December 31, 2018, based on STR data. We aim to increase the relative contribution of our international operations by increasing the number of rooms in our system that are located outside of the U.S., and as of December 31, 2018, over half of our rooms in our development pipeline are located outside of the U.S. We plan to continue to expand our global footprint by introducing the right brands with the right product positioning in targeted markets and allocating business development resources effectively to drive high-quality new unit growth in every region of the world.



 

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Grow our Fee-Based Businesses. We intend to grow our higher margin, fee-based businesses by developing new third-party hotels and converting existing hotels to our brands. Our development pipeline consisted of over 364,000 rooms as of December 31, 2018. Upon completion, this pipeline of new, third-party owned hotels would result in a 41% increase in our managed and franchised hotel room count with minimal capital investment from us. In addition, we aim to increase the average effective franchise fees we receive over time by renewing and entering into new franchise contracts at our current published franchise fee rates.

 

   

Strengthen and Enhance our Brands and Commercial Services Platform. We intend to enhance our customer experience in all of our service offerings by delivering distinctive, quality, consistent brand management and continuing to develop products and services that drive customer preference and increased RevPAR premiums. We will continue to innovate in the delivery of modern products and service standards that are relevant and meet evolving customer needs. We believe providing distinctive customer experiences will deliver financial results that support incremental owner investment in our hotels. We also focus on providing products and services that drive opportunities for growth in the U.S. and tailoring our products as appropriate to meet the needs of customers and developers outside the U.S. We will continue to enhance our commercial services platform to ensure we have a formidable sales, pricing, marketing and distribution platform to drive premium commercial performance to our entire system of hotels. We also will continue to invest in our Hilton Honors guest loyalty program to ensure it remains relevant to our customers and drives customer loyalty and value to our hotel owners.

Recent Developments

In February 2019, our board of directors authorized the repurchase of an additional $1.5 billion of common stock under our existing $2.0 billion stock repurchase program, bringing the total amount remaining for repurchase under the program to approximately $1.8 billion.

Additionally, in February 2019, we launched our newest brand, Signia Hilton, a dynamic, meetings-and-events-focused brand, which will further reinforce Hilton’s commitment to innovation that meets the evolving needs of today’s travelers and will bring premium experiences to top urban and resort destinations around the world.

Subsequent to December 31, 2018 and as of March 29, 2019, we drew a net $50 million under our senior secured revolving credit facility.



 

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Our Structure

The following diagram illustrates our simplified organizational structure as of the date of this prospectus after giving effect to the exchange offers. This diagram is provided for illustrative purposes only and does not show all legal entities or obligations of such entities:

 

 

LOGO

 

(1)

Each of HLT Parent and HWP is a guarantor of indebtedness under the Senior Secured Credit Facilities and the outstanding notes and will be a guarantor of the exchange notes offered hereby. Neither HLT Parent nor HWP is subject to the restrictive covenants in the credit agreement and indentures governing such indebtedness.

(2)

Our Senior Secured Credit Facilities are comprised of: (i) a $1.0 billion senior secured revolving credit facility (the “Revolving Credit Facility”) and (ii) a $3,119 million senior secured term loan facility due 2023 (the “Term Loans”). As of December 31, 2018, we had $937 million of unutilized capacity under the Revolving Credit Facility (after giving effect to $63 million of outstanding letters of credit). See “Description of Other Indebtedness—Senior Secured Credit Facilities” for additional information.

(3)

For the years ended December 31 2018, 2017 and 2016, our non-guarantor subsidiaries represented $1,906 million, or 52%, $1,835 million, or 54%, and $1,785 million, or 60%, of our total revenues, respectively, excluding other revenues from managed and franchised properties, and $501 million, or 24%, $502 million, or 26%, and $441 million or 30% of our Adjusted EBITDA, respectively.

Corporate Information

Hilton Domestic Operating Company Inc., a Delaware corporation, was incorporated under the laws of the State of Delaware on July 12, 2016. Our principal executive offices are located at 7930 Jones Branch Drive, Suite 1100, McLean, Virginia 22102 and our telephone number is (703) 883-1000.



 

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The Exchange Offers

The following summary is provided solely for your convenience and is not intended to be complete. You should read the full text and more specific details contained elsewhere in this prospectus for a more detailed description of the notes.

 

General

On April 13, 2018, the Issuer issued an aggregate of $1,500,000,000 principal amount of 5.125% Senior Notes due 2026 in a private offering. In connection with the private offering of the outstanding notes, the Issuer and the guarantors entered into a registration rights agreement with the initial purchasers in which they agreed, among other things, to deliver this prospectus to you and to complete the exchange offer within 450 days after the date of issuance and sale of the outstanding notes. You are entitled to exchange in the exchange offer your outstanding notes for the exchange notes which are identical in all material respects to the outstanding notes except:

 

   

the exchange notes have been registered under the Securities Act;

 

   

the exchange notes are not entitled to any registration rights which are applicable to the outstanding notes under the registration rights agreement; and

 

   

the additional interest provision of the registration rights agreement is no longer applicable.

 

The Exchange Offer

The Issuer is offering to exchange up to $1,500,000,000 aggregate principal amount of 5.125% Senior Notes due 2026 which have been registered under the Securities Act, for a like amount of outstanding notes.

 

  You may only exchange outstanding notes in denominations of $2,000 and integral multiples of $1,000, in excess thereof.

 

Resale

Based on an interpretation by the staff of the SEC set forth in no-action letters issued to third parties, the Issuer believes that the exchange notes issued pursuant to the exchange offer in exchange for outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

   

you are acquiring the exchange notes in the ordinary course of your business; and

 

   

you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes.

 

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time, on                , 2019, which is the 21st business day after the date of this prospectus, unless extended by the Issuer. The Issuer does not currently intend to extend the expiration date.


 

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  If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes. See “Plan of Distribution.”

 

  Any holder of outstanding notes who:

 

   

is our affiliate;

 

   

does not acquire exchange notes in the ordinary course of its business; or

 

   

tenders its outstanding notes in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes;

 

  cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Inc. (available June 5, 1991) and Exxon Capital Holdings Corp. (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling (available July 2, 1993), or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

 

Withdrawal

You may withdraw the tender of your outstanding notes at any time prior to the expiration of the exchange offer. The Issuer will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the exchange offer.

 

Interest on the Exchange Notes and the Outstanding Notes

The exchange notes will bear interest at a rate of 5.125% per annum from the most recent date to which interest has been paid on the outstanding notes and will be payable semi-annually on May 1 and November 1. No interest will be paid on outstanding notes following their acceptance for exchange.

 

Conditions to the Exchange Offer

The exchange offer is subject to customary conditions, which the Issuer may waive. See “The Exchange Offer—Conditions to the Exchange Offer.”

 

Procedures for Tendering Outstanding Notes

If you wish to participate in the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a facsimile of such letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must then mail or otherwise deliver the letter of transmittal, or a facsimile of such letter of transmittal, together with the outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal.


 

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  If you hold outstanding notes through The Depository Trust Company (“DTC”) and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC by which you will agree to be bound by the letter of transmittal. By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

   

you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

   

you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes;

 

   

you are acquiring the exchange notes in the ordinary course of your business; and

 

   

if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market making activities, that you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes.

 

Special Procedures for Beneficial Owners

If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

 

Guaranteed Delivery Procedures

If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents, or you cannot comply with the procedures under DTC’s Automated Tender Offer Program for transfer of book-entry interests, prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Effect on Holders of Outstanding Notes

As a result of the making of, and upon acceptance for exchange of, all validly tendered outstanding notes pursuant to the terms of the exchange offer, the Issuer and the guarantors will have fulfilled a covenant under the registration rights agreement. Accordingly, there



 

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will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreement. If you do not tender your outstanding notes in the exchange offer, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the indenture; however, as a result of the making of, and upon acceptance for exchange of, all validly tendered outstanding notes pursuant to the terms of the exchange offer, the Issuer will not have any further obligation to you to provide for the exchange and registration of the outstanding notes under the registration rights agreement. To the extent that the outstanding notes are tendered and accepted in the exchange offer, the trading market for the remaining outstanding notes that are not so tendered and exchanged could be adversely affected.

 

Consequences of Failure to Exchange

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, the Issuer does not currently anticipate that they will register the outstanding notes under the Securities Act.

 

Certain U.S. Federal Income Tax Considerations

The exchange of outstanding notes for exchange notes in the exchange offer will not constitute a taxable event to holders for U.S. federal income tax purposes. See “Certain U.S. Federal Income Tax Considerations.”

 

Use of Proceeds

The Issuer will not receive any cash proceeds from the issuance of the exchange notes in the exchange offer. See “Use of Proceeds.”

 

Exchange Agent

Wilmington Trust, National Association is the exchange agent for the exchange offer. The addresses and telephone numbers of the exchange agent are set forth in the section captioned “The Exchange Offer—Exchange Agent” of this prospectus.


 

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Summary Historical Financial Data

We derived the summary statement of operations data and the summary statement of cash flows data for the years ended December 31, 2018, 2017 and 2016 and the summary balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. All summary historical financial data as of and for the years ended December 31, 2017 and 2016 have been restated to reflect the adoption of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) using the full retrospective approach as of January 1, 2016. The summary balance sheet data as of December 31, 2016 was derived from unaudited consolidated financial statements that are not included in this prospectus and reflect the adoption of ASU 2014-09.

You should read the summary historical financial data below, together with the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus, as well as “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Other Indebtedness,” and the other financial information included elsewhere in this prospectus.

 

     Year Ended December 31,  
   2018      2017      2016  
     (in millions, except per share
data)
 

Summary Statement of Operations Data:

        

Revenues

        

Franchise and licensing fees

   $ 1,530      $ 1,321      $ 1,091  

Base and other management fees

     321        324        230  

Incentive management fees

     235        222        142  

Owned and leased hotels

     1,484        1,432        1,434  

Other revenues

     98        105        82  
  

 

 

    

 

 

    

 

 

 
     3,668        3,404        2,979  

Other revenues from managed and franchised properties

     5,238        4,727        3,597  
  

 

 

    

 

 

    

 

 

 

Total revenues

     8,906        8,131        6,576  

Expenses

        

Owned and leased hotels

     1,332        1,269        1,279  

Depreciation and amortization

     325        336        353  

General and administrative

     443        439        409  

Other expenses

     51        56        66  
  

 

 

    

 

 

    

 

 

 
     2,151        2,100        2,107  

Other expenses from managed and franchised properties

     5,323        4,899        3,609  
  

 

 

    

 

 

    

 

 

 

Total expenses

     7,474        6,999        5,716  

Gain on sales of assets, net

                   8  

Operating income(1)

     1,432        1,132        868  

Net income(2)

     769        1,089        354  

Net income attributable to Hilton stockholders(2)

     764        1,084        338  

Earnings per share(2):

        

Basic

   $ 2.53      $ 3.34      $ 1.03  

Diluted

   $ 2.50      $ 3.32      $ 1.03  


 

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     As of and for the Year Ended
December 31,
 
   2018     2017     2016  
     (dollars in millions, except number of
units, Hotel RevPAR and ADR)
 

Summary Balance Sheet Data:

      

Cash and cash equivalents

   $ 403     $ 570     $ 1,062  

Restricted cash and cash equivalents

     81       100       121  

Total assets(2)

     13,995       14,228       26,176  

Long-term debt(3)(4)

     7,282       6,602       6,616  

Total equity(2)

     558       1,691       5,627  

Summary Statement of Cash Flows Data(2):

      

Capital expenditures for property and equipment(5)

   $ (72   $ (58   $ (317

Net cash provided by operating activities

     1,255       849       1,310  

Net cash used in investing activities

     (131     (147     (423

Net cash used in financing activities

     (1,300     (1,724     (44

Operational and Other Data:

      

Number of hotels and timeshare properties

     5,685       5,284       4,922  

Number of rooms and units

     912,960       856,115       804,097  

Hotel occupancy(6)

     75.8     75.5     75.0

Hotel ADR(6)

   $ 147.22     $ 144.78     $ 143.63  

Hotel RevPAR(6)

   $ 111.61     $ 109.27     $ 107.65  

Adjusted EBITDA(7)

   $ 2,101     $ 1,909     $ 1,484  

 

(1)

Restated to reflect the adoption of ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), which was adopted on January 1, 2018 on a retrospective basis for all periods presented.

(2)

Balances as of and for the year ended December 31, 2016 include amounts attributable to Park Parent and HGV Parent.

(3) 

Includes current maturities of $16 million, $46 million and $33 million as of December 31, 2018, 2017 and 2016, respectively, and is net of unamortized deferred financing costs and discount.

(4) 

Includes capital lease obligations and other debt of $242 million, $254 million and $247 million as of December 31, 2018, 2017 and 2016, respectively.

(5) 

Capital expenditures, inclusive of capitalized software costs, and contract acquisition costs were $262 million, $208 million and $453 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(6) 

Operating statistics are for comparable hotels as of each period end.

(7)

EBITDA is defined as income (loss) from continuing operations, net of taxes, excluding interest expense, a provision for income taxes and decpreciation and amortization.

Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated equity investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment (“FF&E”) replacement reserves required under certain lease agreements; (v) reorganization costs; (vi) share-based compensation expense; (vii) non-cash impairment losses; (viii) severance, relocation and other expenses; (ix) amortization of contract acquisition costs; (x) the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties; and (xi) other items.

During the first quarter of 2018, we modified the definition of Adjusted EBITDA to exclude the amortization of contract acquisition costs and the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties. We believe that excluding these items is useful for the reasons set forth below and have applied the modified definition of Adjusted EBITDA to all periods presented.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and the provision for income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and, therefore could vary significantly across companies.



 

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Depreciation and amortization, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves to be consistent with the treatment of FF&E for owned and leased hotels where it is capitalized and depreciated over the life of the FF&E; (ii) share-based compensation expense, as this could vary widely among companies due to the different plans in place and the usage of them; (iii) the net effect of our cost reimbursement revenues and reimbursed expenses, as we contractually do not operate the related programs to generate a profit over the terms of the respective contracts; and (iv) other items that are not core to our operations and are not reflective of our performance.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as alternatives, in isolation or as a substitute, to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

   

EBITDA and Adjusted EBITDA do not reflect a provision for income taxes or the cash requirements to pay our taxes;

 

   

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

 

   

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

   

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

 

   

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

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

The table below provides a reconciliation of income (loss) from continuing operations, net of taxes, to EBITDA and Adjusted EBITDA:

 

     Year Ended December 31,  
     2018      2017      2016  
     (in millions)  

Income (loss) from continuing operations, net of taxes

   $ 769      $ 1,089      $ (17

Interest expense

     371        351        334  

Income tax expense (benefit)

     309        (336      557  

Depreciation and amortization

     325        336        353  
  

 

 

    

 

 

    

 

 

 

EBITDA

     1,774        1,440        1,227  

Gain on sales of assets, net

                   (8

Loss (gain) on foreign currency transactions

     11        (3      16  

Loss on debt extinguishment

            60         

FF&E replacement reserve

     50        55        55  

Share-based compensation expense

     127        121        81  

Amortization of contract acquisition costs

     27        17        16  

Net other expenses from managed and franchised properties

     85        172        12  

Other adjustment items(a)

     27        47        85  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 2,101      $ 1,909      $ 1,484  
  

 

 

    

 

 

    

 

 

 

 

  (a) 

Includes adjustments for transaction costs related to the spin-offs for the year ended December 31, 2017; impairment loss for the years ended December 31, 2017 and 2016; and severance and other items for all periods. Transaction costs related to the spin-offs for the year ended December 31, 2016 are included in discontinued operations and, therefore, are excluded from the presentation above.



 

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The Exchange Notes

The terms of the exchange notes are identical in all material respects to the terms of the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions or additional interest upon a failure to fulfill certain of our obligations under the registration rights agreement. The exchange notes will evidence the same debt as the outstanding notes. The exchange notes will be governed by the same indenture under which the outstanding notes were issued. The following summary is not intended to be a complete description of the terms of the exchange notes. For a more detailed description of the exchange notes, see “Description of the Exchange Notes” in this prospectus.

 

Issuer

Hilton Domestic Operating Company Inc., a Delaware corporation.

 

Notes Offered

Up to $1,500,000,000 aggregate principal amount of 5.125% Senior Notes due 2026.

 

Maturity Dates

The exchange notes will mature on May 1, 2026, unless earlier redeemed or repurchased.

 

Interest

Interest on the 2026 exchange notes will accrue at a rate of 5.125% per annum, payable semi-annually in arrears on May 1 and November 1.

 

  Interest on the exchange notes will accrue from the last interest payment date on which interest was paid on the outstanding note surrendered in exchange.

 

Guarantees

The exchange notes will be fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by HLT Parent, HWP, Parent and each of Parent’s existing wholly owned U.S. restricted subsidiaries (other than the Issuer) that guarantee indebtedness under Parent’s senior secured credit facilities (the “Senior Secured Credit Facilities”) and any future wholly owned U.S. restricted subsidiaries that guarantee indebtedness under our Senior Secured Credit Facilities or certain other indebtedness of Parent, the Issuer or any subsidiary guarantor (collectively, the “required domestic restricted subsidiaries”). As of the date of this prospectus, none of our foreign subsidiaries or U.S. restricted subsidiaries owned by foreign subsidiaries, our non-wholly owned domestic restricted subsidiaries or certain of our special purpose restricted subsidiaries will guarantee the exchange notes, and no foreign subsidiaries or U.S. subsidiaries owned by foreign subsidiaries (existing or formed in the future) are expected to guarantee the exchange notes in the future. The guarantees are subject to release under specified circumstances. See “Description of the Exchange Notes.”

 

Ranking

The exchange notes and the guarantees thereof will be our and our guarantors’ senior unsecured obligations and will rank:

 

   

equally in right of payment with all of our and the guarantors’ existing and future senior obligations;



 

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senior in right of payment to any of our and our guarantors’ subordinated indebtedness; and

 

   

structurally subordinated to all existing and future liabilities (including trade payables) of our subsidiaries that do not guarantee the exchange notes.

 

  The exchange notes and the guarantees thereof will be effectively subordinated in right of payment to our and the guarantors’ secured indebtedness, including indebtedness under our Senior Secured Credit Facilities, to the extent of the value of the collateral securing such indebtedness. As of December 31, 2018:

 

   

the Issuer and the guarantors had $7.1 billion of total indebtedness outstanding, excluding unamortized deferred financing costs and discount, none of which would be subordinated;

 

   

the Issuer and the guarantors had $3,119 million of senior secured indebtedness outstanding, excluding unamortized deferred financing costs and discount, consisting of borrowings under our Term Loans;

 

   

the Issuer and the guarantors had $937 million of availability to incur secured indebtedness under our Revolving Credit Facility (after giving effect to $63 million of outstanding letters of credit); and

 

   

our non-guarantor subsidiaries and entities in which we own interests of 50% or less had $242 million of total indebtedness outstanding.

 

Optional Redemption

We may, at our option, redeem the exchange notes, in whole or in part, at any time prior to May 1, 2021, at a price equal to 100% of the principal amount of the exchange notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date plus the applicable “make-whole premium” described under “Description of the Exchange Notes—Optional Redemption.”

 

  From and after May 1, 2021, we may, at our option, redeem at any time and from time to time some or all of the exchange notes at the applicable redemption prices set forth in this prospectus.

 

  In addition, on or prior to May 1, 2021, we may, at our option, redeem up to 40% of the aggregate principal amount of the exchange notes with the net cash proceeds from certain equity offerings at the redemption price of 105.125% of the principal amount of the exchange notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

 

 

In connection with any tender offer, if holders of not less than 90% in aggregate principal amount of the exchange notes validly tender and do not withdraw such exchange notes in such tender offer and we purchase all of the exchange notes validly tendered and not



 

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withdrawn by such holders, we may, at our option, redeem all the exchange notes that remain outstanding following such purchase at a price equal to the price offered to each other holder in such tender offer plus, to the extent not included in the tender offer payment, accrued and unpaid interest to, but excluding, the redemption date.

 

Change of Control Offers

Upon the occurrence of a change of control triggering event, if we do not redeem the exchange notes, you will have the right, as holders of the exchange notes, to require us to repurchase some or all of your exchange notes at 101% of their principal amount, plus accrued and unpaid interest to the repurchase date. See “Description of the Exchange Notes—Repurchase at the Option of Holders—Change of Control Triggering Event.”

 

Asset Sale Proceeds

If the Issuer or its restricted subsidiaries engage in asset sales, the Issuer generally must either invest the net proceeds from such asset sales in its business within a specific period of time, prepay certain of its or its subsidiary guarantors’ debt or make an offer to purchase a principal amount of the exchange notes with the specified excess net proceeds, subject to certain exceptions. The purchase price of the exchange notes will be 100% of their principal amount plus accrued and unpaid interest, if any, to, but not including, the repurchase date. For more information, see “Description of the Exchange Notes—Repurchase at the Option of Holders—Asset Sales.”

 

Certain Covenants

The exchange notes will be governed by the same indenture under which the outstanding notes were issued. The indenture governing the exchange notes contain covenants that, among other things, limit the Issuer’s ability and the ability of their restricted subsidiaries to:

 

   

incur or guarantee additional debt or issue disqualified stock or certain preferred stock;

 

   

pay dividends and make other distributions on, or redeem or repurchase, capital stock;

 

   

make certain investments;

 

   

incur certain liens;

 

   

enter into certain transactions with affiliates;

 

   

merge or consolidate;

 

   

enter into agreements that restrict the ability of certain restricted subsidiaries to make dividends or other payments to the Issuer;

 

   

designate restricted subsidiaries as unrestricted subsidiaries; and

 

   

transfer or sell certain assets.

 

  These covenants are subject to a number of important limitations and exceptions. See “Description of the Exchange Notes—Certain Covenants.” In addition, most of such covenants will be terminated for the exchange notes if they are rated investment grade by either Moody’s Investors Service, Inc. (“Moody’s”) or S&P Global Ratings (“S&P”).


 

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No Prior Market

The exchange notes will generally be freely transferable but will be new securities for which there will not initially be a market. Accordingly, there can be no assurance as to the development or liquidity of any market for the exchange notes. We do not intend to apply for a listing of the exchange notes on any securities exchange or an automated dealer quotation system. See “Risk Factors—Risks Related to the Exchange Offer—Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and an active trading market may not develop for the exchange notes.”

 

Trustee

Wilmington Trust, National Association.

 

Use of Proceeds

We will not receive any proceeds from the exchange offer. See “Use of Proceeds.”

 

Governing Law

The exchange notes will be governed by the laws of the State of New York.

 

Risk Factors

You should carefully consider all information in this prospectus prior to exchanging your outstanding notes. In particular, you should evaluate the specific risks described in the section entitled “Risk Factors” in this prospectus before participating in the exchange offer.


 

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RISK FACTORS

You should carefully consider the following risk factors and all other information contained in this prospectus before participating in the exchange offer. The risks and uncertainties described below are not the only risks facing us and your investment in the exchange notes. Additional risks and uncertainties that we are unaware of, or those we currently deem less significant, also may become important factors that affect us. The following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. The value of the exchange notes could decline due to any of these risks, and you may lose all or part of your investment.

Risks Related to the Exchange Offer

If you choose not to exchange your outstanding notes in the exchange offer, the transfer restrictions currently applicable to your outstanding notes will remain in force and the market price of your outstanding notes could decline.

If you do not exchange your outstanding notes for exchange notes in the exchange offer, then you will continue to be subject to the transfer restrictions on the outstanding notes as set forth in the offering memorandum distributed in connection with the private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Prospectus Summary—The Exchange Offer” and “The Exchange Offer” for information about how to tender your outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the remaining principal amount of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market price of the outstanding notes not exchanged in the exchange offer due to a reduction in liquidity.

Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and an active trading market may not develop for the exchange notes.

The exchange notes are a new issue of securities for which there is no established trading market. We do not intend to have the exchange notes listed on a national securities exchange or to arrange for quotation on any automated quotation system. The initial purchasers have advised us that they intend to make a market in the exchange notes, as permitted by applicable laws and regulations; however, the initial purchasers are not obligated to make a market in the exchange notes, and they may discontinue their market-making activities at any time without notice. Therefore, we cannot assure you as to the development or liquidity of any trading market for the exchange notes. The liquidity of any market for the exchange notes will depend on a number of factors, including:

 

   

changes in the overall market for securities similar to the exchange notes;

 

   

changes in our financial performance or prospects;

 

   

the prospects for companies in our industry generally;

 

   

the number of holders of the exchange notes;

 

   

the interest of securities dealers in making a market for the exchange notes;

 

   

the conditions of the financial markets; and

 

   

prevailing interest rates.

Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the exchange notes. The market, if any, for the exchange

 

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notes may face similar disruptions that may adversely affect the prices at which you may sell your exchange notes. Therefore, you may not be able to sell your exchange notes at a particular time and the price that you receive when you sell may not be favorable.

Certain persons who participate in the exchange offer must deliver a prospectus in connection with resales of the exchange notes.

Based on interpretations of the staff of the SEC contained in Exxon Capital Holdings Corp., SEC no-action letter (available May 13, 1988), Morgan Stanley & Co. Inc., SEC no-action letter (available June 5, 1991) and Shearman & Sterling, SEC no-action letter (available July 2, 1993), we believe that you may offer for resale, resell or otherwise transfer the exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act. However, in some instances described in this prospectus under “Plan of Distribution,” certain holders of exchange notes will remain obligated to comply with the registration and prospectus delivery requirements of the Securities Act to transfer the exchange notes. If such a holder transfers any exchange notes without delivering a prospectus meeting the requirements of the Securities Act or without an applicable exemption from registration under the Securities Act, such a holder may incur liability under the Securities Act. We do not and will not assume, or indemnify such a holder against, this liability.

Risks Related to Our Indebtedness and the Exchange Notes

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the exchange notes.

We currently have and will continue to have a substantial amount of debt, which requires significant interest and principal payments. As of December 31, 2018, we had approximately $7.4 billion of total debt outstanding, excluding unamortized deferred financing costs and discount, and an additional $937 million (after giving effect to $63 million of outstanding letters of credit) of unutilized capacity under the Revolving Credit Facility provided for under the Senior Secured Credit Facilities. Subject to the limits contained in the credit agreement that governs the Senior Secured Credit Facilities, the indenture that governs the exchange notes offered hereby and the applicable agreements governing our other debt and our restricted subsidiaries, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our high level of debt could increase. Specifically, our high level of debt could have important consequences to the holders of the exchange notes, including the following:

 

   

making it more difficult for us to satisfy our obligations with respect to the exchange notes and our other debt;

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;

 

   

requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings are at variable rates of interest;

 

   

limiting our flexibility in planning for and reacting to changes in the industry in which we compete;

 

   

placing us at a disadvantage compared to other, less leveraged competitors; and

 

   

increasing our cost of borrowing.

 

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Despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions which could further exacerbate the risks to our financial condition described above.

We may be able to incur significant additional indebtedness in the future. Although the credit agreement that governs the Senior Secured Credit Facilities, the indenture that governs the exchange notes offered hereby and the applicable agreements governing our other debt and the debt of our restricted subsidiaries contain restrictions on the incurrence of additional indebtedness and entering into certain types of other transactions, these restrictions are subject to a number of qualifications and exceptions. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt instruments. To the extent new debt is added to our current debt levels, the substantial leverage risks described in the immediately preceding risk factor would increase.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Interest rates may increase in the future. As a result, interest rates on our Revolving Credit Facility or other variable rate debt offerings could be higher or lower than current levels. As of December 31, 2018, excluding unamortized deferred financing costs and discount and the effects of any interest rate swaps, we had approximately $3,119 million of variable rate indebtedness, or 42%, of our outstanding debt. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

We may be unable to service our indebtedness, including the exchange notes.

Our ability to make scheduled payments on and to refinance our indebtedness, including the exchange notes, depends on and is subject to our financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors beyond our control, including the availability of financing in the international banking and capital markets. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to service our debt, including the exchange notes, to refinance our debt or to fund our other liquidity needs, including our existing stock repurchase program and our expected dividends. Substantially all of our other debt, including the Senior Secured Credit Facilities, will mature before the maturity date of the exchange notes.

If we are unable to meet our debt service obligations or to fund our other liquidity needs, we will need to restructure or refinance all or a portion of our debt, including the exchange notes, which could cause us to default on our debt obligations and impair our liquidity. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.

Moreover, in the event of a default, the holders of our indebtedness, including the exchange notes, could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. The lenders under our Revolving Credit Facility could also elect to terminate their commitments thereunder, cease making further loans, and institute foreclosure proceedings against their collateral, and we could be forced into bankruptcy or liquidation. If we breach our covenants under the Senior Secured Credit Facilities, we would be in default thereunder. The lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

 

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The indenture that governs the exchange notes offered hereby and our other debt agreements and the debt agreements of our restricted subsidiaries impose significant operating and financial restrictions on us, which may prevent us from capitalizing on business opportunities.

The indenture that governs the exchange notes offered hereby and our other debt agreements and the debt agreements of our restricted subsidiaries impose significant operating and financial restrictions on us. These restrictions will limit our ability and the ability of our restricted subsidiaries to, among other things:

 

   

incur or guarantee additional debt or issue disqualified stock or preferred stock;

 

   

pay dividends and make other distributions on, or redeem or repurchase, capital stock;

 

   

make certain investments;

 

   

incur certain liens;

 

   

enter into transactions with affiliates;

 

   

merge or consolidate;

 

   

enter into agreements that restrict the ability of restricted subsidiaries to make dividends or other payments to us;

 

   

designate restricted subsidiaries as unrestricted subsidiaries; and

 

   

transfer or sell assets.

In addition, if, on the last day of any period of four consecutive quarters, the aggregate principal amount of revolving credit loans, swing line loans and/or letters of credit (excluding up to $50 million of letters of credit and certain other letters of credit that have been cash collateralized or back-stopped) that are issued and/or outstanding is greater than 30% of the Revolving Credit Facility, the credit agreement that governs the Senior Secured Credit Facilities will require us to maintain a consolidated first lien net leverage ratio not to exceed 7.0 to 1.0.

As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Our failure to comply with the restrictive covenants described above as well as other terms of our existing indebtedness and/or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our results of operations and our financial condition.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flows would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments.

 

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Repayment of our debt, including required principal and interest payments on the exchange notes, is dependent on cash flow generated by our subsidiaries, which may be subject to limitations beyond our control.

Our subsidiaries own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our indebtedness, including the exchange notes, is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and (if they are not guarantors of the exchange notes) their ability to make such cash available to us, by dividend, debt repayment or otherwise.

Unless they are guarantors of the exchange notes, our subsidiaries do not have any obligation to pay amounts due on the notes or to make funds available to us for that purpose. Our non-guarantor subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the exchange notes. Each non-guarantor subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our non-guarantor subsidiaries. While limitations on our subsidiaries restrict their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions.

In the event that we are unable to receive distributions from subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the exchange notes.

Because the guarantee of the exchange notes by HLT Parent is being provided solely for the purpose of allowing the Issuer to satisfy its reporting obligations under the indenture governing the exchange notes, you should not assign any value to the guarantee of the exchange notes by HLT Parent.

The guarantee of the exchange notes by HLT Parent is being provided solely for the purpose of allowing the Issuer to satisfy its reporting obligations under the indenture governing the exchange notes by furnishing financial information relating to HLT Parent instead of the Issuer and, accordingly, you should not assign any value to the guarantee by HLT Parent. Moreover, the covenants in the indenture governing the exchange notes apply only to the Issuer and its restricted subsidiaries and do not apply to HLT Parent or HWP.

Claims of holders of the exchange notes will be structurally subordinated to claims of creditors of certain of our subsidiaries that will not guarantee the exchange notes.

The exchange notes will not be guaranteed by certain of our existing and future subsidiaries. Only our existing wholly owned domestic restricted subsidiaries that guarantee indebtedness under the Senior Secured Credit Facilities will initially guarantee the exchange notes. As of the date of this prospectus, none of our foreign subsidiaries, non-wholly owned domestic subsidiaries that are restricted subsidiaries, or unrestricted subsidiaries will guarantee the exchange notes, and no foreign subsidiaries are expected to guarantee the exchange notes in the future. Claims of holders of the exchange notes will be structurally subordinated to the claims of creditors of these non-guarantor subsidiaries, including trade creditors, and will not be satisfied from the assets of these non-guarantor subsidiaries until their creditors are paid in full.

For the year ended December 31, 2018, our non-guarantor subsidiaries represented $1,906 million or 52% of our total revenues, excluding other revenues from managed and franchised properties, and $501 million or 24% of our Adjusted EBITDA.

In addition, the guarantee of a subsidiary guarantor will be released in connection with a transfer of such subsidiary guarantor in a transaction not prohibited by the indenture governing the exchange notes or upon certain other events described in “Description of the Exchange Notes—Guarantees.”

The indenture that governs the exchange notes permit these subsidiaries to incur certain additional debt and will not limit their ability to incur other liabilities that are not considered indebtedness under the indenture.

 

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Federal and state statutes may allow courts, under specific circumstances, to void the exchange notes and the guarantees, subordinate claims in respect of the exchange notes and the guarantees and/or require holders of the exchange notes to return payments received from us.

Under federal bankruptcy laws and comparable provisions of state fraudulent transfer laws, the exchange notes and the guarantees could be voided, or claims in respect of the exchange notes or the guarantees could be subordinated to all of our other debt, if the issuance of the exchange notes, a guarantee or a grant of security was found to have been made for less than reasonable equivalent value and we, at the time we incurred the indebtedness evidenced by the exchange notes:

 

   

were insolvent or rendered insolvent by reason of such indebtedness;

 

   

were engaged in, or about to engage in, a business or transaction for which our remaining assets constituted unreasonably small capital; or

 

   

intended to incur, or believed that we would incur, debts beyond our ability to repay such debts as they mature.

A court might also void the issuance of the exchange notes or a guarantee without regard to the above factors, if the court found that we issued the exchange notes or the guarantors entered into the guaranty agreements with actual intent to hinder, delay or defraud our or their respective creditors.

A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the exchange notes or the guarantees if we or a guarantor did not substantially benefit directly or indirectly from the issuance of the exchange notes. If a court were to void the issuance of the exchange notes or the guarantees, you would no longer have a claim against us or the guarantors. Sufficient funds to repay the notes (or the related exchange notes) may not be available from other sources, including the remaining guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from us or the guarantors or, with respect to the exchange notes, any guarantee.

In addition, any payment by us pursuant to the exchange notes made at a time when we were subsequently found to be insolvent could be voided and required to be returned to us or to a fund for the benefit of our creditors if such payment is made to an insider within a one-year period prior to a bankruptcy filing or within 90 days for any outside party and such payment would give the creditors more than such creditors would have received in a liquidation under Title 11 of the United States Code, as amended (the “Bankruptcy Code”).

The measures of insolvency for purposes of these fraudulent and preferential transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent or preferential transfer has occurred. Generally, however, we would be considered insolvent if:

 

   

the sum of our debts, including contingent liabilities, were greater than the fair saleable value of all our assets;

 

   

the present fair saleable value of our assets were less than the amount that would be required to pay our probable liability on existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

we could not pay our debts as they become due.

After giving effect to the indebtedness incurred in this offering and the application of the proceeds therefrom, we believe we will not be insolvent, will not have unreasonably small capital for the business in which we are engaged and will not have incurred debts beyond our ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations or that a court would agree with our conclusions in this regard. The indenture that will govern the exchange notes will contain a “savings clause,” which limits the liability of each guarantor on its guarantee to the maximum amount that such

 

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guarantor can incur without risk that its guarantee will be subject to avoidance as a fraudulent transfer. We cannot assure you that this limitation will protect such guarantees from fraudulent transfer challenges or, if it does, that the remaining amount due and collectible under the guarantees would suffice, if necessary, to pay the exchange notes in full when due. Furthermore, in Official Committee of Unsecured Creditors of TOUSA, Inc. v Citicorp North America, Inc. (“TOUSA”), the U.S. Bankruptcy Court in the Southern District of Florida held that a savings clause similar to the savings clause that is included in the indenture governing the exchange notes was unenforceable. As a result, the subsidiary guarantees were found to be fraudulent conveyances. The United States Court of Appeals for the Eleventh Circuit affirmed the liability findings of the Bankruptcy Court without ruling directly on the enforceability of savings clauses generally. If the TOUSA decision were followed by other courts, the risk that the guarantees would be deemed fraudulent conveyances would be significantly increased.

In addition, although each guarantee will contain a provision intended to limit that guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer, this provision may not be effective to protect those guarantees from being voided under fraudulent transfer law, or may reduce that guarantor’s obligation to an amount that effectively makes its guarantee worthless.

Finally, as a court of equity, the bankruptcy court may subordinate the claims in respect of the exchange notes to other claims against us under the principle of equitable subordination, if the court determines that: (i) the holders of the exchange notes engaged in some type of inequitable conduct; (ii) such inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holder of the exchange notes; and (iii) equitable subordination is not inconsistent with the provisions of the Bankruptcy Code.

Because each guarantor’s liability under its guarantees may be reduced to zero, voided or released under certain circumstances, holders of exchange notes may not receive any payments from some or all of the guarantors.

Holders of exchange notes have the benefit of the guarantees of the guarantors. However, the guarantees by the guarantors are limited to the maximum amount that the guarantors are permitted to guarantee under applicable law. As a result, a guarantor’s liability under its guarantee could be reduced to zero, depending upon the amount of other obligations of such guarantor. Further, under the circumstances discussed more fully above, a court under federal and state fraudulent conveyance and transfer statutes could void the obligations under a guarantee or further subordinate it to all other obligations of the guarantor. See “—Federal and state statutes may allow courts, under specific circumstances, to void the exchange notes and the guarantees, subordinate claims in respect of the exchange notes and the guarantees and/or require holders of the exchange notes to return payments received from us.” In addition, you will lose the benefit of a particular guarantee if it is released under certain circumstances described under “Description of the Exchange Notes—Guarantees.”

We may not be able to finance a change of control offer required by the indenture.

Upon a change of control triggering event, as defined under the indenture governing the exchange notes, you will have the right to require us to offer to purchase all of the exchange notes then outstanding at a price equal to 101% of the principal amount of the exchange notes, plus accrued interest. In order to obtain sufficient funds to pay the purchase price of the outstanding exchange notes, we expect that we would have to refinance the exchange notes. We cannot assure you that we would be able to refinance the exchange notes on reasonable terms, if at all. Our failure to offer to purchase all outstanding exchange notes or to purchase all validly tendered exchange notes would be an event of default under the indenture. Such an event of default may cause the acceleration of our other debt, including debt under our Senior Secured Credit Facilities. Our future debt also may contain restrictions on repayment requirements with respect to specified events or transactions that constitute a change of control under the indenture.

 

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We can enter into transactions like recapitalizations, reorganizations and other highly leveraged transactions that do not constitute a change of control but that could adversely affect the holders of the exchange notes.

Certain important corporate events, such as leveraged recapitalizations, may not, under the indenture governing the exchange notes, constitute a “change of control” triggering event that would require us to repurchase the exchange notes, notwithstanding the fact that such corporate events could increase the level of our indebtedness or otherwise adversely affect our capital structure, credit ratings or the value of the exchange notes. Therefore, we could, in the future, enter into certain transactions, including acquisitions, reorganizations, refinancings or other recapitalizations, which would not constitute a change of control under the indenture governing the exchange notes, but that could increase the amount of indebtedness outstanding at such time or otherwise affect our capital structure or credit ratings.

Holders of exchange notes may not be able to determine when a change of control triggering event giving rise to their right to have the exchange notes repurchased has occurred following a sale of “substantially all” of our assets.

The definition of change of control in the indenture governing the exchange notes includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of exchange notes to require us to repurchase its exchange notes as a result of a sale of less than all our assets to another person may be uncertain. See “Description of the Exchange Notes—Repurchase at the Option of Holders—Change of Control Triggering Event.”

A lowering or withdrawal of the ratings assigned to our debt securities by rating agencies may adversely affect the market price or liquidity of the exchange notes.

The exchange notes will have a non-investment grade rating. There can be no assurances that such rating will remain for any given period of time or that such rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Credit ratings are not recommendations to purchase, hold or sell the exchange notes, and may be revised or withdrawn at any time. Additionally, credit ratings may not reflect the potential effect of risks relating to the structure or marketing of the exchange notes. If the credit rating of the exchange notes is subsequently lowered or withdrawn for any reason, you may not be able to resell such exchange notes without a substantial discount.

If the exchange notes are rated investment grade by either Moody’s or S&P, certain covenants contained in the indenture will be terminated, and holders of the exchange notes will lose the protection of these covenants even if the exchange notes subsequently fall back below investment grade.

The indenture contains certain covenants that will be terminated if the exchange notes are rated investment grade by either Moody’s or S&P. These covenants restrict the Issuer’s ability and the ability of its restricted subsidiaries to, among other things:

 

   

incur additional indebtedness or issue preferred stock;

 

   

make distributions or other restricted payments;

 

   

sell capital stock or other assets; and

 

   

engage in transactions with affiliates.

Because these restrictions will not apply once the exchange notes are rated investment grade, we will be able to incur additional debt and consummate transactions that may impair our ability to satisfy our obligations with respect to such exchange notes.

 

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The exchange notes are unsecured and effectively junior to our secured indebtedness, including borrowings under our Senior Secured Credit Facilities, to the extent of the value of the collateral securing such secured indebtedness.

Our obligations under the exchange notes and guarantees will be unsecured and will be effectively junior to our and the guarantors’ secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. Borrowings under our Senior Secured Credit Facilities and the guarantees thereof will be secured by substantially all of the assets of the Issuer and any existing and future subsidiary guarantors, including all of the capital stock of the Issuer and each restricted subsidiary (which, in the case of foreign subsidiaries, is limited to 65% of the capital stock of each first-tier foreign subsidiary).

The exchange notes are effectively subordinated to all such secured indebtedness to the extent of the value of that collateral. If an event of default occurs under the Senior Secured Credit Facilities, the holders of such senior secured indebtedness will have a prior right to our assets, to the exclusion of the holders of the exchange notes, even if we are in default with respect to the exchange notes. In that event, our assets would first be used to repay in full all indebtedness and other obligations secured by them (including all amounts outstanding under our Senior Secured Credit Facilities), resulting in all or a portion of our assets being unavailable to satisfy the claims of the holders of the exchange notes and other unsecured indebtedness. Therefore, in the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of the exchange notes will participate in our remaining assets ratably with each other and with all holders of our unsecured indebtedness that is deemed to be of the same class as such exchange notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the exchange notes. As a result, holders of such exchange notes may receive less, ratably, than holders of secured indebtedness.

As of December 31, 2018, we had approximately $7.4 billion of secured indebtedness outstanding, excluding unamortized deferred financing costs and discount and an additional $937 million (after giving effect to $63 million of outstanding letters of credit) of unutilized capacity under the Revolving Credit Facility provided for under the Senior Secured Credit Facilities. The exchange notes and the related guarantees would have ranked effectively junior to such outstanding indebtedness. The indenture governing the exchange notes will also permit us to incur additional secured indebtedness, which could be substantial.

Risks Related to Our Business and Industry

We are subject to the business, financial and operating risks inherent to the hospitality industry, any of which could reduce our revenues and limit opportunities for growth.

Our business is subject to a number of business, financial and operating risks inherent to the hospitality industry, including:

 

   

significant competition from multiple hospitality providers in all parts of the world;

 

   

changes in operating costs, including employee compensation and benefits, energy, insurance, and food and beverage;

 

   

increases in costs due to inflation or other factors that may not be fully offset by increases in revenues in our business;

 

   

changes in taxes and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;

 

   

the costs and administrative burdens associated with complying with applicable laws and regulations;

 

   

the costs or desirability of complying with local practices and customs;

 

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significant increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;

 

   

shortages of labor or labor disruptions;

 

   

the ability of third-party internet and other travel intermediaries who sell our hotel rooms to guests to attract and retain customers;

 

   

the quality of services provided by franchisees;

 

   

the availability and cost of capital necessary for us and third-party hotel owners to fund investments, capital expenditures and service debt obligations;

 

   

delays in or cancellations of planned or future development or refurbishment projects;

 

   

the financial condition of third-party property owners, developers and joint venture partners;

 

   

relationships with third-party property owners, developers and joint venture partners, including the risk that owners may terminate our management, franchise or joint venture contracts;

 

   

cyclical over-building in the hospitality industry;

 

   

changes in desirability of geographic regions of the hotels in our business, geographic concentration of our operations and customers and shortages of desirable locations for development;

 

   

changes in the supply and demand for hotel services, including rooms, food and beverage and other products and services; and

 

   

decreases in the frequency of business travel that may result from alternatives to in-person meetings, including virtual meetings hosted online or over private teleconferencing networks.

Any of these factors could increase our costs or limit or reduce the prices we are able to charge for hospitality products and services, or otherwise affect our ability to maintain existing properties or develop new properties. As a result, any of these factors can reduce our revenues and limit opportunities for growth.

Macroeconomic and other factors beyond our control can adversely affect and reduce demand for our products and services.

Macroeconomic and other factors beyond our control can reduce demand for hospitality products and services, including demand for rooms at our hotels. These factors include, but are not limited to:

 

   

changes in general economic conditions, including low consumer confidence, increases in unemployment levels and depressed real estate prices resulting from the severity and duration of any downturn in the U.S. or global economy;

 

   

governmental action and uncertainty resulting from U.S. and global political trends and policies, including potential barriers to travel, trade and immigration;

 

   

war, political instability or civil unrest, terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

   

decreased corporate or government travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;

 

   

statements, actions, or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities;

 

   

the financial and general business condition of the airline, automotive and other transportation-related industries and its effect on travel, including decreased airline capacity and routes and increased travel costs;

 

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conditions that negatively shape public perception of travel, including travel-related accidents, outbreaks of pandemic or contagious diseases, such as Ebola, Zika, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine flu) and Middle East Respiratory Syndrome (MERS), and perceived negative impacts of tourism on local cultures and the environment;

 

   

cyber-attacks;

 

   

climate change or availability of natural resources;

 

   

natural or man-made disasters and extreme weather conditions, including earthquakes, tsunamis, tornadoes, hurricanes (e.g., hurricanes Florence, Lane and Michael in 2018), typhoons, floods, wildfires, volcanic eruptions, oil spills and nuclear incidents;

 

   

changes in the desirability of particular locations or travel patterns of customers; and

 

   

organized labor activities, which could cause a diversion of business from hotels involved in labor negotiations and loss of business for our hotels generally as a result of certain labor tactics.

Any one or more of these factors could limit or reduce overall demand for our products and services or could negatively affect our revenue sources, which could adversely affect our business, financial condition and results of operations.

Contraction in the global economy or low levels of economic growth could adversely affect our revenues and profitability as well as limit or slow our future growth.

Consumer demand for our services is closely linked to the performance of the general economy and is sensitive to business and personal discretionary spending levels. Decreased global or regional demand for hospitality products and services can be especially pronounced during periods of economic contraction or low levels of economic growth, and the recovery period in our industry may lag overall economic improvement. Declines in demand for our products and services due to general economic conditions could negatively affect our business by limiting the amount of fee revenues we are able to generate from our managed and franchised properties and decreasing the revenues and profitability of our owned and leased properties. In addition, many of the expenses associated with our business, including personnel costs, interest, rent, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if we are unable to meaningfully decrease these costs as demand for our hotels decreases, our business operations and financial performance and results may be adversely affected.

The hospitality industry is subject to seasonal and cyclical volatility, which may contribute to fluctuations in our results of operations and financial condition.

The hospitality industry is seasonal in nature. The periods during which our properties experience higher revenues vary from property to property, depending principally upon their location, type of property and competitive mix within the specific location. Based on historical results, we generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters. In addition, the hospitality industry is cyclical and demand generally follows the general economy on a lagged basis. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition.

Because we operate in a highly competitive industry, our revenues or profits could be harmed if we are unable to compete effectively.

The segments of the hospitality industry in which we operate are subject to intense competition. Our principal competitors are other operators of luxury, full-service and focused-service hotels, including other major hospitality chains with well-established and recognized brands. We also compete against smaller hotel chains, independent and local hotel owners and operators, home and apartment sharing services and timeshare operators. If we are unable to compete successfully, our revenues or profits may decline.

 

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Competition for hotel guests

We face competition for individual guests, group reservations and conference business. We compete for these customers based primarily on brand name recognition and reputation, as well as location, rates for hotel rooms, food and beverage and other services, property size and availability of rooms and conference space, quality of the accommodations, customer satisfaction, amenities and the ability to earn and redeem loyalty program points. Our competitors may have greater commercial, financial and marketing resources and more efficient technology platforms, which could allow them to improve their properties and expand and improve their marketing efforts in ways that could affect our ability to compete for guests effectively, or they could offer a type of lodging product that customers find attractive but that we do not offer.

Competition for management and franchise contracts

We compete to enter into management and franchise contracts. Our ability to compete effectively is based primarily on the value and quality of our management services, brand name recognition and reputation, our ability and willingness to invest capital, availability of suitable properties in certain geographic areas, and the overall economic terms of our contracts and the economic advantages to the property owner of retaining our management services and using our brands. If the properties that we manage or franchise perform less successfully than those of our competitors, if we are unable to offer terms as favorable as those offered by our competitors, or if the availability of suitable properties is limited, our ability to compete effectively for new management or franchise contracts could be reduced.

Any deterioration in the quality or reputation of our brands could have an adverse effect on our reputation, business, financial condition or results of operations.

Our brands and our reputation are among our most important assets. Our ability to attract and retain guests depends, in part, on the public recognition of our brands and their associated reputation. In addition, the success of our hotel owners’ businesses and the amount of payments to us for the assets and services we provide them may depend on the strength and reputation of our brands. If our brands become obsolete or consumers view them as unfashionable, unsustainable or lacking in consistency and quality, we may be unable to attract guests to our hotels, and may further be unable to attract or retain our hotel owners.

Changes in ownership or management practices, the occurrence of accidents or injuries, cyber-attacks, security breaches, natural disasters, crime, individual guest, owner or employee notoriety or similar events at our hotels and resorts can harm our reputation, create adverse publicity and cause a loss of consumer confidence in our business. Because of the global nature of our brands and the broad expanse of our business and hotel locations, events occurring in one location could negatively affect the reputation and operations of otherwise successful individual locations. In addition, the expansion of social media has compounded the potential scope of negative publicity by increasing the speed and expanse of information dissemination. Many social media platforms publish content immediately and without filtering or verifying the accuracy of that content. A negative incident at one hotel could have far-reaching effects, including lost sales, customer boycotts, loss of development opportunities, and employee difficulties. Such an incident also could subject us to legal actions, including litigation, governmental investigations or penalties, along with the resulting additional adverse publicity. A perceived decline in the quality of our brands or damage to our reputation could adversely affect our business, financial condition or results of operations.

 

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Our business is subject to risks related to doing business with third-party property owners that could adversely affect our reputation, operational results or prospects for growth.

Unless we maintain good relationships with third-party hotel owners and renew or enter into new management and franchise contracts, we may be unable to expand our presence and our business, financial condition and results of operations may suffer.

Our business depends on our ability to establish and maintain long-term, positive relationships with third-party property owners and our ability to enter into new and renew management and franchise contracts. Although our management and franchise contracts are typically long-term arrangements, hotel owners may be able to terminate the contracts under certain circumstances, including the failure to meet specified financial or performance criteria. Our ability to meet these financial and performance criteria is subject to, among other things, risks common to the overall hospitality industry, including factors outside of our control. In addition, negative management and franchise pricing trends could adversely affect our ability to negotiate with hotel owners. If we fail to maintain and renew existing management and franchise contracts or enter into new contracts on favorable terms, we may be unable to expand our presence and our business, and our financial condition and results of operations may suffer.

Our business is subject to real estate investment risks for third-party owners that could adversely affect our operational results and our prospects for growth.

Growth of our business is affected, and may potentially be limited, by factors influencing real estate development generally, including site availability, financing, planning, zoning and other local approvals. In addition, market factors such as projected room occupancy, changes in growth in demand for customers compared to projected supply, geographic area restrictions in management and franchise contracts, costs of construction and anticipated room rate structure, if not managed effectively by our third-party owners could adversely affect the growth of our management and franchise business.

If our third-party property owners are unable to repay or refinance loans secured by the mortgaged properties, or to obtain financing adequate to fund current operations or growth plans, our revenues, profits and capital resources could be reduced and our business could be harmed.

Many of our third-party property owners pledged their properties as collateral for mortgage loans entered into at the time of development, purchase or refinancing. If our third-party property owners are unable to repay or refinance maturing indebtedness on favorable terms or at all, their lenders could declare a default, accelerate the related debt and repossess the property. While we maintain certain contractual protections, repossession could result in the termination of our management or franchise contract or eliminate revenues and cash flows from the property. In addition, the owners of managed and franchised hotels depend on financing to develop or buy and improve hotels and in some cases, fund operations during down cycles. Our hotel owners’ inability to obtain adequate funding could materially adversely affect the maintenance and improvement plans of existing hotels, result in the delay or stoppage of the development of our existing development pipeline and limit additional development to further expand our hotel portfolio.

If our third-party property owners fail to make investments necessary to maintain or improve their properties, guest preference for Hilton brands and reputation and performance results could suffer.

Substantially all of our management and franchise contracts, as well as our license agreement with HGV, require third-party property owners to comply with quality and reputation standards of our brands, which include requirements related to the physical condition, use of technology, safety standards and appearance of the properties as well as the service levels provided by hotel employees. These standards may evolve with customer preference, or we may introduce new requirements over time. If our property owners fail to make investments necessary to maintain or improve the properties in accordance with our standards, guest preference for our brands could diminish. In addition, if third-party property owners fail to observe standards or meet their contractual

 

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requirements, we may elect to exercise our termination rights, which would eliminate revenues from these properties and cause us to incur expenses related to terminating these contracts. We may be unable to find suitable or offsetting replacements for any terminated relationships.

Contractual and other disagreements with third-party property owners could make us liable to them or result in litigation costs or other expenses.

Our management and franchise contracts require us and our hotel owners to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. Any dispute with a property owner could be very expensive for us, even if the outcome is ultimately in our favor. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with any third party. Furthermore, specific to our industry, some courts have applied principles of agency law and related fiduciary standards to managers of third-party hotel properties, which means that property owners may assert the right to terminate contracts even where the contracts do not expressly provide for termination. Our fees from any terminated property would be eliminated, and accordingly may negatively affect our results of operations.

Some of our existing development pipeline may not be developed into new hotels, which could materially adversely affect our growth prospects.

As of December 31, 2018, we had more than 2,400 hotels in our development pipeline, which we define as hotels under construction or approved for development under one of our brands. The commitments of owners and developers with whom we have contracts are subject to numerous conditions, and the eventual development and construction of our development pipeline not currently under construction is subject to numerous risks, including, in certain cases, the owner’s or developer’s ability to obtain adequate financing and obtaining governmental or regulatory approvals. As a result, not every hotel in our development pipeline may develop into a new hotel that enters our system.

New hotel brands or non-hotel branded concepts that we launch in the future may not be as successful as we anticipate, which could have a material adverse effect on our business, financial condition or results of operations.

Since 2011, we have launched seven new brands: Home2 Suites by Hilton; Curio Collection by Hilton; Canopy by Hilton; Tru by Hilton; Tapestry Collection by Hilton; Motto by Hilton and, most recently, LXR Hotels & Resorts. We may continue to build our portfolio by launching new hotel and non-hotel brands in the future. In addition, the Hilton Garden Inn, DoubleTree by Hilton and Hampton by Hilton brands have been expanding into new jurisdictions outside the United States over the past several years. We may continue to expand existing brands into new international markets. New hotel products or concepts or brand expansions may not be accepted by hotel owners, franchisees or customers and we cannot guarantee the level of acceptance any new brand will have in the development and consumer marketplaces. If new branded hotel products, non-hotel branded concepts or brand expansions are not as successful as we anticipate, we may not recover the costs we incurred in their development or expansion, which could have a material adverse effect on our business, financial condition or results of operations.

The risks resulting from investments in owned and leased real estate could increase our costs, reduce our profits and limit our ability to respond to market conditions.

Our investments in owned and leased real property (including through joint ventures) subject us to various risks that may not be applicable to managed or franchised properties, including:

 

   

governmental regulations relating to real estate ownership or operations, including tax, environmental, zoning and eminent domain laws;

 

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fluctuations or loss in value of real estate or potential impairments in the value of our assets due to changes in market conditions in the area in which real estate or assets are located;

 

   

increased potential civil liability for accidents or other occurrences on owned or leased properties;

 

   

the ongoing need for capital improvements and expenditures funded by us to maintain or upgrade properties and contractual requirements to deliver properties back to landlords in a particular state of repair and condition at the end of a lease term;

 

   

periodic total or partial closures due to renovations and facility improvements;

 

   

risks associated with any mortgage debt, including the possibility of default, fluctuating interest rate levels and uncertainties in the availability of replacement financing;

 

   

contingent liabilities that exist after we have exited a property;

 

   

costs linked to the employment and management of staff to run and operate an owned or leased property; and

 

   

the relative illiquidity of real estate compared to some other assets.

The negative effect on profitability and cash flow from declines in revenues is more pronounced in owned or leased properties because we, as the owner or lessee, bear the risk of their high fixed-cost structure. Further, during times of economic distress, declining demand and declining earnings often result in declining asset values, and we may not be able to sell properties on favorable terms or at all. Accordingly, we may not be able to adjust our owned and leased property portfolio promptly in response to changes in economic or other conditions.

Our efforts to develop, redevelop or renovate our owned and leased properties could be delayed or become more expensive than anticipated.

Certain of our owned and leased properties were constructed many years ago. The condition of aging properties could negatively affect our ability to attract guests or result in higher operating and capital costs, either of which could reduce revenues or profits from these properties. There can be no assurance that our planned replacements and repairs will occur, or even if completed, will result in improved performance. In addition, these efforts are subject to a number of risks, including:

 

   

construction delays or cost overruns (including labor and materials);

 

   

obtaining zoning, occupancy and other required permits or authorizations;

 

   

changes in economic conditions that may result in weakened or lack of demand for improvements that we make or negative project returns;

 

   

governmental restrictions on the size or kind of development;

 

   

volatility in the debt and capital markets that may limit our ability to raise capital for projects or improvements;

 

   

lack of availability of rooms or meeting spaces for revenue-generating activities during construction, modernization or renovation projects;

 

   

force majeure events, including earthquakes, tornadoes, hurricanes, wildfires, floods or tsunamis, or acts of terrorism; and

 

   

design defects that could increase costs.

If our properties are not updated to meet guest preferences, if properties under development or renovation are delayed in opening as scheduled, or if renovation investments adversely affect or fail to improve performance, our operations and financial results could be negatively affected.

 

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Our properties may not be permitted to be rebuilt if destroyed.

Certain of our properties may qualify as legally-permissible nonconforming uses and improvements. If a substantial portion of any such property were to be destroyed by fire or other casualty, we might not be permitted to rebuild that property as it now exists or at all, regardless of the availability of insurance proceeds. Any loss of this nature, whether insured or not, could materially adversely affect our results of operations and prospects.

We have investments in joint venture projects, which limits our ability to manage third-party risks associated with these projects.

In most cases, we are minority participants and do not control the decisions of the joint ventures in which we are involved. Therefore, joint venture investments may involve risks such as the possibility that a co-venturer in an investment might become bankrupt, be unable to meet its capital contribution obligations, have economic or business interests or goals that are inconsistent with our business interests or goals or take actions that are contrary to our instructions or to applicable laws and regulations. In addition, we may be unable to take action without the approval of our joint venture partners, or our joint venture partners could take actions binding on the joint venture without our consent. Consequently, actions by a co-venturer or other third party could expose us to claims for damages, financial penalties and reputational harm, any of which could adversely affect our business and operations. In addition, we may agree to guarantee indebtedness incurred by a joint venture or co-venturer or provide standard indemnifications to lenders for loss liability or damage occurring as a result of our actions or actions of the joint venture or other co-venturers. Such a guarantee or indemnity may be on a joint and several basis with a co-venturer, in which case we may be liable in the event that our co-venturer defaults on its guarantee obligation. The non-performance of a co-venturer’s obligations may cause losses to us in excess of the capital we initially may have invested or committed.

Although our joint ventures may generate positive cash flow, in some cases they may be unable to distribute that cash to us or the other joint venture partners. Additionally, in some cases our joint venture partners control distributions and may choose to leave capital in the joint venture rather than distribute it. Because our ability to generate liquidity from our joint ventures depends in part on their ability to distribute capital to us, our failure to receive distributions from our joint venture partners could reduce our cash flow return on these investments.

Failures in, material damage to, or interruptions in our information technology systems, software or websites and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations.

We depend heavily upon our information technology systems in the conduct of our business. We develop, own and license or otherwise contract for sophisticated technology systems and services for property management, procurement, finance, human resources, reservations, distribution and the operation of the Hilton Honors guest loyalty program. Such systems are subject to, among other things, damage or interruption from power outages, computer and telecommunications failures, computer viruses, third party criminal activity including “ransomware” or other malware, and natural and man-made disasters. Although we have a cold disaster recovery site in a separate location to back up our core reservation, distribution and financial systems, substantially all of our data center operations are currently located in a single facility. Although we are migrating portions of our operations to cloud-based providers while simultaneously building and operating new applications and services with those cloud-based providers, any loss or damage to our primary facility could result in operational disruption and data loss as we transfer production operations to our disaster recovery site. Damage or interruption to our information systems may require a significant investment to update, remediate or replace with alternate systems, and we may suffer interruptions in our operations as a result. In addition, costs and potential problems or interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our systems, including those that may result from our failure to adequately develop, implement and maintain a robust disaster recovery plan and backup systems could

 

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severely affect our ability to conduct normal business operations and, as a result, have a material adverse effect on our business operations and financial performance.

We rely on third parties for the performance of a significant portion of our information technology functions worldwide. In particular, our reservation and distribution system relies on data communications networks and systems operated by unaffiliated third parties. The success of our business depends in part on maintaining our relationships with these third parties and their continuing ability to perform these functions and services in a timely and satisfactory manner. If we experience a loss or disruption in the provision of any of these functions or services, or they are not performed in a satisfactory manner, we may have difficulty in finding alternate providers on terms favorable to us, in a timely manner or at all, and our business could be adversely affected.

We rely on certain software vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner.

We are vulnerable to various risks and uncertainties associated with our websites and mobile applications, including changes in required technology interfaces, website and mobile application downtime and other technical failures, costs and issues as we upgrade our website software and mobile applications. Additional risks include computer malware, changes in applicable federal, state and international regulations, security breaches, legal claims related to our website operations and e-commerce fulfillment and other consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce website and mobile application sales and have a material adverse effect on our business or results of operations.

Cyber-attacks could have a disruptive effect on our business.

From time to time we and our third-party service providers experience cyber-attacks, attempted and actual breaches of our or their information technology systems and networks or similar events, which could result in a loss of sensitive business or customer information, systems interruption or the disruption of our operations. The techniques that are used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and may be difficult to detect for long periods of time, and despite our deployment of cyber-attack prevention and detection techniques, we are accordingly unable to anticipate and prevent all data security incidents. We have in the past been subject to cyber-attacks and expect that we will be subject to additional cyber-attacks in the future and may experience data breaches.

Even if we are fully compliant with legal standards and contractual or other requirements, we still may not be able to prevent security breaches involving sensitive data. The sophistication of efforts by hackers to gain unauthorized access to information systems has continued to increase in recent years and may continue to do so. Breaches, thefts, losses or fraudulent uses of customer, employee or company data could cause consumers to lose confidence in the security of our websites, mobile applications, point of sale systems and other information technology systems and choose not to purchase from us. Such security breaches also could expose us to risks of data loss, business disruption, litigation and other costs or liabilities, any of which could adversely affect our business.

We are exposed to risks and costs associated with protecting the integrity and security of our guests’ personal data and other sensitive information.

We are subject to various risks and costs associated with the collection, handling, storage and transmission of sensitive information, including those related to compliance with U.S. and foreign data collection and privacy laws and other contractual obligations, as well as those associated with the compromise of our systems collecting such information. For example, the European Union’s General Data Protection Regulation (“GDPR”), which

 

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became effective in May 2018 and replaced the data protection laws of each EU member state, requires companies to meet new and more stringent requirements regarding the handling of personal data, and failure to meet the GDPR requirements could result in penalties of up to four percent of worldwide revenue. We collect internal and customer data, including credit card numbers and other personally identifiable information for a variety of important business purposes, including managing our workforce, providing requested products and services and maintaining guest preferences to enhance customer service and for marketing and promotion purposes. We could be exposed to fines, penalties, restrictions, litigation, reputational harm or other expenses, or other adverse effects on our business, due to failure to protect our guests’ personal data and other sensitive information or failure to maintain compliance with the various U.S. and foreign data collection and privacy laws or with credit card industry standards or other applicable data security standards.

In addition, U.S. states and the federal government have enacted additional laws and regulations to protect consumers against identity theft. These laws and similar laws in other jurisdictions have increased the costs of doing business, and failure on our part to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws could subject us to potential claims for damages and other remedies. If we were required to pay any significant amounts in satisfaction of claims under these laws, or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such law, our business, operating results and financial condition could be adversely affected.

Failure to keep pace with developments in technology could adversely affect our operations or competitive position.

The hospitality industry demands the use of sophisticated technology and systems for property management, brand assurance and compliance, procurement, reservation systems, operation of our guest loyalty programs, distribution of hotel resources to current and future customers and guest amenities. These technologies may require refinements and upgrades, and third parties may cease support of systems that are currently in use. The development and maintenance of these technologies may require significant investment by us. As various systems and technologies become outdated or new technology is required, we may not be able to replace or introduce them as quickly as needed or in a cost-effective and timely manner. We may not achieve the benefits we may have been anticipating from any new technology or system.

We may seek to expand through acquisitions of and investments in other businesses and properties, or through alliances, and we may also seek to divest some of our properties and other assets. These acquisition and disposition activities may be unsuccessful or divert management’s attention.

We may consider strategic and complementary acquisitions of and investments in other hotel or hospitality brands, businesses, properties or other assets. Furthermore, we may pursue these opportunities in alliance with existing or prospective owners of managed or franchised properties. In many cases, we will be competing for these opportunities with third parties that may have substantially greater financial resources than us. Acquisitions or investments in brands, businesses, properties or assets as well as third-party alliances are subject to risks that could affect our business, including risks related to:

 

   

issuing shares of stock that could dilute the interests of our existing stockholders;

 

   

spending cash and incurring debt;

 

   

assuming contingent liabilities; or

 

   

creating additional expenses.

We may not be able to identify opportunities or complete transactions on commercially reasonable terms or at all or we may not actually realize any anticipated benefits from such acquisitions, investments or alliances. Similarly, we may not be able to obtain financing for acquisitions or investments on attractive terms or at all, or the ability to obtain financing may be restricted by the terms of our indebtedness. In addition, the success of any

 

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acquisition or investment also will depend, in part, on our ability to integrate the acquisition or investment with our existing operations.

We also may divest certain properties or assets, and any such divestments may yield lower than expected returns or otherwise fail to achieve the benefits we expect. In some circumstances, sales of properties or other assets may result in losses. Upon sales of properties or assets, we may become subject to contractual indemnity obligations, incur material tax liabilities or, as a result of required debt repayment, face a shortage of liquidity. Finally, any acquisitions, investments or dispositions could demand significant attention from management that would otherwise be available for business operations, which could harm our business.

Failure to comply with marketing and advertising laws, including with regard to direct marketing, could result in fines or place restrictions on our business.

We rely on a variety of direct marketing techniques, including telemarketing, email and social media marketing and postal mailings, and we are subject to various laws and regulations in the U.S. and internationally that govern marketing and advertising practices. Any further restrictions in laws and court or agency interpretations of such laws, such as the Telephone Consumer Protection Act of 1991, the Telemarketing Sales Rule, CAN-SPAM Act of 2003, and various U.S. state laws, new laws, or international data protection laws, such as the EU GDPR, that govern these activities could adversely affect current or planned marketing activities and cause us to change our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could affect our ability to maintain relationships with our customers and acquire new customers. We also obtain access to names of potential customers from travel service providers or other companies, and we market to some individuals on these lists directly or through other companies’ marketing materials. If access to these lists were prohibited or otherwise restricted, our ability to develop new customers and introduce them to products could be impaired.

The growth of internet reservation channels could adversely affect our business and profitability.

A significant percentage of hotel rooms for individual guests are booked through internet travel intermediaries, to whom we commit to pay various commissions and transaction fees for sales of our rooms through their systems. Search engines and peer-to-peer inventory sources also provide online travel services that compete with our business. If these bookings increase, certain hospitality intermediaries may be able to obtain higher commissions, reduced room rates or other significant concessions from us or our franchisees. These hospitality intermediaries also may reduce these bookings by de-ranking our hotels in search results on their platforms, and other online providers may divert business away from our hotels. Although our contracts with many hospitality intermediaries limit transaction fees for hotels, there can be no assurance that we will be able to renegotiate these contracts upon their expiration with terms as favorable as the provisions that existed before the expiration, replacement or renegotiation. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to the Hilton brands and systems. If this happens, our business and profitability may be significantly affected as shifting customer loyalties divert bookings away from our websites, which increases costs to hotels in our system. Internet travel intermediaries also have been subject to regulatory scrutiny, particularly in Europe. The outcome of this regulatory activity may affect our ability to compete for direct bookings through our own internet channels.

In addition, although internet travel intermediaries have traditionally competed to attract individual leisure consumers or “transient” business rather than “group” business for meetings and events, in recent years they have expanded their business to include marketing to group business and also to corporate transient business. If that growth continues, it could both divert group and corporate transient business away from our hotels and also increase our cost of sales for group and corporate transient business. Consolidation of internet travel intermediaries, or the entry of major internet companies into the internet travel bookings business, also could divert bookings away from our websites and increase our hotels’ cost of sales.

 

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Our reservation system is an important component of our business operations and a disruption to its functioning could have an adverse effect on our performance and results.

We manage a global reservation system that communicates reservations to our branded hotels when made by individuals directly, either online, by telephone to our call centers, through devices via our mobile application, or through intermediaries like travel agents, internet travel web sites and other distribution channels. The cost, speed, efficacy and efficiency of the reservation system are important aspects of our business and are important considerations of hotel owners in choosing to affiliate with our brands. Any failure to maintain or upgrade, and any other disruption to our reservation system may adversely affect our business.

The cessation, reduction or taxation of program benefits of our Hilton Honors loyalty program could adversely affect the Hilton brands and guest loyalty.

We manage the Hilton Honors guest loyalty program for the Hilton brands. Program members accumulate points based on eligible stays and hotel charges and redeem the points for a range of benefits including free rooms and other items of value. The program is an important aspect of our business and of the affiliation value for hotel owners under management and franchise contracts. System hotels (including, without limitation, third-party hotels under management and franchise arrangements) contribute a percentage of the loyalty member’s charges to the program for each stay of a program member. In addition to the accumulation of points for future hotels stays at our brands, Hilton Honors arranges with third parties, such as airlines, other transportation services, online vendors, retailers and credit card companies, to sell Honors points for the use of their customers and/or to allow Honors members to use or exchange points for products or services. Currently, the program benefits are not taxed as income to members. If the program awards and benefits are materially altered, curtailed or taxed such that a material number of Hilton Honors members choose to no longer participate in the program, this could adversely affect our business.

Because we derive a portion of our revenues from operations outside the United States, the risks of doing business internationally could lower our revenues, increase our costs, reduce our profits or disrupt our business.

We currently manage, franchise, own or lease hotels and resorts in 113 countries and territories around the world. Our rooms outside the United States represented approximately 27 percent, 26 percent and 25 percent of our system-wide rooms for the years ended December 31, 2018, 2017 and 2016, respectively. We expect that our international operations will continue to account for a material portion of our results. As a result, we are subject to the risks of doing business outside the United States, including:

 

   

rapid changes in governmental, economic or political policy, political or civil unrest, acts of terrorism or the threat of international boycotts or U.S. anti-boycott legislation;

 

   

increases in anti-American sentiment and the identification of the licensed brands as an American brand;

 

   

recessionary trends or economic instability in international markets;

 

   

changes in foreign currency exchange rates or currency restructurings and hyperinflation or deflation in the countries in which we operate;

 

   

the effect of disruptions caused by severe weather, natural disasters, outbreak of disease or other events that make travel to a particular region less attractive or more difficult;

 

   

the presence and acceptance of varying levels of business corruption in international markets and the effect of various anti-corruption and other laws;

 

   

the imposition of restrictions on currency conversion or the transfer of funds or limitations on our ability to repatriate non-U.S. earnings in a tax-efficient manner;

 

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the ability to comply with or the effect of complying with complex and changing laws, regulations and policies of foreign governments that may affect investments or operations, including foreign ownership restrictions, import and export controls, tariffs, embargoes, increases in taxes paid and other changes in applicable tax laws;

 

   

the ability to comply with or the effect of complying with developing laws, regulations and policies of foreign governments with respect to human rights, including in the supply chain;

 

   

instability or changes in a country’s or region’s economic, regulatory or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts or any other change;

 

   

political, economic and other uncertainty resulting from the U.K.’s June 2016 vote to leave the European Union (commonly known as “Brexit”), the terms and timing of which remain uncertain and could adversely affect our business;

 

   

uncertainties as to local laws regarding, and enforcement of, contract and intellectual property rights;

 

   

forced nationalization of our properties by local, state or national governments; and

 

   

the difficulties involved in managing an organization doing business in many different countries.

These factors may adversely affect the revenues earned from and the market value of properties that we own or lease located in international markets. While these factors and the effect of these factors are difficult to predict, any one or more of them could lower our revenues, increase our costs, reduce our profits or disrupt our business operations.

Failure to comply with laws and regulations applicable to our international operations may increase costs, reduce profits, limit growth or subject us to broader liability.

Our business operations in countries outside the U.S. are subject to a number of laws and regulations, including restrictions imposed by the Foreign Corrupt Practice Act (“FCPA”), as well as trade sanctions administered by the Office of Foreign Assets Controls (“OFAC”). The FCPA is intended to prohibit bribery of foreign officials and requires us to keep books and records that accurately and fairly reflect our transactions. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. Although we have policies in place designed to comply with applicable sanctions, rules and regulations, it is possible that hotels we manage or own in the countries and territories in which we operate may provide services to or receive funds from persons subject to sanctions. Where we have identified potential violations in the past, we have taken appropriate remedial action including filing voluntary disclosures to OFAC. In addition, some of our operations may be subject to the laws and regulations of non-U.S. jurisdictions, including the U.K.’s Bribery Act 2010, which contains significant prohibitions on bribery and other corrupt business activities, and other local anti-corruption laws in the countries and territories in which we conduct operations.

If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm and incarceration of employees or restrictions on our operation or ownership of hotels and other properties, including the termination of management, franchising and ownership rights. In addition, in certain circumstances, the actions of parties affiliated with us (including our owners, joint venture partners, employees and agents) may expose us to liability under the FCPA, U.S. sanctions or other laws. These restrictions could increase costs of operations, reduce profits or cause us to forgo development opportunities that would otherwise support growth.

In August 2012, Congress enacted the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”), which expands the scope of U.S. sanctions against Iran and Syria. In particular, Section 219 of the ITRSHRA amended the Exchange Act to require SEC-reporting companies to disclose in their periodic

 

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reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain OFAC sanctions engaged in by the reporting company or any of its affiliates. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic report, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation with respect to certain disclosed activities, to determine whether sanctions should be imposed.

Under ITRSHRA, we are required to report if we or any of our “affiliates” knowingly engaged in certain specified activities during a period covered by one of our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q. We have engaged in, and may in the future engage in, activities that would require disclosure pursuant to Section 219 of ITRSHRA, including the activities discussed in the disclosures included on Exhibit 99.5 to this prospectus. Disclosure of such activities, even if such activities are permissible under applicable law, and any sanctions imposed on us or our affiliates as a result of these activities, could harm our reputation and brands and have a negative effect on our results of operations.

In addition, we are subject to a number of modern slavery, human trafficking and forced labor reporting, training and due diligence laws in various jurisdictions and expect additional statutory regimes to combat these crimes to be enacted in the future. The impact of laws such as the U.K’s Modern Slavery Act 2015, Australia’s Modern Slavery Bill 2018, and France’s Duty of Vigilance Law 2017 on hotel operations as well as supply chain could increase costs of operations and reduce profits.

The loss of senior executives or key field personnel, such as general managers, could significantly harm our business.

Our ability to maintain our competitive position depends somewhat on the efforts and abilities of our senior executives. Finding suitable replacements for senior executives could be difficult. Losing the services of one or more of these senior executives could adversely affect strategic relationships, including relationships with third-party property owners, significant customers, joint venture partners and vendors, and limit our ability to execute our business strategies.

We also rely on the general managers at each of our managed, owned and leased hotels to manage daily operations and oversee the efforts of employees. These general managers are trained professionals in the hospitality industry and have extensive experience in many markets worldwide. The failure to retain, train or successfully manage general managers for our managed, owned and leased hotels could negatively affect our operations.

Collective bargaining activity could disrupt our operations, increase our labor costs or interfere with the ability of our management to focus on executing our business strategies.

A significant number of our employees (approximately 31 percent) and employees of our hotel owners are covered by collective bargaining agreements and similar agreements. If relationships with our employees or employees of our hotel owners or the unions that represent them become adverse, the properties we manage, franchise, own or lease could experience labor disruptions such as strikes, lockouts, boycotts and public demonstrations. A number of our collective bargaining agreements, representing approximately 20 percent of our organized employees, have expired and are in the process of being renegotiated, and we may be required to negotiate additional collective bargaining agreements in the future if more employees become unionized. Labor disputes, which may be more likely when collective bargaining agreements are being negotiated, could harm our relationship with our employees or employees of our hotel owners, result in increased regulatory inquiries and enforcement by governmental authorities and deter guests. Further, adverse publicity related to a labor dispute could harm our reputation and reduce customer demand for our services. Labor regulation and the negotiation of new or existing collective bargaining agreements could lead to higher wage and benefit costs, changes in work

 

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rules that raise operating expenses, legal costs and limitations on our ability or the ability of our third-party property owners to take cost saving measures during economic downturns. We do not have the ability to control the negotiations of collective bargaining agreements covering unionized labor employed by many third-party property owners. Increased unionization of our workforce, new labor legislation or changes in regulations could disrupt our operations and our ability to promote services expected by customers, reduce our profitability or interfere with the ability of our management to focus on executing our business strategies.

Labor shortages could restrict our ability to operate our properties or grow our business or result in increased labor costs that could adversely affect our results of operations.

Our success depends in large part on our ability to attract, retain, train, manage and engage employees. We employ or manage more than 169,000 individuals at our managed, owned and leased hotels and corporate offices around the world. If we are unable to attract, retain, train, manage and engage skilled individuals, our ability to staff and manage the hotels that we manage, own and lease could be impaired, which could reduce customer satisfaction. In addition, the inability of our franchisees to attract, retain, train, manage and engage skilled employees for the franchised hotels could adversely affect the reputation of our brands. Staffing shortages in various parts of the world also could hinder our ability to grow and expand our businesses. Because payroll costs are a major component of the operating expenses at our hotels and our franchised hotels, a shortage of skilled labor could also require higher wages that would increase labor costs, which could adversely affect our results of operations and the results of hotels that we manage on behalf of third-party owners. Additionally, increase in minimum wage rates could increase costs and reduce profits for us and our franchisees.

Any failure to protect our trademarks and other intellectual property could reduce the value of the Hilton brands and harm our business.

The recognition and reputation of our brands are important to our success. We have more than 6,200 trademark registrations in jurisdictions around the world for use in connection with our services, plus at any given time, a number of pending applications for trademarks and other intellectual property. However, those trademark or other intellectual property registrations may not be granted or the steps we take to use, control or protect our trademarks or other intellectual property in the U.S. and other jurisdictions may not always be adequate to prevent third parties from copying or using the trademarks or other intellectual property without authorization. We may also fail to obtain and maintain trademark protection for all of our brands in all jurisdictions. For example, in certain jurisdictions, third parties have registered or otherwise have the right to use certain trademarks that are the same as or similar to our trademarks, which could prevent us from registering trademarks and opening hotels in that jurisdiction. Third parties may also challenge our rights to certain trademarks or oppose our trademark applications. Defending against any such proceedings may be costly, and if unsuccessful, could result in the loss of important intellectual property rights. Obtaining and maintaining trademark protection for multiple brands in multiple jurisdictions is also expensive, and we may therefore elect not to apply for or to maintain certain trademarks.

Our intellectual property is also vulnerable to unauthorized copying or use in some jurisdictions outside the U.S., where local law, or lax enforcement of law, may not provide adequate protection. If our trademarks or other intellectual property are improperly used, the value and reputation of the Hilton brands could be harmed. There are times where we may need to resort to litigation to enforce our intellectual property rights. Litigation of this type could be costly, force us to divert our resources, lead to counterclaims or other claims against us or otherwise harm our business or reputation. In addition, we license certain of our trademarks to third parties. For example, we have granted HGV the right to use certain of our marks and intellectual property in its timeshare business and we grant our franchisees a right to use certain of our trademarks in connection with their operation of the applicable property. If HGV, a franchisee or other licensee fails to maintain the quality of the goods and services used in connection with the licensed trademarks, our rights to, and the value of, our trademarks could be harmed. Failure to maintain, control and protect our trademarks and other intellectual property could likely adversely affect our ability to attract guests or third-party owners, and could adversely affect our results.

 

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In addition, we license the right to use certain intellectual property from unaffiliated third parties, including the right to grant sublicenses to franchisees. If we are unable to use this intellectual property, our ability to generate revenue from such properties may be diminished.

Third-party claims that we infringe intellectual property rights of others could subject us to damages and other costs and expenses.

Third parties may make claims against us for infringing their patent, trademark, copyright or other intellectual property rights or for misappropriating their trade secrets. We have been and are currently party to a number of such claims and may receive additional claims in the future. Any such claims, even those without merit, could:

 

   

be expensive and time consuming to defend, and result in significant damages;

 

   

force us to stop using the intellectual property that is being challenged or to stop providing products or services that use the challenged intellectual property;

 

   

force us to redesign or rebrand our products or services;

 

   

require us to enter into royalty, licensing, co-existence or other contracts to obtain the right to use a third party’s intellectual property;

 

   

limit our ability to develop new intellectual property; and

 

   

limit the use or the scope of our intellectual property or other rights.

In addition, we may be required to indemnify third-party owners of the hotels that we manage for any losses they incur as a result of any infringement claims against them. All necessary royalty, licensing or other contracts may not be available to us on acceptable terms. Any adverse results associated with third-party intellectual property claims could negatively affect our business.

Exchange rate fluctuations and foreign exchange hedging arrangements could result in significant foreign currency gains and losses and affect our business results.

Conducting business in currencies other than the U.S. dollar subjects us to fluctuations in currency exchange rates that could have a negative effect on our financial results. We earn revenues and incur expenses in foreign currencies as part of our operations outside of the U.S. As a result, fluctuations in currency exchange rates may significantly increase the amount of U.S. dollars required for foreign currency expenses or significantly decrease the U.S. dollars received from foreign currency revenues. We also have exposure to currency translation risk because, generally, the results of our business outside of the U.S. are reported in local currency and then translated to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses and could have a negative effect on our financial results. Our exposure to foreign currency exchange rate fluctuations will grow if the relative contribution of our operations outside the U.S. increases.

To attempt to mitigate foreign currency exposure, we may enter into foreign exchange derivatives with financial institutions. However, these derivatives may not eliminate foreign currency risk entirely and involve costs and risks of their own in the form of transaction costs, credit requirements and counterparty risk.

If the insurance that we or our owners carry does not sufficiently cover damage or other potential losses or liabilities to third parties involving properties that we manage, franchise or own, our profits could be reduced.

We operate in certain areas where the risk of natural disaster or other catastrophic losses exists, and the occasional incidence of such an event could cause substantial damage to us, our owners or the surrounding area.

 

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We carry, and/or we require our owners to carry, insurance from solvent insurance carriers that we believe is adequate for foreseeable first- and third-party losses and with terms and conditions that are reasonable and customary. Nevertheless, market forces beyond our control, such as the natural and man-made disasters that occurred in 2018, could limit the scope of the insurance coverage that we and our owners can obtain or may otherwise restrict our or our owners’ ability to buy insurance coverage at reasonable rates. We anticipate increased costs of property insurance across the portfolio in 2019 due to the significant losses that insurers suffered globally in 2018. In the event of a substantial loss, the insurance coverage that we and/or our owners carry may not be sufficient to pay the full value of our financial obligations, our liabilities or the replacement cost of any lost investment or property. Because certain types of losses are uncertain, they may be uninsurable or prohibitively expensive. In addition, there are other risks that may fall outside the general coverage terms and limits of our policies.

In some cases, these factors could result in certain losses being completely uninsured. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future revenues, profits, management fees or franchise fees from the property.

Terrorist attacks and military conflicts may adversely affect the hospitality industry.

The terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties that are well-known or are located in concentrated business sectors in major cities where our hotels are located may be subject to the risk of terrorist attacks.

The occurrence or the possibility of terrorist attacks or military conflicts could:

 

   

cause damage to one or more of our properties that may not be fully covered by insurance to the value of the damages;

 

   

cause all or portions of affected properties to be shut down for prolonged periods, resulting in a loss of income;

 

   

generally reduce travel to affected areas for tourism and business or adversely affect the willingness of customers to stay in or avail themselves of the services of the affected properties;

 

   

expose us to a risk of monetary claims arising out of death, injury or damage to property caused by any such attacks; and

 

   

result in higher costs for security and insurance premiums or diminish the availability of insurance coverage for losses related to terrorist attacks, particularly for properties in target areas, all of which could adversely affect our results.

The occurrence of a terrorist attack with respect to one of our properties could directly and materially adversely affect our results of operations. Furthermore, the loss of any of our well-known buildings could indirectly affect the value of our brands, which would in turn adversely affect our business prospects.

Terrorism insurance may not be available at commercially reasonable rates or at all.

Following the September 11, 2001 terrorist attacks in New York City and the Washington, D.C. area, Congress passed the Terrorism Risk Insurance Act of 2002, which established the Terrorism Risk Insurance Program (the “Program”) to provide insurance capacity for terrorist acts. The Program expired at the end of 2014 but was reauthorized, with some adjustments to its provisions, in January 2015 for six years through December 31, 2020. We carry, and we require our owners and our franchisees to carry, insurance from solvent insurance carriers to respond to both first-party and third-party liability losses related to terrorism. We purchase our first-party property damage and business interruption insurance from a stand-alone market in place of and to

 

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supplement insurance from government run pools. If the Program is not extended or renewed upon its expiration in 2020, or if there are changes to the Program that would negatively affect insurance carriers, premiums for terrorism insurance coverage will likely increase and/or the terms of such insurance may be materially amended to increase stated exclusions or to otherwise effectively decrease the scope of coverage available, perhaps to the point where it is effectively unavailable.

Changes in U.S. federal, state and local or foreign tax law, interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition or results of operations.

We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other countries and jurisdictions. Our future effective tax rate could be affected by changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in the valuation of our deferred tax assets and liabilities, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, the U.S. federal, state and local and foreign governments make substantive changes to tax rules and their application, which could result in materially higher corporate taxes than would be incurred under existing tax law and could adversely affect our financial condition or results of operations.

We are subject to ongoing and periodic tax audits and disputes in U.S. federal and various state, local and foreign jurisdictions. In particular, our consolidated U.S. federal income tax returns for the fiscal years ended December 31, 2005 through December 31, 2013 are under audit by the Internal Revenue Service (“IRS”), and the IRS has proposed adjustments to increase our taxable income based on several assertions involving intercompany loans, our Hilton Honors guest loyalty program and our foreign-currency denominated loans issued by one of our subsidiaries. In total, the proposed adjustments sought by the IRS would result in U.S. federal tax owed of approximately $817 million, excluding interest and penalties and potential state income taxes. We disagree with the IRS’s position on each of the assertions and intend to vigorously contest them. See Note 14: “Income Taxes” in our audited consolidated financial statements included elsewhere in this prospectus for additional information. An unfavorable outcome from any tax audit could result in higher tax costs, penalties and interest, thereby adversely affecting our financial condition or results of operations.

Changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations.

New accounting rules or regulations and varying interpretations of existing accounting rules or regulations have occurred and may occur in the future. A change in accounting rules or regulations may require retrospective application and affect our reporting of transactions completed before the change is effective, and future changes to accounting rules or regulations may adversely affect our reported financial condition and results of operations. See Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our audited consolidated financial statements included elsewhere in this prospectus for a summary of accounting standards issued but not yet adopted.

Changes to estimates or projections used to assess the fair value of our assets, or operating results that are lower than our current estimates at certain locations, may cause us to incur impairment losses that could adversely affect our results of operations.

Our total assets include goodwill, intangible assets with indefinite useful lives, other intangible assets with finite useful lives and substantial amounts of long-lived assets, principally property and equipment, including hotel properties. We evaluate our goodwill and intangible assets with indefinite lives for impairment on an annual basis or at other times during the year if events or circumstances indicate that it is more likely than not that the fair value is below the carrying value. We evaluate our intangible assets with finite useful lives and long-lived assets for impairment when circumstances indicate that the carrying amount may not be recoverable. Our

 

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evaluation of impairment requires us to make certain estimates and assumptions including projections of future results. After performing our evaluation for impairment, including an analysis to determine the recoverability of long-lived assets, we will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its estimated fair value. If the estimates or assumptions used in our evaluation of impairment change, we may be required to record additional impairment losses on certain of these assets. If these impairment losses are significant, our results of operations would be adversely affected.

Governmental regulation may adversely affect the operation of our properties.

In many jurisdictions, the hospitality industry is subject to extensive foreign or U.S. federal, state and local governmental regulations, including those relating to the service of alcoholic beverages, the preparation and sale of food and those relating to building and zoning requirements. We are also subject to licensing and regulation by foreign or U.S. state and local departments relating to health, sanitation, fire and safety standards, and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions status and citizenship requirements. We or our third-party owners may be required to expend funds to meet foreign or U.S. federal, state and local regulations in connection with the continued operation or remodeling of certain of our properties. The failure to meet the requirements of applicable regulations and licensing requirements, or publicity resulting from actual or alleged failures, could have an adverse effect on our results of operations.

Foreign or U.S. environmental laws and regulations may cause us to incur substantial costs or subject us to potential liabilities.

We are subject to certain compliance costs and potential liabilities under various foreign and U.S. federal, state and local environmental, health and safety laws and regulations. These laws and regulations govern actions including air emissions, the use, storage and disposal of hazardous and toxic substances, and wastewater disposal. Our failure to comply with such laws, including any required permits or licenses, could result in substantial fines or possible revocation of our authority to conduct some of our operations. We could also be liable under such laws for the costs of investigation, removal or remediation of hazardous or toxic substances at our currently or formerly owned, leased or operated real property (including managed and franchised properties) or at third-party locations in connection with our waste disposal operations, regardless of whether or not we knew of, or caused, the presence or release of such substances. From time to time, we may be required to remediate such substances or remove, abate or manage asbestos, mold, radon gas, lead or other hazardous conditions at our properties. The presence or release of such toxic or hazardous substances could result in third-party claims for personal injury, property or natural resource damages, business interruption or other losses. Such claims and the need to investigate, remediate or otherwise address hazardous, toxic or unsafe conditions could adversely affect our operations, the value of any affected real property, or our ability to sell, lease or assign our rights in any such property, or could otherwise harm our business or reputation. Environmental, health and safety requirements have also become increasingly stringent, and our costs may increase as a result. New or revised laws and regulations or new interpretations of existing laws and regulations, such as those related to climate change, could affect the operation of our properties or result in significant additional expense and operating restrictions on us.

The cost of compliance with the Americans with Disabilities Act and similar legislation outside of the U.S. may be substantial.

We are subject to the Americans with Disabilities Act (“ADA”) and similar legislation in certain jurisdictions outside of the U.S. Under the ADA all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. These regulations apply to accommodations first occupied after January 26, 1993; public accommodations built before January 26, 1993 are required to remove architectural barriers to disabled access where such removal is “readily achievable.” The regulations also mandate certain operational requirements that hotel operators must observe. The failure of a property to comply with the ADA could result in injunctive relief, fines, an award of damages to private litigants or mandated capital

 

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expenditures to remedy such noncompliance. Any imposition of injunctive relief, fines, damage awards or capital expenditures could adversely affect the ability of an owner or franchisee to make payments under the applicable management or franchise contract and negatively affect the reputation of our brands. In November 2010, we entered into a settlement with the U.S. Department of Justice related to compliance with the ADA. Our obligations under this settlement expired in March 2015 except that certain managed and franchised hotels that were required to conduct surveys of their facilities remain under an obligation to remove architectural barriers at their facilities through March 15, 2022 and we have an obligation to have an independent consultant to monitor those barrier removal efforts during this period. If we fail to comply with the requirements of the ADA, we could be subject to fines, penalties, injunctive action, reputational harm and other business effects that could materially and negatively affect our performance and results of operations.

Casinos featured within certain of our properties are subject to gaming laws, and noncompliance could result in the revocation of the gaming licenses.

Several of our properties feature casinos, most of which are operated by third parties. Factors affecting the economic performance of a casino property include:

 

   

location, including proximity to or easy access from major population centers;

 

   

appearance;

 

   

local, regional or national economic and political conditions;

 

   

the existence or construction of competing casinos;

 

   

dependence on tourism; and

 

   

governmental regulation.

Jurisdictions in which our properties containing casinos are located, including Puerto Rico and Egypt, have laws and regulations governing the conduct of casino gaming. These jurisdictions generally require that the operator of a casino must be found suitable and be registered. Once issued, a registration remains in force until revoked. The law defines the grounds for registration, as well as revocation or suspension of such registration. The loss of a gaming license for any reason would have a material adverse effect on the value of a casino property and could reduce fee income associated with such operations and consequently negatively affect our business results.

We are subject to risks from litigation filed by or against us.

Legal or governmental proceedings brought by or on behalf of franchisees, third-party owners of managed properties, employees or customers may adversely affect our financial results. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal laws and regulations regarding workplace and employment matters, consumer protection claims and other commercial matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been and may be instituted against us from time to time, and we may incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business. At any given time, we may be engaged in lawsuits or disputes involving third-party owners of our hotels. Similarly, we may from time to time institute legal proceedings on behalf of ourselves or others, the ultimate outcome of which could cause us to incur substantial damages and expenses, which could have a material adverse effect on our business.

Risks Related to Our Spin-offs

The spin-offs could result in substantial tax liability to us and our stockholders.

We received a private letter ruling from the IRS on certain issues relevant to qualification of the spin-offs as tax-free distributions under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”).

 

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Although the private letter ruling generally is binding on the IRS, the continued validity of the private letter ruling will be based upon and subject to the accuracy of factual statements and representations made to the IRS by us. Further, the private letter ruling is limited to specified aspects of the spin-offs under Section 355 of the Code and does not represent a determination by the IRS that all of the requirements necessary to obtain tax-free treatment to holders of our common stock and to us have been satisfied. Moreover, if any statement or representation upon which the private letter ruling was based was incorrect or untrue in any material respect, or if the facts upon which the private letter ruling was based were materially different from the facts that prevailed at the time of the spin-offs, the private letter ruling could be invalidated. The opinion of tax counsel we received in connection with the spin-offs regarding the qualification of the spin-offs as tax-free distributions under Section 355 of the Code similarly relied on, among other things, the continuing validity of the private letter ruling and various assumptions and representations as to factual matters made by each of the spun-off companies and us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by counsel in its opinion. The opinion is not binding on the IRS or the courts, and there can be no assurance that the IRS or the courts will not challenge the conclusions stated in the opinion or that any such challenge would not prevail. Additionally, recently enacted legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is a REIT and prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off. Under an effective date provision, the legislation does not apply to distributions described in a ruling request initially submitted to the IRS before December 7, 2015. Because our initial request for the private letter ruling was submitted before that date and because we believe the distribution has been described in that initial request, we believe the legislation does not apply to the spin-off of Park. However, no ruling was obtained on that issue and thus no assurance can be given in that regard. In particular, the IRS or a court could disagree with our view regarding the effective date provision based on any differences that exist between the description in the ruling request and the actual facts relating to the spin-offs. If the legislation applied to the spin-off of Park, either the spin-off would not qualify for tax-free treatment or Park would not be eligible to elect REIT status for a 10-year period following the spin-off.

If the spin-offs and certain related transactions were determined to be taxable, the Company would be subject to a substantial tax liability that would have a material adverse effect on our financial condition, results of operations and cash flows. In addition, if the spin-offs were taxable, each holder of our common stock who received shares of Park and HGV would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.

Park or HGV may fail to perform under various transaction agreements that we have executed as part of the spin-offs.

In connection with the spin-offs, we, Park and HGV entered into a distribution agreement and various other agreements, including a transition services agreement, a tax matters agreement, an employee matters agreement and, as to Park, management agreements, and, as to HGV, a license agreement. Certain of these agreements provide for the performance of services by each company for the benefit of the other following the spin-offs. We are relying on Park and HGV to satisfy their performance and payment obligations under these agreements. In addition, it is possible that a court would disregard the allocation agreed to between us, Park and HGV and require that we assume responsibility for certain obligations allocated to Park and to HGV, particularly if Park or HGV were to refuse or were unable to pay or perform such obligations. The impact of any of these factors is difficult to predict, but one or more of them could cause reputational harm and could have an adverse effect on our financial position, results of operations and/or cash flows.

In connection with the spin-offs, each of Park and HGV indemnified us for certain liabilities. These indemnities may not be sufficient to insure us against the full amount of the liabilities assumed by Park and HGV, and Park and HGV may be unable to satisfy their indemnification obligations to us in the future.

In connection with the spin-offs, each of Park and HGV indemnified us with respect to such parties’ assumed or retained liabilities pursuant to the distribution agreement and breaches of the distribution agreement

 

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or other agreements related to the spin-offs. There can be no assurance that the indemnities from each of Park and HGV will be sufficient to protect us against the full amount of these and other liabilities. Third parties also could seek to hold us responsible for any of the liabilities that Park and HGV have agreed to assume. Even if we ultimately succeed in recovering from Park or HGV any amounts for which we are held liable, we may be temporarily required to bear those losses ourselves. Each of these risks could negatively affect our business, financial condition, results of operations and cash flows.

If we are required to indemnify Park or HGV in connection with the spin-offs, we may need to divert cash to meet those obligations, which could negatively affect our financial results.

Pursuant to the distribution agreement entered into in connection with the spin-offs and certain other agreements among Park and HGV and us, we agreed to indemnify each of Park and HGV from certain liabilities. Indemnities that we may be required to provide Park and/or HGV may be significant and could negatively affect our business.

 

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USE OF PROCEEDS

We will not receive any proceeds from the issuance of the exchange notes in the exchange offer. The exchange offer is intended to satisfy our obligations under the registration rights agreement that we entered into in connection with the private offering of the outstanding notes. As consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes, except that the exchange notes will not contain terms with respect to transfer restrictions or additional interest upon a failure to fulfill certain of our obligations under the registration rights agreement. The outstanding notes that are surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. As a result, the issuance of the exchange notes will not result in any change in our capitalization.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of December 31, 2018.

You should read this table in conjunction with “Prospectus Summary—Summary Historical Financial Data,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes thereto included elsewhere in this prospectus.

The outstanding notes that are surrendered in exchange for the exchange notes will be retired and cancelled and cannot be reissued. As a result, the issuance of the exchange notes will not result in any change in our capitalization.

 

     As of
December 31, 2018
 
     (in millions)  

Cash and cash equivalents

   $ 403  

Restricted cash and cash equivalents

     81  
  

 

 

 

Total

   $ 484  
  

 

 

 

Total long-term debt, including current maturities(1)(2):

  

4.250% Notes due 2024

   $ 1,000  

4.625% Notes due 2025

     900  

5.125% Notes due 2026

     1,500  

4.875% Notes due 2027

     600  

Senior secured term loan facility due 2023

     3,119  

Capital lease obligations and other debt due 2021 to 2030

     242  
  

 

 

 

Total debt(3)

     7,361  

Equity:

  

Total Hilton stockholders’ equity

     551  

Noncontrolling interests

     7  
  

 

 

 

Total equity

     558  
  

 

 

 

Total capitalization

   $ 7,919  
  

 

 

 

 

(1) 

Does not reflect a reduction for unamortized deferred financing costs and discount of $79 million as of December 31, 2018.

(2) 

As of December 31, 2018, we had an additional $937 million of borrowing capacity under our $1.0 billion Revolving Credit Facility (after giving effect to $63 million of letters of credit outstanding).

(3) 

Does not reflect unconsolidated affiliate debt. As of December 31, 2018, our pro rata share of such debt was $15 million.

 

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SELECTED FINANCIAL DATA

We derived the selected statement of operations data for the years ended December 31, 2018, 2017 and 2016 and the selected balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements included elsewhere in this prospectus. All selected financial data as of and for the years ended December 31, 2017 and 2016 have been restated to reflect the adoption of ASU 2014-09 using the full retrospective approach as of January 1, 2016. The selected balance sheet data as of December 31, 2016 was derived from unaudited consolidated financial statements that are not included in this prospectus and reflect the adoption of ASU 2014-09. The selected statement of operations data for the years ended December 31, 2015 and 2014 and the selected balance sheet data as of December 31, 2015 were derived from audited consolidated financial statements that are not included in this prospectus and have not been adjusted from the basis of accounting applied before our adoption of ASU 2014-09. The selected balance sheet data as of December 31, 2014 was derived from unaudited consolidated financial statements that are not included in this prospectus and have not been adjusted from the basis of accounting applied before our adoption of ASU 2014-09.

We have prepared our unaudited consolidated financial statements on the same basis as our audited consolidated financial statements, with the exception of not adjusting the basis of accounting for our adoption of ASU 2014-09 for statement of operations data and balance data as of and for the years ended December 31, 2015 and 2014, as discussed above, and, in our opinion, have included all adjustments, which include only normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations.

The selected consolidated financial data below should be read together with the consolidated financial statements including the related notes thereto included elsewhere in this prospectus, as well as the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Other Indebtedness” and the other financial information included elsewhere in this prospectus.

 

     As of and for the Year Ended December 31,  
     2018      2017      2016     2015      2014  
     (in millions, except per share data)  

Selected Statement of Operations Data:

             

Total revenues

   $ 8,906      $ 8,131      $ 6,576     $ 7,133      $ 6,688  

Operating income(1)

     1,432        1,132        868       904        708  

Income (loss) from continuing operations, net of taxes

     769        1,089        (17     881        179  

Net income (loss) from continuing operations per share:

             

Basic

   $ 2.53      $ 3.34      $ (0.08   $ 2.67      $ 0.53  

Diluted

     2.50        3.32        (0.08     2.66        0.53  

Cash dividends declared per share

   $ 0.60      $ 0.60      $ 0.84     $ 0.42      $  

Selected Balance Sheet Data:

             

Total assets

   $ 13,995      $ 14,228      $ 26,176     $ 25,622      $ 26,001  

Long-term debt(2)

     7,282        6,602        6,616       5,894        6,696  

 

(1) 

Restated to reflect the adoption of ASU 2017-07, which was adopted on January 1, 2018 on a retrospective basis for all periods presented.

(2) 

Includes current maturities and is net of unamortized deferred financing costs and discount. Also includes capital lease obligations and other debt.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Prospectus Summary—Summary Historical Financial Data,” “Selected Financial Data” and our consolidated financial statements and related notes that appear elsewhere in this prospectus. On January 1, 2018, we adopted the requirements of ASU 2014-09 using the full retrospective approach as of January 1, 2016. Except where otherwise noted, all amounts and disclosures set forth in this prospectus reflect the necessary adjustments required for the adoption of this standard, including the reclassification of prior period balances to conform to current year presentation. See Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements included elsewhere in this prospectus for additional information. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

Our Business

Hilton is one of the largest and fastest growing hospitality companies in the world, with 5,685 properties comprising 912,960 rooms in 113 countries and territories as of December 31, 2018. Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Canopy by Hilton and our recently launched luxury brand, LXR Hotels & Resorts; our full service hotel brands, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton, Home2 Suites by Hilton and our recently launched urban-affordable brand, Motto by Hilton; and our timeshare brand, Hilton Grand Vacations. As of December 31, 2018, we had over 85 million members in our award-winning guest loyalty program, Hilton Honors, a 20 percent increase from December 31, 2017.

On January 3, 2017, we completed the spin-offs of Park and HGV. The historical financial results of Park and HGV are reflected in our consolidated financial statements as discontinued operations. See Note 3: “Discontinued Operations” in our consolidated financial statements included elsewhere in this prospectus for additional information.

Segments and Regions

Management analyzes our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our brands. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) license fees for the exclusive right to use certain Hilton marks and intellectual property; and (iii) fees for managing our owned and leased hotels. As a manager of hotels, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services. The ownership segment primarily derives earnings from hotel room sales, food and beverage sales and other services at our owned and leased hotels.

Geographically, management conducts business through three distinct geographic regions: (i) the Americas; (ii) Europe, Middle East and Africa (“EMEA”); and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S. is

 

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included in the Americas, it represented 73 percent of our system-wide hotel rooms as of December 31, 2018; therefore, the U.S. is often analyzed separately and apart from the Americas geographic region overall and, as such, it is presented separately within the analysis herein. The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Iceland in the west to Russia in the east, and the Middle East and Africa (“MEA”), which represents the Middle East region and all African nations, including the Indian Ocean island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific island nations.

System Growth and Pipeline

Our strategic objectives include the continued expansion of our global footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract to provide management or franchise services. Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, we expect to increase overall return on invested capital and cash available for return to stockholders.

As of December 31, 2018, we had more than 2,400 hotels in our development pipeline that we expect to add as open hotels in our system, representing over 364,000 rooms under construction or approved for development throughout 103 countries and territories, including 35 countries and territories where we do not currently have any open hotels. All of the rooms in the development pipeline are within our management and franchise segment. Additionally, 195,000 rooms in the development pipeline were located outside the U.S., and 184,000 rooms, or more than half, were under construction. We do not consider any individual development project to be material to us.

Principal Components and Factors Affecting our Results of Operations

Revenues

Principal Components

We primarily derive our revenues from the following sources:

 

   

Franchise and licensing fees. Represents fees received in connection with the licensing of our brands. Under our franchise contracts, franchisees typically pay us franchise fees that include: (i) monthly royalty fees, generally based on a percentage of monthly gross room revenue, and, for our full service brands, a percentage of gross food and beverage revenues and other revenues, as applicable, and (ii) application, initiation and other fees for when new hotels enter the system, when there is a change of ownership or when contracts with properties already in our system are extended. We also earn licensing fees from a license agreement with HGV and co-brand credit card arrangements for the use of certain Hilton marks and IP. Consideration to incentivize hotel owners to enter into franchise contracts with us is amortized over the life of the applicable contract as a reduction to franchise and licensing fees.

 

   

Base and incentive management fees. Represents fees received in connection with the management of hotels. Terms of our management contracts vary, but our fees generally consist of a base fee, which is typically based on a percentage of the hotel’s monthly gross revenue and, in some cases, an incentive fee, which is based on hotel operating profits and may be subject to a stated return threshold to the owner, normally measured over a one-calendar year period. Outside of the U.S., our fees are often more dependent on hotel profitability measures, either through a single management fee structure

 

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where the entire fee is based on a profitability measure, or because our two-tier fee structure is more heavily weighted toward the incentive fee than the base fee. Consideration to incentivize hotel owners to enter into management contracts with us is amortized over the life of the applicable contract as a reduction to base and other management fees.

 

   

Owned and leased hotels. Represents revenues derived from hotel operations, including hotel room sales, food and beverage sales and other ancillary goods and services. These revenues are primarily derived from two categories of customers: transient and group. Transient guests are individual travelers who are traveling for business or leisure. Group guests are traveling for group events that reserve rooms for meetings, conferences or social functions sponsored by associations, corporate, social, military, educational, religious or other organizations. Group business usually includes a block of room accommodations, as well as other ancillary services, such as meeting facilities and catering and banquet services. A majority of our food and beverage sales and other ancillary services are provided to customers who are also occupying rooms at our hotels. As a result, occupancy affects all components of our owned and leased hotel revenues.

 

   

Other revenues. Represents revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised properties, including our purchasing operations, and other operating income.

 

   

Other revenues from managed and franchised properties. Represents amounts that are contractually reimbursed to us by property owners, either directly as costs are incurred or indirectly through fees that are billed and collected each month based on the underlying hotel’s sales or usage and are related to certain costs and expenses of the related properties. The direct reimbursements by property owners are for payroll and related costs where the property employees are legally our responsibility, and certain other operating costs of the managed and franchised properties’ operations. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties. These direct reimbursements have no net effect on operating income (loss) or net income (loss). The monthly fee that hotel franchisees and property owners of hotels we manage pay is based on the underlying hotel’s sales or usage and covers the costs of: (i) advertising and marketing programs; (ii) internet, technology and reservation systems; and (iii) quality assurance program expenses. We are contractually required to use these fees solely for the programs.

Factors Affecting our Revenues

The following factors affect the revenues we derive from our operations:

 

   

Consumer demand and global economic conditions. 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. Declines in consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence and adverse political conditions can lower the amount of management and franchise fee revenues we are able to generate from our managed and franchised properties and the revenues and profitability of our owned and leased operations. Further, competition for hotel guests and the supply of hotel services affect our ability to sustain or increase rates charged to customers at our hotels. Also, declines in hotel profitability during an economic downturn directly affect the incentive portion of our management fees, which is based on hotel profitability measures. 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.

 

   

Contracts with third-party owners and franchisees and relationships with developers. We depend on our long-term management and franchise contracts with third-party owners and franchisees for a significant portion of our management and franchise fee revenues. The success and sustainability of our management and franchise business depends on our ability to perform under our management and franchise contracts and maintain good relationships with third-party owners and franchisees. Our

 

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relationships with these third parties also generate new relationships with developers and opportunities for property development that can support our growth. Growth and maintenance of our hotel system and earning fees relating to hotels in development are dependent on the ability of developers and owners to access capital for the development, maintenance and renovation of properties. We believe that we have good relationships with our third-party owners, franchisees and developers and are committed to the continued growth and development of these relationships. These relationships exist with a diverse group of owners, franchisees and developers and are not significantly concentrated with any particular third party.

Expenses

Principal Components

We primarily incur the following expenses:

 

   

Owned and leased hotels. Reflects the operating expenses of our consolidated owned and leased hotels, including room expense, food and beverage costs, other support costs and property expenses. Room expense includes compensation costs for housekeeping, laundry and front desk staff, as well as supply costs for guest room amenities and laundry. Food and beverage costs include costs for wait and kitchen staff and food and beverage inventory. Other support expenses consist of costs associated with property-level management, utilities, sales and marketing, operating hotel spas, telephones, parking and other guest recreation, entertainment and services. Property expenses include property taxes, repairs and maintenance, rent and insurance.

 

   

Depreciation and amortization. These are non-cash expenses that primarily consist of amortization of intangible assets that were recorded at their fair value at the time of the October 24, 2007 transaction whereby we became a wholly owned subsidiary of The Blackstone Group L.P., which include management and franchise contracts, leases and our Hilton Honors guest loyalty program intangible, as well as certain proprietary technologies. These expenses also include depreciation of fixed assets, such as buildings and furniture and equipment that are used in corporate operations or at our consolidated owned and leased hotels.

 

   

General and administrative. Consists primarily of compensation expense for our corporate staff and personnel supporting our business segments, including divisional offices that support our management and franchise segment; professional fees, including consulting, audit and legal fees; travel and entertainment expenses; bad debt expenses for uncollected management, franchise and other fees; and administrative and related expenses.

 

   

Other expenses. Consists of expenses incurred by our purchasing operations and other ancillary businesses, along with other operating expenses of the business.

 

   

Other expenses from managed and franchised properties. Represents certain costs and expenses that are contractually reimbursed to us by property owners for payroll and related costs for properties that we manage where the property employees are legally our responsibility, or paid from fees collected from properties for certain other operating costs of the managed and franchised properties’ operations, marketing expenses and other expenses associated with our brands and shared services. We are contractually required to use these fees solely for the programs. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties.

Factors Affecting our Costs and Expenses

The following are principal factors that affect the costs and expenses we incur in the course of our operations:

 

   

Fixed expenses. Many of the expenses associated with owning and leasing hotels are relatively fixed. These expenses include personnel costs, rent, property taxes, insurance and utilities. If we are unable to

 

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decrease these costs significantly or rapidly when demand for our hotels and other properties decreases, the resulting decline in our revenues can have an 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. Economic downturns generally affect the results of our ownership segment more significantly than the results of our management and franchise segment due to the high fixed costs associated with operating an owned or leased hotel. Employees at some of our owned and leased hotels are parties to collective bargaining agreements that may also limit our ability to make timely staffing or labor changes in response to declining revenues. In addition, any efforts to reduce costs, including the deferral or cancellation of capital improvements, could adversely affect the economic value of our hotels and brands. Additionally, the general and administrative expenses of operating a global business also include fixed personnel costs, rent, property taxes, insurance and utilities. The effectiveness of any cost-cutting efforts related to owning and leasing hotels or corporate operations is limited by the amount of inherent fixed costs. However, we have taken steps to reduce our fixed costs to levels we believe are appropriate to maximize profitability and respond to market conditions, while continuing to optimize the overall customer experience or the value of our hotels or brands.

 

   

Changes in depreciation and amortization expense. We capitalize costs associated with certain software development projects and, as those projects are completed and placed into service, amortization expense will increase. Additionally, changes in depreciation expense may be driven by 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.

Other Items

Effect of foreign currency exchange rate fluctuations

Significant portions of our operations are conducted in functional currencies other than our reporting currency, which is the U.S. dollar (“USD”), and we have assets and liabilities, including those that are intercompany in nature, denominated in a variety of foreign currencies. As a result, we are required to translate those results, assets and liabilities from the functional currency into USD at market-based exchange rates for each reporting period. When comparing our results of operations between periods, there may be material portions of the changes in our revenues or expenses that are derived from fluctuations in exchange rates experienced between those periods. We hedge foreign exchange-based cash flow variability in certain of our foreign currency denominated management and franchise fees using forward contracts.

Seasonality

The hospitality industry is seasonal in nature. The periods during which our properties experience higher or lower levels of demand vary from property to property, depending principally upon their location, type of property and competitive mix within the specific location. Based on historical results, we generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters.

Key Business and Financial Metrics Used by Management

Comparable Hotels

We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods reported, excluding the hotels distributed in the spin-offs; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. Of the 5,634 hotels in our system as of December 31, 2018, 4,218 hotels have been classified as comparable hotels. Our 1,416

 

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non-comparable hotels included 197 hotels, or approximately three percent of the total hotels in our system, that were removed from the comparable group during the year because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were not available.

Occupancy

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of our hotels’ available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable average daily rate pricing levels as demand for hotel rooms increases or decreases.

Average Daily Rate (“ADR”)

ADR represents hotel room revenue divided by the total number of room nights sold for a given period. ADR measures average room price attained by a hotel, and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates charged to customers have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.

Revenue per Available Room (“RevPAR”)

RevPAR is calculated by dividing hotel room revenue by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels, as previously described: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.

References to RevPAR, ADR and occupancy are presented on a comparable basis and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the years ended December 31, 2018 and 2017 use the exchange rates for the year ended December 31, 2018, and comparisons for the years ended December 31, 2017 and 2016 use the exchange rates for the year ended December 31, 2017.

EBITDA and Adjusted EBITDA

EBITDA reflects income (loss) from continuing operations, net of taxes, excluding interest expense, a provision for income taxes and depreciation and amortization.

Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated equity investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment (“FF&E”) replacement reserves required under certain lease agreements; (v) reorganization costs; (vi) share-based compensation expense; (vii) non-cash impairment losses; (viii) severance, relocation and other expenses; (ix) amortization of contract acquisition costs; (x) the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties; and (xi) other items.

During the first quarter of 2018, we modified the definition of Adjusted EBITDA to exclude the amortization of contract acquisition costs and the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties. We believe that excluding these items is useful for the reasons set forth below and have applied the modified definition of Adjusted EBITDA to all periods presented.

 

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We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and the provision for income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and, therefore could vary significantly across companies. Depreciation and amortization, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves to be consistent with the treatment of FF&E for owned and leased hotels where it is capitalized and depreciated over the life of the FF&E; (ii) share-based compensation expense, as this could vary widely among companies due to the different plans in place and the usage of them; (iii) the net effect of our cost reimbursement revenues and reimbursed expenses, as we contractually do not operate the related programs to generate a profit over the terms of the respective contracts; and (iv) other items that are not core to our operations and are not reflective of our performance.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. generally accepted accounting principles (“GAAP”) and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

 

   

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

   

EBITDA and Adjusted EBITDA do not reflect a provision for income taxes or the cash requirements to pay our taxes;

 

   

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

 

   

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

   

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

 

   

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

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

 

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Results of Operations

The hotel operating statistics by region for our system-wide comparable hotels for the year ended December 31, 2018 compared to the year ended December 31, 2017 were as follows:

 

     Year Ended
December 31, 2018
    Variance
2018 vs. 2017
 

U.S.

    

Occupancy

     76.3     0.4% pts.  

ADR

   $ 149.09       1.7%         

RevPAR

   $ 113.68       2.2%         

Americas (excluding U.S.)

    

Occupancy

     71.6     1.6% pts.  

ADR

   $ 127.57       3.8%         

RevPAR

   $ 91.36       6.1%         

Europe

    

Occupancy

     77.0     2.1% pts.  

ADR

   $ 148.37       4.0%         

RevPAR

   $ 114.22       6.9%         

MEA

    

Occupancy

     72.5     3.3% pts.  

ADR

   $ 151.24       (2.9)%       

RevPAR

   $ 109.60       1.8%         

Asia Pacific

    

Occupancy

     73.4     3.0% pts.  

ADR

   $ 135.60       2.1%         

RevPAR

   $ 99.54       6.5%         

System-wide

    

Occupancy

     75.8     0.8% pts.  

ADR

   $ 147.22       1.9%         

RevPAR

   $ 111.61       3.0%         

For the year ended December 31, 2018, we experienced system-wide RevPAR growth, largely driven by improved ADR. Growth in our international portfolio outpaced growth in the U.S., with particularly strong trends in the Europe and Asia Pacific regions. Continued strength in Europe was driven primarily by increased ADR, most notably in Turkey, as it continues to recover from political and economic turmoil. Growth in Asia Pacific was primarily attributable to increased occupancy in China resulting from new hotels maturing in our system. In the Americas (excluding U.S.), increases in RevPAR were largely attributable to positive performance in the Caribbean and Canada, driven by increases in ADR. RevPAR grew moderately in MEA, primarily due to increases in occupancy in Egypt. In the U.S., RevPAR experienced its ninth consecutive year of growth, but was also affected by natural and man-made disasters, driving increased occupancy for the year ended December 31, 2017 and softening results and comparisons of growth during the year ended December 31, 2018.

 

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The hotel operating statistics by region for our system-wide comparable hotels for the year ended December 31, 2017 compared to the year ended December 31, 2016 were as follows:

 

     Year Ended
December 31, 2017
    Variance
2017 vs. 2016
 

U.S.

    

Occupancy

     76.3     0.4% pts.  

ADR

   $ 146.78       1.0%         

RevPAR

   $ 111.93       1.5%         

Americas (excluding U.S.)

    

Occupancy

     71.5     2.1% pts.  

ADR

   $ 124.47       2.1%         

RevPAR

   $ 89.04       5.3%         

Europe

    

Occupancy

     75.3     3.2% pts.  

ADR

   $ 141.20       2.1%         

RevPAR

   $ 106.37       6.6%         

MEA

    

Occupancy

     67.1     5.5% pts.  

ADR

   $ 145.16       (5.0)%       

RevPAR

   $ 97.42       3.6%         

Asia Pacific

    

Occupancy

     72.9     4.9% pts.  

ADR

   $ 140.36       0.1%         

RevPAR

   $ 102.39       7.3%         

System-wide

    

Occupancy

     75.5     1.2% pts.  

ADR

   $ 144.78       0.9%         

RevPAR

   $ 109.27       2.5%         

For the year ended December 31, 2017, we experienced RevPAR growth across all regions, particularly in Asia Pacific, Europe and the Americas (excluding U.S.). Continued growth in Asia Pacific was primarily driven by high demand in China and Japan attributable to new hotels stabilizing in the system, resulting in increased occupancy. Strong performance in Europe was a result of increases in both occupancy and ADR, largely driven by continued recovery from the geopolitical and economic turmoil in 2016, particularly in Turkey. The RevPAR increase in the Americas (excluding U.S.) was driven by strong performance in Canada and Puerto Rico, which was a result of strong transient and group demand and steady demand resulting from the hurricanes, respectively. MEA experienced RevPAR growth due to increased occupancy, despite declines in ADR due to travel sanctions and increased geopolitical pressures. RevPAR growth in the U.S. was driven by increased demand in certain markets as a result of hurricane relief efforts.

 

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The table below provides a reconciliation of income (loss) from continuing operations, net of taxes, to EBITDA and Adjusted EBITDA:

 

     Year Ended December 31,  
     2018      2017     2016  
     (in millions)  

Income (loss) from continuing operations, net of taxes

   $ 769      $ 1,089     $ (17

Interest expense

     371        351       334  

Income tax expense (benefit)

     309        (336     557  

Depreciation and amortization

     325        336       353  
  

 

 

    

 

 

   

 

 

 

EBITDA

     1,774        1,440       1,227  

Gain on sales of assets, net

                  (8

Loss (gain) on foreign currency transactions

     11        (3     16  

Loss on debt extinguishment

            60        

FF&E replacement reserves

     50        55       55  

Share-based compensation expense

     127        121       81  

Amortization of contract acquisition costs

     27        17       16  

Net other expenses from managed and franchised properties

     85        172       12  

Other adjustment items(1)

     27        47       85  
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 2,101      $ 1,909     $ 1,484  
  

 

 

    

 

 

   

 

 

 

 

(1) 

Includes adjustments for transaction costs related to the spin-offs for the year ended December 31, 2017; impairment loss for the years ended December 31, 2017 and 2016; and severance and other items for all periods. Transaction costs related to the spin-offs for the year ended December 31, 2016 are included in discontinued operations and, therefore, are excluded from the presentation above.

Revenues

 

     Year Ended December 31,      Percent Change  
     2018      2017      2016      2018 vs. 2017     2017 vs. 2016  
     (in millions)               

Franchise and licensing fees

   $ 1,530      $ 1,321      $ 1,091        15.8       21.1  
  

 

 

    

 

 

    

 

 

      

Base and other management fees

   $ 321      $ 324      $ 230        (0.9     40.9  

Incentive management fees

     235        222        142        5.9       56.3  
  

 

 

    

 

 

    

 

 

      

Total management fees

   $ 556      $ 546      $ 372        1.8       46.8  
  

 

 

    

 

 

    

 

 

      

The addition of new managed and franchised properties to our system and the increases in RevPAR at our comparable managed and franchised hotels yielded increases in management and franchise fees in all periods.

Including new development and ownership type transfers, we added, on a net basis, 829 managed and franchised properties from January 1, 2017 to December 31, 2018 and 744 managed and franchised properties from January 1, 2016 to December 31, 2017, providing an additional 144,149 rooms and 133,921 rooms, respectively, to our management and franchise segment. As new hotels stabilize in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.

Franchise and licensing fees increased as a result of increases in RevPAR at our comparable franchised hotels of 2.3 percent and 2.0 percent during the years ended December 31, 2018 and 2017, respectively, due to increases in ADR of 1.6 percent and 0.9 percent, respectively, as well as increased occupancy of 0.5 percentage points and 0.8 percentage points, respectively. Franchise and licensing fees also increased during the years ended December 31, 2018 and 2017 as a result of net increases in licensing and other fees of $112 million and $148 million, respectively.

 

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On a comparable basis, management fees increased during the years ended December 31, 2018 and 2017 as a result of increases in RevPAR at our managed hotels of 4.4 percent and 3.4 percent, respectively, due to increased occupancy of 1.7 percentage points and 2.4 percentage points, respectively, and, for the year ended December 31, 2018, increased ADR of 2.1 percent. For the year ended December 31, 2018, the increase in management fees was partially offset by a decrease in base and other management fees that was the result of termination fees recognized during the year ended December 31, 2017.

 

     Year Ended December 31,      Percent Change  
     2018      2017      2016      2018 vs. 2017      2017 vs. 2016  
     (in millions)                

Owned and leased hotels

   $ 1,484      $ 1,432      $ 1,434        3.6        (0.1

The changes in owned and leased hotel revenues during the years ended December 31, 2018 and 2017 primarily included an increase of $21 million and a decrease of $41 million, respectively, resulting from foreign currency exchange rates and, on a currency neutral basis, increases of $48 million and $41 million, respectively, related to our comparable owned and leased hotels.

The increases in revenues at our comparable owned and leased hotels were primarily the result of improved performance due to increases in RevPAR of 5.3 percent and 4.8 percent during the years ended December 31, 2018 and 2017, respectively, driven by increases in ADR of 3.8 percent and 3.2 percent, respectively, and occupancy growth of 1.1 percentage points and 1.2 percentage points, respectively. These increases were partially offset by decreases in revenues, on a currency neutral basis, at our non-comparable owned and leased hotels, of which $18 million and $5 million, respectively, were due to lease terminations and, for the year ended December 31, 2017, the disposal of a property, which were only partially offset by increases in revenues from a property that opened in 2017.

 

     Year Ended December 31,      Percent Change  
       2018          2017          2016        2018 vs. 2017     2017 vs. 2016  
     (in millions)               

Other revenues

   $ 98      $ 105      $ 82        (6.7     28.0  

Other revenues decreased during the year ended December 31, 2018 and increased during the year ended December 31, 2017, primarily as a result of $28 million and $9 million of recoveries from the settlement of a claim by Hilton to a third party related to our defined benefit plans that were recognized during the years ended December 31, 2017 and 2016, respectively. The decrease during the year ended December 31, 2018 was partially offset by an increase in revenues from our purchasing operations due to increased volume.

Operating Expenses

 

     Year Ended December 31,      Percent Change  
     2018      2017      2016      2018 vs. 2017      2017 vs. 2016  
     (in millions)                

Owned and leased hotels

   $ 1,332      $ 1,269      $ 1,279        5.0        (0.8

The changes in owned and leased hotel expenses during the years ended December 31, 2018 and 2017 primarily included an increase of $20 million and a decrease of $40 million, respectively, resulting from foreign currency exchange rates and, on a currency neutral basis, increases of $51 million and $39 million, respectively, related to our comparable owned and leased hotels.

The increases in expenses at our comparable owned and leased hotels were primarily due to increased variable operating costs related to occupancy growth and, for the year ended December 31, 2018, increased

 

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contingent rent expense resulting from improved performance. The currency neutral increases during the years ended December 31, 2018 and 2017 were partially offset by decreases in owned and leased hotel expenses at our non-comparable owned and leased hotels, of which, $13 million and $6 million, respectively, were due to lease terminations and, for the year ended December 31, 2017, the disposal of a property, which were only partially offset by increases in expenses from a property that opened in 2017. Additionally, the changes included a $4 million refund of rent related to a lease termination that was recognized in 2017.

 

     Year Ended December 31,      Percent Change  
         2018              2017              2016          2018 vs. 2017     2017 vs. 2016  
     (in millions)               

Depreciation and amortization

   $ 325      $ 336      $ 353        (3.3     (4.8

General and administrative

     443        439        409        0.9       7.3  

Other expenses

     51        56        66        (8.9     (15.2

The decreases in depreciation and amortization expenses during the years ended December 31, 2018 and 2017 were primarily the result of decreases in amortization expense, driven by certain capitalized software costs being fully amortized during the years ended December 31, 2018 and 2017, respectively. Additionally, the decrease in depreciation and amortization expense during the year ended December 31, 2018 included a $5 million decrease in depreciation expense, primarily related to our leased hotels as a result of a lease termination and assets being fully depreciated in 2017.

The increases in general and administrative expenses during the years ended December 31, 2018 and 2017 were primarily the result of increases in payroll and compensation costs, including share-based compensation, which, for the year ended December 31, 2017, was largely driven by an increase in retirement eligible participants resulting in the acceleration of expense recognition, as well as additional expense recognized from a special equity grant to certain participants in connection with the spin-offs. These increases were partially offset by decreases in severance costs related to the 2015 sale and continued management of the Waldorf Astoria New York of $8 million and $10 million, respectively. Additionally, for the year ended December 31, 2017, there were $18 million of costs associated with the spin-offs, while similar costs for the year ended December 31, 2016 were included in discontinued operations.

Other expenses decreased during the year ended December 31, 2018 as a result of impairment losses and costs for the settlement of the claim relating to our defined benefit plans being recognized during the year ended December 31, 2017. These decreases were partially offset by an increase in expenses from our purchasing operations. The decrease in other expenses during the year ended December 31, 2017 was primarily a result of decreased impairment losses of $11 million.

Non-operating Income and Expenses

 

     Year Ended December 31,     Percent Change  
     2018     2017     2016     2018 vs. 2017     2017 vs. 2016  
     (in millions)              

Interest expense

   $ (371   $ (351   $ (334     5.7       5.1  

Gain (loss) on foreign currency transactions

     (11     3       (16     NM (1)       NM (1)  

Loss on debt extinguishment

           (60           NM (1)       NM (1)  

Other non-operating income, net

     28       29       22       (3.4     31.8  

Income tax benefit (expense)

     (309     336       (557     NM (1)       NM (1)  

 

(1)

Fluctuation in terms of percentage change is not meaningful.

 

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The increases in interest expense were primarily due to the issuances of the 4.625% Senior Notes due 2025 (the “2025 Senior Notes”) and the 4.875% Senior Notes due 2027 (the “2027 Senior Notes”) in March 2017 and, for the year ended December 31, 2018, the issuance of the 5.125% Senior Notes due 2026 (the “2026 Senior Notes”) in April 2018. The increase during the year ended December 31, 2017 also related to the issuance of the 4.250% Senior Notes due 2024 in August 2016 and the reclassification of losses from accumulated other comprehensive loss resulting from interest rate swaps dedesignated in 2016. These increases were partially offset by decreases in interest expense due to the March 2017 repayment of the 5.625% Senior Notes due 2021 (the “2021 Senior Notes”) and the March 2017 refinancing of the senior secured term loan facility (the “Term Loans”), which reduced the interest rate on this borrowing. Additionally, for the year ended December 31, 2018, interest expense decreased due to the April 2018 partial repayment of the Term Loans and the reclassification of gains from accumulated other comprehensive loss resulting from the interest rate swap settled in 2018. See Note 9: “Debt” and Note 11: “Derivative Instruments and Hedging Activities” in our consolidated financial statements included elsewhere in this prospectus for additional information on our indebtedness and interest rate swaps, respectively.

The net gain and losses on foreign currency transactions for all periods were primarily related to changes in foreign currency rates on our short-term cross-currency intercompany loans. The changes were predominantly related to loans denominated in the Australian dollar (“AUD”), the British pound and the euro (“EUR”).

The loss on debt extinguishment related to the repayment of the 2021 Senior Notes and included a redemption premium of $42 million and the accelerated recognition of $18 million of unamortized debt issuance costs during the year ended December 31, 2017.

Other non-operating income, net decreased during the year ended December 31, 2018 and increased during the year ended December 31, 2017 due to a $7 million gain that was recognized in 2017 related to an amendment of one of our capital leases. Additionally, for the year ended December 31, 2018, as a result of the partial repayments of the Term Loans in April and December 2018, we accelerated the recognition of deferred financing costs and discount driving a $6 million decrease, which was partially offset by a combined $12 million gain related to the refinancing and early repayment of a loan we issued that financed the construction of a hotel that we manage.

On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act of 2017 (the “TCJ Act”) was signed into law, which permanently reduced the corporate income tax rate from a graduated 35 percent to a flat 21 percent rate and imposed a one-time transition tax in 2017 on earnings of foreign subsidiaries that were previously deferred. The increase in income tax expense during the year ended December 31, 2018 was the result of a one-time benefit recorded during the year ended December 31, 2017 related to the TCJ Act, as well as an increase in income from continuing operations before incomes taxes, partially offset by the decrease in the annual effective tax rate as a result of the TCJ Act. The income tax benefit during the year ended December 31, 2017 was primarily due to a benefit of $600 million for the estimated impact of the transition tax and the remeasurement of deferred tax assets and liabilities and other tax liabilities based on the rates at which they are expected to reverse in the future. This benefit was partially offset by an increase in tax expense attributable to an increase in income from continuing operations before income taxes compared to the year ended December 31, 2016. See Note 14: “Income Taxes” in our consolidated financial statements included elsewhere in this prospectus for additional information.

Segment Results

We evaluate our business segment operating performance using operating income. Refer to Note 19: “Business Segments” in our consolidated financial statements included elsewhere in this prospectus for a reconciliation of segment operating income to income from continuing operations before income taxes and

 

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additional information on the evaluation of the performance of our segments using operating income. The following table sets forth revenues and operating income by segment:

 

     Year Ended December 31,     Percent Change  
     2018     2017     2016     2018 vs. 2017     2017 vs. 2016  
     (in millions)              

Revenues:

          

Management and franchise(1)

   $ 2,157     $ 1,927     $ 1,521       11.9       26.7  

Ownership

     1,484       1,432       1,434       3.6       (0.1
  

 

 

   

 

 

   

 

 

     

Segment revenues

     3,641       3,359       2,955       8.4       13.7  

Amortization of contract acquisition costs

     (27     (17     (16     58.8       6.3  

Other revenues

     98       105       82       (6.7     28.0  

Other revenues from managed and franchised properties

     5,238       4,727       3,597       10.8       31.4  

Intersegment fees elimination(1)

     (44     (43     (42     2.3       2.4  
  

 

 

   

 

 

   

 

 

     

Total revenues

   $ 8,906     $ 8,131     $ 6,576       9.5       23.6  
  

 

 

   

 

 

   

 

 

     

Operating Income(1):

          

Management and franchise

   $ 2,157     $ 1,927     $ 1,521       11.9       26.7  

Ownership

     108       120       113       (10.0     6.2  
  

 

 

   

 

 

   

 

 

     

Segment operating income

   $ 2,265     $ 2,047     $ 1,634       10.6       25.3  
  

 

 

   

 

 

   

 

 

     

 

(1) 

Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated financial statements.

Management and franchise segment revenues and operating income increased $230 million and $406 million during the years ended December 31, 2018 and 2017, respectively, as a result of the net addition of managed and franchised properties to our system, increases in RevPAR at our comparable managed and franchised hotels of 2.9 percent and 2.4 percent, respectively, and increases in licensing fees. Refer to “—Revenues” for further discussion of the increases in revenues from our managed and franchised properties.

The changes in ownership segment revenues were the result of foreign currency exchange rates and increases in revenues from our comparable owned and leased hotels due to increases in RevPAR, as well as net decreases in revenues from our non- comparable owned and leased hotels. Ownership operating income decreased during the year ended December 31, 2018 as a result of the increase in owned and leased hotel expenses, partially offset by an increase in segment revenues. Ownership operating income increased during the year ended December 31, 2017 primarily as a result of a decrease in owned and leased hotel expenses. Refer to “—Revenues” and “—Operating Expenses” for further discussion of the changes in revenues and operating expenses at our owned and leased hotels.

Liquidity and Capital Resources

Overview

As of December 31, 2018, we had total cash and cash equivalents of $484 million, including $81 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents balance related to cash collateral on our self- insurance programs.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for renovations and maintenance at the hotels

 

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within our ownership segment. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment, dividends as declared, share repurchases and corporate capital and information technology expenditures.

We finance our 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 and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity and minimize operational costs. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases.

We and our affiliates may from time to time purchase our outstanding debt through open market purchases, privately negotiated transactions or otherwise. Purchases or retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

During the years ended December 31, 2018 and 2017, we repurchased 23.5 million and 13.5 million shares of our common stock for $1.7 billion and $891 million, respectively, which we funded with borrowings and available cash.

Sources and Uses of Our Cash and Cash Equivalents

The following table summarizes our net cash flows:

 

     Year Ended December 31,     Percent Change  
     2018     2017     2016(1)     2018 vs. 2017     2017 vs. 2016  
     (in millions)              

Net cash provided by operating activities

   $ 1,255     $ 849     $ 1,310       47.8       (35.2

Net cash used in investing activities

     (131     (147     (423     (10.9     (65.2

Net cash used in financing activities

     (1,300     (1,724     (44     (24.6     NM (2)  

 

(1) 

Includes the cash flows from operating activities, investing activities and financing activities of Hilton, Park and HGV.

(2) 

Fluctuation in terms of percentage change is not meaningful.

Operating Activities

Cash flows from operating activities were primarily generated from management and franchise fee revenue and operating income from our owned and leased hotels and, for the year ended December 31, 2016, sales of timeshare units.

The $406 million increase in net cash provided by operating activities during the year ended December 31, 2018 was primarily the result of improved operating results from our management and franchise business, including net growth in properties, as well as a decrease in net cash paid for income taxes of $238 million. The increase was partially offset by an increase in contract acquisition costs.

The $461 million decrease in net cash provided by operating activities during the year ended December 31, 2017 was primarily the result of a decrease in operating income from our owned and leased properties and sales of timeshare units as a result of the spin-offs.

 

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Investing Activities

For the years ended December 31, 2018, 2017 and 2016, net cash used in investing activities consisted primarily of capital expenditures for property and equipment and capitalized software costs. Our capital expenditures for property and equipment primarily consisted of expenditures related to our corporate facilities and the renovation of hotels in our ownership segment which, for the year ended December 31, 2016, included those hotels owned by Park following completion of the spin-offs. Our capitalized software costs related to various systems initiatives for the benefit of both our hotel owners and our overall corporate operations. Additionally, during the year ended December 31, 2018, these expenditures were offset by the receipt of the repayment of a loan we issued that financed the construction of a hotel that we manage.

Financing Activities

The $424 million decrease in net cash used in financing activities during the year ended December 31, 2018 was primarily attributable to the transfer of cash in connection with the spin-offs during 2017 and the issuance of the $1.5 billion 2026 Senior Notes during the year ended December 31, 2018. These decreases were partially offset by the $800 million repayment of the Term Loans, as well as $1.9 billion of capital returned to our stockholders, which includes dividends and share repurchases, during the year ended December 31, 2018 compared to $1.1 billion of capital returned during the year ended December 31, 2017.

The $1,680 million increase in net cash used in financing activities during the year ended December 31, 2017 was primarily the result of cash transferred in connection with the spin-offs and an increase of $809 million in capital returned to stockholders. In addition, during the year ended December 31, 2017, we received $1.5 billion in proceeds from the issuance of the 2025 Senior Notes and 2027 Senior Notes, which we used with available cash to repay in full our 2021 Senior Notes, including a redemption premium of $42 million.

Debt and Borrowing Capacity

As of December 31, 2018, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $7.4 billion. For additional information on our total indebtedness, debt issuances and repayments and guarantees on our debt, refer to Note 9: “Debt” and Note 23: “Condensed Consolidating Guarantor Financial Information” in our consolidated financial statements included elsewhere in this prospectus.

Our senior secured revolving credit facility (the “Revolving Credit Facility”) provides for $1.0 billion in borrowings, including the ability to draw up to $150 million in the form of letters of credit. As of December 31, 2018, we had $63 million of letters of credit outstanding, leaving us with a borrowing capacity of $937 million. The maturities of the letters of credit were within one year as of December 31, 2018, and the majority of them related to our self-insurance programs.

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, issue additional equity securities or draw on our senior secured revolving credit facility. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control.

 

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Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2018:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 
     (in millions)  

Long-term debt(1)

   $ 9,111      $ 325      $ 651      $ 3,745      $ 4,390  

Capital leases

     312        30        60        58        164  

Operating leases

     1,681        206        357        253        865  

Purchase commitments

     224        60        100        37        27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 11,328      $ 621      $ 1,168      $ 4,093      $ 5,446  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.51 percent as of December 31, 2018.

The total amount of unrecognized tax benefits as of December 31, 2018 was $318 million. This amount is excluded from the table above because these unrecognized tax benefits are uncertain and subject to the findings of the taxing authorities in the jurisdictions where we are subject to taxation. It is possible that the amount of the liability for unrecognized tax benefits could change. Refer to Note 14: “Income Taxes” in our consolidated financial statements included elsewhere in this prospectus for additional information.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of December 31, 2018 included letters of credit of $63 million and performance guarantees with possible cash outlays of approximately $36 million, for which we accrued $12 million as of December 31, 2018 for estimated probable exposure. Additionally, we enter into purchase commitments in the normal course of business for which we are reimbursed by the owners of our managed and franchised hotels to operate our marketing, sales and brand programs. These obligations have minimal or no net effect on our future cash flows. See Note 20: “Commitments and Contingencies” in our consolidated financial statements included elsewhere in this prospectus for additional information.

Critical Accounting Policies and Estimates

The preparation of our consolidated 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 consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the consolidated financial statements and accompanying footnotes. We believe that of our significant accounting policies, which are described in Note 2: “Basis of Presentation and Summary of Significant Accounting Policies” in our consolidated financial statements included elsewhere in this prospectus, the following accounting policies are critical because they involve a higher degree of judgment, and the estimates required to be made were based on assumptions that are inherently uncertain. As a result, these accounting policies could materially affect our financial position, results of operations, cash flows and related disclosures. On an ongoing basis, we evaluate these estimates and judgments based on historical experiences and various other factors that are believed to reflect the current circumstances. While we believe our estimates, assumptions and judgments are reasonable, they are based on information presently available. Actual results may differ significantly from these estimates due to changes in judgments, assumptions and conditions as a result of unforeseen events or otherwise, which could have a material effect on our financial position or results of operations.

Management has discussed the development and selection of the following critical accounting policies and estimates with the audit committee of the board of directors.

 

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Property and Equipment

We evaluate the carrying value of our property and equipment for potential impairment by comparing the expected undiscounted future cash flows to the net carrying value of the assets if we determine there are indicators of impairment.

As part of the process described above, we exercise judgment to:

 

   

determine if there are indicators of impairment present. Factors we consider when making this determination include assessing the overall effect of trends in the hospitality industry and the general economy and regional performance and expectations, historical experience, capital costs and other asset-specific information;

 

   

determine the projected undiscounted future cash flows when indicators of impairment are present. Judgment is required when developing projections of future revenues and expenses based on estimated growth rates over the expected useful life of the asset group. These estimated growth rates are based on historical operating results, as well as various internal projections and external sources; and

 

   

determine the asset fair value when required. In determining the fair value, we often use internally-developed discounted cash flow models. Assumptions used in the discounted cash flow models include estimating cash flows, which may require us to adjust for specific market conditions, as well as capitalization rates, which are based on location, property or asset type, market-specific dynamics and overall economic performance. The discount rate takes into account our weighted average cost of capital according to our capital structure and other market specific considerations.

We had $367 million of property and equipment, net as of December 31, 2018. Changes in estimates and assumptions used in our impairment testing of property and equipment could result in future impairment losses, which could be material.

Hilton Honors

Hilton Honors records a point redemption liability for amounts received from participating hotels and program partners in an amount equal to the estimated cost per point of the future redemption obligation. We engage outside actuaries to assist in determining the fair value of the future award redemption obligation using statistical formulas that project future point redemptions based on factors that require judgment, including an estimate of “breakage” (points that will never be redeemed), an estimate of the points that will eventually be redeemed and the cost of the points to be redeemed. The cost of the points to be redeemed includes further estimates of available room nights, occupancy rates, room rates and any devaluation or appreciation of points based on changes in reward prices or changes in points earned per stay. Any amounts received from participating hotels and program partners in excess of the actuarial determined cost per point are recorded as deferred revenues and recognized as revenue upon point redemption.

In addition to the Hilton Honors fees we receive from hotel owners to operate the program, we earn fees from co-brand credit card arrangements for the use of our IP license and the issuance of Hilton Honors points. The allocation of the overall fees from the co-brand credit card arrangements between the IP license and the Hilton Honors points is based on their estimated standalone selling prices. The estimated standalone selling price of the IP license is determined using a relief-from-royalty method using statistical formulas based on factors that require significant judgment, including estimates of credit card usage, an appropriate royalty rate and a discount rate to be applied to the projected cash flows. The estimated standalone selling price of the future reward redemptions under the co-brand credit card arrangements is calculated using a discounted cash flow analysis with the same assumptions related to the point redemption liability as discussed above, adjusted for an appropriate margin.

As of December 31, 2018, we had a $1,669 million liability for guest loyalty program, including $700 million reflected as a current liability, and deferred revenues of $471 million, including $186 million

 

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reflected as a current liability. Changes in the estimates used in developing our breakage rate or other expected future program operations could result in material changes to our liability for guest loyalty program and deferred revenues.

Income Taxes

See Note 14: “Income Taxes” in our consolidated financial statements included elsewhere in this prospectus for discussion on the effects of the TCJ Act.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying values and the tax basis of assets and liabilities using currently enacted tax rates. We regularly review our deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets that we believe will not be ultimately realized. In performing this review, we make estimates and assumptions regarding projected future taxable income, the expected timing of reversals of existing temporary differences and the implementation of tax planning strategies. A change in these assumptions may increase or decrease our valuation allowance resulting in an increase or decrease in our effective tax rate, which could materially affect our consolidated financial statements.

We use a prescribed more-likely-than-not recognition threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return if there is uncertainty in income taxes recognized in the consolidated financial statements. When determining the amount of tax benefit to be recognized, we assume, among other items, the position will be examined, the examiner will have all relevant information and the evaluation of the position should be based on its technical merits. Further, estimates based on the tax position’s technical merits and amounts we would ultimately accept in a negotiated settlement with the tax authorities are used to measure the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Changes to these assumptions and estimates can lead to an additional income tax benefit (expense), which can materially affect our consolidated financial statements.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. An estimated loss from a loss contingency will be accrued by a charge to income if it is probable and the amount of the loss can be reasonably estimated. Significant judgment is required when we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially affect our consolidated financial statements.

Consolidations

We use judgment when evaluating whether we have a controlling financial interest in an entity, including the assessment of the importance of rights and privileges of the partners based on voting rights, as well as financial interests in an entity that are not controllable through voting interests. If an entity in which we hold an interest is considered to be a VIE, we use judgment determining whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interest in the entity. Changes to judgments used in evaluating our partnerships and other investments could materially affect our consolidated financial statements.

 

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BUSINESS

Overview

Hilton is one of the largest and fastest growing hospitality companies in the world, with 5,685 properties comprising 912,960 rooms in 113 countries and territories as of December 31, 2018. For nearly 100 years, Hilton has been an innovator in its industry, driven by the vision of our founder Conrad Hilton, “to fill the earth with the light and warmth of hospitality.” Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton; our full service hotel brands, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Motto by Hilton, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. In 2018, we launched two new brands: Motto by Hilton and LXR Hotels & Resorts. See “—Our Brand Portfolio,” for additional information. As of December 31, 2018, we had over 85 million members in our award-winning guest loyalty program, Hilton Honors.

We operate our business through a management and franchise segment and an ownership segment, each of which is managed separately because of its distinct economic characteristics. The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels operated or managed by someone other than us. The management and franchise segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) license fees for the exclusive right to use certain Hilton marks and intellectual property (“IP”); and (iii) fees for managing our owned and leased hotels. As of December 31, 2018, this segment included 689 managed hotels and 4,874 franchised hotels consisting of 882,873 total rooms. As of December 31, 2018, the ownership segment included 71 properties totaling 21,720 rooms, comprising 62 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels leased by consolidated variable interest entities (“VIEs”) and six hotels owned or leased by unconsolidated affiliates. For more information regarding our segments, see Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Results” and Note 19: “Business Segments” in our consolidated financial statements included elsewhere in this prospectus.

In addition to our current hotel portfolio, we are focused on the growth of our business by expanding our share in the global hospitality industry through our development pipeline. During the year ended December 31, 2018, we opened over 450 hotels consisting of more than 66,000 rooms, contributing to nearly 57,000 net rooms growth in our system during the year. Additionally, during the year ended December 31, 2018, nearly 110,000 new rooms were approved for development and added to our development pipeline. As of December 31, 2018, we had more than 2,400 hotels in our development pipeline that we expect to add as open hotels in our system, representing over 364,000 rooms under construction or approved for development throughout 103 countries and territories, including 35 countries and territories where we do not currently have any open hotels. All of the rooms in the development pipeline are within our management and franchise segment. Additionally, 195,000 rooms in the development pipeline were located outside the U.S., and 184,000 rooms in the development pipeline, or more than half, were under construction. We do not consider any individual development project to be material to us.

Overall, we believe that our experience in the hospitality industry, which spans nearly a century of customer service and entrepreneurship, and continues to evolve for the tastes, preferences and demands of our hotel guests; our strong, well-defined brands that operate throughout the hospitality industry chain scales; and our commercial service offerings will continue to drive customer loyalty, including participation in our Hilton Honors guest loyalty program. We believe that satisfied customers will continue to provide strong overall hotel performance for us and our hotel owners and encourage further development of additional hotels under our brands with both existing and new hotel owners, which further supports our growth and future financial performance. We believe that our existing portfolio and development pipeline, which will require minimal capital investment from us, positions us to further improve our business and serve our customers in the future.

 

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Our Competitive Strengths

We believe the following competitive strengths provide the foundation for our position as a leading global hospitality company.

 

   

World-Class Hospitality Brands. Our globally recognized, world-class brands have defined the hospitality industry. Our flagship Hilton Hotels & Resorts brand often serves as an introduction to our wider range of brands, including those in the luxury segment, midscale segment and everything in between, that are designed to accommodate any customer’s needs anywhere in the world. Our brands have achieved an average global RevPAR index premium of 14% for the year ended December 31, 2018, based on STR data. This means that our brands achieve on average 14% more revenue per room than competitive properties in similar markets. The demonstrated strength of our brands makes us a preferred partner for hotel owners.

 

   

Leading Global Presence and Scale. We are one of the largest hospitality companies in the world with 5,685 properties and 912,960 rooms in 113 countries and territories as of December 31, 2018. We have hotels in key urban destinations throughout our key operating regions and 575 hotels located at or near airports around the world. Our global presence allows us to serve our loyal customers throughout the world and to introduce our award-winning brands to customers in new markets. These world-class brands facilitate system growth by providing hotel owners with a variety of options to address each market’s specific needs. In addition, the diversity of our operations reduces our exposure to business cycles, individual market disruptions and other risks. Our robust commercial services platform allows us to take advantage of our scale to more effectively deliver products and services that drive customer preference and enhance commercial performance on a global basis.

 

   

Large and Growing Loyal Customer Base. Serving our customers is our first priority. By continually adapting to customer preferences and providing our customers with superior experiences, we have improved our overall customer satisfaction ratings since 2007. We earned 42 first place awards in the J.D. Power North America Guest Satisfaction rankings since 1999. Hilton Honors unites all our brands, encourages customer loyalty and allows us to provide tailored promotions, messaging and customer experiences. Membership in our Hilton Honors program continues to increase, and, as of December 31, 2018, there were over 85 million Hilton Honors members, a 20% increase from December 31, 2017.

 

   

Significant Embedded Growth. We expect to grow through improvement in same-store performance driven by strong anticipated industry fundamentals. CBRE predicts that lodging industry RevPAR in the U.S., where 73% of our system rooms are located, will grow 2.7% in 2019 and 2.2% in 2020. We expect to grow through new room additions, as upon completion, our industry-leading development pipeline would result in a 40% increase in our room count with minimal capital investment from us. In addition, our franchise revenues should grow over time as franchise contracts renew at our published license rates, which are higher than our current effective rates. For the year ended December 31, 2018, our weighted average effective license rate across our brands was 4.9% of room revenue and our weighted average published license rate was 5.6% as of December 31, 2018. We also expect our incentive management fees, which are linked to hotel profitability measures, to increase as a result of the expected improvements in industry fundamentals and new unit growth.

 

   

Strong Cash Flow Generation. We generate significant cash flows from operating activities. During 2018, we generated $1.3 billion in cash flow from operating activities. We believe that our focus on cash flow generation, the relatively low investment required to grow our business, and our disciplined approach to capital allocation position us to maximize opportunities for profitability and growth while continuing to reduce our indebtedness over time.

 

   

Aligned Culture and Organization. As an organization of people serving people, it is imperative that we attract and retain best-in-class talent to serve our various stakeholders. Our purpose-led, performance-driven culture begins with an intense alignment around our mission, vision, values and key strategic priorities. Our President and Chief Executive Officer, Christopher J. Nassetta, has more

 

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than 31 years of experience in the hotel industry, leading Hilton for over 11 years and previously serving as President and Chief Executive Officer of Host Hotels & Resorts, Inc. He and the balance of our executive management team have been instrumental in transforming our organization and building a culture that attracts, develops and retains leaders at all levels of the organization who are focused on delivering exceptional service to our customers every day. We rely on our more than 169,000 employees to execute our strategy and continue to enhance our products and services to ensure that we remain at the forefront of performance and innovation in the lodging industry.

Our Business and Growth Strategy

The following are key elements of our strategy to become the preeminent global hospitality company—the first choice of guests, employees and owners alike:

 

   

Expand our Global Network. We intend to build on our leading position in the U.S. and expand our global footprint. We had approximately 19% of the market share of rooms under construction as of December 31, 2018, based on STR data. We aim to increase the relative contribution of our international operations by increasing the number of rooms in our system that are located outside of the U.S., and as of December 31, 2018, over half of our rooms in our development pipeline are located outside of the U.S. We plan to continue to expand our global footprint by introducing the right brands with the right product positioning in targeted markets and allocating business development resources effectively to drive high-quality new unit growth in every region of the world.

 

   

Grow our Fee-Based Businesses. We intend to grow our higher margin, fee-based businesses by developing new third-party hotels and converting existing hotels to our brands. Our development pipeline consisted of over 364,000 rooms as of December 31, 2018. Upon completion, this pipeline of new, third-party owned hotels would result in a 41% increase in our managed and franchised hotel room count with minimal capital investment from us. In addition, we aim to increase the average effective franchise fees we receive over time by renewing and entering into new franchise contracts at our current published franchise fee rates.

 

   

Strengthen and Enhance our Brands and Commercial Services Platform. We intend to enhance our customer experience in all of our service offerings by delivering distinctive, quality, consistent brand management and continuing to develop products and services that drive customer preference and increased RevPAR premiums. We will continue to innovate in the delivery of modern products and service standards that are relevant and meet evolving customer needs. We believe providing distinctive customer experiences will deliver financial results that support incremental owner investment in our hotels. We also focus on providing products and services that drive opportunities for growth in the U.S. and tailoring our products as appropriate to meet the needs of customers and developers outside the U.S. We will continue to enhance our commercial services platform to ensure we have a formidable sales, pricing, marketing and distribution platform to drive premium commercial performance to our entire system of hotels. We also will continue to invest in our Hilton Honors guest loyalty program to ensure it remains relevant to our customers and drives customer loyalty and value to our hotel owners.

Recent Developments

In February 2019, our board of directors authorized the repurchase of an additional $1.5 billion of common stock under our existing $2.0 billion stock repurchase program, bringing the total amount remaining for repurchase under the program to approximately $1.8 billion.

Additionally, in February 2019, we launched our newest brand, Signia Hilton, a dynamic, meetings-and-events-focused brand, which will further reinforce Hilton’s commitment to innovation that meets the evolving needs of today’s travelers and will bring premium experiences to top urban and resort destinations around the world.

Subsequent to December 31, 2018 and as of March 29, 2019, we drew a net $50 million under the Revolving Credit Facility.

 

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Our Brand Portfolio

The goal of each of our brands is to deliver exceptional customer experiences and superior operating performance.

 

       

December 31, 2018

   

Brand(1)

 

Chain
Scale

 

Countries/
Territories

 

Properties

 

Rooms

 

Percentage of
Total Rooms

 

Selected Competitors(2)

LOGO   Luxury   14   31   10,502   1.2%  

Four Seasons, Mandarin Oriental,

Peninsula, Ritz Carlton,

Rosewood Hotels & Resorts, St. Regis

LOGO   Luxury   1   1   234   —%  

Leading Hotels of the World,

Legend Preferred Hotels & Resorts,

Small Luxury Hotels of The World,

The Luxury Collection

LOGO   Luxury   22   33   10,625   1.2%  

Fairmont, Intercontinental,

JW Marriott, Park Hyatt, Sofitel

LOGO   Upper Upscale   4   8   1,244   0.1%  

Hyatt Centric, Joie De Vivre,

Kimpton, Le Méridien

LOGO   Upper Upscale   94   586   215,623   23.6%  

Hyatt Regency, Marriott, Renaissance,

Sheraton, Sofitel, Westin

LOGO   Upper Upscale   22   68   13,569   1.5%  

Autograph Collection,

The Unbound Collection

LOGO   Upscale   45   559   130,714   14.3%  

Crowne Plaza, Delta, Holiday Inn,

Radisson, Sheraton, Wyndham

LOGO   Upscale   1   18   2,559   0.3%   Tribute Portfolio
LOGO   Upper Upscale   6   253   58,858   6.4%   Hyatt Regency, Marriott, Sheraton, Westin
LOGO   Upper Midscale         —%   CitizenM, Freehand, Moxy, Yotel
LOGO   Upscale   40   815   118,675   13.0%  

Aloft, Courtyard, Four Points,

Holiday Inn, Hyatt Place

LOGO   Upper Midscale   25   2,433   250,310   27.4%  

Comfort Suites, Courtyard,

Fairfield Inn, Holiday Inn Express,

Springhill Suites

LOGO   Midscale   1   53   5,019   0.6%  

Best Western, Comfort Inn & Suites,

La Quinta, Quality Inn, Sleep Inn

LOGO   Upscale   3   482   54,836   6.0%  

Element, Hyatt House, Residence Inn,

Staybridge Suites

LOGO   Upper Midscale   2   290   30,125   3.3%  

Candlewood Suites, Comfort Suites,

TownePlace Suites

LOGO   Timeshare   4   51   8,367   0.9%  

Hyatt Residence, Marriott Vacation Club,

Vistana Signature Experiences,

Wyndham Vacations Resorts

 

(1)

The table above excludes four unbranded properties with 1,700 rooms, representing approximately 0.2 percent of total rooms. HGV has the exclusive right to use our Hilton Grand Vacations brand, subject to the terms of a license agreement with us.

(2)

The table excludes lesser-known regional competitors.

 

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Waldorf Astoria Hotels & Resorts: What began as an iconic hotel in New York City is today a portfolio of luxury hotels and resorts. In landmark destinations around the world, Waldorf Astoria Hotels & Resorts reflect their locations, each providing the inspirational environments and personalized attention that are the source of unforgettable moments. Properties typically include elegant spa and wellness facilities; high-end restaurants; golf courses at our resort properties; 24-hour room service; fitness and business centers; meeting, wedding and banquet facilities; and special event and concierge services.

LXR Hotels & Resorts: Found in some of the world’s most alluring locations, LXR Hotels & Resorts immerse guests in truly profound travel experiences. LXR connects legendary luxury properties into a network of hotels offering singular service and remarkable experiences. In 2018, the first LXR hotel opened in Dubai.

Conrad Hotels & Resorts: Conrad is a global luxury brand offering guests personalized experiences with sophisticated, locally inspired surroundings and an intuitive service model based on customization and control, as demonstrated by the Conrad Concierge mobile application that enables guest control of on-property amenities and services. Properties typically include convenient and relaxing spa and wellness facilities; enticing restaurants; comprehensive room service; fitness and business centers; multi-purpose meeting facilities; and special event and concierge services.

Canopy by Hilton: Canopy by Hilton is an energizing lifestyle hotel in the neighborhood. Our guests are explorers who seek uncomplicated comfort, thoughtful details, an energizing atmosphere and a uniquely local experience. Each property is designed as a natural extension of its neighborhood, with local design, food and drink and culture delivering an authentic neighborhood experience with a boutique hotel feel.

Hilton Hotels & Resorts: Hilton is our global flagship brand and one of the most globally recognized hotel brands, with hotels and resorts in 94 countries and territories across six continents. The brand primarily serves business and leisure upper upscale travelers and meeting groups. Hilton hotels are full service hotels that typically include meeting, wedding and banquet facilities and special event services; restaurants and lounges; food and beverage services; swimming pools; gift shops; retail facilities; and other services. Additionally, Hilton Hotels & Resorts was voted the favorite hotel chain in the 2018 Globe Travel Awards.

Curio Collection by Hilton: Curio Collection by Hilton is created for travelers who seek local discovery and one-of-a-kind experiences. The collection is made up of hand-picked hotels that retain their unique identity or story, featuring elevated food and beverage experiences, and are able to leverage the many benefits of the Hilton global platform, including our common reservation and customer care service and Hilton Honors guest loyalty program.

DoubleTree by Hilton: DoubleTree by Hilton is an upscale, full service hotel designed to provide a comfortable and relaxed environment for today’s business and leisure travelers. DoubleTree’s hotels and resorts are united by the brand’s CARE (“Creating a Rewarding Experience”) service culture that all starts with its signature welcome and iconic warm chocolate chip cookie. DoubleTree’s diverse portfolio allows for flexibility with a variety of hotel and location types including historic icons, small contemporary hotels, resorts, suburban locations and both small and large urban markets.

Tapestry Collection by Hilton: Tapestry Collection by Hilton, which launched in 2017, is a portfolio of upscale, unique hotels that caters to guests seeking original and authentic experiences. Every Tapestry Collection property has its own unique style, while giving travelers the peace of mind and reassurance associated with the Hilton name, in addition to the benefits of the award-winning Hilton Honors guest loyalty program.

Embassy Suites by Hilton: Embassy Suites by Hilton is the upscale all-suites hotel brand that delivers inclusive value. All guests are welcomed with spacious two-room suites with separate areas to work and play, plus free made-to-order breakfast daily and complimentary drinks and snacks every night.

 

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Motto by Hilton: Motto by Hilton is a micro-hotel with an urban vibe in prime global locations. It is Hilton’s new affordable urban lifestyle brand that empowers guests by giving them the freedom to create their own experiences in the world’s most sought-after cities. Motto combines comfort and accessibility with travel and lifestyle trends centered around location, value and experience.

Hilton Garden Inn: Hilton Garden Inn is an award-winning brand where guests find an open, inviting atmosphere with warm, glowing service and simple, thoughtful touches that allow them to relax and recharge. As a recognized leader in food and beverage services, Hilton Garden Inn caters to guests’ dining needs by serving cooked-to-order breakfast and offering handcrafted cocktails, shareable small plates and full meals at its on-site restaurants and bars. Flexible meeting space, free Wi- Fi, wireless printing and fitness centers are offered to help guests stay polished and productive.

Hampton by Hilton: Hampton by Hilton is our moderately priced brand with limited food and beverage facilities. The Hampton by Hilton brand also includes Hampton Inn & Suites hotels, which offer both traditional hotel rooms and suite accommodations within one property. At our Hamptons around the world, guests receive free hot breakfast and free high-speed internet access, all for a great price and all supported by the 100% Hampton Guarantee.

Tru by Hilton: Tru by Hilton is a brand designed to be a game changer in the midscale segment. Tru was built from a belief that being cost conscious and having a great stay do not have to be mutually exclusive. By focusing on the brand’s three key tenets of simplified, spirited and grounded in value, every detail of the property is crafted for operational efficiency and to drive increased guest satisfaction – from the activated, open lobby to the efficiently designed bedrooms.

Homewood Suites by Hilton: Homewood Suites by Hilton is the upscale extended-stay hotel brand that delivers the comforts of home with the added conveniences of a hotel. Every room is a spacious suite featuring a fully equipped kitchen—suitable for stays of any length. A free, full hot breakfast is served daily, along with complimentary drinks and bites Monday through Thursday.

Home2 Suites by Hilton: Home2 Suites by Hilton provides a modern and savvy option to budget conscious extended-stay travelers. Offering innovative suites with contemporary design and cutting-edge technology, we strive to ensure that our guests are comfortable and productive, whether they are staying a few days or a few months. Each of the brand’s hotels offers complimentary continental breakfast, integrated laundry and exercise facility, recycling and sustainability initiatives and a pet- friendly policy.

Hilton Grand Vacations: Hilton Grand Vacations is our timeshare brand. Ownership of a deeded real estate interest with club membership points provides members with a lifetime of vacation advantages and the comfort and convenience of residential-style resort accommodations in select, renowned vacation destinations. Each of the Hilton Grand Vacations properties provides a distinctive setting, while signature elements remain consistent, such as high-quality guest service, spacious units and extensive on-property amenities.

Our Guest Loyalty Program

Hilton Honors is our award-winning guest loyalty program that supports our portfolio of brands at our managed, franchised, owned and leased hotels and resorts. The program generates significant repeat business by rewarding guests with points for each stay at any of our nearly 5,700 properties worldwide, which are then redeemable for free nights and other goods and services. Members can also use points earned to transact with nearly 75 partners, including airlines, rail and car rental companies, credit card providers, Amazon.com and others. The program provides targeted marketing, promotions and customized guest experiences to over 85 million members, a 20 percent increase from December 31, 2017. Affiliation with our loyalty programs encourages members to allocate more of their travel spending to our hotels. The percentage of travel spending we capture from loyalty members increases as they move up the tiers of our program. The program is funded by contributions from eligible revenues generated by Hilton Honors members and collected by us from hotels and resorts in our system. These funds are applied to reimburse hotels and partners for Hilton Honors points redemptions by loyalty members and to pay for administrative expenses and marketing initiatives that support the program.

 

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Our Business

As of December 31, 2018, our system included the following properties and rooms, by type, brand and region:

 

     Owned / Leased(1)      Managed      Franchised      Total  
     Properties      Rooms      Properties      Rooms      Properties      Rooms      Properties      Rooms  

Waldorf Astoria Hotels & Resorts

                       

U.S.

     1        215        14        5,956                      15        6,171  

Americas (excluding U.S.)

                   1        142        1        984        2        1,126  

Europe

     2        463        4        898                      6        1,361  

Middle East and Africa

                   4        949                      4        949  

Asia Pacific

                   4        895                      4        895  

LXR Hotels & Resorts

                       

Middle East and Africa

                                 1        234        1        234  

Conrad Hotels & Resorts

                       

U.S.

                   4        1,289        1        319        5        1,608  

Americas (excluding U.S.)

                   2        402                      2        402  

Europe

                   4        1,155                      4        1,155  

Middle East and Africa

     1        614        2        993                      3        1,607  

Asia Pacific

     1        164        17        5,035        1        654        19        5,853  

Canopy by Hilton

                       

U.S.

                                 5        831        5        831  

Europe

                                 2        263        2        263  

Asia Pacific

                   1        150                      1        150  

Hilton Hotels & Resorts

                       

U.S.

                   67        48,780        177        54,082        244        102,862  

Americas (excluding U.S.)

     1        405        26        9,320        21        7,066        48        16,791  

Europe

     53        14,424        49        15,440        36        10,182        138        40,046  

Middle East and Africa

     5        1,998        42        12,607        3        1,609        50        16,214  

Asia Pacific

     7        3,437        92        33,447        7        2,826        106        39,710  

Curio Collection by Hilton

                       

U.S.

                   4        1,981        34        7,253        38        9,234  

Americas (excluding U.S.)

                                 10        1,669        10        1,669  

Europe

                   3        270        10        1,072        13        1,342  

Middle East and Africa

                   2        255        1        356        3        611  

Asia Pacific

                   3        663        1        50        4        713  

DoubleTree by Hilton

                       

U.S.

                   35        11,791        316        73,948        351        85,739  

Americas (excluding U.S.)

                   3        494        24        5,231        27        5,725  

Europe

                   12        3,347        93        15,966        105        19,313  

Middle East and Africa

                   10        2,350        6        718        16        3,068  

Asia Pacific

                   57        15,797        3        1,072        60        16,869  

Tapestry Collection by Hilton

                       

U.S.

                                 18        2,559        18        2,559  

Embassy Suites by Hilton

                       

U.S.

                   42        11,110        202        45,548        244        56,658  

Americas (excluding U.S.)

                   3        667        6        1,533        9        2,200  

Hilton Garden Inn

                       

U.S.

                   5        537        655        90,603        660        91,140  

Americas (excluding U.S.)

                   12        1,663        39        6,177        51        7,840  

Europe

                   21        3,826        43        7,182        64        11,008  

Middle East and Africa

                   10        2,251        1        175        11        2,426  

Asia Pacific

                   29        6,261                      29        6,261  

 

(1) 

Includes properties owned or leased by entities in which we own a noncontrolling financial interest.

 

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     Owned / Leased(1)      Managed      Franchised      Total  
     Properties      Rooms      Properties      Rooms      Properties      Rooms      Properties      Rooms  

Hampton by Hilton

                       

U.S.

                   46        5,641        2,140        209,300        2,186        214,941  

Americas (excluding U.S.)

                   13        1,677        92        10,923        105        12,600  

Europe

                   18        2,956        63        9,873        81        12,829  

Middle East and Africa

                   1        420                      1        420  

Asia Pacific

                                 60        9,520        60        9,520  

Tru by Hilton

                       

U.S.

                                 53        5,019        53        5,019  

Homewood Suites by Hilton

                       

U.S.

                   19        2,016        439        50,103        458        52,119  

Americas (excluding U.S.)

                   3        358        21        2,359        24        2,717  

Home2 Suites by Hilton

                       

U.S.

                   2        198        283        29,384        285        29,582  

Americas (excluding U.S.)

                                 5        543        5        543  

Other

                   3        1,450        1        250        4        1,700  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Hotels

     71        21,720        689        215,437        4,874        667,436        5,634        904,593  

Hilton Grand Vacations

                                 51        8,367        51        8,367  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     71        21,720        689        215,437        4,925        675,803        5,685        912,960  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes properties owned or leased by entities in which we own a noncontrolling financial interest.

Management and Franchise

We manage hotels and license our brands through our management and franchise segment. This segment generates its revenue primarily from fees charged to hotel owners, as well as from fees associated with license agreements. We grow our management and franchise business by attracting owners to become a part of our system and participate in our commercial services to support their properties. These contracts require little or no capital investment to initiate on our part and provide significant return on investment for us as fees are earned.

Hotel Management

Our core management services consist of operating hotels under management contracts for the benefit of third parties who either own or lease the hotels and the associated personal property. Terms of our management contracts vary, but our fees generally consist of a base management fee, which is typically based on a percentage of the hotel’s monthly gross revenue, and, when applicable, an incentive management fee, which is typically based on a percentage of the hotel’s operating profits. In general, the owner pays all operating and other expenses and reimburses our out-of-pocket expenses. In turn, our managerial discretion typically is subject to approval by the owner in certain major areas, including the approval of annual operating and capital expenditure budgets. Additionally, the owners generally pay a monthly program fee based on the underlying hotel’s sales or usage, which covers the costs of: (i) advertising and marketing programs; (ii) internet, technology and reservation systems; and (iii) quality assurance program expenses. Owners are also responsible for various other fees and charges, including payments for participation in our Hilton Honors guest loyalty program, training, consultation and procurement of certain goods and services. As of December 31, 2018, we managed 689 hotels with 215,437 rooms, excluding hotels included in our ownership segment.

The initial terms of our management contracts are typically 20 to 30 years. In certain cases, we are both the franchisor and manager of the hotel, when we enter into a franchise contract in addition to a management contract, and we classify the hotel as managed in our portfolio. Extension options for our management contracts

 

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are negotiated and vary, but typically are more prevalent in full service hotels. Typically, these contracts contain one or two extension options that are for either five or 10 years and can be exercised at our or the hotel owner’s option or by mutual agreement.

Some of our management contracts provide early termination rights to hotel owners upon certain events, including the failure to meet certain financial or performance criteria. Performance test measures typically are based upon the hotel’s performance individually and/or in comparison to specified competitive hotels. We often have a cure right by paying an amount equal to the performance shortfall over a specified period, although in some cases our cure rights are limited.

Franchising

We license our brand names, trademarks and service marks and operating systems to hotel owners under franchise contracts. We do not own, manage or operate franchised properties and do not employ the individuals working at these locations. We conduct periodic inspections to ensure that brand standards that we establish are maintained. For newly franchised hotels, including both new construction and conversions of existing hotels from other brands, we approve the location, as well as the plans for the facilities to ensure the hotels meet our brand standards. For existing franchised hotels, we provide franchisees with product improvement plans that must be completed to keep the hotels in compliance with our brand standards, so that they can remain in our hotel system. We also earn license fees from a license agreement with HGV and co- brand credit card arrangements for the use of certain Hilton marks and IP.

Each franchisee pays us an application, initiation or other fee in conjunction with the inception of a franchise contract. Franchisees also pay a royalty fee, generally based on a percentage of the hotel’s monthly gross room revenue and, in some cases, a percentage of gross food and beverage revenues and other revenues, as applicable. Additionally, the franchisees generally pay a monthly program fee based on the underlying hotel’s sales or usage, which covers the costs of: (i) advertising and marketing programs; (ii) internet, technology and reservation systems; and (iii) quality assurance program expenses. Franchisees also are responsible for various other fees and charges, including payments for participation in our Hilton Honors guest loyalty program, training, consultation and procurement of certain goods and services. As of December 31, 2018, we franchised 4,925 properties with 675,803 rooms.

Our franchise contracts typically have initial terms of approximately 20 years for new hotels and approximately 10 to 20 years for converted hotels. At the expiration of the initial term, we may have a contractual right or obligation to relicense the hotel to the franchisee for an additional term ranging from 10 to 15 years. We have the right to terminate a franchise contract upon specified events of default, including nonpayment of fees or noncompliance with brand standards. If a franchise contract is terminated by us because of a franchisee’s default, the franchisee is contractually required to pay us liquidated damages. We have no legal responsibility for the employees or the liabilities associated with operating franchised properties.

Ownership

As a hotel owner and lessee, we focus on maximizing the cost efficiency and profitability of the portfolio by, among other things, maximizing hotel revenues, implementing new labor management practices and systems and reducing fixed costs. Through our disciplined approach to hotel and asset management, we develop and execute on strategic plans for each of our hotels to enhance their market position and, at many of our hotels, we invest in renovating guest rooms and public spaces and adding or enhancing meeting and retail space to improve profitability. As of December 31, 2018, our ownership segment consisted of 71 hotels with 21,720 rooms that we owned or leased or that are owned or leased by entities in which we own a noncontrolling financial interest.

 

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Properties

Hotel Properties

Owned or Controlled Hotels

As of December 31, 2018, we owned 100 percent or a controlling financial interest in the following three properties, representing 579 rooms.

 

Property

  

Location

   Rooms  

Hilton Hotels & Resorts

     

Hilton Nairobi(1)

   Nairobi, Kenya      287  

Hilton Odawara Resort & Spa

   Odawara City, Japan      163  

Hilton Belfast Templepatrick Golf & Country Club

   Templepatrick, United Kingdom      129  

 

(1) 

We own a controlling financial interest, but less than a 100 percent interest, in the entity that owns this property.

Joint Venture Hotels

As of December 31, 2018, we had a minority or noncontrolling financial interest in the entities that own or lease the following six properties, representing 2,459 rooms. We have a right of first refusal to purchase additional equity interests in certain of these joint ventures. We manage each of the hotels for the entity owning or leasing the hotel.

 

Property

  

Location

   Ownership     Rooms  

Waldorf Astoria Hotels & Resorts

       

Waldorf Astoria Chicago

   Chicago, IL, USA      12     215  

Conrad Hotels & Resorts

       

Conrad Cairo

   Cairo, Egypt      10     614  

Hilton Hotels & Resorts

       

Hilton Tokyo Bay

   Urayasu-shi, Japan      24     828  

Hilton Nagoya

   Nagoya, Japan      24     460  

Hilton Mauritius Resort & Spa

   Flic-en-Flac, Mauritius      20     193  

Hilton Imperial Dubrovnik

   Dubrovnik, Croatia      18     149  

Leased Hotels

As of December 31, 2018, we leased the following 62 hotels, representing 18,682 rooms.

 

Property

  

Location

   Rooms  

Waldorf Astoria Hotels & Resorts

     

Rome Cavalieri, Waldorf Astoria Hotels & Resorts

   Rome, Italy      370  

Waldorf Astoria Amsterdam

   Amsterdam, Netherlands      93  

Conrad Hotels & Resorts

     

Conrad Osaka

   Osaka, Japan      164  

Hilton Hotels & Resorts

     

Hilton Tokyo(1)

   (Shinjuku-ku) Tokyo, Japan      821  

Ramses Hilton

   Cairo, Egypt      817  

 

(1) 

We own a controlling financial interest, but less than a 100 percent interest, in the entity that owns this property.

 

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Property

  

Location

   Rooms  

Hilton London Kensington

   London, United Kingdom      601  

Hilton Vienna

   Vienna, Austria      579  

Hilton Osaka(1)

   Osaka, Japan      562  

Hilton Tel Aviv

   Tel Aviv, Israel      560  

Hilton Istanbul Bosphorus

   Istanbul, Turkey      500  

Hilton Munich Park

   Munich, Germany      484  

Hilton Munich City

   Munich, Germany      483  

London Hilton on Park Lane

   London, United Kingdom      453  

Hilton Diagonal Mar Barcelona

   Barcelona, Spain      433  

Hilton Mainz

   Mainz, Germany      431  

Hilton Trinidad & Conference Centre

   Port of Spain, Trinidad      405  

Hilton London Heathrow Airport

   London, United Kingdom      398  

Hilton Izmir

   Izmir, Turkey      380  

Hilton Addis Ababa

   Addis Ababa, Ethiopia      372  

Hilton Vienna Danube Waterfront

   Vienna, Austria      367  

Hilton Frankfurt

   Frankfurt, Germany      342  

Hilton Brighton Metropole

   Brighton, United Kingdom      340  

Hilton Sandton

   Sandton, South Africa      329  

Hilton Milan

   Milan, Italy      320  

Hilton Brisbane

   Brisbane, Australia      319  

Hilton Glasgow

   Glasgow, United Kingdom      319  

Ankara Hilton

   Ankara, Turkey      309  

The Waldorf Hilton, London

   London, United Kingdom      298  

Hilton Cologne

   Cologne, Germany      296  

Adana Hilton

   Adana, Turkey      295  

Hilton Stockholm Slussen

   Stockholm, Sweden      289  

Hilton Madrid Airport

   Madrid, Spain      284  

Parmelia Hilton Perth

   Parmelia Perth, Australia      284  

Hilton London Canary Wharf

   London, United Kingdom      282  

Hilton Amsterdam

   Amsterdam, Netherlands      271  

Hilton Newcastle Gateshead

   Newcastle Upon Tyne, United Kingdom      254  

Hilton Vienna Plaza

   Vienna, Austria      254  

Hilton Bonn

   Bonn, Germany      252  

Hilton London Tower Bridge

   London, United Kingdom      248  

Hilton Manchester Airport

   Manchester, United Kingdom      230  

Hilton Bracknell

   Bracknell, United Kingdom      215  

Hilton Antwerp Old Town

   Antwerp, Belgium      210  

Hilton Reading

   Reading, United Kingdom      210  

Hilton Leeds City

   Leeds, United Kingdom      208  

Hilton Watford

   Watford, United Kingdom      200  

Mersin Hilton

   Mersin, Turkey      186  

Hilton Warwick/Stratford-upon-Avon

   Warwick, United Kingdom      181  

Hilton Leicester

   Leicester, United Kingdom      179  

Hilton Nottingham

   Nottingham, United Kingdom      176  

 

(1) 

We own a controlling financial interest, but less than a 100 percent interest, in the entity that owns this property.

 

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Property

  

Location

   Rooms  

Hilton St. Anne’s Manor, Bracknell

   Wokingham, United Kingdom      170  

Hilton London Croydon

   Croydon, United Kingdom      168  

Hilton Cobham

   Cobham, United Kingdom      158  

Hilton Paris La Defense

   Paris, France      153  

Hilton East Midlands Airport

   Derby, United Kingdom      152  

Hilton Maidstone

   Maidstone, United Kingdom      146  

Hilton Avisford Park, Arundel

   Arundel, United Kingdom      140  

Hilton Northampton

   Northampton, United Kingdom      139  

Hilton London Hyde Park

   London, United Kingdom      136  

Hilton York

   York, United Kingdom      131  

Hilton Mainz City

   Mainz, Germany      127  

Hilton Puckrup Hall, Tewkesbury

   Tewkesbury, United Kingdom      112  

Hilton Glasgow Grosvenor

   Glasgow, United Kingdom      97  

Corporate Headquarters and Regional Offices

Our corporate headquarters are located at 7930 Jones Branch Drive, McLean, Virginia 22102. These offices consist of approximately 238,000 rentable square feet of leased space. We also have corporate offices in Watford, England (Europe), Dubai, United Arab Emirates (Middle East and Africa), Singapore (Asia Pacific), Tokyo (Japan) and Shanghai (China). Additionally, to support our operations, we have our Hilton Honors and other commercial services office in Addison, Texas. Other non-operating real estate that we own or lease includes centralized operations centers located in Memphis, Tennessee and Glasgow, U.K., and our Hilton Reservations and Customer Care office in Carrollton, Texas. We believe that our existing office properties are in good condition and are sufficient and suitable for the conduct of our business. In the event we need to expand our operations, we believe that suitable space will be available on commercially reasonable terms.

Competition

We encounter active and robust competition as a hotel and resort manager, franchisor and owner. Competition in the hospitality industry generally is based on the attractiveness of the facility; location; level of service; quality of accommodations; amenities; food and beverage options and outlets; public and meeting spaces and other guest services; consistency of service; room rate; brand reputation; and the ability to earn and redeem loyalty program points through a global system. Our properties and brands compete with other hotels, resorts, motels and inns in their respective geographic markets or customer segments, including facilities owned by local interests, individuals, national and international chains, institutions, investment and pension funds and real estate investment trusts (“REITs”). We believe that our position as a multi-branded manager, franchisor and owner of hotels with an associated system-wide guest loyalty and commercial platform helps us succeed as one of the largest and most geographically diverse hospitality companies in the world.

Our principal competitors include other branded and independent hotel operating companies, national and international hotel brands and ownership companies, including hotel REITs. While local and independent brand competitors vary, on a global scale, our primary competitors are firms such as Accor S.A., Choice Hotels International, Hongkong and Shanghai Hotels, Hyatt Hotels Corporation, Intercontinental Hotel Group, Marriott International, Radisson Hotel Group and Wyndham Hotels & Resorts.

Seasonality

The hospitality industry is seasonal in nature. The periods during which our hotels and resorts experience higher revenues vary from property to property, depending principally upon their location and the customer-base served. We generally expect our revenues to be lower in the first quarter of each year than in each of the three subsequent quarters.

 

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Cyclicality

The hospitality industry is cyclical, and demand generally follows, on a lagged basis, key macroeconomic indicators. There is a history of increases and decreases in the development and supply of and demand for hotel rooms, occupancy levels and room rates realized by hotel owners through economic cycles. The combination of changes in economic conditions and in the supply of hotel rooms can result in significant volatility in results for owners and managers of hotel properties. The costs of running a hotel tend to be more fixed than variable. As a result of such fixed costs, in a negative economic environment, the rate of decline in earnings can be higher than the rate of decline in revenues.

Intellectual Property

In the highly competitive hospitality industry in which we operate, trademarks, service marks, trade names, logos and patents are very important to the success of our business. We have a significant number of trademarks, service marks, trade names, logos, patents and pending registrations and expend significant resources each year on surveillance, registration and protection of our trademarks, service marks, trade names, logos and patents, which we believe have become synonymous in the hospitality industry with a reputation for excellence in service and authentic hospitality.

Government Regulation

Our business is subject to various foreign and U.S. federal and state laws and regulations, including laws and regulations that govern the offer and sale of franchises, many of which impose substantive requirements on franchise contracts and require that certain materials be registered before franchises can be offered or sold in a particular jurisdiction.

In addition, a number of states regulate the activities of hospitality properties and restaurants, including safety and health standards, as well as the sale of liquor at such properties, by requiring licensing, registration, disclosure statements and compliance with specific standards of conduct. Operators of hospitality properties also are subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. Our franchisees are responsible for their own compliance with laws, including with respect to their employees, minimum wage requirements, overtime, working conditions and work permit requirements. Compliance with, or changes in, these laws could reduce the revenue and profitability of our properties and could otherwise adversely affect our operations.

We also manage hotels with casino gaming operations as part of or adjacent to the hotels. However, with the exception of casinos at certain of our properties in Puerto Rico and one property in Egypt, third parties manage and operate the casinos. We hold and maintain the casino gaming license and manage the casinos located in Puerto Rico and Egypt and employ third-party compliance consultants and service providers. As a result, our business operations at these facilities are subject to the licensing and regulatory control of the local regulatory agency responsible for gaming licenses and operations in those jurisdictions.

As an international manager, franchisor, owner and lessee of properties in 113 countries and territories, we also are subject to the local laws and regulations in each country in which we operate, including employment laws and practices; privacy laws; tax laws, which may provide for tax rates that exceed those of the U.S. and which may provide that our foreign earnings are subject to withholding requirements or other restrictions; unexpected changes in regulatory requirements or monetary policy; and other potentially adverse tax consequences.

In addition, our business operations in countries outside the U.S. are subject to a number of laws and regulations, including restrictions imposed by the FCPA, as well as trade sanctions administered by OFAC. The FCPA is intended to prohibit bribery of foreign officials and requires us to keep books and records that

 

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accurately and fairly reflect our transactions. OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. In addition, some of our operations may be subject to additional laws and regulations of non-U.S. jurisdictions, including the United Kingdom’s (“U.K.”) Bribery Act 2010, which contains significant prohibitions on bribery and other corrupt business activities, and other local anti-corruption laws in the countries and territories in which we conduct operations. The European Union’s General Data Protection Regulation, effective in 2018, has stringent requirements regarding the handling of personal data such as credit card numbers and other personally identifiable information that we collect for a variety of important business purposes, including managing our workforce, providing requested products and services and maintaining guest preferences to enhance customer service and for marketing and promotion purposes.

Environmental Matters

We are subject to certain requirements and potential liabilities under various foreign and U.S. federal, state and local environmental, health and safety laws and regulations and incur costs in complying with such requirements. These laws and regulations govern actions including air emissions; the use, storage and disposal of hazardous and toxic substances; and wastewater disposal. In addition to investigation and remediation liabilities that could arise under such laws, we may also face personal injury, property damage, fines or other claims by third parties concerning environmental compliance or contamination. We use and store hazardous and toxic substances, such as cleaning materials, pool chemicals, heating oil and fuel for back-up generators at some of our facilities, and we generate certain wastes in connection with our operations. Some of our properties include older buildings, and some may have, or may historically have had, laundry and dry-cleaning facilities and underground storage tanks for heating oil and back-up generators. We have from time to time been responsible for investigating and remediating contamination at some of our facilities, such as contamination that has been discovered when we have removed underground storage tanks, and we could be held responsible for any contamination resulting from the disposal of waste that we generate, including at locations where such waste has been sent for disposal. In some cases, we may be entitled to indemnification from the party that caused the contamination pursuant to our management or franchise contracts, but there can be no assurance that we would be able to recover all or any costs we incur in addressing such problems. From time to time, we may also be required to manage, abate, remove or contain mold, lead, asbestos-containing materials, radon gas or other hazardous conditions found in or on our properties. We have implemented an ongoing operations and maintenance plan at each of our owned and managed properties that seeks to identify and remediate these conditions as appropriate. Although we have incurred, and expect that we will continue to incur, costs relating to the investigation, identification and remediation of hazardous materials known or discovered to exist at our properties, those costs have not had, and are not expected to have, a material adverse effect on our consolidated financial position, results of operations or cash flows.

Insurance

U.S. hotels that we manage are permitted to participate in certain of our insurance programs by mutual agreement with our hotel owners. If not participating in our programs, hotel owners must purchase insurance programs consistent with our requirements. U.S. franchised hotels are not permitted to participate in our insurance programs, but rather must purchase insurance programs consistent with our requirements. Foreign managed and franchised hotels are required to participate in certain of our insurance programs. In addition, our management and franchise contracts typically include provisions requiring the owner of any hotel to indemnify us against losses arising from the design, development and operation of such hotel.

Most of our insurance policies are written with self-insured retentions or deductibles that are common in the insurance market for similar risks, and we believe such risks are prudent for us to assume. Our third-party insurance policies provide coverage for claim amounts that exceed our self-insurance retentions or deductible obligations. We maintain insurance coverage for general liability, property, business interruption, terrorism and other risks with respect to our business for all of our owned and leased hotels, and we maintain workers’

 

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compensation coverage for all of our employees. In addition, through our captive insurance subsidiary, we participate in a reinsurance arrangement that provides coverage for a certain portion of our deductibles. In general, our insurance provides coverage related to any claims or losses arising out of the design, development and operation of our hotels.

History

In May 1919, our founder Conrad Hilton purchased his first hotel in Cisco, Texas and we are celebrating our 100th anniversary in 2019. Our predecessors commenced corporate operations in 1946 and Hilton Worldwide Holdings Inc. was incorporated in Delaware in March 2010.

Employees

As of December 31, 2018, more than 169,000 people were employed at our managed, owned and leased properties and at our corporate locations.

As of December 31, 2018, approximately 31 percent of our employees globally and 36 percent of our employees in the U.S. were covered by various collective bargaining agreements generally addressing pay rates, working hours, other terms and conditions of employment, certain employee benefits and orderly settlement of labor disputes.

Legal Proceedings

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums, including proceedings involving tort and other general liability claims, employee claims, consumer protection claims and claims related to our management of certain hotel properties. We recognize a liability when we believe the loss is probable and can be reasonably estimated. Most occurrences involving liability, claims of negligence and employees are covered by insurance with solvent insurance carriers. The ultimate results of claims and litigation cannot be predicted with certainty. We believe we have adequate reserves against such matters. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth the names, ages and positions of Hilton’s directors and executive officers as of March 29, 2019.

 

Name

   Age     

Position

Christopher J. Nassetta

     56      President, Chief Executive Officer and Director

Jonathan D. Gray

     49      Chairman of the Board of Directors

Charlene T. Begley

     52      Director

Melanie L. Healey

     57      Director

Raymond E. Mabus, Jr.

     70      Director

Judith A. McHale

     72      Director

John G. Schreiber

     72      Director

Elizabeth A. Smith

     55      Director

Douglas M. Steenland

     67      Director

Kristin A. Campbell

     57      Executive Vice President and General Counsel

Ian R. Carter

     57      Executive Vice President and President, Global Development

Kevin J. Jacobs

     46      Executive Vice President and Chief Financial Officer

Matthew W. Schuyler

     53      Executive Vice President and Chief Human Resources Officer

Christopher W. Silcock

     47      Executive Vice President and Chief Commercial Officer

Jonathan W. Witter

     49     

Executive Vice President and Chief Customer Officer

Christopher J. Nassetta joined Hilton as President and Chief Executive Officer in December 2007 and has served as a director of Hilton since that time. Previously, he was President and Chief Executive Officer of Host Hotels and Resorts, Inc., a position he held from May 2000 un