Greetings and welcome to Park Hotels & Resorts Incorporated Third Quarter 2020 Earnings Conference Call. As a reminder this conference is being recorded. I would now like to turn the conference over to your host today: Ian Weissman, Senior Vice President Corporate Strategy. Please begin, sir.

Thank you, operator, and welcome everyone to the Park Hotels & Resorts third quarter 2020 earnings call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information such as adjusted EBITDA. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in this morning's earnings release as well as in our 8-K filed with the SEC and the supplemental financial information available on our website at pkhotelsandresorts.com. This morning, Tom Baltimore, our Chairman and Chief Executive Officer will provide an overview of Park's current financial position, as well as an update on operations; Sean Dell'Orto, our Chief Financial Officer will provide a brief review of third quarter results as well as more detail on our balance sheet and liquidity. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.

Thank you, Ian, and welcome everyone. I want to start by saying that I hope all of you and your families remain safe, healthy, and well. Unfortunately, the pandemic is continuing across much of the globe and its impact has been profound on our industry. As we have adjusted and adapted to this new reality, I am pleased to report that Park has made significant progress on its near-term objectives, while keeping an eye towards longer-term opportunities as more widespread travel resumes. Since the onset of COVID-19, our priorities have been clear. First and foremost, to ensure the health and safety of our employees and hotel guests; second, reduce our burn rate by aggressively asset managing the portfolio, including the responsible suspension and subsequent reopening of hotels; and third, strengthen the balance sheet by raising additional liquidity, eliminating near-term debt maturities, and extending debt covenant relief to a point when we believe the challenges of the COVID-19 virus will largely be behind us. I'll start with the proactive decisions we made to bolster our balance sheet and liquidity during the quarter. We worked diligently with our financial partners to further fortify our balance sheet and ensure the company is well-positioned to successfully navigate these unprecedented times by executing a strategic capital raise and extending our near-term debt maturities. Accordingly, in mid-September, Park launched our second corporate bond offering successfully raising $725 million of 8-year secured notes at very attractive pricing and eliminating the risk of impending debt maturities and liquidity concerns. I am incredibly proud of the collective efforts of our team and our partners to implement impactful changes in such a short period of time. Finally, as it relates to the balance sheet, we remain focused on continuing to selectively sell non-core assets, with net proceeds expected to be used to pay down debt. While the bid-ask spread remains wide, there is a significant amount of capital on the sidelines and we anticipate a more active transaction market once the path to recovery becomes more apparent. Turning to operations, since March, our team has been focused on mitigating the impact of severely diminished hotel demand. We have undertaken several initiatives to reduce our monthly burn rate and maximize efficiencies in a low-demand environment. During much of the second quarter, our actions were largely defensive as we suspended operations at 38 of our 60 hotels at the height of travel restrictions and reduced operations at several others, ending the quarter on a more positive note with our first set of hotel reopenings in June. During the third quarter, as we witnessed pockets of increased demand across our portfolio and moved closer towards a recovery, we opened an additional 14 hotels including our 1,500-room Bonnet Creek complex of hotels in Orlando, which exceeded 30% occupancy during the quarter, and the 1,600-room Hilton New Orleans Riverside, which averaged 42% occupancy. Among our drive-to leisure markets, occupancy for the quarter averaged over 30%, up from 8% in the second quarter. Key West continued to post very solid results with occupancy averaging 57% for both properties for the quarter. In fact, our Casa Marina resort in Key West, along with our Hilton resort in Santa Barbara and the Hyatt Regency in Mission Bay in San Diego all impressively held rate relative to last year, supporting the appeal to drive leisure resort locations. Our teams also continue to find areas of incremental demand, such as the NBA-related business at the Waldorf Astoria at Bonnet Creek, as well as university-related demand at the Hilton and New Orleans, which resulted in $9 million of revenue for the quarter. Thus far in the fourth quarter, we have opened two additional hotels, the Caribe Hilton in Puerto Rico and the Hilton Lake Buena Vista in Orlando, and we currently plan to open both Hawaiian hotels in the coming weeks. In mid-October, the state of Hawaii began accepting proof of a negative COVID test taken within 72 hours of departure to bypass a mandated 14-day quarantine. Data from these first few weeks show strong demand, with airline loads at over 50%, and forward trends for airlift to the state are also encouraging, with Hawaiian airlines reporting that they expect to reach over 50% capacity by December, while both United and Southwest expect to significantly ramp up flights into Hawaii over the next two months. Based on these initial positive receptions, and as we continue to monitor the demand patterns in reaction to these testing protocols, we currently plan to open the Hilton Lake Buena Vista around mid-November, and we expect to open the 793-room Rainbow Tower at the Hilton Hawaiian Village by mid-December. All combined, we would expect to have 50 out of our 60 hotels opened by year-end, and with those hotels representing 74% of our total rooms. In terms of the remaining 10 suspended hotels, four are in San Francisco. The city's lengthy restrictions on travel have suppressed leisure demand, and its responsible healthy building ordinance has added unreasonable incremental costs. And with higher occupancy thresholds needed in New York and Chicago, coupled with little or no business across these markets during the winter months, the New York Hilton Midtown and the Hilton Chicago will remain suspended through the rest of the year and likely through most of Q1 in 2021. As I emphasized on our last call, we do not expect to see a meaningful increase in demand until vaccines and therapeutics become widely available. Given this current situation, we remain disciplined in our approach to hotel reopenings, moving forward only when the economic benefits outweigh the costs in order to preserve our liquidity. Turning to forward trends: while our property teams and brand partners are working hard to generate demand and reassure the public that the hotel brands have instituted top-notch cleanliness standards, ongoing concerns over the surge in cases through the winter months will likely dampen both business transient and group demand over the balance of this year. Overall, we expect leisure to continue to outperform during the fourth quarter and be a net positive for Park with 40% of our hotels located in drive-to locations, as we continue to witness solid trends among our resorts in markets like Key West, Santa Barbara, and San Diego. We are also encouraged by the expected reopening of our properties in Hawaii and the initial airlift to the state, indicating that there is indeed pent-up demand for leisure-related travel to Hawaii. We do note that just this week, the state of Hawaii changed policy and now allows travelers from Japan to also bypass quarantine with proof of a negative COVID test. So we are hopeful that this will lead to a similar rebuilding of demand from Japan over the coming weeks and months. On the group side, there was little demand for the balance of 2020, and group bookings in the first half of 2021 continue to weaken as meeting planners look to cancel their events a quarter or two in advance. However, group pace for the second half of 2021 is holding, clearly dependent on medical solutions being available by early next year. Over 25% or 450,000 room nights of the COVID-canceled group business have been booked into future years, with approximately 6% booked into the second half of 2021 and 5.5% booked in 2022. In this environment, we are laser-focused more than ever on cost savings and opportunities to reimagine the business model. As a result, we took the very difficult, but necessary steps to reorganize property-level management across our portfolio, which will result in $70 million of savings on an annualized basis, equating to a 200-plus basis point improvement in margins based on 2019 revenue levels. While these savings are significant, we also continue to work with our brand partners to identify ways to eliminate cost from the business model, including revisiting both operational and CapEx brand standards, simplifying positions, reinventing the food and beverage model, and reducing above-property expense allocations. I'm very proud of our progress to date and will continue to keep you apprised of additional initiatives and the expected improvements to the bottom line. While there are many challenges still ahead, I am reassured by the incredible work our team has done to date in managing through this crisis and positioning Park to successfully navigate through to the other side. I also believe in our country's resilience and do not believe that virtual mediums will replace the fundamental need people have to connect in person. While we have limited near-term visibility on when demand will return to normal, we have an extremely strong platform with high-quality assets that should realize outsized benefits and operating leverage as demand recovers, and we will continue to work tirelessly to serve our stakeholders and position Park for long-term success. And with that, I'd like to turn the call over to Sean, who will provide some more color on our balance sheet and liquidity.

Thanks, Tom. Turning briefly to our third quarter results. We ended the quarter with an 86% RevPAR decline, as several of our Big Box hotels remained suspended during the quarter. That said, we continue to witness incremental improvements in demand, with hotel occupancy for consolidated opened hotels improving sequentially from 30% in June to 32% in July, 39% in August, 42% in September, and 43% in October. Unsurprisingly, our drive-to leisure resorts experienced solid demand with occupancy averaging 45% in September. While open hotels in airport and suburban locations reported September occupancy of 40% and 30%, respectively. Occupancy at our open urban hotels averaged 45% in September, although the strength was driven in large part by the Hilton New Orleans Riverside, which recorded 74% occupancy for the month mostly due to university-related demand. Overall, our encouraging results further highlight our strategic and disciplined approach to hotel reopenings, which considers restrictions set by state and local ordinances, airlift capacity, demand and booking trends, alternative sources of demand like we captured in both New Orleans and Orlando, and consolidation of demand into neighboring Park hotels. This is another great example of the collaborative effort between our operating partners and asset management team which helped drive these impressive results. In terms of profitability, as of September, a third of our 39 open consolidated hotels were at breakeven EBITDA or better producing a combined EBITDA of $3.2 million, with top-performing hotels including the Hilton Santa Barbara, which generated $1.5 million of EBITDA, Casa Marina, which exceeded $500,000, and Hilton Riverside of approximately $350,000, thanks in large part to the Xavier University business, which is expected to remain with the hotel through May 2021. As demand improved, so did our monthly burn rate, which improved from $59 million during the second quarter to $50 million for the third quarter, helping to further extend our overall liquidity to over 30 months. Looking out over the balance of the year, the operating environment is expected to remain challenging with group revenues projected to be down over 90% and RevPAR declining over 80% with a slight improvement in demand as occupancy should continue to improve another 150 basis points from the third quarter. Turning to the balance sheet. As Tom noted in his comments, we are incredibly pleased with our ongoing efforts to fortify the balance sheet, having executed another very successful bond offering in late September, issuing $725 million of eight-year bonds at a very attractive coupon and three times oversubscribed. The transaction, which further demonstrates our ability to access alternative sources of capital had several intended effects, including helping to further enhance our liquidity, improving our debt profile by extending near-term maturities, and also further diversifying our capital sources while reducing our exposure to bank debt, which provides us with a longer runway to successfully navigate through this crisis. Specifically, net proceeds from the offering were used to fully repay a $631 million term loan maturing in December 2021. We also successfully negotiated a two-year extension of a majority of our revolver, which was also set to mature in December 2021. Finally, given the ongoing uncertainty around the slope of the recovery, we successfully negotiated additional covenant relief, pushing out covenant testing until March 31, 2022. As of quarter-end, the balance sheet is in very solid shape with net debt totaling $4.2 billion while our liquidity stood at $1.6 billion, including $474 million available on our revolver. That concludes our prepared remarks. We will now open the line for Q&A. To address each of your questions, we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please.

Thank you. At this time we will conduct a question-and-answer session. Our first question comes from Smedes Rose with Citi. Please proceed with your question.

Hi. Good morning. This is Daksh on for Smedes. Just....

Good morning.

Are you thinking about – good morning. Just are you thinking about a more meaningful way to deleverage, whether bringing in capital partners or looking at asset sales?

It's a great question. Historically, our approach has emphasized a low-levered balance sheet, a principle we adopted after the Chesapeake deal. We achieved around $470 million in asset sales, reducing our net debt-to-EBITDA to approximately 4.2 times. We had to slightly increase leverage due to the unforeseen global pandemic, but our medium- and long-term goal is to lower it to below four. We have sold 24 assets over the years, including 14 internationally, showing our team's experience with transactions. We are actively discussing potential asset sales. As mentioned in our previous call, we believe the discount caused by COVID was excessive, around 30% to 40%. There is significant capital available currently with less debt capital in the market. We are cautiously optimistic that the COVID discount will decrease, and we expect to see asset sales from us soon. The proceeds will be used to reduce our debt and improve our balance sheet and liquidity position. At this moment, we do not see a need for operating partners or a dilutive equity offering.

Great. Thanks. And then, just one follow-up, on just the way you're thinking about strategy would you want to reduce your exposure to large group assets?

It's easy to see that Park has more exposure in some of the most affected markets. However, I believe strongly in the dedicated scientists working on medical solutions. Once we have those solutions and people's adoption rates are rising, leading to a return to more normal living, Park's presence in these major cities will be a strategic advantage. We may reassess certain markets, especially in the Southern region where conditions are improving. However, I would not count out places like New York, Boston, Washington D.C., Chicago, San Francisco, Los Angeles, or Hawaii in the long run. I truly believe there will be significant demand over time, and there are considerable barriers to new developments. These factors present real advantages for Park in the medium to long term. Although it may be challenging for us now, this advantage will provide substantial support for Park as we move forward.

Great. Thank you.

Our next question comes from David Katz with Jefferies. Please proceed with your question.

Hi David.

Hi. Good to hear everyone's voices. Hope you're all doing well. And this may be a follow-up to the answer you just gave Tom, which is thinking about the long-term value versus the near and intermediate-term value of urban hotels? And what your collective view is around business travel and the trajectory of that recovery? Just balancing the long-term with the near-term of getting to your goal of leverage and other financial metrics, just urban versus not. Thank you.

David, that's a good question. Part of our confidence stems from our strong belief that urban centers remain a compelling investment opportunity. I recall that years ago, many believed independent hotels in New York and similar markets would outperform branded hotels, but that didn't pan out well for those who made that singular bet. While New York faces significant challenges today, I believe a reset will take place. Barry Sternlicht mentioned that up to 50% of hotel supply might disappear, but even if it's only 25%, considering the past decade's growth in supply and the additional restrictions being put in place by the municipality, we have faith that one of the greatest cities in the world will rebound. Although it may seem obvious to walk away right now, I believe that in the intermediate and long term, cities like this will recover, as will others I've mentioned. This leads to your follow-up question about remote working. There's no doubt that platforms like Zoom have influenced the current landscape, but nothing can replace the benefits of in-person interactions, whether for sales meetings, personal connections, or group gatherings. Even companies that lean towards remote work will likely find an increased need for bringing teams together for celebrations, incentive plans, recognition, and training. This heightened demand will, in turn, make our meeting venues in major cities even more valuable. We appreciate our market presence and while we may reduce exposure in certain areas, we also have outstanding properties, like our two exceptional resorts in Hawaii. The Hilton Hawaiian Village, with its unique 22-acre footprint and nearly 3,000 rooms, has been a remarkable success story for over 60 years, and I believe it will continue to be a strong investment for future generations. I hope that addresses your question.

You have. And if I may follow that up and just overlay those comments around the notion of how your definition of non-core versus core may have evolved over the recent past? I'd love to hear your thoughts on that too, please?

Thank you for the great question, David. Currently, we have 60 hotels, with our top 30 properties representing around 90% of our overall value. When comparing our top 30 hotels to those of our closest competitor, I believe our properties measure up very well against their top 40. These hotels embody our investment strategy and focus areas. I see several markets poised for growth due to population migration, including Denver, Austin, certain areas in Texas, and Nashville. While Nashville has experienced significant supply increases, these regions could enhance our current investment strategy. We are also committed to maintaining our oceanfront properties in Miami, our presence in Hawaii, and our jointly owned resort in San Diego with Sunstone. Our emphasis is on brand strength, and we believe in the value of brands like Hilton, Marriott, and Hyatt. We expect these relationships to grow and evolve over time.

Thank you so much. Appreciate it.

Yeah. Thank you.

Our next question comes from Rich Hightower with Evercore. Please proceed with your question.

Good morning, Rich.

So Tom, I think you may have helped answer my question here, but just regarding a couple of your CMBS assets. If my arithmetic is correct, there’s close to maybe $450,000 of CMBS debt per key on Hawaiian Village. Obviously, it’s an irreplaceable asset and has a lot of value, but could you comment on your view of the long-term value of that asset in relation to the debt? Additionally, I think I saw that Hilton Union Square Parc 55 CMBS was placed on a watch list. I understand that may be just a technicality, and if you're still current on debt service, it's probably not a significant issue, but could you provide some additional information on that as well?

Sure. A couple of things, Rich. Looking at the entire portfolio, we estimate the replacement costs for all 60 assets, but let's focus on the top 30, which amounts to around $16.5 billion. This puts you at about $770,000 per key. Currently, with our enterprise value below $7 billion, we are trading at a significant discount to the replacement cost, between 65% and 70%. Those figures are quite striking. For instance, consider the Hilton Hawaiian Village, which features five towers, nearly 2,900 rooms, and 150,000 square feet of meeting space, plus another 150,000 square feet of retail space—this is something that is impossible to replicate. We have a CMBS mortgage of roughly $1.275 billion that doesn’t mature until 2026, and we are not concerned about that. We believe this asset will continue to excel and remain a leading performer, as it has been for many years. Regarding San Francisco, we have two assets there, and we are currently facing challenges. Sean can clarify the amount of debt, which I think is $470 million.

$725 million over of the two assets. We are current building to the cash burn rate or debt service for all of our assets; we are covering without issue. We see no issue in the near-term there. There are no other issues that we need to be concerned about that will mature in 2023. And we certainly believe with confidence given all the great work happening in the scientific community that that will be in the rearview mirror that both themselves will be reopened and performing as well as they have before.

Okay. I appreciate that color, Tom. And then just a question on future supply, obviously there's a lot of discussion right now between owners and brands, and maybe in the context of operating expense savings and the owners for the first time in a long time have maybe gained some of the upper hand in those negotiations. But if you listen to the brands on their calls, obviously, the new unit growth sort of post-COVID engine is cranking as we speak. And so how do you think about that particular issue even if there's a lull in supply in the next sort of near term? How do you think about it over the longer term?

That's a great question, Rich. Given my experience with various Marriott and Hilton brands, I have a unique perspective on this. Our brand partners are focused on distribution, but before COVID, we were getting out of balance. This crisis is prompting a necessary reset and serves as a wake-up call. While their businesses are capital-light, they're also reliant on a healthy ownership community, which has been significantly affected. I anticipate that supply numbers will continue to decline in the near to intermediate future. There will be less debt capital and reduced development, which leads me to disagree with some of the overly optimistic growth projections. In the select-service sector, that business has increasingly turned into a commodity, and for older assets, replacement is likely. However, I don't think the supply can grow at the previous pace; the math just doesn't support it. This crisis has also pushed us all to reconsider our operating models. As mentioned earlier, we've already cut $70 million in costs, which represents over 200 basis points at non-union hotels, and there's still potential for better balance with employees represented by CBAs. This situation will encourage that discussion. Regarding supply and its effect on Park, we have less supply risk compared to most peers, which is a competitive advantage for us moving forward. In cities like New York and Chicago, we're seeing varying percentages of supply potentially diminishing. There will be more challenges and transformations, whether those are conversions to residential, workforce housing, or homeless shelters. A decline in supply is inevitable given the unprecedented impact on our industry.

All right. Thanks for the comments, Tom.

Thank you.

Our next question comes from Anthony Powell with Barclays. Please proceed with your question.

Hi. Good morning. Just a question on Hawaii. In terms of what do you think in terms of demand there and where those customers are being sourced in the U.S.? And maybe on Waikoloa, is the Big Island still not opting into the testing program? And how is that maybe impacting demand for that property versus your Hawaiian Village property?

Thank you for the questions. The governor has lifted the 14-day quarantine and replaced it with a 72-hour negative test requirement. This applies not only to Hawaii but also to Japan. To provide some context on COVID, Hawaii has seen around 15,000 total cases, which is among the lowest numbers in the country, and there have been only 219 deaths. While any loss of life is tragic, in the broader context of the pandemic, the impact on Hawaii has been relatively minimal. We believe there is considerable pent-up demand, and historically, we’ve seen short booking patterns. Most demand appears to be coming from the West Coast. As we mentioned earlier, Hawaiian Airlines has provided encouraging data, showing Q4 schedules at about 35% to 40% of 2019 levels, with expectations of reaching around 50% in December. United and Southwest are also significantly increasing their services over the next two months. Looking ahead to summer 2021, Hawaiian Airlines anticipates being 15% to 25% below 2019 levels, which is positive news. At the Hilton Hawaiian Village, we plan to open in mid-December. The Rainbow Tower is expected to open soon, with around 600 of nearly 800 rooms likely to sell out during the week of Christmas, which is a promising sign even though it accounts for only 20% to 25% of the total property. The average daily rate is down about 20%, but that is still encouraging. For Hilton Hawaiian Village and Hilton Waikoloa Village, we anticipate filling about 200 to 300 of the applicable 600 rooms, indicating strong demand. Historically, Hawaii sees around 8.5 million visitors annually, with about 62% from the U.S. and approximately 1.5 million from Japan, so we are optimistic about this being a positive first step in the recovery process. Regarding the Big Island, we understand that the Mayor is considering easing certain testing requirements, which could further support demand as we move forward.

Got it. And maybe for Sean, I just wanted to confirm when you were selling assets in the past an issue was kind of a low tax basis of the portfolio. Given the losses this year, that probably shouldn't be an issue, but I wanted to confirm that your impairment that you took in the first quarter would be fully, I guess, able to be used as losses to offset any taxable gains on asset sales in the future?

Anthony, that's a good question. We have a five-year period following the spin where we are subject to building gain tax. Therefore, any operational losses we incur won't significantly offset gains, but thankfully, this only extends until the beginning of next year. The assets we sell today or in the next 12 months are likely to benefit from tax-efficient strategies, whether it's through a 1031 exchange or the basis we have from last year's transaction. In the short term, we are still focused on net limitation. In the long term, we will have losses that can continue to carry forward and be used to offset future gains concerning distributable income for dividends.

Got it. Thank you.

Our next question comes from Aryeh Klein with BMO Capital. Please proceed with your question.

Thanks. So of the remaining hotels that are closed, can you talk a little bit about the San Francisco market specifically and how you're thinking about when to open there given some of the unique challenges in that market?

Yes. I think Sean did a great job in the prepared remarks kind of walking through. I mean, we are being incredibly disciplined about the metrics we're looking at in terms of demand patterns. If you think about San Francisco, we've got the JW Marriott opened, the Hyatt Centric. They never closed. So we had medical personnel, we got airline crew, and we have first responders. Both of those hotels have been averaging occupancy in the third quarter and on high 20s. And that, in fact, has continued even until October for the 28%, 29%. So that's a good sign we're being able to maintain. But given the fact that there's little or no citywide business, there's no little or no business transient, you've got remote work being strongly encouraged or mandated by the city; growth in the remaining four hotels just doesn't make sense at this point and we actually will lose less money by keeping them closed. And again, one of our primary objectives is continuing to keep the cash burn rate as low as possible and you've seen the great progress that we've made here. Regarding the healthy buildings ordinance, I think our remarks were clear. It is unfortunate. It's not a safety bill. It's nothing more than a job's bill and it is not helpful for either our associates and workers or guests, and we will continue to monitor and we think demand is sufficient. We'll make the assessment against whatever incremental operating costs there are before we reopen. So this is a very experienced team of men and women. We're going to be thoughtful about how and when we reopen, and we believe in San Francisco over the long-term, no doubt one of the great cities of the country, it will recover. We will get to the other side of this. We think in the near-term it's really important to be prudent and disciplined in the reopening process.

Thanks for the update. I have a quick follow-up regarding Hawaii. I understand it's early to evaluate the change related to Japan, but have you noticed any trends in bookings or initial demand from that market?

We haven't seen any trends yet because it's early. The recent information regarding Hilton Hawaiian Village suggests that historically, about 30% of the business comes from this area, with 63% of our international demand translating to around 223 room nights from Japan, based on 2019 data. Over the last 30 years, this has been stable and reliable, and we expect this to continue. However, it is too early to provide more data on this. We do see encouraging signs for the holiday season, mainly coming from the U.S. and particularly from the West Coast.

Our next question comes from Dori Kesten with Wells Fargo. Please proceed with your question.

Thanks. Good morning everyone.

Hi, Dori. How are you?

I’m good. How are you?

Great.

So I think most would agree that prior peak EBITDA for The Reach should return before prior peak RevPAR and some have thrown out that the gains in margins can be 100 to 200 basis points. Is there anything specific to your portfolio whether asset size or location or gains you expected but hadn't yet realized from Chesapeake that could put you out of that range either plus or minus?

I think that's a great question. Reflecting on our Chesapeake deal, we identified $24 million in synergies, of which we had achieved about $20 million by February. This involved both reducing overhead and restructuring management contracts, so we were making good progress. We were optimistic about the benefits we anticipated from renovated properties and the implementation of my asset management strategies, and we remain positive about the long-term outlook. Several significant factors are contributing to this reset, including the $70 million in expenses we have already removed from the business, which corresponds to over 200 basis points in margin improvement based on 2019 levels. I agree with my colleagues who estimate a potential range of 100 to 200 basis points. However, I believe Park could be at the higher end of that spectrum as we evaluate the situation. One positive outcome of this crisis has been the open and honest conversations between brand owners, acknowledging the need for a reset. We need to embrace advancements in technology, and adjustments to stay-over cleaning practices will depend on guest preferences. There will also be a reset regarding food and beverage operations. I believe many of these changes will be either semi-permanent or permanent, which will further enhance margins in the intermediate and long term. Therefore, I can confidently state that we expect a margin benefit of 100 to 200 basis points, and on Park’s side, I anticipate we will be on the higher end of that range.

Perfect. Thank you.

Thank you.

Our next question comes from Neil Malkin with Capital One Securities. Please proceed with your question.

Good morning everyone.

Good morning.

First question with the brand standards and a lot of the changes happening, it seems like it's the out-of-room revenues or outlets that are going to be most impacted. Just wondering in some of your larger hotels, group-oriented hotels, what do you think happens to that space? After those things are shut down or reduced, how do you plan to get economic use out of the space? One of the things we've heard is that as office footprints shrink, they will turn to hotel space as a sort of same-day or temporary office meeting space. Just curious on your thoughts because that's a big component of your total revenues?

Yes, that's an excellent question, and I agree with your observations. What we're starting to notice, and there's already some evidence, is that while we have day offices and are adapting for additional training, we may become more of a supplementary space for offices. People might opt for less office space and reclaim some of that by leveraging the expanded meeting areas we have, especially on the Park side. This shift could be particularly advantageous for us in urban centers. We view this trend as a significant positive. Depending on how it's organized, this approach could even be more profitable, especially when considering the food and beverage component. Historically, the banquet segment has been lucrative, though other areas have seen less profitability. Thus, we see this as a potential opportunity moving forward. This situation has compelled all of us to rethink our strategies. Our collaboration with the NBA and Xavier University of New Orleans has encouraged us to be creative and seek new revenue opportunities.

Thank you. I have a broader question for Tom. Considering the nature of being a public lodging REIT, the lower margins and cyclicality of this asset class lead to significant fluctuations in public equity pricing. Additionally, the requirement to distribute a considerable portion of capital and the necessity to engage third-party managers for the hotels are factors to consider. Do you reflect on the advantages and disadvantages of being public? Do you believe it's sustainable for hotel REITs to stay public in the long run?

It's an interesting question and definitely a fair one to ask at this time when we're facing significant challenges. Having extensive experience in this industry and having operated a private equity platform, I believe access to public markets, both on the equity and debt sides, remains crucial. The scale and, honestly, the lower cost of capital during certain phases of the cycle make this a viable platform. While the environment is tougher now, it's clear why that is the case. I see this crisis as an opportunity for a reset, which can lead to continued expansion and development in the future. We will prioritize what's best for our shareholders, including the possibility of selling assets or the company itself to maximize value.

Appreciate it Tom.

Our next question comes from Brandt Montour with JPMorgan. Please proceed with your question.

Good morning everyone. And thanks for taking my questions. Good morning. So just a quick question on some of the stats you guys gave in your release. On just the open hotels looking at August and September monthly results looks like you guys found some pretty nice gains in occupancy there and then into October. But then rate retrenched a little bit and it looks like that's a comparable set of hotels. So just curious sort of broader elasticity price elasticity of demand that you're seeing; was that sort of by design to take pricing back down, or is it more of a function just of mix moving into the fall?

Brandt, I mean kind of a quick answer to that is really truly is in the New Orleans Riverside impact, given the Xavier contract we had in there and the amount of rooms they've taken, which is obviously, as we mentioned, a great piece of business for a hotel that is mainly relied on group business that won't be there certainly through the first half of next year. So that business came online mid-August ramped up as the students came across Park. So it's really about a 400 to 500 basis point impact to the portfolio on a given month, but that hotel alone to the rate. So if you kind of remove that, you kind of see things more in line or more normalized on the rate decline.

That's really helpful. And then just a follow-up. I'm curious about the plan for managing operating expenses as you surpass the breakeven level for your hotels, which the 37 hotels achieved in September. What is the strategy? Are you going to focus on maintaining breakeven for the next several points of occupancy, or will you be aiming to maximize cash flow?

The focus is on the 0-based buildup aspect. We will concentrate on how we manage expenses closely. Looking at quarter-over-quarter performance, as we open and rent out hotels on the room side, we are at 80% flow-through, and for food and beverage, specifically the outlets, we are at about 40%. As we ramp up occupancy in these hotels, we will continue to be strategic. Breakeven does not mean we will immediately increase expenses; maintaining our market share and meeting guest needs are essential. We have discussions regarding enhancing our offerings, especially in food and beverage and guest amenities. We are gathering insights as we open hotels operating at 60% to 70% occupancy to apply those learnings to other properties. While we don't have specific numbers to share right now, we will be very disciplined as we work to revive this business.

Got it. Thanks for the comments. Good luck.

Thanks.

Our next question comes from Chris Woronka with Deutsche Bank. Please proceed with your question.

Hey. Good morning, guys.

Good morning, Chris. How are you?

Doing well, thanks. Hope you’re doing well also. I want to ask you about group business kind of in 2022 and 2023? And I know it's very early, but I mean, Tom, do you think that no matter where 2021 ends up, it's a transition year, doesn't really have anything to do with what you'll earn in 2022? Do you think there's a possibility that group comes all the way back, whether it's 2022 or 2023, and you actually have a higher group concentration than you did in say 2019?

Yes, Chris, that's a great question. As I mentioned earlier, we don't expect demand to really pick up until vaccines and therapies are widely available and adopted. If we receive positive announcements in the coming months and start the distribution process, we could see improvements in the second half of 2021. However, based on the discussions and tentative signs we are observing, along with insights from our peers, it seems that there will be considerable pent-up demand for social engagements, group events, and conventions in 2022 and 2023. This provides encouraging signals that we might return to 2019 levels for group business more quickly. On the leisure side, we anticipate continued growth as well. Regarding business transient travel, its recovery might be slower, but the need for face-to-face interactions will remain essential. Despite the challenges posed by COVID, we've adapted with various technologies, but we believe the core lodging business will rebound once we overcome current medical difficulties.

Yeah. That's helpful. The other question is as we think about you and your peers reimagining the cost structure at some of these full-service hotels, I guess particularly the urban ones. How much do you see the line blurring between select-service, especially newer select-service and full service? And the question in that is will the rate integrity be able to hold up if service levels are different?

Yeah. Another great question. Clearly, the value proposition has to be there. And so when you think about how the food and beverage experience may change, how room service may change. I think the reality is that the customer wants that limited touchpoint and probably more of that knock and drop. I think that could be a net positive from a profitability standpoint. As you know, room service has not been terribly profitable. I think on the banquet and how the meeting platform is going to change, I think there'll be other sources of revenue. So I don't see the full-service business getting to a commodity business if we manage it the right way. I think on the select-service and obviously, I know that sector well. It's becoming more and more of a commodity just given the amount of supply the secret's out. And so I do think, and given our footprint where our assets are located and the optionality that we have, we're very encouraged. As we look to the future, a very tough environment today; as we look out over the intermediate and long-term, really like our footprint, really like this portfolio particularly the core 30 hotels.

Okay. Very helpful. Thanks Tom.

Thank you.

Our next question comes from Stephen Grambling with Goldman Sachs. Please proceed with your question.

Thanks. Two questions. First, what are your thoughts on engaging in another timeshare conversion as a potential source of capital, especially given the strength in leisure? And then second, what changes do you think are being considered or should be considered in the structure of management and franchise contracts to better align owner, managers, and brands?

Thank you for the questions. I believe the timeshare business is quite resilient, and with the growth we're experiencing in leisure, it adds another advantage to the Park portfolio. It offers us flexibility in various scenarios, and we will keep exploring this. Our established presence, due to our size and distribution, could allow us to integrate timesharing into our residential fees. This is indeed an important topic we will continue to investigate. While I prefer not to discuss the specifics of negotiations, it's important to stress that our capital-light business model is only sustainable with a strong owner community. We need to consider various costs, including those from loyalty programs, sales and marketing, and distribution, which are prompting us to rethink our approach. Sean Dell'Orto and our asset management team have done exceptional work, and it's worth noting that the $70 million discussed pertains solely to labor costs, separate from allocation. We believe there are significant excess costs within the system that we need to address in collaboration with our brand partners and management companies.

Those are both helpful. One very quick follow-up on the timeshare side. I mean where do you think timeshare and resi valuations are versus pre-COVID and versus where you're seeing the COVID discount in the hotels now? Thanks.

Yes, I don't have that information, Steve, with me. It's a fair question. As you can tell just by the great progress we've made, we are laser-focused on our priorities, reopening hotels, getting the cash burn working on our balance sheet, and extending out maturities. Keep in mind we were proactive and had a need to given our debt profile. But to go back-to-back the way we did on the covenant relief and a lot of credit to the men and women on the Park team. This team knows how to execute and that's where our focus has been. You'll see us continue to explore on non-core asset sales where we also had a strong track record and you'll also see us continue to look for creative ideas whether it's timeshare, resi, or whatever, but given the footprint we have, there's a lot of optionality and a lot of embedded value in this portfolio. And as I said earlier that we're trading at a 65% to 70% discount to replacement costs. We know we will work a lot more than where we're trading today and we will prove it out over time.

That's great. Thanks so much.

Our next question comes from Robin Farley with UBS. Please proceed.

Thank you. Many of my questions have already been addressed. I want to revisit the topic of asset sales. I understand you've mentioned the long-term value in your core markets, but I’m interested to know if your plans for asset sales include more assets now compared to what you were considering before COVID. Thank you.

Yes, it's a fair question, Robin. Look, we are constantly coming through the portfolio. And as Sean mentioned there, we do have some assets that have a historical low tax base. We have some assets that are higher; there are some that we think are assets that are more attractive to a family office or private equity. So, all of that goes into the sausage maker as we're engaging in a dialogue. We've had a lot of success selling assets, as you know, the 24 since the spin that we've sold and 14 international, all of which were highly complex and whether the legal tax and European locations. So we are always in discussions. Where we have been hesitant is that we're not going to sell at 30% to 40% discounts. We don't have to. We have the liquidity. We can get to the other side, but we also know that these gaps are going to narrow, particularly as we get more visibility, and you'll see us pounce and be prepared to move quickly. And look, there will be a natural culling. There are some markets where it's just not long-term for us. There are other markets that are great markets, but we'd like to reduce our concentration. And so you'll see us continue to be thoughtful and disciplined about the decisions we make as a team.

Okay. Great. Thanks very much.

Thank you.

Our next question comes from Lukas Hartwich with Green Street. Please proceed with your question.

Thanks. Good morning.

Good morning.

Good morning. I have a quick question. Regarding operating efficiency, do you believe there are insights gained that can be applied to group operations once we return to a normal environment without group events?

Yes, it's a great question, Lukas. We're giving a lot of credit to Sean and our asset management team, as well as our operating partners. We are starting from scratch to reconsider aspects like labor and how we can incorporate technology. We're also responding to feedback and needs from our customers. Therefore, you can expect to see increasing efficiencies. We have opportunities to improve, reset, and reimagine this business, which could lead to greater profitability as an investment thesis in the intermediate and long term.

Great. Thank you.

Thank you.

Thank you. At this time, we've reached the end of the question-and-answer session. I would like to turn the call back to Mr. Baltimore for closing remarks.

Thanks all of you for taking time today. We hope that you and your families will stay safe and be well. We look forward to continuing the discussion with many of you at our upcoming Nareit virtual meetings, and be well.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for participation.