Park Hotels & Resorts Inc. Q4 FY2020 Earnings Call

Greetings and welcome to Park Hotels & Resorts Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Ian Weissman, Senior Vice President Corporate Strategy. Thank you. You may begin.

Thank you operator and welcome everyone to the Park Hotels & Resorts fourth quarter and full year 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 may 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 release as well as in our 8-K filed with the SEC and in 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 the industry as well as a review of Park's fourth quarter performance. He will also provide the company's views on 2021 as the industry recovers from the devastating effects of the global pandemic although we will not be providing full year guidance at this time. Sean Dell'Orto, our Chief Financial Officer will provide a brief review of our fourth quarter and full year results as well as a more detailed view 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 expressing my profound sadness that my friend Arne Sorenson is no longer with us. Arne was a giant in our industry and more importantly, we have lost a genuinely kind and compassionate human being. He was a loving father and husband and a true friend to many. For those of us who were lucky enough to cross paths with Arne, our lives are a lot richer because of it. Arne will be greatly missed. I send my sincere condolences to his wife Ruth and their children. As I reflect back on 2020, there is no doubt that last year was the most difficult period our industry has ever faced. And I could not be prouder of how the Park team managed through the adversity and met the challenges head on. As the pandemic began to take hold, we quickly took steps to protect our team members, preserve our liquidity position and plan for the long road ahead. Our efforts to significantly reduce operating costs by suspending operations at 38 of our 60 hotels, cutting our CapEx budget by 75%, suspending our dividend helped to meaningfully reduce our monthly cash burn rate to just $42 million during the fourth quarter. In addition, we made great strides to strengthen our balance sheet and liquidity position. And with the highly successful launch of two corporate bond offerings in 2020, raising nearly $1.4 billion of capital and amending our bank credit facilities. Finally, with the business stabilized and demand trends showing signs of improvement, we began to prudently and responsibly reopen hotels while identifying additional operating efficiencies including the permanent removal of $70 million of costs across the portfolio. We continue to actively pursue other potential cost savings as we ramp up operations at our hotels. Today 50 of our 60 hotels are opened, accounting for approximately 75% of our total room count. Despite some challenges across some of our core markets, we are optimistic that we will not need to re-suspend operations at any hotels based on our current outlook. Regarding our liquidity position, we currently have $1.4 billion of liquidity available to us with just $100 million of debt maturing through 2022. Turning to our fourth quarter results, as expected, we saw little performance improvement during the quarter with RevPAR down 85% as both group and business trends remained impaired by the effects of the pandemic. Our leisure business was down 78% overall for the quarter, while drive-to leisure continued to outperform on a relative basis. Occupancy at our drive-to leisure portfolio averaged over 33% during the quarter, a 120 basis point improvement over the third quarter. We witnessed relatively solid results at several of our resort properties, especially across South Florida. Key West remains one of our stronger markets, our two hotels Casa Marina and The Reach continue to outperform the submarket, with hotel occupancy averaging 70% during the quarter. I'm also pleased to share that the Casa Marina celebrated its 100th anniversary this past December, an important milestone for this iconic property. Looking ahead to 2021, we expect performance at our Key West properties to remain strong, aided by increased airlift capacity, which should help to support the pent-up leisure demand for the region. The year is off to a good start with January occupancy averaging 68% across the two properties and February is expected to be well above 80%, while the average daily rate is relatively in line with pre-pandemic levels. In Miami, we witnessed solid results at our Royal Palm Hotel as South Beach has enjoyed sustained positive leisure momentum, aided by Miami Day's decision to lift restrictions in October. Royal Palm's occupancy for the fourth quarter was 56% and increased to 69% in January with February on pace to hit 85%. Turning to Hawaii. The islands officially reopened for business on October 15 and visitors can now bypass the state's mandatory 10-day quarantine with proof of a negative COVID test within 72 hours of departure. We reopened our first hotel, a 647-room Hilton Waikoloa Village in mid-November, followed by the partial reopening of our 280-room Hilton Hawaiian Village Hotel on December 15. At Hilton Hawaiian Village, results were encouraging during the initial two weeks that the hotel was open in December, with Christmas week occupancy in the high 20% range and New Year's popping at 31%. This level of demand was enough to warrant opening two of the five towers during the holiday season. In addition, despite being nearly double the size of the nearest comparable property, Hilton Hawaiian Village materially outperformed its competitors on both occupancy and RevPAR throughout the holiday season by 33% and 19% respectively. Throughout the pandemic, Hawaii has been one of the most restrictive states in the nation, although the situation seems to be turning a corner. With the rollout of the COVID-19 vaccines and the drop in case count, state officials are close to easing travel restrictions, allowing for unrestricted interisland travel for those individuals that have been fully vaccinated as of March 1, while the potential for Trans-Pacific travel by May 1. This is very good news for demand trends over the back half of the year, with the continental United States making up 67% of inbound travel to Hawaii. We expect the first quarter of 2021 to remain challenging for Hawaii given the continuation of global travel restrictions. However, we are already starting to see signs of increased demand in that market with a noticeable pickup in February with the Hilton Hawaiian Village achieving 900 rooms occupied over Valentine's Day and the President's Day weekend combo. Waikoloa hosted over 500 occupied rooms. Rates are improving as more bookings are funneling through the higher-rated channels with a reduced reliance on OTAs. In the back half of the year, group bookings continue to hold. Our transient bookings have increased, which has been a consistent theme we heard from several of the main airline carriers to the islands. Overall, it looks like demand trends, cost efficiencies, airlift, and travel restrictions are all moving in the right direction and setting a much more positive tone for 2021. If we look out over the next 12 months, we have several key priorities we intend to focus on which we believe will help position Park for long-term success. First and foremost, we remain laser-focused on deleveraging the balance sheet with a long-term goal to get back to our stated range of three to five times net debt to adjusted EBITDA. While organic growth will be the primary driver, we will initiate the marketing process for several hotels as the bid-ask spread continues to narrow with the improvement in operating fundamentals. Overall, we hope to sell upwards of $300 million to $400 million in non-core hotels during 2021. We will provide further details on asset sales as they occur. Second, we look to safely and efficiently reopen the balance of our portfolio and continue to chip away at our monthly cash burn rate with a goal of returning to breakeven over the back half of the year. Finally, as we have noted on several past calls, we continue to work with our operating partners to enhance the hotel operating model. Overall, we believe that the efficiencies that we have already implemented over the past year and will continue to focus on as the sector recovers are sustainable and have the potential to realize incremental margin improvement over time. With respect to the broader lodging recovery, we remain encouraged by the progress that has been made on the vaccine front with nearly 70 million doses already administered in the U.S. At the current pace of daily vaccinations, it is estimated that by late summer or early fall upwards of 75% of the U.S. population could be fully vaccinated. We expect that lodging recovery will be further bolstered by a healthy U.S. economy as massive amounts of fiscal stimulus and accommodative policy continue to support the economy including the $900 billion plan Congress passed in December and an additional $1.9 trillion recently put forth by the President with the possibility of a significant infrastructure spending bill to follow as well. Additionally, the U.S. personal savings rate has soared to almost 14%, equating to over $1 trillion saved over the last 12 months, while GDP growth is forecasted to be near 6% for 2021. Against this backdrop, we believe there is significant pent-up demand, which should lead to accelerated growth beginning in the second half of 2021 as both business and leisure travelers seek to reclaim all that was lost in 2020. As more of the population is vaccinated and travel restrictions are eased, corporate offices reopen, demand trends will undoubtedly improve and we believe Park is incredibly well positioned to successfully lead our industry through this expected recovery phase. By and large, demand recovery is projected to follow recent trends with drive-to leisure continuing to lead during the early phases of the recovery, and with over 45% of our rooms located in drive-to markets, we believe Park remains very well positioned for this early phase of the recovery. We've been very encouraged with the improvement in demand since the beginning of the year with portfolio-wide occupancy improving sequentially over the last several weeks. We have witnessed particularly strong results at several of our drive-to and leisure markets, including Key West, Miami, New Orleans, Seattle, and Southern California. The next phase of the recovery, which we anticipate may begin to take shape during the third and fourth quarter of 2021, is expected to be fly-to leisure with a disproportionately high U.S. savings rate and pent-up desire for travel supporting demand trends across several of our key markets including Hawaii, Orlando, Miami, Southern California, and even San Francisco as restaurants and local attractions reopen. On the corporate side, however, there remains very limited visibility with many companies remaining more focused on when to bring workers back to the office full-time and less focused on booking travel at this point. The group side is expected to be similarly impacted by the lack of corporate travel in the near term. However, we are encouraged by the lead volume and group booking activities seen since November shortly after news of the vaccines were announced. With leads for 2021 doubling and definite bookings for the year increasing fivefold in January. In addition, looking out to 2022, group pace is largely holding firm at this point with rates up 3% over the 2019 levels. While the industry still has a long road ahead, I'm very optimistic about the lodging recovery and Park's relative position. I'm incredibly proud of the entire Park team, which worked tirelessly all year. And thanks to their hard work and dedication I am confident that we will emerge from this crisis stronger and more resilient than ever. And with that, I'd like to turn the call over to Sean who will provide some more color on our results and an update on our balance sheet and liquidity.

Thanks Tom. Overall, our operating results for the fourth quarter and the full year met our expectations, with RevPAR dropping 85% and 73% respectively. We reported a $65 million adjusted EBITDA loss for the fourth quarter and a total loss of $194 million for the year. The operating losses for the fourth quarter were partially offset by a positive $5 million property tax adjustment from successful tax appeals for our hotels in Chicago, along with about $5 million in cancellation and attrition income for the quarter. As Tom mentioned, we expect first quarter 2021 performance to closely resemble fourth quarter 2020 results due to ongoing challenges in corporate demand and the negative impact of travel restrictions on demand. However, we do foresee some positive exceptions, particularly in leisure markets like Key West and Miami, and in Washington D.C., where two of our hotels, the DoubleTree Crystal City and Hilton McLean, benefited from the presence of over 25,000 National Guard troops supporting local authorities. Occupancy at Crystal City exceeded 63% in January, while Hilton McLean reached over 82%, contributing an additional $2.4 million in revenue for the month. Regarding the 10 hotels currently suspended in our portfolio, most are situated in metropolitan areas of New York, San Francisco, and Chicago. While demand trends in these cities remain weak, there are some encouraging signs. For instance, in San Francisco, JP Morgan's Healthcare conference scheduled for January is showing potential to return to pre-pandemic strength in 2022. The majority of group contracts for our San Francisco hotel portfolio for 2021 have been successfully rolled over to 2022 at flat rates. Our Hilton Complex in Union Square has already transferred over 40 groups worth $4 million to next year, and the JW Marriott has contracted 75% of its 2021 commitments for the following year. In New York, we are beginning to notice benefits from the permanent closures of several larger hotels, including the Roosevelt, Grand Hyatt, and Hilton Times Square. The New York Hilton is securing groups with a longstanding relationship with the Roosevelt, and we see significant demand from corporate clients displaced by the other closures. We will keep a close watch on these urban market dynamics and aim to reopen most of these hotels before summer. Overall, we are optimistic about the demand pickup in key markets and expect to reach breakeven for our hotel portfolio in the latter half of this year. Looking at our balance sheet, as of the end of the quarter, we had over $1.4 billion in liquidity, including $474 million accessible on our revolver. Our net debt stood at $4.4 billion, with less than $100 million maturing before 2022 and a weighted average maturity of nearly five years. Last year, our primary focus was on strengthening our balance sheet and liquidity; our strategic plans for 2021 and beyond include reducing leverage through asset sales and available cash, lowering corporate level bank debt exposure, and extending maturities while maintaining the financial flexibility to pursue growth opportunities. The public debt markets remain favorable, and we will consider additional capital raises to further enhance our balance sheet as necessary. Regarding capital expenditures, we plan to gradually increase our maintenance CapEx program and restart select ROI projects, including the meeting platform at Bonnet Creek. In total, we anticipate spending approximately $40 million on maintenance CapEx in 2021 and an additional $20 million at Bonnet Creek, part of a $90 million project expected to be completed by late 2023. We will keep you informed on our progress. That concludes our prepared remarks, and we will now open the line for Q&A. Operator, can we have the first question please?

Thank you. Our first question comes from David Katz with Jefferies. Please go ahead with your question.

Hi. Good morning everyone.

Good morning.

Good morning or afternoon. I wanted to talk specifically about two markets. And I know you've given us some commentary around Hawaii and San Francisco. But with respect to Hawaii, the notion is that access by air travel is going to just continue to progress. How far out are you taking bookings? Presumably, those are entirely leisure bookings and with all of the sort of commentary we're getting from a number of different directions this week about leisure endeavors and consumer activities help us be balanced and not get too far ahead of ourselves with what Hawaii could be in say 2022?

Dave, it's a great question. Let me try to...

Talk me off the ledge.

Okay. Yeah. If I could just kind of frame Hawaii for you a little bit. Let's keep in mind that, Hawaii has had really fewer cases than – other than Vermont and Alaska, they’ve had fewer cases and fewer deaths. So that's level set about 27,000 cases as of this morning about 435 deaths. Any loss of life is certainly horrible as we all know. But when you think about the restrictions they put in place, how onerous they were from the 10-day quarantine to obviously now the 72-hour test – negative test before arriving, the state is moving to Tier 3. Tier 4 is completely unrestricted. So again, that's encouraging. Interisland travel is going to start here as of March 1 for those that have been fully vaccinated. And then when you think about vaccinations in Hawaii, 12% of the population has already been vaccinated, including most of the royal people. So all of the concerns that the governor and his administration and the stress that it may put on the facilities there, I think are being mitigated. And so that's a really encouraging backdrop as we think about that. There is significant pent-up demand in Hawaii. One, you've got really historical short booking patterns. You've got the airlines, so Hawaiian Airlines, United and Southwest, all ramping up, I believe Hawaiian Airlines for the fourth quarter they were running at about 35% to 40% of 2019 levels, and I think as high as 50% in December. And if you just look at what we're seeing on the last six weeks alone in Hawaii, we've gone from January three occupancy of 21% and into mid-February up to 36%. And so again, really setting a backdrop and let's not underestimate the need that we all have to reclaim recapture our lives. And as the vaccinations continue to accelerate here in the mainland and given the fact that really 67%, historically, have traveled to the Hawaiian Islands or out of the U.S. and Continental U.S., we are very, very bullish on Hawaii. We think that the second half of the year could surprise to the upside and we are very bullish on 2022 and beyond as we move forward.

Got it. San Francisco, I think is a bit more complicated, right, because we're – the business travel aspect of this in general in San Francisco in particular is a bit more complex. Can you just go a little bit further? I heard the JP Morgan data point, but what range of strategies, do you have to generate demand assuming that business travel does come around a little bit slower?

Yeah. It's another fair question. And let's again level set, right? You've got a mayor and a governor that essentially adopted as of December 4, sort of pretty aggressive stay-at-home orders. Hotels were generally restricted to essential travelers only. We've had – and you think about the CBD six hotels four of them remain closed. And obviously, you've had 10-day quarantine for anybody traveling to or returning to San Francisco. And those probably aren't going to be relaxed, we believe until probably late February. But if you look at the two hotels that are open, even through Q4, we were running about 24% occupancy, and if you think even there ramping up January and February in both properties were about 16%, 17% occupancy, about 26%, 25%, 26% in February. We expect Q1 to probably continue in that low 20% range. There's very little citywide business here in the first half, but if you look at the second half of the year, the Game Developers Conference in July is still slated to continue. The Dreamforce Conference in September is still slated to continue. And there are 18 events for about 363,000 room nights for the second half of the book. Now that doesn't compare favorably to what was the record in 2018, 2019 of about 1.2 million room nights. But again, look, we know San Francisco is a challenging environment. It is still one of the great cities of our great nation out of the world. We're not prepared to write it off. There are some challenging issues with the Healthy Buildings Ordinance. And we continue and I've written two op-eds about it that we don't think that's a health bill or a safety bill. It's just a jobs bill. But we are encouraged by some recent discussions recognizing that tourism is such an important part of the local economy there. And so we are optimistic over the intermediate and long-term. We certainly think that 2021 is going to continue to be a little softer and clearly going to be a little slower ramp-up there certainly within our portfolio and within the industry. But over the intermediate long-term, very bullish on San Francisco and the opportunities that so remain there.

Thank you for those. Appreciate.

My pleasure.

Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.

Hi. Thanks. You mentioned in New York that you're starting to benefit from some of the permanent closures. Are you starting to see that in any other markets, or are there other markets where you think you could see supply contract?

It's a great question. Sean provided some insights on New York. Currently, there are about 129,000 hotel rooms in New York, with estimates suggesting that as many as half might still be closed, some permanently. We see a significant opportunity to adjust that number. One of the issues in New York has been the increase in supply over the last five to seven years, primarily due to limited service hotels. Only a few hotels have large meeting spaces, and we believe that the Hilton New York, which we own, has the best facilities. As other hotels either convert or close permanently, we expect to capture a significant portion of that business, which will help us strengthen our position. We have always maintained that we should leverage our strengths; we focus on group business, followed by contracts, and then transient yields. New York is an iconic city facing some challenges, especially as it was heavily impacted at the start of the pandemic. However, it is clear that New York will recover, and we are already noticing some positive signs. We anticipate that openings will likely commence in the middle of this year as we analyze demand patterns. We have been closely monitoring this situation across our portfolio. After we initially closed 85% of our hotels and reopened them gradually, we haven't had to suspend operations again; we only made slight reductions. This success is a testament to Sean and the asset management team's effective management of the challenges we faced. There are indeed promising signs in New York. As we look towards group business in 2022, we believe the anticipated decrease in supply will positively impact New York in the medium to long term.

Thanks. And then, I guess just maybe a little bigger picture as the recovery kind of gets underway at some point hopefully later this year. Are you thinking at all differently about Park's strategy in terms of initially the sort of expectations to group up, or do you think maybe there could be more of a focus on leisure and resort sort of historical drives to given its resilience, or how are you just thinking about the portfolio, I guess over the next few years?

Yes, Smedes, that's a great question. We are very confident that our strategy of building a portfolio of upper upscale and luxury assets in the top 25 markets or premium resort destinations is the right approach. We will continue to monitor demand patterns and population growth. You can expect us to assess opportunities in key markets such as Phoenix, where we already have a presence, and we are looking to expand in Denver over time. Austin is another market I know well from my previous experience. We're also seeing growth in Nashville, the southeast, and particularly South Florida, which we believe will continue to develop. However, we are not ready to explore what we would consider non-top 25 markets that might be more suburban and lack diverse demand sources. We value having a balanced portfolio that includes strong leisure, transient business, and group segments. Currently, leisure represents about 35% to 40% of our portfolio, and we have a significant leisure presence in areas like San Diego, Southern California, parts of Northern California, and South Florida, along with New Orleans. Our leisure properties make up about 61% of our hotels, which is approximately 35 to 36 of our locations. We believe we are well-positioned today, and we will continue to adapt, but we are not inclined to make hasty decisions that would lead us to abandon strong markets with high barriers to entry and replacement costs, especially considering that we are likely trading at about 50% of replacement cost. Replicating most of our portfolio in terms of geographic footprint would be extremely challenging.

Thank you.

Our next question comes from the line of Dany Asad with Bank of America. Please proceed with your question.

Hey, good afternoon everybody.

Good afternoon, Dany. How are you?

I’m doing great. Thanks. So you guys have done a pretty commendable job at being as nimble as you've been with your CapEx deployment. But then just looking ahead to this year and possibly 2022 are there major ROI projects we should be thinking about that are kind of coming up? And then looking on the maintenance front, is there anything that's been either delayed or deferred in the last call it 12 months or so that we'll need to either think about or that needs to be addressed?

Dany, it's a great question and thank you for the compliment. I again want to commend the Park team. When you think about what we were faced with nearly a year ago, we made clear and decisive actions, we suspended operations, we suspended our dividend, we reduced CapEx by 75%, we immediately focused on liquidity and our cash burn rate. And I would submit that this is a very experienced team, not our first crisis. Obviously this was the worst crisis that any of us have seen. But we were steady. We didn't panic. We knew exactly what to do. A lot of credit to Sean and our finance team as we went out and did two bond deals to push out maturities and secure liquidity. And candidly I think there were some out there that wrote us off for dead. And I think we've shown just how experienced and capable the men and women of Park are. So I want to state that because I think it's really important. As we think about CapEx as Sean mentioned we are going to restart, obviously, our Bonnet Creek world-class resort. We think the positioning for that over the intermediate and long term is to expand the facility and upgrade the brand to the Signia brand by Hilton. So we're really excited about that. When you look at all of the embedded opportunities within our portfolio and I'll just mention a few. Hilton Hawaiian Village, we're working on getting an outparcel, which would allow us to do a six tower. Hilton New Orleans Riverside, there is the whale lot there, there's eight acres adjacent to our hotel and the convention center that has probably the equivalent of five million square feet FAR. If you think about the Waldorf Casa Marina, we have two adjacent sites there and Key West gives us also continued optionality. The DoubleTree that we have in San Jose, we're slating that for an upgrade to the Hilton brand. The Hilton Santa Barbara that we converted from a DoubleTree is a huge success. And of course The Reach Resort that we completed last year, making that a Curio collection has been a huge home run as well. So we'll continue to comb through. We'll have more information as to our ROI. But there is significant upside in this portfolio embedded within our existing footprint that we really want to continue to focus on here in the next few years to realize some of that great upside.

Got it. Thank you very much.

Thank you.

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

Hey, good afternoon everybody. Thanks for taking my questions here.

Hi, Rich.

Hey. Tom. So I'd like to follow up on the New York Hilton really quickly. So we all sort of know that the issues perhaps with that asset pre-COVID never really surrounded occupancy. It was more of a rate and an overall profitability hurdle that we had to sort of get over for various reasons. So maybe take us through the future in that regard? As you steal share from hotels that are closing down permanently, would that be higher-rated business? And then, help us understand maybe the cost structure given the union presence and some of the other moving parts there going forward?

There's a lot to unpack in that question. Let me get straight to the point, which I believe you'll appreciate. The operating environment, especially with the current CBA, is quite difficult, and anyone with hotels in New York understands this. Our EBITDA margin is on the lower end of the portfolio. Given the current crisis, we have been diligently working with our operational partners and discussing with the union about ways to adjust our model. While nothing is easy or guaranteed, we believe that with 25% to 50% of the supply being affected, there’s a natural advantage there. A decade ago, New York was one of the best hotel markets, and I have a long history with investments in this area going back over 25 years with Hilton. With the increase in limited-service supply, we've experienced rate erosion. However, we believe only three hotels possess the capacity for group business meetings, and we have the best meeting space available. Our plan is to attract group business, which will, in turn, help us raise rates in transient business. We remain optimistic about the medium to long-term outlook. Currently, the hotel has been closed for a year due to travel restrictions, indoor dining limitations, and gathering limits imposed by the government, which are beyond our control. Additionally, we are aware of capital flight and how people perceive New York’s future performance. It would be a significant error to discount New York; similar attempts have been made in the past, and they have proven unsuccessful. Looking back at 2011, there were about 140 days of super compression when the market was over 95% occupied, giving us substantial pricing power. In contrast, in 2019 and 2020, that number dropped significantly. This presents an opportunity to reset and optimize operations, including potential job combinations or partnerships with other owners to manage costs. All of these options are being considered. Given the iconic nature of our asset, there is a considerable amount of embedded value, and we’re open to exploring all avenues, including our existing timeshare component, to maximize value for our shareholders.

Okay. I appreciate those thoughts, Tom. Maybe to switch gears to another topic, but how do we think about the trade-off in terms of equity issuance, so to speak, via asset sales for equity issuance in the normal manner with increasing the share count? And we can obviously see where Park, as a whole, is trading versus pre-COVID and maybe compare that to the implied discount if there is one on the $300-or-so million of non-core asset sales. So help us think through maybe the cost and the benefit of the trade-offs between those two forms of equity in the context of the ultimate goal of deleveraging?

Yes, I believe this is straightforward, Rich. I have been consistent for a long time. The last thing this management team will do is issue dilutive equity. We see no advantage in that. Considering our current trading position, we are still at a 50% to 55% discount to replacement cost and at a significant discount to our internal net asset value. Therefore, pursuing an equity offering right now would not be wise for shareholders. We think a more judicious capital allocation choice is to continue selling non-core assets. We began selling intentionally at the start and middle of last year when the COVID-related discount was 20%, 30%, or 40%. We didn't need to make any moves due to other wise decisions we made. We believe that conditions will improve, particularly as vaccinations increase and confidence returns, which will encourage more travel. We think it will be more sensible to sell those assets in 2021. We are publicly stating our targets, and we already have activities in progress. We remain cautiously optimistic. We will also use the proceeds to reduce our debt and continue to lower leverage organically. If our stock continues to recover, we will use equity for growth opportunities, possibly over-equitizing a little at that time. However, we do not see the necessity for an equity offering now. In fact, we have received numerous inquiries from bankers when we were trading at $13, $14, or $15 after the vaccine, but it didn't make sense then and doesn't make sense now. We've also had many inquiries about ATM programs, which we have wisely declined. Looking back, we would have regretted any moves made given how the stock has performed, yet it remains undervalued, and we are still trading at a significant discount.

Got it. Thank you.

Thank you.

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

Hi. Good afternoon, everyone.

Hey, Anthony.

How's it going? Just a question on CapEx, I guess, competitive CapEx. One of your large peers is spending a lot on various hotels in your markets and they're saying, they expect to gain market share as kind of business comes back over the next several years. Do you buy that argument? And do any of your hotels in markets like New York, San Francisco, Orlando, Boston needing any kind of just regular way maintenance CapEx in order to compete with those refreshed properties that are going to be competing with you?

It's a valid question, Anthony. I'd like to make a few points. Our capital expenditure has been around 6% of revenue, and we've maintained that level consistently over the past five years. The Hilton Blackstone has invested significantly in the portfolio at this 6% rate that we are continuing to uphold. While we would have liked to proceed with Bonnet Creek, we believed it was more prudent to ensure we have sufficient liquidity for the overall business. We plan to increase our spending, and as I mentioned, there are numerous embedded return on investment opportunities which we will continue to evaluate and prioritize in the near future. Overall, we don't have much deferred maintenance in our portfolio, so we feel confident in our current position and will approach future investments thoughtfully.

Got it. And, I guess, on market concentration you're selling some non-core assets. I'm guessing those aren't in Hawaii or San Francisco. How do you view earning over 20% of your EBITDA in those two markets 25% or higher in Hawaii? And just how you look at the risk of having that exposure to any one market as you evolve the portfolio?

Yes, it's a valid question. We are confident in our overall strategy and in the strategic rationale for the Chesapeake acquisition. It has enhanced our portfolio by providing brand and operational diversification, as well as improved geographic diversification. We have expanded our presence in San Diego, Denver, Miami, Los Angeles, San Francisco, Boston, and D.C., which has positively impacted our growth profile. Ideally, I would prefer no single market to account for more than 15% to 18% of our portfolio. However, with an iconic portfolio like the one we have in Hawaii, it's irreplaceable. Once we return to a more normalized environment, we believe the interest in Hawaii will persist, and we can reduce our exposure over time by growing in other markets as opportunities arise. It’s possible to slightly decrease our presence in San Francisco without reflecting a lack of confidence in the long-term potential of that market. As we consider growth areas, there are clear opportunities in places like Phoenix, Austin, Nashville, South Florida, and Central Florida, all of which are expected to see continued growth. We intend to follow demand and population trends, as historically, targeting markets with diverse sources of demand has been a sound strategy.

Got it. Thank you.

Thank you.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning, Tom. I noticed that you've stopped making debt service payments on the W Chicago. Considering the labor issues you've discussed in that market, what do you see as the future of your presence in Chicago? Given that those assets were not particularly favored in the market initially, should you have exited sooner?

It's easy to reflect on the past, Bill. When we closed in September 2019, we were then impacted by COVID, which hit us hard. I consider Chicago to be in a similar position as New York and San Francisco, facing significant challenges for various reasons that you are well aware of. However, I wouldn't count Chicago out; it's one of the great cities and will recover. The situation regarding that asset is particular, and we would like to discuss it with the special servicer. However, conversations can’t proceed while payments are ongoing. We have ample liquidity and more than 2.5 years of options available. As you're aware, we've made certain strategic moves, and I wouldn't interpret those as anything more than what they are. We are also collaborating with Marriott to integrate operations at the two Ws, which we see as very promising with plenty of options ahead.

But Tom, to push back a little, you mentioned the markets recovering, and I agree with you. However, take New York for example; was the Hilton profitable in 2019 or 2018? It seems that some of these markets were already declining before everything went down. Now we have companies moving to other markets and a widespread remote workforce. Even if they do recover, will they be able to achieve profitability?

Yes. Historically, that asset was generating higher margins and significant cash flow. When I rejoined Hilton to spin out, it was still among the top five or seven in this portfolio in terms of EBITDA. It has always been NOI positive, though lower margins compared to other assets in the portfolio. Last year was an exception because it was closed, and we still have underlying costs. There’s definitely an opportunity for a reset, and we are aware of the challenges. We’re experienced and are actively working to find ways to reduce costs; we've already cut $70 million and improved the entire portfolio by about 200 basis points. New York presents a significant challenge, but we are prepared to tackle it. It's our only asset in Manhattan, and it's irreplaceable. There are also other potential revenue sources we can explore over time. There are broader issues in New York, with capital flight and relocations, partly due to the pandemic, along with concerns about security and safety. It's crucial that business leaders and the new mayor and governor step up to address these issues since New York is one of the great cities of the world. Many of us hope to return and enjoy the vibrant restaurants, theater, and shopping. Writing off New York seems overly pessimistic to me; I believe it will recover, but I don't expect that to happen in 2021.

All right. I appreciate the time. Thank you.

No, thank you.

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

Hello everyone. Good afternoon.

Hi, Neil. How are you?

Hey, it's great to wrap up earnings on a positive note. I think we all feel that way. Building on Bill's comments, I want to clarify something because it seems there's a bit of mixed messaging. While you want to stay true to your core market, you are also responding to demand. I believe your observations about major American cities are accurate from a top-line perspective. However, considering the current labor situation and the potential impact of safety legislation, particularly in California where Prop 13 may lead to higher taxes, I wonder if you believe you can return to pre-COVID conditions in those major markets. Would you say that's a fair assessment?

Yes. It is fair to say and I hope I'm not giving mixed messages. Look we understand that in the near term, you can cite those three markets, obviously, New York, Chicago, and San Francisco, which they're largely closed by government mandate given the fact that we're still here pandemic and we will be coming out of that. But there are significant investments across this great nation that have been invested in those cities. To completely write them off, I think is a bit premature. And to think now that we're all going to relocate, you're going to see some capital flight. You're going to see certainly some migration, probably more coming out of New York right now. And part of that is going into Florida for all the reasons that we know. But I also think that that creates an opportunity to sort of rightsize. Remember, we have a completely diversified portfolio from incredible iconic real estate and other parts, whether it's Hawaii, whether it's in Boston, whether it's in D.C., San Diego, New Orleans, South Florida, so this is not dependent on just those three markets. Those markets may lag a little, but I think it would be premature to sort of write them off and say we should abandon them at this point. I also think it's probably not reasonable to think that we would abandon our top 25 market strategy and then pivot so that we're chasing more suburban assets top 30 top 40. You're not going to have the barriers to entry. You're not going to have the sources of demand. We certainly want to add more resorts as would everybody, given the opportunities that exist but that will also be a very competitive footprint. You've got to be careful. We think there are really prudent investment ideas within our existing footprint given the amount of ROI opportunities that also exist.

Okay. I always appreciate that. Thank you. Last one for me. I think actually more for Sean, who's been relatively quiet. But just in terms of I guess how you think about balance sheet progression versus growth, I guess maybe Tom to take this as well, but you guys have done a good job getting ahead of sort of liquidity maturity issues. But at the same time, you also have more leverage and now higher coupon parts in your capital stack. So a lot of companies talk about sort of being opportunistic having the capacity, your ability to sort of acquire, it seems like you guys maybe have a little bit other things to work on kind of before you'd start being acquisitive. So maybe can you just kind of talk about your thinking on that? I understand it's early very early in sort of recovery but how you kind of weigh those things just given Tom, you're outspoken in nature about being an industry consolidator? Thanks.

Yes. I mean, I'll take the comment here about sort of industry consolidation. Look we are – I've been saying it now for certainly north of a decade or more that it makes sense. The fact that we've got – I can't remember, how many lodging REITs we have and some baby REITs along the way. We're 10, 11, 12, 13, 14 be a more efficient use of capital to have a fewer players. But look, I also acknowledge that when you think about us buying Chesapeake or the other two deals with RLJ, FelCor or Pebblebrook and LaSalle, none, one of them have been incredibly well received by investors. And so that clearly is something that we'll continue to monitor. But we don't see consolidation here in the near term. We are focused, as we articulated on – continuing to reopen hotels, sell non-core assets, reduce debt, use those proceeds plus excess cash to continue to reduce debt. I would disagree with your point of given our leverage we don't have optionality. We have plenty of optionality, given within the covenant framework. We also have the ability, as Sean noted, we'll continue to look at the balance sheet and continue to push out maturities. I also don't think you're going to see a lot of transactions but I would say bigger. With those more strategic, I don't see those occurring this year. I think those as we work through the recovery continue to get better visibility. I think those of being 2022 and beyond, you can rest assure that Park will be in position to be able to compete at the appropriate time.

And I'd just add real quick too just to think about the balance sheet and some of the kind of things we've accessed is for us too in our scale, we do have access to a lot of different markets. We'll continue to monitor those and opportunity just to address, as Tom said, our maturities as well. But I think, certainly cost of debt, it depends on what you go after. And certainly the bank debt has been one that I think the entire sector kind of took advantage of the last cycle, and I think it's been overexposed to it. So, certainly our drive is to kind of reduce that exposure and have far more flexibility with some of the things like bonds going forward.

Okay. Appreciate you guys thought. Thank you.

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

Good afternoon, everyone. Thanks for taking my question. So just on the operating model enhancements and the $70 million of permanent labor expense from where you guys are initiating soon. Just curious what types of jobs are being cut? Is it mostly redundancy related, or is it more of a tactical removal of certain services? And then I guess on a follow-up would be is it uniform across the portfolio, or is it heavier in your larger assets?

Yes, it is pretty well distributed across the portfolio. Many of the positions being cut are management roles, like banquet managers or front desk managers. Clearly, larger properties will see cuts due to the number of employees. Unfortunately, we had to let go about 1,100 property-level staff through this process. However, we're not reducing services; instead, we're in a position to rethink our operations after experiencing a complete drop in revenues. This has allowed us to make some significant decisions. We are confident that these cuts will be permanent, as we are focusing on achieving more efficient operations over time.

Okay. Thanks for that. Sean and maybe another one for you and maybe you can answer it, but are you able to maybe give us a measure of EBITDA sensitivity or flow-through to RevPAR top line growth as you sort of build back demand as maybe your peers were able to measure that in a certain range? But I don't know if you could give us anything that could help us understand how that could play out?

If we increase occupancy, the flow-through will be impacted. We will gradually reintroduce some amenities, particularly in food and beverage. As revenue returns, we expect a flow-through rate of about 50% to 60%. However, with a pure rate profile, the flow-through could be between 80% to 90%, depending on the specifics. Historically, this has been our experience, and it may even improve with higher occupancy. Additionally, initiatives like clean stay have shown a slight positive effect on costs, which helps counterbalance the extra expenses from additional labor and materials we have encountered. As occupancy rises and stays get longer across our portfolio, we anticipate seeing early benefits that can help manage the gradual costs associated with reintroducing services like food and beverage.

Excellent. Thanks for the comment, guys.

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

Hi. Thanks. I guess a few follow-ups. And starting with the margins and Brandt's questions there. Does the $70 million consider any benefits from changes to distribution that could be permanent as you I think you mentioned less OTA mix? And are there any offsets we should think about in our models whether it's labor insurance or taxes, or is that in that $70 million number?

The $70 million solely relates to a reduction in force. I'm uncertain about any connection to concerns regarding taxes and similar issues.

Yes. Just considering if there are any other permanent cost reductions we should be aware of as you look at the business. You mentioned the sensitivity in a recovery, but regarding OTAs, should we expect that to be permanently lower based on what you've observed, or could it potentially rise again?

I think OTAs currently make up a larger portion compared to historical levels. We anticipate that these will become more significant drivers over time, particularly with the return of brand and other sources. We are also observing an increase in discount leisure options within OTAs that wasn't expected as we ramp back up. In the short term, I believe we will experience some savings on property taxes, especially in jurisdictions where property assessments are based on income. We've already started to notice reductions in assessments and in the actual bills. This isn't just about waiting for rates to increase; we are seeing decreases in certain areas, including a one-time appeal in Chicago, where we expect another reduction during its tri-annual assessment this year. Therefore, I anticipate some tailwinds in property taxes moving forward. The insurance market remains challenging, but I see signs of it softening. We have a renewal coming up on June 1, and I hope to see slight rate increases, along with offsets to insurable values due to lower business interruption levels resulting from decreased income. Overall, I think we may experience a pause in some of the increases we've witnessed in the insurance market over the last couple of years, allowing us to get some relief.

That's helpful color. And then as another follow-up just on the balance sheet, I think folks have historically been looking at net debt-to-EBITDA ratios but with where interest rates are and the flexibility in your covenants, how is your perspective on the right leverage for the enterprise evolve? And what are the most important metrics that you're watching from here on out?

I mean I think we still hold by the range of 3 to 5x leverage. We've always wanted to kind of get to the lower part of that range. We've been hovering about 4x pre-pandemic so we'll obviously with the burn, we'll see net leverage to graduate up to about a turn or so based on kind of 2019 levels of EBITDA. So we'll have some work as we've talked about at selling assets, utilizing cash flow as you go forward to reduce debt and get closer to that target. But I think that's the right target even if you think about interest rates popping up some I think that's where we're fine at the lower 3x.

Got it. Thanks so much.

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

Hey good afternoon guys and thanks for hanging around with us, past the hour. Yes, doing well and thank you Tom. Thanks. A question for you Tom is, how do you think cancellation policies evolve as we kind of come out of this? And there have been a lot of progress over the years? And then obviously things change pretty quickly. But how do you see it evolving coming out of this? Do you see any kind of new opportunities that might come out to further yield up, or just any of your thoughts there would be great?

It's a great question because we made significant progress before the pandemic, and I hope that as we enter the post-COVID era, we can return to where we were. I think the impact on hotels and other services started to lessen, and I'm cautiously optimistic about that possibility. However, I don't see this happening in the near term since we are still navigating the pandemic. Throughout this crisis, I've observed unprecedented communication and collaboration among owners, operators, and brand companies, all working diligently to streamline operations and reduce costs. Both Hilton and Marriott have made difficult choices to downsize their workforce and improve efficiency, and I believe this trend will continue. We will not revert to the previous business model, and advancements in technology will prompt us to rethink our approaches as we explore ways to cut costs further.

Okay. Very helpful. That's all for me. Thanks.

Our next question comes from the line of Robin Farley with UBS. Please proceed with your question.

Great, thanks. Just to maybe take one more try. I had a little bit of clarification on the comment about asset sales. I know you talked a lot about the markets that you see us still growing and markets that over the long-term may take longer to get back. Can you sort of characterize for the assets that you would sell that you see as non-core? Can you kind of characterize what that means then right? Because I think we have a good idea of kind of what you value in assets. So how would you characterize the noncore when you think about that $300 million to $400 million?

We have historically sold 25 assets for approximately $1.2 billion, with 14 of those being international. This indicates that we made the right decisions at the right times. As we consider other assets, the remaining ones were either lower in revenue per available room, located in slower growth markets, functionally obsolete, or required excessive capital expenditures. We will apply similar analysis moving forward. There may be smaller properties that do not align with our long-term strategy, and some markets might have more concentration than we prefer. This provides an opportunity to realign and adjust. Additionally, certain assets might be more suited for owner-operators, allowing us to sell and manage without the constraints of branding. All these factors will be considered as we aim to maximize value for shareholders. We were cautious about pricing during the pandemic, but now that visibility is improving, we are optimistic about selling at attractive prices, primarily to reduce leverage. We believe this is the right decision for capital allocation at this time.

Okay. Great. Thank you for that added color. And you mentioned wanting to add resorts. And I guess would you wait until your balance sheet is investment grade, or kind of what is your target for that before you'd be willing to buy something?

Yes. We certainly aren't going to wait for investment-grade and obviously that we believe investment-grade would be a little ways off. And as Sean mentioned, we need to get into the low 3s. And clearly we're above that today. You would expect I think more activity on the buy side here the latter part of this year into 2022 and beyond. And clearly, as the recovery takes hold and I don't think it's inconceivable that it could be a pretty significant snapback particularly on the leisure side. I would also expect it's going to be a fair amount of competition also for those types of assets for the obvious reason. I think we all know that this recovery is going to be led by leisure both drive to and fly to.

Hi Tom. I have one more question. In Hawaii, I'm curious about how you think the recovery will progress between Oahu and the Big Island. Do you expect the recovery to be similar in both places or will there be some differences?

If you think about Waikoloa right now, I want to give a lot of credit to Sean and the team for all the work done before the spin. That hotel was likely too large with 1,200 rooms, and now we're resizing it to just over 600 rooms with the right meeting footprint. It's very efficient. Typically, those who visit start in Oahu and then move to the big island, which is a common pattern. There’s a lot of space here, and as we continue to find ways to save costs across the two properties, the synergy between them is very positive. We're very optimistic about both assets.

There are no further questions. I'd like to hand the call back to management for closing remarks.

Thank you. We really appreciate everybody taking time today and we look forward to discussions with many of you over Raymond James and the Citi conferences and stay safe and be well. We look forward to seeing you all in person hopefully sometime this summer or early fall.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.