Park Hotels & Resorts Inc. Q2 FY2021 Earnings Call

Greetings and welcome to Park Hotels & Resorts Inc. Second Quarter 2021 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 Second Quarter 2021 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 last night's earnings release as well as in our 8-K filed with the SEC and the supplemental 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 second quarter performance and thoughts on the balance of this year. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on second 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 am pleased to report that widespread leisure demand accelerated during the second quarter, leading to stronger-than-expected operating performance, which ultimately drove breakeven results at the corporate level during the month of June, well ahead of expectations. We continue to make progress on strengthening our balance sheet, raising an additional $750 million of attractively priced senior secured notes, and announcing nearly $480 million of asset sales with net proceeds being used to repay debt. Given the meaningful improvements to both operations and the balance sheet, we are in a great position to once again prioritize growth opportunities, including ROI projects and selective acquisitions. On the macro front, the combination of strong economic growth and stimulus, high personal savings, widespread availability of vaccines and the corresponding easing of COVID-related restrictions has fueled a resurgence in leisure travel. The pace of economic growth has accelerated meaningfully since our last call. GDP reached an all-time high during the second quarter and is now forecast to increase 6.6% for 2021. Nonresidential fixed investment, which is highly correlated with lodging demand, is estimated to grow by 8.4% this year, 60 basis points higher than our last call and by an additional 6% in 2022. U.S. savings sat at $1.7 trillion as of June. And with roughly two-thirds of the U.S. population over 12 years old now vaccinated, all signs do point to a return to in-person schooling and work for many people post Labor Day assuming for now that the Delta variant does not alter this progression. The ongoing return of normalcy is an important catalyst for our industry's recovery. While we have all benefited from strong leisure demand in recent months, this next step should allow for the resumption of business travel, corporate group, and convention business. None of us can be certain of the shape or the pace of the recovery, but I strongly believe that the fundamental desire to be with people face-to-face will again prevail. We continue to work closely with our brand partners to ensure we are offering our customers what they need: enhanced safety and cleanliness, more automated and digital amenities, and flexible workspaces to blend between business and leisure. I am thrilled with Hilton's recent announcement for opt-in housekeeping at the majority of its hotels. We believe that measures like these will push the industry in the right direction, not only from a profitability standpoint but also from an environmental standpoint. For Park, we have five key priorities that I would like to highlight. First, we are focused on reopening our three remaining suspended properties located in the New York and San Francisco metro areas. Second, we are seeking to maximize RevPAR by pushing average rates in the strong leisure demand markets while positioning ourselves for select business and smaller SMERF and corporate group opportunities to build occupancies in urban, suburban and airport locations. Third, we remain laser-focused on implementing operational efficiencies to increase profitability and realize the $85 million in cost savings or nearly 300 basis points of margin improvement we've mentioned on previous calls. Fourth, we continue to make progress on deleveraging our balance sheet through asset sales. And finally, pivoting now to offense to drive earnings growth through accretive investments, including value-enhancing ROI projects, like our Bonnet Creek Signia conversion and meeting space expansion while eyeing several other potential brand conversions and repositionings within the portfolio. With respect to future acquisitions, we anticipate being very active as we head into 2022 with a continued focus on upper upscale and luxury hotels in top 25 markets and premium resort destinations. Turning to our second quarter results. Consolidated RevPAR came in 25% higher than expected, driven by incremental growth in both occupancy and ADR in select markets. Performance at our hotels and leisure-oriented markets helped us generate $33 million of adjusted EBITDA or more than $60 million ahead of the forecast we set at the beginning of the quarter. Results at our leisure-focused properties continue to surprise to the upside with 5 of our hotels meeting or surpassing 2019 occupancy levels, while 10 of our hotels surpassed 2019 ADRs by an average of 25% during the quarter. The phenomenon of revenge spending is very real and has led to pricing sensitivity fueled by higher-than-average savings and cabin fever. Our Royal Palm hotel in Miami, for example, grew ADR by $47 or 25% over the second quarter of 2019, while our two resorts in Key West, which have continued to see incredible demand, recorded quarterly occupancy of over 92% and an ADR of nearly $500, leading to nearly 50% RevPAR growth over the second quarter of 2019. In total, our open hotels saw ancillary out-of-room spend increase 65% to $26 on a per occupied room basis during the second quarter compared to the same time in 2019, highlighting the pent-up demand for perceived extras such as golf or spa treatments as well as the appeal of drive-to destinations, which provided incremental parking revenue. Note that this figure excludes food and beverage, as many of our outlets were closed during the quarter. As our food and beverage outlets reopen, we expect to see incremental growth in our total RevPAR stats. As restrictions eased during the quarter, we reopened the W City Center in Chicago in mid-May, followed by the Hilton San Francisco Union Square just before Memorial Day, and the Hilton Chicago in mid-June. We were able to move up the full reopening of all five towers in Hilton Hawaiian Village due to the robust demand we've been seeing in Hawaii. We now have 90% of our total portfolio rooms opened and hope to reopen our remaining three hotels over the coming months as we evaluate the near-term business demand trends in these markets. From a segmentation perspective, leisure demand doubled from the first quarter and accounted for roughly 70% of total demand, benefiting from strong performance in Hawaii, in particular. While we are still seeing very modest numbers overall, both business transient and group revenues also doubled from the first quarter, supporting the trend we are seeing of increased mobility. Over one-third of our total group business for Q2 was picked up in the quarter for the quarter as people gain confidence and restrictions eased. We are seeing group pace picking up beginning in the fourth quarter with confirmed bookings pacing at roughly 50% of 2019 revenues. Looking ahead to 2022, we are trending at 72% of pace for 2019 at the same time in 2018. Our top group markets for 2022 include Hawaii, New Orleans, Key West, and Orlando. As we mentioned on our last call, we have been working tirelessly to reimagine the operating model to find incremental permanent savings across our portfolio. Adopting the adage of 'never waste a crisis,' we've identified $85 million of savings, which translates into nearly 300 basis points of margin improvement on an annualized basis. All across our portfolio, our asset managers have challenged our operating partners to think creatively, cross-utilize staff, and reexamine contracts and procedures. In Hawaii, for example, we combined management of our two resorts under one executive leader and implemented several new operational synergies, which resulted in roughly $1.5 million in savings in the second quarter. We have modified operating hours or changed food and beverage outlet concepts to mitigate losses stemming from low occupancies, and we have reimagined how these outlets can operate more profitably moving forward. We remain confident that with the support of our brand partners, we can translate these modifications into permanent practice going forward. As another example of proactively sourcing operating efficiencies across our portfolio, we are very pleased to have transitioned our four self-managed select service hotels to third-party management arrangements in July. Combined with our exit on these three laundry facilities last year, we no longer directly manage any properties, which is a significant savings to our operating model going forward. Diving into our markets. As we have forecasted on our last call, Hawaii has seen a huge acceleration in demand. Many travelers are opting to take advantage of the ability to work from anywhere before a return to work and school after the summer, and this is especially true for Hawaii. Increased domestic airlift to the state, particularly from Southwest, is providing U.S. air travelers with ready access to a tropical destination when many international destinations remain restricted. For our two resorts, RevPAR exceeded the first quarter by $104 or nearly 210%. At Hilton Hawaiian Village, occupancy at our nearly 3,000-room resort jumped from 44% in April to 84% in June, all from domestic leisure strip. We have reopened all five towers. And most of our food and beverage outlets have reopened, some with operational modifications to increase profitability. Operating margins at the property exceeded 34% for the second quarter or just 570 basis points shy of the level achieved during the same period in 2019. At Waikoloa, occupancy increased from 70% in April to nearly 90% in June. Even more impressive, we have been able to maximize rate over 2019, with June's ADR of close to $300 coming in $81 higher than June 2019. In fact, Waikoloa generated more EBITDA this past June with half the number of rooms available than it did in June 2019, clear proof that we made the right decision to transfer 600 rooms to HGV, and right size the hotel to maximize operating efficiencies, yield higher rates, and drive better margins. Furthermore, many guests are taking full advantage of all of our resorts have to offer. Ancillary spending increased 33% over the second quarter of 2019 to $116 on a per occupied room basis for our two Hawaii properties during the quarter. While we expect these leisure-driven trends to moderate some after Labor Day, we remain very bullish on Hawaii going forward. We expect strong demand over the winter holidays, where we are already seeing rates in excess of $1,000 per night, with that momentum expected to continue well into 2022 and beyond, as we anticipate the resumption of Asian travel to Hawaii later next year. In terms of group demand, some headwinds persist from restrictions against gatherings that remain in place statewide. However, group pace for our Hawaii hotels is currently up over 20% in 2022, and at this time, we have every expectation that these groups will be able to meet, albeit with potential attrition from international attendees in the early part of the year. Moving to Florida. Our resorts across the state continue to have strong performance, fueled by leisure strength as well as small groups. In Key West, RevPAR at our two resorts was up nearly 50% over 2019 levels as we continue to reap the benefits from our renovated assets and complementary branding strategy. We are seeing incredibly strong out-of-room spend in Key West, with total RevPAR for our two assets reaching $663 for Q2, which is 37% ahead of 2019. On the group side, our hotels hosted 5,200 group room nights during the quarter and local catering was up 26% over 2019, driven by weddings. The resorts have more weddings on the books than they have had in any prior year with 136 weddings on the books in 2021 versus 122 in 2018. In Miami, our teams have employed aggressive rate strategies to drive ADR 23% higher than the second quarter of 2019. Our rates this summer have been more in line with peak season rather than the typical post-spring break discounting we see. Although we do expect that this to moderate post Labor Day, and then reaccelerate as we move into the peak winter holiday season. In Orlando, we are starting to see the return of traditional group demand. Our newly rebranded hotel, Signia by Hilton Bonnet Creek, has over 50,000 improved room nights on the books for the back half of the year, which is down just 5% to 2019 levels. In addition, the Orange County Convention Center lifted all capacity restrictions in June, and the convention calendar for the balance of the year sits at roughly 75% of 2019 levels in terms of room nights. Based on past trends, we expect Orlando and Florida to continue to remain accommodating of both transient and group visitors, which should continue to translate into increased bookings going forward. Moving to our capital allocation successes. We made significant progress at reshaping our balance sheet and reducing leverage during the quarter, issuing attractively priced corporate debt and also executing strategic asset sales. I'm especially proud of the team's efforts on the capital recycling front. Given the strong appetite for institutional quality assets in major markets by private equity, we took advantage of market conditions and are on track to exceed our stated goal of $300 million to $400 million worth of asset sales this year with our recently completed and pending transactions. We remain disciplined throughout the pandemic, as the bid-ask spread narrowed significantly following the widespread distribution of the vaccine, further supported by our most recent completed and pending San Francisco hotel sales, which went under contract at less than a 2% to 3% discount to pre-COVID levels. Despite increased price transparency in the private markets, the valuation gap between public and private pricing remains at among the widest gaps in recent memory. Similar to previous cycles, however, we expect the valuation gap to narrow as the lodging recovery continues to take shape and the pace of private market transactions accelerates over the coming months. With respect to additional asset sales over the balance of the year, while we do not have anything to report at this time, we are always seeking to maximize shareholder value, and we'll entertain attractive offers as they arise. As we look ahead, we are encouraged by the healthy lead volumes we've seen since the start of the second quarter, which have held steady at roughly 80% of 2019 levels. We are seeing larger corporate and citywide meetings planned for 2022 and beyond in our major group markets, while on average, our more near-term groups scheduled for the next couple of quarters are seeing smaller projected group sizes compared to historical levels, which is not surprising, given the current uncertainty surrounding the Delta variant. However, we expect this trend to normalize over the next few months as we get past these next few weeks and as vaccination rates continue to increase. As we think about transient demand for the balance of the year, we expect domestic leisure to continue to lead the way, combined with an uptick in business transient post Labor Day. Before I hand the call over to Sean, I want to emphasize the important milestones we have reached with regards to achieving breakeven at the corporate level, coupled with our initiatives to sell assets and improve the overall quality of our balance sheet, all well ahead of expectations. This, along with our operational improvements and expectations for continued improvements in overall travel demand, positions Park for ongoing success for the coming quarters. We believe our diversified portfolio will allow us to benefit from all demand segments, group, business transient, and leisure throughout all phases of the lodging recovery. With over $1.8 billion in current liquidity, we are also poised to move to offense by unlocking embedded value through targeted ROI initiatives as well as strategic acquisitions that fit our strategic profile. We look forward to updating you on future calls. And with that, I would like to turn the call over to Sean, who will provide you with some more color on our results and an update on our balance sheet and liquidity.

Thanks, Tom. Overall, we were very pleased with our second quarter performance with pro forma RevPAR sequentially increasing 92% over Q1, driven by a 1,600 basis-point improvement in occupancy, while average daily rate exceeded $185, accounting for a 19% pro forma increase from the previous quarter. Driven in large part by the strong leisure demand, we generated positive adjusted EBITDA of $33 million for the second quarter, well ahead of expectations, representing the first time since the first quarter of 2020 that we generated positive adjusted EBITDA. We are very encouraged by the pace of improvement throughout the summer. As performance accelerated in June, the number of breakeven consolidated hotels increasing to 34 hotels, up from just 12 during the first quarter, allowing us to achieve breakeven at the corporate level during the month as well, a meaningful improvement from the $23 million burn rate achieved in April. In light of this past quarter's strong results and the momentum we anticipate throughout the summer, we expect to exceed breakeven levels for the third quarter as well. In addition to strong top-line results, performance throughout the second quarter was further enhanced by ongoing operating efficiencies, especially within our resort properties, with hotel adjusted EBITDA margins exceeding 35% or 30 basis points higher than 2019. Looking ahead to the third quarter, July gave us a very strong start with occupancy for all open hotels improving sequentially by over 800 basis points to approximately 64%, while ADR is expected to reach approximately $220 for sequential improvement of over 10% from June. Overall, we expect to finish the third quarter with an average occupancy in the mid-50% range for our consolidated portfolio, while RevPAR is projected to exceed $100 overall, an expected sequential increase in excess of 30% over Q2. Turning to the balance sheet. As Tom noted, our liquidity currently stands at over $1.8 billion, including nearly $1.1 billion available on our revolver and $800 million of cash on hand. Taking into account the sale of the two San Francisco hotels this quarter, our net debt, which was $4.4 billion at the end of Q2, is expected to decrease by nearly $300 million, with 100% of the net sales proceeds used to partially repay our sole remaining bank term loan, leaving just an estimated $80 million balance versus a $670 million outstanding at the start of this year. Over the past two years, we have made incredible progress in improving the overall quality of our balance sheet, raising $2.1 billion of public corporate debt while paying down over $2.3 billion of bank debt and extending our weighted average maturity profile by almost a year. The public debt markets remain open, while other debt markets are becoming more constructive. As the lodging recovery gains more traction over the coming months and into 2022, we will continue to evaluate options to refinance our $725 million CMBS loan coming due in late 2023 and anticipate refinancing the $650 million of senior secured notes that we issued in May of last year. This 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.

Our first question comes from the line of David Katz with Jefferies.

Tom, it sounded in some of your opening commentary that we heard some appetite on both the buy side and the sell side. Any chance you can elaborate and maybe set some boundaries or give us just a little bit more color on what Park would find compelling in either direction?

David, that's a great question. I want to remind everyone that over the past five years, we've made significant efforts to reshape our Park portfolio. We have sold 30 assets for approximately $1.7 billion and purchased 18 assets as part of the Chesapeake deal for $2.5 billion. We've been very active in both selling and repositioning as well as acquiring new properties. The key takeaway I'd like to share today is our strong focus on reopening hotels. We still have three hotels to open and will wait for the right conditions. We have been dedicated to reimagining our operating model and are confident that we've achieved $85 million in cost savings. Hilton's recent announcement about opt-in housekeeping is a good example of this. As previously mentioned, we've reduced our workforce by about 1,200 FTEs, which is roughly 8% at the property level. We’ve also been innovative in our approach, as illustrated by our decision to have Debbie Bishop oversee two properties, which has allowed us to cut an additional $1.5 million in administrative costs from those two assets. You can expect to see these types of initiatives continue to enhance our cash flow. Our portfolio has many opportunities for embedded ROI, including the reactivated Bonnet Creek, which we are excited about, and the DoubleTree San Jose, which presents a great conversion opportunity similar to our successful DoubleTree in Santa Barbara. The Casa Marina in Key West is another property we're looking to reposition, even though it is currently performing well. We successfully converted The Reach to a Curio, and we're also assessing options for the Casa. As for our next growth focus on single-asset acquisitions, we plan to prioritize top 25 markets and upscale and luxury assets in these areas and premium resort destinations. We aim to take a more active approach in the Southwest and Southeast, which will be competitive. However, we will remain cautious and are not dismissing other markets that may be overlooked by some. We believe deals will emerge opportunistically, and those markets will eventually recover, although perhaps more slowly. It's clear that major urban markets will bounce back as well. We're also interested in exploring creative strategies, given the significant gap between public and private market valuations. We will not be issuing equity. We've made that very clear throughout this challenging period, and we've demonstrated our commitment. Last year, despite facing an $85 million burn rate, we made strategic decisions that allowed us to break even without any dilutive equity raises. Moving forward, we will avoid dilutive actions, and we will be thoughtful in our approach to raising capital, ensuring that it's at prices that reflect NAV and are accretive. We are committed to this strategy, and you will see our consistency in this regard as we advance.

And as my follow-up, I just wanted to ask about the Chesapeake portfolio. If we can go back in time, a part of the thesis was the opportunity to grow margins with less through the OTA channel. I realize it may be a little bit of an unfair comparison. But, can you just talk about progress to that end, if it's available at this stage?

Yes, there is no doubt that it is still available, David. We stand by the Chesapeake acquisition. We believed then, as we do now, that it significantly improves the overall quality of our portfolio. We have brand and operator diversification, geographic diversification, and it has enhanced our growth profile. Additionally, there is embedded value in terms of ROI opportunities and margins. Sean and the asset management team are continuing to work on these initiatives. We have sold some assets in the Chesapeake portfolio; in nearly every case, except one, these assets did not align with our intermediate or long-term asset goals. Currently, we have 11 assets remaining out of the original 18 and we are confident that all of them provide the opportunities we initially projected. You may recall that right before we faced a major setback, we had already identified and accounted for $21 million of the $24 million in synergies. Therefore, we remain very optimistic about the Chesapeake acquisition as we look ahead.

Our next question comes from the line of Floris Van Dijkum with Compass Point.

Tom, I appreciated your perspective on not issuing equity below NAV. Could you share your thoughts on NAV? It's clearly an evolving target. Given the recent transactions and increased market activity, how should we view your NAV moving forward? Additionally, how much has your NAV increased since the difficult period in January and February?

Floris, that's a great question. We feel much more optimistic now than we did 16 months ago during the tough times of the pandemic, and I'm sure our peers feel the same way. Our consensus net asset value is around $27 a share, while pre-pandemic, we were likely closer to $30, if not higher. We've experienced about $3 of impact from the pandemic in terms of cash needed to manage expenses during that time. However, we've made significant recovery in our balance sheet thanks to our proactive finance team, led by Sean. This team is experienced and knew how to respond effectively without panic then or now. Regarding your point about dilutive equity moves, we have been clear that we would not engage in any dilutive equity trading, and that remains our stance today. Currently, we are trading at a significant discount to our net asset value, which is why we will not consider any equity offerings or ATM programs. Selling equity at this discount does not make sense for us. Our portfolio offers great options, and as I mentioned earlier, we can recycle assets from certain markets or explore joint ventures. We have shown that there is considerable liquidity in the private market, allowing us to achieve net asset value or better. Therefore, it is not logical for us to sell equity right now. We will continue to be creative and thoughtful in our approach, and we are committed to creating value for our shareholders, whether through recognition in public markets or private markets.

If I can follow up on that vein. In terms of, obviously, you've got a couple of irreplaceable assets, multibillion dollar assets, particularly in Hawaii. That was, I believe, institutionally owned in the past. Would you consider selling a stake in Hawaii Village to a large institutional investor or one of your other trophy assets?

Yes, I think we would clearly explore with a trophy asset. Obviously, the last on that list, as you can imagine, would be Hilton Hawaiian Village. We get calls all the time. I would respectfully submit that I can’t imagine that there is a REIT asset across any sector as valuable as Hilton Hawaiian Village, 22 acres, 5 towers. We're working on the 6th tower and getting the optionality of adding another tower there, world renowned. But, we will do what's in shareholders' best interest, and we will create value for shareholders.

Our next question comes from the line of Rich Hightower with Evercore ISI.

Tom, I want to follow up on the investment question. And you sold two San Francisco assets for reasons, I think, all on this call, we understand. But, I'm curious for your longer-term expectations for that market, knowing that it's always going to be a relatively low supply market and demand is going to grow eventually once we get out of COVID here, maybe back to prior peak levels, whenever that happens. So, how do you sort of pair the income and the value foregone from selling those assets versus maybe what you're looking at currently in terms of future acquisitions as we think about a use of proceeds there?

Yes, that's a great question, Rich. We have a strong belief in the long-term potential of the San Francisco market. There are significant barriers to entry and real supply constraints in that area, along with multiple sources of demand—corporate, convention, and leisure. We are confident that San Francisco will recover, and it remains one of the great cities in the world. However, we had two main concerns. One was concentration; San Francisco represents about 17% of our portfolio, and we prefer to be below 15%. The second was our need to reduce leverage. It was important for us to maintain flexibility on our balance sheet. We assessed the six assets we owned in the central business district and determined that Adagio would be better managed by private equity, given the benefits of the adjacent parcel. Le Meridien, under ideal conditions, might have been an asset we would have liked to retain, but when compared to our other assets, it presented more optionality and we believed we could achieve solid pricing similar to what we saw in 2019. A year ago, many expected that there would be significant distress in the market with assets trading at steep discounts, but I made it clear that we would not participate in such pricing. We waited patiently and achieved favorable pricing on both assets, which makes us proud of our team's discipline. Looking at other markets, there is a lot of interest in the Southeast right now. We've seen this before, as about ten years ago, there was a rush to buy lifestyle hotels in New York, which did not turn out well. We acknowledge that the Southwest and Southeast markets are becoming more attractive due to population and demand growth, and while we are well positioned in Florida, we will be looking for opportunities. We will assess pricing and market conditions carefully. Investors should understand that we have a strong portfolio with significant options, though it seems we might not be receiving full recognition for this aspect of our business. We have many opportunities to continue creating substantial value for our shareholders.

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

I wanted to ask you a little bit more about the $85 million of cost savings. With the recent investments as Hilton made around housekeeping, is that factored into those cost savings, or do you think there could be upside to that, or does it just give you more kind of certainty around meeting that number?

Yes. Smedes, this is Sean. The recent Hilton policy change there or locking an opt-in housekeeping is not included in the $85 million. The $85 million is an exercise of us looking at department head roles, manager roles within what they call it, front desk, or ultimately, F&B outlets and whatnot. So, it was kind of going position by position within each property and kind of thinking through the org chart and not so much about brand initiatives. So, certainly some upside potential there with Hilton's opt-in change going forward.

Yes, it seems like there would be. Do you have any way to quantify it, or is it too early to tell?

I think it's too early to tell. We need to see more business travelers return to get a better understanding. We've observed how the CleanStay program has performed over the past few quarters. It's not an exact science and it's not perfect, but we believe we've seen benefits that outweigh the initial costs associated with enhanced cleaning protocols after each checkout. We expect to see some advantages moving forward, but it's still too soon to quantify this.

I wanted to ask about your cash flow projections. You mentioned you'll be cash flow positive in the third quarter, but didn't mention the fourth quarter. Do you think cash flow will be negative in the fourth quarter, or is it too soon to know? Additionally, could you discuss the transition from the leisure season to a focus on business travel and how that is progressing in the near term?

Sure. We're currently focused on our cash positions for the third quarter, which had a very strong July. As we move into August, we anticipate it may be slightly lighter due to back-to-school preparations and office returns. Historically, leisure travel tends to slow down during this time, but August seems to be holding steady. Overall, July was a strong month for us, and we feel positive about the quarter. Looking ahead to the fourth quarter, we expect a resurgence in leisure travel around the holidays. The key factor will be business transient travel, which we have seen improve recently. Our midweek occupancies in non-resort hotels have risen from about 35% to 65% from April to mid-July. This aligns with our observations of increased travel and meetings as offices reopen. We anticipate this trend to continue into September and after Labor Day. However, we must remain cautious about potential impacts from the Delta variant. We still have some uncertainties and need better visibility as we approach the fourth quarter, but it's not that we don't expect the fourth quarter to perform well; we're just maintaining a near-term focus.

Our next question comes from the line of Ari Klein with BMO Capital Markets.

Maybe on the optionality within the portfolio, you noticed some opportunities. But, how are you thinking about timing there, especially for some of the bigger ones? When could we expect to see more progress on those?

We continue to evaluate opportunities. You'll hear more, probably as we get third, fourth quarter and beyond, these things tend to be opportunistic. And candidly, that will depend on how the overall demand patterns unfold. I think, it will depend on discussions that we have. We get lots of inbound calls all the time about different ways to work together. There's no shortage of private capital. And there's no shortage of obviously, private capital is prepared to pay NAV or above. And the public markets are dragging. We've been to this movie before. As we get more visibility, we think the public markets will catch up. We're certainly not going to wait. We're going to continue to execute the initiatives that we talked about, both on continuing to rightsize the operating model, looking at embedded ROI, and then other ways that we can unlock. So, it could be that we sell some additional assets and recycle capital. It could be that we look to partner and unlock capital that way. Some of the tax implications of the spin go away here at the end of the year, so that makes it a lot, gives us even more optionality as we get into 2022. The other thing to keep in mind. And again, I don't think the market always appreciates just the complexity of the spin. We sold 30 assets, 14 of those international. We inherited the laundry business. We've gotten rid of that. We had four assets that we had to self-operate as part again some of the requirements of the spin. We've now solved that problem, and we got third-party operator. So, the Park team has been incredibly busy. Proud of our work. Obviously, none of us expected to get hit by the Asteroid and the pandemic. We quickly retooled. We've managed it. Our balance sheet is in outstanding shape, and we have a lot of optionality. And we can toggle between defense and offense. But you can certainly begin to see us positioning to offense. We've got scale, and we will be a player. So, make no mistake about that.

Thanks. And then, on the group side, as businesses book events, are there any new trends or differences that you're seeing relative to how the groups would look previously? And then, are they asking for different things? And are you seeing like-for-like events booked for fewer people, and especially as you look out to 2022?

Yes. I'd say a couple of things. We can all expect a return to normal, similar to what we've seen in leisure, where pent-up demand accelerated activity. The same will happen for business and group events. Even companies with remote workers are looking to gather their teams more often. There will be opportunities for smaller or larger groups for training, innovation, and team building. The desire to connect in person won't disappear. While technology and hybrid meetings have their place, I don't think anyone has truly perfected them yet. Zoom calls were effective during the pandemic due to lack of options, but now people recognize the value of in-person interactions. I believe we'll return to previous levels of activity more quickly than anticipated. I want to be on the road and have been receiving more requests from people wanting to meet. As we return to offices, reopen schools, and get past the Delta variant, with more vaccinations, the situation will improve for everyone. However, there hasn't been any significant change, and while some hybrid options may be on the margin, I don't see hybrid meetings becoming the new standard as we move forward.

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

Just a question on Hilton, both going to opt-in housekeeping and also changing some of the breakfast benefits for elite members. You have a lot of full-service Hiltons, and I'm guessing some of the customers may be used to daily housekeeping and a generous breakfast. How has that been received by customers? And do you worry about any kind of long-term impact to customer satisfaction from these changes?

No. I'll jump in here, Anthony, and then Sean can jump in. First of all, as I said in my prepared remarks, I really applaud Hilton. We have got to use the crisis as an opportunity to reimagine the operating model. I think, the opt-in was the right move. I think the changing the credit for elite members was also, I think, a more efficient. And I think we're going to continue to see changes in food and beverage. And whether that's room service or whether that's grab-and-go or eliminating three-meal restaurants that are unprofitable. We have to think about the business differently. This crisis was painful for all of us, particularly owners, but also for the brands as well. If they don't have a healthy owner community, they're not going to continue getting that distribution as they'd like to see and need to see. So, I think the moves were the right moves as we move forward. Clearly, the luxury product and luxury customer, I think, will be less likely to make those changes. But, we continue to evaluate it. And I think on the margin, there have been modest or small complaints. But the reality is, I think people are accepting where we are right now.

Yes. I would quickly add that ultimately, as I mentioned before, we still need to see a solid return of business customers to evaluate this properly. However, early on, we haven't received many complaints and haven't heard any concerns from our partners at Hilton. They are very focused on maintaining their market share and premiums. We are in discussions regarding any brand standards that might be adjusted with this in mind, while also considering the financial aspects. We're having productive conversations as we reintegrate or rethink our strategies. I am optimistic about how these elements will play out moving forward, but we need to monitor and assess the situation over the coming months.

And one more on CapEx. You guys have been pretty consistent in your CapEx as a percent of revenue, I guess, up to the pandemic. I know you're working on Signia in Orlando. Maybe an update on the New Orleans, I guess, Convention Center expansion there, other projects and just general CapEx levels over the next few years, and do you think you need to up CapEx going forward, or is that 7% still kind of where you want to be?

Yes. Anthony, we've been kind of at 6.5% to 7%. I know Sean and the team are looking at possibly increasing that slightly. We've got the three ROI projects that I mentioned. Those are probably about $200 million in capital. And we think the returns are probably 14% to 15%, and you're probably looking at EBITDA somewhere in the $30 million range. That does not include New Orleans. New Orleans is certainly more complex. But keep in mind, we've got the well locked that we often referred to. We've got 8 acres, plus or minus, and we've got 5 million square feet of additional FAR adjacent to the convention center. That's clearly a longer-term project and one that we would look for a development partner and others as we proceed. But, we see huge, huge upside. I mean, that could be another sort of L.A. Live type execution there in New Orleans. We want to find the right timing for it, but we see huge upside. Again, none of that is factored into NAV or future growth, but it's land that was land banked 25-plus years ago. And obviously, we appreciate having that benefit for the future shareholders of Park.

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

Tom, I was hoping we could circle back to the acquisition topic for just a minute. And obviously, you guys took on the Chesapeake portfolio, you've sold a bunch of mostly single assets, including some of the Chesapeake hotels. And you mentioned that you could potentially JV some of your assets and free up a fair amount of capital. So, should we triangulate that to mean you might have a preference for chunkier deals or portfolios going forward as opposed to a lot of your peers focusing on a one-off acquisition strategy?

Yes, that's a great question. I would say we're focused on being opportunistic. We aim to be flexible, whether it involves a significant single asset or not. We clearly desire upper upscale or luxury assets in top markets, which we expect to be acquisitions exceeding $100 million. These will naturally be substantial transactions. However, we are also open to larger portfolio deals and mergers and acquisitions. Although we don't believe M&A is the right move at the moment for various reasons, we think that with 15 or 16 lodging REITs, there will come a time when investors and analysts advocate for consolidation, given that our sector is the most fragmented within lodging. This isn't something we're pursuing right now or spending much time on, as we find it more critical to focus on the initiatives and priorities I've laid out. Nonetheless, we strongly believe the sector will eventually see consolidation.

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

We've heard some indications on the airline front that they're seeing a greater than seasonal decline in forward ticket sales. And I assume that would be related mostly to the latest Delta outbreak. But, anything you're seeing from a cancellation front or reservations over the next, call it, 30 days that we might be entering a little bit of an air pocket?

Yes, Bill, it's Sean. We've noticed some cancellations in specific areas, particularly in markets like Orlando, Florida, and New Orleans. This trend has been more pronounced this month and into mid-September. While the cancellations are not widespread, the majority we've observed have come from medical groups. Interestingly, despite the activity in Orlando, our Bonnet Creek complex hasn't been significantly affected. We've seen some movement with our other properties there. There seems to be a pause from groups who are delaying decisions, possibly to reassess in a few weeks. Although there might be a slight lull, I believe most people expect things to return to normal quickly. We should see a resumption of typical activity as we move toward the end of the month and into early September.

Bill, it's Tom. As Sean mentioned, we might be experiencing minor setbacks, but we're not overly worried. We all believe we'll push through this. It's essential that vaccination rates increase, and people need to get vaccinated. As I mentioned during my speech at Elis, we need leaders to take charge, and companies and governments to implement mandates. That's the only way to move forward, and we're starting to see these changes, which is positive. Looking at our non-resort markets from mid-April to mid-July, we noticed an increase in occupancy from around 35% to approximately 65%. We're seeing more business travelers in these non-resort areas, excluding high-growth locations like Hawaii, Florida, and New Orleans. We noted growth in midweek occupancy, which is a promising indicator. Ultimately, we must acknowledge the ongoing situation, get vaccinated, wear masks, and keep moving ahead. People are beginning to take action. We don't expect significant lockdowns or widespread panic. We need to progress, and I believe we'll see that continue.

I appreciate that. Tom, you guided me right into my follow-up questions about mandates. Today, United Airlines announced a vaccination mandate for their employees. I'm curious about how much pressure you can apply on Hilton to implement and enforce a mandate.

Well, I certainly am not going to try to speak for my good friend, Chris. He's more than capable to speak and to set that tone, and he's a dynamic leader. And I would expect that he will arrive at the right conclusion. I was crystal clear in my remarks out at Elis, and I'll say it again. We're not going to get to the other side until we have leaders leading in mandating, and we're doing it at Park, and I'm doing it and saying it on this call and any form I get. And look, there are going to be exceptions, whether it's for medical or religious. But, the reality is, we've got to get shots in arms to move forward. So, I've said my piece.

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

Yes. Just thinking about the Delta variant and things that are potentially being implemented or things that are being canceled. One of the things about Delta is that its clinical breakthrough rate is pretty significant in terms of people who get it, been vaccinated with the original vaccine. So, given those things, and you're starting to see companies delay back to work. And I'm just wondering, I guess, what do you expect, or what's your view on, if like the UN assembly or Fashion Week Broadway stuff is held up as an example? And what's your kind of view on if vaccine passports are mandated in some of your bigger markets, like, call it, New York and California. How do you think that winds up playing out in terms of both business and leisure demand near term?

Yes, there are a few points to consider. While I’m not a medical expert, it appears that the range of vaccines we have is performing well. Most issues, about 99%, are among unvaccinated individuals. It's crucial to establish this context. I believe that the more support and encouragement we receive from federal and local governments, as well as business leaders advocating for vaccination, the quicker we will overcome this situation. I don't foresee widespread lockdowns happening again; we’ve experienced that before, and I don’t think the country is prepared or willing to go down that path again. We're closely monitoring demand trends. One reason New York remains closed is to ensure we reopen at the right moment, considering the size and complexity of that location in comparison to others like San Francisco. We will keep assessing the situation. I anticipate that a few companies may delay their return to work, but most individuals, particularly as schools resume and childcare issues are resolved, will want to reconnect with colleagues and engage in in-person interactions. There might be slight delays of a few weeks or even a month, but I expect such delays to be exceptions rather than the norm.

Our next question comes from the line of Lukas Hartwich with Green Street.

So, for the unconsolidated portfolio, are there any opportunities to reduce or increase stakes there?

Yes. Regarding buying and increasing our interest in them, Lukas, I didn't quite catch that. I want to ensure I understand your question.

Yes. Sorry. Yes, the unconsolidated portfolio, there's some assets in there, some held by owners that arguably have higher levels of leverage, may need access to capital. So I'm just curious if there's any opportunity to increase stakes in some of those or maybe even sell stakes potentially?

Yes, we are actively involved in discussions. It's important to note that our top core portfolio represents 90% of our value. The remaining 10 joint ventures have their own unique legal and tax challenges. Once we surpass the fifth-year threshold on the spin, we will have more flexibility next year to enhance our strategies. Additionally, some of these ventures have short-term ground leases that need to be extended or modified. Each situation is different. However, you can be assured that the team at Park is diligently addressing these matters, as demonstrated by our efforts to streamline our operations, selling off 30 assets, including divesting from the international sector and exiting the laundry and management businesses. We have ongoing initiatives for many of these assets.

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

Thank you. We really appreciate everybody taking time today. Hope you enjoy the remaining part of your summer. And we look forward to seeing many of you in person in September, October and look forward to our next call in early November. Stay safe.

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.