Park Hotels & Resorts Inc. Q3 FY2021 Earnings Call

Greetings and welcome to Park Hotels & Resorts Inc. Third 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. I would now like to turn this conference over to your host, Mr. Ian Weissman, Senior Vice President, Corporate Strategy. Thank you, sir. You may begin your presentation.

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts third 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 and adjusted FFO. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in yesterday'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 third quarter performance and thoughts on demand trends. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on third quarter results as well as more detail on our balance sheet and liquidity. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.

Thank you, Ian, and welcome, everyone. I'm pleased to report another quarter of strong improvement to operating fundamentals, and we are pleased to report that we've achieved corporate level breakeven for the first quarter since the start of the pandemic. Based on the strength we witness at our resort properties, the leisure traveler adds significant pent-up demand as evidenced by incredibly strong rates and out-of-room spend. Additionally, we are seeing promising signs of sequential growth in business transient and group demand in pockets across our portfolio. And while still early, we believe this is a positive indicator that we are on the path toward recovery. On a macro front, there continue to be encouraging indicators of growth and momentum including a nearly 8% annual increase in non-residential fixed investment projected for 2021 and ongoing momentum on vaccine distribution, which should contribute to increased mobility and confidence. Additionally, the unemployment rate improved to 4.8% in September, more than a 100 basis point improvement from the start of the third quarter. While U.S. personal savings stand at an impressive $1.3 trillion as of September highlighting the ongoing strength of the U.S. consumer, which we expect to continue fueling the strong recovery in overall demand. Against this backdrop, I'd like to remind listeners of Park's unique and compelling value proposition, and how the execution of our strategic priorities is positioning us well for the recovery. First, we have seamlessly executed on a non-core disposition program which has greatly enhanced the overall quality of our portfolio and positioned the company for attractive long-term earnings growth. In total, we have sold or disposed of 31 hotels accounting for over $1.7 billion of total proceeds since spinning out of Hilton five years ago including all 14 of our international assets. Second, our portfolio combines the right mix of demand drivers which we believe should help drive outsized earnings growth over the next few years as business travel accelerates. We believe that there will be a return to traveling for work and a return to meeting in person. It's human nature to want to meet and connect and I firmly expect both business transient and group demand to return to pre-COVID levels. While it is possible the mix of demand will shift over time to accommodate more flexible work schedules, I want to emphasize that we do not believe there are secular headwinds in logic, and the earnings power of our company remains as strong as ever. Third, our iconic portfolio of core hotels contains untapped embedded ROI opportunities, including expansions, brand conversions and potential alternative uses that we believe will create meaningful value for shareholders, and we plan to capitalize on these opportunities over the next several years. These efforts began with the successful conversions of our Hilton Santa Barbara and our Reach Resort in Key West and continue today with our Signia Hilton conversion and expansion of our meeting space platform at our Bonnet Creek Complex in Orlando. We will continue further as we accelerate planning to reposition and expand a number of our core hotels. Finally, we have continued to improve our balance sheet through opportunistic asset sales and debt repayments surpassing our capital recycling targets and providing us with liquidity and optionality for the future. With over $1.8 billion of liquidity including the entire $1.1 billion available on our revolver, we are well-positioned to capitalize on creative opportunities as they arise. Turning to our third quarter. Our results came in well ahead of our expectations driven by ongoing strength across our leisure properties coupled with better than expected expense savings. Consolidated pro forma RevPAR of $105 was above expectations and 38 of our 45 open consolidated hotels generated positive EBITDA for the quarter. Particular leisure strength in Hawaii, Southern California and South Florida helped the portfolio generate an average leisure transient ADR that was 3.4% ahead of the third quarter of 2019. While leisure led the quarter, we did see a sequential increase in both group and business transient revenues. Group revenues increased nearly 130% from the second quarter growing from 8% of mix to 13% of mix, while business transient demand increased nearly a 100% to account for nearly 20% of mix for the third quarter. Looking more closely at group demand, we witnessed pockets of group strength during the third quarter in markets like New Orleans, Chicago, Orlando and Honolulu, although fourth quarter performance is expected to moderate somewhat as the uncertainty surrounding the delta variant caused nearly $8 million in cancellations. Many of these groups have rescheduled for later in 2022 and we currently expect to see meaningful pickup in group demand in the second half of 2022. We are currently trending around 65% to 70% of the group pace for 2019, at the same time in 2018 with rates exceeding 2019 levels. Our top group hotels for 2022 include the Hilton Chicago and our four assets in Key West and Miami where 2022 group bookings are exceeding 2019 levels. On the business transient side, we have seen a consistent increase in midweek demand among our hotels that cater to business transient demand, with midweek occupancy at these hotels increasing roughly 1200 basis points since the start of the third quarter through October. There has been a noticeable improvement in midweek demand in October, which aligns with the increased confidence we have been seeing among travelers following the late summer delta surge. We expect this trend to continue in the fourth quarter and pick up in the New Year as more corporations return to the office. In terms of hotel reopenings, we are pleased to report that our third largest hotel, the 1878-room New York Hilton Midtown reopened on October 4th and has already surpassed our performance expectations. The hotel ran 44% occupancy the first Saturday after reopening and has already hosted a 1300 person event highlighting the pent-up demand in the market as well as the recovery of the New York market as a whole. The hotel ended the month of October roughly $1 million ahead of revenue forecast and we expect the remainder of the fourth quarter to continue to pose strong results with the hotel projected to sell out over the upcoming New York City Marathon weekend in just a few days. Transient rates are trending at roughly 95% of 2019 levels and group rates have also remained in line. With domestic transient travel already surpassing 2019 levels in the market along with the reopening of international borders for travelers who have historically averaged over 60 million annual visitors to the city, we are expecting healthy transient demand in the fourth quarter. Overall our portfolio now has 96% of its total rooms opened with operations at just two hotels currently suspended. Diving into other core markets. Our two Hawaii resorts continue to capitalize on strong summer leisure demand trends with third quarter occupancy averaging over 75% and impressive RevPAR indexes of 124% for the Hilton Hawaiian Village and 113% for Waikaloa Village. Hilton Hawaiian Village recorded 91% occupancy for the month of July across its 2860 rooms with an average rate of $303, well ahead of expectations. On the Big Island, the Hilton Hawaiian and Waikaloa Village achieved its highest quarterly average rate ever with an ADR of $320, which was nearly 25% above the third quarter of 2019. While our hotels benefited from strong demand and increased airlift, demand was temporarily disrupted by the governor's August 23rd plea for travelers not to visit the state due to a rise in COVID cases. Following this announcement our property saw a material drop in demand with widespread cancellations in both transient and group business for the third and fourth quarters. Under our hotel team's exceptional leadership, our hotels quickly pivoted and enacted contingency plans to modify staffing and operational outlets leading to impressive EBITDA margins for the quarter of 39.4%. Looking forward, we are pleased that the governor recently announced that Hawaii would once again welcome vaccinated travelers starting November 1st. Although we note that the typical lead time for bookings to Hawaii averages several weeks. We are expecting some upside throughout the holiday season at this point and we are turning our focus predominantly to 2022 when we expect to see increasing levels of international visitation by mid-year. We are particularly encouraged by the pace of vaccinations in Japan, which has accelerated dramatically over the past few months. Japan typically accounts for approximately 20% of all visitors to our two Hawaiian resorts. South Florida continues its incredible run with some softness in September attributable to both the delta variant pause and normal seasonality. Our hotels in Key West continue to achieve record milestones including an average ADR of $474 at the Casa Marina and $433 at the Reach for the quarter, up 635% and 58% respectively over the third quarter of 2019. Looking ahead to the fourth quarter, we are expecting a very strong holiday season with ADRs of $1200 to $1400 across our two resorts for the week of Christmas. In addition, we expect the momentum to continue into future periods as our resorts booked 2700 more group room nights during the third quarter for all future periods than ever before. Orlando finished the quarter with decent momentum following a tough August and early September where leisure travel slowed due to the delta variant. This momentum continued into October with strong group production at our upbrand in Signia at Bonnet Creek, as well as continued leisure strength associated with Walt Disney World's 50th anniversary celebration. Turning to the West Coast. In San Francisco we are seeing leisure strength at our JW Marriott Union Square and our Hyatt Centric Fisherman's Wharf, partially offset by the lack of group, business transient and business at the Hilton Union Square. As we look ahead, we are encouraged by the return of international travel to the market, which typically accounts for 18% to 20% of demand for our San Francisco hotels. We expect the JPMorgan conference in January will occur as scheduled in early January with average daily rates in line with pre-pandemic levels at our Hilton Union Square and JW Marriott hotels. As companies began to return to the office in 2022, we expect to see more business transient and corporate group demand return to the market. Finally, to touch on some of our other key markets. We saw stronger than expected demand at the Hilton Chicago for the quarter with incredible rate performance, down just 1% to 2019. We have also seen strong performance from our hotels in Southern California with a combined RevPAR down only 1.6% to 2019, and in Boston we have seen promising growth in the business transient and group segments. Finally, in New Orleans, we are pleased to report that the Hilton New Orleans Riverside sustained minimal damage from Hurricane Ida in late August. Power was restored to the hotel within five days and our property secured a significant amount of disaster response and recovery group business that offset any business interruption that resulted from the storm. Turning to capital allocation. During the third quarter, we completed the sale of Le Meridien San Francisco, which helped us exceed our goal of completing $300 million to $400 million of non-core asset sales in 2021 with total sales topping $477 million. On the investment side, significant work is underway on our Bonnet Creek meeting space expansion project with the Waldorf Ballroom Foundation Port and site preparation work started on the Signia side. We also recommenced approximately $20 million of renovation work to update meeting space at the Signia Bonnet Creek and the Hilton San Francisco Union Square as well as another phase of rooms in the Tapa Tower at the Hilton Hawaiian Village. All projects were accelerated to occur during low occupancy periods to minimize disruption ahead of the recovery. Turning to acquisitions. We remain laser-focused on maximizing shareholder value and plan to selectively pursue attractive acquisitions and target markets that are both accretive to earnings and net asset value with a continued focus on upper upscale and luxury hotels and top 25 markets and premium resort destinations. Looking ahead, our outlook looks better than it did a few months ago. For the fourth quarter, we expect to see healthy transient booking trends with the resumption of international travel, which should benefit our hotels in markets like New York, Miami and San Francisco. We believe international demand from Asia, particularly to Hawaii, will not see a material increase until the middle of next year. Although this could certainly accelerate with increased vaccinations. We also expect our hotels and markets that have historically hosted group events with large international attendees such as New York, Chicago and San Francisco will see healthy improvements in demand in 2022. As noted, while we are forecasting a sequential improvement in business transit for the fourth quarter, we are expecting a more material increase beginning in the first half of 2022 with the presumed return to office for many workers. For group, we're expecting momentum to build as we head into 2022 with 2022 group pace currently at approximately 66% of the 2018 pace for 2019. Finally, despite ongoing improvements in lodging demand and the expectations for strong business recovery in 2022, the gap between public and private market valuations remains incredibly wide. A disconnect which has become increasingly more apparent as the volume of private market transactions builds, while providing greater transparency on hotel real estate values. While most other asset classes within the broader REIT universe traded at a premium to consensus net asset values, hotel REITs continue to trade at historically wide discounts and Park is no exception. Based on the latest range of analyst estimates, Park trades at nearly a 30% discount to consensus midpoint or $27 a share, a very conservative view on valuation in our opinion. In our view, however, as the path to recovery becomes increasingly more apparent with a return to business travel, the evaluation gap should eventually narrow. Before I hand the call over to Sean, I want to emphasize the strength of Park's current position. As we look ahead to a more broad-based recovery, our diversified portfolio is positioned to reap the benefits of incremental growth in the business transient and group segments while simultaneously continuing to capitalize on leisure demand. On the capital side, we are poised for growth and optionality. We plan to continue to focus on value-added transactions and projects that create meaningful shareholder value. We continue to work tirelessly to unlock value and shape our portfolio for long-term growth. And with that, I would like to turn the call over to Sean who will provide some more color on our results and updates on our balance sheet, liquidity and ESG efforts.

Thanks, Tom. Overall, we were very pleased with our third quarter performance with pro forma RevPAR sequentially increasing nearly 35% over the second quarter. Driven by a 900 basis point increase in occupancy and an 11% sequential improvement in rates, which neared $206 for the quarter or just 7% below the same period in 2019. Overall, total performance operating revenue was $404 million during the quarter, while pro forma hotel adjusted EBITDA was $83 million, nearly double what we reported last quarter. Q3 adjusted EBITDA was $77 million, and adjusted FFO per share was $0.02 marking the first quarter of positive earnings since the start of the pandemic. We witnessed widespread strength across the portfolio with 43 out of 52 open hotels generating positive EBITDA for the quarter versus just 32 during the second quarter. In addition to strong top line growth, our improved performance was driven by our ongoing efforts to contain expenses, resulting in hotel adjusted EBITDA margins of nearly 21% during the quarter. We saw particular strength across our 11 resort properties where margins exceeded 2019 levels by nearly 250 basis points to over 36% for the quarter. While over 80% of our open consolidated hotels generated positive operating margins for the quarter. Looking forward to the fourth quarter, we expect operating results to be a bit choppy especially in Hawaii and Orlando where both group and transient demand were negatively impacted by the delta variant, and in New York where its reopening and subsequent ramp-up will negatively impact portfolio margins versus Q3. That said, October is off to a solid start, with occupancy for our consolidated portfolio improving sequentially by 270 basis points to 50%, while ADR is expected to reach approximately $200 or a 5% improvement over September. November and December look equally promising with transient pace for our resorts accelerating week over week at levels commensurate with those seen pre-delta, and groups once again booking events in the fourth quarter. 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 over $770 million of cash on hand, while net debt is $4.1 billion. Overall, the balance sheet remains in very solid shape with only 2% of total outstanding debt maturing through 2022 and with 99% of our debt obligations fixed. As we have noted in previous calls, the public debt markets remain open while other markets are also becoming more constructive. As a result, and as we plan for next year, we anticipate turning our attention to refinancing our $725 million CMBS loan on our two San Francisco assets coming due in late 2023 to further extend our maturities and refinancing the $650 million, 7.5% senior secured notes that we issued in May of last year to reduce our cost of debt. We have now paid off 97% of our bank debt leaving us with considerable optionality going forward. Finally, I'd like to finish by providing an update on some of our ESG initiatives. I am pleased to report that we recently published our fourth annual Corporate Responsibility Report for our stakeholders. As the report highlights, we are committed to ongoing improvements across environmental, social, and governance initiatives, as well as continuing to provide additional disclosures around them. To that end, our report includes indices that align with the Sustainability Accounting Standards Board or SASB and the Global Reporting Initiative or GRI, as well as our first Task Force on Climate-Related Financial Disclosures or TCFD report. We also participated in our second annual Cres Real Estate assessment. We are pleased to report a seven-point increase in our scores as we continue to build out our ESG program. Finally, we recently updated some of our ESG specific policies including our environmental policy, our human rights policy, and our vendor code of conduct to further ensure our role as a good corporate citizen. For more information about these initiatives and Park's corporate responsibility approach, please visit the responsibility tab on our website. This concludes our prepared remarks. We are now open the line for Q&A to address each of your questions. We ask that you limit yourself to one question and one follow-up. Operator, can we have the first question, please?

Our first question comes from the line of Rich Hightower with Evercore. You may proceed with your question.

Hi. Good morning, everybody.

Good morning, Rich.

Good morning, Tom. I'm asking, I guess, a question related to - I guess the context is the reopening in the Bay Area and the return to office targets in January of next year. But I'm wondering as you look at, I guess, what we might consider alternate data around office utilization in the different major markets. If you've noticed any historical patterns there in conjunction with the return to office metrics in other cities around the country and maybe how that translates into the pace and the cadence of the occupancy buildup and just kind of the ramp-up related to some of those indicators. And then also, where do you think about timing for the reopening of Parc 55 again in San Francisco?

Yes. There's a lot in your questions there, Rich. Let me talk a bit about kind of Parc 55 for a second. As we look out to San Francisco, I think it's probably the most complex situation in our portfolio. Obviously, we had six assets there in the CBD. We have sold two at 2019 pricing, very pleased and proud about that. Obviously, we've got the Hilton Union Square and the Parc 55 across the street. Union Square is open. Our plan is based on demand trends right now is to open Parc 55 probably in the December timeframe. We're really pleased that JPMorgan is proceeding with the healthcare conference. One, we understand they're committed to it, which we think is great. Obviously, what we're hearing so far is probably 50% to 75% participation at 2019 sort of rate levels. I think also an encouraging sign there. So, if that holds true and we believe it to be the case, it certainly makes sense for us to probably reopen Parc 55 in that December timeframe, plus or minus. Again, we will continue to evaluate. As you’ve seen, I think us do carefully in all of these situations. We reopened New York and obviously New York is exceeding expectations and doing quite well. Regarding office occupancies, clearly there's more sublet activity in San Francisco than I think in other major markets. But I think it would be a huge mistake to bet against San Francisco. We hear this all the time. I think it's important to remind listeners when you look at the amount of innovation that is coming out of that market, the job creation, the educational footprint, the venture capital industry being anchored there and the amount of capital flows. No doubt it’s a tougher environment right now, particularly for business transient and group, but we believe as you heard in my prepared remarks that when you get people back in offices, you get more vaccinations for kids and families, and people resuming sort of a normal life. We fully expect that San Francisco among the other urban markets is going to come back. These are great cities of the world and people who are writing them off, I think it's a bit premature. If you look at, for example, on the leisure front in San Francisco, our JW Marriott and our Hyatt Fisherman's Wharf, both continue to do very well. I think in the third quarter, JW Marriott was about 67%, obviously a smaller box there, but continuing to ramp up in occupancy. The Hyatt Fisherman's Wharf was in the mid 80s. Obviously, Union Square is a big group box. So as we begin and see that ramping up in January, and certainly into 2022, we certainly expect that's going to continue to ramp up nicely as we move forward. So I'll stop there, if you've got any follow-up questions. But I wanted to respond to your inquiries.

No. That's helpful. Yes. I'm good. Thank you, Tom.

Our next question comes from the line of David Katz with Jefferies. You may proceed with your question.

Hi, good morning.

Good morning, David.

Good morning. Thanks for taking my question, and for all the commentary. I did hear commentary about the prospect of being positioned to be a buyer. And I wondered whether there are circumstances or any discussion worth having on whether you'd be a seller, and how you think about some further divestitures at the moment?

Yes. Dave, it's a great question. All options are on the table to create value for our shareholders. I think we've been crystal clear and I think I've made a statement before and I'll make it again. We're going to get paid either by the public markets or the private markets. And when you look at the kind of significant discount to NAVs that exist today, it's certainly not sustainable. And clearly with us trading somewhere at a 30% discount plus or minus. As I make the case for just a minute for Park, think back to the crisis and the decisions that we made. We were calm. We were prudent. We didn't panic. As Sean outlined, we did three bond deals. We pushed out our maturities. We've now paid off 97% of our bank debt. We didn't do any kind of dilutive equity raises. We didn't sell any assets at wide discounts. All of those were very wise and appropriate decisions. We've reshaped the portfolio. We've sold or disposed of 31 assets for $1.7 billion. We bolted on Chesapeake's 18 assets there for $2.5 billion. We've achieved all of our 2021 priorities reopening hotels with the exception of Parc 55 and the Hilton and Short Hills which will open probably in our first quarter of next year. We've reimagined the operating model taking out $85 million in costs about 300 basis points. We've sold five assets this year at just south of $500 million and obviously paid down debt. And we've transitioned to offense, meaning looking at both the embedded opportunities within our portfolio and in addition to that, obviously, we are open to acquisitions that make sense. And we have a lot of optionality. Our built-in gain tax is part of the spin expires at the end of 2021, that's going to be huge. We've got NOLs that are also significant, that also give us optionality. So to your point of selling and your question, I think the most likely scenario would be that we look to partner in a JV on an iconic asset or two. Hawaii would not be included on that list. But others that we could sell an interest at private market valuations, which would then allow us and shield that with our NOLs, and give us optionality to go on offense whether that's embedded opportunities within the portfolio or whether that's opportunities externally. We will be thoughtful. I don't know that we have a need to buy an asset today or tomorrow, particularly given the fact that we've been so active in recycling the last few years. As I mentioned selling assets and of course obviously bolting on the Chesapeake portfolio.

Perfect. Thank you so much.

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

Hi, hello. Good morning.

Good morning, Anthony.

Good morning, Tom. It's a question on acquisitions. You mentioned you want to be selective and you're looking to grow eventually. A lot of your peers are focused very heavily on these very ultra-luxury smaller properties. You've talked this morning about how you're very, I guess, positive on the long-term return of business travel and group. Could you maybe go the other way and lean more into upper-upscale group hotels and urban markets or would you be looking at some of these kind of more small luxury properties that others have been buying?

It's an excellent question, Anthony. We will keep monitoring demand trends and we've clearly established our position. We are well-prepared with 18 hotels that cater to leisure travel. Looking at our performance in places like Orlando, Hawaii, and Key West, we see strong results. There are areas where we want to grow, like Phoenix and parts of Texas, and we're looking to expand our presence in Florida, though that market is quite competitive right now. Some current pricing is aggressive, and I'm uncertain about the potential for scale, returns, and cash flow on smaller resorts. However, we will see how that develops. This situation reminds me of over a decade ago when there was a heavy focus on lifestyle hotels in New York. In hindsight, that approach didn't yield positive results for many investors, especially at the prices being paid. We will continue to assess our portfolio and are confident in upper upscale and luxury hotels in the top 25 markets and premium resort locations. We currently have a solid presence in resorts and will expand it carefully, ensuring it makes economic sense. We have numerous opportunities within our existing portfolio, exemplified by Bonnet Creek, where our investment is approximately $300,000 per key. We have a substantial 1500-room resort on 350 acres, complete with a world-class golf course. We are also enhancing our meeting facilities alongside leisure options. We believe this is a wise investment that will deliver strong risk-adjusted returns for our investors.

Got it. Thanks. And maybe switching gears to pricing, that leisure pricing has been very strong across the country. We're seeing prices well above 2019 levels. But in group and BT, I think prices are at 2019 or slightly below. Is there an opportunity for you and others to push pricing on corporate group and business transient a bit more or are you more focused on getting those parts of the business back in volume?

Yes. It's a great question, Anthony. I do think over the intermediate and long term there's going to be more pricing power in this business. And I have to believe that demand is going to outpace supply certainly given the amount of scarring and pain that occurred through this pandemic. And we're pleased as some of the stats that Sean outlined I think really demonstrate that operators are being disciplined on pricing and we're getting close to 2019 levels, and we're still at RevPARs at our 20%, 30% below and in some cases below 2019. So I do think that there's going to be a much better opportunity for real pricing power and margin growth in this industry which we have not seen. We certainly did not see at the end of the last cycle. So we are encouraged as we look out.

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

Hi. Good morning. This is Saffron for Smedes. Can you just talk about what you're seeing on labor costs? I think in March you cited $70 million in cost savings from a reduction in hotel staffing? And then, as you think about that, what percent do you think could be offset of the rising labor costs by the reduction in staffing needs?

Yes. It's a great question. Let me answer the first part. We've spent a lot of time and huge credit to Sean and our asset management team and the other men and women on the Park team of sort of reimagining the operating model. So we're confident that we've been able to take out $85 million in permanent cost. It's about 1200 FTEs approximately across both hourly and management. And we're confident that that will deliver huge benefits for shareholders as we move forward. The one benefit that we have on the labor side is being 60% union and with those costs already largely baked in, we're not seeing some of the same challenges on the labor front. We are seeing it at our non-union hotels. Key West is an example where labor and certainly Orlando, pockets of Florida that are a bit more challenging. But we're not seeing huge increases on the labor front. Let me hand it over to Sean if he's got additional comments he'd like to make.

Sure, Tom. Thanks. What Tom mentioned reflects our approach to limiting positions. When considering some of the elements of our operating model, such as housekeeping or changes in food and beverage, those areas are still evolving. It's challenging to assign specific dollar amounts at this stage. We need the right mix to test these changes and the impact on our standards and take rate. This process is ongoing, and while it's a work in progress, we're confident that we will contribute to the $85 million that Tom discussed as we move ahead and ramp back up.

Great. And then just as a follow-up. In your prepared remarks, you mentioned the focus on value-added transactions in projects. But it looks like you reduced CapEx to $56 million for maintenance projects this year. Just going into 2022, how do you think about spending there? And are there any major projects on the horizon?

Yes. As we mentioned, the Bonnet Creek project is moving forward with the expansion of the meeting space for both the Waldorf and the Hilton, which is a project costing over $100 million. We are very confident that this will be a significant success for us. Additionally, we will be renovating the meeting areas as well as some guest rooms. We have recently completed renovations of the meeting spaces at the Hilton San Francisco and have partially renovated the TAPA Tower at Hilton Hawaiian Village. You will notice that our costs are increasing on both the maintenance side and the embedded ROI side for the Park portfolio. We are also making significant progress on planning for the DoubleTree San Jose, which we aim to convert to a Hilton, serving as another example of our initiatives.

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

Hi, good morning, everyone.

Good morning, Neil.

Hey. I'm just wondering if you can give an outline just kind of what you see for group outlook pace or how do you want to qualify it for your San Francisco and Chicago markets heading into again like I said in 2022?

Yes. If you think about San Francisco 2022 citywide, I think right now in the books about 34 events, about 620,000 room nights. And if you look back to 2019, which I think was an all-time high at about 1.2 million room nights. So, clearly continuing to ramp up. I think JPMorgan proceeding with the healthcare conference is great news. And I think as you continue to get more people back to say, we weren’t returned to the office and back to business travel, we fully expect that market will continue to thrive. As we look out in Chicago in a corporate group there, our group pace is about 83% of the 2019 levels. That's about 168,000 room nights plus or minus, citywide are also I think of over 700,000 room nights in Chicago. So, very encouraged. Chicago has really held up better since we reopened back in June of this year. So encouraged about both of those markets as we move forward.

Appreciate that. One of the things that the group guys, the group focused owners saw was a pretty significant pickup from second quarter to third quarter on the group side, and obviously significantly below 2019. But compared to the first and second quarter, I would say a pretty significant step function higher. And that also came with a pretty stronger than expected, I think F&B overall. I was wondering if you can comment on what are the spending habits as those groups kind of bread and butter groups start to come back? Are you seeing the same amount of willingness in terms of like minimum spend? Any different or changes in preferences for like banquets or group gathering sessions? And also, I think it spills into the other revenues which have been just on fire and maybe you could shed some light on what's going on there as well?

Yes, Neil. This is Sean. In general, the groups are acting similarly to how they did before the pandemic. While overall participation is lower than in 2019, we are finding that we often underestimate participation when planning events. The positive aspect is that attendees are indeed showing up. Additionally, they seem to want to spend more than they initially planned. We are witnessing some incremental spending on site, as participants tend to stay within the hotel rather than seeking alternative venues or dining experiences. This trend is also evident in leisure activities, leading to increased benefits for certain outlets. We are seeing growth in out-of-room spending, particularly in amenities like golf, which has been consistent while we operate at elevated demand levels during various stages of the pandemic.

Okay. Thank you.

Our next question comes from the line of Gregory Miller with Truist. You may proceed with your question.

Thanks. Good morning. Just one question from my end. As we look to Thanksgiving and the December holidays, I'm interested in how your cold weather markets may fare this season? And the extent of pent-up leisure demand that may be shifting back up north. So, if possible, could you share your initial expectations for markets like New York City this year relative to pre-pandemic years?

Yes. Greg, this is Sean. For New York specifically, clearly a good news story happening up there, opening up the asset early October and has really ultimately exceeded our expectations as we looked at our reopening models for October. And as we get into November and December, clearly the holidays are part of the success for this asset. And so, what we're seeing right now for New York is Thanksgiving is pacing around 80% of 2019 levels with sellouts for Wednesday and Thursday with ADR flat. So feeling good about how we're coming into that week. Earlier than that we have a sellout around the New York City marathon this coming weekend. So I think again, November is shaping up pretty well for the asset. And then as you get in December, we're seeing certainly some real good strength there of about 60% to 70% committed occupancy with the asset. So, I think we've got a good base and I think we're continuing to see positive pickup volumes at or above the comp set in the market there. So feel good about New York. And obviously, feel really good about our resort areas where you would expect strength around the holidays. Hawaii is looking good despite the governor kind of putting a pause and a little bit of pause and hesitation on booking the holiday travel. We're now seeing the pickup as I mentioned in my remarks starting to see some more, the pace picking up week over week just like we were seeing pre-delta. Hawaiian Village right now is a little behind. I think without the far east traveler there, which typically comes in strong around the holidays. It’s still tracking a little bit below 2019 levels, but Waikaloa on the Big Island is just going to be incredible. It's going to be about 50% higher rates than 2019. So that’s a combination of the demand and rate strategies being deployed there by the team, so kudos to them. So again together - in together or combined those two will make Hawaii a really good market for us. And then Florida, just across the board Miami, Key West, Orlando, all great markets for us for the holidays. Thanksgiving week is going to be supported by some sporting events in Orlando. The Waldorf is pacing ahead of 2019 levels with a 60% increase in rate. The Bonnet's complex is seeing pace up 85%, Waldorf 125% to 2019 on the Christmas New York Eve. So just incredible. And then Casa, I mean just remains on a tear. We're looking at rates that are $500 to $600 higher than 2019 levels around the holidays, around especially the Christmas and New Year's Eve holidays. So that basically translates to a $100,000 of incremental revenue per day at the hotel.

That sounds great. I appreciate all the detail there, Sean.

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

Hey, Chris.

Good morning, Tom. I heard your comments about potential acquisitions and possibly a joint venture where we could mark an asset to market and then increase liquidity for acquisitions. My question is about any potential acquisitions—considering the faster recovery gaining momentum, are you leaning towards options that currently yield returns but lack a compelling story, or would you prefer to pursue opportunities that have a narrative and can add value?

It's an excellent question, Chris. We're discussing this in a hypothetical context. Ideally, I believe finding a cash-flowing opportunity where we can apply our best practices, alongside our asset management team and our design and construction team for added value over time, would yield the most benefit. Clearly, an asset that can generate cash flow is appealing as we look ahead. However, we will assess each situation carefully. There are instances where deep value plays could make sense, but those may be more fitting for private equity rather than a recapitalization structure. We are being deliberate. It's essential for listeners to note that we have added 18 hotels from the Chesapeake deal, presenting significant opportunities within our portfolio. For example, the DoubleTree in San Jose, the DoubleTree in Crystal City right by the Amazon campus, and the Hilton Hawaiian Village where we have options for a six-tower development a few years down the line. We've also converted the Hilton Santa Barbara and are rebranding Bonne Creek to a Signia. There's substantial potential within this portfolio. Therefore, we want to approach acquisitions thoughtfully. We are certainly poised for growth and will participate in acquiring assets while also recycling capital within our existing portfolio as the recovery progresses.

Okay. Very helpful. And then how do we think about the puts and takes next year with international coming back both ways inbound and outbound? And for you guys, Florida big beneficiary this year of state domestic. And then you're going to get more international inbound next year. Is there a way to think about from a maybe a rate perspective what happens when we kind of see more Americans going abroad and more international guests coming into your markets maybe other than Florida? Is there any way to just directionally think about that?

Yes. First of all, I think it's going to bode very well for not only the industry, but I think for Park in particular. If you think back to 2019, we had inbound international of about $79 million. And outbound from the U.S. was about 100 million plus or minus. That may be a little off Chris, but I don't think much. And so, when you think about what's happened here during the pandemic, those hundred million travelers plus or minus were all really focused on U.S. or the Caribbean. Some going international, but largely those that were traveling were focused more kind of U.S. centric. I think as we're coming out of the pandemic, we're going to begin the journey to get back to the way things were. Meaning, you're going to see more and more of those international travelers coming back into the U.S. and think about where they want to go. They're not likely going to San Antonio. They're looking, and I love San Antonio, but they're looking more for New York, Boston, D.C., Chicago, San Francisco in addition to Florida and Miami. All of those markets where Park is incredibly well positioned. So we see this being really positive for us. But I also think we can't lose sight again of the pent-up demand we have been through for two years now. And I think this sort of revenge spending and this desire to get out and reclaim and recapture people's lives is only going to continue to accelerate. Our aim for an industry that in our market where you've got less supply risk, we think we finally benefit from having our supply exposure. It's about 1.7%, I think among the lowest in the lodging REITs given our footprint. But we think that's only going to bode well for us and having more pricing power. And I didn't even talk about Hawaii. Keep in mind, Hawaii, historically it's about 30% international of that about 60% of that, 63% I think to be exact relates to coming out of Japan. While Japanese have been coming the last 30 years consistently 15% to 17% of that market. So now you've got two years where they haven't visited. So I think Hawaii gets the double benefit, getting more and more penetration coming from the U.S. in addition to seeing the international, particularly the Asian trade beginning to really ramp up. As Sean said, that's probably the second quarter. I mean, we think we'll have a really strong holiday. But we think as you look out to Hawaii and particularly now with international travel and six markets in particular driven largely by Japan will continue to only benefit that market as we move forward. So the international is nothing but a significant tailwind for the industry and I think for Park in particular.

Okay. Very helpful. Appreciate all the thoughts. Thanks, Tom.

Thank you.

Our last question comes from the line of Robin Farley with UBS. You may proceed with your question.

Great. Thanks. Most of my questions have already.

Good morning, Robin.

Good morning. How are you? Most of my questions have already been addressed. I just have one follow-up. In terms of the transaction environment, with low interest rates and some types of buyers being more leveraged than a public lead, do you anticipate that making it challenging to pursue some of the acquisitions you might be considering?

It's a great question, Robin. There’s no doubt that there is a significant amount of cash in the market, and I believe this trend will continue. Clearly, the lowest cost of capital will prevail, and there are some prime real estate opportunities that are being traded at astonishing prices, around $2.5 million per key, which is not where Park is likely to be positioned. We are very interested in these opportunities. You will find that sovereigns, high-net-worth individuals, and some family offices may pursue these investments. We are confident that our relationships will enable us to discover appealing opportunities. We will need to be selective and put in extra effort, but historically, my teams have excelled in identifying off-market deals that meet compliance standards. Additionally, as our stock continues to recover, we will leverage operational units and maintain the flexibility to structure deals that can be appealing to certain sellers. We will utilize every resource available to ensure we are creating value for our shareholders.

And I'm also thinking about your comments about the asset value and what a significant discount you're trading. In the past you have actually sort of given targets for asset sales. Any thought that, I mean, if the public market's not valuing them and you get more value by selling them, would you think about actually giving a target for asset sales?

Yes. It's another fair question. All options are on the table. I mean, we are committed to creating shareholder value and as I've said, we'll get paid either by the public markets or the private markets and we're serious about that. We will continue to work hard and create value for shareholders. And we do expect as the recovery takes hold and continues to accelerate I think some of the fears and concerns of the New York, San Francisco's and Chicago's of the world will certainly subside. These are great cities of the world that people that are betting against them and my humble opinion are making an unwise bet. These cities are certainly going to be coming back.

Good morning. Thanks.

Good morning, Bill. How are you?

Good. Thank you. Quick clarification and then a question. Clarification on the Hilton Midtown. Is it fully open, all 1800 rooms open? I had read that it was going to be partially opened?

Now, all rooms are open, Bill.

As Sean said and we fully expect a near if not a full sell out for the marathon this weekend. So it's ramping up better candidly than any of us thought. And I've been to New York three times here in the last couple of weeks and the city's coming back. It's coming back to life and it's great to see.

The question really is, how much do you think labor wage rates need to increase over the next year to reach an equilibrium, aside from your union contracts? We're not discussing a deficit in man hours and increased turnover compared to historical levels.

Yes. That’s a thoughtful and reasonable question, Bill. It’s a challenging one because we need to consider individual markets. If we take New York or any major city as an example, we’re offering significant wages, generally above $30 an hour in those areas. We’re not experiencing the same turnover pressures that some of our peers are facing. There’s a level of seniority and recall rights at play. We believe we have an opportunity to continue to find the right balance and adjust accordingly. Advancements in technology, like digital key and other applications, alongside changing customer preferences, are important factors that we all recognize and expect to be beneficial for the industry. However, there will be some challenges, particularly in labor markets like Key West or Orlando, where issues such as leased labor and lack of affordable housing create hurdles. Wages are rising there, but as Sean mentioned, our two assets in Key West saw an increase in RevPAR of 88% compared to 2019 levels, and we expect that trend to accelerate. This increase is partly due to pent-up demand as people want to reclaim their lives. Sean, do you have any further insights on the labor situation? We will continue to study this matter and follow up with you, Bill, to ensure we address your question properly.

Yes. Appreciate it. It seems like the smaller mid-size markets may have more pressure from competition from Amazon warehouses and things like that than maybe some of the large markets.

Yes. We're not seeing it, Bill. I believe there is increasing optimism regarding pricing power, margin growth, and supply growth, even considering the Park portfolios. I mentioned earlier about 1.7%. Although the past nearly two years have been tough, there are valid reasons to feel optimistic as we move forward. We are finally returning to a more attractive business environment for hotel ownership compared to the past, especially in the recent couple of years and by the end of the last cycle.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Tom Baltimore for closing remarks.

We appreciate the opportunity to visit with all of you today. Look forward to seeing you in person in the near future. Although I know the upcoming navy will be virtual. We will be on the road and have been over the last several weeks and really be reaching out to many of you to get together in person. So, stay healthy and look forward to seeing you soon.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.