Park Hotels & Resorts Inc. Q4 FY2021 Earnings Call

Greetings. And welcome to the Park Hotels & Resorts Fourth 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. Please note that this conference is being recorded. I would now turn the conference over to our host, Ian Weissman, Senior Vice President, Corporate Strategy. Thank you. You may begin.

Thank you, Operator. And welcome everyone to the Park Hotels & Resorts fourth quarter and full year 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 recently 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 a review of Park’s major milestones and an overview of our fourth quarter performance, as well as thoughts on Park’s priorities as we head into the recovery. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on fourth 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. Six weeks ago, we celebrated the fifth anniversary of Park Hotels & Resorts. Over the past five years, the Park team has worked tirelessly, with laser focus and discipline to transform the company. We have sold or disposed of 31 assets, $1.7 billion, including all 14 of the international assets that were part of this spin, vastly simplifying Park’s operating profile. We added 18 high-quality assets through the $2.5 billion Chesapeake Lodging Trust acquisition, improving portfolio metrics and diversifying our geographic, brand, and operating profile. We facilitated the exit of both Blackstone and HNA from Park stock, eliminating the perceived equity overhang and taking out HNA in a highly successful secondary offering that allowed us to buy back Park stock at a significant discount to NAV. We also shut down operations at the three freestanding laundry facilities and turned over management of Park’s for select hotels to third-party management, freeing up our internal resources and simplifying our employee base. As we pass the five-year anniversary on January 3, 2022, we removed significant built-in gain tax restrictions on the sale of legacy Park assets, giving us increased flexibility and optionality, as we expect to enter the growth phase of a lodging recovery. The past two years have been grueling for all of us. When I think about Park’s efforts, I’m especially proud of how our experienced team has navigated this environment. We did not panic; we acted swiftly and decisively to stabilize the business, temporarily suspending operations at several hotels to reduce monthly cash burn. Thanks to the exceptional efforts of our asset management team to re-imagine the operating model and reopen hotels only when it was financially beneficial to do so. We reduced our monthly cash burn from a high of $85 million to portfolio breakeven by March of 2021. We also worked proactively to maximize our financial flexibility. We were one of the first lodging REITs to enter the bond market in 2020, orchestrating three successful bond offerings between May 2020 and September 2021, raising $2.1 billion in senior secured notes. In combination with the proceeds from Park’s strategic capital recycling program, the bond issuances allowed us to push out debt maturities and pay off 97% of our bank debt, and, perhaps most importantly, avoid the need to issue dilutive equity, which we communicated as a key priority. Looking at 2021 in particular, I’d like to call out four key achievements. First, we successfully reopened six hotels during the year, including the nearly 1,900 room New York Hilton Midtown, with the portfolio now 96% open and only two of our hotels were suspended. Second, we achieved positive FFO in the last two consecutive quarters through the stellar efforts of our asset management team and operating partners to drive topline growth, working towards re-imagining the operating model to permanently cut an estimated $85 million in expenses, the elimination of approximately 1,200 full-time positions across the portfolio, translating into an estimated 300 basis points of margin upside. Third, we increased our financial flexibility through our strategic capital allocation priorities, opportunistically selling five hotels for nearly $480 million to reduce leverage and issuing $750 million of attractively priced corporate debt. Finally, we restarted work on several key ROI projects, including the Bonnet Creek meeting space platform expansion in Orlando, which we expect will drive outsized growth for our portfolio going forward. In sum, we finished 2021 well poised to capitalize on the expected recovery and return to normalcy. Running briefly through fourth quarter performance, results came in ahead of our expectations, driven by strong performance from several core markets. Consolidated pro forma RevPAR of $110 was above expectations, fueled by outsized ADR growth, with 37 of our 46 open consolidated hotels generating positive EBITDA for the quarter. Similar to the third quarter leisure strength in Hawaii, Southern California, and South Florida helped drive portfolio performance, generating an average leisure transient ADR that was 5.2% ahead of the fourth quarter of 2019. We saw healthy performances at two hotels in Hawaii during the fourth quarter, with minimal impact from the Omicron variant over the holidays. Hilton Hawaiian Village ran over 96% average occupancy during the last week of the year, and in Waikoloa, we continue to see strong rates in comparison to 2019, with ADR of 27% or $63 to the fourth quarter of 2019. On the mainland, our Florida properties continue to post incredible rate growth, increasing by nearly 30% over 2019 levels in the fourth quarter and by 18% for the full year. In particular, our two Key West hotels saw a 76% increase in RevPAR compared to 2019 levels during the fourth quarter and a 44% increase the entire year. We continue to see meaningful sequential improvements in group and business transient demand as well. Business transient revenues increased by over $10 million from the third quarter to account for 30% of the total quarterly revenue mix in the fourth quarter, and group revenues increased by over $90 million from the third quarter to account for nearly 20% of the total mix during the fourth quarter, up from just 7% in the first half of the year. We saw pockets of group strength in New Orleans, Orlando, and New York, and short-term group demand in Hawaii throughout the quarter, an encouraging sign of the pent-up demand that is present as groups increase meeting in person. Looking ahead to 2022, Park remains laser-focused on key priorities as we move from the pandemic to the endemic phase of the crisis. Park owns among the highest quality hotel portfolios in the sector, with incredible optionality and significant embedded value, which we plan to unlock over the next several years. Our focus over the balance of this year and beyond remains on aggressively asset managing our hotel portfolio and our principle of relentless pursuit of operational excellence. I mentioned earlier that we have eliminated an estimated $85 million in expenses through our tireless efforts to re-imagine the operating model, translating into an estimated 300 basis points in margin upside. As our portfolio recovers, we seek to demonstrate to the market that the operational efficiencies we achieved over the last two years are permanent while unlocking the embedded growth opportunities across the portfolio. Additionally, we will seek to take advantage of strong demand for hotel real estate in the private markets by continuing to sell an estimated $200 million to $300 million of non-core assets at or near 2019 valuations while evaluating opportunities to buy back upwards of $250 million of stock at a meaningful discount to NAV. We believe that there is no better capital allocation decision than to invest in Park, either through share repurchases or investment in ROI projects. Thanks to the great work of Sean and his team, we recently amended some of our debt covenants to our credit facility to allow for more flexibility going forward. As the recovery broadens over the back half of 2022, we plan to reinstate a modest dividend, subject to Board approval, and plan to selectively pursue attractive acquisitions in our target markets that are immediately accretive to both earnings and NAV, with a continued focus on upper upscale and luxury hotels in top 25 markets and premium resort destinations. Finally, we expect to prioritize portfolio-enhancing ROI projects that are targeted to drive outsized growth and unlock the embedded value in our portfolio. Significant work is underway on our $110 million Bonnet Creek meeting space expansion project. We seek to repeat incredibly successful brand conversions at the Hilton Santa Barbara and The Reach Resort in Key West. We plan to launch two additional brand conversions, DoubleTree San Jose to a Hilton and the Waldorf Casa Marina to a Curio branded hotel. Overall, we expect to invest at least $200 million in value-enhancing ROI projects over the next few years, which we project will yield attractive returns. Before I hand the call over to Sean, I want to emphasize the strength of Park’s current position as we head into a more broad-based recovery. We remain committed to maximizing shareholder value and working aggressively to narrow the current valuation gap, which currently stands at over a 25% discount to consensus estimates and an even wider gap based on our own internal view of value. Our balance sheet is in excellent shape with over $1.6 billion of liquidity, and we believe we have several levers to pull to generate outsized earnings growth over the next few years as we unlock the enormous embedded value within our portfolio while also taking advantage of our streamlined operating model and the impending return of both business and international travelers. We expect our strong leisure base of business in markets like Hawaii, Florida, and Southern California to continue to fuel results, and the recovery of business and group-related demand in markets like New York and San Francisco should translate into a strong second half of the year, with overall group pace approximately 62% of 2019 pace as of December 2018. Despite near-term challenges presented by the Omicron variant, we believe we will remain on track to return to prior peak operating results by 2023. With that, I’d like to turn the call over to Sean, who will provide more color on our results and updates on our balance sheet and liquidity.

Thanks, Tom. Overall, we were very pleased with our fourth quarter performance, with pro forma RevPAR improving sequentially to $110, driven by a 120-basis-point increase in occupancy to 52.5%. While occupancy averaged 210 during the quarter, we were just 4% below the same period in 2019. Overall, total operating revenue was $435 million during the quarter. While hotel adjusted EBITDA was $85 million, resulting in hotel adjusted EBITDA margin of nearly 20%. Q4 adjusted EBITDA was $81 million, and adjusted FFO per share was $0.05, marking the second quarter in a row of positive FFO since the start of the pandemic. We witnessed widespread strength across the portfolio, with all four location types—resort, urban, airport, and suburban—reporting flat to positive hotel adjusted EBITDA for the quarter. Among the highlights for Q4, we were very impressed with the overall performance of the Hilton New York Midtown, which averaged nearly 60% occupancy during the months of November and December, while rates surpassed 2019 levels, as the hotel was able to host groups, international travelers, and leisure guests looking to take advantage of everything that the city had to offer during the holiday season. Looking to the first quarter of 2022, performance has been negatively impacted by the Omicron variant, particularly in markets like San Francisco, New York, and Chicago, which saw major city-wide events canceled, coupled with a delayed return to office, negatively impacting business transient demand in an otherwise seasonally weaker quarter for leisure travel in these markets. Overall, the portfolio has taken $30 million in group cancellations due to Omicron, although the vast majority of the fallout appears to be contained to just the first quarter. Therefore, we anticipate Q1 RevPAR to dip slightly from Q4 of last year; our margins are expected to be negatively impacted by a projected year-over-year increase in real estate taxes. Despite the Q1 challenges, we are very encouraged by the year-end pickup with nearly $25 million in new group bookings generated just last month for Q2 through Q4, beginning a trend of positive net group booking activity over the past few weeks, especially in the Hilton managed portfolio, which has seen 2022 corporate group lead volume double compared to this time last year and increase nearly fourfold in January versus December. On the transient side, demand has increased from roughly 59% of 2019 levels in early January to around 77% over the past several weeks, and our rates have averaged a 3% to 4% premium over 2019. By the end of January, transient booking pace for weekends was 26% higher than 2019, and our weekday pace was down just a percent, improving from down 19% at the beginning of the month. Turning to the balance sheet, our liquidity currently stands at $1.6 billion, including over $900 million available on a revolver and approximately $650 million of cash on hand. Our net debt sits at $4.2 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 currently fixed. Despite recent volatility, the debt markets remain active and are becoming more constructive towards lodging, which puts Park in a solid position to refinance the $725 million CMBS loan on our two San Francisco assets, which comes due in late 2023. We also expect to refinance the $650 million 7.5% senior secured notes that we issued in May 2020, calling them on or prior to the June 1st call date to realize meaningful interest savings going forward. Finally, as Tom noted, I’m very pleased to report that we successfully amended our revolving credit facility and term loan, which we finalized earlier this week. With this effort, we accomplished three key objectives. First, we extended our financial covenant waiver period by two quarters, with the first test period pushed out to the end of the third quarter of 2022, with the exception of a one-time fixed charge coverage ratio test based on Q2 results, and further modified the covenant thresholds beyond the waiver period. Second, we gained more flexibility to run the business by increasing the amount of investments permitted, eliminating restrictions on asset sales and capital expenditures within the portfolio, while also giving us the flexibility to prepay outstanding secured debt among other adjustments. Third, we secured the ability to buy back upwards of $250 million of stock, which is permitted as long as there are no outstanding amounts on the revolver and the repurchases are funded solely from cash on hand, cash from operations, or proceeds from asset sales. I would like to personally thank the members of our bank group for their continued support of the company. They have been incredible partners throughout these unprecedented times. 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.

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

Hi. Good morning, everyone. Thanks for taking my questions. I wanted to ensure I get a clear take on your views on New York and San Francisco, and how those qualitatively speaking are going to roll through this year, right? They’re still in much earlier stages of recovery, I think that’s probably a fair statement? How do you expect those to evolve as we go through 2022?

It’s a great question, David, and thank you for joining us today. First, if we look at the New York Hilton as an example, we reopened the asset on October the 4th; we studied quite carefully whether or not it made sense to open at that point. We debated whether or not it would make sense to open perhaps earlier or in the spring of 2022. We were pleasantly surprised that we made the decision to open in October. If you think back, as Sean pointed out in some of his remarks, based on our occupancy in November, we were running about 55% to 60% occupancy at close to $300 rates. I believe we were just 7% or 8% below 2019 levels. In December, we were running occupancy there at about 63% at a rate of about $345, and we were about 7% plus or minus over 2019 levels. So, it performed much better. I think, again, to the issue of pent-up demand, we also saw the resurgence in international travel there as well. Obviously, that had been impacted by Omicron and the variant, but we remain very, very bullish and constructive on New York. You really have only three hotels that have significant meeting platforms. In our view, Hilton has the best meeting platform. As we look out into the booking pace, we are seeing just in group pace upwards of about 60% of 2019. I think we’re encouraged as we move forward. As for San Francisco, many people are quite down on it. However, that’s important to remove some of the emotional clutter and negative energy that’s out there and just step back for a second and think about the city. It’s one of the great cities of the world, known for innovation and creativity, and has numerous universities and venture capital sinking, and so I think the notion that San Francisco is going to collapse is a bit premature. Obviously, safety and security is an issue, and I personally was out there in early December with another REIT CEO, meeting with not only the Mayor but the Chief of Police and their Chief of Staff, stressing the need for safety and security. The meetings were positive catalysts. As we look out in San Francisco, we are encouraged. There was a recall election recently with three school board members that were recalled, and there’s talk of the District Attorney possibly facing a recall as well. There’s been a positive movement happening, but of course, safety and security need to be addressed. Regardless, we remain constructive on San Francisco over the intermediate and long term.

Understood. Perfect. Thank you very much.

Our next question comes from Smedes Rose with Citi. Please state your question.

Hi. Thanks. You guys have talked a little bit on your calls about selling non-core properties and emphasized that most of the REITs come from your core assets. Is now the time to kind of formalize a disposition program, given your confidence in a broad-based recovery? Is it now the time to move quickly on this?

Yeah, it’s a great question, Smedes. If you think back over the five-year history, we were aggressive and proactive. We’ve sold now 31 assets for $1.7 billion, including 14 international assets, operating in South Africa, Germany, the U.K., Brazil, and more, all complicated with lots of legal and tax issues. It was prudent of us to do that, as had we not done so heading into COVID, we would have faced significant complexity. We will continue to aggressively recycle. Our top 27 assets account for about 90% of the value of the company and we’ve identified another batch of non-core assets that we’re going to aggressively move. With the built-in gain tax requirements now expired, we now have more options for the portfolio. Our sales activities are already underway and you’ll see us accelerate those non-core asset sales. We’ll also explore our joint ventures, where possible. We will continue to reshape the portfolio, improve metrics, and utilize proceeds for share buybacks. We trade at a significant discount to NAV and replacement cost, and we are not satisfied with that; we will work hard to rectify this situation.

Okay. Thank you. And then just as a follow-up regarding dividends, if you reinstate it in the back half, would that be driven by taxable concerns or would it be more about your confidence in the recovery outlook? How do you gauge targeted payout ratio?

Certainly, we expect to have taxable income. We do have net operating losses from the pandemic that gives us additional options. Having a modest dividend makes us more attractive to some income investors who might otherwise overlook us. Additionally, it reflects confidence that we believe as we move from this pandemic phase to endemic phase, having a return of capital that includes not only buybacks but a modest dividend is a prudent move that will benefit shareholders.

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

Hi. Good morning, guys. Tom, I think you intercepted the question I had on built-in gains implications, so I can move to a different angle here. Just from where we sit today, not knowing anything about the future in terms of potential acquisitions you are considering, how do you weigh specifically between prepaying some of the higher-cost secured debt that remains on the balance sheet later this year versus share repurchases? What kind of competing IRR profiles do those create, and how do we think about those priorities?

It’s a fair question, Rich. I want to back up for a second to emphasize our priorities for this year. First and foremost is operational excellence. We are laser-focused on the operational front and reimagining the operating model. We’ve repeatedly articulated our confidence in removing $85 million in costs, leading to about 300 basis points in margin benefit. By demonstrating operational improvements and closing the valuation gap, we gain options for growth. Selling non-core assets will further support share buybacks. We currently trade at a significant discount to our intrinsic value; thus, we’ve reallocated to focusing on investing back into the portfolio.

Okay. That makes perfect sense. And then just a quick follow-up, if I may. I believe you said you were planning on reopening Park 55 in December. Obviously, Omicron has since happened, but was that the only change affecting the timing, or were there other delays?

As we said, we will reopen hotels when financially viable. It was our intent to open in that timeframe. The variant certainly played a role in delaying it. However, based on current trends in San Francisco, we think reopening Park 55 is likely to happen around April to May to maximize its performance.

Our next question comes from Floris Van Dijkum with Compass Point. Please state your question.

Thanks. Hey, Tom. I want to see if I can get you to say something a little bit more in terms of your own view of value. I know one of your peers is talking publicly about his shares. Will you be doing something similar, particularly when we look at your stock and there seems to be significant value? The street appears to have skepticism, particularly regarding your urban exposure. Can you provide more details on your replacement costs, and have they changed since last time we spoke?

It’s a fair question. We intend to put out a more detailed summary of NAV, given that consensus is somewhere around $27 a share. Our internal range is $28 to $32. We plan to provide more details to support this. It’s important to point out that many assets in our portfolio are impossible to replicate. Properties like the Hilton Hawaiian Village, with its 22 acres and nearly 3,000 rooms, showcase our competitive edge. Given rising inflation and construction costs, we are confident we are trading at a significant discount—around 55%—to replacement costs. We are more optimistic about growth, especially as urban markets recover.

Thank you. I have one more question, which may be for Sean as well. As some of your peers are exiting covenant waivers or getting close to it, could you weigh acquisition considerations against share repurchases, given the reality of needing to exit waivers?

Certainly, Floris. We take a balanced approach. We're proactive, given the valuation disparity. We intend to be diligent about stock repurchases while completing refinancing to improve our capital structure. We anticipate that performance will continue to improve.

If you were to refinance today, could you quantify the annual savings you would seek?

We are looking at savings in the range of $8 million to $12 million on the $650 million.

Our next question comes from Anthony Powell with Barclays. Please go ahead.

Hi. Good morning, everyone.

Good morning, Anthony.

Question on ROI projects. You mentioned allocating $200 million over the next few years on those. Why not do more? It seems like given the broader industry recovery, more investment could pay off now.

It’s a great question, Anthony. We want to strike the right balance. Our portfolio has significant opportunities, including DoubleTree San Jose, Curio's Casa Marina conversion, and Bonnet Creek with its meeting platform expansion. We are also evaluating additional investments as demand continues to normalize.

On pricing, you mentioned New York had strong ADRs. What distinguishes your ability to price in New York, and when do you think other urban markets catch up?

We have a talented team in New York focusing on maintaining rates and demand. The New York market is unique in its resilience as it hosts major groups. Pricing may need a bit of adjustment, but as demand normalizes in other urban markets, we anticipate stronger performance moving forward.

Our next question comes from Neil Malkin with Capital One Securities. Please go ahead.

Hey, Tom. Bigger picture question regarding debt management and prepayment options. Given the debt markets are improving, do you anticipate that could catalyze valuations?

It’s a solid question, Neil. This will depend on improvements in visibility for demand and the overall financing landscape. I expect we’ll see some take-private activity and potential mergers. There might be fewer public lodging REITs next year.

Could you provide insight on customer service? Are you hearing from core travelers about satisfaction amidst changes post-pandemic?

We have not received negative feedback from our partners. Hilton has positive scores despite operational changes. Guests are understanding, and we expect improvements in service quality as we return to the new norm.

Given the portfolio's exposure, do you consider selling larger market assets into joint ventures to boost capital allocation?

All options are on the table to close the valuation gap. We’re committed to operational excellence and maximizing shareholder value, ensuring our portfolio continues delivering growth.

Our next question comes from Ari Klein with BMO Capital Markets. Please go ahead.

Great to be on the call. You've mentioned potential assets with alternative uses, such as the New York Hilton. Where does that rank on your priorities?

That’s a fair question. We have high-quality assets and the potential for alternative uses, but it requires careful evaluation and execution. Our priority remains delivering shareholder value.

What wage growth have you seen, and where's your staffing level versus ideal?

Wage increases are being felt more in markets like Orlando. We’re seeing some stability, but staffing levels fluctuate. We’re evaluating market conditions, but we feel strong overall about our labor situation moving forward.

Our next question comes from Bill Crow with Raymond James. Please go ahead.

I appreciate your optimistic view. Yet, I wonder, do you think markets like San Francisco may adjust pricing to offset challenges like crime and high holding costs?

It’s a fair point, Bill. San Francisco faces operational challenges, but its significance as an innovative market cannot be overlooked. Safety initiatives and pricing adjustments may be needed, but we remain optimistic about its recovery.

Thank you, Tom. That’s all from me.

Our next question comes from Jay Kornreich with SMBC. Please go ahead.

I wanted to follow up on an amendment to your credit facility that allowed for increased acquisition capacity. What signals would prompt you to reactivate acquisitions?

While we are actively underwriters, purchases must be accretive and fit within our strategic objectives. Right now, our focus is on operational improvements and enhancing shareholder value.

Do you think that business travel and group demand will converge over the recovery, or do you foresee one leading the other?

We expect that as offices reopen, business demand will increase, followed by group demand. There’s also potential for blending leisure and business travel, and we believe our portfolio is well positioned for that growth.

Thank you very much for your time.

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

Good morning, guys. I wanted to ask about the Chesapeake portfolio. Has your perspective on its potential been recalibrated since you took ownership?

We recognized synergies within the Chesapeake portfolio through our operational improvements. There’s potential for EBITDA increases, and we believe there are more opportunities as the market stabilizes.

What are your thoughts on whether resort assets will maintain higher multiples than urban assets in the future?

We believe in the value of a diversified portfolio. Our resorts have performed exceptionally and we expect them to retain value given their unique nature. That said, urban markets also have significant growth potential.

Our next question comes from Robin Farley with UBS. Please go ahead.

My question was on the transaction environment, which I think you’ve probably covered. So, I’m all set. Thanks.

Thank you, Robin.

That’s our last question we have in queue. I’ll now turn the floor back over to Mr. Tom Baltimore for closing remarks. Thank you.

We really appreciate each of you taking time today. We look forward to seeing many of you at the upcoming Citi Conference and other events. Stay safe, be well, and we really look forward to seeing each of you in person.

Thank you. This concludes today’s conference call. All parties may disconnect. Have a great day.