Park Hotels & Resorts Inc. Q4 FY2022 Earnings Call

Greetings. Welcome to the Park Hotels & Resorts Inc. Fourth Quarter 2022 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 this conference is being recorded. I will now turn the conference over to your host, Ian Weissman. You may begin.

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts fourth quarter and full-year 2022 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. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Note also that comparisons to prior year periods are on a comparable basis as defined in our earnings release. Please refer to the documents filed by Park with the SEC, specifically the most recent reports on Form 10-K and 10-Q which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. 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 financial 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 fourth quarter performance and outlook for 2023. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on fourth quarter results, an update on our balance sheet and liquidity, and further details on guidance. 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. 2022 was an incredibly productive year for Park as we witnessed widespread improvements in demand throughout the portfolio while continuing to strengthen the overall quality and flexibility of our balance sheet. For the travel industry as a whole, 2022 was an important year as businesses returned to the office, conferences resumed, and the majority of travel restrictions were lifted around the globe, allowing the industry to benefit from a broad-based recovery across all demand segments. For the Park portfolio, we saw improving group and business transient demand throughout the year, which combined with ongoing strength in leisure demand to deliver healthy results for the full year. Looking ahead, the continued increase in group demand and recovery in urban markets provides a favorable backdrop for Park to outperform. In 2022, we remained focused on our strategic priorities, including operational excellence, in terms of realizing operational efficiencies, prudent balance sheet management, and investing in value-enhancing projects. We continue to reap the benefits from the reimagined operational model developed during the pandemic, which translated into labor costs that were 16% lower in 2022 versus 2019, and are expected to remain above our target of approximately 1,200 positions or a 9% headcount reduction throughout 2023. We also made substantial progress improving the overall quality of our balance sheet in 2022, raising our total liquidity to $1.9 billion, an increase of approximately $300 million over the last 12 months due to both our capital recycling efforts and our debt modification initiatives. On the capital recycling front, we sold an interest in eight non-core hotels for $435 million at 12.7 times 2019 EBITDA since the start of 2022, including the recently announced sale of the Hilton Miami Airport for $118 million in early February. Additionally, we exited our covenant waivers and pushed out debt maturities with the recast and upsize of our $950 million revolver in December. Thanks to these incredible efforts by the team, Park remains well positioned to execute on our internal and external growth initiatives, with the flexibility to pivot between offense and defense, certainly depending on market conditions. In terms of our strategic priority to invest in our assets, we spent $168 million across our portfolio in 2022, and we expect to increase to over $300 million this year, nearly half were ROI projects as we continue to unlock embedded value opportunities throughout our portfolio. Excellent progress continues on our meeting platform expansion at Bonnet Creek with the opening of the new Waldorf ballroom this past December, along with the completion of lobby renovations at the Signia hotel with a full rooms, public space, and existing meeting space renovations at the Waldorf expected to be completed by the fourth quarter of 2023. We expect to finish the Signia meeting platform expansion, along with the renovation of the Rees Jones Championship golf course by Q1 2024, completing a five-year $220 million full-scale renovation of this world-class resort. We are also finalizing plans to complete our Curio conversion at our iconic Casa Marina Resort in Key West later this year. A $70 million investment, which will include a full rooms renovation and a reimagination of the public space, including its food and beverage outlets. We also plan to implement climate change mitigation upgrades during our renovation, making the asset more resilient in the event of weather-related issues. Finally, we also completed Phase 2 of the Tapa Tower rooms renovation at Hilton Hawaiian Village during the fourth quarter and expect to execute the third and final phase of the renovation at the 1,000-room tower in the fourth quarter of this year, culminating in $85 million of total CapEx spend for the project. Finally, in 2022, we returned over $290 million of capital to shareholders in the form of common stock dividends and share buybacks. Beginning in Q1, we reinstated our quarterly dividend generating a full-year payout of $0.28 per share. In addition, given the ongoing dislocation between public and private valuations, we bought back a total of $227 million of stock last year in addition to another $30 million of stock so far in 2023 for a total of over 15 million shares repurchased at a significant discount to net asset value. Looking at fourth quarter results, comparable RevPAR increased 47% year-over-year, having recovered to 91% of 2019 levels and fully recovered within a 0.3% increase to 2019 for the fourth quarter if we exclude San Francisco. Results were led by strong leisure demand in our resort markets and healthy group trends in markets like New York, Hawaii, and New Orleans. In Hawaii, our Hilton Hawaiian Village hotel reported fourth quarter RevPAR that was 2% ahead of 2019 results with average daily rate 11% above 2019. The hotel reported its strongest group quarter since 2019 during the fourth quarter and finished 2022 with an annual EBITDA contribution of over $173 million, its highest amount in our company's history. While we have been very encouraged by the strong fundamentals in Hawaii, we believe tailwinds for continued growth remain. With international demand still pacing 70% below 2019 levels and Japan off by over 95%. As a reminder, Japan historically represented nearly 20% of our demand at the village. Turning to Florida, Key West was the only resort market within our portfolio that faced notable headwinds in the fourth quarter. The entire island has seen demand moderate as a result of reduced compression, while hurricanes Ian and Nicole also negatively impacted the island in the quarter, accounting for 420 basis points of RevPAR drag. Looking ahead to 2023, we expect RevPAR at our Reach Resort to likely be flat to down versus 2022, but still well in excess of prior peak levels, while the transformative $70 million renovation of Casa Marina during the second half of the year is expected to account for approximately 105 basis points of full-year RevPAR disruption and $14 million of EBITDA disruption overall. The recovery in urban markets was solid during the fourth quarter as we expect that rebound to accelerate this year. We saw ongoing improvements in demand during the quarter in most of our urban markets, led by New Orleans, New York, Boston, and D.C. Performance at the New York Hilton was driven by better-than-expected group demand, which helped to drive both strong occupancy gains and subsequent rate compression with ADR averaging nearly $365 for the quarter or 13% above 2019 levels. As a result, hotel adjusted EBITDA increased sequentially over Q3 2022 by over $19 million to more than $22 million for the quarter, while hotel adjusted EBITDA margin was an impressive 27.5% during the fourth quarter. We expect that momentum to continue into 2023 with both RevPAR and hotel adjusted EBITDA margin expected to exceed 2019 levels in 2023 growth pace to be above 2019 for the same period. Turning to San Francisco, our Q4 performance was weaker than expected. We were very encouraged by January's preliminary results following a successful JPMorgan Healthcare Conference. And we see several encouraging green shoots that we believe will help support ongoing improvements in the city in 2023 and beyond. First, group is expected to continue to improve in 2023 with the Moscone Center expected to generate nearly 700,000 room nights of citywide demand this year, up from just 380,000 in 2022. Second, several airlines have announced plans to return or expand key international routes throughout the year, bringing welcome economic activity as international spend was nearly three times domestic spend in the city in 2019. Finally, both political and business leaders are now more focused than ever to reimagine and reenergize the city. Just two weeks ago, the mayor announced an economic recovery plan with nearly 50 initiatives, including tax incentives, health and safety measures, and designs to diversify the city's employer base. While San Francisco's fortunes will not change overnight, we do expect to see continued recovery that will lead to more meaningful contributions to Park's earnings growth over the next few years. In terms of revenue segments, the rebound in group demand is a strong tailwind for our portfolio that we started to see in 2022 and expect to accelerate further in 2023. Q4 group revenues exceeded our forecast by 9% or approximately $9 million and showed a 12% incremental improvement over Q3. While we continue to see robust short-term group bookings, we are also encouraged to see the booking window elongate. In Q4, $55 million of new business was booked for 2023 with gains primarily concentrated in San Francisco, New York, and Orlando, and group revenue pace for 2023 increased by 300 basis points to 78% of pre-pandemic levels. Group revenue pace is up 28% to the same time last year, nearly doubling during the quarter from 15% at the end of Q3. We look out to 2024, over 70,000 room nights were booked in December alone, led by San Francisco with over 15,000 room nights or over 21% of December's pickup for the year. Given these trends, Park remains very well positioned to generate impressive year-over-year earnings growth, driven by ongoing strength in resort markets like Hawaii and Orlando, while pent-up business travel and stronger citywide calendars should support accelerating demand across our core urban markets. Accordingly, we are establishing full-year RevPAR guidance based on year-over-year growth of 7% to 14% with the wider than usual range driven by ongoing macro uncertainty. With respect to earnings, we anticipate adjusted EBITDA to be in the range of $610 million to $690 million, while hotel adjusted EBITDA margin is expected to range between 26.7% and 27.3% and a roughly 80 to 140 basis point improvement over the prior year. Adjusted FFO per share guidance is forecasted to be between $1.60 to $1.99 per share. As we look ahead to 2023, our strategic priorities are unchanged. We remain laser-focused on operational excellence as we continue to aggressively asset manage our portfolio and improve the operating model, and we will continue to reshape and upgrade the portfolio by selling non-core assets and heavily reinvesting in the core portfolio with value-enhancing renovations and ROI projects. With that, I'd like to turn the call over to Sean, who will provide further details on our performance as well as provide additional details on first quarter expectations.

Thanks, Tom. Overall, we were very pleased with our fourth quarter performance. As Tom noted, Q4 RevPAR came in at approximately $163 as occupancy was just shy of 68%. And ADR was slightly stronger than we had expected at $241, or 8% above 2019 levels. Overall, comparable hotel revenue was $644 million during the quarter, while comparable hotel adjusted EBITDA was $166 million, resulting in a comparable hotel adjusted EBITDA margin of nearly 26%. The Q4 adjusted EBITDA was $159 million, and adjusted FFO per share was $0.45. Turning to the balance sheet. Our current liquidity is approximately $1.9 billion, while net debt currently stands at $3.9 billion or nearly $300 million lower since the beginning of 2022. We continue to evaluate several opportunities to address our $725 million CMBS loan on our two San Francisco Hilton Hotels, which matures in November. And given our balance sheet and liquidity, we are confident we will have the matter addressed before the third quarter. We will keep everyone apprised of any developments over the coming months. Looking ahead to the first quarter, we expect to see the greatest improvement across our urban portfolio with continued strength in Hawaii, Orlando, Miami, and Southern California, with all of these leisure markets forecasting year-over-year gains. Softer citywide calendars in key markets such as Chicago and New York during the first quarter will present some headwinds with softer group trends expected. However, we project a sharp rebound beginning in Q2 with the acceleration of solid group trends expected to be a meaningful driver of performance for the remainder of 2023. Accordingly, we are establishing Q1 guidance with RevPAR forecasted to range between $156 and $162 for year-over-year growth of 37% at the midpoint of the range. Adjusted EBITDA is expected to range between $124 million and $140 million, while hotel adjusted EBITDA margin is expected to range between 22.8% and 23.4%, roughly 400 to 460 basis point improvement over the prior year. This margin improvement will be negatively impacted by outsized cancellation income recorded during Q1 2022 related to Omicron accounting for approximately 100 basis points of drag versus prior year. Finally, adjusted FFO per share should range between $0.30 and $0.37. Note that both Q1 and full-year guidance considers the recently announced sale of our Hilton Miami Airport Hotel, which removed nearly $4 million and $12 million from expected earnings for these respective time periods. Turning to the Q1 dividend. Based on current forecasts, we are targeting a recurring quarterly dividend of $0.15 per share, which aligns with our more constructive views of the recovery and full-year guidance while remaining prudent given the ongoing macro uncertainty. Note that the actual amount of the first quarter dividend is subject to Board approval, which is expected to occur by mid-March. Finally, as Tom noted in his comments, over the past year, Park has bought back over $250 million of stock at a significant discount to NAV. We continue to believe that there is currently no better use of our capital than reinvesting in our company, given the widespread gap between public and private market valuations. Accordingly, I am pleased to report that the Board approved a replenishment of Park's stock buyback program. This gives the company the ability to buy back up to $300 million of common stock over the next two years, which we will prudently execute on a leverage-neutral basis. 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. Operator, may we have the first question, please?

Sure. Thank you. Our first question comes from the line of Floris Van Dijkum with Compass Point. Please proceed with your question.

Thanks for taking my question, guys.

Good morning, Floris.

Good morning. Thank you for providing guidance for 2023 and the first quarter. It appears that you believe we are unlikely to face a hard landing recession. I would like to get your thoughts on the economic environment you anticipate for the hotel sector. Additionally, I am impressed by the performance of your Hawaii assets. Given that 20% of the demand has been absent, could you share your outlook for Hawaii? Despite this, you are still achieving $173 million above EBITDA at Hawaii Village. Is it realistic to expect this hotel could reach $200 million in EBITDA if Hawaii travelers return in 2023? Please start with that.

Thank you for the question, Floris. There’s a lot to discuss, so let me begin with Hawaii. During the pandemic, we recognized the need to reimagine our operating model and have made significant improvements. Labor costs across our portfolio are now 16% lower, reflecting the elimination of 1,200 jobs in areas where redundancies were identified. We’ve worked closely with our operational partners and asset management team to drive efficiencies. Hawaii remains a world-class resort with significant historical value and a loyal visitor base that returns generation after generation. We are investing heavily there, including renovating the Tapa Tower and working on the sixth tower. There’s substantial pent-up demand, particularly from U.S. travelers. You mentioned the Japanese market, which has traditionally made up 15% to 17% of our demand. Those visitors tend to stay longer and spend more, making the potential for reaching $200 million or more in EBITDA very realistic as we continue to enhance the guest experience. We are equally excited about our developments in Orlando, especially our $200 million investment in the Bonnet Creek Resort, which we expect to complete by the end of this year or early next year. We plan to host an event for investors and analysts to showcase the completed project. Regarding the economic backdrop, we acknowledge the current uncertainty, including inflation, interest rates, and geopolitical factors. However, the consumer remains resilient, highlighted by a strong labor market. Inflation seems to have peaked, and Europe’s economic outlook is not as dire as previously feared, thanks to better planning and a milder winter. China's shift in COVID policy is also promising for the travel and supply chain sectors. Overall, while we anticipate a softer economic period rather than a deep recession, our diversified portfolio has several positive indicators that position us for accelerated earnings growth. We project a RevPAR increase of 7% to 14% year-over-year, which likely exceeds many of our peers. Despite our earlier challenges, the outlook for Park in 2023 and beyond is strong and optimistic, and we are excited about our prospects in the medium to long term.

Thanks. My follow-up, and this may be for Sean. Sean, why would you not consider using the spare cash on your balance sheet to pay off the maturing CMBS loan completely? And what would that do to your earnings expectation? Because presumably, you are earning less on your cash on your balance sheet than you're paying on the debt, I would assume.

Well, ultimately, I would say it's pretty close in terms of what's being earned. That debt is at 4.1%. And clearly, with cash on the balance sheet, I would say it's still a little more important as kind of we think about paying that down. $725 million, certainly a lot of money, it's going to be certainly a part of the solution, but I wouldn't say that we're looking to pay it off completely today with that cash that we have on our balance sheet.

Floris, I want to emphasize that our current position is strong due to our robust balance sheet. We've implemented various measures over the past few years that give us flexibility. We will carefully assess the situation, but I assure you that we will resolve it by the third quarter, if not sooner. We have options available, including putting debt on an asset or a combination of assets, and reaching out to the servicer. We're not alarmed. We will be thoughtful and measured in our approach to achieve the best outcome. During the early months of the pandemic, when many believed Park wouldn’t survive due to our debt maturities, we remained calm. We executed three bond deals, extended our maturities, and eliminated 98% of our bank debt. When we sought to recast our revolver, the banks responded favorably, and we were able to upsize in that challenging environment. Our experienced team knows how to navigate these situations, and we will diligently work towards the right resolution.

Thanks, guys.

Yes, thank you.

Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Please proceed with your question.

Hey, thanks. Good morning.

Good morning, Duane.

Hey, nice to see you. Just on labor cost inflation, I wonder if your relative flexibility and geography, essentially operating in higher-cost urban markets where rates were already high makes you less exposed to labor rate increases versus your peers. Is having less flexibility on labor actually a good thing right now?

It's a great question, and I think you are spot on. One, we have a labor piece. We've been working with our union partners, and as a result, the fact that we had perhaps higher wages gives us a benefit. And there's another part to it as well because of seniority, because of a recall rights, we didn't suffer and have to challenge and chase labor to the extent that perhaps some of our peers had to. That doesn't mean that we didn't have challenging markets. Orlando has been a challenging market for everyone. Key West was a particularly challenging market. But for many of our markets, having that embedded relationship was an advantage for us.

Appreciate those thoughts. And maybe just to expand a little bit on the Japanese traveler returning to Hawaii. Do you have a view just given seasonality of the year and maybe some of the incentives that they continue to run in the first part of this year, when would you expect that to kind of meaningfully pick up?

It's the second half of the year, and we are in touch with the tour operators. Your observation is correct; there are many incentives to retain some of those dollars and yen in Japan at this time. However, we fully expect that after three years of diminished Japanese travel, and recalling that we used to host around 150 weddings annually, we anticipate more than our fair share when they return. We believe they will arrive with significant enthusiasm, leading to longer stays and increased spending. We are very excited about this prospect. Furthermore, despite the challenges mentioned in the prepared remarks, we had a record year at one of our properties, achieving EBITDA comparable to some of our peers, highlighting the substantial potential at that world-class resort.

Okay, appreciate the thoughts.

Thank you.

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

Hi, good morning.

Good morning, Anthony.

Good morning, Tom. It's a question on asset sales that you made a lot of progress last year and start this year with asset sales. Maybe update us on what you're still looking to achieve this year in terms of incremental sales?

Great question, Anthony. If you take a moment to consider, we have sold or disposed of 39 assets totaling about $2.1 billion since the spin-off. We are focused on continuing to reshape, improve, and upgrade our portfolio. We've also added 18 hotels from the Chesapeake deal as part of this effort. It's important to note that our top 27 assets represent around 90% of the company’s value. We aim to further enhance the portfolio, targeting an additional $200 million to $300 million this year. Last year, including Miami, we achieved $435 million from eight asset sales, and we are confident in our ability to make continued progress. We plan to reinvest the proceeds back into the company or repurchase stock on a leverage-neutral basis. Our commitment will be to consistently recycle and upgrade the portfolio.

Thanks. And kind of a related question. I think on the CapEx guidance for the year, 300 to 325, I think it's the highest since you've been a public company, a lot of ROI projects which I view as positive. So does that mean that you may cycle more ROI projects over time? And maybe it's your approach of ROI projects versus buybacks and capital allocation?

Yes. Great question, Anthony. We'll seek to find that right balance. Look when you are trading at this count of discount to NAV, you can certainly expect that we'll be buying back stock. No better investment, as Sean said in his prepared remarks, than investing back in the portfolio. So we'll find that balance of buying back stock on a leverage-neutral basis, but at the same time, investing in the portfolio. Just a few, the Bonnet Creek that we mentioned in the north of $200 million we're putting in there. We completed the Reach Resort, which is a sister property to the Casa Marina in Key West, which is a huge success. We're now going to complete the Casa Marina project. We've probably closed the property for about five months, plus or minus. We've given what we think will be the disruption as well as the EBITDA impact that is baked into our guidance. We have an extraordinarily talented design and construction team led by Carl Mayfield, best in the industry, seasoned. We know how to handle this. We've dealt with the extensive hurricanes, major projects. So we've got it teed up and we're confident we'll get that done this year. We'll also be able to get the final phase of the Tapa Tower in Hawaii. So look, we obviously paused a little during the pandemic for the obvious reasons, but we are being very thoughtful, very strategic. We're planning well, making sure that all the supply chain issues are addressed. And we know how to handle it, and we know how to handle the large, complicated projects as well as anybody in the sector.

Right, thank you.

Thank you, yes.

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

Hi, good morning. I wanted to revisit your RevPAR outlook and margin expectations. It seems that after the first quarter, the remaining three quarters of the year might range from slightly down to mid-single-digit growth at the high end. Regarding margin expansion, do you anticipate it being concentrated in the first quarter, or do you believe that even with modest RevPAR growth for the rest of the year, margin expansion is still achievable?

Hey Smedes, this is Sean. Yes, as you look at the latter half of the year, I assume you are referring to year-over-year comparisons. We feel confident about maintaining margins at least at the same level compared to last year during this period. Moving forward, a significant part of this relies on our group performance, which we believe will be strong this year. As Tom mentioned in his remarks, our pace compared to the same time last year is robust, and we actually think it's improving. Therefore, we are optimistic about adjusting our margins, particularly on the food and beverage side, to enhance flow-through as we accommodate the banquet and catering services that come with group bookings in the second half of the year. Most of our other costs are generally fixed, and we are currently not looking to add positions. Overall, we feel we have established a solid cost structure, which allows us to expect a decent flow-through even if RevPAR is slightly lower than anticipated.

Okay. And just in your composition of RevPAR, I mean it's fair to say that it's maybe more occupancy-driven this year versus rate-driven, which seems to be sort of a theme in the industry. But I'm just wondering if you're thinking that way as well.

Exactly, Smedes. That's how we're thinking about it as well. Certainly a lot more opportunity than rate.

Our next question comes from the line of Patrick Scholes with Truist. Please proceed with your question.

Thank you, operator. Good morning, everyone.

Good morning, Patrick.

When we think about the full-year RevPAR guide of 7% to 14%, drilling down a little bit more on our customer set, how might you think that specifically the leisure travel RevPAR would look in that range? Would be towards the lower end of the 7% to 14%? Or how would you think about that? Thank you.

And in terms of the RevPAR improvement year-over-year, certainly, on the lower end, I mean, you can imagine you've got some moderation in the markets like Southern Florida where you've had tremendous uplift. And so while we're still well ahead of ‘19 levels, I think from a year-over-year comparison, they continue to be tough comps. We've seen as well some moderation in places like our Santa Barbara asset, again, has performed tremendously. But I would say still we'll continue to have some positive growth, but on the lower end of the range. Hawaii is still, I think, strong, and certainly the first half of last year, it was still trying to ramp up. So we still have some, I think, easier comps for that market as great as it's been. I think we'll still kind of see that pretty strong in the first half of the year. Ultimately, we'll face tougher comps in the back half of the year. So put all of it together, I think, certainly, you see the leisure end being a little bit lower on the end versus certainly urban where we have tremendous growth year-over-year, certainly in Q1 and certainly as you build through the rest of the year.

Okay. That’s it from me. Thank you for the color.

Thanks, Patrick.

Our next question comes from the line of Aryeh Klein with BMO Capital Markets. Please proceed with your question.

Thanks and good morning. Maybe just on San Francisco, you mentioned improving group outlook there. What about from a business transient standpoint? What are you seeing there? And then I think you did about flattish EBITDA in 2022. What do you think that's to look like this year?

Flattish EBITDA in San Francisco?

I think that's what it is for the full-year in 2022.

Yes. You said flat; it was certainly zero.

Net zero, yes.

Yes, you were being diplomatic, and we appreciate that. Let's be honest; the situation in San Francisco has been incredibly complex. If you look at trends and reflect on last year, many believed that New York and San Francisco would take years to recover. Look at what happened in New York. In the first quarter, we didn't open the New York Hilton until October of 2021. We saw a 55% drop in RevPAR, a 22% decline in the second quarter, a decrease of around 16% in the third quarter, and then a 2% increase in the fourth quarter. This shows how quickly the recovery occurred. San Francisco's story has been different. We didn’t reopen Park 55 until May, and the Hilton opened later in 2021. We experienced an 82% decline, followed by a 47% drop, and then a 40% decrease, before rebounding slightly to 52%. There's no question it has lagged, and it has been frustrating. However, there are reasons for optimism. The JPMorgan conference was a significant test, and it passed. We expect 700,000 room nights citywide this year compared to 380,000 last year. With only 32,000 rooms, it's a market that has the potential for real pricing power in good times. Additionally, we finally see an alignment between political leaders and business leaders. I've been actively engaged, having visited the city over ten times, and I’m scheduled to go again in March. The mayor has presented our plans, with multiple initiatives in progress aimed at improving cleanliness, providing tax incentives, reimagining buildings, and finding ways to reactivate the city. This is very encouraging. We're also starting to see an increase in group business returning to the city, with about 150,000 room nights already secured at the Hilton and Park 55. The uncertain factor remains business transient travel. However, if we can establish a solid base with citywide events, group bookings, and leisure travel to generate momentum, it should help San Francisco recover. While I don't think it will bounce back as quickly as New York, we are more optimistic about the outlook for 2024 and beyond. I hope this answers your question and provides a helpful framework to consider.

Yes, I appreciate it. And then maybe just following up on the ROI projects. I think you previously talked about potential for new tower in Hilton Hawaiian Village. Can you just update us on the timelines around that? And I think you've also mentioned potentially bringing outlet capital to help fund that and where that might stand?

Yes. It's way too early to talk about how we're going to capitalize it. Other than to say that we've got options on two sites that we are going to move forward on. We're working through the entitlement process. It's certainly a few years out. It's not something that will require capital in '23 or '24. And I'd leave it at that. Other than to say, adding another tower to that world-class resort coupled with the 1,000 rooms of timeshare in addition to the nearly 3,000 rooms we have and the incremental amenities being talked about will only continue to strengthen it for generations to come.

Thanks a lot for the color.

Yes, thank you.

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

Hey, good morning, guys. Good morning, Tom.

Good morning.

The question is about our focus on margins. There's a lot of discussion around reimagining the operating model, and while inflation has brought some challenges, how do you see this evolving this year and in the future? Has the reimagination of the operating model been completed? Will we reach a point where we can start bringing back more housekeeping or extending restaurant hours? The key factor seems to be if occupancy returns. I appreciate the margin guidance you've provided for this year, which is quite impressive. With the potential for more service-oriented aspects to resume, is there room for further improvement? Or do we need to fully recover group business and occupancy levels to return to our desired margins from 2019?

Yes, it's a great question. And Chris, you and I both have a history here, and initially, you started out going down what I call the amenities creep. And every time things start to look better, the brands want to add back more. I do think the pandemic forced all of us to think about the business differently using technology, whether it's digital key, whether it's reimagining room service with a knock and drop which have been widely accepted and I think appreciated by guests. I believe in the Marriott call, the CEO made reference to different levels of housekeeping service and that now being finding the right balance with both stakeholders, whether that's employees and whether it's guest. And so I think you're going to see permanent changes and I think what we've got to do as an organization and as an industry is to continue to be relentless in figuring out what drives customer satisfaction and intent to return, but also figure out a way to make sure that we've got an operating model that makes economic sense. None of us want to go back to the days of ‘16, ‘17, ‘18, ‘19 where we had anemic growth of the top line and no margin growth. It wasn't fun for you guys to analyze the business, and it certainly wasn't fun for us as owners. And in our case, operators, since we had to self-operate a few hotels as well. So I think that these changes are here. There will be pressure points. And you're right, once we can get group back to the levels in business transient, there'll be some add-ons from here and there. But I think the abuse and the amenity creep that we've seen for generations in my view, that game is over. It just doesn't make sense in an environment where we're going to continue to have cost pressures. And you've seen us. We're giving you guidance where we're expanding margins in part because of the great work done by the men and women at Park and our partners to really work hard to take costs out of the business. So we're going to continue to fight and find ways to continue to find those efficiencies.

Okay. Very helpful, Tom. That’s all I had. Thanks.

Thank you.

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

Good morning, everyone. Thanks for taking my question.

Good morning.

You covered a lot of detail. I just wanted to go back to the credit markets and it obviously plays in a couple of different ways. Sean's comments, you talked about some of the alternatives for refinancing. But we have seen some improvement in the credit markets lately. How important is that in order for you to be able to sell $200 million or $300 million of assets? Are you embedding some expectation that it will continue to improve in there, what's your thoughts on how that all plays into what you've talked about so far?

David, you raised a good point. I'll address the first part of your question. Since the spin-off, we've successfully divested 39 assets for over $2 billion, encompassing various qualities and incorporating tax and legal aspects, as well as joint ventures. Some assets were highly appealing, while others were less so, yet we've managed to navigate through this effectively. During the pandemic, we managed to sell two assets in San Francisco at very competitive prices. There's significant capital available right now, with $400 billion in private equity focused on real estate. Family offices, owner-operators, and regional banks remain active in the market. While larger money center banks are being more cautious, we have consistently shown that we can proceed without relying on seller financing; our buyers have managed to secure the necessary funds for their acquisitions. We are optimistic about the situation. Once the current tightening cycle eases and there is more clarity, banks will return to normal operations. Currently, interest rates are in the 4% to 5% range, which, for those of us with more experience, isn't too concerning. The challenge is that a newer generation has become accustomed to very low interest rates. Frankly, the era of easy money is over, so we all have to exert more effort. In the medium to long term, this situation could actually benefit Park. The debt markets will recover, liquidity will return, and it will again be possible to finance transactions. The process may require more effort than before, but we believe there will still be ample capital available for deals.

Okay. Thank you.

Well, thank you.

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

Great. Thank you. I'm interested in what's going on.

Hi, Robin.

Hi, good morning. How are you? I'm interested in what's happening with business transient. Looking at your urban RevPAR, it seems like there was only a small improvement in Q4 compared to Q3, where occupancy was down 18 points relative to 2019 in Q4, slightly better than the 19 points down in Q3. This appears to be almost negligible. I'm curious if you could share your thoughts on what's happening with business transient, as it's surprising that we didn't see a more significant change, and it seems to be a common trend among hotel companies. Thank you.

I think in terms of business transient, we have certainly observed improvements, especially when analyzing mid-week occupancies throughout the year. There has been significant progress, although our occupancy numbers, particularly for urban locations, are somewhat affected by the return of San Francisco. There are noticeable shifts in some major cities. Compared to 2019, we faced tough comparisons when considering the third and fourth quarters, but once we normalize for those factors, we should expect some improvement in occupancy in that portfolio from Q3 to Q4. As we move into Q1, there has been a slower start. We are focusing on major corporate accounts, which are beginning to return. However, considering the recent layoffs in technology, there is a bit of reluctance regarding travel. While some sectors have performed well towards the end of the year, financial services and similar sectors are seeing less activity. Currently, transaction activity is also low. We do anticipate adjustment and improvement moving forward. There was some disruption during the holiday events in Q4, and as we transition into a more regular schedule in March, I believe we will see a rebound. We are closely monitoring this area, and I feel optimistic about the recovery of both group bookings and business transient travel this year.

Okay. Great. Thank you. And just a quick follow-up. You did already allude to the fact that San Francisco wasn't cash flow positive, and I know you talked about that for a while through last year. Are you at a point in recovery where it's starting to be cash flow positive? Or is that not necessarily something you expect for right now?

Robin, we do. We are encouraged that and certainly believe it's going to be cash flow positive. Now do we expect it back to ‘19 levels and peak, we do not at this time. But we certainly turned the corner and expect it to be cash flow positive.

Okay, okay, great. Thanks.

Thank you.

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

Yes, thanks. Good morning.

Good morning, Bill. How are you?

I’m well. Thank you, Tom. Sean, I want to start with you and following up on Robin's question about the urban properties. And I'm just curious what your RevPAR index trends are within those properties?

We have observed the trends, particularly in San Francisco, which are lagging. Typically, we see a RevPAR around 90% to 95%. The larger spaces in this area face disadvantages due to their location compared to others in the competitive set, especially concerning the convention center. Currently, the RevPAR is in the mid-60 to 70 range. We expect that to improve as we experience greater demand, but this market is indeed lagging. New York appears to be performing at or slightly above past levels, even better than what we saw in 2019. In Chicago, our large property is maintaining its performance index relative to 2019, staying within 5% to 10% of that level. Meanwhile, New Orleans is also performing well, slightly above past metrics, aided by the productivity of the convention center, which has been beneficial for that asset. These are the key markets I would highlight for review of the index.

Bill, the other thing I'd add to that, if you look historically, going to date myself here. But if you probably went back and looked 10, 20 years or more, I would bet the San Francisco complex ran between 90% and 100%. And part of it is the size of the facility and the complex and also the location. So clearly, well below that. And I think there are reasons for it as it's ramping back up. But just to put it in context and to frame that for you, we're well aware, one of our projects is going to be, and we've been completely transparent about this, we were going to renovate Park 55 in ‘20, obviously, the pandemic, but the model rooms are done. The capital is allocated. It's just a matter of when we're going to begin that. We're going to wait; we'll figure out how we refinance the asset and then that will be one package. But we clearly are going to get that done, and that certainly is going to help the overall complex.

And Tom, you remain optimistic about San Francisco, which I appreciate. I think progress has been made, as we've discussed. However, the economic situation has worsened, and downtown is becoming somewhat deserted. What would reduce your optimism? For instance, if JPMorgan announced a relocation when their contract ends, would that be a turning point for the market in your opinion?

Yes. A few things, Bill. I mean, obviously, you and I could probably could spend an afternoon talking about it. I think what happened in San Francisco is a sort of the narrative got away from them. I think we all saw at NAREIT that city conditions were better than I think people expected. No doubt they're lagging. And I think you know I've been out there as much as anybody. But I think in fairness, there are some embedded advantages to San Francisco. The just the geography, the beauty, I don't need to share that with you. But when you think about the education base, when you think about what's happening in the technology space. If you look at what's happening in the AI, there's six times the money being spent in AI out in San Francisco than any other market in the country. So look, a lot of the uniforms were getting money and spending like drunken sailors; those days are over. So you're going to see that market right size, but the foundation of venture capital of that innovation, it still is going to be a very important part of that growth. And then don't forget and lose sight of close connection to Asia; that will reconcile at some point. It may take a little while. And as we pointed out, that spend of that Asian traveler really nearly three times what we see on the domestic side. So there are fundamental benefits, I think, to be encouraged over the intermediate and long term. We're not pollyannish about this. We've been living through this like no one else given the fact that we've got, obviously, that 3,000-room complex, that's really the big drag. Once you get that anchored in that recovery given the operating leverage, it could come back faster than people realize. You probably heard the New York story I gave, right, where we were 55% in the first quarter and up 2% in the fourth quarter. None of us would have predicted that. I'm not sure that was in your crystal ball and your crystal ball is probably as good as anybody. So I wouldn't write it off. It's a source of frustration, I think, for many, but safety security is important. You've got to have political leadership, but you also have to have business leaders. And I think the women and men leaders there are also stepping up. So you're seeing them far more engaged, as you talk about tax incentives, other incentives to reimagine the city. So it's going to take time. It's not going to happen in ‘23, but I do think the foundation can be laid and some things to be encouraged about in ‘24, ‘25. The fundamental issue for us is do we believe that the intrinsic value of that real estate is higher than the debt. And the debt is at $250 a key or inside of $250 a key. We sold a Law Meridian for north of $600,000 a key in the middle of the pandemic. So we believe there's embedded value here, and you're not going to be adding a lot more hotel product in San Francisco, particularly with the market with 32,000 rooms. You're not going to see what happened in New York with the onslaught of all the select service hotels that peppered and undermine the market; you're not going to see that in San Francisco. So there are some fundamental benefits there that over the intermediate and long term. Today, painful, but we certainly believe that worth hanging in there. And as we said, we're going to carefully study how we're going to refinance it, but we'll get it done like we've gotten everything else done through the worst of it through the pandemic and through the recast last year. I think we've demonstrated time and time that it's a very experienced team and we know how to handle the situation.

Well. I appreciate the time as always. Thank you, Tom.

Thank you.

And our next question comes from the line of Jay Kornreich with SMBC. Please proceed with your question.

Hi, thanks. Good morning, guys.

Hi, good morning.

Just one for me on the group side. It looks like T plus one group bookings at the end of the year were 74% of what they were in 2018. So clearly picking up, and I'm sure a good portion of that is coming from San Francisco. But can you break down at all if you're seeing the same type of groups return and similar sizes and markets or if there's a different type of group customer that's showing up currently stronger than what you saw before the pandemic?

I wouldn't say it looks drastically different. I mean, certainly, we're starting out with smaller groups on peak than we have had in the past and haven't really gotten to one where we got those it's 800,000 room on peak behemoths, but that's growing. Ultimately, the booking window is lengthening here as we've seen plenty of activity booking for ‘24 in December and January as well. So clearly, while it remains in the quarter for the quarter, I'd say that's a big difference, clearly, it's a lot of short-term in smaller groups, but you're starting to see through the pipeline, some of the larger groups coming through planning ahead, a group that might have done something last year is coming back and ultimately being bigger. But I wouldn't say the demographics of that group or the breakdown of those groups look much different. Just kind of the sizing of it is they're starting smaller, but we really expect them to get bigger as we go along.

Okay. Appreciate it. Thanks for all the color, guys.

And we have reached the end of the question-and-answer session. And I'll turn the call back over to Tom Baltimore for closing remarks.

Really appreciate everybody taking time today. We look forward to seeing you in the coming weeks and perhaps many of you at the Citi Conference. So have a great day.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.