Park Hotels & Resorts Inc. Q1 FY2023 Earnings Call

Greetings. Welcome to the Park Hotels & Resorts First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Thank you, operator, and welcome everyone to the Park Hotels & Resorts first quarter 2023 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. 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 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 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 measures in this morning’s earnings release, as well as in our 8-K filed with the SEC and the supplemental financial information available on our website.

Thank you, Ian, and welcome everyone. I'm pleased to report another very successful quarter where we delivered impressive top line results and significant margin expansion as we continue to execute against our strategic priorities and benefit from a strong recovery taking shape across our portfolio. We remain optimistic about our outlook and our ability to continue to deliver sector-leading results while creating value through our prudent capital allocation including continued debt reduction, stock buybacks, and ROI investments. Turning to operations, first quarter results exceeded expectations driven in large part by ongoing improvements at our urban hotels and sustained strength at our resort markets. Q1 comparable RevPAR increased an impressive 37% year-over-year with occupancy up 1400 basis points to 65% for the quarter and average rate higher by nearly 7% over the same period last year. While all demand segments witnessed year-over-year gains, we were particularly impressed with group trends with revenue up 74% year-over-year to $124 million, recovering to 83% of 2019 levels. Healthy group performance, particularly banquets and catering, coupled with the ongoing benefits from aggressive cost-cutting measures we implemented during the pandemic, drove exceptional margin gains during the quarter with hotel adjusted EBITDA margin improving approximately 550 basis points year-over-year, to 24.2%, or approximately 115 basis points above the midpoint of our guidance, an impressive accomplishment despite increased cost pressures. Overall food and beverage revenues exceeded our expectations by over $15 million during the quarter, driven in large part by banquets and catering with notable strength in New Orleans, Orlando, and San Francisco. The acceleration in group demand is expected to be a primary driver of growth for Park in 2023 as group ADR is expected to exceed 2019 levels by 4%. Q1 group revenues exceeded our forecast by 15%, or approximately $16 million during the quarter, and we continue to see strong short-term group bookings with the portfolio picking up approximately 300,000 room nights for 2023 during the quarter, accounting for $66 million of incremental revenues primarily concentrated in San Francisco, New York, and Orlando. In addition, group revenue pace for 2023 increased by 410 basis points during the quarter to 82% of pre-pandemic levels and 90% excluding San Francisco. As we look out to 2024, we are encouraged by the momentum in some of our larger group markets with the 2024 portfolio-wide group revenue pace as of March 31, 2023, up 9% compared to the same time last year, driven by strong convention and citywide activity expected for Chicago and New Orleans, and healthy in-house group booking activity including at the Bonnet Creek complex in Orlando, where we expect to see significant benefits from the expansion of the meeting space platforms at both the Insignia and Waldorf Astoria, with 2024 group revenue pace currently up 47% versus 2023 at the complex. Turning to our markets, as we anticipated, the rebound at our urban hotels was very robust with Q1 RevPAR increasing 81% year-over-year, while RevPAR at our resort hotels increased 13% compared to the first quarter of 2022. In Hawaii, performance remains very strong with Q1 RevPAR up 26% over 2022, and RevPAR at our Hilton Hawaiian Village Hotel was up 32% from 2022, evenly split between occupancy and ADR gains and driven by continued strength in transient demand despite travel from Japan being down 93% from Q1 2019 at the hotel. The hotel also saw strong food and beverage revenues that contributed approximately $10 million, or 78% over 2022, while well-managed cost controls resulted in an impressive hotel adjusted EBITDA margin of 39.8%, or 440 basis points above 2022 and 100 basis points above 2019. Our Hilton Waikoloa Hotel witnessed a 5% year-over-year increase in RevPAR despite challenging comparisons to near buyout conditions during Q1 of 2022. Effective cost controls and a modified outlet strategy at the hotel resulted in a 39.3% hotel adjusted EBITDA margin, or 150 basis points above 2022 and an incredible 840 basis points above 2019, thanks to decisions made to shrink the overall size of the hotel in 2019, which materially improved operating efficiencies. Looking ahead, we expect our two hotels in Hawaii to deliver mid-single-digit RevPAR gains over the balance of the year, with demand expected to be driven mostly from U.S.-based travelers as international demand remains 60% below 2019 levels for both hotels. However, we expect to see increased inbound activity from Japan towards the second half of the year, providing a significant tailwind to performance in the coming years. Turning to our urban markets, we are particularly encouraged by better-than-expected group performance in San Francisco with Q1 convention room nights up over 200% to over 140,000 room nights compared to the same period last year. Additionally, strong performance during the J.P. Morgan conference helped drive meaningful rate increases across the city. Group revenues for our four San Francisco hotels were up over 530% from last year, with group rates exceeding 2019 levels by 15%. Q1 RevPAR averaged $142, with ADR just 8% shy of 2019 levels, as we witnessed solid rate gains during the quarter. Significantly, all four hotels generated positive EBITDA during the quarter, a first since the start of the pandemic. Looking out over the balance of the year, convention room nights in San Francisco are expected to reach 675,000, an increase of 78% year-over-year, with over 60% of the room nights booked for the second half of this year. In our other urban markets, Washington DC delivered over 80% RevPAR growth year-over-year, driven by stronger-than-expected performance from government travel. Our Chicago and Boston markets showed approximately 50% and 42% year-over-year RevPAR growth, respectively. Our RevPAR at our Hilton New Orleans Riverside improved by 37% year-over-year, driven by double-digit growth across all segments, particularly among group which was up 49% compared to last year. We were especially pleased to see the return of large medical events to New Orleans during Q1, a sign of the continued momentum in group recovery across our portfolio. Finally, New York City continues to show remarkable progress benefiting from all three demand segments with RevPAR increasing 113% year-over-year, or just 5% below 2019 levels, driven by strong rate growth up over 4% year-over-year and a 35-percentage point increase in occupancy to 69% for the quarter. We saw another strong group quarter in New York, with group revenues during the first quarter surpassing 2019 levels by approximately $640,000. Our group booking strength continued with $30 million of business booked during the quarter, including an incremental $8 million for 2023. We expect 2023 hotel adjusted EBITDA from New York to surpass 2019 levels. As we look out over the balance of the year, we recognize that the macro backdrop remains uncertain; however, at this point, we have not witnessed any notable impact on our business. We remain constructive on hotel fundamentals and anticipate demand trends to remain healthy, especially across our major U.S. cities, as an expected pickup in convention room nights should support improving group trends while anticipated ongoing leisure strength, especially in Hawaii, should continue to drive our performance. Regardless of the macro backdrop, Park remains well-positioned to handle potential fluctuations in the economy with approximately $1.8 billion of liquidity available, and we remain laser-focused on prudent capital allocation initiatives which we are confident will create long-term value for shareholders. Despite the more challenged credit markets, we expect to target $200 million to $300 million in non-core asset sales this year, utilizing excess liquidity to further reduce leverage and reinvest back into our portfolio through value-enhancing ROI projects while opportunistically taking advantage of the disconnect between public and private market pricing through leveraged-neutral stock buybacks. During the quarter, we used cash proceeds from the sale of the Hilton Miami Airport Hotel and cash on hand to fully repay the $50 million balance on our revolver and repurchased 8.8 million shares at a nearly 10% implied cap rate and at a material discount to the consensus net asset value. Finally, we plan to invest over $300 million back into our portfolio this year, including the final phase of the Tapa Tower rooms renovation at our Hilton Hawaiian Village Hotel, the full-scale renovation, rebrand, and resiliency upgrade of our Casa Marina Resort in Key West, and the transformative renovation and meeting space expansion at our Orlando Bonnet Creek complex. Turning to guidance: given our better-than-expected results during the first quarter, we are increasing our full-year 2023 guidance range and remain on track to deliver sector-leading RevPAR and earnings growth this year. Specifically, we are increasing our adjusted EBITDA forecast by just over 2%, or $14 million at the midpoint, to a new range of $624 million to $704 million, while our adjusted FFO guidance increases by approximately 9%, or $0.15 per share at the midpoint, to a new range of $1.76 to $2.12 per share, representing year-over-year adjusted EBITDA growth of 10% and AFFO per share growth of 26%. I want to reemphasize that our team remains laser-focused on executing our internal growth strategies and capital allocation priorities, which we are confident will create long-term shareholder value and position the company for long-term success.

Thanks, Tom. Overall, we were very pleased with our first quarter performance. As Tom noted, Q1 RevPAR came in at approximately $159 with 65% occupancy and strong ADR growth of 7% year-over-year to $244, or 8% above 2019 levels. Hotel revenue was $623 million during the quarter, while hotel adjusted EBITDA was $151 million, resulting in a hotel adjusted EBITDA margin of over 24%, or 550 basis points above the same period in 2022. Q1 adjusted EBITDA was $146 million, and adjusted FFO per share was $0.42, or 25% above the midpoint range of the guidance we set last quarter. Turning to the balance sheet, our current liquidity is approximately $1.8 billion, while net debt is currently $3.9 billion, down approximately $600 million since Q1 2021 when net debt peaked at approximately $4.5 billion. Overall, our balance sheet remains in excellent shape with ample liquidity to execute our strategic priorities, regardless of potential shifts in the macro backdrop. In terms of deleveraging, during the second quarter, we expect to repay the $75 million loan secured by the W Chicago City Center. With respect to our $725 million San Francisco CMBS loan maturing in November, we continue to evaluate our options, which include a potential extension of the current loan, and we remain confident we will have a resolution by early summer. Turning to guidance, our RevPAR forecast for the year remains unchanged at $167 to $179, or a year-over-year increase of 10% at the midpoint, while our hotel adjusted EBITDA margin forecast has increased versus prior guidance by 10 basis points to a new range of 26.8% to 27.4%, a roughly 125 basis point improvement at the midpoint over the prior year. Better-than-expected margin gains were driven by solid group contributions as group demand continues to build, a trend we anticipate continuing throughout the balance of the year, helping to offset increasing costs for property insurance and utilities. While we are moving away from providing quarterly guidance, now that we have lapped the impact of last year's Omicron surge, we wanted to provide a bit more color on second quarter expectations. Despite facing difficult year-over-year comparisons, we expect our portfolio to continue to narrow the gap to 2019, with Q2 RevPAR forecast to be up year-over-year within a range of 7% to 11%, driven primarily by our portfolio of urban hotels, led by Chicago, New Orleans, San Francisco, and New York City. Note, however, that Q2 margins are likely to soften relative to last year's peak performance, which was driven by outsized cancellation income during Q2 2022 that exceeded $9.6 million, or roughly $6 million above historical levels, and disruption this quarter from the comprehensive renovation of our Casa Marina resort in Key West, with operations expected to be suspended from mid-May through most of Q4. Overall, the negative impact on earnings from the Casa Marina renovation is forecast to be approximately $14 million for the full year, with a roughly 130 basis point drag on RevPAR growth and a more than 30 basis point drag on hotel adjusted EBITDA margin during the second quarter, negatively affecting full-year RevPAR growth by a forecasted 110 basis points and hotel adjusted EBITDA margin by 30 basis points. As a reminder, the renovation disruption at Casa is already factored into our full-year guidance. 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 Smedes Rose with Citi. Please go ahead with your question.

Hi, thank you. Tom, could you share your observations about the situation in San Francisco for the remainder of the year and offer any insights for the next couple of years? Also, if possible, could you provide some rough estimates for the EBITDA these properties might generate this year and your expectations for next year?

Yes, that's a great question. There's quite a bit to consider here. As I've mentioned before, I've spent significant time in San Francisco, visiting every four to six weeks to meet with city officials, SF Travel, and other business leaders. Given our strong presence there, which accounts for about 15% of pre-pandemic EBITDA, it's crucial for me to be involved. Overall, I don't expect San Francisco to be a major contributor, estimating around $20 million to $25 million based on the guidance Sean and I provided. This year, we anticipate 675,000 citywide room nights, which is substantial but does fall short of the pre-pandemic peak of around 800,000 to 850,000. The performance of 675,000 is solid, with about 60% expected in the latter half of the year, so we remain cautiously optimistic. The first quarter has been impressive, showing a 200% increase with 140,000 more room nights than last year, which is a strong start. However, it’s still a tough environment. We are confident that San Francisco will rebound; it’s not a question of if, but when. Recent reports suggest the recovery might take a bit longer than expected. SF Travel is undergoing a leadership change, and their booking pace has slightly declined to around 500,000 to 550,000 for the coming years. The narrative surrounding the city seems to have shifted somewhat. On a positive note, street conditions are improving, and the mayor's initiatives are promising. Additionally, AI investment in San Francisco is significantly higher than in other U.S. markets, not to mention that it’s the fifth-largest economy. There are certainly fundamental advantages to San Francisco, though the rising office vacancy rates are concerning and something we’re monitoring closely. We also have our maturity at the end of the year, which we are addressing, and we aim to resolve that by early summer, as Sean mentioned. Looking ahead, the first quarter showed an increase of 183%, but we don't expect that pace to continue. For the second quarter, we predict a 15% to 20% increase in RevPAR compared to 2022, primarily driven by larger properties. While we are cautiously optimistic, we recognize that recovery will take time and will likely span a few years.

Thank you, that's helpful. I wanted to ask about your plan to sell non-core assets valued between $200 million and $300 million. Could you share your thoughts on the current valuations in that area, including cap rates or EBITDA multiples, as you see fit?

Yes. I'd make the observation, obviously, we sold seven assets last year for north of $300 million. Obviously, we've completed the Miami sale earlier this year. I think even in the worst of times, Smedes, as you know, even in the middle of the pandemic, we sold two marquee assets in San Francisco, one Le Meridian for north of $630,000 a key. And obviously, the autograph there, Adagio for almost $500,000 a key. So, look, there's still plenty of capital, owner operators, private equity. Obviously, the debt markets are constrained. I would say that asset sales below $100 million are easier to get done. Clearly, pricing is certainly depending on where you price the debt, and I think around 8% is probably where a lot of the debt is getting priced and perhaps some even higher. We're still confident that we'll be able to achieve the objectives that we've outlined. I think we've met or exceeded all of the non-core asset sales that we've outlined over the years and I think we're now up to 39 assets and about $2.1 billion in recycling non-core assets. That's, of course, including 14 international assets and many assets that met lots of complications and lots of hair. So the team is very skilled, very experienced and we're confident that we'll get at least $200 million in asset sales done this year, and certainly, if not higher.

Thank you, appreciate it.

Hey, thank you, good morning. Just on San Francisco, obviously, a hotly debated market, but one is you're showing that it is improving. For the investors that are evaluating whether or not you should give the keys back on some of those assets, and you know better than we do, there's a lot of strong opinions on that issue. How do you think about giving the keys back as one of your options and what are the positives and negatives of taking that approach as you see them?

Thank you for the question. First, I would want to say that we are under a confidentiality agreement. We are in discussions with the servicer. All options are being explored, and I emphasize all options are being explored, and we expect to have this resolved by the summer. Look, these are never cut and dry. So if we were hypothetically to give back the keys, there's a forgiveness of debt, income that we'd have, we're able to shield certainly most of that, but not all of that; it would result in a potential dividend payout of $150 million to $200 million approximately. In theory, it obviously reduces our leverage, but it also takes away a growth story and some optionality in San Francisco, certainly depending on what you believe in its timeline. And as I said earlier, based on this AI revolution that I think we kind of all are reading and hearing about, I mean it is anchored in San Francisco and the spend, again, being six times that level. San Francisco historically is a high beta market, so it goes through these periods of boom and bust. Clearly a tougher period now, but we are seeing it certainly beginning to recover. I think that recovery is going to be a little more elongated, but we certainly believe that we are going to carefully examine the options and make no mistake, we're going to do what's in the best interest of shareholders and what creates the most value.

Thank you. Thank you for those detailed thoughts. And then just for my follow-up on New York, I guess it caught my attention that you felt like New York could be above 2019 on EBITDA. Can you talk about the drivers of that, which segments are really leading that, and maybe how sustainable you think that is, are there maybe changes in the operating model or things of that sort? Thank you.

Yes, that's a great question. I'm really glad you asked it. Over the past year or two, we've discussed our retooling efforts and how we used the pandemic to rethink our operating model. Some investors and analysts may have been skeptical about this, but I want to express my pride in our team, especially our asset management team and Sean's leadership. We worked hard, reducing our workforce by 1,200 FTEs, which accounts for about 55% management and 45% hourly positions. This helped eliminate redundancies in sales and marketing, saving us $85 million and improving our margins by about 300 basis points. It's important to note that we achieved these improvements despite a challenging environment, with margins increasing by over 500 basis points. This success is not just luck; it comes from dedication and a focused approach to optimizing our operations during the crisis. Last quarter, we reported that our labor costs were 16% lower in 2022 compared to 2019, and this quarter, we had 200 fewer management FTEs than in the first quarter of 2019. Our team is putting in a tremendous effort, and I believe the results we’re sharing today reflect that. New York is a city that many believed would not recover from the pandemic, with some predicting it wouldn't bounce back until 2027 or 2028. However, we saw a 113% increase in RevPAR this quarter. We anticipate exceeding 2019 levels in EBITDA. The city is buzzing again, with people returning to the office, and this trend is accelerating. We are confident about the outlook in New York and our position in the market. There are only a few large venues capable of hosting significant group businesses, and we believe we have the best meeting facilities and a strong leadership team in place. We are excited about the future in New York and optimistic, expecting double-digit RevPAR growth in the second quarter. Overall, we feel very positive about our current standing in New York.

Thanks Tom.

Thank you for answering my question. I have a quick follow-up regarding New York. I noticed that New York had a negative hotel EBITDA of $3 million in the first quarter, and in 2019, it was $47 million for the full year. This suggests a significant increase is needed, which aligns with your comments, but may be a bit steeper than what some people anticipated. Is that the correct perspective?

Yes, this quarter is typically our weakest in New York, with occupancy around 69% and RevPAR at approximately $170. EBITDA was negative $3.4 million, indicating that the remainder of the year should exceed $50 million, which we are confident in. We expect a substantial increase in RevPAR, particularly in Q2. Additionally, we have about 180,000 group room nights booked, which significantly contributes to overall profitability when combined with transient demand. Currently, 80% of our demand is domestic, but international demand is increasing, historically around 16% to 17%. Travel from Europe is particularly advantageous, though Asia has not yet recovered. Overall, we are optimistic about the trends in New York at this time.

Thanks, Tom. As a follow-up, I want to discuss the recent buyback of 8.8 million shares in the first quarter and the sale of a hotel. If you plan to sell another $200 million before the year ends, should we anticipate that around half of that will be allocated for share buybacks and the other half for debt reduction? How do you balance those two priorities, considering you also have some redevelopment capital to spend?

Hey Floris, it's Sean. We want to approach this on a leverage-neutral basis, so that's something to consider as we move forward. Regarding the returns on investments, we are definitely focused on that too. While we will still have some buybacks, you might notice that we are likely to prioritize redeployment within the portfolio or some debt reduction. Additionally, just to mention New York, they recorded a loss of $2 million in Q1 of 2019, so as Tom pointed out, it’s a softer quarter and not unusual for this year.

Hi, good morning, everyone. I appreciate you taking my questions. Tom, you mentioned raising the full year by the amount you projected in the first quarter, and your comments are quite encouraging. My question is, how is Q2 looking compared to your expectations from 60 to 90 days ago? Should we consider any macroeconomic factors or caution that might influence the rest of the year, especially given the positivity of your remarks in relation to your year guidance?

It's great to hear your questions. I want to emphasize what Sean mentioned earlier. We face some tough comparisons and cancellations, especially since last year's second quarter was exceptionally strong and has historically been our best quarter. We're optimistic about the guidance we provided, particularly the RevPAR range of 7% to 11%. The group pace is also looking promising as we move forward. However, we must acknowledge the existing uncertainties and variables. With the Federal Reserve nearing the peak of its tightening cycle, concerns about a potential credit crunch remain. This isn't news to anyone listening. On the consumer front, we see strength, with around $1.1 trillion in savings and a savings rate of about 6.2%, along with low unemployment, making the economy not feel like it's in a recession. Nevertheless, we are cautious due to the Fed's signals and the tightening credit landscape in banking; this conservatism is warranted. We are comfortable with our guidance, despite facing tough comparisons. We're proud of the efforts of our team, especially considering the challenges brought by the pandemic. We avoided dilutive equity raises, executed three bond deals to extend maturities, and have been proactive in managing our capital. We've successfully streamlined operations, with our top 27 assets representing around 90% of our company's value. Looking ahead, we remain focused on improving and optimistic about the second quarter. The group segment is vital to our strategy, and leisure travel remains robust, especially in Hawaii, which continues to show impressive performance and has the potential to strengthen further. Additionally, the absence of Japanese travelers adds another positive factor. While we face a few headwinds, there are also significant tailwinds that will benefit our story, setting us apart from many competitors. Achieving a 500 basis point increase in margins reflects the hard work of our team.

Thank you, Tom. For my follow-up, could you elaborate on the strength of the group? What factors are contributing to that strength across different segments, such as associations or SMERF? Also, could you remind us about the profitability of these segments in our portfolio?

Hey Dany, this is Sean. I'll take that one. There are a few key takeaways regarding group performance. Clearly, it's a strong story. Park outperformed in Q1 compared to our performance in the market. We saw an increase in revenue per available room by 40%, compared to nearly 37% for room revenue. The out-of-room spending tied to group demand is significant. Looking at trends, while we're still focused on the near term, with nearly 60% of room nights booked for March or Q2, we also booked 77,000 room nights for 2024, following about 18,000 room nights in both January and February. This indicates that meeting planners are gaining confidence in booking further out and recognize the necessity of doing so. They appear optimistic about hosting in-person events. We're also witnessing a shift within the group segment, with a notable increase in corporate and convention bookings. We anticipate that in-house corporate group bookings will recover quickly throughout the year, improving from a 20% revenue decline compared to 2019 in Q1 to being flat or slightly increasing by Q4. Convention bookings are approaching 90% of 2019 levels. While quarter-to-quarter results will vary based on calendars, these segments traditionally contribute significantly to our portfolio's revenue. Seeing these segments rebound and gain more market share is integrated into our outlook for the year. Lastly, it's worth mentioning that there remains a tailwind from the approximately 30% of canceled COVID-related events still awaiting rebooking, which we believe will benefit our portfolio moving into next year as people work to reschedule those events.

Hi, good morning. Good morning, Tom. Question on business transient. There's been a lot of very positive data points on group. Just maybe some detail on how BT trended in the quarter and what you're assuming for the back half of this year in terms of recovery there?

Anthony, it's Sean again. I mean, I think BT as a whole is tracking well. I would say, certainly, we would say it's recovered. It was down overall in revenue about 10% to 2019 levels, but we see that improving and actually being up high single digits by the back part of the year, maybe even double digits. Clearly, we get focused on the corporate negotiated a lot where you see within financial services or tech, professional services; I mean that sub-segment has certainly been off. It's down 40% to 19% in Q1. We do see that improving through the year, getting to probably 20% down by the back half. But you've got RAC rate, you've got government and you got local negotiated all helping to kind of pick up the slack a little bit. I mean from a RAC standpoint, I think you've probably heard another commentary certainly from Hilton that you're going after more of the smaller businesses. And what we're seeing there is the usual comes through in more local as well as RAC. And so RAC's about 30% above corporate negotiated on rate on average. And while local and government are below on rate, about 25%, I would say the vast majority of the pickup on the mix is on the RAC side. So all in all, we think business transient as an overall segment is recovering through this year and getting back to 2019 levels easily by certainly the midpoint of this year or the back half. It's just, again, a lot of attention on the corporate negotiated makes it feel like business transient is down, but it's really not.

Got it. Okay. And maybe one more. I saw that you purchased some land in Hawaii where you mentioned plans for a tower. Could you provide an update on the scope of that project, the timing, and the potential opportunities there? That would be great.

Anthony, as we've said it would be the opportunity to add a sixth tower there. We own the land which we're pretty excited about. We're working through the entitlement process. It's probably another 12 to 18-month process, plus or minus. And we're looking at 500 keys plus or minus that possibly could be added. And as you know, that is a world-class resort. We've got nearly 2,900 rooms on five towers. There's also an additional 1,000 units of timeshare, which we don't own. And you look at the extraordinary success that we had last year, again, not having the Japanese traveler down 95%. We did historically about 150 weddings there a year; I think we did less than five last year, with the Japanese traveler typically accounting for about 20% of our business. We expect we'll start to see more visitation in the second half of the year, but we are tracking for probably another all-time high in EBITDA. So I feel very good about what's happening there, not only there, but also on the Big Island. So we think a future investment there is going to be extraordinarily accretive. We also, again, are more profitable today in Hilton Waikoloa as a 600-room hotel than we were as a 1,200-room hotel. And in addition to that, we've uncovered that we have the rights for an additional 200 keys that we can add there. So the story in Hawaii for Park only gets better and stronger as we look out.

Thanks, and good morning. Maybe as it relates to guidance, it seems to imply about 2% to 3% RevPAR growth in the second half of the year. How would that compare to your expectations on the expense side? And maybe what are the more significant pressures on the expense side from a broader perspective?

Yes, regarding expenses, we are seeing them slightly outpace revenue, leading to some year-over-year margin decline. However, we anticipate a more balanced growth between revenue and expenses in the latter half of the year, with a slight advantage for revenue, suggesting potential margin improvement. We're positive about our position. Specifically, we've maintained the $85 million in expected savings, while wages have increased approximately 4% to 5% annually over recent years. Overall payroll has risen 20% since 2019, but we've seen a decrease in nominal terms of 3% to 19% in Q1. In terms of headcount, management full-time equivalent positions have decreased by 14%, and hourly staff is down 19% compared to 2019, aligning with the 8.5% reduction linked to the $85 million in savings. We are pleased with this progress. Nonetheless, we expect pressure from insurance and utility costs in the coming months. Utility expenses have increased by 22% since 2019, and 40% on a per-occupied room basis, which may affect our savings. Insurance costs are projected to rise nearly 40% since 2019, affected by expected renewal rates due to losses and capital constraints from insurance carriers. We anticipate these increases may pressure our margins, but these costs could also decrease in the future, as we have seen periods of lower insurance and utility costs before. We have less exposure to insurance costs compared to others, as we haven't experienced losses in recent years, indicating we may perform better in this area.

Thanks. And then, Tom, maybe just as you think about the San Francisco market and maybe to the extent you're positioning for a recovery, how much capital do you think is required to invest in the assets you have in that market to remain competitive over the next couple of years?

First, would be the Park 55. We've completed the model rooms. We were prepared to complete renovation. That's about 1,024 units in that hotel. So, that's about $90 million, but probably over a five-year stretch, it's probably approaching $200 million in total. We've renovated the ballroom, the public space, and the San Francisco Hilton. But as you look out over a five-year period, it's probably in the $200 million range, plus or minus. Again, that's 3,000 rooms at those two properties.

Thanks, good morning. Can you discuss the renovation plan for the Rainbow Tower in Hawaii for next year? Do you have expected costs yet, and what kind of renovation disruptions might occur? Additionally, what eventual benefits do you anticipate?

Yes, we are currently planning that, Dori. We expect to complete Phase 3 of the Tapa Tower this year and are very excited about the work being done there. The Rainbow Tower will be next on the list. Managing renovations while maintaining occupancy in the high 80s to mid-90s can be challenging. However, Carl Mayfield and our design and construction team are top-notch, and we have strategically planned the adjustments, including the minor disruption anticipated at the Casa. We intend to approach the Rainbow Tower renovation in the same way, designing it carefully and completing a few model rooms during the least disruptive times. We expect this renovation to take place in 2024 or 2025, but I don't have specific disruption details to share at this time. We will provide updates as more information becomes available.

Okay. You mentioned that group revenue for 2024 is expected to increase by 9% year-over-year. I didn't catch where that stands in the context of our discussions.

So yes, we believe the pace for 2023 is around 90%, and excluding San Francisco, it's likely in the mid to low 80s. Therefore, it's expected to be in the upper 80s compared to 2019.

Sorry, that's 2023 or 2024?

That's 2024; I was giving a little 2023 background but then giving it to 2024.

Yes, Dori, it's in the low 80s. The group pace for 2024, excluding San Francisco, is 90.2%.

Hey, good morning guys. Tom, so there's obviously a lot of moving parts out in San Francisco. I think there's a lot of hotels for sale, whether publicly or not. And I'm not including any of your stuff in that. But the question is, what do you think happens? There's talk of governments buying those for alternative use or others. How does that impact, do you think there's any chance we see some surprising prints on sale, high or low? And how does that really impact what you guys want to do with the refi and your thoughts on the market longer term in terms of some supply potentially coming out?

Yes, it's a great question, Chris. Look, we have studied San Francisco. We've looked at the cycles, and there are a few, I think, big, important takeaways. It's the most supply-constrained market, probably second only to Key West. You've only got 32,000 keys versus New York at 125,000 to 150,000. It is a high beta market, as we all know. And if you look from that sort of 2008 through 2019, probably first or second-best market, lodging market. No doubt, it is a more challenged environment today. And it really comes down to making sure that we are carefully underwriting and understanding the demand flow. Obviously, the recent print from SF Travel was not particularly helpful. Obviously, you're going to have a leadership change there. And the sooner that selection committee can get to work, the better. But we have no doubt that San Francisco recovers for the reasons we talked about. When you think about venture capital, education, and the natural beauty, you look at the AI spend—again, you've got six times the spend in this revolution, it is going to be anchored there. Having said that, we're not being overly optimistic about this. It's going to be an elongated recovery. And again, we are under a confidentiality agreement; we are in discussions, and we will carefully evaluate all options and arrive at the option that creates the most value for shareholders. And the office vacancy rate rising, again, is something that you need to carefully review and understand. The office sector is clearly going to continue to take it on the chin there. But these periods of dislocation also create opportunities. We don't see—I'd think it would be difficult for a lot of office-to-hotel conversions, so we don't see that really as a risk. It really is about the basic blocking and tackling. The Moscone Center has talked about lowering rates. We think that's a good idea. We think a national marketing campaign is another good idea that we've communicated. The ambassador program has been well received. The street conditions are improving; they are far better than I think it's been reported. But the city has to do a better job communicating that to the broader public. And again, the first quarter was strong, and we were profitable, but we also recognize that it's still 30% to 40% below 2019 levels and certainly lagging behind other markets. So we're factoring all that in, in those discussions. And we're going to be very thoughtful and very disciplined about it, and I'm confident we'll arrive at the right outcome. But remember, San Francisco is a very small contributor to Park this year and the guidance and overall EBITDA that we've outlined. So the story is intact. It's not driven by San Francisco. San Francisco actually is if we get to an acceptable resolution, is really the optionality of some additional upside, but it is not a huge drag on our guidance this year because we see a small contribution. The contributions are coming from other cities that are really accelerating, again, led by what we're seeing in Hawaii, which just continues to accelerate.

Yes. Thanks, Tom. Appreciate all the color there. Just as a quick follow-up in Hawaii and some of the expansion opportunities you have, you covered a few of them. I know planning is not done and it's a little far out, but is there a way you would look to do that in a more capital-light manner given how much construction costs have risen or is there kind of an offset later down the road with more asset sales, just thoughts on how to make that most, I guess, economical?

Yes, that's a valid point. While we are not at that stage currently, I assure you that we will not pursue any dilutive equity raise. The best approach for utilizing recycled capital is to reduce leverage and buy back stock on a leverage-neutral basis, as well as reinvest in our portfolio. We are committing $300 million and we haven’t detailed the specific plans yet, but the outcome will be remarkable once completed. Later this year, we are eager to unveil the expanded meeting space over water, along with a fully renovated golf course and the Waldorf Ballroom, both of which are already in full operation. We are truly excited about this. As we consider how and when to capitalize, we will be careful and keep all options on the table. Fortunately, that's a few years away before I need to make a decision, and I anticipate that by then we will see more normalized conditions and a return to standard capital costs.

Hey, good afternoon.

Hey Patrick, how are you?

Great, great, thank you. Tom, can you talk a little bit about the mix of what types of businesses, given the group strength in the quarter? And as you look in your group of new crystal balls, the rest of the year and into next year, if that composition of who is strong, who is weak is there change in that all. And I state who is strong is making a financial firm, marketing firms, etc.? Thank you.

I will let Sean jump in on some of the little more granular. But let me just make a couple of macro comments. I mean, look, as you think about remote work and hybrid work, what I hear from C Suite leaders, men and women as I talk to in various forms, the need to bring people together is even greater. And so when you have a portfolio like ours that is so well distributed and has a lot of meeting space, we are well-positioned to take advantage of that. I mean we began the year with a forecast of about 2.1 million room nights. I think that last quarter we were about 1.4 million in debt finance and we said we needed to make up about 660,000 for that year. Now, at the end of the first quarter here, we are at a deficit of about 1.72 million. We need to only make up about 330,000 room nights. So, we are very confident that we will be able to meet our targets, if not exceed them. And also to the point that Sean made, you're seeing about 30% of companies, plus or minus, it still have pent-up demand in group, and New Orleans is seeing obviously the medical conferences come back, and that need to be together isn’t going to go away. And as you think about just 2023 to markets, New York and Chicago we have got 180,000 group room nights. New Orleans is 230,000, New York again 180,000, Monte Creek, and we are still under a transformational expansion of 170,000. Hilton Hawaiian Village 100,000 and, of course, the complex in San Francisco north of 180,000. So, just that backdrop is just a half dozen of our big group houses as well. So we don’t see that at all slowing down, and we see that as a real competitive advantage for us. Leisure continues, it moderated in Key West, but we anticipated and we said that, and we expect to add to add trends don’t go to the sky, but we see groups got a tailwind as we sort of move forward.

I would say there aren't any specific verticals that are performing exceptionally. Everyone is just gradually returning to group settings. Across the company's in-house group and corporate side, there's activity evident in the overall portfolio. Much of this still feels short-term, as people are coming back for training or gatherings that they haven't participated in recently. We've noticed conventions are clearly making a comeback, with notable activity in Chicago and New Orleans during the first half of this year, particularly in the first quarter. The J.P. Morgan Healthcare Conference in San Francisco and a few others this quarter have also contributed positively to our market and portfolio. Additionally, group tours this quarter have shown significant strength. Group events took some time to transition past the pandemic and reestablish their regular cycles. It may have been a delay and a lag in the absence of certain sub-segments, such as SMERF, which were impacted during the pandemic. However, that aspect has stabilized, with a stronger focus on the corporate side, which is effectively bouncing back.

Hi, good morning. Thanks for asking, how are you?

Good.

I wanted to touch on the target of a couple of hundred million in assets. Any information you can provide regarding what the net proceeds might be or what that could look like would be helpful. Additionally, I believe you mentioned earlier that you are looking to improve leverage with those assets, so any insight on that would be appreciated.

David, both Sean and I touched on this earlier. We've always focused on recycling capital, which exceeded $300 million last year. Our target is set between $200 million and $300 million. We've already made progress with the Miami sale earlier this year. Generally, assets valued under $100 million are more feasible to transact in the current environment. There is ample capital available from various sources such as owner-operators, family offices, and private equity, which has nearly $400 billion at its disposal, not including sovereign funds. This capital needs to be invested. Our Chief Investment Officer, Tom Morey, and the team have performed remarkably over the years, and we'll keep evaluating our non-core assets. Our top 27 assets represent about 90% of our total value. While debt capital is accessible, it requires effort to identify the right buyers, especially given the tighter conditions in the debt markets. We are not facing a credit crunch at this moment, but it's a potential concern. Regarding our proceeds, we will approach this carefully. If we're trading at a significant discount to NAV, you can anticipate continued stock buybacks as we did in the first quarter. These initiatives will be on a leverage-neutral basis, and we will keep reinvesting in the portfolio. These represent the best decisions for our management team at this time, and we will proceed with them.

Great, thanks. I just wanted to circle back on the idea of what's going on with business transient. When looking at your urban RevPAR, if we exclude San Francisco, which has some city-specific issues, it looks like your urban RevPAR was down about 10% versus 2019, which is kind of a little bit or a bit worse than Q4 being down 2% versus 2019. So I know you mentioned that Business Transient is improving, but—and maybe that's just in the markets outside of your urban portfolio. But can you give a little narrative around what's going on with the urban RevPAR excluding San Fran, that sort of sequentially looks worse, and is that just something you're seeing across the board?

No, I would say it's relatively stable, Robin. I think clearly, I mean, obviously, you’re looking at it—the seasonality element against 2019, and it's a sequential decline. But I think, even in this—we sit here today, still trying to recover, I think some of those weaker seasonal time frames end up being a little bit more disproportionately weaker, if you can kind of—hopefully, that makes sense. But I think you just kind of see a little bit more, I think, a little bit more underperformance in some of those weaker pockets from a seasonality standpoint. So when you look at the Q4 to Q1, I think it's generally in line. I think we certainly expect improvements as we get through the year.

Thanks, good morning.

Good morning, Chris.

Tom, what's the latest thinking around a potential rebrand of the DoubleTree, San Jose? And anything new you can share as it relates to timing or scope of that project?

Yes. It clearly is in the queue and love the location, the quality of the real estate. We certainly think an upbrand is the right move. And we've got a couple of model rooms done. We continue to study, obviously, all of Northern California and figure out what the right sequencing is. But that one is probably more of a late 2024, 2025. That certainly is not what I would call in the top tier of our conversions at this time.

I don't think anything specific to call out there. Just I think for the most part, those are kind of our, I would say, non-core market areas. I mean there's probably one that sits in there would be, I believe, the Creebay Hotel, which certainly has been an outperformer for us, and it's a little bit disproportionate contributor given its size relative to a lot of smaller assets we have in that bucket. But they have been—generally, that group has somewhat outperformed because they're not in those CBD markets. Just been general outperformance, they're not also in those compressed leisure markets that you've seen a little bit of moderation. So they're in a sweet spot still.

Thanks. Thanks for sticking around. Good morning. Tom, what's going on with the Japanese traveler? Are they going to other places? I think I had read months ago they had basically decided to travel or just stay domestic. And I'm just wondering you're optimistic about the recovery, but has there been somewhat of a permanent shift here in their travel?

I don't think so, Bill. I mean, remember, you had the Japanese government relax the restrictions on October 11th, including the elimination of a daily kind of arrival caps. Look, there's been a long history, if you think back over the last 30 years, that visitation has been pretty consistent and even periods where the Yen was pretty volatile. So I just think, given the history, given the cultural tie-ins, we're not sensing that there is going to be any long-term dilution there. And look, there was another flight just added today by Hawaiian Airlines to a fourth destination. So we think the second half of the year starts to show improvement, but we're really excited as we look out to 2024, 2025 and beyond. And if you think about, again, the comment I made about weddings, a lot of those were Japanese weddings. As you think back to 150 of those a year and single digits last year. So, very, very optimistic. Despite that, obviously, you continue to see the air seats into Honolulu I think we're up 21% in the first quarter and over the last year, and I think about 3% below 2019 levels. So, we would hope, and you dig in and take a look, I mean, our Hawaii story is extraordinary. In terms of the performance, we've retooled the operation at Hilton Hawaiian Village, the work that we did, at Hilton Waikoloa, shrinking the hotel at 50% capacity, and we're more profitable. And as you look out, we fully expect we're going to be mid—at least mid-single-digit RevPAR increase and probably again, all-time high EBITDA. So it's really good blocking and tackling, but we are excited to welcome back the Japanese traveler. We certainly think that will begin in earnest in the second half of the year and certainly optimistic about 2024 and 2025 as we look out, we see that as a real tailwind for us.

Yes. No, I appreciate it. Sean, one for you. I think it was Duane that earlier asked a question about hitting back the keys in San Francisco. I don't recall you mentioning, but what is the prospective tax hits on the gain? And is there any way to either use the 1031 exchange or a special dividend? Is there some way that you would be able to avoid the tax hit on that?

Yes. Sorry if we haven't made it clearer. You wouldn't expect a tax hit, Bill. It's just that the gain is going to trigger more distribution, and it would be more like a special dividend, which is what Tom described as $100 million.

Yes. You got to keep in mind, Bill, it's a very low tax basis. So with that, if we're giving us a debt, we end up with a significant gain. Given the NOLs, we can shield, but we still believe we end up with a dividend requirement of about $150 million to $200 million. Now look, you evaluate that in the context of the options. As we said, we're under a confidentiality agreement right now. We are reviewing and studying the situation carefully. We're going to do what's in shareholders' best interest. And as I said, all options are on the table, and they should be on the table.

Okay. Thank you. At this time, we've reached the end of our question-and-answer session. And I'll hand the call back to Tom Baltimore for closing remarks.

Thank you all. It's great to visit with you today and look forward to seeing you all at the upcoming conferences. Travel well and be safe.

This will conclude today's call. You may disconnect your lines at this time. Thank you for your participation.