Greetings, and welcome to Park Hotels and Resorts Inc. First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded.

Thank you, operator, and welcome everyone to the Park Hotels & Resorts First Quarter 2024 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. 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. Additionally, unless otherwise stated, all operating results will be presented on a comparable hotel basis. This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of Park's first quarter performance and update you on our 2024 outlook. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on first quarter results, Q2 and full year guidance, and an update on our balance sheet. 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. Before we begin, I would like to take a moment to acknowledge and remember former Senator Joe Lieberman, who served on the Park Board since January 2017. Senator Lieberman was a great American, a wonderful Board member, and a dear friend. I wish to convey my heartfelt condolences to the Lieberman family, and I know I speak for the entire Park Board and management team when I say that his wisdom and integrity will be greatly missed by all of us. I am pleased to report another incredibly successful quarter marked by outstanding performance across our portfolio as demand trends improved across all segments, bolstered by the strategic investments made in Key West, Orlando, and Hawaii, in addition to other prudent decisions we've made over the past few years. We remain laser-focused on achieving the highest returns on our invested capital with our ROI pipeline providing the groundwork for outperformance in 2024 and beyond. Having invested nearly $300 million of capital last year, we are targeting an additional $260 to $280 million in strategic investments this year as we seek to unlock the significant embedded value within our portfolio. We also believe the decision we made last year to exit the two Hilton San Francisco hotels meaningfully improved our balance sheet and operating metrics and changed the narrative for Park. Through these efforts, we were able to return $630 million of capital to shareholders last year. And as we continue our momentum in 2024, we are excited about the growth potential in our portfolio and focused on maximizing returns for shareholders. Turning to first quarter results. RevPAR in Q1 increased a sector-leading 7.8%, which was 50 basis points above the high end of our Q1 guidance range and also exceeded Smith Travel's reported upper upscale performance by nearly 500 basis points. This is an exceptionally strong performance given the tough year-over-year comparison with 2023 first quarter RevPAR growing 28% over 2022. We experienced broad-based strength across our portfolio, with our urban and resort portfolios each reporting 8% RevPAR growth during the quarter, while our suburban and airport hotels also reported an aggregate RevPAR increase of over 6.5%. These results highlight the continued upside potential in our portfolio driven by particularly strong group demand and convention calendars, positive trends in business travel across our key urban markets, and the ongoing resiliency of our resorts. Group demand remains a key driver of growth for Park in 2024 and beyond. This was evident in the first quarter as group room revenues increased by 15% year-over-year to $123 million, which exceeded our expectations as rates grew by 5%, while the elevated demand drove an increase in banquet and catering revenue by over 11%. As we look over the balance of 2024, group demand is expected to remain very strong with full year revenue pace as of March 31 up nearly 11% compared to the same time last year, benefiting from strong convention and citywide activity expected for New York, Chicago, and New Orleans, and healthy in-house group booking activity in the resorts, including our Bonnet Creek complex in Orlando. In the year, for the year bookings also remain very active with the portfolio picking up approximately 240,000 room nights for 2024 during the quarter, accounting for $56 million of incremental revenues with gains primarily concentrated in New York, Orlando, and Hawaii. Turning to several of our core markets. We are pleased to report another solid quarter in Hawaii, which achieved impressive RevPAR growth of nearly 7% versus last year. Hilton Hawaiian Village led the way with exceptional RevPAR growth of nearly 8%, supported by strong domestic airlift and a steady recovery of inbound travel from Japan. Overall, February year-to-date inbound airlift in Japan increased by 65% compared to the previous year, resulting in nearly an 85% increase to 55,000 monthly passenger arrivals to O‘ahu and the Big Island. While Japanese airlift still lags 2019 by 31%, we are very encouraged by the ongoing improvement. Group bookings increased by 41%, which helped to push occupancy to nearly 92% during the first quarter, while driving the average daily rate to $304, marking the highest first quarter average daily rate in the hotel's nearly 60-year history. At our Casa Marina Resort in Key West, the transformative investment we made to reimagine this iconic hotel has yielded exceptional results, with performance during the first quarter meaningfully exceeding expectations. RevPAR increased by over 34% during the quarter, primarily driven by an impressive 24% increase in rate, while strong leisure and group demand drove occupancy higher by over 600 basis points to 82% in the first quarter. As a reminder, the first quarter is a clean quarter-to-quarter comparison as the resort was not closed for renovation until May of last year. The resort also achieved the highest banquet revenue quarter on record, helping to drive food and beverage revenues up nearly 32% compared to the prior year period. The food and beverage offerings at Casa have been further enhanced with the introduction of the new beachside Durata bar, which opened April 13 and is expected to have the restaurant fully operational by the end of Q2. Overall, we are thrilled about the potential of this iconic resort, with current projections for 2024 trending ahead of our underwriting. In Orlando, our Bonnet Creek resort complex, which includes the Waldorf Astoria and Signia Bonnet Creek hotels achieved impressive results following the completion of a comprehensive renovation and meeting space expansion. RevPAR for the complex increased by nearly 9% versus 2023 during the quarter. At Signia, the addition of the 35,000 square foot waterside ballroom contributed to a 43% increase in group revenues during the quarter, helping the asset improve its RevPAR index by over 8% for the quarter. Looking ahead, 2024 group revenue is pacing up over 36%, while 2025 group revenue pace is up over 17%. We look forward to welcoming many of you at our upcoming Bonnet Creek property tour later this month, where we will showcase our best-in-class development capabilities and the incredible work achieved by the team. Shifting to our urban portfolio of hotels, we delivered solid results as both business travel and international demand continue their path towards a full recovery. New York continues to be one of the strongest urban recovery stories in the country, exemplified by our Hilton Midtown hotels' RevPAR growth of 11% over the first quarter of 2023, with group revenue exceeding 2019 levels by nearly 28%. As a result, occupancy improved 570 basis points above the prior year period, with 14 sellout nights during a seasonally low occupancy quarter. There remains significant embedded upside potential at the hotel with transient room nights still 16% below 2019 while overall occupancy versus 2019 trails by 440 basis points, a gap we expect to close with the eventual rebound in travel from Asia, coupled with continued improvements in business transient demand. In New Orleans, proactive efforts to generate in-house group, given the significant drop in citywide events during the first quarter helped to drive solid results at our Hilton Riverside Hotel, with RevPAR growth exceeding 13% versus a 4% decline for the comp set. While in Chicago, a 70% increase in citywide production helped to drive an 11% increase in RevPAR across our 3 hotels, with contributions from both transient and group segments. As we look out over the balance of the year, we remain well positioned to deliver sustained growth throughout the year as we execute against our strategic priorities, supported by an expected favorable macro backdrop including a resilient U.S. consumer, improving inbound international travel, and a continued acceleration of group demand. We remain optimistic about the growth potential of our portfolio. As a result, we are increasing our full year 2024 guidance to reflect the better-than-expected performance during the first quarter and remain on track to deliver sector-leading RevPAR and earnings growth this year. Sean will provide more details on our improved outlook for the year. From a capital allocation perspective, we remain very focused on maximizing returns on invested capital. While we continue to assess potential acquisitions, we firmly believe that our portfolio holds significant embedded value, which we seek to unlock through targeted ROI projects. At Hilton Hawaiian Village, we expect to commence a 2-year phased room renovation, with nearly half of the 796 rooms in the Rainbow Tower being renovated during the second half of this year, with the remaining rooms expected to be renovated during the same time next year, along with 26 additional keys being added as part of the project. Similar to HHP, we plan to renovate nearly half of the rooms in the 400-room Palace Tower at the Hilton Waikoloa Village later this year, with the balance of rooms expected to be renovated next year along with 11 keys being added as part of the project. Both renovations are expected to begin in August with an anticipated completion date of early 2025 for Phase I. In total, we expect only $8 million of EBITDA disruption this year from both projects and 40 basis points of RevPAR disruption. Overall, we are very excited by the impact that these reimagined rooms will have on the results following the success of our Tapa Tower renovation at Hilton Hawaiian Village, which wrapped up last year, and generated a $60 average daily rate premium to other resort room types. In addition, we continue to evaluate other major ROI projects among our core hotels, including a comprehensive renovation of our Royal Palm, Oceanfront Hotel in South Beach, Miami, which is currently contemplated for 2025, while making significant progress on the entitlement process for a ground-up development project at Hilton Hawaiian Village to add our fifth tower with approximately 515 rooms. I want to reemphasize that our team remains intensely 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. With that, I will turn the call over to Sean.

Thanks, Tom. Overall, we were very pleased with our first quarter performance. Q1 RevPAR increased an impressive 7.8% year-over-year with occupancy up 350 basis points to nearly 71% for the quarter, and average rate higher by 2.5% over the same period last year. Hotel revenue was $618 million during the quarter and hotel adjusted EBITDA was $168 million, resulting in a hotel adjusted EBITDA margin of 27.3%, 190 basis points above the same period in 2023. Q1 adjusted EBITDA was $162 million, and adjusted FFO per share was $0.52. First quarter results were positively impacted by double-digit RevPAR gains in several key markets, including Key West, New York, New Orleans, and Chicago, while ongoing strength in Hawaii drove our stronger-than-expected results. In addition, margin outperformance was also aided by approximately $4 million of state unemployment tax refunds received at both of our Hawaii resorts and $5 million of relief grants awarded to our 3 Boston properties. Excluding these items, first quarter hotel adjusted EBITDA margin still expanded by approximately 40 basis points. Turning to the balance sheet. Our current liquidity is approximately $1.3 billion, including $400 million of cash, while net debt is currently $3.5 billion. Our net debt to adjusted EBITDA ratio on a trailing 12-month basis has improved significantly to just 5.2x. Overall, our balance sheet remains in excellent shape with a focus on extending near-term maturities while maintaining sufficient liquidity and optionality to execute our strategic initiatives. With respect to our dividend, on April 15, we paid our first quarter cash dividend of $0.25 per share. And on April 19, our Board approved a second quarter dividend of $0.25 per share to be paid on July 15 to stockholders of record as of June 28. The dividend translates to an annualized dividend yield of 6% based on recent trading levels. As we stated last quarter, we expect to resume our targeted payout ratio in the range of 65% to 70% of adjusted FFO per share for the full year, which based on our current guidance, would translate into an incremental top-off dividend at the end of the year. Turning to guidance. As Tom noted earlier, given stronger-than-expected results during the first quarter, we are increasing our 2024 RevPAR forecast by 25 basis points at the midpoint to a new range of $186 to $188 representing year-over-year growth of 4% to 5.5%, while our hotel adjusted EBITDA margin forecast improved by 30 basis points at the midpoint to a new range of 27.1% to 28.1% or down 70 basis points to up 30 basis points versus 2023. Additionally, given the stronger-than-expected performance during the first quarter, we are increasing our adjusted EBITDA forecast by $10 million at the midpoint to a new range of $655 million to $695 million, while our adjusted FFO per share guidance increases by approximately $0.05 at the midpoint to a new range of $2.07 to $2.27 per share, representing year-over-year adjusted EBITDA growth of 2.5% and AFFO per share growth of 6%. Overall, we expect our portfolio to continue to deliver solid RevPAR growth over the balance of the year. Year-to-date preliminary RevPAR growth through April is pacing up over 5%, while we forecast Q2 RevPAR growth to range between 3% and 5%. While April performance was impacted by typical year-over-year comparisons coupled with the Easter holiday shift, which impacted leisure transient demand into Hawaii, we are anticipating performance to accelerate in May and June driven by Key West as we lap the Casa Marina renovation disruption beginning in May of 2023, along with continued improvement in our urban markets and solid group base across the portfolio. In addition, the back half of the year looks solid, with RevPAR growth expected to be above 3.5%, which includes 80 basis points of renovation disruption during this time at both of our Hawaii hotels, and at our Hilton New Orleans hotel where we will renovate 250 of the 1,167 rooms in the main tower during the low operating season from July through October. 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.

The first question comes from Floris Van Dijkum with Compass Point.

So this is a really strong report, although the market's initial reaction is somewhat puzzling. It's interesting to see that while your expectations for cash flow and EBITDA have increased, your guidance still doesn't indicate a return to 2019 levels of same-property EBITDA. However, if I recall correctly, your first quarter EBITDA this year actually exceeded 2019 on a same-property basis. Could you elaborate on where the potential for increasing your EBITDA recovery lies, especially regarding your urban assets where occupancy seems to be falling short of 2019 levels?

There’s a lot to discuss here, and you’ve made an excellent point. Our first quarter serves as a strong example. While some might focus solely on Hawaii, it's important to note that we experienced significant growth in both urban and resort markets. We are still approximately 500 basis points below pre-pandemic occupancy levels, but that figure is improving. Looking at our entire portfolio, we are quite optimistic. I acknowledge there are concerns regarding the second quarter, particularly in April, which appears to be our weakest month of the year with a projected decline of about 1%. However, this is expected to be our lowest month for group bookings as well, sitting around a 3.7% decline. As we look toward May and June, we anticipate strong growth, with group bookings entering the 8% to 9% range. Cities like Seattle are expected to exceed 15% in RevPAR, D.C. should see around 10% to 11%, Boston at 8% to 9%, and Chicago around 5% to 6%. While it's important to note that Casa is not a straightforward comparison due to its closure, it has shown an impressive increase of roughly 900%. The signs of recovery and growth are evident, and we remain optimistic about our portfolio. We have issued guidance of 3% to 5% for the second quarter and feel confident about this outlook. It can be frustrating to see initial market reactions, but as people gain a clearer understanding, we are very confident about the outlook for the remainder of 2024.

Great. Tom, I’d like to follow up on Hawaii. You mentioned that Hawaii Village generated $51 million in EBITDA during the first quarter. If you annualize that, it's not a completely fair assumption, but it suggests an EBITDA run rate close to $200 million for a single asset, which is significant for many companies. Considering the air uplift and demand from Japanese tourists, how much do you think that contributes to the occupancy increase? Do you see potential for further growth in this area?

Yes, that's an excellent question, Floris. To provide some context, the last two years in Hawaii have shown nearly record performance. We expect this trend to continue this year. Before the pandemic, Japanese travelers contributed about 18% to 20% of our revenue. Last year, that figure dropped to around 3.5%. For the year-to-date results this year, it's also about 3.5%. We anticipate it will rise to approximately 4% to 5% this year, indicating significant potential for growth. Despite the absence of Japanese travelers, we are still seeing revenue growth, which is partly due to increased market penetration in the U.S. and other international markets. Consequently, we are optimistic about Hawaii's prospects. It's also important to note that adding additional supply is extremely challenging. With this context in mind, we are diligently working on adding a fifth tower, which we believe holds significant potential as well. Although we are still in the entitlement process, we are encouraged by our outlook. Thank you for your questions and for highlighting that we generate more EBITDA in Hawaii compared to most of our peers when considering both properties. It's quite impressive, and we believe that investing in Hawaii is a wise choice.

Next question comes from the line of Smedes Rose with Citibank.

You've mentioned this quite a bit, but I'd like to ask some more because the trends in leisure from larger branded companies have been noted. It seems like expectations are somewhat declining throughout the year. The trends in Hawaii appear to be very strong, but I believe I'm correct in noting that middle-market properties, which attract a lot of tour and travel, might have consumers who are a bit more vulnerable. I'm curious if you've considered whether that segment could be weaker as the year progresses, or if that's already reflected in your expectations. Can you provide a bit more insight on how you're approaching leisure trends right now?

Yes. I would say, if you think about the last couple of years and think about this year and what we saw obviously in the first quarter, take Hilton Hawaiian Village as a great example of north of 7%. And we're probably low to mid-single digit, we think, for probably the balance of the year. One, Smedes, one comment I'd make is this is not a lower-end property. It's nearly 2,900 rooms. Historically, we were averaging about 150 mid-market high-end weddings. It's not ultra-luxury, certainly no doubt about that. But I think that's really part of the appeal, and part of the reason that it continues and has done so incredibly well. And as we noted, near record EBITDA over the last 2 years and certainly believe in trending in that direction this year. Some are looking at some of the leisure trends and obviously, Maui took an incredible blow and is recovering, but O‘ahu continues to be really strong and solid.

Smedes, this is Sean. I would like to add that while your question centers on leisure, it’s important to consider that Hawaiian Village has a strong group component in the convention calendar this year. Although this is not the primary source of demand for the hotel in the market, Honolulu has a very strong citywide calendar for Q3. Looking at Q2 for our property, we have seen impressive growth, with a 50% increase in May and a 100% increase in June. While leisure is certainly important to the complex, we also have a diverse layer of group business contributing to our success.

Great. And can I just ask one more? You have the sort of the two positive impacts in the quarter with the Massachusetts grant and the employment refund in Hawaii. Were those in your full year guidance as initially contemplated? And I think maybe this is more of a comment, but I think maybe the reason people are struggling a little bit with the stock is we're kind of backing that out, and I was just wondering what did you have embedded? And maybe are there any other things like that, that we should be expecting over the course of the year?

We had the Massachusetts grants included in our guidance, which we booked in February. However, we didn't account for the Hawaii SUTA reimbursement of about $4.4 million that will take place in March. Considering the shift in EBITDA, it includes the SUTA, approximately $4.5 million or so of operational fees from Q1.

Yes, I just think that even if it was included in your full year outlook, we wouldn't have necessarily expected it to impact the first quarter with the Massachusetts situation. So it seems people are naturally factoring that out. That might be what’s happening. Still, it was a strong quarter even with those items excluded. This is more of a comment than a question.

Next question comes from the line of Duane Pfennigwerth with Evercore ISI.

Tom, can you talk a little bit about your Miami renovation plans? When we last met, it sounded like you saw an opportunity to go bigger in that market, and maybe the timing is pushing a little bit to the right here. So can you just talk a little bit about the analysis and the opportunity you see there?

I would compare it to what we've accomplished at the Casa. It's a landmark property, situated on the oceanfront in South Beach, and we believe there is a significant opportunity to rethink that asset. Looking at Casa, it has been exceptionally well received, and in the second quarter, we're anticipating a 900% increase in RevPAR for May and June. We see similar potential with this property due to its prime real estate. Our team, led by Carl Mayfield in design and construction, is diligently collaborating with local architects to explore the three buildings, which house around 393 rooms. While we don't have everything fully outlined yet, we are genuinely excited about the prospects. Reflecting on our recent completion in Bonnet Creek, we are eager to showcase our team's talents and the extraordinary work achieved there. Additionally, we are continuing our investments in Hawaii, where, as previously noted, we're already experiencing a $60 increase in average daily rate for the Tapa Tower. Considering the last two decades, Miami and Hawaii have consistently ranked as two of the strongest markets. While we do not expect Royal Palm to compete at the ultra-luxury level, there is ample opportunity for a lifestyle hotel that can elevate our offerings.

And maybe just for a follow-up, I would love your thoughts on the outlook for New York. It's been a positive surprise, a pleasant surprise, frankly, for a while now, would love to hear your thinking for maybe the balance of the year?

If you recall, New York's RevPAR increased by 30% in 2023, with an 11% rise in the first quarter. Supply has decreased by about 9%, and there haven't been any new permits issued by the city council since December 2021. Regulation of Airbnb has also impacted the market, reducing the number of illegal hotels. Consequently, New York is currently a more attractive market than it has been in the past. Historically, over the last decade, New York has consistently been one of the strongest markets. We are very optimistic, and this trend is not limited to New York; we are seeing improvement across various urban markets, which is beneficial for the Park portfolio.

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

It was a good quarter. I wanted to focus a bit on the group segment. I believe you mentioned that your pace for the second quarter is up by 11%. As you negotiate new group contracts, particularly for 2025 and beyond since there isn’t much left for 2024, what kind of room rate increases are you expecting? Also, regarding ancillary services, you noted the strength in catering and banqueting. Are you still able to implement price increases beyond inflation in those areas?

I think the general answer is yes, Chris. This is Sean. As we examine the group booking pace compared to 2019, we're currently at about 111% higher. For the pace in 2025, we're looking at an additional 114% increase. Moving forward, we believe we can continue to increase group rates. Operators quickly adapted post-COVID by booking at 2019 rates but soon realized they needed to adjust for rising inflation and adopt a more dynamic pricing strategy. We're experiencing the advantages of that now, as last year we saw a 5% increase over 2019, and we are currently seeing an 11% increase this year and 14% for the future. We're confident in our ability to further raise prices for groups. Additionally, out-of-room spending has been strong. For Q1, we noted an 11% increase in banquet and catering, and we expect to keep driving that pricing.

The follow-up question pertains to costs. I believe margin performance was quite strong this quarter, even after adjusting for one-time factors. How confident do you feel about visibility moving forward? While labor costs are somewhat fixed due to union contracts, are there any uncertainties regarding the rest of the year related to areas like insurance, utilities, or any other factors?

I believe everything is known at this point. Clearly, people are aware of the negotiations regarding the collective bargaining agreements and budgets, and they are planning accordingly. I would say there is likely some upside from reinsurance. They received significant rate improvements last year without any major losses domestically. This has shifted the situation somewhat in favor of the insureds, allowing for potentially better renewals this year compared to last. We are continuing to budget at a higher rate than what we actually expect to realize, which could be a positive outcome. We are also appealing real estate taxes, which are forecasted to increase by over 10% this year. If we can achieve some wins in those appeals, it would benefit us on the tax front. Overall, we feel confident about our cost controls, with the teams effectively managing expenses. We approached approximately 2.5% cost per occupied room across all operating expenses, and we've seen an improvement of about 1% to 1.5% in that area, even after adjusting for one-time costs. We experienced benefits in Q1 and hope to maintain that into the next few quarters, while also anticipating some new positions being added. However, as occupancy increases, we expect nominal expense growth. We stated earlier that we anticipate over 3% growth in occupancy for Q1, but since we won’t have markets in Q2, we don’t expect expenses to increase as significantly.

Next question comes from the line of Anthony Powell with Barclays.

I wanted to drill in a bit more on the CapEx and ROI projects. It seems like with the Hawaii renovations in Miami, and you may be at an elevated level in the next couple of years. Should we expect kind of this high $200 million range to be your CapEx spend looks for maybe '25 to '26?

Historically, we've maintained a revenue range of around 6%. We believe that our capital allocation priorities still involve selling non-core assets and reshaping our portfolio. Since the spin-off, we have sold or disposed of 42 assets for nearly $3 billion, resulting in a significantly different portfolio. Our top 25 assets now represent about 90% of our value. It makes sense to reinvest in areas where we are profitable and hold competitive advantages, such as Hawaii, Orlando, and Miami. Some of our plans reflect a recovery from the pandemic. While we may not consistently reach the $300 million range, a spending target of $260 million to $280 million aligns with our priorities. We have another tower renovation planned at Hilton Hawaiian Village and Hilton Waikoloa, along with a transformative project in Miami, and early results are promising at Casa Marina, which is arguably our best asset in Key West.

Got it. And maybe a follow-up on the asset sales. What are you seeing in the market right now in terms of just demand for assets, pricing and whatnot?

Look, it's choppy. We're not a distressed seller, Tom Morey, our Chief Investment Officer and his team are doing a fabulous job. And we're out in discussions and assets at various stages of the marketing process. But we're going to be disciplined. I think we've been able to demonstrate again, given the track record that I outlined, we've been able to sell assets, and we'll certainly get some asset sales done this year, and we'll use those proceeds to reinvest back in the portfolio, pay down debt or depending on where we're trading, buy back stock. We bought back, obviously, 15 million shares last year, and if the NAV gap remains wide or widens, we clearly will be buying back stock.

Next question comes from the line of David Katz with Jefferies.

I wanted to just drill down just a little further on Hawaii because the commentary is quite positive. And we have heard and seen across our platform instances where inbound travel from Japan to Hawaii has been challenged by currency and cost. Are you seeing any of that? Or is it just a relatively small piece and the rest of what's going on kind of overshadows it?

Yes, it's a valid observation. The yen has certainly depreciated. In 2019, it was roughly 110 yen per U.S. dollar, and now it's about 155 yen, plus some additional fuel surcharges. This has hampered the recovery of Japanese travelers. Before the pandemic, there were around 1.5 million visitors from Japan, which had been stable for approximately the last 25 years. However, in 2023, we only saw about 600,000, a decline of about 65%. This year, we expect around 850,000 to 900,000 visitors, and I commend our operators and asset management team for this progress. While we eagerly await the return of Japanese travelers to pre-pandemic numbers, we have become more selective and are managing our transient yields more effectively than before. As I mentioned earlier, the revenue from Japanese travelers is only about 3.5% below the usual range of 18% to 20%, which we view as a positive indicator for future growth. Even so, we are on track for potentially our third consecutive record year in overall performance. Last year, total EBITDA for those two assets was around $240 million to $250 million. Therefore, investing in Hawaii appears to be a strong choice, especially given the limited new supply, which is among the lowest in any U.S. market.

Understood. And as my follow-up, I just wanted to touch on the cost of labor, if I may. I hope that feedback isn't coming on my side, and you can hear me okay.

Yes, we can hear you fine.

There has been a significant amount of labor union activity in the past six to twelve months, which I believe is an important factor. Are you anticipating or accounting for additional costs due to some of these developments?

Yes, that's a valid question. As you can understand, we won't be negotiating publicly on this recorded line. I want to highlight that about 60% of our business has associates who are contractually obligated to a collective bargaining agreement, and we have strong relationships with them. We have always managed to navigate these situations, primarily through our operators, mostly Hilton but not limited to them. Given the current environment, I don't believe anyone wants extended strikes or ongoing conflicts, especially considering how much our industry has already endured during the pandemic. Therefore, while we are cautiously optimistic and have budgeted for some potential costs as Sean mentioned earlier, we are not overly worried about the situation, and I would urge listeners not to be too concerned either.

Next question comes from the line of Stephen Grambling with Morgan Stanley.

As a follow-up to your first question, considering the positioning of the portfolio and the positive results from renovations, along with the changing demand dynamics, does this affect how you're assessing investments in the portfolio or re-evaluating core versus non-core assets?

Yes. That's a great question. And the answer is yes. We're constantly going through and looking at the portfolio and we've done that. Again, as I said earlier, we've sold or disposed of 42 assets. And the vast majority of that were non-core, a couple we were in a minority position at a small joint venture. I think about San Diego as an example where we ended up selling our interest there to Sunstone. We didn't want to be in a 25% interest. But we constantly look at the portfolio and we look at really where we're making money and where we think there's huge upside. Obviously, we believe that there's huge upside in Hawaii and hence, the investments that we've made and the others that we're contemplating. We obviously feel the same way about Key West, and we're seeing the results there. If you think about Orlando, Orlando and what we've done there, and I think people forget, you've got about 45 million visitors into Vegas. Obviously, you've got the entertainment and gaming piece, but you actually have 75 million visitors into Orlando. You've got the Epic Universe, $5 billion, hundreds of acres and a new park opening next year. You've got Disney coming out now and talking about $60 billion that they're looking to invest over the next 10 years. And we see all of that are real tailwinds and real benefit, plus you've got a top 5, top 7 convention center in Orlando as well. So we use those markets as examples, where we're certainly investing in assets that we own, and we're not looking to add new assets necessarily in those markets, but we're certainly investing in the ones that we have, and we see considerable upside. And compare that to paying a 15x multiple for an asset versus investing in our portfolio where we can generate mid-teens unlevered returns, and we're trading at a sub-10 EBITDA multiple. I mean, the math is pretty simple, and we think the benefit to shareholders is pretty strong, and we will continue to use that kind of discipline and thought process as we move forward.

Maybe as an unrelated follow-up. It seems like there's a lot of concern around the leisure consumer. And you touched on this a bunch, but maybe to ask the question in a different way, what are the things that you would be looking out for to try to assess whether there is some underlying pressure or deterioration in the leisure consumer in particular?

Yes, I believe it's important to recognize that there isn't a one-size-fits-all approach. It's clear that individuals at the lower end of the socioeconomic spectrum are facing significant challenges, which is evident in various credit metrics and their spending behaviors. However, when considering our customer base, particularly those in the upper middle class with incomes around or above $150,000, we see continued resilience among them. For instance, personal savings were approximately $775 million last quarter and have decreased to around $670 million this quarter, which is about 3.2% of disposable income, indicating the consumer remains healthy. When we assess demand patterns, our guidance suggests a growth of 4% to 5.5%. Overall, we are not observing a general decline, although we have noticed some isolated cases, particularly in April. We anticipate April will be our weakest month of the year due to seasonal shifts and a slowdown in group travel. However, we expect a reacceleration in demand in May and June, which appears to be quite significant. Concerns regarding the leisure sector may be somewhat exaggerated. While it is true that we cannot expect continuous growth indefinitely, unlike some of our peers who experienced extraordinary growth that needed to stabilize, we have not encountered such a phenomenon since our products differ. We are seeing an increase in travel, especially in urban areas and group settings, with more people visiting cities like New York for leisure purposes rather than solely for business.

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

What did your peers express some caution about in June that you did not? Given the significance of leisure demand in that month and its importance relative to the entire quarter, particularly with the weak performance in April, is June possibly the key moment for your ability to meet your guidance for the year? Should we be focusing on that month specifically?

Yes, that's a great question, Bill. When we look at our performance mix, the first quarter showed an increase of about 15.4% as reported. Currently, we're seeing a trend of around 7% in the second quarter, which has tough comparisons. However, for the third quarter, we're expecting growth of around 16% to 18%, making it particularly strong for us. If we break down May and June, we're anticipating RevPAR in the 5% to 6% range. Additionally, earlier I shared that cities like Seattle and D.C., as well as Boston, are showing high single digits or even mid- to double digits growth, with Seattle leading. The group pace for just May and June is about 9%. This suggests that we have positive momentum and a reacceleration underway. To answer your question, April was really our lowest point in terms of demand patterns, but we're feeling very optimistic as we look ahead.

Next question comes from the line of Sean O'Reilly with Evercore ISI.

I appreciate that. A follow-up question, actually, for Sean, congratulations on the improvement in the balance sheet. I'm just curious, you're at 5.2 right now, net debt to EBITDA. As you think of the CapEx projects, the tower that you want to build in Hawaii, everything else going on, is it likely that we're going to be funding the additional capital with asset sales? Is that kind of the path that we're still on at this point?

I think that's certainly part of it, Bill, near term as we certainly continue to explore that the non-core asset sales are more focused that way in redeploying that capital between the balance sheet and the ROI projects. So I think that's a fair assessment in the near term. Obviously, the tower, we're working through to get the entitlements and everything else, and we're still a ways away from being shovels in the ground, but that's, I think, for a future discussion as to kind of how we capitalize that.

It sounds like any acquisitions are probably a ways away at this point?

Yes, Bill, Tom here. I wouldn’t say we are far off. As we assess the situation, I think my earlier comment stands: we believe that reinvesting in our portfolio to achieve unlevered mid-teens returns is a better way to create value for shareholders compared to purchasing assets at 15 times. We aim to reshape our portfolio by selling non-core assets and reinvesting that capital. This includes paying down debt and buying back shares, which we see as preferable to making new acquisitions. We are still actively underwriting and occasionally bidding, but any move must make economic sense and be accretive. We’ve observed some of our peers overpay for luxury assets, and I haven’t seen that strategy yield favorable outcomes.

Next question comes from the line of Dori Kesten with Wells Fargo.

Is it fair to say that the Phase I renovation benefits in Hawaii should balance out the challenges from Phase 2 next year? Additionally, if we consider both projects together, what is the expected EBITDA growth as you move towards stabilization?

So Dori, regarding the first part, yes, we completed a 3-phase renovation at Tapa Tower. With the newly renovated rooms, we were able to charge a premium rate. For Rainbow Tower, which is particularly appealing because of its beachfront location, we plan to start with Phase I, taking some rooms offline for renovations. This may cause a larger disruption this year, but as we complete renovations next year, we’ll be able to charge higher rates for those rooms and take additional ones offline. I recognize your current thoughts on this. At this point, I’m not prepared to provide specific EBITDA figures related to this. We mentioned a disruption cost of around $8 million for this renovation phase. We anticipate this will be lower next year, as I mentioned. As we recover, I expect that we’ll see a premium return. While we didn’t specifically model ROI or IRR figures, we do expect a solid return from the room renovations.

Next question comes from the line of Jay Kornreich with Wedbush Securities.

I guess just one question for me. Just going back to the urban segment, which saw RevPAR improvement of 8% in the quarter, yet urban occupancy still sits at 63%. I'm wondering, how do that compare to, I guess, the first quarter of '19 for the comparable portfolio? And what are the goalposts you see for urban occupancy getting to as the year progresses? But maybe also, is there any opportunity to see upside from pushing rate there as well?

Yes. If we consider 2019 for a moment and our current performance, overall occupancy across the portfolio is still about 500 basis points lower than in 2019, but the average daily rate is around 15% higher. There remains an opportunity to increase occupancy. I commend the team for their disciplined pricing approach, but there is definitely potential for further growth in occupancy. Some markets are likely to recover faster than others; New York is a clear example where we've observed significant improvement, owing to better regulations and reduced supply. Other markets will take longer to bounce back for various reasons. However, we are not giving up; while some may have deserted certain markets, we're optimistic about New York. Although it has not fully returned to previous levels, it is certainly becoming a more attractive market than it has been in recent years. Chicago is having an excellent year, having reached record levels for city-wide events. New Orleans is also performing well, and the first quarter indicated a strong year for city-wide events as well. Boston and D.C. are showing improvement too. Nevertheless, some markets face ongoing challenges. Seattle is expected to have a robust second quarter, but other locations like L.A. and San Francisco are likely to lag for a while.

Next question comes from the line of Ryan Lambert with JPMorgan.

Ryan on for Joe Greff. I wanted to approach the occupancy question from a different angle. When you look across various industry segments, such as manufacturing, technology, or consulting, can you provide any insights on how those sectors are recovering and their significance in achieving full occupancy recovery?

As you consider those groups, you're aligning with corporate negotiated demand, which has been lagging compared to 2019. We're currently down about 35% to 40% in the business transient segment, but we're starting to see improvements and some of that demand returning. Overall, we exceeded our first-quarter expectations with an increase of approximately 13,000 room nights, or about 3%. This growth includes corporate, local, and government negotiated segments. While the recovery is encouraging as we move into Q2 and Q3, there is still a long way to go. We know that firms like Deloitte and PwC are traveling less and may continue to do so for the foreseeable future. The return to in-office work is progressing slowly as well, which impacts business transient travel. Ultimately, we don't expect this segment to fully recover, but currently, corporate negotiated demand represents about 5% of our overall demand historically. If it manages to get back to 80% of its former levels, it shouldn't significantly hinder our overall portfolio, as we anticipate compensating through other areas like leisure and group travel.

That's helpful. And following up on sort of the capital markets discussion from earlier. In the past, maybe we've kind of heard management teams across the industry talk about the difference between large and small assets and wondering with what you're seeing in the rate environment right now, if that difference is starting to be less meaningful or if that's at all changed in your view?

Yes, it varies by individual market. In a place like Key West, where supply is already limited, we have examples like Casa with 311 rooms, where we are achieving strong rates. There may be slightly smaller hotels, but not many larger ones. In other markets like New York, we have a larger presence, and with the right balance of demand and supply, along with demand generators, we can efficiently layer our transient business on top of group bookings. While it might be assumed that smaller hotels maintain better pricing integrity, this isn't a universal truth. Our portfolio demonstrates this. For instance, at Hilton Hawaiian Village with 2,900 rooms, we consistently achieve occupancy rates in the high 80s to 90%, generating additional revenue sources and significant cash flow. So, the effectiveness really depends on the specific circumstances. I would strongly challenge the notion that investing in smaller hotels is the only viable strategy and would welcome a discussion on this topic.

Thank you. There are no further questions at this time. I would now like to address one more question. Do you want to take it?

Sure, sure.

All right. This question comes from the line of Robin Farley with UBS.

Hopefully, this wasn't my line has dropped three times during this call. I believe you have already addressed my question regarding what was included in your original EBITDA guidance. I have two additional inquiries. First, can you clarify if there is currently any allocation in your CapEx budget for Miami, or is there no planned spending for that in 2024? Secondly, you mentioned expecting some asset sales to occur this year. Is there a specific interest rate scenario that is necessary for that to happen, or that you require to meet your expectations?

The predevelopment costs for Miami include expenses related to architects, engineers, and design work. However, I would say we're not spending significant amounts this year in 2024. Regarding asset sales, we have successfully sold assets in various conditions. For example, during the pandemic, we sold two assets in early San Francisco at record prices. We are not a distressed seller and have set a target of at least $100 million in asset sales this year, which we are confident we can achieve. We will proceed carefully, as uncertainty affects decision-making for both buyers and sellers until the Federal Reserve makes its final decisions. We all hope that the tightening cycle is over and that the Fed will eventually lower rates, which would certainly benefit the debt markets. There is a lot of liquidity available, so we anticipate increased transaction activity in the second half of the year.

Thank you. There are no further questions at this time. I would like to turn the floor over to Tom Baltimore for closing comments.

Operator, thank you, and thank you for your help today, and look forward to seeing many of you next week and also at NAREIT and safe travels.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.