Park Hotels & Resorts Inc. (NYSE:PK) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Greetings, and welcome to the Park Hotels & Resorts Third 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Weissman, Senior Vice President, Corporate Strategy. Thank you. You may begin.
Ian Weissman: Thank you, operator, and welcome everyone to the Park Hotels & Resorts third 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 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 forward-looking statements. Please refer to 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 current basis and include all 41 consolidated hotels. In some instances, however, we will be discussing results on a comparable hotel basis with a comparable view excluding the two Hilton San Francisco hotels. This morning Tom Baltimore, our Chairman and Chief Executive Officer will provide an update on the status of our two San Francisco hotels, review Park’s third quarter performance and near-term outlook, and highlight our strategic capital allocation initiatives.
Sean Dell’Orto, our Chief Financial Officer will provide additional color on third quarter results and forward-looking guidance, as well as an update on our balance sheet and liquidity. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.
Tom Baltimore: Thank you, Ian, and welcome, everyone. I’m very pleased to report another solid and productive quarter for Park with Q3 earnings exceeding expectations and tremendous progress being made against our capital allocation priorities, including entering the final stages of our transformative ROI projects at our Bonnet Creek and Casa Marina resorts and repurchasing 5.8 million shares worth $75 million during the third quarter. But let me first begin with an update on our two San Francisco Hilton hotels and the related non-recourse CMBS debt. Last week the trustee for the loan filed a lawsuit against the borrowers related to our ceasing debt payments since June and the court has appointed a receiver to take full control of the hotels.
The receiver has completed an exclusive possession of the hotels, as well as all income generated from their operations, which is to be used solely to pay all operating expenses and to cover all operating losses. Any operating losses or additional funds required to operate the hotels will be addressed between the receiver and the trust team. As such Park no longer has any economic interest, benefits or burden in the hotel’s operations. The receiver also has the power to market and sell the hotels during the receivership. However, if the hotels are not under contract by September 1, 2024, the receivership will conclude in a non-judicial foreclosure by the end of 2024. Now let me be clear about what this means for Park and its shareholders. First, while in receivership and through its conclusion be it a stale or foreclosure, Park will no longer be obligated to fund any shortfalls for working capital or for payments on the loan.
Second, we expect all operations at the hotels will remain intact. Hilton will continue to manage the hotels, which will continue to welcome guests, provide services in line with brand standards and maintain its employee base. Third, as we have committed to thus far, we will continue to make ourselves available throughout the receivership, as the special servicer or receiver request to effectuate a reasonable outcome for all stakeholders in a timely manner, but with no financial applications. Fourth, there will be some adjustments to our earnings guidance which Sean will provide further details on in his comments. Finally, we and our Board of Directors have determined that it is appropriate to pay a special dividend related to the taxable gain triggered by exiting the economic interest of these assets.
Therefore, I am pleased to report that as of October 27 2023, the Board has declared a special cash dividend of $0.77 per share to be paid on January 16 2024, to shareholders of record as of December 29 2023. As a reminder, the removal of these assets from our portfolio materially reduces our San Francisco exposure to just 3% of rooms from 14%, and meaningfully strengthens our balance sheet and credit metrics with net leverage improving nearly a full turn. With the San Francisco market still facing an elongated recovery, we still firmly believe this complicated but necessary exit and these two hotels is in the best interest of our shareholders. Now turning to our third quarter results, which were driven by a favorable mix of accelerating group fundamentals, ongoing strength at our Hawaii resorts and strong resorts in key urban markets such as New York, Boston and Denver.
RevPAR increased 3% over Q3 2022, or an impressive 4.8% excluding our Casa Marina Resort hotel, where operations were suspended throughout the third quarter for a comprehensive renovation. Despite facing difficult year-over-year comparisons in July, our portfolio produced solid results with RevPAR including Casa, increasing 3.2% during the month followed by a 7.3% increase in August and a 4.2% increase in September, which were driven by improvements in both rate and occupancy. Turning to group performance. We saw a continued acceleration in group trends during the quarter in revenue for the comparable portfolio improving 12%, year-over-year to over $95 million, while strong banquet catering results helped to drive performance. We continue to see solid short-term pickup, adding approximately 112,000 room nights for 2023 or over $25 million of incremental revenue in the third quarter.
As a result, full year 2023 comparable group revenue pace improved during the quarter, increasing nearly 180 basis points to 93% relative to the same period 2019. While Q4 comparable group revenue pace is 99% relative to the same period 2019. Group demand trends remain very healthy, while 2023 comparable group ADR remains on track to exceed 2019 by nearly 8%. Focusing on a few key markets. Performance was once again driven by exceedingly strong performance in Hawaii and New York. Demand in Hawaii, continues to be driven primarily by solid domestic leisure demand, coupled with strong group trends. Our two resorts generated 3.5% RevPAR growth in the quarter compared to last year. Fortunately, our hotels were not negatively impacted by the devastating Maui wildfires.
We are proud of our hotel teams and their efforts to provide relief, and support to the neighbors on the Island of Maui. At Hilton Waikoloa Village, hotel delivered over 4% RevPAR growth in Q3 year-over-year and 38% hotel adjusted EBITDA margins and impressive results, given the difficult year-over-year comparison. Overall, hotel witnessed the pick up and demand generated by displaced Maui residents and travelers during the quarter including an incremental $1 million in business expected in the fourth quarter from two groups moving their programs to the big island. At our Hilton Hawaiian Village Hotel, we are pleased to report the near completion of the multiphase renovation of the 1021 room Tapa Tower to wrap up in December 2023, with the newly renovated rooms in the tower commanding a $75 ADR premium to the other room types.
This strong performance is even more encouraging as inbound travel from Japan continues to recover with Q3 production at our Hilton Hawaiian Village hotel improving to 24% of 2019 levels from 8% during the first six months of the year. Conversations with our Japanese travel partners indicate improving sentiment and willingness to travel internationally. And the expected increase in airlift to the islands and but also support better inbound trends into 2024. With respect to airlift, Delta Airlines just launched daily direct service to Honolulu, while Japanese carrier ANA Airlines announced that in order to accommodate a recent pickup in demand. It has brought a third Airbus A380 aircraft into service between Tokyo and Honolulu starting in early December, increasing its weekly round trips to 14 from 10.
According to the airline, the expansion sets a record for seat capacity on this route reaching over 18,000 seats per week in total and surpassing pre-COVID levels. Looking ahead to the fourth quarter, we expect RevPAR growth to remain very strong across both of our Hawaii hotels, with low double-digit year-over-year growth forecasted ranking among the top performing markets within our portfolio. Turning to our urban performance. Our comparable urban portfolio delivered 7% RevPAR growth during the quarter. In particular, our Hilton New York Midtown hotel delivered impressive results. RevPAR, up nearly 30% year-over-year or 8% above 2019. Results were driven by better-than-expected group trends, coupled with strong attendance at this year’s US open the UN General Assembly.
Overall, compression days translated into a 17% uplift transient ADRs versus 2019, while the hotel achieved 44 sellout nights during the quarter, a fourfold increase of the prior period. In addition, reduced supply across the city has also helped had a very positive impact on performance with total room count down approximately 7% in 2019 on New York’s strict regulation on short-term rentals could have a positive impact on leisure transient trends across the city for the foreseeable future. Looking ahead to the fourth quarter, we anticipate the positive momentum to continue with the hotel on pace to generate a solid Q4 gains, with preliminary October revenues of approximately $32 million, the second highest monthly revenue in the property’s history.
Touching briefly on the macroeconomic backdrop. We have yet to witness any signs of an economic slowdown impacting transient demand outside of the normalization of Sunbelt leisure demand. In fact, we are very encouraged by the strong group trends heading into next year the 2024 comparable group revenue pace backing 94% versus 2019, a nearly 100 basis point improvement from last quarter, driven by double-digit increases in convention room nights across several of our core markets including Chicago, New Orleans, San Diego, Washington D.C. and Hawaii. In Chicago, we expect to benefit from a strong citywide calendar, with convention room nights up 65% to a record 786,000 room nights. While in New Orleans convention room nights are expected to reach nearly 510,000 or a year-over-year increase of 11%.
Hawaii slated for another solid year as international demand continues to build, while both Casa Marina in Key West and our Bonnet Peak complex will benefit from easier year-over-year comparisons and newly renovated product. As a reminder, Casa Marina accounted for 110 basis point drag on RevPAR performance in 2023 and translating to $15 million of EBITDA disruption this year. While the rooms renovation at Waldorf Orlando contributed to almost $3 million of disruption in the second half of this year. We are thrilled to introduce our newly renovated and upgraded Casa Marina Resort, which partially reopened with nearly 60% of its room inventory in October. The balance of rooms slated to open December 15. We are also introducing our new ocean front restaurant in February 2024, El Dorado which will elevate the resort and offer an unparalleled dining experience on the island.
At Bonnet Creek, we will wrap-up our $220 million comprehensive renovation in January 2024 which will include an additional 137,000 square feet of meeting space newly renovated guestrooms throughout the complex refreshed public spaces and a comprehensive renovation of our Championship Golf Course. 2024, group revenue is forecasted to be a record year for the complex, the revenue on the books facing 38% of 2023, price of an even mix of room nights and average rate gains. In summary, I’m optimistic about the setup for next year with our comparable portfolio well positioned to benefit from improved group and urban demand. In addition to ongoing strength in Hawaii coupled with expected tailwinds from fully renovated hotels in both Key West and Orlando.
In addition, the effective exit of our two San Francisco Hilton Hotels meaningfully changes the Park Narrative. We remain on track to deliver sector-leading earnings growth for the year and we remain laser-focused on executing our internal growth strategies and capital allocation priorities we are confident will create long-term shareholder value and position the company for success. With that, I will turn the call over to, Sean.
Sean Dell’Orto: Thanks Tom. Overall we are pleased with our third quarter performance. Q3 RevPAR for the portfolio was approximately $178, representing year-over-year growth of 3% driven primarily by occupancy gains of 2.5 percentage points above last year. Hotel revenue was $657 million during the quarter while hotel adjusted EBITDA was $173 million, resulting in a 26.3% hotel adjusted EBITDA margin. Margins were natively impacted by a few factors including the renovation disruption at our Casa Marina resort which accounted for over a 60 basis point drag on portfolio performance. In addition to our two San Francisco Hilton Hotels which accounted for an additional 210 basis point drag on hotel adjusted EBITDA margins. Excluding all three properties from our results, hotel adjusted EBITDA margin would have exceeded 29% for the quarter or approximately 40 basis points above 2019 levels.
Q3 adjusted EBITDA was $163 million and adjusted FFO per share was $0.51, both of which exceeded our expectations. Looking ahead to the fourth quarter, preliminary results in October looks strong with RevPAR growth on pace to be up 6% with results driven once again by Hawaii and our urban poor including New York City, Boston and Chicago. Overall preliminary comparable RevPAR for the month of October stands at $198 or 4% above 2019. Turning to the balance sheet. Our current liquidity is approximately $1.7 billion, including $726 million in cash. Net debt at the end of Q3 was $3.9 billion and net leverage on a trailing 12-month basis was six times. Excluding the two San Francisco Hilton Hotels from our portfolio, since Park has no further financial exposure with these assets, balance sheet metrics materially improved with net leverage decreasing by nearly a full turn to just under 5.2 times and interest coverage improving by over half a turn to 3.2 times.
With respect to our dividend on, October 16, we paid our third quarter cash dividend of $0.15 per share. And anticipate paying a fourth quarter dividend, which is subject to Board approval in the range of $0.85 to $0.95 per share, comprised of a quarterly cash dividend of $0.15 per share and an annual top-off component of between $0.70 and $0.80 per share. Including the San Francisco special dividend, Tom discussed earlier, we expect total Q4 dividends be $1.67 per share at the midpoint of the top off range. Excluding the special dividend, 2023 dividends from operations will total $1.30 to $1.40 per share, which translates to roughly two-thirds of adjusted FFO per share based on the midpoint of our guidance, bringing us back in line with the payout ratio we targeted prior to the pandemic.
The dividend yield between 11% to 12% based on current trading levels. In total, Park is projected to return nearly $625 million of capital to shareholders in 2023, when considering the $445 million in expected cumulative dividend payments and $180 million of share repurchases for nearly 15 million shares executed since the start of the year. Turning to guidance. Let me first address how we expect to capture the two San Francisco hotels and CMBS debt in our financial statements. As Tom noted earlier, with the receivership in place, we will no longer control the operations of the hotels. Therefore, the hotel operations will not be included in our consolidated P&L. The data hotels were placed into receivership. Treating the two assets for this purpose as if they were sold.
Interest expense and fees will continue to be improved until the assets are sold or foreclosed upon. However, since we will not have any financial obligations for this non-recourse debt, we will add back these expenses when presenting adjusted FFO. Considering this treatment, we are adjusting our full year guidance to reflect RevPAR and adjusted EBITDA margin ranges based on our comparable portfolio, with comparable RevPAR guidance in a range of $177 to $179, or year-over-year growth of 7.5% and 9%, while comparable hotel adjusted EBITDA margin is expected to fall within a range of 27.7% to 28.2%, an improvement of 170 basis points when accounting for the removal of both San Francisco hotels. With respect to adjusted EBITDA, guidance has been increased to a new range of $644 million to $668 million, reflects better-than-expected results from the third quarter partially offset by an adjustment to our Q4 outlook for an additional $3 million of disruption at our Casa Marina and Waldorf Orlando renovation projects, which are expected to conclude before year-end.
Adjusted FFO per share guidance increases by $0.08 at the midpoint to a new range of $1.92 to $2.03 with Q3 buyback activity and the add-back of San Francisco CMBS interest expense contributing $0.05 of the $0.08 increase. This concludes our prepared remarks. We will now open the line for Q&A to address each of your questions we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question please?
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Q&A Session
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Operator: Absolutely. [Operator Instructions] Our first question is coming from the line of Floris van Dijkum with Compass Point. Please proceed with your question.
Floris van Dijkum : Hey, thanks guys.
Tom Baltimore : Good morning, Floris.
Floris van Dijkum : Good morning. I think this welcome reports. I think sort of validating some of our beliefs here on you guys. Tom and maybe if you could comment a little bit, obviously, you’ve got some capital return plans already outlined for the rest of this year, but you’re still sitting on a big pile of cash. Your balance sheet metrics are significantly better particularly if we look at 2024 EBITDA, I mean, we’re looking at a floor handle in terms of leverage. Should the market expect more share buybacks and/or are you looking at acquisitions going forward as well now that you’re in a better capital position?
Tom Baltimore: Floris, it’s a great question. I think the first thing is I want to just reiterate the point that you’ve made and I’ll say it differently, we’ve eliminated the noise around San Francisco. I could not be prouder and I’d like to highlight Nancy Wu, our General Counsel; and Sean Dell’Orto and many of the men and women inside and outside counsel that have been working with us since June to really find the right outcome and I believe, we’ve done that. So, we are glad to be moving forward. There is a clear path forward and really positive tailwinds for Park, as we look forward. Look, we continue to trade at a significant discount to both NAV, as well as replacement costs. So, as we sort of look forward, you can find us really continuing to focus on operational excellence.
These transformative renovations will continue to provide a tailwind for us. There’s a strong growth profile as you think about Hawaii, New York City, Chicago having a record year next year in citywides, New Orleans having a record year, DC being strong. The Japanese traveler returning as we pointed out in Hawaii. And again, Hawaii had a record year last year. We’re cautiously optimistic, we’ll have another record year this year, but with still a tailwind as we sort of look out. So we’ll continue to focus on selling noncore assets as well. Our top 25 assets account for about 90% of value in the portfolio. And we’ll use those proceeds for share buybacks, ROI projects and reducing leverage. But again, we’re in a much better position today at 5.2 times than we were before.
And there’s been a lot of great work done by this team and very, very proud and we are hopeful and expect that the narrative around Park changes that we don’t have to answer question after question every day on San Francisco. That problem has been solved. We have no economic benefit or burden of San Francisco, the two subject assets moving forward. Over finished. We’re moving forward.
Floris Van Dijkum: That seems pretty clear. Maybe also, can you just talk a little bit about Hawaii relative to other resort markets and why you remain — I mean you sort of talked about the fact that flight capacity and the Japanese tourists is returning to Hawaii, maybe why your portfolio is better position maybe than some of the other markets in Hawaii? And then also, your outlook on some of the markets that did really well during COVID that are softening now particularly South Florida. But when will that stabilize in your view? And how much of an impact will that be on your earnings going forward?
Tom Baltimore: I think Hawaii sort of speaks for itself for us. If you think about, you’ve got inbound demand that’s averaged approximately 9 million to 10 million visitors, about 55% to 65% of that comes out of the US historically, about 15% to 17% coming out of Japan and you’re seeing international growth certainly improved, but it’s historically been anchored by US and Japanese. There’s been more flight capacity and certainly more domestic travel coming out of the US and that started a little bit in the pandemic and then afterwards. And it just continues in our particular resort there, Hilton Hawaiian Village, upper upscale, it’s not ultra-luxury, it’s got 60-plus years of history. So it’s an icon, it’s a landmark. And if you look over the last 30 years irrespective of where the yen was vis-à-vis the dollar, it’s been consistent visitation.
Interesting now, the Japanese have been away largely for the last three years. And as we cited, we’re encouraged as we sort of look out with what ANA is doing obviously adding a third A380 aircraft between Tokyo and Honolulu in early December, again increasing capacity to 18,000 per week which again exceeds COVID. Delta again adding more capacity. And having the city-like environment irreplaceable beaches that you can’t replicate and then again having international particularly the Japanese traveler who generally we were averaging about 150 high-end weddings there a year. I think we’ve been four to six, I think the last couple of years in kind of post-COVID. So, we see all of that being a tailwind. And we have an extraordinary team led by Debbie Bishop on the Hilton side who just continues to find the right mix of demand.
So we are excited about what we believe to be the acceleration of Japanese visitation but even without that we certainly expect that you continue to see US and other visitors as well. And it’s different than some of those ultra high-end luxury and given the size of it it’s a unique positioning. And if you look at what happened with the revenge spend, I mean all of that is sort of moderated and a reversion back to the mean. We didn’t get that sort of real acceleration. We were modest increases but now I think that lift off for us looks better. Now, we’ll probably be low double digit here in the fourth quarter. But as we look out to 2024 and beyond we’re very, very encouraged and particularly if the Japanese traveler continues to accelerate. They stay longer and spend more.
