Park Hotels & Resorts Inc. (NYSE:PK) Q1 2024 Earnings Call Transcript

Park Hotels & Resorts Inc. (NYSE:PK) Q1 2024 Earnings Call Transcript May 1, 2024

Park Hotels & Resorts Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Park Hotels and Resorts, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Mr. Ian Weissman, Senior VP, Corporate Strategy. Thank you, Mr. Weissman, you may begin.

Ian Weissman: 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.

Tom Baltimore: 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 change 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 Oahu and the Big Island. While Japanese airlift still lags 2019 by 31%, we are very encouraged by the ongoing improvement.

Group book — 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 and 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 a 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, has been further enhanced with the introduction of the new beachside dorado 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 Cigna 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 three 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 two-year phased room renovation 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 1. 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.

Sean Dell’Orto: 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 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 three 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, and 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. Operator, may we have the first question, please?

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Floris Van Dijkum with Compass Point. Please go ahead.

Floris Van Dijkum: So really good report, obviously, a little puzzling the initial reaction here by the market. But one of the things that I find fascinating here, obviously, your expectations for cash flow and EBITDA has increased, but you’re still not getting based on your guidance back to 2019 levels of same-property EBITDA. Although if I’m not mistaken, I think your first quarter EBITDA this year actually surpassed 2019 on a same-property basis. Can you maybe talk about some of — where the latent upside appears to be in terms of your EBITDA recapture in particular, talk — maybe talk about some of the upside potential on your urban assets where your occupancy still appears to be lagging 2019?

Tom Baltimore: Yes, Floris, a lot to unpack there, but I think you really hit the nail on the head. It’s look, you’re seeing and I think our first quarter is a great example. I think sometimes people sort of overly focus on sort of Hawaii, but you noticed, obviously, we had really broad-based and acceleration in both urban and in our resort markets as well. So, we’re still 500 basis points below, I believe, plus or minus in occupancy from pre-pandemic levels, but that continues to accelerate. And as we look across the portfolio, we’re incredibly encouraged. I know that there are some concerns about second quarter in sort of April, and April is sort of isolated and it’s probably best that I sort of addressed some of that now.

And obviously, April is trending to about negative 1%. But that’s really, we believe, our softest month in the entire year. It’s our softest group month as well. We’re about 3.7%. But as you sort of look out to May and June, we see a real acceleration. Looking at group pace in kind of May and June, we’re probably in the 8% to 9%. We’re looking at Seattle being above 15% in RevPAR; D.C. up probably in the 10% to 11% range; Boston, 8% to 9%; Chicago kind of 5% to 6%. And if you think about Casa, obviously not a clean comp since it was closed, but up really a whopping sort of 900%. So, I think it’s embedded in your question that the acceleration is — and the recovery is accelerating. And it’s broadening, and we certainly continue to see that in our portfolio.

So, we’re very encouraged as we look out. And obviously, we’ve given guidance at 3% to 5% here in the second quarter, feel good about that. A little frustrating to see the early response in the market. But I think once people sort of dig in and understand a little better, we are very, very confident as we look out for the balance of 2024.

Floris Van Dijkum: Great. And Tom, maybe if I can follow up on Hawaii. You talk about — obviously, Hawaii Village, I think had $51 million of EBITDA in the first quarter. I mean you annualize that, I mean, not a fair assumption, but you’re at a run rate of close to $200 million of EBITDA on one asset. That’s some companies that produce that. But if you think about the air uplift and the Japanese tourist demand. How much is that driving some of that occupancy gain there? And do you see more upside there?

Tom Baltimore: Yes. It’s another great question, Floris. But let’s — if we sort of back up for a second, look, the last two years in Hawaii have been near record performance. We expect this year that is likely to continue, and if you look at pre-pandemic, the Japanese travelers accounted for about 18% to 20% of revenue. Last year, they were about 3.5% of revenue. And if you look year-to-date this year, it’s only 3.5% of revenue. We think it probably gets back to 4% to 5% this year. So huge upside. So, despite the fact that we don’t have the Japanese traveler back, we’re still generating — and part of that is just obviously increased penetration in the U.S. market, but also in other international markets as well. So, we are bullish on Hawaii.

The other thing that we would note is it’s near impossible to add additional supply. So, when you think about that backdrop and we’re working very hard to add fifth tower there, which we think, obviously, there’s huge upside as well. Now, we’re not done the entitlement process, but certainly very encouraged as we look out. So — thank you for the questions and the observation and your comment about we generate more EBITDA in Hawaii when you add both properties than candidly, most of our peers. It’s a startling, but if you’re going to bet anywhere, we think bed in Hawaii is a solid bet.

Operator: Next question comes from the line of Smedes Rose with Citibank. Please go ahead.

Smedes Rose: I mean, look, you’ve talked about this a fair amount, but I just wanted to ask a little bit more because the trends in leisure, I’ve spoken about by the larger branded companies. It sounds like they’re kind of achieving the downtick in terms of expectations over the course of the year. And — it sounds like trends in Hawaii are very strong, but I think I’m correct in thinking that kind of a middle-market property, kind of a lot of tour and travel, maybe a slightly more susceptible consumer. And I’m just wondering, it sounds like you’re not, but might you — or have you sort of factored in that, that segment of the market might be a little weaker as we work through the year? Or is that already in your expectations? Or I guess just maybe a little more color on how you’re thinking about leisure trends at this point?

Tom Baltimore: 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 is 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 ultraluxury, 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 two 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 Oahu continues to be really strong and solid.