Park Hotels & Resorts Inc (PK) 2017 Q3 法說會逐字稿

Greetings, and welcome to Park Hotels & Resorts Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Ian Weissman, Senior Vice President of Corporate Strategy. Thank you, you may begin.

Thank you, operator and welcome, everyone, to the Park Hotels & Resorts Third Quarter 2017 Earnings Call. Before I 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.

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 direct comparable GAAP financial measure, in yesterday's earning release as well as in our 8-K filed with the SEC and the supplemental financial information available on our website at www.pkhotelsandresorts.com.

Additionally, it's important to note that all financial results for 2016 are on a pro forma basis, which takes into account post-spin adjustments, including the new management fee structure, and presents the results of our portfolio as it stands today. Reconciliations to the closest GAAP financial measure in our 2016 combined consolidated financial statements, which were prepared on a carve-out basis and do not contain these pro forma adjustments, may be found in the supplemental financial information available on our website.

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a brief overview of our third quarter operating results and outlook for the remainder of the year as well as update you on the current situation in both Key West and Puerto Rico following the devastating storms which hit the region back in September. Tom will also provide a bit more color on our capital recycling initiatives, which kicked off after Labor Day. Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our third quarter financial results and most recent activity as well as provide an update to our annual earnings guidance. In addition, Rob Tanenbaum, our Executive Vice President of Asset Management, will be joining for Q&A. Following our prepared remarks, we will open the call for questions.

With that, I'd like to turn the call over to Tom.

Thank you, Ian, and good morning, everyone. The third quarter was certainly a challenging period with the recent natural disasters in Florida, the Caribbean, the Gulf Coast and Northern California. I want to pass along my thoughts and prayers to all those affected. I also want to commend the hard work and commitment of all first responders and team members, including our partners at Hilton, who have worked tirelessly to ensure the safety of our guests and associates, while pushing to get our properties reopened as quickly as possible. In particular, I would like to also express my personal gratitude to the general managers of both of our Key West and Puerto Rico hotels, John Trovato and Pablo Torres, as well as their entire teams for their efforts during this very difficult time.

Turning to our portfolio performance. I am pleased with our overall results, considering all the events which impacted our operations during the quarter, including the hurricanes, renovation disruption and the Jewish holiday calendar shift. Overall, comparable RevPAR for our total consolidated portfolio declined just 0.1% on a currency-neutral basis, while comparable hotel-adjusted EBITDA margins for the portfolio declined roughly 120 basis points. Excluding these impact items, on a normalized basis, our comparable RevPAR would have increased by 1.1%, while comparable hotel-adjusted EBITDA margins would have declined only 7 basis points. Recent hurricanes reduced comparable RevPAR by 10 basis points. Renovation displacement at 6 of our hotels during the quarter reduced RevPAR by approximately 40 basis points, while the Jewish holiday calendar shift reduced RevPAR by approximately 70 basis points.

Overall, group revenues were up 0.1% for the quarter. Our portfolio benefited from strong in the quarter group pickup, particularly at our Hilton Bonnet Creek hotel, with much of that pickup related to guests displaced by Hurricane Irma. We expect group business in the fourth quarter to be down 1.8%.

On the transient side, revenues declined 0.3% in Q3 as the increase in leisure business of 3.2% was not enough to offset weakness in corporate transient revenues, which were down 4.2%. Despite the continued softness in the corporate transient segment, we remain encouraged by the broader macro environment and the potential uptick in corporate demand supported by strong corporate profits, low unemployment and the increased business investment spending.

We were also pleased to record a 5.7% increase in food and beverage revenues in the quarter, which translates into 8.1% of additional revenue as well as a 16% increase in other revenues, with nearly 1% -- with nearly $1 million attributable to increased resort fees and parking revenues. These are just a few examples of the asset management initiatives put in place by Rob and his team.

Digging deeper into quarterly performance across our core domestic markets. San Francisco was one of our strongest markets, with RevPAR increasing 4.4% for our 2 Union Square hotels. As we noted last quarter, despite the continued challenges amid ongoing renovations at the Moscone Convention Center, our team and operating partners did an impressive job of securing a significant amount of in-house group for the quarter with group revenues up 16%. Overall, our 2 San Francisco hotels outperformed the market by 500 basis points. We do not expect this pace to continue, however, with RevPAR growth at our San Francisco properties likely to turn negative in the fourth quarter due to softness in group bookings, compounded by our decision to accelerate the final phase of room renovations for 385 rooms at our San Francisco Hilton to take advantage of improving market conditions next year. Looking forward, 2018 citywide pace is up 20% to 735,000 room nights, while 2019 is projected to be a record year for the city with citywide room nights up nearly 65% to 1.2 million. We remain very bullish on the city over the long term and believe our 2 hotels, with nearly 3,000 rooms and over 160,000 square feet of meeting space combined, are well positioned for long-term success.

Overall, we were pleased with our results at the Hilton Hawaiian Village, which posted RevPAR growth of 1.6% for the quarter, outperforming the Waikiki submarket by 370 basis points. Fundamentals in Hawaii remain healthy, driven by strong leisure demand from both mainland U.S. and Japan, with arrivals to the state up nearly 5% year-to-date through August, while visitor spending increased 8.5% to $11.3 billion.

For the fourth quarter, our expectations are for the hotel to have accelerating RevPAR growth, likely to be in the upper single digits. The outlook for the market remains healthy for 2018 due to the new direct flights from Japan as well as additional routes from the U.S. mainland, including the recently-announced start of direct service on Southwest Airlines from select U.S. markets beginning in late 2018 or early 2019.

Another market worth highlighting is Orlando, which benefited from displaced residents up and down the coast of Florida, with RevPAR growth up 3.1% during the quarter, while our portfolio of international hotels, which account for 4.2% of adjusted EBITDA posted a 2.2% increase in RevPAR during the quarter, driven by particularly strong results across much of Europe. If we were to exclude São Paulo, which was down 15.4% for the third quarter, international RevPAR would have been up 7.7%.

Offsetting this strong third quarter performance was our New York Hilton, which witnessed a 7.8% drop in RevPAR during the quarter, although 170 basis points of that drop was attributable to disruption as we wrapped up a comprehensive suites renovation in September. While we were disappointed by the hotel's performance during the quarter, we believe there is a meaningful opportunity for improvement at this hotel by shifting the guest mix to drive more group business to the hotel, with a targeted goal of at least 35% group, up from 30% forecasted for 2017. In doing so, we believe we can better yield our transient business while dramatically increasing food and beverage and catering revenues. While the team is working hard to build the group base, this shift in strategy will take time.

I want to provide some additional color on the impact of the hurricanes on our Key West and Puerto Rico assets. In Key West, we own 2 hotels, the 311-room Waldorf Casa Marina and the 150-room Waldorf Reach Resort, which collectively account for approximately 3% of our total EBITDA. I am happy to report that both hotels avoided major structural damage. And after the outstanding efforts by our teams and various contractors and support personnel on the ground, both hotels reopened doors on October 13 with nearly all the rooms back in service. The total deductible for both hotels is $5 million, including property and business interruption.

From an operational standpoint, with our 2 properties closed for nearly 40 days, RevPAR declined 16.4% at our Key West hotels during the third quarter, accounting for a 34 basis point drag on comparable portfolio RevPAR results, while third quarter adjusted EBITDA was negatively impacted by approximately $1 million. We note that while group business is not expected to be impacted in the fourth quarter, we anticipate a slower ramp-up in our transient business, which accounts for 80% of our demand in Key West. Accordingly, we estimate the residual impact of Key West on fourth quarter adjusted EBITDA will be approximately $3 million.

Turning to Puerto Rico. Unfortunately, the situation is far more challenged at our 748-room Caribe Hilton hotel, which sustained significant damage from Hurricane Maria and remains closed throughout the remainder of the year and will likely remain closed most of 2018. First of all, I am most thankful that all guests and team members are safe and accounted for. And our teams on the ground need to be commended for their hard work and dedication for dealing with what continues to be a very difficult situation across much of the island. I personally traveled to Puerto Rico a few weeks ago and was struck by the widespread devastation, although I remain encouraged by the resilience of the Puerto Rican people and have no doubt that the island will make a full recovery over time.

As I noted, damage to the property was extensive, with more than 80% of the rooms in need of some repair and a majority of the public space will require significant work. We are currently working with our design teams and various consultants to come up with the -- an estimate of total damage. But we anticipate total expenditures, including business interruption, to far exceed our $11 million insurance deductible. With Caribe accounting for just under 1% of EBITDA, the impact on earnings is largely immaterial with a third quarter drag on adjusted EBITDA of roughly $300,000, although fourth quarter impact is expected to be approximately $2 million.

In total, we estimate this year's hurricane season negatively impacted comparable RevPAR by just 10 basis points during the third quarter, while having virtually no impact on adjusted EBITDA or adjusted FFO. As it relates to the fourth quarter, the cumulative impact on adjusted EBITDA from the storms is expected to be approximately $5 million or $0.02 adjusted FFO per share with Caribe to remain closed and Key West anticipated to have a slower ramp-up. Note, these amounts exclude asset write-offs and recovery costs incurred. While the final amount of the damage associated with Hurricane Irma and Maria have yet to be determined, we believe insurance proceeds will be sufficient to cover a significant portion of the property damage to the hotels. Total out-of-pocket expenses, including our insurance deductibles, are estimated to be $20 million, inclusive of the $2 million that was recognized in the third quarter.

Now a quick update on our capital recycling efforts. As we discussed on last quarter's call, we have started the marketing process for a group of noncore hotels accounting for $40 million to $50 million of EBITDA. The pool of assets consist of a portfolio of international hotels, a portfolio of Embassy Suites and several one-off hotels, which simply do not fit our long-term strategic goals. These assets are in lower-growth markets at below-average RevPAR, are CapEx intensive and remain a drag on corporate resources. Furthermore, the average RevPAR for the portfolio being marketed is just $111, which is nearly 32% below the portfolio average of $162, while margins are 430 basis points lower than our portfolio average. As we look to redeploy sales proceeds, I want to assure investors that we do not anticipate a material drag on earnings once proceeds are fully reinvested. Additionally, our capital recycling efforts will help to materially improve operating metrics, including portfolio RevPAR and margins, while ultimately reducing our G&A expense as we shrink our footprint abroad and produce CapEx savings well in excess of $100 million. It is too early to report on price expectations, and we caution that we are still early in the process and there is no guarantee that we will transact on all of these assets. We will update you in the coming months as the process unfolds.

Finally before turning the call over to Sean, I want to provide some perspective on our view looking ahead to 2018. We remain encouraged by the strength in the U.S. economy, including expected 2.5% GDP growth next year, healthy corporate profit growth, low unemployment, increasing business investment spending and improving consumer confidence. Additionally, supply across most of our markets remains in check with our portfolio facing roughly 2.5% average supply growth over the next 2 years among the top 25 markets or approximately 60 basis points below our peers. Overall, the setup for next year looks favorable, and barring an unforeseen demand shock, we remain cautiously optimistic about an extended lodging cycle.

I will now turn the call over to Sean, who will provide you with more details on third quarter results, CapEx spend as well as update you on 2017 full year guidance.

Thanks, Tom, and welcome, everyone. Looking at our results for the third quarter, adjusted EBITDA was $182 million while adjusted FFO was $141 million or $0.66 per share. As Tom noted, portfolio results were largely driven by strong performance of our 2 San Francisco hotels as well as strength from our Orlando hotels that helped to offset hurricane disruption felt elsewhere in the portfolio, resulting in a generally flat same-store RevPAR growth for the quarter.

The same offset held true on the margin side, which was more profoundly impacted by year-over-year increases in real estate taxes, primarily attributable to our 2 assets in Chicago, where an aggressive city assessment resulted in a $1.1 million accrual true-up in the quarter for prior periods, as well as the lapping of a $1.7 million credit received at our Chicago downtown and Atlanta airport hotels in Q3 of last year. Together, these nonrecurring items contributed roughly 44 basis points of impact to our comparable EBITDA margin decline within the quarter.

Very briefly on our balance sheet, there are no major changes to our capital structure during the quarter, with net leverage still running at just 3.8x. We remain well positioned with a fortress balance sheet with more than $1.3 billion of liquidity available between our revolver and available cash as of quarter end. Other than the $55 million of bonds we expect to pay off by mid-December, we have no significant maturities until 2021.

Turning to the dividend. On October 16, we paid our third quarter cash dividend of $0.43 per share. As relates to our fourth quarter dividend, we remind investors of our intention to pay out on an annualized basis, 65% to 70% of adjusted FFO, which would translate into a Q4 step-up dividend in the range of $0.51 to $0.58 per share. The actual amount of the Q4 dividend will be approved by Park board on around mid-December with a record date prior to year-end and a payment date occurring in the middle of January 2018.

With respect to CapEx, we invested $39 million during the third quarter, nearly 80% of which was for guest-facing areas within our hotels, taking our year-to-date CapEx spend to $125 million. More specifically, we completed a $9 million investment at the Hilton New York, which included the build-out of 5 luxury suites and an upgrade to some of the meeting space. The property now has 1,169 rooms fully renovated with 385 additional rooms commencing in Q1 2018. And as Tom noted, we've elected to pull forward the final phase of rooms renovation for 385 rooms at the Hilton San Francisco into Q4 from Q1 '18 to better position ourselves with a fully renovated property for next year. We expect approximately $700,000 of disruption in the fourth quarter, negatively impacting the hotel's RevPAR by approximately 200 basis points for the quarter.

Regarding future ROI projects, we have commenced our planned Hilton conversion at the DoubleTree Fess Parker Hotel in Santa Barbara. The scope of the project includes a full guestroom remodel, renovation of the meeting space and improvements to the lobby and restaurant. The $13 million project is expected to finish by Q2 of 2018.

Finally, for the Bonnet Creek meeting space expansion, due diligence is underway, and we should start construction by Q3 '18 with a scheduled completion in late 2019. The project will include a 35,000 square foot ballroom, taking our total meeting platform to nearly 200,000 square feet of meeting space and more in line with the complex's competitive set.

Turning to an update on our annual RevPAR and earnings guidance. Despite the challenges facing Key West, for our comparable portfolio, we are maintaining our full year RevPAR guidance of flat to up 1%, while tightening our margin guidance by 10 basis points at the midpoint to a new range of down 20 basis points to down 80 basis points. As Tom noted earlier, given the uncertainty of when our Caribe Hilton hotel will be opened to guests, we are taking the property out of our comparable portfolio for the balance of 2017. Overall, we expect Caribe and the slower ramp-up in Key West to account for an approximate $5 million hit to adjusted EBITDA over the balance of this year, resulting in a $0.02 drag on FFO per share. Consequently, we are lowering our full year 2017 earnings guidance only by this disruption, which translates into a new adjusted EBITDA range of $735 million to $760 million, while adjusted FFO per share decreases to $2.68 to $2.78.

Finally, the rooms transfer at our Hilton Waikoloa Village hotel at Hilton Grand Vacations has begun. In July, 14 of the 600 rooms were taken out of inventory, with another 120 rooms transferred in early October. The remaining 466 rooms will be transferred by the end of 2019. Noted previously, the impact to EBITDA this year is estimated to be approximately $4 million.

That concludes our prepared remarks. We will now open the line for Q&A. (Operator Instructions)

(Operator Instructions) Our first question comes from Jeff Donnelly with Wells Fargo.

I just want to kick off with the Hilton in New York. You've talked a little bit about shifting the mix there. Can you maybe just talk a little bit where -- I mean, you mentioned in your remarks, but where would you like to take it, but I guess I'm curious, what's that time frame on how long it would take to shift it? And I guess, where should we set our expectations on what it will be like during that process? Is that a fairly linear process in your eyes? Or could it be a little bumpy along the way? And I guess, maybe an adjunct to that, have you been much of a beneficiary in that hotel from the closure of the Waldorf?

That's quite a few questions embedded in there, Jeff, but always appreciate your insight. And obviously, look, we love the hotel. We think it's in a fortress position, nearly 2,000 rooms, 150,000 square feet of meeting space. We plan to keep it obviously in the Park portfolio and see long-term success there. The decision that we've made as a team at Park is that we really believe that both the intermediate and long-term success there is going to be dependent on grouping up. As you know, when you look at the New York market, nearly 38% increase in supply, plus or minus. We have a competitive advantage there, given the fact that we're one of the few hotels with that kind of capacity. So having the right kind of group base is terribly important to us. We began the year with group probably in the low to mid-20% range. Rob and his team have done an excellent job working with our partners at Hilton. We fully expect that we'll finish the year around 30%. As I said in the prepared remarks, ultimately, we think we need to be at least 35%. And candidly, it may make sense, given the fact that the market dynamics have changed, to really take it probably closer to 40%. That will allow us, again, to better yield our transient, and then on top of that, allows us to really grow our food and beverage and our catering revenue as well. So it will take time. Rest assured, we are not pleased with the results so far. We're working our tails off in conjunction with Hilton to improve the situation. Candidly, I think it's going to take a few quarters, Jeff, as we look out. And really, as you look at long -- kind of the long lead sort of grouping -- booking pace for a hotel of that size, it does take some time as we unfold. We're encouraged as we look to the quarter. The group pace there is about 5.2% with that [should a] -- if you may recall, in the first quarter, group there was up about 7%, and the hotel did extraordinarily well. So having a strong group base there is really important as we move forward. So love the hotel, working hard. We'll get this done. And if you were to take New York out of our performance for the third quarter, it really was about 100 basis points sort of negative drag. So instead of being down 0.1%, we really would have been up 0.9%, almost 1% of RevPAR. So great asset, we're working. It will take some time as we continue to group up. Regarding the Waldorf effect, it's really about $22 million in incremental business that we've got. Rob is here, so he can correct me if my stats are wrong. But I think we were just north of 70% of that coming really on that catering and food and beverage side. We continue to grow that business. We have a plan, we're confident on the plan, and we will deliver over time.

And just maybe one quick follow-up, if there's a quick answer to it. But the top 25 markets in the U.S. are running at occupancy levels that are low 70s, which is probably 300 to 500 basis points above what historical peaks were for the hotel industry over many years. Why do you think this cycle hotels have been managed more for occupancy than for rate, I guess, is my conclusion there?

Yes, I think there are certainly a number of variables, Jeff, but I think one that we can all point to as you see the advances in technology and that allow people to -- with the former cancellation policies. Obviously, Hilton, Marriott and others have revised that, which we certainly think will help. But I think that played a role in allowing people to cancel and rebook and really had a pretty negative impact on rate and certainly, profitability. Look, I remain bullish and optimistic. When you look at sort of where we are, even as you think about supply, supply growth has been relatively muted, all things considered, if you look back to prior cycles. So we're not at risk here of what I would call a major shock, unless God forbid some sort of geopolitical. But as you think about it, it really is steady as you go. I think that we've got to continue to press forward. I'm encouraged by improving business investment spending. Remember, it was negative last year, negative 0.6%. We're expecting it to be up north of 4% this year, another 4% next year. Corporate profits are growing. Consumer confidence is at a 17-year high. So there's a really nice backdrop. If a tax reform happens, again, they launched, I think, the initial kind of framework. I think we all know that the sausage now will begin to get made. And that will take some time and probably take many twists and turns. But it does seem like our leaders in Washington, the men and women there are working hard to hopefully get something done. I think that could also be a catalyst, and I think deregulation can certainly help as well. So it is a little bit frustrating that we're not seeing the pricing power. There probably has been a little more supply and certainly in the CBD markets. And as we pointed out in our prepared remarks, we were extremely well positioned. We've got less supply exposure than many, if not all of our peers. We think it's about 2.5 of our portfolio and really about 60 basis points better than our peer average. So really like our positioning long term, and I think overall, given what happened vis-à-vis the hurricanes and the devastation throughout the country, really pleased with our performance. Keep in mind, we got Key West open, and the credit going to the men and women who worked so hard in 40 days, given both assets, given the amount of devastation there. Puerto Rico will be out of service for some time, as we've noted. But like our positioning, and we're encouraged as we move forward.

Our next question is from Anthony Powell with Barclays.

Tom, you talked a bit about your view on 2018, given the expected improvement in San Francisco, the favorable outlook in Hawaii and some easier comps in some other markets, would you expect your overall RevPAR growth to accelerate in '18 versus this year?

Well, we certainly are encouraged by what we see. Again, Hawaii, I'm not sure there's a better asset candidly in our industry when you think about 22 acres and nearly 3,000 rooms and 145,000 square feet of retail space, nearly 100,000 square feet of meeting space, oceanfront, north of 20% EBITDA, still running high margins there in the 36%, 37% range. So love that asset. We expect to have a very strong fourth quarter, as we said, probably high single digits in RevPAR there. Feel good about the booking pace as we look out. We feel good about the supply constraints in that market. So we clearly think that's going to be a real positive for us. As we think about San Francisco, obviously, we're pulling forward, as you know, the renovation -- final phase of the renovation in the fourth quarter of San Francisco, very bullish long term. We think, obviously, next year, citywides will improve about 20%, as I've said during the prepared remarks, to about 735,000 room nights. Again, that's up from low 600,000 this year. And again, as you think back to 2000 -- look forward to 2019, obviously, we're looking at a record year. I know many of my peers have talked about that as well and probably at about 1.2 million. So love San Francisco, love Hawaii, and those, when you look at that distribution, that accounts for about 30% to 35% of our EBITDA. That's a fortress sound position as we move forward. So I still think, even with that strong backdrop, we'll have pockets of continued success and choppiness from [New York] and certain other markets. As I mentioned, New York will continue to ramp up as we change the mix there for that hotel. It still looks and feels to me right now, until we really begin to see the benefit of all the initiatives , it's probably a 1% to 2% RevPAR environment. But candidly, we're really early in the budgeting process and that's just anecdotal until we really scrub the numbers and do the work as a team and meet with our operating partners. We'll have more to say in our early 2018, and certainly, as we prepare for our earnings call in February.

Got it. Could you tell more about Chicago? It's been a difficult market for many of your peers. And I think Sean mentioned property tax increases. A large competitor opened up in the market recently. What's your long-term view of that market and your hotel's positioning within it?

I think a couple of things in Chicago. We obviously had a challenging comp there, given the World Series last year. I won't go back, and Sean gave a very thorough, I think, assessment of the kind of onetime kind of property tax issues there. There were a loss of a couple citywides in 2016 that didn't repeat this year. So look, we like Chicago long term. We love our asset there, 1,600 rooms, 250,000 square feet of meeting space. It's an iconic. Clearly, we see Chicago being on the circuit of the large conventions, and we certainly expect that we'll get more than our fair share. Obviously, there's been new supply with the Marquis being added. Chicago is one of those markets where candidly every few years, you get outsized performance, and otherwise, I think it's -- it generally is a steady Eddie. The new supply clearly has to get absorbed, but again, it's a market that we like long term. I don't know whether Rob, you -- is there anything else you'd like add for Chicago?

Certainly. Anthony, just from a property perspective, even though we had a drop in group business during the quarter, our group catering contribution increased and the team improved their food and beverage margin by over 750 basis points. So we're certainly very excited about what the team is doing working in partnership with us.

Our next question is from Bill Crow with Raymond James.

Tom or Rob, just following up on Jeff's question earlier on New York. If you could kind of give us the order of magnitude that NOI declined in the quarter that asset on a 7-plus percent RevPAR decline? And then the second part of the New York question is, did Hilton fail? And by that, I mean, did they -- with the known closing of the Waldorf, it seems like more business should have been directed your way, and I'm just curious, your take on that.

Yes, let me jump in first and then Rob can jump -- can add. Again, we're down, as I said, 7, 7.8%. Keep in mind, we had the renovation disruption, so really down about 6% there. Margins, I believe, were down about 350 basis points. And Sean or Rob can sort of give you the EBITDA decline there. I would make this statement. Our partners at Hilton are -- they are aligned. They are working their tails off with us. We are confident. And I want to reassure listeners and investors in particular, we are confident that we will turn this ship around and that we'll have long-term success there. We have a wonderful asset, a fortress position. The reality is that it's not a transient box. It needs to be run as one with a large group base, and that's the real key to success. You saw that in the first quarter when we were up, I believe, by about 2.9% with 7% growth in group pace there. And you'll see certainly better results, we believe, in the fourth quarter, obviously, with the group pace being up 5.2%, but that's the real key to success. Could efforts collectively -- could more marketing dollars have been spent in pushing on the group side? I'm not one to look in the rearview mirror. The Park team owns this situation. We, I think, delivered a solid quarter in the third quarter, including New York. And we are confident that we will create significant value for shareholders as we move forward. We have a plan, and we're executing the plan, and we expect to be held accountable accordingly.

I appreciate that, Tom. My follow-up is really given the immaterial financial contribution from Puerto Rico and what seems to be a significant commitment of capital and management's time to rebuild, is there any consideration of perhaps marketing the asset, taking your insurance proceeds et cetera, letting somebody else rebuild the property?

It's a fair question, Bill, but it's not something that we are looking at as a team. Look, we -- that's an iconic hotel, long history within the Hilton family, if you look at the brand. And we think really that this opportunity is tragedy. And again, I want to reinforce first and foremost to thank the first responders, Pablo Torres and his team, our partners at Hilton and many others who just did a phenomenal job and spent, not only put their own lives at risk here, but they got into Puerto Rico and have remained there. We've got many of our associates there that have continued to have their own personal issues to deal with there. So love the asset, love the potential. We think, candidly, that this unfortunate set of circumstances gives us an opportunity to rightsize the hotel. There are 3 kitchens there. Do we really need 3 kitchens? Can we reconfigure perhaps some of the meeting space? Can we make it more efficient? And as you know, the byproduct of a major renovation like this, you effectively get close to a new hotel with insurance proceeds. So we think the better answer long-term for creating value for shareholders is really to not only continue to own it, but renovate it, improve it. And when we look at a hotel with 748 rooms and that footprint, we know that we can generate more than 1% EBITDA across this portfolio. So it will take time, will be a slight distraction, as you noted, from management's time. But the team is up to the challenge. And we're confident that we will deliver a much better product that all of the Park team, Hilton and the associates there and the community, the great island of Puerto Rico will be proud of.

Our next question is from Robin Farley with UBS.

I wonder if you could -- I know you're not giving specifics to us on the guidance for next year, but if we kind of look in...

Robin, I'm having a hard time hearing you. Robin. You're --

Sorry, I know you haven't given specific guidance for RevPAR for next year. But if your -- you've been about 100 basis points below the Hilton range. And so if we use that range for you next year, I guess, do you feel like -- or what RevPAR level would keep your margin flat next year? Is that something that fits into that kind of 0% to 2% RevPAR range for next year?

Yes, it's a couple of things. At this point, obviously, as, Robin, as you can imagine, we're not in a position to really give guidance for next year. I said anecdotally when you look at where Hilton came out at 1 to 3, clearly we've been south. Hence, the reason I said it looks and feels like a 1% to 2% range. I say that anecdotally without having done the ground-up work of our own portfolio. We are encouraged what we're seeing in specific markets, San Francisco, I noted, obviously Hawaii. I noted the great success that we continue to have in Florida there, some of the ROI initiatives that we have. Also, keep in mind that we have a very active recycling program. Depending on how those proceeds are used, then we plan to take whatever assets we buy upstream, which will also improve the overall metric. So I would give you that as a backdrop. Look, we're in an environment. And I got to say that I'm really proud of the team. When you think about it, we're essentially running 0.5% RevPAR, and that includes Key West and those 2 hotels being out of service there for 40 days. Yet, our margins are only down less than 100 basis points, and we're still -- we've tweaked guidance there, but Rob Tanenbaum and the men and women that we have on our asset management team have just done an extraordinary job. So we are confident that we will continue to improve margins. And we picked up about $12 million plus or minus, about 48 basis points so far this year. We've set the marker next year that there's another 75 basis points and probably close to about $21 million. And we're going to work aggressively with our partners at Hilton to find those opportunities, and we're confident that we'll get there.

Okay. And I mean, do we think about those 75 basis points as being the net delta year-over-year? Or are you're sort of saying 75 basis points offsetting maybe the wage inflation and other things that maybe would result in margins not being up that 75 basis points?

It's certainly, Robin, going to be a combination and I don't want to get into the specifics of that. We're working through. That will be, obviously, part of the budgeting process. And we'll certainly have more detail to provide as we get into 2018.

Our next question is from Brandt Montour with JPMorgan.

So I don't know if I might have missed this, but group pace for 2018, are you in a position to kind of give us where you're tracking kind of with and without San Francisco?

Yes I would say that we're -- and our group pace right now is flattish. If you think about this year, we're going to end the year flattish. And then if you take out San Francisco, it's probably up 2% in 2017. As we look to next year, obviously we feel very good again what we're seeing in Hawaii. We feel great about what we're seeing, obviously, in San Francisco improving. But I'd say right now, the early indications are that group pace is tracking on the flat- to low single digits is where we would be right now.

All right, that's helpful. And then on the cancellation front with your partners at Hilton, can you just discuss if you're seeing traction from that recent policy change, maybe in the form of cancellation trends as well as fees associated with them?

I was a pretty big advocate along with many of my peers in really pushing for this. I would say that we saw prior to these changes, probably 30%, if you just take New York, of reservations being canceled in that sort of 0 to 7 days. And almost all of that had a rate impact. So I commend Hilton, Marriott, Hyatt and others that have either implemented or are considering implementing. We can't have a free option on our inventory. And I think in some markets, 72 hours is appropriate. And candidly, I expect that over time that we will continue to reevaluate. If you want flexibility and an advance, then customers ought to be prepared to pay for that. There are some situations where an advance deposit or advance purchase makes sense. The airlines have really retrained all of us, and there's no reason that I think the hotel and lodging industry can't do the same. So -- so far, the early indications are encouraging. Again, don't have enough data that we received from Hilton regarding that, but anecdotally all of the feedback is that it's working and that there's really not a lot of resistance from customers and from guests.

Our next question is from Rich Hightower with Evercore.

A lot of questions answered already, I just got one. So as you're marketing the 15 assets for sale, I presume that you're also scouting out assets on the buy side with respect to the 1031 exchange on the back-end there. I mean, can you tell us what you're seeing in the market for acquisitions? How do they stack up against your long-term return hurdles, Park's current cost of capital? How do you think all that's about to shake out?

Yes, I'd say, Rich, one -- always a great question. Really, the focus right now is really on the recycling of capital. As you know, you've heard me say this many times. As you think back to where our energy has been here in the first year, the internal growth story has been terribly important. Recycling capital, our return on investment projects which are underway, our grouping-up strategy, which obviously we talked about and again, Rob and his team partnering with Hilton to figure out ways to continue to improve margin. So recycling capital, we were very thoughtful about identifying assets. Again, assets that were capital-intensive, we believe we're going to save north of $100 million in CapEx by certainly deposing of those assets. The RevPAR was about $111 versus our portfolio average of about $162, so about 32% savings there. Obviously, the margin drag that we had there, the drag on resources. 9 of the 15 assets are international in various markets, where we do have some resources that are deployed there that we'd certainly like to bring home or reallocate. So that's really been the focus from that standpoint. As it relates to the U.S. component, as you know, those will likely be a 1031, given the building gain tax that is required for the first 5 years subsequent to our spin. So we're really working hard on that. We'll have more to report. At the same time, we're always in the market. Matt Sparks and our very talented investment team are in frequent contact with brokers, with sellers. Given my relationships and others, finding deals, I don't think is going to be an issue for us. Our strategy, as you know, is to invest in upper-upscale and luxury hotels in top 25 markets and premium resort destinations. We want assets, one, that are going to improve the overall quality of portfolio, that are going to meet our return hurdles. We're looking for returns of unlevered IRRs in the 10% to 12% range. At the same time, we want them to be accretive to NAV and have as little dilution as possible as it relates to AFFO. We're sensitive to that. We're confident that we can balance those -- all those goals. And we also again want to protect the balance sheet and make sure that we preserve our high dividend payout. So we're confident we'll be judged accordingly and don't see any real issues of being able to find attractive deals.

Do you think that the timing on this -- is there anything you can speak to at this point? I mean, would we be having a different conversation 12 months from now as we kind of see some of the results of this whole process?

I would fully expect us to have this first phase of recycling capital done here before the end of next year. And look, we are -- we're active. We're encouraged by the response. It will take time. But would expect these assets to trade in '18 and certainly, well before the end of 2018.

Our next question is from Lukas Hartwich with Green Street Advisors.

So my first question is on the Hilton Hawaiian Village. I noticed the RevPAR was up about 2%, but revenue is up almost 10%. So just curious what kind of drove the upside on the revenue line?

I'll let Rob Tanenbaum. Rob is chomping at the bit. So he and his team have been working really hard on this asset, and again, it is a gem, and one of a kind in my humble opinion.

Lukas, our revenue growth there actually comes through several categories. One is through the rooms revenue, second is through F&B, and then third is through other. From -- just looking from the rooms and food and beverage revenue side, we were up over $4 million in the quarter. And the team did an amazing job flowing through all that revenue. In fact, our rooms flow-through was 113%, and our food and beverage margin flow-through was north of 78%. The other revenue came -- was up quite a bit due to the Grand Islander, which is a Hilton Grand Vacation building. And so we received revenues associated with servicing that building, and it's a direct pass-through. So whatever comes up comes down, and we make a slight profit on it. That was what was driving the initial revenue growth there.

Great. That's helpful. And then Rob, while I've got you, can you maybe touch on group production trend?

Sure. In Hilton Hawaiian Village, we're really thrilled with what we're doing. We've combined their sales groups with Hilton Waikoloa and Hilton Hawaiian Village to sell the U.S. And the group has really blended very well together, assisting one another and we see the benefits from that in and of itself where we -- if we don't have space in one hotel, we can move it to another property. So by working together and collaborating, we're really -- we're seeing the benefits of it [and our '18 pacing] at Hilton Hawaiian Village reflects that change in strategy.

Our next question is from Sean Kelley with Bank of America.

You guys have covered plenty of ground, so I'm going to try one. Sorry, if you're sort of making you repeat yourself in a different way. But just Tom, at a really high level, obviously, when we came out at the beginning of the year, the idea for you guys was that there was some kind of incremental margin you could take, just based on internal operating initiatives. And obviously, a couple curve balls came up here in kind of later part of this year with the hurricanes and whatnot. I guess the big picture question I have is just like, has anything changed at all? Or do you still think you've sort of got that absolute margin growth? And how much of that has been achieved versus how much is still ahead of you?

Yes, it's a fair question, Sean. I would tell you as you kind of step back, and I could remind listeners, remember 1.5 years ago was me and Sean Dell'Orto, me rejoining Hilton and Sean having 3 jobs before the team was built out here. And when you think now where we are almost a year as a public company, I could not be prouder of the men and women that we've put together, the way the team is gelling, the interface with our board, the rhythm that we have with our operating partners at Hilton, and again, having a $9 billion company, plus or minus. I think we're off to an excellent start. Not starry eyed at all, we've got to earn our stripes. We've got to perform. And as you think through really the first year, what were the priorities? Priority #1 was really looking at figuring out this internal growth story. We thought that there were opportunities on the margin front. I do think that we've made really positive. Rob has built out a very strong team. Candidly, as part of that evaluation and working with Hilton, there's been a fair number of turnover, both in sales operations as well as GMs, I want to say, were 10 to 12 changes across the portfolio. And again, we've got to hold people accountable there. We've already taken out about $12 million in costs. I think that equates to about 48 basis points. So had we not done that, that would have been even more margin erosion. So I think a really solid foundation there, confident of what we've got to do, the next 2 years as we've said, 200 -- 150 to 200 basis points. We're setting a target of 75 basis points next year. Not easy to do, but we have the plan in place. We've got the various initiatives. There are macro issues that can occur beyond our control, as we're seeing obviously with these national disasters, but we're cautiously optimistic there. Again, recycling capital, we said that, that was going to be a high priority for us. Made great progress on that front. The ROI projects, again, the few that we identified, all the work on those are underway. As Sean mentioned in his prepared remarks, we expect that the Fess Parker Doubletree to be converted to a Hilton here in the second quarter. Adding 35,000, 40,000 square foot ballroom in Bonnet Creek will take time. We expect to break ground there next year. Grouping up, we're just obsessed with it. Because we know, we've seen evidence that, that really is going to be the game changer for this portfolio, particularly for those top 10 boxes. So we're working hard with our partners at Hilton to make sure that we've got the additional sales resources. We did bring in the concept under Rob's encouragement with Hilton of having a group of hunters. These are men and women that are targeted really specifically for the Park portfolio and really to drum up business for our portfolio there. We've got a dedicated team of men and women who are working closely with us and are really assigned to the Park portfolio. So I would tell you all things considered, I'd say we're slightly ahead of plan and where I thought we'd be. Not my first rodeo, done this before, but feel really good about where this team is and how they're gelling. And next year is a big year for us. We've got to continue to earn our stripes and earn your confidence and respect and hopefully that of investors as well.

The next question is from Chris Woronka with Deutsche Bank.

Tom, I want to ask you, you've been in the industry for a while. We've heard some of your peers, I think, talking a little bit more about supply this quarter than maybe last quarter. And the question really is -- it's kind of theoretical, but do you think some of these 3-star -- these new upscale hotels, obviously, some of them are Hilton-branded, some of them are not. Are they kind of creeping in on 4-star in some of these urban markets? Maybe not San Francisco and Hawaii so much, but kind of New York and everywhere else. What's your opinion on that?

Chris, I don't think there's any doubt that they are formidable products. In some cases, they're sort of stealth full-service hotels. They offer a good product and good guest experience. So no doubt that it's a threat. And I think if you take New York as an example, New York if you think back to 2011, we had 141, what I'd would call, super-compression days, north of 90%, 95% where in those [less] incremental rooms, you could really drive rate. That was down to probably 88 days, if memory serves me correctly, and probably a 38% decline if you look to 2015, 2016. So no doubt that that's had an impact. I would say in part, one of the real defenses that we believe, and strategic advantages that we have with the Park portfolio, the fact that we've got this iconic portfolio, we've got this aircraft carrier, 10 hotels with more than 125,000 square feet of meeting space. We've got to use our natural advantage. And I think that's why the grouping up is so important for us to have that base. As we've said, we want to move the top 25 hotels from 31% to 35%. We think to some extent, that helps insulate us, and then that gives us really the opportunity yield out that incremental transient business. No doubt that when you think back, I'm going to date myself here, but if you look back 10 years or so ago, New York, in particular, was undersupplied with this sort of select service hotel. I would say today it's oversupplied. And I think given the operating model there, I wouldn't be surprised if you saw some of those hotels converted to other uses. I don't know how sustainable it's going to be for everybody, given the amount of supply that's being added there. There's a position, there's a role, and there's a, we think, a competitive advantage long-term for our asset. It's irreplaceable. You would replicate this asset today. Bull's Eye Real Estate and we are going to reconfigure the operating mix there, and again, using more group as the base and are confident that long term it will deliver to shareholders.

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this point, I'd like to turn the call back to Mr. Tom Baltimore for closing comments.

I thank all of you for taking time. I wish you all a wonderful fall. Please travel to Park Hotels, and that we look forward to talking with you in the New Year, about 2018 and beyond. Best wishes.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.