Park Hotels & Resorts Inc (PK) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Park Hotels & Resorts Second Quarter 2018 Earnings Conference Call. (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 Strategies for Park Hotels & Resorts. Thank you. Mr. Weissman, you may begin.

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts Second Quarter 2018 Earnings Call.

Before we begin, I'd like to remind everyone that many of our 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 reconciliation 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.

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of our second quarter 2018 operating results and updates to the second phase of our capital recycling program as well as 2018 guidance. Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our second quarter financial results and update to our balance sheet and additional color on our insurance claims. 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 welcome, everyone. I'm very pleased to announce a great second quarter in which we materially outperformed across several key metrics, highlighting our internal gross strategies of recycling capital, improving margins, grouping up and unlocking embedded value through our ROI projects. Our relentless focus on these priorities contributed to tremendous success in the second quarter, and we expect continued progress and success in the quarters ahead.

Turning to operational results. Comparable RevPAR for the portfolio increased 4.3% during the quarter while comparable hotel-adjusted EBITDA margin improved by 150 basis points at 31.9%. Group revenues exceeded expectations and were up an impressive 17.7%, driven by San Francisco, up 55%; New York, up 33%; and Chicago and Key West, which were each up over 20%.

In addition to contributing to strong banquet and catering revenues, strong group trends also allowed us to better yield transient rates to drive overall profitability. Total revenues for our comparable portfolio increased 6.2% during the second quarter. F&B revenues at our comparable hotels increased nearly 10% with a 14% increase in banquets and catering revenue leading the way.

The enhanced cancellation policies employed by Hilton also contributed to a 65% increase in cancellation and attrition revenue. The combination of increased revenue across multiple sources and the measured control of expenses led to impressive flow-through for the quarter, driving our significant margin improvement.

In addition, hotel-adjusted EBITDA of $228 million and adjusted FFO per diluted share of $0.93 came in well above our expectations. We are very pleased with our results this quarter, which further illustrates our internal growth strategies are working.

The group revenues throughout the quarter resulted in the group segment improving nearly 400 basis points to 34% of the total mix. Group strength primarily came from corporate group, which was up 35%. This is particularly encouraging as we think about group business going forward as strength on the corporate group side indicates optimism in the broader economy and a return to corporate spending with the latest forecast for nonresidential fixed investment spend of 6.5% this year and over 4% forecast for 2019. This resurgence has led to a noticeable improvement in group pace for both 2018 and 2019 in our portfolio since the first quarter.

2018 group pace improved 110 basis points to 4.7%, while 2019 group improved 240 basis points to an impressive 9.2% and 6.8% when you exclude San Francisco, setting the stage for what we believe will be a banner group year for our portfolio. We witnessed notable improvements in 2019 pace in key markets like Chicago and New York throughout the quarter, up 890 basis points and 660 basis points, respectively, which indicates that the booking window continues to lengthen.

Our short-term group pickup also mirrors this improving group trend. We picked up over $6 million in the quarter for the quarter group revenue across our comparable consolidated portfolio, which was $2 million more than last year. And since we currently have over 94% of group revenue on the books for 2018, we remain very optimistic that we will meet our group revenue goals through the balance of the year.

The shift in mix to focus on group contributed to a 4.2% decline in transient revenues for the quarter. While a reduction in transient room nights drove the reduction in transient revenue, transient ADR increased 2.9% as we were able to effectively yield demand due to the large group base. Also, when analyzing our weekday demand trends during the quarter, we are encouraged to see that business travel demand was up in the low to mid-single digits among our non-Resort portfolio, and the outlook going forward into the third quarter is also encouraging. And while we saw a slight decline in lease-related demand, decline was partially due to the Easter shift, and we expect leisure to improve in the second half of the year.

Diving into our major markets. Our 2 San Francisco assets with nearly 3,000 rooms and 160,000 square feet of meeting space led the way, recording a combined RevPAR increase of 13.7% and significantly outperforming the respective comp sets during the quarter. Group revenues were up 55% over the second quarter of 2017, which was the quarter most impacted by the Moscone Center closure last year.

Group production at both hotels was well ahead of expectations, benefiting from room block increases for groups on the books and also short-term group pickup. Our 2 San Francisco hotels improved margins by over 500 points for the quarter on a combined basis. Looking forward, we expect group to remain strong for the second half of the year, and our San Francisco complex should see group revenue increase in the low to mid-teens for 2018. We are very excited by the outlook for 2019 for these 2 assets with group pace up over 17% or 23,000 room nights.

Continuing the strong group theme, we also saw favorable results at the Hilton Chicago and the New York Hilton Midtown. The Hilton Chicago posted a RevPAR increase of 10.5% in the second quarter, which vastly outperformed the comp set by 740 basis points and the overall Chicago market by 650 basis points. The hotel did a phenomenal job driving group business throughout the quarter while also controlling expenses as group revenues increased over 22% and margins improved 250 basis points.

Turning to New York. A 33% increase in group revenues led to a record-setting food and beverage revenue quarter of nearly $33 million, and total group catering contribution reached over $450 per group guest in May due in part to the hotel hosting a large group in May, which produced over $5 million in catering alone. The hotel's second quarter RevPAR of 5% outperformed its comp set by 350 basis points and the overall New York market by 80 basis points. Both hotels have a favorable outlook for the balance of the year.

Hilton Hawaiian Village continued its steady performance fueled by a combination of healthy group and transient demand. Hotel ran at an impressive 95% occupancy for the quarter, and RevPAR increased 3.3%, outperforming its comp set by 30 basis points. Margins improved by 140 basis points. As discussed during the first quarter, there continues to be some choppiness in the Far East wholesale business. There has also been some shift in Japanese visitation trends to Hawaii. Oahu has continued to see softer Japanese inbound travel. However, we remain confident in the overall demand fundamentals and our iconic assets' unique positioning in Oahu, particularly when considering Southwest Airlines' expansion into Hawaii in 2019.

In terms of our Hilton Waikoloa Village hotel that is located on the Big Island of Hawaii, we are seeing a slight impact from the volcanic activity that began in early May. However, we want to stress that our hotel is not at risk of any danger with the property located on the opposite side of the island nearly 100 miles away from the volcanic activity. However, we expect some continued modest impact until the situation stabilizes.

As a reminder, this hotel is noncomparable and, therefore, not included in our portfolio operating metrics due to the scheduled giveback of rooms to HGV through 2020. For modeling purposes, we estimate that the lost EBITDA, inclusive of the impact in the second quarter, could be in the range of $3 million to $5 million, less than 1% of the company's adjusted EBITDA expected for 2018. This compares to the $38 million of EBITDA the hotel was budgeted to generate in 2018.

Florida had weaker results this quarter as the Easter shift and unfavorable weather conditions negatively impacted leisure demand. While RevPAR was down 0.4% for our Florida portfolio, EBITDA margins improved 100 basis points, highlighting the effectiveness of our asset management strategy and our ability to drive other sources of revenue while also controlling expenses.

Our 3 Orlando properties posted a slight RevPAR decline for the quarter of 0.7%. The Bonnet Creek complex had a challenging transient quarter, although positive group revenues and growth in ancillary revenues, sources like cancellation and resort fees, contributed to a 2.7% increase in total revenues. Looking forward, we expect our Orlando hotels to be relatively flat for the balance of the year with potential third quarter softness due to tougher comps being offset by a stronger fourth quarter.

Onto our asset management initiatives. We continue to make significant progress on both the revenue enhancement and cost-containment initiatives. In terms of our grouping up initiative, our top 25 assets improved their group base by 410 basis points during the second quarter to 35.2%. We expect the progress to translate into measurable group mix improvements for the full year, increasing roughly 30 basis points to 30.5%. Given the lead time for booking group business, we are pleased with our progress this year and remain on target to reach our goal of improving the group mix for our top 25 assets to 35% over the next couple of years.

Now I'd like to provide an update on our capital recycling efforts. As announced on our last call, we closed on the sale of the Hilton Berlin during the second quarter, which represented the final hotel in our highly successful Phase I asset disposition program in which we sold 13 noncore assets, 10 of which were located outside of the U.S. for $519 million and recycled the proceeds to repurchase 14 million shares owned by HNA at a significant discount to NAV and pay a special dividend of $0.45 per share. Park now has an ownership interest in just 4 hotels outside of the U.S. accounting for approximately 1% of EBITDA, down from 14 hotels and 5%, respectively, held at the beginning of the year.

During the quarter, we also started the marketing process for the sale of 4 additional noncore assets as the initial part of Phase 2 of our capital recycling program. These assets account for approximately $24 million of EBITDA and average just $108 in RevPAR in 2017.

In addition, we expect to market an additional 3 to 4 noncore assets as part of Phase 2 with similar metrics well below our portfolio average. We will keep you posted on our progress as the marketing process for the initial phase of Phase 2 unfolds as well as any progress made on the subsequent set of assets in the months ahead.

Turning to guidance. Looking forward to the remainder of the year, although our third quarter is our weakest group quarter of the year, we are encouraged by the pickup during the second quarter as we added over $14 million for the third quarter, which is nearly $3 million more than last year. We also anticipate stronger transient demand and remain positive about the outlook for the rest of the year. Although group demand is a bit softer next quarter in San Francisco relative to a tough comp from last year, we are still forecasting group to be up in the low to mid-single digits with a very strong quarter during Q4 for the portfolio from in-house group bookings.

Finally, there will be some hurricane-related noise as Orlando laps a strong third quarter last year, while Key West should have very favorable results as it compares to the weak third and fourth quarters from 2017.

Given our better-than-expected results during the second quarter, we are adjusting our guidance range for 2018. Specifically, we are increasing our full year RevPAR guidance by 100 basis points at the midpoint to a new tighter range of 2% to 3% with adjusted EBITDA increasing by $15 million at the midpoint to a new range of $730 million to $760 million, while EBITDA margins increased by 50 basis points at the midpoint to a new range of flat to a positive 60 basis point improvement and our adjusted FFO guidance increases by $0.06 at the midpoint to a new range of $2.84 to $2.96 per share.

Before returning the call over to Sean, I want to reemphasize that our team remains laser-focused on executing our internal growth strategies and remains committed to partnering with Hilton and future operators to meet and exceed our operational goals and create long-term shareholder value.

With that, I will turn the call over to Sean.

Thank you, Tom. Looking at our results for the second quarter, we reported total revenue of $731 million and adjusted EBITDA of $228 million. Adjusted FFO was $187 million or $0.93 per diluted share.

Turning to our core operating metrics. Our comparable portfolio produced a RevPAR of $186 or an increase of 4.3% during the second quarter. Our occupancy for the quarter was 86.1%, up 1 percentage point over last year, while our average daily rate was $216 or an increase of 3.1% versus the prior year.

These top line trends resulted in hotel-adjusted EBITDA of $215 million for our comparable portfolio. Our comparable hotel-adjusted EBITDA margin was 31.9%, which was a 150 basis point increase over the prior year.

Our top 10 hotels had a very strong quarter to lead the portfolio with RevPAR increasing 6% to $217 and hotel-adjusted EBITDA margin improving 170 basis points to 33.2%. These hotels recorded strong growth in other sources of revenue as well with total RevPAR increasing 8.8% to $351. And group revenues increased nearly 20% across the top 10 fueled by San Francisco, New York and Chicago.

Moving to our balance sheet. Park remains in solid financial shape with over $1.2 billion of liquidity, including our $1 billion undrawn revolver. Pro forma for the asset dispositions, net leverage on a trailing basis is currently at 3.7x, below the midpoint of our targeted range of 3 to 5x.

Turning to dividends. On July 16, we paid our second quarter cash dividend of $0.43 per share as well as a special dividend of $0.45 per share related to the sale of the Hilton Berlin. And as of last Thursday, our board declared our third quarter cash dividend of $0.43 per share to be paid on October 15 to stockholders of record as of September 28. This dividend currently translates into an implied yield north of 5.5%, maintaining our position as one of the highest yielding stocks in the lodging sector.

Finally, we'd like to provide an update on our insurance claim related to Caribe Hilton Hotel in Puerto Rico, which is still on track for a soft opening in mid-December this year as our team has been working tirelessly to restore this iconic property. To-date, we have received $60 million, including $45 million received over the past 8 weeks, as we have ramped up the restoration work. We've also received $7 million of business interruption proceeds, which is included in the $60 million.

When netted against carrying costs and other expenses, we recorded approximately $5 million of the BI proceeds as EBITDA in the quarter. Over the coming weeks, we expect to receive another $25 million advance, which includes another portion of BI. This would increase our cash proceeds received to-date to $85 million. And when added with our $11 million deductible, we'll have a total of $96 million against the combined damage and BI claim that's currently estimated to be $168 million for the resort property.

For modeling purposes, we want to note that the EBITDA related to business interruption receipts in our original guidance is $8 million, equating to a full year's worth of EBITDA from the Caribe Hilton. As just discussed, we have recorded net BI proceeds of $5 million thus far, and we expect to receive additional BI funds this year and in early 2019.

Overall, we remain confident that our insurance coverage is sufficient to cover the vast majority of the total cost of damage and business interruption resulting from last year's hurricane, in excess of our deductibles. We continue to work with our insurance representatives and other advisers to process our insurance claims in an efficient and timely manner.

That concludes our prepared remarks. At this point, operator, we'd like to open up to questions. (Operator Instructions)

(Operator Instructions) Our first question comes from the line of Rich Hightower with Evercore.

Tom, I want to start with the market for transactions. Obviously, Park has had a lot of success with Phase 1 and the first part of Phase 2 of the asset sale program. So maybe just segmenting the overall transaction market, can you talk about what you're seeing in terms of what we might refer to as secondary markets or assets versus maybe some of the more -- the higher RevPAR, more iconic assets that Park over time wants to gravitate to? Just what are you seeing in those different segments, cap rates, depth of the buyer pool, valuation and so forth.

I think one of the things, Rich, I'd want to point out is just keep in mind how laser-focused we've been on the internal growth strategies. We really think that by executing that well, if you think back to really kind of our 3 guiding principles, which you've heard me talk about many times, our operational excellence, I think we check the box. We looked at prudent capital allocation, I think we continue to demonstrate that. I think today, it's match funded probably as well as can be executed. Obviously, the stock fell north of 50% since that. Sean and team have done a fabulous job on the balance sheet. So those guiding principles really guide everything that we do, we will always keep those front and center.

And when you think about kind of the next phase, what we've always concluded is that as we seek to sort of recycle capital and reshape the portfolio doing that. We've now sold 13 assets. We've got another 7 or 8 kind of in various stages of the process. And the hope and the plan is that we'll take those proceeds from say Phase 2, recycle those in a tax-efficient way probably through a 1031 and to be able to match fund and be able to use that opportunity for bringing an operated diversification.

Wonderful relationship with Hilton. They know and we know that it's important that we broaden that. And first -- top 2 on our list is clearly be able to expand into both Marriott and Hyatt family of brands. So stay tuned. There's nothing to report today. But it's clearly a priority for us as we move forward.

We are constantly monitoring the transaction market. No doubt that those more iconic assets certainly garner a lot of attention. I do think as we continue to execute our plan, we continue to improve, obviously, our multiple, get our NAV up and it gives us the optionality to really be portable and competitive player there.

Also keep in mind, that those other family of brands would love to have Park included, so we too have assets that they either control or influence and allow it to (inaudible). We've worked hard to try to find as many assets as we can sort of off-market or (inaudible). But rest assured, that, that first deal that we announced, we know that it's important. It should be middle of the fairway. It should be compliant with our strategy. We are focused on upper upscale and luxury. There are markets where we're underrepresented, certainly DC, Boston, Miami, Southern California, both L.A. and San Diego, come to mind. And there are pockets certainly within center of the U.S. that we'd also consider, right asset at the right price.

We recognize that there could be a little bit of near-term dilution in the sense of what we're going to be selling our Phase 2 assets for versus what we'll be buying. Very thoughtful about that. We have a story and a plan that really minimizes any (inaudible). So market -- we are close and plugged in, and we're ready to execute. We're confident that will certainly be in play.

Okay. And then maybe just shifting to something that was said in the prepared comments. You've mentioned and others have mentioned that the booking windows are lengthening with respect to group business sort of in the out years. Can you quantify that for us? Just kind of give us a sense of what an average booking window for a sizable group looks like today versus where we were a year ago or 2 years ago? Just so we have a sense of that.

I think a couple things that I would say, Rich. Let me get at it a little differently because I think it gets to the real part of your question and that is I think the economic environment is really, obviously certainly deregulation, tax reform, non-residential fixed investment spending, which you heard me talk about earlier in the prepared remarks, up 6.5% forecasted in '18. Again, that's up -- continues to be up quarter-to-quarter here. It's expected to be up -- the latest forecast is north of 4% into 2019, historical high correlation with RevPAR and certainly over 90%.

That provides a backdrop, and it provides an environment where businesses are more likely to invest, to spend. And what we're seeing is not only the short-term pickup but also the ancillary revenue. So part of that, I think, ties into the economic environment. We talked -- you heard me talk about whether or not we're in sort of a super cycle, a super cycle kind of 10 to 15 years. We're obviously 9 years in this business cycle. A traditional business cycle is about 7 years, but we've had such an anemic recovery, I think it's fair to say and I think we can all say reasonably confidently that this cycle has at least a couple more years, if not more.

But one of the things that I would note is that you're seeing a shift in my view for U.S. growth, shifting from, say, consumer to business-led, and I think that really gets at those businesses investing, getting their men and woman back on the road, getting meetings and having more people attend, getting the ancillary spend. That's I think what we're seeing and what some of our peers are seeing.

We do think Park is uniquely positioned to take advantage of that given the fact that we've got iconic properties. We've got 10 assets with over 125,000 square feet of meeting space, and it gives us the optionality to really grow our business. And I think the second quarter is just really a great example of that. We were firing on all cylinders. We had all of the avenues open up of ancillary revenue. Bob Tanenbaum and his team -- asset management team in combination with our operating partners at Hilton are really laser-focused on maximizing the opportunities of our properties. So a quarter doesn't make a year, but we're really pleased that the hard work is paying off as we are moving forward.

Our next question comes from the line of Smedes Rose with Citi.

Tom, you mentioned an additional 3 to 4 noncore assets that you could also bring to market as well. Can you -- do you have a range of what amount of EBITDA would be attached to those properties?

Yes, all 8 of them, Smedes, approximately would be in the $40 million range, similar profile to what we saw largely in Phase 1 RevPAR. That's 30% to 35% below our portfolio average. Capital savings probably in the $90 million to $100 million range. So again, when you look at our portfolio, our top 25 assets really account for about 85% of EBITDA, and our strategy will be in an efficient way to take the [banner] that remains, 15% of EBITDA in an orderly way. Some are more actionable today than others, and we've got 7 to 8. We've got 4 that we're currently marketing, another 3 to 4 that we're in the process of getting ready to market there, whether it's cleaning out joint venture issues or lease issues, et cetera. We are working aggressively to get those assets sold as quickly as we can and, again, recycle that capital into higher growth markets. We really want to plant another flag, and we'd really like to recycle that capital into an asset or 2 in a higher-growth market.

Okay. I wanted to ask you as well just, you noticed that the pace -- group pace is up 9% for 2019. Group, obviously, outperformed in the quarter, I think, relative to at least our expectations. And how much do you kind of attribute to the overall efforts that you've talked about, about just increasing your overall group exposure? And where do you think that'll be as a percentage of occupancy next year, say, versus where it's been historically versus just like a recovery in some markets like San Francisco, which I think it's been well telegraphed?

No doubt that San Francisco is a great tailwind. As we said, up 9.2%. When you take San Francisco out, you're still up 6.8%. So Hawaii is up 25% next year. New York's up another 4%. Orlando, I think, is up 5%. Our top-10 assets, which are really behaving like a top 10, if you think about it, they're up 10%. So I would say 2 things. Again, think back and listen to what we've been saying. Those just aren't words for us. They're the mission. We're focused. We believe that we've got a great portfolio that's anchored really in an opportunity to leverage our national strength, which is really going to be on the group side by year-end. Obviously, transient business, some contract business and drive that incremental transient so that it's a far more efficient (inaudible). We saw that, we saw the real benefit of that.

We -- as Rob has talked about, remember we hired sort of hunters for men and women that are exclusively focused on our portfolio, sort of business development managers who are generating worth of $2 million, $2.5 million of business. So it's certainly the environment for spending and investment, all of that is healthy. But we're also getting more than our fair share of it. I think it's represented (inaudible) growth of 9%, which candidly, would be -- we'd not be surprised to see that number increase here as conditions still remain favorable.

I think the one thing from listeners that I think is a really important issue, if you think back to New York, it is a great example. The decision was made a few years ago, rightly or wrongly to sort of take that, make it more of a transient, shrink the hotel, focus less on the food and beverage and ancillary catering and banquet revenue, just sell rooms. Well, probably made sense 3, 4, 5, 6 years ago before there was this onslaught of supply. What we concluded as a team is that we've got the best group hotel in New York. There's always going to be a need, going to dominate and be the first choice there. And I think together with our partners, we're beginning -- our partners at Hilton, we're beginning to see real benefit of that. So we're going to do 192,000 room nights, which I think is the highest in the last 4 to 5 years there.

That's an example of really playing to your strength, being focused there and if you look through the booking pace season even in New York now, we're up -- going to be up 7% for this year. It's embedded in that 4.7% in 2018. I think that grows to another 4% or so next year. Third quarter will be our softest. We knew that coming into the year, but even that we closed the gap. So feel very good about what we're doing, making good progress based on those priorities that we've been communicating.

Our next question comes from the line of Anthony Powell with Barclays.

So continuing on the group theme. You mentioned that you are taking some market share. Are your hotels taking share within their markets? Are the markets themselves taking share from other locations in the country? And going forward, do you think there's more group demand growth over time? Or do you expect most of your growth to come from taking share from competitors?

No doubt that we've been taking -- as we outlined in the prepared remarks, we're taking share in our respective comp sets and would expect us to. Again, if you think about the portfolio and our natural mapping, if you will, 10 hotels with (inaudible) 125,000 square feet of meeting space certainly makes sense. I do think that we're -- going back to my earlier comment about there's part of the cycle being business-led and consumer-led. Seeing that really in some of the midweek trends as well. So the midweek RevPAR has been growing now faster than what we've been seeing over the [weekend.] So I think 3.5% up to probably just north of 2%. So that again shows that other financial investment spending, corporate profits.

I do think lower unemployment is forcing companies to think about what do I need to do. There's dynamic men and women on my team. So they're doing more celebration, more training, more incentives. So you're seeing, I think across the board, and even the pickup that we saw on the corporate group of 35%, it was really broad-based from our portfolio.

Got it. And also, the resort and cancellation fee growth seems to be having a real impact on the bottom line. How much more upside do you think there is to revenues and margins from those sources?

Rob Tanenbaum will answer that for you.

Anthony, we continue to drive additional opportunities with our resort fees. We're adding new properties. Hilton Santa Barbara, which is our recent conversion back on April 27, (inaudible) resort fee of $25 per day there. And we're also improving and increasing our resort fees at our 6 other resorts as well.

So we're looking everywhere and anywhere. (inaudible) that we're offering in the resort fees to further push that. So we believe our run rate goes well into 2019 on opportunity.

Our next question comes from the line of Lukas Hartwich with Green Street Advisors.

So on the margin front, how much of the increase was driven by expense savings versus operating leverage on that 6% revenue growth number?

Lukas -- you were -- wasn't clear to hear you. Could you repeat the question, please?

Sure. So on the margin front, how much of the increase there was driven by expense savings versus just the operating leverage on a 6% revenue growth front?

I don't have that exact number. You know I'm pretty good with remembering -- sort of remembering the numbers. I would tell you probably a 60-40 is my initial, but we'll certainly research that and get back to you.

Okay. And then secondly, New York seems to be rebounding pretty nicely after a tough couple years. I'm just curious, do you have any color on what's driving the improvement there? Is it just that all the other substitute markets have seen substantial ADR growth? And New York has kind of lagged on that front? Or what's kind of driving that?

We think a couple things in play in New York. I mean look, New York has largely missed this cycle. It's been obviously a big increase in supply. It's largely been sort of on the select-service side, 35% to 40%. So you really haven't had sort of the pricing power. And if you followed this probably back to 2011, had 141 of these sort of super compression days and dropped down in '16 to about 88, so about a 38% decline there. So we've had, I think, a really secular shift in New York. We made the conscious decision here at Park that we were going to play to our natural strength and, again, focus on being the best group house and anchor our business with group and layer in obviously a contract business and then efficiently (inaudible) and is transient.

I think the second quarter is just a great example of really the hard work, the plan. It takes time to build a group base, and certainly, we've been doing it with our partners and look forward to our positioning as we move forward.

New York is a great market. We're still running 5% occupancy. Supply is still getting in some work, and I believe close to 90% last quarter. And we love New York long term. I also think the initiatives to certainly help regulate level the playing field with some of the shadow supply is also helping as well.

I never really thought that -- we don't mind the competition, but we certainly want the playing field to be level. We pay taxes. We have (inaudible) safety. We've got (inaudible) requirements. I think now as the shadow supply has been limited and addressed and contained that also I think will help the competitive landscape in New York as well.

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

Congratulations, Tom. Good quarter. A couple of questions here. You noted the big increase in collection of cancellation fees. I think you said up 65% or something like that. I'm just wondering if the cancellation policy by Hilton was actually having an impact on the number of cancellations.

It actually is. What's really happening when you think about it, it's changing the way that guests are booking hotels now. It's allowing our inventories to be available to us sooner, closer to day of arrival. So it really has -- it's changing what some of the airlines did, changing the way the business is happening here. But it's been -- our gross cancellations have definitely gone up.

All right. That's helpful. The second topic is, I think we're kind of lapping the stop clicking around marketing campaign, so a 2-part question. Number one is, is it working? Has it worked? Has it effectively steered the bookings over to the Hilton website in your portfolio? And number two is, are we seeing the narrowing of the ADR differential with fewer discounts to get people to book direct?

Yes, I'll answer a couple different ways, Bill. I think, look -- I think Hilton and Marriott to some extent given their brand segmentation, given their global sales, given their loyalty programs, and I was looking the other day at Hilton. I think Hilton had 2 years ago, 2.5 years ago, when I rejoined Hilton from my second tour of duty was spinning apart. I think there were 53 million members of the loyalty program. And I think at the recent report, they mentioned now 78 million (inaudible) data that they expect to be north of 100 million. I think Marriott is well north of 100 million today. And now occupancy growing from, say, 50% to almost 60% of that now being loyalty, plus given the optionality they have through all of the channels, whether it's cards or credit cards or through engagement.

So there's no doubt that it is cheaper, more efficient. One of the things that keeps me up late at night is the customer acquisition costs. And the more that we can push that demand through those channels and the more that the brand can engage and customers certainly want that engagement, right. They want digital key. They want mobile check-in. That engagement, that personalized service is only going to increase over time, and I think those dominate brands that really have that full arsenal available to them are more powerful and more useful, I think we're clearly seeing the benefit of that and expect that to only increase over time.

Okay. But you have seen -- have you seen a material change in the booking -- in bookings moving over to their website?

Yes. Yes. Certainly without question. There has been a shift.

Our next question comes from the line of Shaun Kelley with Bank of America.

So I just wanted to ask about, obviously, the group up strategy has paid big dividends. So could you just remind us, at a high level, what's your kind of overall anticipated group mix across the portfolio? And maybe for the top 10 assets both for 2018 and then given the big resurgence in San Francisco, kind of any clue on where you think that mix is going to end up for 2019?

If you think about it, Shaun, we said we're up 400 basis points, right. So it's been huge here in second quarter. But we said even for the year if you have 30 basis points it's probably around 30.5%, 31%. So look, we -- there's still huge upside in this initiative. That's one of the things we certainly want to stress. We're making progress.

As we've said, we think in the next couple of years, we can move that from 31% to 35%. Also, it's going to vary as we continue to shrink the portfolio and obviously unload some of the noncore assets. So we think this is critical for us. We're demonstrating that when we're firing on all cylinders like this in the second quarter. Incremental revenue you get, the incremental flow-through.

We also said that, look, if you look at margins, we needed to be at 2.5% before we thought we could really grow margins on a positive. We completely -- we're moving in that. If you look at our revised guidance where 2.5% obviously for the midpoint, we're obviously now expecting margins to be positive. So feel really good about where we are in this journey. And I think 35% is achievable. If I had to pick a time line, I would say probably in that 2020 range, plus or minus.

I would say respectfully that think back here over the last 18 to 19, 20 months, I would tell you that I think we've exceeded every key metric from recycling capital to H&H rates to Blackstone's departure to begin to reshape the portfolio to the back office and moving off of Hilton's back office. The team here is working hard, and every goal that we've set (inaudible) or exceed shorter time frame.

And, Tom, would -- would -- do you think '19 would be the biggest step function in the kind of let's call it, 30% to 35% move, just given San Francisco and maybe -- or is there anything else, meeting space expansion in Orlando or anything else that you need to see that jump?

As I said, I think if you're looking for 35%, Shaun, it'd be closer to, say, 2020 as we think about it internally. When you look at Orlando and Bonnet Creek, I mean, we've got a, we think, just a gem there. We are going to add the additional meeting platform, which will make us more competitive against strong peers there. And candidly, we're also looking -- Hilton's exploring a Hilton plus brand. I'll tell you no more than that. And we're thinking as part of that, we'll also certainly be able to upgrade that overall facility, which will improve not only for leisure and transient side but also on the group side as well. So I clearly see '19 being a step up. I don't think that '19 gets us all the way there. That's probably closer to 2021.

Understood, very clear. Thanks a lot, solid quarter.

Our next question comes from the line of Robin Farley with UBS.

This is [Jake] on for Robin. So you mentioned compression in New York last year, couple years. Can you tell how compression has trended on kind of a portfolio level and maybe around some other markets? And with supply kind of topping in coming years, how do you see the compression outlook going forward?

Look, a lot embedded in the question. Look, if you look at where we ended the quarter, probably up 86% occupancy. If you look at where the industry is, there's clearly some pricing power that's building. I also think again having that tailwind of solid leisure, coupled with a stronger business transient and certainly stronger group gives us really the optionality in many markets to really begin to push.

If you look at compression, clearly, you should think about next year in San Francisco. It's going to be significant when you've got $1.2 million, plus or minus, of city lights coming there, up 65% to 70%, depending on who you believe, and we're going to be up 17%, a lot of that in-house group. So huge compression opportunities there. New York is not anywhere near where it was back in the 2011 time frame.

We benefit obviously from Hawaii. There's compression opportunities there. We'll be up 25% there next year, we already run 95% occupancy, so that will give us opportunities. So our top 10, by and large being up 10% next year. That's certainly embedded in that. I won't name every one, but also will give us opportunities for compression as well.

There are no further questions in queue. I'd like to hand the call back to management for closing comments.

Thank you so much. On behalf of the Park team, we wish you all a great summer and look forward to seeing you in the upcoming conferences. And certainly, in our next earnings call 90 days from today. Have a great summer.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.