Park Hotels & Resorts Inc (PK) 2018 Q3 法說會逐字稿

Greetings, and welcome to the Park Hotels & Resorts Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ian Weissman, Senior Vice President, Corporate Strategy for Park Hotels & Resorts. Thank you. You may begin.

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts Third Quarter 2018 Earnings Call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws.

As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. You will 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 third quarter 2018 operating results, preliminary observations for 2019 and an update to our full year 2018 guidance. Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our third quarter financial results, an update to our balance sheet and additional color on our expected fourth quarter dividend and 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 would like to turn the call over to Tom.

Thank you, Ian, and welcome, everyone. We posted another solid quarter, highlighting the ongoing strength of our portfolio. Comparable RevPAR for the portfolio increased 2.6%, driven by healthy transient demand, while our comparable hotel adjusted EBITDA margin increased 10 basis points. These results include some impact to our performance from the volcanic activity and storms in Hawaii and the labor strike in Chicago. Combined, these events lower comparable RevPAR by 60 basis points and comparable margins by roughly 30 basis points and reduced EBITDA by approximately $3 million for the quarter.

Despite these events, I remain very optimistic on the fundamentals of our business. The fourth quarter should be one of our strongest quarters of the year with that momentum expected to carry into 2019. While there has been some concern over weaker citywide calendars next year across several major U.S. cities, one of Park's key advantages is the strength of our group business, and we believe Park remains very well positioned in this regard for a few reasons.

First, we have some of the largest group-oriented hotels in the sector with 8 hotels offering over 125,000 square feet of meeting space. This platform allows us to book a considerable amount of our demand in-house with only 1/3 of our group business generated from citywide conventions.

Second, there is a favorable setup in a number of our key markets going into next year, and we anticipate strong group performance in Hawaii, Orlando and especially, San Francisco, as the Moscone Center will be fully renovated and operational by the end of this month.

And finally, the strength of our group pace reinforces our optimism. Our 2019 group pace is up nearly 12% and over 9% when you exclude San Francisco, demonstrating our continued success in grouping up across our top 25 hotels with most of that growth generated on the demand side.

Of particular note is the impressive pace for corporate group, which is up over 20%. Additionally, our transient business continues to improve with the pace of business transient revenues accelerating in the second half of this year, supported by favorable macroeconomic fundamentals. Simply put, the setup for Park in 2019 is very good.

Turning to third quarter operations. We are pleased with our results this quarter as they illustrate that our portfolio has an effective strategy of targeting both group and transient segments that can deliver strong results while further highlighting the benefit of our aggressive approach to asset management and commitment to driving margins higher.

To further highlight this point, our comparable hotel adjusted EBITDA margin has increased an impressive 60 basis points year-to-date, which is among the highest rate of improvement in the sector against a comparable RevPAR growth of 2.7%. I remind listeners that breakeven margins in lodging typically require at least 2.5% to 3% RevPAR growth rate.

Diving deeper into our business mix this quarter. Transient RevPAR was positive across both business transient and leisure segments. Despite weather-related disruption in Hawaii, leisure increased 0.8% while business transient increased 1.2%. As expected, group business was relatively flat and revenues down 20 basis points during the quarter. There were, however, several markets with healthy group performance, including San Francisco, which was up 10.8%; and Hawaii and Downtown Chicago, which were up 7.6% and 6.1%, respectively. New York and New Orleans were both down as New York faced weak citywide demand while New Orleans faced difficult year-over-year comps in July, following very strong in-house group, during the third quarter of 2017.

We're also pleased with the continued improvements to group pace. This time last year, group pace for 2018 was trending flat to slightly negative while we now expect current pace for the year to finish up 4.8%. This trend highlights the underlying strength of not only the group segment, but the economy as a whole. The corporate profits continuing to improve, up over 16% in the second quarter, following the tax cuts, which went into effect on January 1, coupled with the continued improvements in consumer confidence and nonresidential fixed investment, which were up over 8% in the second quarter.

It is clear that the U.S. economy is healthy and businesses are spending more on corporate travel. Finally, contract business was up an impressive 24.5% in the quarter as we continue to build bigger bases within our hotels to ultimately yield up on transient demand. This has been an effective strategy for us all year, and we believe that it will continue to be an important tool for us as we seek to maximize our business mix moving forward.

Reviewing our major markets. Our 2 San Francisco hotels continued their strong performance from last quarter, posting RevPAR growth of 5.8% in the third quarter, with strong group production and margins of the complex improving roughly 160 basis points. Looking forward, we expect a solid fourth quarter with RevPAR in the mid-single digits despite citywide convention weakness that projects room nights to be down close to 30%.

Overall, our San Francisco complex should see group revenues increase in the mid-teens for 2018, which is more than double the group pace expectation set at the beginning of the year. We believe this is a direct result of our focused resources we have targeted towards identifying opportunities and capturing in-house business.

In addition, group pace for our 2 assets is up over 21% to over 257,000 room nights for 2019. Basing easier year-over-year comps due to the impact from Hurricane Irma last year, Key West was among our portfolio's best-performing markets during the quarter with our 2 hotels posting a combined RevPAR growth of 12.5% and margin improvement of approximately 360 basis points.

As a reminder, our 2 hotels were closed for much of September 2017 as a result of a hurricane. Our Casa Marina resort did experience some disruption in the third quarter related to remediation work from last year's hurricanes, which is now complete. Overall, it appears that demand in the market is generally recovered and the outlook for the fourth quarter is favorable.

Our Orlando hotels had a tough year-over-year comparison this quarter as our Bonnet Creek assets housed displaced residents from Hurricane Irma in the third quarter and into the beginning of the fourth quarter of last year. The Bonnet Creek complex recorded a 5.7% RevPAR decline for the third quarter, although fourth quarter RevPAR should improve. The outlook for the Bonnet Creek complex in 2019 is considerably better with group pace up roughly 6% despite a projected 6% drop in citywide room nights.

Turning to Chicago. I want to start out by first commending the team in Chicago for their dedication and hard work during the labor strike, which impacted the hotel during the third quarter. Hilton General Manager John Wells and his team did an unbelievable job, ensuring hotel operations ran smoothly throughout the strike so that the hotel could serve its guests. I am pleased to report that both sides reached an agreement and all employees are back to work.

In spite of a strike, we posted very solid results with our Hilton Chicago reporting an 8.6% increase in RevPAR, driven by double-digit RevPAR increases in July and August that continued the momentum from the second quarter. Note that September performance at the hotel was impacted by the citywide strike that lasted for 23 days. If you were to exclude the impact of the strike, RevPAR of the hotel would have been up 11.6% while margins would have been roughly 280 basis points higher.

Turning to Hawaii. RevPAR growth at our Hilton Hawaiian Village asset was up 0.2% or slightly weaker than we had anticipated as results were negatively impacted by Hurricanes Lane and Olivia and disruption from the 2 hurricanes as well as Typhoon Jebi, which disrupted demand from Asia, placed 180 basis point drag on RevPAR performance during the quarter with some of that weakness expected to bleed into the fourth quarter. That said, 2019 should be a very strong year given improved airlift to the island, strong forward bookings from Asian wholesale producers and an extremely favorable group pace of over 25% next year.

Regarding our capital recycling efforts. As we announced on our last call, we're in the early stages of Phase 2 marketing for a handful of noncore assets. At this point, we do not have any new information on the volume of sales or expected timing of any transactions as we have demonstrated. We will continue to be disciplined and focused in our approach, and we'll keep you posted on our progress as it unfolds in the months and quarters ahead.

Turning to guidance. In the fourth quarter, we expect another strong quarter with results driven by continued strength in San Francisco, Chicago and Key West while we expect to see better results in Hawaii, Orlando and New York City.

Given our positive view on fundamentals over the balance of this year, we are tightening the range of our comparable RevPAR forecast by 15 basis points at the midpoint to a new range of 2.4% to 2.9% while comparable hotel adjusted EBITDA margin is being increased at the midpoint by 10 basis points to a new range of plus 25 basis points to 55 basis points improvement for the year.

In spite of the third quarter weather- and strike-related disruption, we are keeping the midpoint of earnings guidance unchanged, although we are tightening our guidance ranges with adjusted EBITDA amount forecasted at $735 million to $755 million, while FFO tightens to $2.86 to $2.94 per share.

Before turning the call over to Sean, I want to reemphasize that we are excited about our portfolio's outlook for the remainder of the year and set up in the 2019, and firmly believe that our group-oriented portfolio will continue to drive meaningful results. Our team remains focused on executing our internal growth strategies and committed to generating outsized total returns for shareholders.

With that, I wanted to provide additional guidance on our fourth quarter dividend. While our final fourth quarter dividend remains subject to board approval, we currently expect the dividend to range between $0.95 and $1.05 per share, approximately $0.65 to $0.75 per share, of which relates to our normal dividend payout amount for the fourth quarter 2018 and the remaining $0.30 per share of which relates to additional gains from this year's asset sales.

I will now turn the call over to Sean, who will elaborate more on the dividend as well as the other matters concerning the portfolio and balance sheet. Sean?

Thanks, Tom. Looking at our results for the third quarter, we reported total revenues of $652 million and adjusted EBITDA of $168 million. Adjusted FFO was $132 million or $0.65 per diluted share.

Turning to our core operating metrics. Our comparable portfolio produced a RevPAR of $175 or an increase of 2.6% during the third quarter. Our occupancy for the quarter was 83.8%, up 20 basis points over last year, while our average daily rate was $209 or an increase of 2.3% versus the prior year. These top line trends resulted in comparable hotel adjusted EBITDA of $166 million while our comparable hotel adjusted EBITDA margin was 27.7%, which was a 10-basis-point increase over the prior year.

In spite of inflation concerns, especially around labor costs with U.S. unemployment running at 3.7%, our asset management and hotel operating teams together have done an exceptional job at keeping a cap on cost with overall expense growth expected to be approximately 2% for the year.

Our top 10 hotels produced RevPAR growth of 1.7%. However, if you were to exclude the Hilton Waikoloa Village Resort, which was negatively impacted by Hurricane Lane and the Kilauea volcano eruption, RevPAR performance for the group would have been 2.1%.

Moving to our balance sheet. Park remains in solid financial shape with close to $1.4 billion of liquidity, including our $1 billion undrawn revolver. While net leverage on a trailing basis pro forma for the assets sold earlier in the year is currently at 3.8x, below the midpoint of our targeted range of 3x to 5x.

Turning to dividends. On October 15, we paid our third quarter cash dividend of $0.43 per share. As Tom mentioned earlier, we expect to distribute between $0.95 to $1.05 per share for our fourth quarter dividend, which includes our normal top-off fourth quarter payment amount ranging from $0.65 to $0.75 per share, plus an additional $0.30 per share related to excess gains from the assets sold earlier this year. As a reminder, our intention is to pay out 65% to 70% of adjusted FFO on an annualized basis, which represents this fourth quarter normal payout amount.

Excluding the additional $0.30 per share related to gains from asset sales, our normalized dividend yield for 2018 is approaching 7%, among the highest in the sector. Note that the actual amount of the total fourth quarter dividend will be approved by our Board of Directors by mid-December with a record date prior to the end of the year and a payment date occurring in the middle of January 2019.

Finally, we'd like to provide an update on our restoration efforts at the Caribe Hilton in Puerto Rico. Due to various factors affecting the schedule, which are not surprising given the circumstances, we are targeting a soft opening of mid- to late first quarter 2019, with roughly half of the rooms available at that time and the grand reopening of the historic hotel expected towards the latter part of Q2.

We would like to recognize our design and construction team and the teams on the ground for their tireless efforts on this complex project. Regarding the insurance claim. To date, we have received cash advances totaling $105 million, including $65 million received during the third quarter as the restoration work and claims process has intensified.

In terms of business interruption proceeds, to date, we have received $15 million, which when applied against carrying costs and other expenses, nets to roughly $5 million of EBITDA year-to-date through the third quarter. The adjusters and insurance carriers have been helpful in keeping pace with our schedule and cash needs, and we expect to receive additional funds in the fourth quarter for both the damage side of the claim as well as business interruption proceeds.

That concludes our prepared remarks. At this point, operator, we'd like to open up for questions. (Operator Instructions) Operator, may we have the first question, please.

(Operator Instructions) Our first question comes from the line of Bill Crow with Raymond James.

Let me start with the fourth quarter. Pretty bullish on RevPAR growth, I think you said mid-single digits. So a 2-part question. Number one, what does October look like to date? If you can give us some idea there. And then number two is are the results going to benefit from specific issues and challenges last year? We're all trying to get a run rate here after some calendar issues and weather issues, et cetera, over the last few months. So maybe you could help us think about the run rate.

It's a great question, Bill. First thing, honestly, October, we think, will be the strongest month in the fourth quarter. We do expect the fourth quarter will be our second best quarter for the year. As you may recall, we were up 4.3% in second quarter and obviously, the 2.6%, and then 3.2%, if you were to exclude, obviously, the disruption and strikes, et cetera. But October, our preliminary RevPAR number is approximately 6%. And there's some strong performance coming out in San Francisco. Obviously, we got a strong group pace there. Chicago, double digits there, continues to perform well. New Orleans having a great month as well, solid group of pace there. New York, even -- New York up 6% in again, October. And it's a preliminary number in Orlando again having a strong booking base, so sort of 8% to 9% as well. So that's broad-based. Obviously, a little bit as we alluded to in the prepared remarks, [speck to lie]. Obviously, the wholesale continues to be a little slow and given some of the activity, we expect that to bleed a little bit. Although we're very optimistic about Hawaii as we look to 2019 and beyond. Obviously, November, December, solid. But certainly, we don't expect them to be the same kind of number that we're seeing, obviously, in October. And feel good. Again, as we noted, having both business transient and leisure transient up in the third quarter, having continuing to the fourth quarter is very encouraging. So I like our position as we close out the year and love our positioning as we look to 2019.

Great. My follow-up is this. You certainly have talked before about the industry consolidation and your desire to participate in it. But it feels to me like maybe you've been a little bit slower to bill dry powder to sell assets. And I know you've got some on the market right now. But can you talk about the pace you desire to kind of continue to shift the portfolio composition?

Yes, I would -- I might push back politely on that, Bill. I think if you step back, we have really been focused on our internal growth strategy, recycling capital. Keep in mind, we've already sold 13 assets this year or about $520 million. And as you may recall, we used the first 12 of those for about $379 million, we used $350 million of that for each, and a secondary, where we bought back 14 million shares at a huge discount to NAV. We continue to make progress, obviously, on our live projects. And obviously, we've been laser-focused on improving margins, improving up. We really believe that by executing that internal growth initiatives and doing it successfully, that's going to continue to strengthen, one, our credibility. Two, we hope to see a corresponding increase in the multiple, which really allows us to then go on offense. I have been a strong advocate for consolidation. Nothing has changed. I'd have taken this opportunity with the kind of enthusiasm that I have. But as you know, those things tend to be episodic and lumpy. I think we are positioning the company for long-term success and clearly plan and expect to be a participant at the right time. Obviously, the last 2 deals that have been announced are, in my view, the [Falkirk] deal. And then now I see the pending [Falkirk Sale] as possible, and we are the most fragmented sector out all of the REIT landscape. And I do think that there are advantages of scale. Regarding our next phase of assets, we are -- if you think about it, remember, our top 25 assets really account for about 90% of the EBITDA. We do have some legacy assets, and we'll break those. We've got a lot of trains running. We got 5 to 8 that were currently at various stages. None that are far enough along to report out, but we are making progress against our initiatives on continuing to recycle capital.

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

So you mentioned that you expect the group pace for this year to be up 4% to 5% compared to flat pace at this time last year, which was a good increase over the past 12 months. What drove that? Was it all end year for the year group pickup? Or was there stronger-than-expected attendance at events?

I think it's a combination, but I really want to give a lot of credit to Rob Tanenbaum and our asset management team and really working in partnership with Hilton. We have believed that we have a natural strength here and that as you think about these hotels really continuing to group up, continuing to build our contract base, allows us to shrink the hotels and to yield our transient a lot more effectively and really grow all of our ancillary sources of revenue. I thought -- I think you saw near perfect execution of that in the second quarter, when we had huge group increases there. Obviously, we knew the third quarter was going to be a little softer. But even then, we had a fair amount of business that we picked up in the quarter, for the quarter. But when we think about fourth quarter, our group pace is up about 2.8% and 4.8% for the year. And again, it's very, very bullish on -- as we look our setup and our positioning in 2019 and beyond.

Right. Is that contract growth, is that excluded in your pace or excluded in your group pace? Just for clarification.

Yes, it's excluded.

Okay. All right. So your group pace for next year is up 12%, which is obviously good. How do you expect that number, that come in, I guess, when we're looking back 12 months from now, are you...

We feel great about it. And if anything, we expect and hope that, that would grow. But I think even if it's at 12%, keep in mind in my prepared remarks, we made a comment about 2019 city-wise. So if you just look at 3 or 4 markets, Honolulu is going to be down city-wise. Next year 23% at room nights, 7 fewer events. Orlando, down 6%, 6 fewer events. Well, Park, in our Hawaiian Village, we're up 25%. Our in-house group business. Orlando, we expect to be just -- Bonnet Creek up 6%. But if you look at our -- all 3 assets, we're expecting group pace to be up 11%. Even New Orleans expected to be down for us to be slightly up. And of course, San Francisco, just as a significant year as we all know, with citywide room nights being up 74%, 75%, plus or minus, up to $1.2 million. And our group pace for the 2 hotels, the city block that we have with 3,000 rooms north of 21%. So we really do like our positioning as we look at 2019.

Right. What percent of your expected group room nights are on the books now?

Anthony, it's 70% on books right now. That's about 500 basis points credit at the same time last year.

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

I wanted to ask just a little bit, I guess, about labor, which has been in the spotlight a lot lately going into 2019. And I guess, specifically, first of all, if you guys have any union contracts coming due next year? And then I think the bulk of your workforce is subject to labor contracts. And I'm wondering if you could just share what kind of the contract increases in labor are for next year? And does that actually puts you at a relative advantage to maybe some of your peers who -- where we kind of going potentially just higher market rates or increases. Just maybe some color around that as we think about next year.

Yes. If you think about it, Rob and Sean can fact-check me here, but I believe about 10,000 of the associates working on property, obviously, their boys are thrilled to be managing the assets are represented by CBAs and probably about 60% of our EBITDA. I also think it's important to note that Hilton has enjoyed really long, strong, long-term relationships with union partners and Park has done nothing but to continue to strengthen that and take advantage of that. So we think we're well positioned. They're obviously, the Chicago matter has been resolved. Obviously, there are current negotiations that we expect that will occur -- that could occur finish up 2018, I believe, into early '19 really in Boston. We've got the hotel in Logan and then of course, in San Francisco, and then Hawaii and Honolulu. So we're in a good position there. When you think about what happened in Chicago, the results were really with what we expected and what we had budgeted. And that's really in that sort of 3% to 4% range so renegotiation will be different. And the package and corresponding work rules will be adjusted as well. But really, enjoy -- I think we're -- and typically those contracts are 5 years. So when you look out to that, windows are seldom agreed to, gives us really a good foot plant as we move forward on the labor side. So we're cautiously optimistic there, Smedes.

Okay. I just sort of asked to -- I mean, obviously, bearing your group bookings performing really well into next year, is that coming primarily post the change in the way that third-party brokers are paid? Or do you think part of that was pulled forward with those changes? Or any kind of changes in booking patterns you're seeing there?

Yes, and as I think as Rob pointed out, 70% that are already on the books. And the other thing I would point at is if you look at our trends during the year, last quarter, we said 9.2%. And that was before obviously the expiration. So could there've been a little bit of a tail there, perhaps, but also keep in mind, it's really been a strategic focus of ours and our partners at Hilton to group up and take advantage of the natural positioning of this portfolio.

Our next question comes from the line of Rich Hightower with Evercore ISI.

So I appreciate the prepared comments, Tom, where you said that only 1/3 your group business is dependent on the city-wides. I think I had that correct. So you're a little more insulated than perhaps the average group-oriented hotel in your comps set. But if it's possible, could you kind of help us understand the overall impact to your portfolio next year in terms of the citywide calendar being down? If you wanted to give us sort of a run rate, on RevPAR growth and in basis points, what the difference is, notwithstanding the fact that you guys are able to replace a lot of that independently of the citywide calendar itself?

Yes, Rich, I don't think we -- I don't have that information available. I tried to go on to your earlier question, give you a little bit of color there. But again, you can take some isolated cities, Honolulu being down about 23% of room nights. We don't expect we're going to be impacted at all strong in-house group that we have. If you take even Orlando. Another example. Again, going to be down 6%. If you take our 3 hotels there, we expect to be up 11%. So just given the hard work that we've done in advance of that, knowing this would be a challenging citywide calendar year, lot of credit to our asset management team is really our partners at Hilton in getting out in front of that. I mean, even at New Orleans, it's going to be down double-digit. We're still expected to be up low- to mid-single digits in group pace. So we'll follow up and make sure you get that. But I think that the position for us vis-à-vis from a lot of our peers, I think we're in a much stronger position.

Okay, great. I appreciate that additional color, Tom. My second question in terms of the capital recycling targets and everything, can you give us a sense of what you're seeing from your perspective on the buy side? And I'm going back to the time of the spin. And I think one of the original part of the thesis was the buyer pool for the assets, the larger group, big box assets that you're targeting, the buyer pool is thinner. Cap rates are generally wider. And I'm just putting that in context of capital flows into real estate and into hotels are still very robust in general. And do you think that, that part of the thesis is still correct? I mean, have you seen cap rates narrow between some of the bigger hotels versus smaller hotels. What are you seeing there?

Well, I think, intuitively, you would expect obviously, you're talking about bigger convention center hotels and luxury resorts. Obviously, just given the capital outlay. The checks are going to be bigger. And I do think it's a limited buyer pool, generally speaking, right? It's going to be as a REIT, it's going to be private equity, it's going to be high net worth for sovereigns, family offices. So -- but it's certainly competitive. There's no doubt about that. I think that's certainly one of the things that we've observed. I think the debt markets are still open and still attractive. I think it's important to keep in mind kind of the journey that we're on at Park. Remember, 2 years ago, we didn't have a name, an office and a fully filled-out staff. I think about the wonderful progress that the team has made in that both in recycling capital, both in just dividends alone. Think about dividends, we distributed about $1.3 billion already in dividends that does not include potential dollar to take the midpoint that we're talking about in the fourth quarter. And that also doesn't include $350 million return of capital in terms of the HNA buyback. So we've been very thoughtful about building up the team, being thoughtful, reshaping the portfolio, which then allows us again to go on offense. We expect to be here on the long term. So you'll see us competing like many of our peers. But we still don't think the buyer pools are that finite type of assets will be the same as in my past life that upper upscale limited service or assets that are trading at $50 million or below.

Our next question comes from the line of Stephen Grambling with Goldman Sachs.

I guess, 2 follow-ups. One on Rich's question. Are you seeing any change in the availability of those big box assets you'd be interested in acquiring? And do you sense in any change in seller expectations amidst the recent market volatility? And then second, if you can just give us a sense for how you're thinking about competitive supply growth over the next, call it, 2 or 3 years.

Yes, a lot embedded there. I think regarding sort of the number of assets, I think that there are a number of assets that people are sort of testing the market with. I think the competition you have in this environment that you're also competing with seller indifference or sellers can refinance as a way to reposition the asset or essentially sell the asset by refinancing. So I don't think people are desperate. But I certainly think that there are a number of hotels and natural partners for us that we look forward to doing business with as the years and months unfold. Regarding the supply picture, look, demand continues to outpace supply. Well, this isn't -- if you think back to what we saw in other cycles, remember, the last 50 years, we've had 6 recessions, right, but we've only had really 5 years and I'm thinking of 3 specific recessions where we've had negative RevPAR. Obviously, the Great Recession, we had obviously the SNL crisis, we had 911. Even in this environment, there's still running room in the cycle. I know we had a little bit of a blip there in September. But I think if you take Houston out of that, things are still -- there's still running room out at 1 year, 2 years, 3 years, your guess is as good as mine. But we certainly, as we look out and see what we're looking at in the fourth quarter, as we look out in 2019, even our group pace for 2020, I think, is in the 9% range. So we're cautiously optimistic that there is running room. It is getting more difficult. Construction costs are rising, materials, labor. I think quality. So there's no doubt that it's making -- it's keeping somewhat of a lid on supply and certainly, where we're playing in the upper upscale and the luxury segments.

Our next question comes from the line of Patrick Scholes with SunTrust Robinson Humphrey.

Just a quick question. Any remaining residual issues from the strike that you saw at your hotels? And then, as their ongoing strike is in the Marriott properties, are you seeing -- are you picking up any business from that?

Regarding the strike we had in Chicago, there's no residual issues at all, everything's been settled. We're thrilled to have those men and women back. So no ongoing issues, tensions, et cetera, so non-issue there. And I'm reluctant to comment on where Marriott actually have not been following the play-by-play of that. Obviously, that will get resolved at some point, and there's nothing of any significance that we're seeing in terms of residual business to park into our portfolio.

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

I wanted to ask you a bit of a longer-term question, which hopefully will be refreshing for you. But as we think out about the current portfolio you have, we kind of our cycle agnostic CapEx, we've heard from one of your peers that they're going to be stepping up on CapEx and it's targeted in ROI and everything. But where do you guys sit with the -- with current portfolio? And can you tell us if there have been any discussions with Hilton about larger projects coming down the road?

Yes, it's a fair question. If you think about our portfolio, as I said earlier, again, really, those top 25 assets account for about 90% of the EBITDA, obviously our top 10, that iconic portfolio accounts for about 65%. We really want to be spending money where we're making the money. The other thing that's unique about our portfolio are all the embedded ROI opportunities that we have. Now if you look at New Orleans, obviously, we've got 9 acres there with 2 parcels there on the river. I think, create additional opportunities for us. Bonnet Creek, as we've talked about. We're planning to add another 70,000 square feet of meeting space, plus Hilton is working on a Hilton Plus brand that we think our Hilton Bonnet Creek would be a great conversion opportunity. So we are having preliminary discussions about both. Obviously, we heard that the Fess Parker is a DoubleTree to a Hilton and we're seeing lift there. There are a few others in the portfolio where we think will make strategic sense to create ROI opportunities and in terms that we think will be in the high-teens, the low 20s. The Reach at -- the Waldorf-Reach in Key West is another that we're looking at and that we'll be converting that to a Curio at some point. So a lot of work and thought going into it. We want to be very thoughtful about how we're investing that capital. You've got to be careful sometimes when the brands come forward with their sort of new initiatives. Those aren't -- those can be costly and there could be some trial and error with that. We certainly look forward to partnering with Hilton as they propose things, certainly with advancements in technology, et cetera. But we also want the experience target it at where we're spending capital and making sure we're getting significant return on investments with that.

Okay. That's very helpful, Tom. A quick housekeeping question probably for Sean. How do we think about this -- the Caribe? I think you mentioned in the press release you're kind of up in that $5 million year-to-date. I mean, how we think about that compared to what the hotels should generate when it reopens on an annual basis? Is there a give or a take next year?

[We don't want to] get too much in the next year. We always kind of talked about this year being about $8 million, which is what we had forecast for the property prior to the hurricane hitting in '17. So we've kind of targeted our business interruption claim process to kind of match that expectation. As you get into next year, we'll certainly look to have business interruption continue while we remain effectively -- at the construction project grew middle to end of Q1 and then even until we book the main building, it's about halfway through the year. So we'll have -- we'll [so] the business interruption that we'll look to bring in. The question will be kind of how much -- will we ramp up the property in the market that's there? Certainly, it's a little bit harder to predict at this point, given the conditions. But ultimately, when we get open, I know this is iconic property and one where, I think, will ultimately gets opened, makes a name, it helps drive -- bring some visitation back to Puerto Rico. But we'll be -- it's a little hard to predict. We'll get a little more educated on that and kind of give you guys a little better sense, to get that early next year and give out our guidance.

Our next question comes from the line of Brandt Montour with JPMorgan.

So just curious on margins and your big-picture margin goals. I was just wondering if you could give us an update on that. And specifically, if the acceleration in the group pace that you're seeing, how that stacks up against the internal expectations implied in those goals.

Well, let me -- I'll remind listeners, a little bit of background, and perhaps I can give you a little more granular detail. Keep in mind, last year, we were able to move margins about 12 -- about 47 basis points, about $12.5 million. This year, we've had a goal of 75 basis points, then again, about $20 million, and then again another 100 basis points next year. As Sean -- as we mentioned in our prepared remarks, we're up RevPAR 2.7% year-to-date. Now we have 60 basis points despite the fact that obviously there's been noise and weather and obviously the strike. I'm really, really proud of the team, just the number of initiatives that we have underway. And Rob, I think we've got 20 plus or minus in both from a revenue standpoint, cost-saving menu pricing, room pricing. Just a number of great things that Rob and the team are working on in partnership with Hilton to pay dividends. And as we look to continue to group up, we think that we're not at all retreating from what we've said vis-à-vis margins and expect to continue to meet the goals that we've outlined.

Brandt, I'll just add on to that. Just from a room reclassification opportunity, at our Parc 55 hotel, we categorized 85 guestrooms. And in this quarter alone, Q3, we generated $274,000 of revenue from that recategorization, which added $3 to the average rate. And then our hotel -- in our Casa Marina hotel, we took back the beach operation that will generate an annual $250,000 to EBITDA to us. So we're looking at everything and anything. We continue our objectives, remain the same, and we're very excited as we go forward here.

Okay, great. And then one more on the asset recycling topic, if I may. How has inbound interest from overseas buyers been trending, given the strength of the dollar and geopolitical noise and the like? And then maybe you could just talk about what you're seeing in the major buckets of buyer types out there right now?

Yes, there's still, to your point, obviously given where the dollar down against the euro, still a lot of activity. If you recall, again, we sold 13 assets this year, 10 of those have been international. We reduced our international footprint from 5% down to about 1.5%. And look, it's -- some of those remaining, we've got 4 international assets. They're on the list of assets that we'd like to move, but over time. Some of those are more actionable today than others. But the buyer pool book, internationally and domestically, is strong. The markets are attractive. Again, it's trying to find the right buyer for the right situation. And look, we want to make sure that we can maximize value for the shareholders. So these are not a fire sale, these are assets that don't fit our long term, but we want to make sure again that we're selling at the appropriate price.

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

Just really one follow-up that I think is probably more of a clarification. Just going back to the prepared remarks and all the detail you guys gave on, the group pace statistics. I was just -- I was trying to reconcile, I thought there was a comment that said something about finishing up at 4.8%. But I don't know if that's a comparable period to what some of the other numbers that you've talked about that are really strong. So did I catch the number correctly? Or could you put that number just in context relative to the 12% you've seen right now, and then I think it was up 9% actually in San Francisco.

Yes, that's just -- the 4.8%, Shaun, is really just for 2018. And obviously, the 12% is the group pace for 2019, of which it's 9%, a little over 9% if you back out San Francisco. So if you think about ...

Got it. Yes. Okay. So the 4.8% is for this year?

The 4.8% is for this year.

Great. And just the only other question I had was then -- and I think this is again just a clarification because I think you mentioned it earlier. The pull forward -- the group commission sales team at Hilton, which I think went into play somewhere like October 1. It doesn't seem like you guys are going to see much of a deceleration even though I think Hilton called out that they expect their numbers to slow a little bit. And that's really just a result of how well you guys are doing on the group up-strategy. Is that sort of the right summary?

That's the takeaway, Shaun. We have been -- it's been one of our key priorities and again working in partnership with Hilton. And I think the track record shows. If you look at the group pace that we've been announcing, it continues to grow. Would there have been some negligible impact as a result, obviously, a big deadline perhaps, but we're really not seeing that.

Okay. Last thing would be if you hit those numbers, Tom, like what would this take your sort of overall group mix toward versus sort of year, I think you've given some guidelines of where you'd like to get the group mix to over a longer period of time. So where would you be in '19 if you have these types of numbers?

It's a great question, Shaun. If you think we're at 31%, now we're a little over 30%. We want to go from 31% to 35% by 2020. If you look at prior peak, we were up at about 38% group. So we're hoping obviously that this -- we get an incremental 100 basis points, maybe a little more. Maybe a little 150. But it's probably somewhere in that 100 to 150 basis points against the 400 basis point goal.

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

Just a follow-up to your comments about kind of making investments, spending money where you're making money and all of that. I understand that you're selective with the kind of investments you make it since you're pretty much [really] focused on the top 25 properties. But is there any room, do you think, to just based on what we're seeing some others beat to the market and negotiating to have the brand and management give financial help and incentive for the REITs to make those kinds of investments? Do you think there's opportunity for you to get a similar incentive?

Yes, it's a fair question, Robin. Obviously, I've been in the business a long time, as you know, and I worked with 3 American companies, for Hilton twice. Those tend to be sort of complex negotiations. And I know one of our peers is probably, from what they've announced, similar conversations with another brand, my experience is that brands, if they -- if there are certain initiatives that they want done, they can contribute dollars to that. They can provide for both returns and also lower fees. I mean all of that comes into play. We certainly are open to those as well when they makes sense. But I do want to stress to listeners that we are really targeting those ROI projects that we know that create tremendous value to shareholders, and we're seeing it already. And the Fess Parker conversion to a Hilton. Obviously, we expect the same. We expect tremendous success of Bonnet Creek as we look to add more meeting space. So it really give the property a lift-up as we raise the brand to a Hilton Plus concept once it's been fully defined and announced. A great example of that, we think those are dollars well spent. There will be other initiatives. Technology and other things come to mind that we certainly will be talking with current partner, Hilton and future partners as well about those types of initiatives. But again, they have to make economic sense, have to meet our return expectations.

That's helpful. And maybe just one last one. Just thinking about the Hilton book direct initiative. And can you give us a sense of where OTA mix and sort of cost is for you versus a year or 2 ago?

Sure, Robin. During Q4 -- 3, our OTA mix was 14%, up about 70 basis points. And year-to-date, we talk about 70 basis points to 12%. The increase though when we look at it, it's really driven by 2 hotels that we were replacing demand leverage from both sale room night as well as nonrepeating groups. So we're using that as another demand lever for us. So if you take those 2 specific data portfolio mixes, down year-over-year when you normalize for these 2 unique situations.

Mr. Baltimore, there are no further questions at this time. I'll turn the floor back to you for final comments.

Well, I appreciate the opportunity to discuss our third quarter results. We look forward to seeing many of you next week in Nareit and safe travel. We'll catch up soon.

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