Park Hotels & Resorts Inc (PK) 2021 Q3 法說會逐字稿

Greetings, and welcome to Park Hotels & Resorts Inc. Third Quarter 2021 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Ian Weissman, Senior Vice President, Corporate Strategy. Thank you, sir. You may begin your presentation.

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts' Third Quarter 2021 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 adjusted EBITDA and adjusted FFO. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure, in yesterday's earnings release as well as in our 8-K filed with the SEC and the supplemental financial information available on our website at pkhotelsandresorts.com.

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide an overview of the industry as well as a review of Park's third quarter performance and thoughts on demand trends. Sean Dell'Orto, our Chief Financial Officer, will provide additional color on third quarter results as well as more detail on our balance sheet and liquidity. Following our prepared remarks, we will open the call for questions.

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

Thank you, Ian, and welcome, everyone. I'm pleased to report another quarter of strong improvement to operating fundamentals. We are pleased to report that we have achieved corporate-level breakeven for the first quarter since the start of the pandemic. Based on the strength we witnessed at our resort properties, the leisure traveler had significant pent-up demand as evidenced by incredibly strong rates and out-of-room spend. Additionally, we are seeing promising signs of sequential growth in business transient and group demand in pockets across our portfolio. And while still early, we believe this is a positive indicator that we are on the path toward recovery.

On the macro front, there continues to be encouraging indicators of growth and momentum, including a nearly 8% annual increase in nonresidential fixed investment projected for 2021 and an ongoing momentum on vaccine distribution, which should contribute to increased mobility and confidence. Additionally, the unemployment rate improved to 4.8% in September, more than a 100 basis point improvement from the start of the third quarter, while the U.S. personal savings stand at an impressive $1.3 trillion as of September, highlighting the ongoing strength of the U.S. consumer, which we expect to continue fueling the strong recovery in overall demand. Against this backdrop, I'd like to remind listeners of Park's unique and compelling value proposition and how the execution of our strategic priorities is positioning us well for the recovery.

First, we have seamlessly executed on our noncore disposition program, which has greatly enhanced the overall quality of our portfolio and positioned the company for attractive long-term earnings growth. In total, we have sold or disposed of 31 hotels, accounting for over $1.7 billion of total proceeds since spinning out of Hilton 5 years ago, including all 14 of our international assets.

Second, our portfolio combines the right mix of demand drivers, which we believe should help drive outsized earnings growth over the next few years as business travel accelerates. We believe that there will be a return to traveling for work and a return to meeting in person. It's human nature to want to meet and connect, and I firmly expect both business transient and group demand to return to pre-COVID levels. While it is possible that the mix of demand will shift over time to accommodate more flexible work schedules, I want to emphasize that we do not believe there are secular headwinds emerging, and the earnings power of our company remains as strong as ever.

Third, our iconic portfolio of core hotels contains untapped embedded ROI opportunities, including expansions, brand conversions and potential alternative uses, that we believe will create meaningful value for shareholders. And we plan to capitalize on these opportunities over the next several years. These efforts began with the successful conversions of our Hilton Santa Barbara and our Reach Resort in Key West and continue today with our Signia Hilton conversion, and expansion of our Meeting Space platform at our Bonnet Creek complex in Orlando will continue further as we accelerate planning to reposition and expand a number of our core hotels.

And finally, we have continued to improve our balance sheet through opportunistic asset sales and debt repayments, surpassing our capital recycling targets and providing us with liquidity and optionality for the future. With over $1.8 billion of liquidity, including the entire $1.1 billion available on our revolver, we are well positioned to capitalize on accretive opportunities as they arise.

Turning to our third quarter. Our results came in well ahead of our expectations, driven by ongoing strength across our leisure properties, coupled with better-than-expected expense savings. Consolidated pro forma RevPAR of $105 was above expectations, and 38 of our 45 open consolidated hotels generated positive EBITDA for the quarter. Particular leisure strength in Hawaii, Southern California and South Florida helped the portfolio generate an average leisure transient ADR that was 3.4% ahead of the third quarter of 2019. While leisure led the quarter, we did see a sequential increase in both group and business transient revenues. Group revenues increased nearly 130% from the second quarter, growing from 8% of mix to 13% of mix, while business transient demand increased nearly 100% to account for nearly 20% of mix for the third quarter.

Looking more closely at group demand. We witnessed pockets of group strength during the third quarter in markets like New Orleans, Chicago, Orlando and Honolulu, although fourth quarter performance is expected to moderate somewhat as the uncertainty surrounding the Delta variant cost nearly $8 million in cancellations. Many of these groups have rescheduled for later in 2022, and we currently expect to see meaningful pickup in group demand in the second half of 2022. We are currently trending around 65% to 70% of the group pace for 2019, at the same time in 2018, with rates exceeding 2019 levels.

Our top group hotels for 2022 include the Hilton Chicago and our 4 assets in Key West and Miami, where 2022 group bookings are exceeding 2019 levels.

On the business transient side, we have seen a consistent increase in midweek demand among our hotels that cater to business transient demand, with midweek occupancy at these hotels increasing roughly 1,200 basis points since the start of the third quarter through October. There has been a noticeable improvement in midweek demand in October, which aligns with the increased confidence we have been seeing among travelers following the late-summer Delta surge. We expect this trend to continue in the fourth quarter and pick up in the new year as more corporations return to the office.

In terms of hotel reopenings. We are pleased to report that our third largest hotel, the 1,878-room New York Hilton Midtown, reopened on October 4 and has already surpassed our performance expectations. The hotel ran 44% occupancy the first Saturday after reopening and has already hosted a 1,300-person event, highlighting the pent-up demand in the market as well as the recovery of the New York market as a whole. The hotel ended the month of October roughly $1 million ahead of revenue forecast, and we expect the remainder of the fourth quarter to continue to post strong results with the hotel projected to sell out over the upcoming New York City Marathon weekend in just a few days.

Transient rates are trending at roughly 95% of 2019 levels and group rates have also remained in line. With domestic transient travel already surpassing 2019 levels in the market, along with the reopening of international borders for travelers who have historically averaged over 60 million annual visitors to the city, we are expecting healthy transient demand in the fourth quarter. Overall, our portfolio now has 96% of its total rooms opened, with operations at just 2 hotels currently suspended.

Diving into other core markets. Our 2 Hawaii resorts continue to capitalize on strong summer leisure demand trends, with third quarter occupancy averaging over 75% and impressive RevPAR indexes of 124% for the Hilton Hawaiian Village and 113% for Waikoloa Village. Hilton Hawaiian Village recorded 91% occupancy for the month of July across its 2,860 rooms with an average rate of $303, well ahead of expectations.

On the Big Island, the Hilton Waikoloa Village achieved its highest quarterly average rate ever with an ADR of $320, which was nearly 25% above the third quarter of 2019. While our hotels benefited from strong demand and increased airlift, demand was temporarily disrupted by the Governor's August 23 plea for travelers not to visit the state due to a rise in COVID cases. Following this announcement, our properties saw a material drop in demand with widespread cancellations in both transient and group business for the third and fourth quarters.

Under our hotel team's exceptional leadership, our hotels quickly pivoted and enacted contingency plans to modify staffing and operational outlets, leading to impressive EBITDA margins for the quarter of 39.4%. Looking forward, we are pleased that the Governor recently announced that Hawaii would once again welcome vaccinated travelers starting November 1, although we note that the typical lead time for bookings to Hawaii averages several weeks. We are expecting some upside throughout the holiday season at this point, and we are turning our focus predominantly to 2022, when we expect to see increasing levels of international visitation by midyear.

We are particularly encouraged by the pace of vaccinations in Japan, which has accelerated dramatically over the past few months. Japan typically accounts for approximately 20% of all visitors to our 2 Hawaiian resorts.

South Florida continues its incredible run, with some softness in September attributable to both the Delta variant pause and normal seasonality. Our hotels in Key West continue to achieve record milestones, including an average ADR of $474 at the Casa Marina and $433 at The Reach for the quarter, up 63% and 58%, respectively, over the third quarter of 2019.

Looking ahead to the fourth quarter, we are expecting a very strong holiday season with ADRs of $1,200 to $1,400 across our 2 resorts for the week of Christmas. In addition, we expect the momentum to continue into future periods, as our resorts booked 2,700 more group room nights during the third quarter for all future periods than ever before.

Orlando finished the quarter with decent momentum, following a tough August and early September, where leisure travel slowed due to the Delta variant. This momentum continued into October with strong group production at our up-branded Signia at Bonnet Creek as well as continued leisure strength associated with Walt Disney World's 50th anniversary celebration.

Turning to the West Coast. In San Francisco, we are seeing leisure strength at our JW Marriott Union Square and our Hyatt Centric Fisherman's Wharf, partially offset by the lack of group business transient business at the Hilton Union Square. As we look ahead, we are encouraged by the return of international travel to the market, which typically accounts for 18% to 20% of demand to our San Francisco hotels.

We expect the JPMorgan Conference in January will occur as scheduled in early January, with average daily rates in line with pre-pandemic levels at our Hilton Union Square and JW Marriott Hotels. As companies begin to return to the office in 2022, we expect to see more business transient and corporate group demand return to the market.

Finally, to touch on some of our other key markets. We saw stronger-than-expected demand at the Hilton Chicago for the quarter with incredible rate performance, down just 1% in 2019. We've also seen strong performance from our hotels in Southern California with a combined RevPAR down only 1.6% to 2019, and in Boston, where we have seen promising growth in the business transient and group segments.

Finally, in New Orleans. We are pleased to report that the Hilton New Orleans Riverside sustained minimal damage from Hurricane Ida in late August. Power was restored to the hotel within 5 days, and our property secured a significant amount of disaster response and recovery group business that offset any business interruption that resulted from the storm.

Turning to capital allocation. During the third quarter, we completed the sale of our Le Meridien San Francisco, which helped us exceed our goal of completing $300 million to $400 million of noncore asset sales in 2021, with total sales topping $477 million.

On the investment side. Significant work is underway on our Bonnet Creek meeting space expansion project, with the Waldorf Ballroom Foundation Port and site preparation work started on the Signia side. We also recommenced approximately $20 million of renovation work to update Meeting Space at the Signia Bonnet Creek and the Hilton San Francisco Union Square and another phase of rooms in the top of tower at the Hilton Hawaiian Village. All projects were accelerated to occur during low occupancy periods to minimize disruption ahead of the recovery.

Turning to acquisitions. We remain laser focused on maximizing shareholder value and plan to selectively pursue attractive acquisitions in target markets that are both accretive to earnings and net asset value with a continued focus on upper upscale and luxury hotels in top 25 markets and premium resort destinations.

Looking ahead, our outlook looks better than it did a few months ago. For the fourth quarter, we expect to see healthy transient booking trends with the resumption of international travel, which should benefit our hotels in markets like New York, Miami and San Francisco. We believe international demand from Asia, particularly to Hawaii, will not see a material increase until the middle of next year, although this could certainly accelerate with increased vaccinations. We also expect our hotels in markets that have historically hosted group events with large international attendees, such as New York, Chicago and San Francisco, will see healthy improvement in demand in 2022.

As noted, while we are forecasting a sequential improvement in business transient for the fourth quarter, we are expecting a more material increase beginning in the first half of 2022. And with the presumed return to office for many workers and for group, we're expecting momentum to build as we head into 2022, with 2022 group pace currently at approximately 66% of the 2018 pace for 2019.

Finally, despite ongoing improvements in lodging demand and the expectations for strong business recovery in 2022, the gap between public and private market valuations remains incredibly wide, a disconnect which has become increasingly more apparent as the volume of private market transactions builds while providing greater transparency on hotel real estate values. While most other asset classes within the broader REIT universe traded a premium to consensus net asset values, hotel REITs continue to trade at historically wide discounts, and Park is no exception.

Based on the latest range of analyst estimates, Park trades at nearly 30% discount to consensus midpoint or $27 a share, a very conservative view on valuation in our opinion. In our view, however, that as the path to recovery becomes increasingly more apparent with a return-to-business travel, valuation gap should eventually narrow.

Before I hand the call over to Sean, I want to emphasize the strength of Park's current position. As we look ahead to a more broad-based recovery, our diversified portfolio is positioned to reap the benefits of incremental growth in the business transient and group segments, while simultaneously continuing to capitalize on leisure demand. On the capital side, we are poised for growth and optionality, and we plan to continue to focus on value-added transactions and projects that create meaningful shareholder value. We continue to work tirelessly to unlock value and shape our portfolio for long-term growth.

And with that, I would like to turn the call over to Sean, who will provide some more color on our results and updates on our balance sheet, liquidity and ESG efforts.

Thanks, Tom. Overall, we’re very pleased with our third quarter performance, with pro forma RevPAR sequentially increasing nearly 35% over the second quarter, driven by a 900 basis point increase in occupancy and an 11% sequential improvement in rates, which neared $206 for the quarter or just 7% below the same period in 2019. Overall, total pro forma operating revenue was $404 million during the quarter, while pro forma hotel adjusted EBITDA was $83 million, nearly double what we reported last quarter. Q3 adjusted EBITDA was $77 million, and adjusted FFO per share was $0.02, marking the first quarter of positive earnings since the start of the pandemic.

We witnessed widespread strength across the portfolio, with 43 out of 52 open hotels generating positive EBITDA for the quarter versus just 32 during the second quarter. In addition to strong top line growth, our improved performance was driven by our ongoing efforts to contain expenses, resulting in hotel adjusted EBITDA margins of nearly 21% during the quarter. We saw particular strength across our 11 resort properties, where margins exceeded 2019 levels by nearly 250 basis points to over 36% for the quarter, while over 80% of our open consolidated hotels generated positive operating margins for the quarter.

Looking forward to the fourth quarter, we expect operating results to be a bit choppy, especially in Hawaii and Orlando, where both group and transient demand were negatively impacted by the Delta variant; and in New York, where its reopening and subsequent ramp-up will negatively impact portfolio margins versus Q3. That said, October is off to a solid start, with occupancy for our consolidated portfolio improving sequentially by 270 basis points to 50%, while ADR is expected to reach approximately $200 or a 5% improvement over September. November and December look equally as promising with transient pace for our resorts accelerating week-over-week at levels commensurate with those seen pre-Delta and groups, once again, booking events in the fourth quarter.

Turning to the balance sheet. As Tom noted, our liquidity currently stands at over $1.8 billion, including nearly $1.1 billion available on our revolver and over $770 million of cash on hand, while net debt is $4.1 billion. Overall, the balance sheet remains in very solid shape with only 2% of total outstanding debt maturing through 2022 and with 99% of our debt obligations fixed.

As we have noted in previous calls, the public debt markets remain open, while other markets are also becoming more constructive. As a result, and as we plan for next year, we anticipate turning our attention to refinancing our $725 million CMBS loan on our 2 San Francisco assets coming due in late 2023 to further extend our maturities; and refinancing the $650 million, 7.5% senior secured notes that we issued in May of last year to reduce our cost of debt. We have now paid off 97% of our bank debt, leaving us with considerable optionality going forward.

Finally, I'd like to finish by providing an update on some of our ESG initiatives. I am pleased to report that we recently published our fourth annual corporate responsibility report for our stakeholders. As the report highlights, we are committed to ongoing improvements across environmental, social and governance initiatives as well as continuing to provide additional disclosures around them. To that end, our report includes indices that align with the Sustainability Accounting Standards Board, or SASB, and the Global Reporting Initiative, or GRI, as well as our first Task Force on Climate-related Financial Disclosures, or TCFD report.

We also participated in our second annual GRESB real estate assessment. We are pleased to report a 7-point increase in our scores as we continue to build out our ESG program.

Finally, we recently updated some of our ESG specific policies, including our environmental policy, our human rights policy and our vendor code of conduct, to further ensure our role as a good corporate citizen. For more information about these initiatives and Park's corporate responsibility approach, please visit the Responsibility tab on our website.

This concludes our prepared remarks. We will now open the line for Q&A. (Operator Instructions) Operator, may we have the first question, please?

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

I'm asking, I guess, a question related to -- I guess, the context is the reopening in the Bay Area and the return-to-office targets in January of next year. But I'm wondering, as you look at, I guess, what we might consider alternate data around office utilization in the different major markets, if you've noticed any historical patterns there in conjunction with return-to-office metrics in other cities around the country and maybe how that translates into the pace and the cadence of the occupancy buildup and just kind of the ramp-up related to some of those indicators. And then also, what do you think about timing for the reopening of Parc 55 again in San Francisco?

Yes. There's a lot in your questions there, Richard. Let me talk a little bit about kind of Parc 55 for a second. As we sort of look out to San Francisco, I mean, obviously, I think probably the most complex situation in our portfolio. Obviously, as you know, we had 6 assets there in the CBD. We have sold 2 at 2019 pricing, very pleased, very proud about that. And obviously, we've got the Hilton Union Square and the Parc 55 across the street. Union Square is open. Our plan based on demand trends right now is to open Parc 55 probably in the December time frame. Really pleased that JPMorgan is proceeding with the health care conference. One, we understand they're committed to it, which we think is great. Obviously, what we're hearing so far is probably 50% to 75% participation at 2019 sort of rate levels, I think also an encouraging sign there. So if that holds true, and we believe it to be the case, it certainly makes sense for us to probably reopen Parc 55 in that December time frame, plus or minus.

Again, we will continue to evaluate, as you've seen, I think, us do carefully in all of the situations. We reopened New York. And obviously, New York is exceeding expectations and doing quite well.

Regarding office occupancies, clearly, there's more sublet activity in San Francisco than I think in other major markets. But I think it would be a huge mistake to sort of bet against San Francisco. We hear this all the time. I think it's important to remind listeners, when you look at the amount of innovation that is coming out of that market, the job creation, the educational footprint, the venture capital industry being anchored there and the amount of capital flows, no doubt, it's a tougher environment right now, particularly for business transient and group. But we believe, as you heard in my prepared remarks, that when you get people back in offices, you get more vaccinations for kids and families and people resuming sort of a normal, we fully expect that San Francisco, among the other sort of urban markets are going to come back. These are great cities of the world. And people who are sort of writing them off, I think it's a bit premature.

If you look at, for example, on the leisure front in San Francisco, our JW Marriott and our Hyatt Fisherman's Wharf, both continue to do very well. I think in the third quarter, JW Marriott was about 67%. Obviously, a smaller box there, but continuing to ramp up in occupancy. The Hyatt Fisherman's Wharf was in the mid-80s. Obviously, Union Square, as obviously, it's a big group box. So as we begin and see that ramping up in the January and certainly into 2022, we certainly expect that that's going to continue to ramp up nicely as we move forward. So I'll stop there if you've got any follow-up questions, but I wanted to respond to your inquiries.

No, that's helpful. Yes, I'm good.

Our next question comes from the line of David Katz with Jefferies.

I did hear a commentary about the prospect of being positioned to be a buyer. I wondered whether there are circumstances or any discussion worth having on whether you'd be a seller and how you think about some further divestitures at the moment?

Yes, David, it's a great question. All options are on the table to create value for our shareholders. I think we've been crystal clear, and I think I've made the statement before, and I'll make it again. We're going to get paid either by the public markets or the private markets. And when you look at the kind of significant discount NAVs that exist today, it's certainly not sustainable, and clearly, with us trading somewhere at a 30% discount, plus or minus.

As I make the case, if you will, for just a minute for Park, think back to the crisis and the decisions that we made. We were calm. We were prudent. We didn't panic. As Sean outlined, we did 3 bond deals. We pushed out our maturities. We've now paid off 97% of our bank debt. We didn't do any kind of dilutive equity raises. We didn't sell any assets at wide discounts. All of those were very wise and appropriate decisions. We've really reshaped the portfolio. We've sold and or disposed of 31 assets for the $1.7 billion. We bolted on Chesapeake, 18 assets there for the $2.5 billion.

We've achieved all of our 2021 priorities, reopening hotels with the exception of Parc 55 and the Hilton in Short Hills, which will open probably in the first quarter of next year. We've reimagined the operating model, taking out $85 million in cost, about 300 basis points. We've sold 5 assets this year at just south of $500 million and obviously paid down debt. We've transitioned to offense, meaning looking at both the embedded opportunities within our portfolio, and in addition to that, obviously, we're open to acquisitions that make sense. And we have a lot of optionality. Our building gain tax as part of the spin expires at the end of 2021, that's going to be huge. We've got NOLs that are also significant that also give us optionality.

So to your point of selling in your question, I think the most likely scenario would be that we look to partner in JV on an iconic asset or 2. Hawaii would not be included on that list. But others that we could sell an interest at private market valuations, and which would then allow us and shield that with our NOLs, that gives us optionality to go on offense, whether that's embedded opportunities within the portfolio or whether that's opportunities externally.

We will be thoughtful. I don't know that we have a need to buy an asset today or tomorrow, particularly given the fact that we've been so active in the recycling in the last few years, as I mentioned, selling assets and, of course, obviously, bolting on the Chesapeake portfolio.

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

It's a question on acquisitions. You mentioned you want to be selective, and you're looking to grow eventually. A lot of your peers are focused very heavily on these very ultra-luxury smaller properties. You've talked this morning about how you're very, I guess, positive on the long-term return of business travel and group. Could you maybe go the other way and lean more into upper upscale group of hotels in urban markets? Or would you too be looking at some of these kind of more small luxury properties that others have been buying?

It's a great question, Anthony. And look, we will continue to follow the demand patterns. We have put a stake in the ground. I think we've been clear. And look, we are well positioned. We've got 18 hotels that clearly have a strong leisure. And if you look at what's happening for us in Orlando and Hawaii and certainly Key West that we shared, I mean, we're seeing really aggressive solid performance there and we will continue to look. There are markets that we're underrepresented. Phoenix comes to mind, parts of Texas, clearly we'd like to continue to expand our footprint into Florida. At the same time, that's an overbought trade right now. I think some of the pricing is quite aggressive. I do intellectually have a hard time with whether you can generate the scale and the return and the cash flow on some of the baby resorts, but we'll see how that unfolds over time.

This does remind me, 10-plus years ago, I've been around for a long time, when the focus was on lifestyle hotels in New York. And I've cited this example, but I think it's a real example when there was this excessive focus on buying those lifestyle hotels in New York. And as we now fast forward and look back, I don't think that trade really worked out for a lot of people, particularly at the prices that people were paying.

So we will continue to evaluate the portfolio. We are confident that upper upscale and luxury hotels in top 25 markets and premium resort destinations. We have a great footprint on resorts now. We'll look to expand that selectively, but I think that it's got to make economic sense. I think the message we'd like to send is, we have so many embedded opportunities within our portfolio. I think Bonnet Creek is just a great illustration of that. And our basis there, given where we're trading is about $300,000 a key, we've got 350 acres, of 1,500-room resort, a world-class golf course. We're expanding the footprint there for the meeting footprint in addition to the optionality that we have from a leisure standpoint. We think that's a wise and prudent investment, and that's going to yield superior risk-adjusted returns for our investors.

Got it. And maybe switching gears to pricing. The leisure pricing has been very strong across the country, and we're seeing prices well above '19 levels. But in group and BT, I think prices are at '19 or slightly below. Is there an opportunity for you and others to push pricing on corporate group and business transient a bit more? Or are you more focused on getting those parts of the business just back in volume?

Yes, it's a great question, Anthony. I do think over the intermediate and long term, there's going to be more pricing power in this business. And I have to believe that demand is going to outpace supply, certainly given the amount of scarring and pain that occurred through this pandemic. And we're pleased as some of the stats that Sean outlined, I think, really demonstrate that operators are being disciplined on pricing. And we're getting close to '19 levels, and we're still at RevPARs that are 20%, 30% below, in some cases, below '19. So I do think that there's going to be a much better opportunity for real pricing power and margin growth in this industry, which we have not seen. We certainly did not see the end of the last cycle. So we are encouraged as we look out.

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

This is (inaudible) for Smedes. Can you just talk about what you're seeing on labor cost? I think in March, you cited $70 million in cost savings from a reduction in hotel staffing. And then as you think about that, what percent do you think could be offset of the rising labor cost by the reduction in staffing needs?

Yes. It's a great question. Let me answer the first part. What we've said is, we spent a lot of time, and huge credit to Sean and our asset management team and the other men and women on the Park team of sort of reimagining the operating model. So we're confident that we've been able to take out $85 million in permanent cost. It's about 1,200 FTEs approximately across both hourly and management. And we're confident that, that will certainly deliver huge benefits for shareholders as we move forward.

The one benefit that we have on the labor side is obviously being 60% union. And with those costs already largely baked in, we're not seeing some of the same challenges on the labor front. We are seeing it in our nonunion hotels. Key West is an example where labor, and certainly Orlando, pockets of Florida that are a bit more challenging. But we're not seeing huge increases on the labor front. Let me hand it over to Sean, if he's got additional comments he'd like to make.

Sure, Tom. Thanks. And certainly, what Tom had mentioned is really kind of our doing in limiting positions, but you think about some of the operating model elements, whether it's housekeeping or changes to F&B, and those things are still evolving. It's hard to kind of sit there and, I think, at this point, put dollars at it. We still need the right mix to come in through to kind of test some of these changes to the standards out and the take rate and everything there. So that's kind of evolving and work in progress, but we're certainly confident that we'll kind of be additive to the $85 million Tom discussed as we move forward and ramp back up.

Great. And then just as a follow-up. In your prepared remarks, you mentioned a focus on value-added transactions and projects. But it looks like you reduced CapEx to $56 million for a maintenance project this year. Just going into 2022, how do you think about spending there? And are there any major projects on the horizon?

Yes. As we mentioned, obviously, the Bonnet Creek, we have reinstated both our expansion there of the meeting footprint for the Waldorf as well as the Hilton. So that's north of a $100 million project there that is underway. Very confident that, that's going to be a huge success for us. We're also going to be renovating the meeting space as well as some of the guestrooms as well.

We've also completed recently the meeting space at the Hilton, San Francisco. We've also done partial renovation of the Tapa Tower at Hilton Hawaiian Village. So you'll see those costs really ramping up both on the maintenance side as well as on the embedded ROI side for the Park portfolio. DoubleTree, San Jose is one that we're pretty far along in planning and our plan to convert that to a Hilton as well, just another example.

Our next question comes from the line of Neil Malkin with Capital One Securities.

I was just wondering if you can give an outline just kind of what you see for group outlook pace or how do you want to qualify it for your San Francisco and Chicago markets heading into, again, like I said, 2022.

Yes. If you think about San Francisco, 2022, Citywide, I think, there are right now, in the books about 34 events, about 620,000 room nights. And if you look back to '19, which I think was an all-time high, at about 1.2 million room nights. So clearly, continuing to ramp up. I think JPMorgan proceeding with the health care conference is a great news. And I think, as you continue to get more people back to, say, return to office and back to business travel, we fully expect that, that market will continue to thrive.

As we look out in Chicago, corporate group there, our group pace is about 83% of the 2019 levels. That's about 168,000 room nights, plus or minus. Citywides are also, I think, over 700,000 room nights in Chicago. So very encouraged. Chicago has really held up better since we reopened back in June of this year. So encouraged about both of those markets as we move forward.

I appreciate that. One of the things that the group guys, the group-focused owners saw was a pretty significant pickup from second quarter to third quarter on the group side, obviously, significantly below 2019. But compared to the first and second quarter, I would say a pretty significant step function higher. And that also came with it pretty stronger than expected, I think, F&B overall. I was wondering if you can comment on what are the spending habits as those kind of bread and butter groups start to come back. Are you seeing the same amount of willingness in terms of like minimum spend? Any different or changes in preferences for like banquets or group gathering sessions? And also, I think it stills into the other revenues, which have been just on fire. And maybe you could shed some light on what's going on there as well.

Yes, Neil, this is Sean. I think in the end, the groups are generally behaving consistent with what they were doing pre-pandemic. I mean, obviously, the overall participation is lower than '19 as they show up. But I would say, as we kind of project out and plan for an event, I think generally, it's been pretty consistent that we're underestimating the participation. So the good news is they are showing up. And with that planning and everything else, I think, too, they're also showing up and realizing they want a little bit more than they had planned for too. So I think you're seeing some kind of incremental spend when they're on site.

Participants aren't necessarily leaving the assets a lot and going out and seeing alternative outlets or F&B experiences. They're kind of mostly, a lot of times staying in the hotels. Clearly, that's happening with the leisure side, too. So we're seeing a lot of benefit in outlets in certain areas there. Certainly, some out-of-room spend where we have the amenities like golf at Bonnet and everything else, we're seeing upticks as well. And that's been consistent as we've been open in kind of good kind of elevated operations or elevated demand levels in different parts of this pandemic.

Our next question comes from the line of Gregory Miller with Truist.

Just one question from me. As we look to Thanksgiving and the December holidays, I'm interested in how your cold weather markets may fare this season and the extent of pent-up leisure demand that may be shifting back up North. So if it's possible, could you share your initial expectations for markets like New York City this year relative to pre-pandemic years?

Yes, Gregory, this is Sean. For New York specifically, clearly, a good news story happening up there, opening up the asset early October and it has really ultimately exceeded our expectations as we looked at our reopening models for October. And as we get into November, December, clearly, the holidays are part of the success of this asset. And so what we're seeing right now for New York is Thanksgiving is pacing around 80% of '19 levels, with sellouts for Wednesday and Thursday with ADR flat. So feeling good about how we're coming into that week.

Earlier than that, we have a sellout around the New York City Marathon this coming weekend. So I think, again, November is shaping up pretty well for the asset. And then as you get to that in December, we're seeing, certainly on the weekend, some real good strength there of about 60% to 70% committed occupancy with the asset. So I think we've got a good base. And I think we're continuing to see positive pickup volumes at or above the comp set in the market there.

So I feel good about New York. And obviously, we feel really good about our resort areas where you would expect strength around the holidays. Hawaii is looking good despite the Governor kind of putting a pause and a little bit of pause and hesitation on booking the holiday travel. We're now seeing the pickup, as I mentioned in my remarks, starting to see some more -- the pace picking up week over week, just like we were seeing pre-Delta. Hawaiian Village right now is a little behind, I think, without the Far East traveler there, which typically comes in strong around the holidays. It's still tracking a little bit below '19 levels. But Waikoloa on the Big Island is just going to be incredible. It's going to be about 50% higher rates than '19. So that's a combination of the demand and rate strategies that are being deployed there by the team. So kudos to them.

So again, together or combined, those 2 will make Hawaii a really good market for us. And then Florida, just across the board, Miami, Key West, Orlando, all great markets for us for the holidays. Thanksgiving week is going to be supported by some sporting events in Orlando. The Waldorf is pacing ahead of '19 levels with a 60% increase in rate. The Bonnet's complex is seeing pace up 85%. Waldorf up 125% to '19 on the Christmas-New Year's Eve week. So just incredible.

And then Casa, I mean, just remains on a tear. We're looking at rates that are $500 to $600 higher than '19 levels around the holidays, around especially the Christmas-New Year's Eve holiday. So that basically translates to $100,000 of incremental revenue per day at the hotel.

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

So I heard your comments about potential, when we think about acquisitions, maybe some kind of joint venture where you can contribute an asset, mark-to-market on that and then add more liquidity for acquisitions. And so the question on that is just on any potential acquisitions, is this something, given where we are and the recoveries coming along faster, gaining steam. You're going to go for something that's yielding right now that doesn't have a ton of story to it? Or would you prefer to do things that have a story to them and value add?

Yes, it's a great question, Chris. And as you know, we're talking a hypothetical thinking here. In a perfect world, I think finding something that is cash flowing, but that we could plug in our best practices and our asset management team and the men and women on our design and construction team for some value-add over time would probably create the most upside. And clearly, with something with in-place cash flow is certainly attractive to us as we look out. But we'll evaluate. There are sometimes really deep turns that can make sense. But that's really better suited, I think, in many cases, for private equity than it is for perhaps a REIT capital structure.

We'll be thoughtful. We don't feel the need. People think it's important for listeners to remember. We bolted on 18 hotels from the Chesapeake deal. We have tremendous embedded opportunities within the portfolio, whether it's the DoubleTree in San Jose, the DoubleTree in Crystal City at the front door of the Amazon campus there, literally at the front door. Hilton Hawaiian Village on the long term, we're getting a site in title that we've got an option to that will allow us to do a 6 tower. Now that's a few years out as we sort of look out. The Hilton Santa Barbara that we converted, we up-branded Bonnet Creek, which we're also up-branding to a Signia. I mean there's huge upside within this portfolio. So we want to be really thoughtful about acquisitions. We're going to grow, make no mistake, that as this recovery continues to unfold, as it unfolds, that Park will be a participant both in buying assets in addition to continuing to recycle capital within our current portfolio.

Okay. Very helpful. And then how do we think about the puts and takes next year with international coming back both ways, inbound, outbound? And for you guys, Florida, a big beneficiary this year of state domestic. And then you're going to get more internationally down next year. Is there a way to think about from maybe a rate perspective, what happens when we kind of see more Americans going abroad and more international guests coming into your markets, maybe other than Florida? Is there any way to just directionally think about that?

Yes. First of all, I think it's going to bode really well for not only the industry, but I think for Park in particular. If you think back to '19, we had inbound international of about 79 million, and outbound from the U.S. was about 100 million, plus or minus. I maybe a little off, Chris, but I don't think much. And so when you think about what's happened here during the pandemic, those 100 million travelers, plus or minus, were all really focused on U.S. or the Caribbean, some going international. But largely, those that were traveling were focused more kind of U.S.-centric.

I think as we're coming out of the pandemic, we're going to begin the journey to get back to the way things were, meaning you're going to see more and more of those international travelers coming back into the U.S. and think about where they want to go. They're not likely going to San Antonio. They love San Antonio, but they're looking more for New York, Boston, D.C., Chicago, San Francisco, in addition to the Florida, Miami, all of those markets where Park is incredibly well positioned.

So we see this being really positive for us. But I also think we can't lose sight again of the pent-up demand. We have been through 2 years of hell. And I think this sort of revenge spending and this desire to get out and reclaim and recapture people's lives is only going to continue to accelerate. Again, for an industry that, in our market where you've got less supply risk, we think we finally benefit from having our supply exposure, is about 1.7%, I think, among the lowest in the lodging REITs given our footprint. But we think that that's only going to bode well for us in having more pricing power.

And I didn't even talk about Hawaii. Keep in mind, Hawaii, historically, it's about 30% international. Of that, about 60% of that, 63%, I think, to be exact, relates to coming out of Japan. While Japan, Japanese have been coming the last 30 years consistently 15% to 17% of that market. So now you've got 2 years where they haven't visited. So I think Hawaii gets the double benefit, getting more and more penetration coming from the U.S. in addition to seeing the international and particularly the Asian trade beginning to really ramp up.

As Sean said, that's probably second quarter. I mean we think we'll have a really strong holiday. But we think as you look out to Hawaii, and particularly now with international travel in 6 markets in particular, driven largely by Japan, we'll continue to only benefit that market as we move forward. So the international is nothing but a significant tailwind for the industry and I think for Park in particular.

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

Most of my questions have already been covered. I guess maybe just one follow-up, and you sort of touched on it a little bit. But just in terms of the transaction environment, low interest rates out there and some types of buyers that can be much more leveraged than a public REIT. I guess, do you foresee that kind of making it difficult maybe to make some of the acquisitions that you might be thinking about?

Yes, it's a great question, Robin. There's no doubt, the world is awash with cash, and I think that's only going to continue. And clearly, the lowest cost of capital wins. And there are, what I would call, some of the trophy real estate, if you will. And we're seeing some of that trade at sort of eye-popping numbers at these $2 million, $2.5 million a key, not likely to be where Park is going to be trading and where we're most interested. So I think you'll find, whether that's the sovereigns, the high net worth, some of those family offices, perhaps will be in the hunt for some of that.

We're confident just given our relationships that we'll be able to find very attractive opportunities. And we'll have to be selective. We'll have to work a little harder. But historically, my led teams have always done well in finding off-market in those deals that are compliant. We also will have the ability, as our stock continues to recover, to use OP units and have the optionality of being able to structure deals that can also be attractive for certainly types of sellers. So we'll use everything in our toolkit to make sure that we're creating value for shareholders.

And I'm also thinking about your comments about the asset value and what a significant discount you're trading. In the past, you have actually sort of given targets for asset sales. Any thought that -- I mean, if the public market is not valuing them, and you get more value by selling them, would you think about actually giving a target for asset sales?

Yes. It's another fair question. All options are on the table. I mean we are committed to creating shareholder value. And as I've said, we'll get paid either by the public markets or the private markets, and we're serious about that. And we will continue to work hard and create value for shareholders. And we do expect, as the recovery takes hold and continues to accelerate, I think some of the fears and concerns of the New Yorks, San Franciscos, and Chicagos of the world will certainly subside. These are great cities of the world that, people that are betting against them, in my humble opinion, are making an unwise bet. These cities are certainly going to be coming back.

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

Quick clarification and then a question. Clarification on the Hilton Midtown. Is it fully open? Are all 1,800 rooms open? I had read that it was going to be partially opened.

No, all rooms are open, Bill.

Yes. And Bill, as Sean said, and we fully expect a near if not a full sellout for the marathon this weekend. So it's ramping up. It's ramping up better candidly than any of us thought. And I've been in New York 3 times here in the last couple of weeks, and the city is coming back. It's coming back to life, and it's great to see.

Good. Okay. The question really, don't just take a crack at the labor question, kind of a different angle, which is, aside from your union contracts, how much do you think labor wage rates have to rise over the next year to get us back to an equilibrium where we're not talking about a deficit manhours and increased turnover relative to history?

Yes, it's, as always, Bill, thought-provoking and a reasonable question. It's a tough question because I think you got to think about individual markets. If you look at a New York as an example or any of the other major cities, I mean we're paying pretty significant wages, as you know, well north of $30 an hour, plus or minus, in any of those cities. So some of that pressure that we have and some of the turnover that I think some of our peers and others are seeing, we're just not seeing it. There's seniority. There are recall rights.

If anything, we think there's an opportunity to continue to work hard, to right size, to find the right balance. There are going to be continued advances in technology, whether it's digital key and other applications. And these changing customer preferences have got to be factored in. We all know it. It's expected, and I think that's going to continue to be a benefit for the industry. There'll be some pain pockets as we unfold. Where I think we see more of some of the labor challenges are markets like a Key West or Orlando, where there were some lease labor and other opportunities where you don't have the affordable housing. And it's just a tougher market there, and you are seeing wages rise.

But the other side of that, as Sean pointed out, I mean if you think about just third quarter, our 2 Key West assets, RevPAR was up 88% over 2019 levels. And that's only going to continue to accelerate. Part of that's pent-up demand and people wanting to reclaim and recapture their lives. And I don't know whether, Sean, you've got some other insight on the labor side, but it's one that we'll study some more, Bill, and then follow with you offline and just make sure that we answer your question appropriately.

Yes. I appreciate it. It seems like the smaller and midsized markets may have more pressure from competition from Amazon warehouses and things like that and maybe some of the large markets so...

Yes. We're not seeing it, Bill. And the one thing I'd say, Bill, and you and I both have been around a long time. I just think the one thing as we look out, I think there's more optimism. I think there's more optimism for having pricing power, for having margin growth, the supply growth. As you look out even over the Park portfolio, as I think I said earlier, about 1.7%, while it's been a tough, tough nearly 2 years, there are reasons for having real optimism as we move forward. I think finally, we can get back to this being a certainly more attractive business than it has been from a hotel ownership in the past, certainly in the near term, in the last couple of years, and certainly at the end of the last cycle.

Right. We can all use some optimism.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Thomas Baltimore for closing remarks.

We appreciate the opportunity to visit with all of you today. Look forward to seeing you in person in the near future, although I know the upcoming NAREIT will be virtual. We will be on the road and have been over the last several weeks and really be reaching out to many of you to get together in person. So stay healthy and look forward to seeing you soon.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.