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spk14: to Park Hotels and Resorts, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ian Wiseman, Senior VP, Corporate Strategy. Thank you, Mr. Wiseman. You may begin.
spk12: Thank you, Operator, and welcome everyone to the Park Hotels and Resorts First Quarter 2024 Earnings Call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Please refer to the documents filed by PARCC with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in yesterday's earnings release, as well as in our 8K filed with the SEC, and the supplemental financial information available on our website at pkhotelsandresorts.com. Additionally, unless otherwise stated, all operating results will be presented on a comparable hotel basis. This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of PARCC's first quarter performance and update you on our 2024 outlook. Sean DeLorto, our Chief Financial Officer, will provide additional color on first quarter results, Q2 and full year guidance, and an update on our balance sheet. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.
spk09: Thank you, Ian, and welcome everyone. Before we begin, I would like to take a moment to acknowledge and remember former Senator Joe Lieberman. who served on the Park Board since January 2017. Senator Lieberman was a great American, a wonderful board member, and a dear friend. I wish to convey my heartfelt condolences to the Lieberman family, and I know I speak for the entire Park Board and management team when I say that his wisdom and integrity will be greatly missed by all of us. I am pleased to report Another incredibly successful quarter marked by outstanding performance across our portfolio as demand trends improved across all segments, bolstered by the strategic investments made in Key West, Orlando, and Hawaii, in addition to other prudent decisions we've made over the past few years. We remain laser focused on achieving the highest returns on our invested capital, with our ROI pipeline providing the groundwork for our performance in 2024 and beyond. Having invested nearly $300 million of capital last year, we are targeting an additional $260 to $280 million in strategic investments this year as we seek to unlock the significant embedded value within our portfolio. We also believe the decision we made last year to exit the two Hilton San Francisco hotels meaningfully improved our balance sheet and operating metrics and changed the narrative for PARC. Through these efforts, we were able to return $630 million of capital to shareholders last year. And as we continue our momentum in 2024, we are excited about the growth potential in our portfolio and focused on maximizing returns for shareholders. Turning to first quarter results, RevPAR in Q1 increased a sector-leading 7.8%, which was 50 basis points above the high end of our Q1 guidance range and also exceeded Smith Travel's reported up or up scale performance by nearly 500 basis points. This is an exceptionally strong performance given the tough year-over-year comparison with 2023 first quarter REVPAR growing 28% over 2022. We experienced broad-based strength across our portfolio with our urban and resort portfolios each reporting 8% REVPAR growth during the quarter while our suburban and airport hotels also reported an aggregate REVPAR increase of over 6.5%. These results highlight the continued upside potential in our portfolio, driven by particularly strong group demand and convention calendars, positive trends in business travel across our key urban markets, and the ongoing resiliency of our resorts. Group demand remains a key driver of growth for PARCC in 2024 and beyond. This was evident in the first quarter as group room revenues increased by 15% year-over-year to $123 million, which exceeded our expectations as rates grew by 5%, while the elevated demand drove an increase in banquet and catering revenue by over 11%. As we look over the balance of 2024, group demand is expected to remain very strong, with full-year revenue pace as of March 31st up nearly 11% compared to the same time last year, benefiting from strong convention and citywide activity expected for New York, Chicago, and New Orleans, and healthy in-house group booking activity in the resorts, including our Bonnet Creek Complex in Orlando. In the year, 40-year bookings also remain very active, with the portfolio picking up approximately 240,000 room nights for 2024 during the quarter, accounting for $56 million of incremental revenues with gains primarily concentrated in New York, Orlando, and Hawaii. Turning to several of our core markets, we are pleased to report another solid quarter in Hawaii, which achieved impressive REVPAR growth of nearly 7% versus last year. Hilton Hawaiian Village led the way with exceptional rev-par growth of nearly 8% supported by strong domestic airlift and a steady recovery of inbound travel from Japan. Overall, February year-to-date inbound airlift from Japan increased by 65% compared to the previous year. resulting in nearly an 85% increase to 55,000 monthly passenger arrivals to Oahu and the Big Island. While Japanese Airlift still lags 2019 by 31%, we are very encouraged by the ongoing improvement. Group bookings increased by 41%, which helped to push occupancy to nearly 92% during the first quarter. while driving the average daily rate to $304, marking the highest first quarter average daily rate in the hotel's nearly 60-year history. At our Casa Marina resort in Key West, the transformative investment we made to reimagine this iconic hotel has yielded exceptional results, with performance during the first quarter meaningfully exceeding expectations. REVPAR increased by over 34% during the quarter, primarily driven by an impressive 24% increase in rate, while strong leisure and group demand drove occupancy higher by over 600 basis points to 82% in the first quarter. As a reminder, the first quarter is a clean quarter-to-quarter comparison, as the resort was not closed for renovation until May of last year. The resort also achieved the highest banquet revenue quarter on record, helping to drive food and beverage revenues up nearly 32% compared to the prior year period. The food and beverage offerings at Casa has been further enhanced with the introduction of the new Beachside Dorada Bar, which opened April 13th and is expected to have the restaurant fully operational by the end of Q2. Overall, we are thrilled about the potential of this iconic resort, with current projections for 2024 trending ahead of our underwriting. In Orlando, our Bonnet Creek Resort complex, which includes the Waldorf Astoria and Cigna Bonnet Creek hotels, achieved impressive results following the completion of a comprehensive renovation and meeting space expansion. REVPAR for the complex increased by nearly 9% versus 2023 during the quarter. At Signia, the addition of the 35,000 square foot water side ballroom contributed to a 43% increase in group revenues during the quarter, helping the asset improve its REVPAR index by over 8% for the quarter. Looking ahead, 2024 group revenue is pacing up over 36%, while 2025 group revenue paces up over 17%. We look forward to welcoming many of you at our upcoming Bonnet Creek property tour later this month, where we will showcase our best-in-class development capabilities and the incredible work achieved by the team. Shifting to our urban portfolio of hotels, we delivered solid results as both business travel and international demand continue their path towards a full recovery. New York continues to be one of the strongest urban recovery stories in the country, exemplified by our Hilton Midtown Hotel's RevPar growth of 11% over the first quarter of 2023, with group revenue exceeding 2019 levels by nearly 28%. As a result, Occupancy improved 570 basis points above the prior year period with 14 sellout nights during a seasonally low occupancy quarter. There remains significant embedded upside potential at the hotel, with transient room nights still 16% below 2019. While overall occupancy versus 2019 trails by 440 basis points, a gap we expect to close with the eventual rebound in travel from Asia, coupled with continued improvements in business transient demand. In New Orleans, proactive efforts to generate in-house group, given the significant drop in citywide events during the first quarter, helped to drive solid results at our Hilton Riverside Hotel. With REVPAR growth exceeding 13%, versus a 4% decline for the comp set. While in Chicago, a 70% increase in citywide production helped to drive an 11% increase in REVPAR across our three hotels with contributions from both transient and group segments. As we look out over the balance of the year, we remain well positioned to deliver sustained growth throughout the year as we execute against our strategic priorities. supported by an expected favorable macro backdrop, including a resilient US consumer, improving inbound international travel, and a continued acceleration of group demand, we remain optimistic about the growth potential of our portfolio. As a result, we are increasing our full year 2024 guidance to reflect the better than expected performance during the first quarter, and remain on track to deliver sector-leading REVPAR and earnings growth this year. Sean will provide more details on our improved outlook for the year. From a capital allocation perspective, we remain very focused on maximizing returns on invested capital. While we continue to assess potential acquisitions, we firmly believe that our portfolio holds significant embedded value which we seek to unlock through targeted ROI projects. At Hilton Hawaiian Village, we expect to commence a two-year phased room renovation with nearly half of the 796 rooms in the Rainbow Tower being renovated during the second half of this year, with the remaining rooms expected to be renovated during the same time next year, along with 26 additional keys being added as part of the project. Similar to HHV, we plan to renovate nearly half of the rooms in the 400-room Palace Tower at the Hilton Waikoloa Village later this year, with the balance of rooms expected to be renovated next year, along with 11 keys being added as part of the project. Both renovations are expected to begin in August with an anticipated completion date of early 2025 for Phase 1. In total, We expect only $8 million of EBITDA disruption this year from both projects and 40 basis points of REVPAR disruption. Overall, we are very excited about the impact that these reimagined rooms will have on the results following the success of our Tapa Tower renovation at Hilton Hawaiian Village, which wrapped up last year and generated a $60 average daily rate premium to other resort room types. In addition, we continue to evaluate other major ROI projects among our core hotels, including a comprehensive renovation of our Royal Palm Oceanfront Hotel in South Beach, Miami, which is currently contemplated for 2025, while making significant progress on the entitlement process for a ground-up development project at Hilton Hawaiian Village to add our fifth tower with approximately 515 rooms. I want to reemphasize that our team remains intensely focused on executing our internal growth strategies and capital allocation priorities, which we are confident will create long-term shareholder value and position the company for long-term success. With that, I will turn the call over to Sean.
spk11: Thanks, Tom. Overall, we were very pleased with our first quarter performance. Q1 Repar increased an impressive 7.8% year-over-year, with occupancy up 350 basis points to nearly 71% for the quarter, and average rate higher by 2.5% over the same period last year. Hotel revenue was $618 million during the quarter, and hotel-adjusted EBITDA was $168 million. resulting in hotel adjusted EBITDA margin of 27.3%, 190 basis points above the same period in 2023. Q1 adjusted EBITDA was $162 million, and adjusted FFO per share was 52 cents. First quarter results were positively impacted by double-digit rep part gains in several key markets, including Key West, New York, New Orleans, and Chicago. while ongoing strength in Hawaii drove our stronger-than-expected results. In addition, margin outperformance was also aided by approximately $4 million of state unemployment tax refunds received at both of our Hawaii resorts and $5 million of relief grants awarded to our three Boston properties. Excluding these items, first-quarter hotel-adjusted EBITDA margin still expanded by approximately 40 basis points. Turning to the balance sheet, our current liquidity is approximately $1.3 billion, including $400 million of cash, while net debt is currently $3.5 billion. Our net debt to adjusted EBITDA ratio on a trailing 12-month basis has improved significantly to just 5.2 times. Overall, our balance sheet remains in excellent shape with a focus on extending near-term maturities while maintaining sufficient liquidity and optionality to execute our strategic initiatives. With respect to our dividend, on April 15th, we paid our first quarter cash dividend of $0.25 per share, and on April 19th, our Board approved a second quarter dividend of $0.25 per share to be paid on July 15th to stockholders of record as of June 28th. the dividend translates to an annualized dividend yield of 6% based on recent trading levels. As we stated last quarter, we expect to resume our targeted payout ratio in the range of 65% to 70% of adjusted FFO per share for the full year, which, based on our current guidance, would translate into an incremental top-off dividend at the end of the year. Turning to guidance, as Tom noted earlier, given stronger-than-expected results during the first quarter, we are increasing our 2024 REVPAR forecast by 25 basis points at the midpoint to a new range of $186 to $188, representing year-over-year growth of 4% to 5.5%, while our hotel-adjusted EBITDA margin forecast improves by 30 basis points at the midpoint to a new range of 27.1% to 28.1%. or down 70 basis points to up 30 basis points versus 2023. Additionally, given the stronger than expected performance during the first quarter, we are increasing our adjusted EBITDA forecast by $10 million at the midpoint to a new range of $655 million to $695 million, while our adjusted FFO per share guidance increases by approximately 5 cents at the midpoint to a new range of $2.07 to $2.27 per share, representing year-over-year adjusted EBITDA growth of 2.5% and AFFO per share growth of 6%. Overall, we expect our portfolio to continue to deliver solid REBPAR growth over the balance of the year. Year-to-date preliminary REBPAR growth through April is pacing up over 5%, while we forecast Q2 REBPAR growth to range between 3% and 5%. While April performance was impacted by difficult year-over-year comparisons, coupled with the Easter holiday shift, which impacted leisure transient demand into Hawaii, we are anticipating performance to accelerate in May and June, driven by Key West as we lap the Casa Marina renovation disruption beginning in May of 2023, along with continued improvement in our urban markets and solid group base across the portfolio. In addition, the back half of the year looks solid, with rent part growth expected to be above 3.5%, which includes 80 basis points of renovation disruption during this time at both of our Hawaii hotels and at our Hilton New Orleans hotel, where we will renovate 250 of the 1,167 rooms in the main tower during the low operating season from July through October. This concludes our prepared remarks. We will now open the line for Q&A. To address each of your questions, we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please?
spk14: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. The first question comes from the line of Floris Van Dijkum with CompassPoint. Please go ahead.
spk17: Hey, guys. Thanks for taking my question. So, really good report, obviously. a little puzzling the initial reaction here by the market. But one of the things that I find fascinating here, you know, obviously your expectations for cash flow and EBITDA has increased, but you're still not getting, based on your guidance, back to 2019 levels of same property EBITDA. Although, if I'm not mistaken, I think your first quarter EBITDA this year actually surpassed 2019 on a same property basis. Can you maybe talk about some of where the latent upside appears to be in terms of your EBITDA recapture? In particular, maybe talk about some of the upside potential on your urban assets where your occupancy still appears to be lagging 2019.
spk09: Yeah, of course, a lot to unpack there, but I think you really hit the nail on the head. Look, you're seeing it, and I think our first quarter is a great example. I think sometimes people sort of overly focus on sort of Hawaii, but you notice, obviously, we had really broad-based and acceleration in both urban and in our resort markets as well. So we're still you know, 500 basis points below, I believe, plus or minus in occupancy from pre-pandemic levels. But that continues to accelerate. And, you know, as we look across the portfolio, we're incredibly encouraged. I know that there are some concerns about second quarter and sort of April. And, you know, April is sort of isolated. And it's probably best that I sort of address some of that now and you know, obviously April is trending to about negative 1%, but that's really, we believe, our softest month in the entire year. It's our softest group month as well. We're about 3.7%, but as you sort of look out to May and June, you know, we see a real acceleration. Looking at group pace and In kind of May and June, we're probably in the 8% to 9%. We're looking at Seattle being above 15% in REVPAR. D.C. up probably in the 10% to 11% range. Boston, 8% to 9%. Chicago, kind of 5% to 6%. And if you think about Casa, obviously not a clean comp since it was closed, but up really a whopping sort of 900%. So, I think it's embedded in your question that the acceleration is, and the recovery is accelerating, and it's broadening, and, you know, we certainly continue to see that in our portfolio. So, we're very encouraged as we look out, and obviously, we've given guidance that 3 to 5 percent here in the second quarter feel good about that. A little frustrating to see the early response in the market, I think once people sort of dig in and understand a little better, we are very, very confident as we look out for the balance of 2024.
spk17: Great. And, Tom, maybe if I can follow up on Hawaii, you talk about, obviously, Hawaii Village, I think, had $51 million of EBITDA in the first quarter. I mean, you annualize that. I mean, it's not a fair assumption, but you're at a run rate of close to $200 million of EBITDA on one asset. That's some companies that produce that. But if you think about... the air uplift and the Japanese tourist demand, how much is that driving some of that occupancy gain there? And do you see more upside there?
spk09: Yeah, it's another great question, Flores. But let's, if we sort of back up for a second, look, the last two years in Hawaii have been near record performance. We expect this year that that is likely to continue. And if you look at pre-pandemic, The Japanese travelers accounted for about 18 to 20 percent of revenue. You know, last year they were about three and a half percent of revenue. And if you look year to date this year, it's only three and a half percent of revenue. You know, we think it probably gets back to, you know, four to five percent this year. So, huge upside. So, despite the fact that we don't have the Japanese traveler back, we're still generating. And part of that is just obviously increased penetration in the U.S. market, but also in other international markets as well. So we are bullish on Hawaii. The other thing that we would note is it's near impossible to add additional supply. So when you think about that backdrop, and we're working very hard to add a fifth tower there, which we think obviously there's huge upside as well. Now, you know, we're not done the entitlement process, but certainly very encouraged as we look out. Thank you for the questions and the observation and your comment about we generate more EBITDA in Hawaii when you add both properties than, candidly, most of our peers. It's startling, but if you're going to bet anywhere, we think betting in Hawaii is a solid bet.
spk16: Thanks, Tom. Thank you. Thank you.
spk14: Next question comes from the line of Smith Rose with Citibank. Please go ahead.
spk09: Hey, Smith. Hi.
spk05: Hi. I mean, look, you've talked about this a fair amount, but I just wanted to ask a little more because the trends in leisure, you know, as spoken about by the larger branded companies, you know, it sounds like they're kind of taking a downturn in terms of expectations over the course of the year. And it sounds like trends in Hawaii are very strong, but I think I'm correct in thinking that's kind of a middle market property, kind of a lot of tour and travel, maybe a slightly more susceptible consumer. And I'm just wondering, it sounds like you're not, but might you, or have you sort of factored in that that segment of the market might be a little weaker as we work through the year, or is that already in your expectations? Or I guess just maybe a little more color how you're thinking about leisure trends at this point.
spk09: Yeah, I would say, if you think about the last couple years and think about this year and what we saw, obviously, in the first quarter, take Hilton Hawaiian Village as a great example, up north of 7%. And, you know, we're probably low to mid-single digit, we think, for probably the balance of the year. You know, one comment I'd make is, you know, this is not a lower-end property. It's nearly 2,900 rooms. Historically, we were averaging about 150 mid-market high-end weddings. It's not ultra-luxury, certainly no doubt about that, but I think that's really part of the appeal and part of the reason that it continues and has done so incredibly well. As we noted, near-record EBITDA the last two years and certainly believe in trending in that direction this year. Some are looking at some of the leisure trends. Obviously, Maui took an incredible blow and is recovering, but Oahu continues to be really strong and solid.
spk11: Sumit, this is Sean. I might add, too, I mean, your question is focused on leisure, but also consider that Hawaiian Village, especially this year, has a good group component with it and a convention calendar, while, again, not the primary source of demand of the business and the hotel, per se, in the market, but In the end, it's a strong, very strong citywide calendar for Honolulu in Q3. And if we look at Q2 for our properties specifically, we've got some great pace, up 50% in this quarter in May and 100% in June. So I think we feel that while leisures are certainly very important to the complex, we certainly have a different layer, diversified layer in there with group as well.
spk05: Right, and can I just ask one more? You know, you have sort of the two positive impacts in the quarter with the Massachusetts grant and the employment refund in Hawaii. Were those in your full-year guidance as initially contemplated? And I think maybe this is more of a comment, but I think maybe the reason people are struggling a little bit with the stock is, you know, we're kind of backing that out. And I'm just wondering, you know, what did you have embedded and maybe are there any other things like that that we should be expecting over the course of the year?
spk11: Steve, so we had the Massachusetts grants in our guidance. We booked those in February, but we did not have the Hawaii SUTA reimbursement that occurred in March, which is about $4.4 million. As we think about the shift, Smeed, sorry for cutting you off there, but you think about the shift in EBITDA, what it ultimately obviously includes is the SUTA, four and a half, and five and change or so of just operational B from Q1.
spk05: Yeah, okay. I just, you know, because I think, you know, I mean, even if it was in your full year outlook, we wouldn't necessarily have kind of known that would hit in the first quarter on the Massachusetts thing. So I think people are, you know, would naturally kind of back that out. So I think that's just kind of maybe what's going on a little bit. Although, you know, look, it was obviously a strong quarter even taking that stuff out. But it's just kind of a comment, I guess. That's more than a question.
spk16: Thank you. Yep.
spk14: Thank you. Next question comes from the line of Dwayne Fenigberth. with Evercore ISI. Please go ahead.
spk13: Hey, thanks. Good morning. Morning. Hey, Tom. Can you talk a little bit about your Miami renovation plans? When we last met, it sounded like you saw an opportunity to go bigger in that market. And maybe the timing is pushing a little bit to the right here. So can you just talk a little bit about the analysis and the opportunity you see there?
spk09: Yeah, I would liken it in many cases to what we've just done in the Casa. You know, it's an iconic property. It's oceanfront. It's South Beach. We see a great opportunity to reimagine that iconic asset. And if you think about what we're seeing already in Casa, not only is it incredibly well received and throwing out numbers in the second quarter, we expect we'll be up You know, I think we, May, June, we were looking at 900% increase in REVPAR. But we see that kind of upside with that, again, great real estate. So we continue to sort of investigate it, continue to study it. Carl Mayfield, who heads our design and construction, certainly best in class. He and his team are working hard and working with local architects there and figuring out. It's three buildings. It's about 393 rooms approximately. Don't have it all scoped out yet, but it's something we're really excited about as we look out. And if you think about what we just completed in Vana Creek, we can't wait to really show the talents of the team and that extraordinary work that was done there. And then, of course, we continue to invest in Hawaii. And as we mentioned in the script, when you think about just the Tapa Tower there and the fact that we're already seeing a a $60 increase in average daily rate. So, you know, we see considerable upside in Miami when you look at the last 20 years, what have been the two strongest markets or two of the strongest markets, certainly Miami and Hawaii have been too. And when you think about the ultra luxury projects that are being contemplated, obviously we're not envisioning the Royal Palm would compete at that level, but there's certainly plenty of space right beneath that. and a lifestyle hotel that we can really take it to the next level.
spk13: Thanks for that, Tom. And maybe just for a follow-up, would love your thoughts on the outlook for New York. It's been a positive surprise, a pleasant surprise, frankly, for a while now. Would love to hear your thinking for maybe the balance of the year.
spk09: Well, if you think back for a second, New York was up 30% at Red Bar in 2023. We were up 11% in the first quarter. And I think supply is down about 9%. And you're obviously seeing there have been no new permits, I think, issued through the city council since December of 21, I think, plus or minus. And Airbnb is finally being regulated. So a lot of the illegal hotels are are certainly not in supply. So New York is a more compelling market today than it has been. And if you look historically, look back 10 years plus or minus, New York certainly was among the strongest markets. So we're very encouraged. And I would say as you sort of look across the urban portfolio, and I think obviously evidenced by New York, but not just New York, you're seeing markets really broaden and begin to recover, which is a good thing, and certainly benefiting the park portfolio. Thank you.
spk16: Thank you.
spk14: Thank you. Next question comes from the line of Chris Urunca with Deutsche Bank. Please go ahead.
spk07: Hey, guys. Good morning. Nice quarter. Morning, Tom. So, Wanted to drill down a little bit on group if we could. I think you said that your pace, your second quarter pace up 11%. As you're negotiating some of these new group contracts, whether it's for the rest of, I assume not a lot to go in 24, but more for 25 and beyond, what kind of, I guess, room rate increase can you still get? And also on the ancillary, right? You mentioned strength and catering, banqueting. Are you still able to push through above inflationary price increases on those?
spk11: I think the general answer is yes, Chris and Sean. As we look at kind of where group pace is to, you know, as you kind of look to 19 on the rate side, we're about 111% over 19. And as you think about 25 pace, we're actually up another 114%. So I think As we look out, I think we continue to see the ability to kind of roll forward and charge groups more. I mean, clearly the operators quickly went, as it came out of COVID, to booking things and being happy to do so at kind of 19 rates, but then quickly realized they had to pivot as inflation was was coming on strong to kind of be more dynamic with the rate pricing. And I think we're seeing the benefits of that now as we come through and seeing what we saw last year was about 5 percent to 19, and now we're seeing, again, 11 for this year and up 14. So I think we are seeing the ability to further drive price with the groups. And on top of that, the out-of-room spend has been pretty robust as well. As we noted for Q1, we had some, you know, 11 percent banquet and catering. I think we continue to drive that pricing.
spk07: okay uh very good thanks thanks sean um the follow-up question is kind of on the cost side um i think margin performance pretty good in the quarter even if you kind of adjust for the you know the one time um how much visibility or i guess conviction do you think you have um i know labor you have some that are on union contracts but but across the whole portfolio is there anything we have to uh that's unknown for the rest of the year whether it's a insurance or utilities or anything else
spk11: I don't think there's anything unknown. Clearly, you know, people have marked the negotiations you noted on the CBAs and budgets and whatnot, planning for things like that. So I would say, you know, I think potentially, you know, a potential upside from insurance. You know, they got some great improvements from everybody last year with no major loss, certainly domestically. So I think that's kind of changed the tables a little bit in favor of us. the insureds to kind of have a better renewal this year than the last year. So I think that's something that we continue to kind of budget at a higher level rate than I think we'll actually actualize. So I think that could be a positive going forward. We continue to appeal real estate taxes, which are up over 10% this year, forecasted. So I think we can kind of get some, not counting on them, but if we can get some appeal wins there, we'll get some benefits on the real estate tax side. But in the end, I think We feel good about the cost controls. The team's doing a great job working with the operators to maintain those and manage those. We probably looked around 2.5% cost per occupied room across all operating expenses going in, and we achieved just about over a percent, 1.5% on that, even if you adjust for those one-timers. I think we saw some benefits in Q1. I think we hope to carry that into the next couple of quarters. I think we'll still see some positions being added. But, you know, again, as occupancy goes, we'll see nominal expense grow. And we've certainly had 3 plus percent occupancy growth in Q1. We won't have as much in Q2, and therefore we wouldn't expect expenses to grow as much either.
spk07: Okay. Very helpful.
spk16: Thanks, guys. Yep. Thank you.
spk14: Thank you. Next question comes from the line of Anthony Powell with Barclays. Please go ahead.
spk10: Hey, Anthony. Hi, Tom. I guess I wanted to drill in a bit more on the CapEx and RRI project. It seems like with the Hawaii renovations in Miami, you may be at an elevated level in the next couple of years. Should we expect kind of this high $200 million range to be your CapEx bandwidth for maybe 2025 to 2026?
spk09: Yeah, I would say historically, Anthony, we've been sort of in that 6% range of revenue. As we said, we really believe that as we think about capital allocation priorities, we're still focused on selling non-core and continuing to reshape the portfolio. And to remind listeners that we've, I think about since the spin, we've sold or disposed of 42 assets just south of $3 billion. So it's a very different portfolio today than it was. And then our top 25 assets really account for about 90% of the value. And what we've concluded is it really makes sense to reinvest where we're making money and where there are real competitive advantages. So thinking about Hawaii as an example, Orlando, clearly what we're talking about in Miami. You know, a little bit of that is sort of catch up to from the pandemic. So I don't know that we'll be in the $300 million range consistently, but 260 to 280s sort of makes sense given the priorities in what we're doing. Another tower we want to renovate both at Hilton Hawaiian Village and Hilton Waikalola. And of course, another transformative project and what we want to do in Miami. And you can see the early results that we're getting in the Casa Marina now probably, I don't think without question, the best asset in Key West and really performing accordingly.
spk10: Got it. Thanks. And maybe a follow-up on the asset sales. What are you seeing in the market right now in terms of just demand for assets, pricing, and whatnot?
spk09: Yeah. Look, it's choppy. We're not a distressed seller. Tom Morey, our chief investment officer, and his team are doing a fabulous job. And we're out in discussions and assets at various stages of the marketing process. But we're going to be disciplined and I think we've been able to demonstrate, again, given the track record that I outlined, we've been able to sell assets. And we'll certainly get some asset sales done this year. And we'll use those proceeds to reinvest back in the portfolio, pay down debt, or depending on where we're trading, buy back stock. And we bought back, obviously, 15 million shares last year. And if the NAV gap remains wide or widens, we clearly will be buying back stock. Thanks, Al. Thank you.
spk14: Thank you. Next question comes from the line of David Katz with Jefferies. Please go ahead.
spk02: Hey, David. Good day, everyone. It's almost afternoon. Thanks for taking my question. I wanted to just drill down just a little farther on Hawaii because the commentary is quite positive and we have heard and seen across our platform instances where inbound travel from Japan to Hawaii has been challenged by currency and cost. Are you seeing any of that or is it just a relatively small piece and the rest of what's going on kind of overshadows it.
spk09: Yeah, it's a fair point. I don't think you can deny that the yen is certainly weakened. I mean, if you think back to 2019, I think it was around $110 per U.S. dollar, and today, obviously, it's about $155 plus or minus, and then there's some fuel surcharges. So it's It's clearly elongating the recovery of the Japanese traveler. We had about, if you think back to pre-pandemic, it was about 1.5 million visitors from Japan. That's been pretty consistent for probably the last 25 years, plus or minus. 2023, I think, was about 600,000. So you're about 65% down. You know, this year, forecast is about $850,000 to $900,000. A huge credit to our operators and our asset management team. We've really worked hard to have less reliance. While we're still really anxious and waiting for the Japanese traveler to come back to pre-pandemic levels, we can certainly be a little more selective and certainly yield the transient a little more efficiently than perhaps we were able to do in the past. And as I noted earlier, the Japanese traveler revenue coming from the Japanese traveler is only about three and a half percent, you know, down from the traditional level of 18 to 20 percent. So, you know, we see that as really a tailwind, a future tailwind and continued growth. But despite that, you know, we're trending towards perhaps our third record year in a row in terms of overall performance. And As you know, I think last year total EBITDA of those two assets approaching in that $240 to $250 million. So if you're going to bet anywhere, we think betting Hawaii is a solid bet. And as you know, given the constraints on new supply, certainly among the lowest, if not the lowest in any market in the U.S., continental or outside. Understood.
spk02: And as my follow-up, I just wanted to touch on the cost of labor, if I may. I hope that feedback isn't coming on my side, and you can hear me okay. Yeah, we can hear you fine. Okay, right. Okay, great. So there's been, you know, there's obviously been, you know, over the past, call it, you know, six to 12 months, a lot of labor union activity. which I think is a sort of a relevant dynamic. Are you expecting or factoring in further costs as a result of some of what at least gives the appearance of being out there?
spk09: Yeah, it's a fair question. And as you can appreciate, we're not going to negotiate, obviously, publicly on the recorded line. I would just say this, that we've We've got about 60% of our business that associates are certainly contractually obligated to a CBA. We enjoy very strong relationships. We have always been able to work through those. Obviously, we do that primarily through the operators, largely Hilton but not exclusively Hilton. And we're confident that in this environment, I don't think anybody wants protracted strikes or ongoing battles, particularly when our industry suffered so much during the pandemic. And so when you think through it, we are cautiously optimistic. And have we built in some cost to account for For overall budget, as Sean outlined earlier in the earlier question that we got, for sure. But we're not overly alarmed, David, and I would encourage listeners to not be overly concerned about it.
spk02: I hope you appreciate the context of the question.
spk16: Thanks very much. No, no. Fair question. Thank you.
spk14: Next question comes from the line of Stephen Grambling with Morgan Stanley. Please go ahead.
spk06: Hi, thanks. Perhaps as a follow-up to, hey there, as a response to your first question from Anthony, as you look out at the positioning of the portfolio and take into consideration the upside that you've been seeing from the success of renovations, but also taking into consideration changing demand dynamics, Does that change how you're evaluating deploying into the portfolio or even redefining core versus non-core assets?
spk09: Yeah, that's a great question, and the answer is yes. You know, we're constantly going through and looking at the portfolio, and we've done that. Again, as I said earlier, we've sold or disposed of 42 assets, and You know, the vast majority of that were non-core. A couple, you know, we were in a minority position, had a small joint venture. I think about San Diego as an example where we ended up selling our interest there to Sunstone. We didn't want to be in a 25% interest. But we constantly look at the portfolio and we look at really where we're making money and where we think there's huge upside. You know, obviously we believe that there's huge upside in Hawaii and hence the investments that we've made and the others that we're contemplating. I obviously feel the same way about Key West, and we're seeing the results there. If you think about Orlando, you know, Orlando and what we've done there, you know, I think people forget you've got about 45 million visitors into Vegas. Obviously, you've got the entertainment and gaming piece, but you actually have 75 million visitors into Orlando. You've got the Epic Universal $5 billion investment hundreds of acres and a new park opening next year. You've got Disney coming out now and talking about $60 billion that they're looking to invest over the next 10 years. And we see all of that are real tailwinds and real benefit. Plus, you've got a, you know, a top five, top seven convention center in Orlando as well. So, we use those markets as examples where we're certainly investing in assets that we own and, you know, and we're not looking to add new assets necessarily. in those markets. But we're certainly investing in the ones that we have, and we see considerable upside. And compare that to paying a 15 times multiple for an asset versus investing in our portfolio where we can generate mid-teens unlevered returns, and we're trading at a sub-10 EBITDA multiple. I mean, the math is pretty simple, and we think the benefit to shareholders is is pretty strong, and we will continue to use that kind of discipline and thought process as we move forward.
spk06: Maybe as an unrelated follow-up, it seems like there's a lot of concern around the leisure consumer, and you touch on this a bunch, but maybe to ask the question a different way, what are the things that you would be looking out to try to assess whether there is some underlying pressure or deterioration in the leisure consumer in particular.
spk09: Yeah, I think you can't look at a one-size-fits-all, Stephen. I think there's no doubt that those at the lower end of the socioeconomic framework are struggling the most, and you're seeing it. You're seeing it in all the credit metrics. You're seeing it in their spending patterns and But as you think about our customer base and that upper middle class, more affluent, incomes over $150,000 plus or minus, that consumer is still resilient. And another stat to look at is look at personal savings. I mean, I think last quarter it was about $775 million. I think this quarter it's down to about $600 million. and $70 million plus or minus and about 3.2% of disposable income. So the consumer is still healthy. So when we look out from that standpoint and think about as we think about demand patterns and our guidance as we think forward to 5.5%, I mean, we're not seeing softening. You see pockets of it. Obviously, April is down for us, but Again, we believe that's our softest month of the year. You've got the holiday shift. You've got obviously slower group. You've got transient was less in April. But we see reacceleration as we look out in both May and June, and it's pretty significant. And so I think the worries, if you will, on the leisure front, I think are a bit over overdone. We were never going to, trees don't grow to the sky, and so when you saw the kind of growth that some of our peers had, those had to normalize. We didn't see that because in many respects we don't have that type of product, but we're seeing lift, and we're seeing it again in the urban areas. We're seeing it through the group. We're seeing it broadening, and embedded in that are leisure trips as well. A lot of people going to New York, not all are going for business. Many of those are also going for leisure as part of that trip. Thanks. Really appreciate the insight. Appreciate the question. Thanks.
spk14: Thank you. Next question comes from the line of Bill Crow with Raymond James. Please go ahead.
spk08: Hey, good morning. Um, Sean, Tom, one of your peers expressed some caution over June. Um, you did not. Um, and I'm wondering, given the importance of leisure demand in that month and the important importance of the month relative to the entire quarter, especially with the week, April is June, maybe the biggest pivot point on your ability to achieve guidance for the year. Is that really the month we need to kind of focus in on?
spk09: Yeah, it's a great question. Um, Bill, a couple things. When you look at our mix, if you will, first quarter we had obviously group up about 15.4% as we reported. We're trending at about 7% in second quarter and also tough comps. But if you think about third quarter, we're probably 16% to 18%. So third quarter is really strong for us. But as you unpack kind of May and June, you know, we're seeing rev par probably in the 5% to 6% range. And then I gave some stats earlier where you've got Seattle and D.C., Boston, all high single digits or mid to double digits in the case of Seattle. And then group pace for just May and June alone I think is around 9%. So to your point, that really gives us tailwinds and that reacceleration. So that answers your question. You know, April was sort of the bottom of the barrel, if you will, for us as we sort of looked out and saw our demand patterns. But, you know, very encouraged as we look out. Yeah, I appreciate that.
spk08: The follow-up question, actually for Sean, congratulations on the improvement in the balance sheets. I'm just curious, you're at 5-2 right now, NetDuty, but as you think of the CapEx projects, the tower that you want to build in Hawaii, everything else going on, is it likely that we're going to be funding the additional capital with asset sales? Is that kind of the path that we're still on at this point?
spk11: I think that's certainly part of it, Bill, near term as we certainly continue to explore that the non-core asset sales are more focused that way and redeploying that capital between the balance sheet and the ROI project. So I think that's a fair assessment in the near term. Obviously, the tower, we're working through to get the entitlements and everything else, and we're still a ways away from putting any shovels in the ground, but that's, I think, for a future discussion as to kind of how we capitalize that.
spk08: It sounds like any acquisitions are probably a ways away at this point.
spk09: Yeah, Bill, Tom here. I would not say a ways away. I just think as we look at the playing field, and I think the comment I made earlier, we think reinvesting in our portfolio where we can generate unlevered mid-teens returns is investing in a great portfolio versus buying something at 15 times is really just a better way to create value for shareholders. We are focused on continuing to reshape the portfolio and sell non-core and reinvest, take that cash, pay down debt, reinvest back in the portfolio, buy back shares. It is also a better alternative to than going out and buying assets. We continue to underwrite, look. Tom Moore and the team, we're underwriting, occasionally bidding, but it's also got to make economic sense and it's got to be accretive. We just don't think that, and we've seen some of our peers do it and pay up for some of the luxury assets, and I can't see one that's worked out so well is my view, Bill. Okay.
spk08: Appreciate the time.
spk16: Thank you.
spk14: Thank you. Next question comes from the line of Dori Kesson with Wells Fargo. Please go ahead.
spk15: Thanks. Good afternoon now. Is it fair to say the Phase 1 renovation tailwinds in Hawaii should offset the Phase 2 tailwinds headwinds next year? And then I guess if we just put the two projects in aggregate, what's the EBITDA growth that you've underwritten to stabilization?
spk11: So Dori, I would say the first part, yes. As we saw with Tapa Tower, we did a three-phase renovation. And as we delivered the newly renovated rooms, we were able to get a premium rate on that. So as you think about Rainbow Tower especially is the big driver right there on the beach. It's highly sought after. So to start out with the phase one and take some of the rooms off the line to renovate them, I think we'll have a bigger disruption this year than as we come through next year and have renovated rooms we can charge a higher premium and then take the others offline. I think that kind of talks about what you're thinking right now on that. I'm not at this point really kind of looking to... give any kind of pure EBITDA numbers to that. I mean, we talked about disruption being about $8 million for this renovation phase. Again, we probably expect that to certainly be less next year, as I discussed. But as we kind of look to recover, I would certainly think that we'd be getting a premium, and I wouldn't say that we underwrote any kind of ROI-type IRR, but we certainly expect a decent return on just a rooms renovation.
spk15: Okay, thanks. We'll see you guys next week.
spk16: Great. Thanks.
spk14: Thank you. Next question comes from the line of Jay Conrike with Redbush Securities. Please go ahead.
spk04: All right. Thanks very much for taking the question. I guess just one question for me, just going back to the urban segment, you know, which saw rev part improvement of 8% in the quarter, yet occupancy still sits at 53%. I guess I'm wondering, how does the occupancy compare to, I guess, the first quarter of 19 for the comparable portfolio? And what are the goalposts you see for urban occupancy getting to as the year progresses? But maybe also, is there any opportunity to see upside from pushing rate there as well?
spk11: Sorry, you were breaking up a little bit there. So if you could kind of repeat just briefly kind of what you're trying to get.
spk03: Yeah, sure. Just commenting on I saw urban occupancy upside in the first quarter.
spk04: Urban Red Park grew 8%, yet urban occupancy still sits at 63%. So just curious as to how much urban occupancy upside you see in 2024, and if there's additional opportunity to push rate on the urban markets as well.
spk09: Yeah, I think if you think about just 19 for a second and kind of how we're performing, occupancy... Overall portfolio is still about 500 basis points below 19, but ADR is about 15% over. So we, look, there's still an opportunity to drive more occupancy. I'm proud of the team and the fact that we've been disciplined from a pricing standpoint. But there's definitely upside on the occupancy front. Obviously, some markets, I believe, are going to, accelerate faster than others. I think New York's an example where we've seen that really take off, and part of that's given the fact that you've got better regulation and obviously supply taken out. There'll be other markets that'll be a little slower to recover for a whole host of reasons. But we haven't given up. Perhaps some have abandoned certain markets. I think New York is a great example, and It's not back fully to where it was, but it certainly is approaching in a more compelling market today than it has been certainly the last several years. So we use that. Obviously, Chicago's having a great year city-wise on their record. New Orleans continues to be solid and saw the first quarter and another good year city-wise. Boston, D.C., certainly improving. There are other challenging markets out there. Seattle should have a very strong second quarter. But there are other markets out there that continue to remain challenged. L.A., San Francisco are two that will lag and probably lag for some time.
spk04: Okay. That's it for me. Thanks very much for the call. Okay.
spk09: All right. Thanks.
spk14: Thank you. Next question comes from the line of Ryan Lambert with J.B. Morgan. Please go ahead.
spk01: Good afternoon. Ryan on for Jogra. Just kind of wanted to frame the occupancy question a little bit differently. When you kind of look across industry segments, whether it's manufacturing or tech or consulting, you know, Do you have any sort of color there on how those are recovering and how meaningful those are for you guys to kind of make a full occupancy recovery?
spk11: I mean, I think ultimately as you think about those kinds of groups, you're kind of aligning with corporate negotiated type of demand, and that's certainly one that's been from the business transient, and that's really been a laggard as you think about relative to 19. I'd say on the demand side, you know, Oxfam-related, we're still down, call it, 35%, 40% in that specific subsegment of business transient. We are seeing improvement on that, and we've seen some of that demand come back on the business transient side overall. We were, I think, outperformed our expectations for the first quarter. We're up 13,000 room nights, about 3%, and that was across the board, including corporate negotiated as well as local negotiated and government negotiated. So we are seeing that kind of trickle back still, and I think it's certainly a good sign as we kind of look through Q2 into Q3. But I think there are certainly ways to go there, and we certainly know professional services, Deloitte to the world, PwC and the like are ultimately traveling less and probably will be for the foreseeable future. Remote work and return to office has been coming back a little bit slowly too, and that will certainly help the business transient. But I would say that in the end, We don't expect that to really fully recover. That said, at this point, that corporate negotiated segment is really about, call it 5% of overall demand historically. So if it ultimately gets back to 80% of it was, I wouldn't say it's a big drag in the overall portfolio. I think we'll overcome that with other aspects of whether it's leisure or group.
spk01: Thanks. That's helpful. And following up on sort of the capital markets discussion from earlier, In the past, we've kind of heard management teams across the industry talk about the difference between large and small assets and wondering with what you're seeing in the rate environment right now if that difference is starting to be less meaningful or if that's at all changed in your view. Thanks.
spk09: Yeah. I think it depends on the individual market, right? If you're in a market like Key West, where you're already supply constrained, and in our case, we've got Casa as an example, 311 rooms. I mean, we're driving as strong a rate as anyone. There might be hotels that are a little smaller. I doubt many that are larger. You know, as you think about other markets, New York is where we've got, obviously, a larger box. But if you've got the right demand-supply balance, and you've got demand generators and a tailwind, and you've got multiple sources of demand, meaning you're anchored with group, and then you can layer in your transient business more efficiently. I think the thesis that a smaller hotel is always going to be more efficient, in theory, you would think that that smaller hotel has more pricing integrity. But, you know, it's not a perfect story. And I think that we have demonstrated throughout our portfolio, if you think about Hilton Hawaiian Village, where you've got 2,900 rooms, and we run north of high 80s to 90% occupancy, and we can yield additional sources of revenue. It's done quite well for us and you're generating significant cash as a result of that. So it's a really good question, but I think it really depends on the facts and circumstances. Those that argue that the smaller hotels are the only way to invest, I would vehemently dispute that and love to engage in a dialogue about that.
spk16: Mr. Lambert, are there any questions? No, that's great. Thank you. Thank you. Thank you.
spk14: Thank you. There are no further questions at this time. I would now like to, we have one more question from, do you want to take it?
spk02: Sure, sure.
spk14: All right. This question comes from the line of Robin Farley with UBS. Please go ahead.
spk00: Great, thanks. Hopefully this wasn't asked already. How are you? My line's gotten dropped three times from this call, so I think you'd already answered my question about what was included in your original EBITDA guidance. Just two other things. One is, can you clarify, is there anything at all in your CapEx budget right now for Miami? Or would that not be anything in 2024, any spend on that? And then also you mentioned you expect some asset sales to be done this year. Is there a particular interest rate scenario that you need for that to happen or that you would need for your expectation to be met? Thanks.
spk09: There are pre-development costs on Miami, as you would imagine, architects, engineers, other selling design work. So there's work like that, but I would say not significant dollars being spent this year in 24. Regarding asset sales, we've sold in all conditions. Think back to the pandemic when we sold two assets in early San Francisco at record pricing in the middle of the pandemic. So it's We're not a distressed seller. We've set a target of at least $100 million in asset sales this year. We're confident that we'll achieve that. We'll be thoughtful about it. Clearly, uncertainty is the enemy of decision-making for both buyer and seller until the Fed makes its final decision. We think we all want to believe that the tightening cycle is over and At some point, the Fed will begin to lower rates. That certainly will help the debt markets, but I think there's so much liquidity out there that you'll start to see, I think, more activity here in the second half of the year on the transaction side.
spk16: Okay, great. Thank you. Thank you.
spk14: Thank you. There are no further questions at this time. I would like to turn the floor over to Tom Baltimore for closing comments.
spk09: Operator, thank you, and thank you for your help today. I look forward to seeing many of you next week and also at NARIT and safe travels.
spk14: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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