In 2021, leisure travelers finally took that long-awaited vacation, and U.S. hotels surged last summer. Based on demand trends and booking patterns, Park Hotels & Resorts executives believe group business could see a similar recovery in 2022 or 2023.
During a conference call to discuss the first quarter earnings of the Tysons, Virginia-based hotel real estate investment trust, Park Chairman, President and CEO Thomas Baltimore Jr. said the company's hotels generated significant group business for 2022 and 2023 in March as the omicron variant of COVID-19 started winding down. During the month, Park's portfolio added $44 million of group business and an additional 200,000 room nights over February's total.
"We are encouraged by recent trends and feel confident that our group-oriented hotels will realize outsize growth over the near term and will return to pre-COVID group demand levels in 2023," he said. "Additionally, we expect business travel to accelerate during the second quarter, paving the way for healthy portfolio-wide growth in the second half of 2022."
Park Hotels & Resorts has large hotels in its portfolio in markets such as New York City, San Francisco, Chicago, Boston, and Washington, D.C., among others, that are dependent on steady meetings business or citywide exhibitions. Baltimore said pent-up group business demand is apparent across the REIT's portfolio, and none of its markets still show signs of struggling or lagging.
"There have been a lot of people that have been certainly, understandably concerned about the group and the business transient on the urban [portfolio]. I think it's clear that those segments are accelerating and we are confident that that's certainly going to continue," he said.
With the pandemic, global supply-chain disruption and labor crunch in the construction business over the past few years, fewer hotels are being built, at least compared to historic averages. Baltimore said the low-supply environment across the industry will be a huge boon for Park's portfolio, including in Hawaii, San Francisco and Orlando.
"As we look out at our exposure vis-à-vis our peers, it's certainly at sub 2% [new hotel rooms in construction as a percentage of existing supply]. And as we look out across the industry, as we think about '23, '24, '25, you're below the long-term average of 2% and probably in the 1% range as you think about urban markets," he said. "It would be very difficult to replicate our portfolio, whether it's in San Francisco, New Orleans, Chicago, even the two-city block and what we have in New York. New York is probably the one market with a little more supply, but you've also got a bunch of hotels that are also being taken out and probably at a reset lower than where it was in the 2019 level."
That pipeline of new hotels is weighted toward select-service hotels — properties without full restaurants or conference space — which don't directly compete with Park's urban full-service hotel portfolio. Baltimore added that any potential competitors trying to enter Park's large urban markets will pay significantly more to reach Park's scale, and all Park will need to do is keep up with renovating its properties.
"While you're seeing other select-service, you're not seeing urban full-service hotels get done given the fact that that entitlement process can be three, four, five years," he said. "We see that being a real benefit, and of course we're going to trade at a huge discount for replacement costs, probably 55% plus or minus. And you're also seeing obviously this inflationary environment that's probably increased, given the fact that you're looking at replacement costs probably rising another 10% to 15%, if not more."
Park released a second quarter performance outlook but did not provide guidance for full-year 2022 performance. The company projects revenue per available room between $160 and $164, which translates to RevPAR growth between 14% to 16% behind second quarter 2019 RevPAR growth. Park also expects net income in the second quarter between $16 million and $36 million, and adjusted earnings before interest, taxes, depreciation and amortization between $160 million and $180 million.
Baltimore was asked about the conservative second quarter guidance, and whether average daily rate at Park's leisure destinations might have a tougher comparison this summer. He said Park's properties in Hawaii and Key West will likely maintain consistent high rates even if ADR growth isn't as high this year.
"We see no real retreat other than probably pockets of just 'trees don't grow to the sky,' and given the fact that Key West has just been so extraordinarily successful, that a slight moderation there is not unreasonable," Baltimore said.
Park's resorts in Hawaii — the Hilton Hawaiian Village Waikiki Beach Resort in Honolulu and the Hilton Waikoloa Village — also stand to benefit from the return of international travelers, specifically inbound demand from Japan, he added.
"They spend more and they stay longer. ... That recovery, that return is coming and really is going to be robust and pretty significant. So we are really encouraged by that, and we fully expect that in the second half of '22 and '23 and beyond," he said.
Disposition Strategy
Park Hotels & Resorts aims to sell between $200 million and $300 million in non-core portfolio dispositions this year, Baltimore said.
"There's tremendous capital, whether it's private equity, whether it's high-net-worth, whether it's sovereign funds," he said. "And clearly, as we look out at certainly limited supply growth, as we demonstrated last year, we sold five assets for $477 million at pretty attractive cap rates and multiples. We see really no slowing down of that. The debt markets are a little choppy, and have widened out a little bit, but it's still no real hindrance in getting a deal done."
Once those deals are finalized, Park will use the proceeds to buy back stock, invest in portfolio return-on-investment projects or pay down its debt, he said.
This year could be a busy season of major hotel mergers and acquisitions, and if that's the case, Baltimore said he wouldn't be surprised.
"I've been one of the stronger advocates for the need for consolidation or 'take-private' in the sector, and obviously Blackstone knows this industry as well as anyone and other [private equity] firms," he said. "So I would expect, again, just given the amount of capital that's on the sidelines, that clearly the hotel trade would accelerate over time."
First Quarter Performance
During the quarter, Park Hotels & Resorts reported a net loss of $56 million, which was a 70.7% gain on the first quarter of 2021, according to an earnings release. Adjusted EBITDA was $82 million, up 1.8% from the fourth quarter of 2021 and up 267.3% from a year ago.
Across Park's portfolio of 46 hotels and resorts, pro-forma occupancy during the first quarter was 51.9%, ADR was $224.42 and RevPAR was $116.42.
As of press time, Park's stock was trading at $19.50 per share, up 3.28% year to date. The NYSE Composite Index was down 9% for the same period.