Park: ‘Wake-up call’ for the brands

Park

Park Hotels & Resorts CEO Tom Baltimore, said that the crisis was “forcing a reset and a wake-up call” for the brands.

Baltimore said that the relationship between brands and owners was “getting out of balance right before Covid”.

Baltimore said: “Our wonderful brand partners, they create brands and they're all about distribution.

“While their businesses are capital-light, their businesses are also dependent on having a really healthy ownership community. The owners and the franchisees have been hurt and they've been hurt hard. I suspect that, you will see these supply numbers continue to reduce over the near and intermediate timeframe. I think you're going to see less development. And so I would respectfully refute some of those pretty optimistic growth scenarios they have.”

The CEO said that Park had been working with its brand partners “to identify ways to eliminate cost from the business model, including revisiting both operational and capex brand standards, complexing positions, reinventing the food and beverage model and reducing above property expense allocations”.

Baltimore said that Park was “aggressively asset managing the portfolio”, including the “responsible suspension and subsequent reopening of hotels”. The company has reopened 16 hotels since June, increasing the total number of hotels open to 48 of 60 hotels, representing 80% of the portfolio.

Baltimore told analysts: “During the third quarter as we witnessed pockets of increased demand across our portfolio and moved closer toward a recovery.

“In terms of the remaining suspended hotels, four are in San Francisco. The city's lengthy restrictions on travel has suppressed leisure demand and its irresponsible healthy building ordinance has added unreasonable incremental cost. And with higher occupancy thresholds needed in New York and Chicago coupled with little or no business across these markets during the winter months, the New York Hilton Midtown and the Hilton Chicago will remain suspended through the rest of the year and likely through most of Q1 in 2021.

“We do not expect to see a meaningful increase in demand until vaccines and therapeutics become widely available. Given this current situation, we remain disciplined in our approach to hotel reopenings, moving forward only when the economic benefits, outweigh the cost in order to preserve our liquidity.”

He added that the group continued to look at opportunities for alternative sources of revenue, including housing for colleges and universities, medical professionals and those associated with professional sporting events. In addition, certain hotels are providing guest rooms as work spaces.

Looking at the transactions market, the CEO said: “We remain focused on continuing to selectively sell non-core assets with net proceeds expected to be used to pay down debt. While the bid-ask spread remains wide, there is a significant amount of capital on the sidelines and we anticipate a more active transaction market once the path to recovery is more apparent.

The Reit reported that revpar was $26.14, a fall of 86.1% from the same period in 2019. Occupancy for Park’s 33 consolidated hotels open during the entirety of the third quarter was 36.4%. The group reported adjusted Ebitda was $(89)m.

Looking at the remainder of the year, revenues were projected to be down over 90% and revpar declining over 80% with a slight improvement in demand as occupancy “should” continue to improve another 150 basis points from the third quarter

Park’s net debt was $4.2bn, with total cash and cash equivalents of $1.2bn the group amended its bank credit facilities to obtain additional financial covenant relief and increase its carve out for acquisitions funded with equity proceeds from $500m to $1bn.

Baltimore said: “We do not at this point see the need for any operating partners this time. And we certainly do not see the need for a dilutive equity offering at this time.”

 

Insight: It’s been all cheer and hail good fellow on the part of the brands this season. OK bigging up 30% occupancies might seem a little strange, but these are strange times and the brands need to sell themselves whatever the weather.

Enter the owners. And, for Park, which is heavy on the urban hotels, the comments are less sugar coated. The brands will have to work for their reduced fees.

In the long term Baltimore was more bullish, commenting: “I certainly wouldn't bet against a New York, or a Boston, or a DC, or Chicago, or even San Francisco. I really do think that there will be significant demand over time. And clearly there are huge barriers to entry in terms of getting new development done”.

There was also, he noted, the likelihood of supply being cut. He said: There's going to be more distress and more pain, there's going to be conversions. Is that conversions into residential is that into workforce housing, is that going to be homeless shelters? There's going to be a reduction in supply that's naturally going to come out of what's an extraordinarily unprecedented impact on – on our industry.”

Less supply is good news for Park. Less great for the brands and their pipeline hopes.