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Absorbing Chesapeake gives Park a path for 2020 growth
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Courtesy: Sean McCracken | News Source:

TYSONS, Virginia—With stronger-than-average revenue growth and the recent acquisition of Chesapeake Lodging Trust, Park Hotels & Resorts officials said they have plenty of cause for optimism heading into 2020 even if macroeconomic conditions are less than ideal.

Speaking during the company’s third-quarter earnings call Thursday, President and CEO Tom Baltimore Jr. said the company has plenty of room for growth via its internal strategies even as the industry faces headwinds.

“We’re cognizant of the ever-changing macro backdrop, and remain confident in our strategic plan,” he said.

The company closed on a $2.5-billion deal to acquire Chesapeake’s 18 hotels on 18 September, and Baltimore said the company is now pivoting to a two-pronged approach of unrolling asset-management initiatives to improve profitability of the hotels in its portfolio and disposing of non-core assets.

That includes a newly announced deal to sell the 182-room Ace Hotel and Theater Downtown Los Angeles for $117 million.

Baltimore said Park is currently looking to sell six properties worth a value of $550 million, the proceeds of which it will use to sell down debt.

Properties included in that total are Park’s joint-venture interest in the Conrad Dublin for $127 million and the 503-room Hilton São Paulo Morumbi for $125 million. With the sale of those hotels, Park will no longer have any international hotels.

The company also announced plans to terminate the ground lease on the Hilton Sheffield Hotel before 31 January 2020.

Paying down debt has been a priority for the company since the Chesapeake deal pushed Park above its targeted leverage level, up to 4.4 times net debt to earnings before interest, taxes, depreciation and amortization, and Baltimore said he’s confident the wave of deals will be enough to get the company for a more palatable debt-to-earnings ratio of four times.

He said market interest in Park’s remaining assets is strong, noting there has been “little if any pullback in pricing” from potential buyers.

Baltimore said there are several reasons to be optimistic about the legacy Chesapeake hotels going forward, including the fact that many recently underwent significant renovations, and Park’s strategy of garnering a higher-rate of group business instead of chasing high occupancies could yield more profitability through attracting high-paying guests.

Strong internal asset-management efforts will continue to be a priority across the company’s portfolio, Baltimore said, and he’s hopeful the company will be able to hold down expenses even as revenue flatlines.

“We’re going to work our tails off to maintain” relatively low expense growth, he said.

While labor costs continue to be a challenge, he said the company has recently renegotiated union contracts, giving it good visibility into how those costs will increase. What is less predictable is how property tax increases will shake out in 2020.

“Property taxes continue to be a wild card, and I don’t see that changing,” he said. “Municipalities continue to want to overtax commercial real estate.”

Baltimore also noted the company will be looking at stock buybacks as cash becomes available due to executives’ beliefs that the current stock price is well below the net asset value of Park’s portfolio.

Q3 performance

The legacy Park portfolio saw revenue per available room increase 1.9% to $183.51, according to the company’s Q3 news release, with flat occupancy and a 1.9% increase in average daily rate. That was a higher rate of RevPAR growth than many of the company’s real estate investment trust peers realized in the quarter, Baltimore said.

The company saw even more significant growth in total RevPAR, which accounts for other revenue streams like food and beverage, with a 4.9% year-over-year increase.

Park had adjusted EBITDA in the quarter of $180 million, a 7.1% increase.

Park officials revised full-year 2019 RevPAR guidance downward to a range of 1% to 2%, with an adjusted EBITDA target of $768 million to $788 million.

Baltimore told analysts he remains confident his company will be able to maintain higher-than-average RevPAR growth, relative to other U.S. hotel REITS, into 2020.

As of press time, Park’s stock was trading at $23.35 a share, a year-to-date decrease of 10.1%. The Baird/STR Hotel Stock Index was up 12.9% for the same period.

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