Park Hotels & Resorts CEO Tom Baltimore Jr. says his company is ready to move on to the next stage of growth, focusing on acquisitions to expand brand and operator diversity. But the right deals have to become available to make that a reality.
TYSONS, Virginia—After selling $519 million in noncore assets in 2018, Park Hotels & Resorts President and CEO Tom Baltimore Jr. indicated his company is approaching the long-promised point of purchasing new properties to expand “brand and operator diversity.”
Baltimore has long said that’s a goal of the company, which spun off from Hilton at the beginning of 2017.
Speaking during Park’s fourth-quarter and full-year 2018 earnings call with investors and analysts, Baltimore described his company as “open for business” in regards to purchasing new hotels, portfolios or even other real estate investment trusts.
He noted some of the barriers that kept Park from being buyers earlier in its life cycle are no longer in the way.
“Clearly, in the first two years there were safe harbor restrictions and other tax issues we had to be sensitive to,” he said. “And I thought as a new public company, we had to earn our stripes and have operating discipline.”
Baltimore said the company’s ongoing asset management initiatives to improve profit margins across its portfolio—and its continued focus on its top luxury and upper-upscale assets—has proven out that strategy.
Buying and selling
Baltimore was peppered with questions from analysts about what kinds of acquisitions Park would be looking at, and he stressed the company, while eager to become more diverse beyond just Hilton-branded and operated hotels, will remain “thoughtful and disciplined.”
“We’ve demonstrated that we’re very prudent capital allocators,” he said. “But we’re excited about our growth prospects. It’s important to have that brand and operator diversification, and we want to add Marriott and Hyatt properties to our portfolio at the appropriate time and pricing.”
Asked what kind of deals Park will pursue, Baltimore said the company is willing to look at anything that makes economic sense and is accretive within the upper-upscale and luxury segments in the top 25 U.S. markets. He said the company will maintain a bias toward large group hotels in those markets, and is more interested in properties with established cash flow than those that would require significant investment to realize their potential. He said that latter point was driven largely by the belief that the hotel industry is late in its current cycle.
“Doing something transformative at this point in the cycle is not something we want to take on,” he said. “That’s something you do earlier in the cycle and is better-placed in private equity platforms.”
Baltimore was asked if he would be interested in investing in independent properties, to which he reiterated his preference to work with brands and the advantages they provide with their loyalty programs and distribution platforms.
“I’m a brand guy,” he said. “I believe in their strength, but I believe in soft brands to tie (independent or boutique properties) into those portals.”
Baltimore told analysts he wasn’t concerned that adding properties from different brands would negatively impact the “special relationship” his company has with Hilton.
Diversification “is terribly important for us in the long term,” he said. “Think about the evolution of the old Host (Hotels & Resorts) to where they are today, and that brand diversity is important.”
Baltimore also said he has long believed the hotel REIT sector is overdue for mergers and acquisitions, as evidenced by the RLJ Lodging Trust-FelCor Lodging Trust deal in 2017 and the Pebblebrook Hotel Trust-LaSalle Hotel Properties deal in 2018.
“At the end of the day, capital is going to go to the most efficient manager, and it’s not efficient to have 16 or 17 lodging REITs,” he said. “Over time, that’s going to change, in my view.”
But he also noted Park won’t be chasing large portfolios at low cap rates just for the sake of getting a deal done.
“We’re not a buyer of that kind of real estate at this point in the cycle,” he said. “That’s not prudent.”
The company will remain dedicated to its capital recycling strategy, he said, noting there are “another five to eight noncore assets in various stages of the marketing process.”
The company sold 12 hotels and a joint-venture interest in the Hilton Berlin in 2018. So far this year, the company has sold the Squaw Peak Resort for $51.4 million, bringing its total sold assets to $570 million.
Rebranding in Orlando
Park officials are expanding the meetings space at the Hilton Orlando Bonnet Creek—in what Baltimore described as an “arms race” in the Orlando market—that will culminate in the hotel converting to one of the first Signia Hilton properties for Hilton’s new meetings- and events-focused brand.
When asked by analysts how he viewed the potential risk of affiliating with a new brand for a marquee property, Baltimore said views Signia Hilton as a safe flag.
“We have great confidence in our partners at Hilton,” he said. “I think there was a need for a sort of ‘Hilton plus’ brand, and Signia does that. We’re hearing from meeting planners that they want that sort of upgraded experience. Working with a new brand is always a risk, but Hilton has a demonstrated track record of launching new brands. And I view this as more of a brand extension or upgrade, so it’s not taking away the advantage of affiliating with Hilton.”
Positivity around group
Baltimore said his company’s strategy to focus on group business is paying dividends and will continue to do so throughout 2019 and 2020, especially in San Francisco, as convention business bounces back following the renovations of the Moscone Center.
“We’re prepared to reap the benefits of strong group demand across several key markets,” he said. “And grouping up will remain a key focus of Park’s in the next few years, which should support above industry average (revenue per available room) growth through 2020.”
Park officials are projecting 2% to 4% RevPAR growth for 2018, with net income between $294 million and $323 million and adjusted earnings before interest, taxes, depreciation and amortization of $745 million to $775 million.
Q4 and full-year performance
Park saw RevPAR grow 2.9% for full-year 2018 to $174.29 and 3.6% in the fourth quarter to $170.57. That growth was largely buoyed by rate growth, with average daily rate up 2.4% for the year and 2.8% for the quarter.
The company’s adjusted EBITDA for the year was $754 million, down slightly from 2017’s $757 million.
As of press time, Parks stock was selling at $31.35 a share, up 21.4% year to date. The Baird/STR Hotel Stock Index was up 13.3% for the same period.