San Francisco weakness sinks Park’s second quarter
San Francisco weakness sinks Park’s second quarter
04 AUGUST 2017 7:33 AM

Weakness in San Francisco is causing short-term headaches for Park Hotels & Resorts officials, who said they remain optimistic about the market long term.

MCLEAN, Virginia—Following the first quarter of 2017, Park Hotels & Resorts officials were hopeful they could drum up sufficient demand to outperform their competitors in San Francisco even amid the ongoing renovations at the Moscone Center.

That optimism wasn’t rewarded in the second quarter, they said, and weakness in the market was enough to push year-over-year revenue-per-available-room growth into negative territory (down 0.2%) for the company’s entire portfolio in the quarter. With San Francisco taken out of the equation, RevPAR was up 1.7% for the quarter.

Tom Baltimore, chairman, president and CEO of the company, said despite the short-term issues, he and his company remain positive on their outlook for the Bay Area.

“I want to emphasize that we remain bullish (on San Francisco) in the long run,” he said. “I believe we hold a competitive advantage in the market with nearly 3,000 hotel rooms and 360,000 square feet of meeting space. We’re positioned to reap outsized benefits from the Moscone expansion.”

The company’s two hotels in the market, the Hilton San Francisco Union Square and the Parc 55 San Francisco, saw RevPAR decrease 12.5% and 11.5%, respectively, for the quarter.

Baltimore pointed out the Moscone work could ultimately add 1.2 million annual roomnights to the city.

The company had originally planned to do some renovation work on the Hilton San Francisco Union Square starting in the first quarter of 2018, but pushed up that work to start in the fourth quarter of this year to better take advantage of the Moscone-induced demand earlier.

The worse-than-expected results spurred Park officials to push down the high end of their full-year 2017 guidance for RevPAR. Company officials had expected flat to 2% growth but are now projecting flat to 1%.

CFO Sean Dell’Orto said the company’s focus on cost containment and asset management is expected to keep that weak RevPAR growth from affecting margin and earnings before interest, taxes, depreciation and amortization.

“We expect our asset management efforts to take hold later in the year, so net net it will be largely immaterial,” he said.

As of press time, Park’s stock was trading at $26.01 a share, down 3.8% year to date. The Baird/STR Hotel Stock Index was up 25.8% for the same period.

Disposition strategy
During the call, Baltimore reiterated his company’s plans to sell of 10 to 15 of what he described as noncore assets before buying more properties to seek brand and operator diversification following the real estate investment trust’s spin off from Hilton earlier this year.

The noncore assets are “in lower growth markets with below average RevPAR growth, are capital-intensive and remain a drag on management’s resources,” he said.

He said those properties fall outside the company’s target of iconic upper upscale and luxury hotels in top 25 markets. Some of those assets are international, which he said due to taxes and regulatory issues are more difficult to hold. He said his plan is to flip those assets to enable Park to buy more high-quality hotels.

Baltimore said he believes his company will be able to successfully compete for assets with a price tag of over $100 million once Park’s stock is trading at a price he feels is appropriate for the value of their portfolio.

“Rest assured, this team is laser focused on making sure it’s minimizing or eliminating any dilution,” he said.

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