While group business isn’t expected to bounce back for some time, Park Hotels & Resorts executives said they believe in their long-term strategy of building around big group hotels.
TYSONS, Virginia—Executives with Park Hotels & Resorts believe they have a winning long-term strategy, albeit one that is especially challenged in the near term.
Speaking during the company’s first-quarter earnings call with analysts, President and CEO Thomas Baltimore Jr. said just 15% of the company’s 33,000 rooms are currently open as the company and global economy cope with the spread of COVID-19.
But the large group-driven properties that are Park’s bread and butter are not heavily represented in the sliver that remains open.
“The majority of the hotels that remain open are either airport or suburban properties housing airline crews or special circumstance groups,” he said. “A small number of our urban hotels are operating with extremely limited capacity to house medical-related demand. We expect to resume operations at some hotels beginning in early June subject to easing of restrictions and near-term demand.”
Baltimore doesn’t expect the company’s New York properties, such as the New York Hilton Midtown, to be in that first wave of reopenings. Instead, those are more likely to open at some point in the late third or fourth quarters of this year.
Baltimore said some major markets like New York are feeling the crisis more acutely than others, and New York in particular suffered from negative supply-demand dynamics during the previous cycle. Ultimately, the coronavirus-related shutdown will tamper supply in that market as some hotels are converted to alternative uses like affordable housing, he said.
But ultimately, Baltimore feels Park’s long-term strategy of “grouping up” and solid asset management of big-box hotels is a winning one.
“Regarding our strategy, intermediate and long term, it certainly hasn’t changed,” he said. “We think that this portfolio, we continue to reshape and improve it. Our top 30 hotels, which obviously are urban, convention center, resorts, the operating metrics of that I think play very well against our peers.”
The more near-term hopes for the company are pinned on a rise in leisure demand in “drive-to” markets, he said.
“There are 12,500 of our rooms that are effectively in drive-to markets where we think in the interim as we work our way through this recession and ultimate recovery that we can certainly be competitive,” he said.
Baltimore said his executive team won’t lose its “laser focus” on its established strategy, which includes selling off non-core assets. Dispositions might temporarily be shelved, though, as the transaction market works through a COVID-19-driven bid-ask gap.
“I honestly think the discount gap is too wide right now,” Baltimore said. “I see sellers who would like to sell at a 10% to 15% discount, depending on needs. But buyers are looking for north of 30% to even 40%. There is plenty of liquidity looking to go into that sector, but the gap is too wide to expedite any kind of transaction.”
Asked if he expects the ongoing crisis to expedite mergers and acquisitions among hotel-focused real estate investment trusts, Baltimore said consolidation is necessary in the sector. But he also doesn’t believe Park will be a participant in that for the foreseeable future.
“Park is not interested in (M&A) at this time,” he said. “We’re laser-focused on getting through this crisis so we’re well-positioned when the recovery begins.”
Asked if the company has more of an appetite for smaller deals, Baltimore’s response was similar.
“We’re more focused on our balance sheet, cash preservation and right-sizing the operating model,” he said.
While performance figures came in as expected for the first two-and-a-half months for Park, the drop-off the company saw in mid-March was severe, as are the early returns for April.
According to the company’s Q1 earnings release, revenue per available room fell 22.6% year over year to $136.27. The company posted a $689 million loss for the quarter, which they attributed to “a $607 million non-cash impairment loss related to goodwill allocated to Park from Hilton in the spinoff and $88 million of non-cash impairment losses related to long-lived assets, primarily associated with one hotel.”
The company has formulated a monthly burn-rate of $70 million a month, assuming all of its hotels had to completely close, and Park officials said they’re well-capitalized to survive with $1.2 billion in liquidity.
As of press time, Park’s stock was trading at $8.03 a share, a 69% drop year to date. The Baird/STR Hotel Stock Index was down 41.1% for the same period.