Before buying, Park to sell lowest-performing hotels
Before buying, Park to sell lowest-performing hotels
04 MAY 2017 3:28 PM

In the long term, Park Hotels & Resorts CEO Tom Baltimore sees his company making significant acquisitions, but for now, he said, the company’s focus will be on selling off its lowest-performing assets.

McLEAN, Virginia—Executives at Park Hotels & Resorts want the relatively new real estate investment trust to be one of the biggest players in the REIT space and to focus solely on upper upscale and luxury properties in key markets.

But the company’s current portfolio doesn’t entirely fit into the vision, and that’s why Park CEO Tom Baltimore said the first step in the REIT’s maturation will be selling off assets that fall outside of that criteria.

Ultimately, the move could generate capital for the company to then acquire more favorable assets.

“While the team is still in the early stages of the analysis, they have identified a potential pool of 10 to 15 noncore assets representing $40 million to $45 million of (earnings before interest, taxes, depreciation and amortization) that are likely candidates for sale,” he said on a call with investors to discuss first-quarter earnings. “Generally speaking, these assets are located in secondary markets both abroad and here in the United States, with an average (revenue per available room) 25% below the portfolio average.”

He said for tax purposes, those proceeds would be used to purchase new assets, focusing “exclusively on upper upscale and luxury branded hotels across the top 25 largest MSAs in the United States.”

He noted that, at least in terms of EBITDA, the company is currently very top-heavy, with the top 10 hotels accounting for 61% of the total EBITDA and the top 25 accounting for 82%. The company currently has 56 properties.

Baltimore said there are a lot of reasons for his company to be acquisitive, including realizing the benefits of additional scale and diversifying beyond Hilton-branded hotels following Park’s spinoff from that company. But he reiterated a point made during the fourth-quarter earnings call that his company is unlikely to make significant acquisitions in 2017.

Baltimore said he remains optimistic his company has significant room for growth, even absent acquisitions activity. He said the company has ground to make up in terms of profit margin, compared to Park’s lodging REIT peers.

He said the company’s early efforts in asset management have been encouraging, and Park’s close relationship with Hilton will help attain healthier margins quickly.

“We believe we can unlock embedded value that exists within our core portfolio by closing the margin gap relative to our peer set—a gap that we believe we can reduce by a 150 to 200 basis points over the next 18 to 24 months by employing an active asset management strategy,” he said.

HNA at the table
Park EVP, CFO and Treasurer Sean Dell’Orto noted that in March, HNA Group picked up a 25% stake in the REIT, in a move similar to the Chinese travel conglomerate’s purchase of a 25% stake in Hilton in October. (HNA owns Carlson Rezidor Hotel Group and part of NH Hotels.)

That means HNA will get two seats on the Park Hotels & Resorts Board of Directors.

“While we have nothing to report on this front just yet, we expect the HNA-nominated directors to join our Board in the near future,” Dell’Orto said.

Q1 performance and 2017 outlook
The company saw comparable hotel RevPAR increase 1.7% year over year for domestic hotels during the first quarter and 1.4% overall. Adjusted EBITDA increased 4.1% to $177 million, with $2.3 billion in net income for the quarter.

Among individual assets, Park saw some of its highest performers in markets that lately had been lagging, with the Hilton Chicago seeing RevPAR jump 17.5%. Park officials said this was a combination of better overall performance in the market, which was up 8% across the company’s various assets there, and the fact that hotel was undergoing renovations in 2016.

The company maintained its guidance of flat to 2% RevPAR growth for full-year 2017.

As of press time, the company’s stock was trading at $25.99 a share, a decrease of 13% year to date. The Baird/STR Hotel Stock Index was up 20.9% for the same period.

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