Park CEO: Good days ahead for hotels but obstacles loom
Park CEO: Good days ahead for hotels but obstacles loom
02 APRIL 2019 8:16 AM

The rising costs of customer acquisition, wages, taxes and insurance concern Park Hotels & Resorts CEO Tom Baltimore Jr., but he foresees the industry’s lengthy up-cycle continuing through at least 2020.

ATLANTA—Tom Baltimore Jr. sees good days ahead for his company Park Hotels & Resorts and for the overall hotel industry—even though there are challenging issues knocking on their doors.

Speaking after receiving the 10th annual Hunter Conference Award for Excellence and Inspiration, Park’s chairman, CEO and president, told event attendees he sees plenty of opportunities remaining for hoteliers in this lengthy positive economic cycle. He said he doesn’t foresee a recession for 2019 or 2020.

“We’re in an elongated period in part because obviously we had a relatively slow and modest recovery coming through … coming out of the Great Recession,” Baltimore said, adding that the current economic cycle stands at 10 years—about three years longer than the normal cycle. “As a result of what we’re seeing coming out of the tax reforms and deregulation, I really think there’s more running on in this cycle.”

Among the key economic indicators, Baltimore said he looks at nonresidential fixed investment spending and its high correlation with the hotel industry’s revenue per available room, the unemployment rate and corporate profits.

But at the end of the day, RevPAR is the key performance indicator for his company, he said.

“The pundits are still saying 2% to 2.5% RevPAR growth,” he said. “C-corps are 1% to 3%; REITs tend to be little more aggressive than that.

“A lot of that will depend on your geographic makeup … if you have a huge distribution in San Francisco given what’s happened there, you’ve got a great tailwind to look forward. We happen to be well-positioned there,” Baltimore added. “In markets where there’s limited supply growth. Hawaii, San Francisco—even Orlando, obviously, there’s so many hotel rooms and other brands … it’s hard to add more supply. But even then you’re looking at the demand, it seems to grow in that market among others.”

New York City’s supply growth during the past few years makes it an especially interesting market—one that he expects will be a strong performer, Baltimore said.

One metric that keeps Baltimore bullish is consumer confidence.

“Personal balance sheets are still solid in grouping and consumer confidence being at an 18-year high—that’s a nice tailwind as well as we move forward,” Baltimore said.

“I think we’re solid for ‘19. I think ‘20 looks good,” he said. “Some believe we might have a slight pullback in ‘21. We’ll see and have to watch that.”

Rising costs—particularly from wages, property taxes and insurance—are among Baltimore’s top concerns. He said wages increased 3% in 2018, and 40% of public lodging real estate investment trusts addressed increased property taxes on their fourth-quarter 2018 earnings calls, with 40% of those REITs also addressing increased property insurance expense.

Park’s portfolio stands out in REIT land
Park, which Baltimore launched in 2016 as a real estate owner when it spun out of Hilton, had a portfolio of 52 hotels with an enterprise value of approximately $9 billion, when Baltimore spoke at Hunter. The company has since announced the $17.5 million sale of the Hilton Nuremberg, bringing the portfolio to 51 properties. Baltimore previously had been a co-founder of RLJ Lodging Trust, another lodging REIT.

“We’re actually the 25th largest REIT,” Baltimore said of Park. “There are about 200 REITs, so when you look across all the asset types, to build that and to do that, when you think about the fact that we started with nothing—we didn’t have a name, we didn’t have a board, we didn’t have office space. I had a designated CFO, and to build all that in six months and then launch the company, it’s been an incredible journey. And it’s been a lot of fun as well.”

As of press time, Park’s stocks were trading at $31.56 per share, up 23.5% year to date. The Baird/STR Hotel Stock Index was up 12.1% for the same time period.

Baltimore said the company sold 13 assets in 2018 for proceeds of $519 million and posed 2.9% year-over-year same-store RevPAR growth. It has sold two more assets in 2019.

“Our returns have been significant: going for 37% since the (initial public offering), and we’ve been fortunate to outperform many of our peers. We’ve had a number of internal growth issues that we’ve been really focused on,” Baltimore said. “We’ve also been recycling capital and focusing on ROI projects, spending time and trying to improve margins and grouping up this large portfolio because we thought those were really the core issues for (us).”

“I tell the team that we’re judged every day as a public hotel venue. And the first two years are good; we can’t rest on our laurels; we’ve had strong performance, and that could change quickly if you underperform and make bad decisions,” Baltimore said. “We happen to be the second largest (lodging REIT) today, and we’ve got bold and aggressive plans like many of our peers.”

Baltimore said there are three guiding principles in the REIT landscape—regardless of whether the company is privately held or publicly traded:

  1. Operational excellence. “It’s really important to actually take care of the guests. You drive the topline, you get great flow-through, you have the margins … and all of those things (are) so important for us,” he said.
  2. Approved capital outtake. “We have to distribute all of our capital, all of our profits, the dividend is at least 90% to retain our REIT status. We choose to distribute 100%,” Baltimore said. “We’ve got to go back into the equity markets to continue raising capital for growth, so investors have to believe that you’re a good capital allocator.”
  3. The inability to leverage up debt: “Having a low-levered balance sheet becomes terribly important for our success,” Baltimore said. “Investors prefer that we be low-levered, given the volatility in business. I do miss being able to lever up 70, 75% as we did in our private equity days.”

Loyalty programs make a difference
Brands do matter in this age of rapidly changing distribution landscapes, according to Baltimore. He cited customer acquisition costs as the top thing that keeps him awake at night, and said loyalty program membership is a key indicator of the importance of brands and one route to containing those customer acquisition costs. He pointed to the 120 million members of Marriott International’s Bonvoy loyalty program and the 85 million members of the Hilton Honors loyalty program as proof that the brands will continue to play a major part in the distribution puzzle.

“It’s amazing now that 50% to 60% of contribution is coming through those loyalty programs,” Baltimore said. “The ability to be able to understand through the engagement, through the benchmarking … understanding a branding preference becomes critically important as we look to the next generation.

“We’ve got to continue to figure out ways to drive that direct relationship” with online travel agencies, he added. “Those loyalty programs are going to be an incredibly important vehicle and tool available to us as we move forward.”

However, Baltimore also cautioned the industry—and brands in particular—to beware of unbridled supply growth.

“Brands like to plant flags, developers like to build hotels, occasionally we get a recession,” he said. “The beauty of this industry —and I think we’re at a really good balance today—and that is that the value proposition is dependent on a healthy owner community. We have to always maintain that balance. We’ve got great push and pull today and it’s something we’ve got to continue to manage as we move forward.”

The other major issue that needs to be addresses is the lack of women in leadership positions—in management roles and on boards of directors—in the hotel industry, according to Baltimore.

“I challenge myself with every search we have to make sure that we’ve got a broad outreach,” he said.

The CEO pointed to Leslie Hale, the current president and CEO at RLJ, as a prime example as looking beyond the industry to find female candidates. Hale worked at General Electric Capital Corporation and Goldman, Sachs & Company prior to being hired by Baltimore at RLJ in 2005.

“To see that we only have one in five women in the C-suite, one in 25 women of color, I encourage all of us to continue to do more in this area,” Baltimore said. “If you have women leaders in your companies — senior VPs, EVPs, in the c-suite — what happens is the impact that it has on your company. Because women will want to join to say, ‘She’s there. She’s a great role model. She’s somebody that I aspire to be.’ … Those companies and those industries that get this, I think are going to be far more successful over the long run.”

Baltimore noted that Park has two women on its six-member board of directors—Patricia M. Bedient and Christie B. Kelly. In addition, two members of Park’s 11-member leadership team are women—Jill C. Olander and Diem T. Larsen.

Five other thoughts from Baltimore’s speech:

  1. “I’d like to see a ceasefire in the arms race. I was on an NYU (International Hospitality Investment Conference) panel in 2006, and I made a comment we were going to flat screen TVs and we were at 27-inch, 32-inch, and then suddenly we were at 45, 50, 60, 70. It never seems to end. I don’t think the size of the TV drives customer preference. I’ve been saying it for a long time, and I’m not sure there’s a difference much between 36 and 55. But I do think these are issues that we’ve got to be talking about.”
  2. “We’ve got to really begin thinking about technology and big data, and how we can improve and understand those customer preferences, those behaviors, how we engage as we move forward.”
  3. “We’re making a lot of progress getting a level playing field with Airbnb. I welcome the competition. I just want a level playing field.”
  4. “Sustainability becomes increasingly important. As a public company, we continue to get more and more inquiries from investors, from analysts, about (sustainability-related issues). It’s not going away. The other side of that sustainability: We also have that sensitivity on the workforce. As we think about ‘going green,’ well what does it mean? Does it shorten their hours, does it make us more efficient? Do we still have the opportunity to retrain those that maybe displaced as part of that process? The same goes with technology as we look at the front desk that ultimately will be affected by it. … At some point we’re going to see AI and robotics affect our business more and more. So these are things that are all important as we all want to improve our margins.”
  5. “I don’t know about the rest of you, but I sure do miss those days when we could charge for Wi-Fi. And I sure am glad that the same-day (room) cancellation days are gone.”

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