Park Hotels & Resorts Inc. (PK) Q2 2018 Earnings Report, Transcript and Summary

Greetings. And welcome to the Park Hotels & Resorts Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Weissman, Senior Vice President, Corporate Strategy for Park Hotels & Resorts. Thank you. Mr. Weissman, you may begin.

Thank you, operator, and welcome, everyone to the Park Hotels & Resorts second quarter 2018 earnings call. Before we begin, I would like to remind everyone that many of our comments made today are considered forward-looking statements under Federal Securities Laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. In addition, on today’s call, we will discuss certain non-GAAP financial information such as FFO and adjusted EBITDA. You can find this information together with reconciliations to the most directly comparable GAAP financial measure in yesterday’s earnings release, as well as in our 8-K filed with the SEC and the supplemental financial information available on our website at pkhotelsandresorts.com. This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of our second quarter 2018 operating results and updates to the second phase of our capital recycling program, as well as 2018 guidance. Sean Dell’Orto, our Chief Financial Officer, will provide further detail on our second quarter financial results, an update to our balance sheet and additional color on our insurance claim. Rob Tanenbaum, our Executive Vice President of Asset Management, will be joining for Q&A. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom

Thank you, Ian, and welcome everyone. I am very pleased to announce a great second quarter, which we materially outperformed across several key metrics, highlighting our internal growth strategies of recycling capital, improving margins, grouping up and unlocking embedded value through our ROI projects. Our relentless focus on these priorities contributed to tremendous success in the second quarter, and we expect continued progress and success in the quarters ahead. Turning to operational results, comparable RevPAR for the portfolio increased 4.3% during the quarter, while comparable hotel adjusted EBITDA margin improved by a 150 basis points to 31.9%. Group revenues exceeded expectations and were up an impressive 17.7%, driven by San Francisco up 55%, New York up 33% and Chicago and Key West, which were each up over 20%. In addition to contributing to strong banquet and catering revenues, strong group trends also allowed us to better yield transient rates to drive overall profitability. Total revenues for our comparable portfolio increased 6.2% during the second quarter, F&B revenues at our comparable hotels increased nearly 10% with a 14% increase in banquets and catering revenue leading the way. The enhanced cancellation policies deployed by Hilton, also contributed to a 65% increase in cancellation and attrition revenue. The combination of increased revenue across multiple sources and the measured control of expenses led to impressive flow through for the quarter, driving our significant margin improvement. In addition, hotel-adjusted EBITDA of $228 million and adjusted FFO per diluted share of $0.93 came in well above our expectations. We are very pleased with our results this quarter, which further illustrates our internal growth strategies are working. The group revenues throughout the quarter resulted in the group segment improving nearly 400 basis points to 34% of the total mix. Group’s strength primarily came from corporate group, which was up 35%. This is particularly encouraging as we think about group business going forward, as strength on the corporate group side indicates optimism in the broader economy, and a return to corporate spending with the latest forecast for non-residential fixed investment spend of 6.5% this year and over 4% forecast for 2019. This resurgence has led to a noticeable improvement in group pace for both 2018 and 2019 in our portfolio since the first quarter. 2018 group pace improved a 110 basis points to 4.7%, while 2019 group improved 240 basis points to an impressive 9.2% and 6.8% when you exclude San Francisco, setting the stage for what we believe will be a banner group year for our portfolio. We witness notable improvements in 2019 pace in key markets like Chicago and New York throughout the quarter, up 890 basis points and 660 basis points respectively, which indicates that the booking window continues to lengthen. Our short-term group pick-up also mirrors this improving group trend. We picked up over $6 million of in-the-quarter for-the-quarter group revenue across our comparable consolidated portfolio, which was $2 million more than last year. And since we currently have over 94% of group revenue on the books for 2018, we remained very optimistic that we will meet our group revenue goals through the balance of the year. The shift in mix to focus on group contributed to a 4.2% decline in transient revenues for the quarter. While a reduction in transient room nights drove the reduction in transient revenue, transient ADR increased 2.9% as we were able to effectively yield demand due to the large group base. Also, when analyzing our weekday demand trends during the quarter, we are encouraged to see that business travel demand was up in the low-to-mid single-digits among our non-resort portfolio, and the outlook going forward into the third quarter is also encouraging. And while we saw a slight decline in the leisure-related demand, decline was partially due to the Easter shift, and we expect leisure to improve in the second half of the year. Diving into our major markets. Our two San Francisco assets with nearly 3,000 rooms and a 160,000 square feet of meeting space led the way, reporting a combined RevPAR increase of 13.7% and significantly outperforming their respective comp sets during the quarter. Group revenues were up 55% over the second quarter of 2017, which was the quarter most impacted by the Moscone Center closure last year. Group production at both hotels was well ahead of expectations, benefiting from room block increases for groups on the books and also short-term group pick-up. Our two San Francisco hotels improved margins by over 500 points for the quarter on a combined basis. Looking forward, we expect group to remain strong for the second half of the year. And our San Francisco complex should see group revenue increase in the low-to-mid-teens for 2018. We are very excited by the outlook for 2019 for these two assets with the group pace up over 17% or 23,000 room nights. Continuing the strong grouping, we also saw favorable results at the Hilton Chicago and the New York Hilton Midtown. Hilton Chicago posted a RevPAR increase of 10.5% in the second quarter, which vastly outperform the comp set by 740 basis points and the overall Chicago market by 650 basis points. The hotel did a phenomenal job driving group business throughout the quarter, while also controlling expenses as group revenues increased over 22% and margins improved 250 basis points. Turning to New York, a 33% increase in group revenues led to a record setting food and beverage revenue quarter of nearly $33 million and total group catering contribution reached over $450 per group guest in May, due in part to the hotel hosting a large group in May, which produced over $5 million in catering alone. The hotel’s second quarter RevPAR of 5% outperformed this comp set by 350 basis points and the overall New York market by 80 basis points. Both hotels every favorable outlook for the balance of the year. Hilton Hawaiian Village continued its steady performance fueled by a combination of healthy group and transient demand. Hotel ran at an impressive 95% occupancy for the quarter and RevPAR increased 3.3%, outperforming its comp set by 30 basis points. Margins improved by 140 basis points. As discussed during the first quarter, there continues to be some choppiness in Far East wholesale business. There have also been some shifts in Japanese visitation trends to Hawaii, Oahu has continued to see softer Japanese inbound travel. However, we remained confident in the overall demand fundamentals and our iconic asset’s unique positioning in Oahu, particularly when considering Southwest Airlines’ expansion into Hawaii in 2019. In terms of our Hilton Waikoloa Village hotel that is located on the Big Island of Hawaii, we are seeing a slight impact from the volcanic activity that began in early May. However, we want to stress that our hotel is not at risk of any danger with the property located on the opposite side of the Island, nearly 100 miles away from the volcanic activity. However, we expect some continued modest impact until the situation stabilizes. As a reminder this hotel is non-comparable and therefore not included in our portfolio operating metrics due to the scheduled giveback of rooms to HTV through 2020. For modeling purposes, we estimate that the lost EBITDA inclusive of the impact in the second quarter could be in the range of $3 million to $5 million, less than 1% of the company’s adjusted EBITDA expected for 2018. This compares to the $38 million of EBITDA the hotel was budgeted to generate in 2018. Florida had weaker results this quarter, as the Easter shift and unfavorable weather conditions negatively impacted leisure demand. Our RevPAR -- while RevPAR was down 0.4% for our Florida portfolio, EBITDA margins improved a 100 basis points, highlighting the effectiveness of our asset management strategy and our ability to drive other sources of revenue, while also controlling expenses. Our three Orlando properties posted a slight RevPAR decline for the quarter of 0.7%, the Bonnet Creek Complex had a challenging transient quarter, although positive group revenues and growth in ancillary revenues sources like cancelation in resort fees contributed to a 2.7% increase in total revenues. Looking forward, we expect our Orlando hotels to be relatively flat for the balance of the year with potential of third quarter softness due to tougher comps being offset by a stronger fourth quarter. On to our asset management initiatives. We continue to make significant progress on both the revenue enhancement and cost containment initiatives. In terms of our grouping up initiative, our top 25 assets improved their group base by 410 basis points during the second quarter to 35.2%. And we expect the progress to translate into measurable group mix improvements for the full year, increasing roughly 30 basis points to 30.5%. Given the lead time for booking group business, we are pleased with our progress this year and remain on target to reach our goal of improving the group mix, our top 25 assets to 35% over the next couple of years. Now I’d like to provide an update on our capital recycling efforts. As announced in our last call, we closed on the sale of the Hilton Berlin during the second quarter, which represented the final hotel and our highly successful Phase 1 asset disposition program, in which we sold 13 non-core assets, 10 of which were located outside of the U.S. for $519 million and recycled the proceeds to repurchase 14 million shares owned by H&A at a significant discount to NAV and pay special dividend of $0.45 per share. Park now has an ownership interest in just four hotels outside of the U.S., accounting for approximately 1% of EBITDA, down from 14 hotels and 5% respectively at the beginning of the year. During the quarter, we also started the marketing process for the sale of four additional non-core assets as the initial part of Phase 2 of our capital recycling program. These assets account for approximately $24 million of EBITDA and averaged just a $108 in RevPAR in 2017. In addition, we expect to market an additional three to four non-core assets as part of Phase 2 with similar metrics well below our portfolio average. We will keep you posted on our progress as the marketing process for the initial phase of Phase 2 unfolds, as well as any progress made on the subsequent set of assets in the months ahead. Turning to guidance. Looking forward to the remainder of the year, although our third quarter is our weakest group quarter of the year, we are encouraged by the pick-up during the second quarter as we added over $14 million for the third quarter, which is nearly $3 million more than last year. We also anticipate stronger transient demand and remained positive about the outlook for the rest of the year. Although group demand is a bit softer next quarter in San Francisco, relative to a tough comp from last year, we are still forecasting group to be up in the low-to-mid single-digits with a very strong quarter during Q4 with the portfolio from in-house group bookings. Finally, there will be some hurricane-related noise as Orlando lapse a strong third quarter last year, while Key West should have very favorable results as it compares to the weak third quarter and fourth quarters from 2017. Given our better than expected results during the second quarter, we are adjusting our guidance range 2018. Specifically, we are increasing our full year RevPAR guidance by 100 basis points at the midpoint to a new tighter range of 2% to 3% with adjusted EBITDA increasing by $15 million at the midpoint to a new range of $730 million to $760 million, while EBITDA margins increased by 50 basis points at the midpoint to a new range of flat to a positive 60 basis points improvement and our adjusted FFO guidance increases by $0.06 at the midpoint to a new range of $2.84 to $2.96 per share. Before turning the call over to Sean, I want to reemphasize that our team remains laser-focused on executing our internal growth strategies and remains committed to partnering with Hilton and future operators to meet and exceed our operational goals and create long term shareholders value. With that, I will turn the call over to Sean. Sean Dell’Orto: Thank you, Tom. Looking at our results for the second quarter, we reported total revenue of $731 million and adjusted EBITDA of $228 million. Adjusted FFO was a $187 million or $0.93 per diluted share. Turning to our core operating metrics. Our comparable portfolio produced a RevPAR of a $186 or an increase of 4.3% during the second quarter. Our occupancy for the quarter was 86.1%, up 1 percentage point over last year, while our average daily rate was $216 or an increase of 3.1% versus the prior year. These top-line trends resulted in hotel-adjusted EBITDA of $215 million for our comparable portfolio. However, our comparable hotel-adjusted EBITDA margin was 31.9%, which was a 150 basis point increase over the prior year. Our top 10 hotels had a very strong quarter to lead the portfolio with RevPAR increasing 6% to $217 and hotel-adjusted EBITDA margin improving a 170 basis points to 33.2%. These hotels recorded strong growth and other sources of revenue as well with total RevPAR increasing 8.8% to $361, and group revenues increased nearly 20% across the top 10, fueled by San Francisco, New York and Chicago. Moving to our balance sheet. Park remains in solid financial shape with over $1.2 billion of liquidity, including our $1 billion undrawn revolver. Pro forma for the asset dispositions, net leverage on a trailing basis is currently at 3.7 times below the midpoint of our targeted range of 3 times to 5 times. Turning to dividends, on July 16, we paid our second quarter cash dividend of $0.43 per share, as well as a special dividend of $0.45 per share related to the sale of the Hilton Berlin. And, as of last Thursday, our board declared our third quarter cash dividend of $0.43 per share to be paid on October 15 to stockholders of record as of September 20. This dividend currently translates into an implied yield north of 5.5%, maintaining our position as one of the highest yielding stocks in the lodging sector. Finally, we like to provide an update on our insurance claim related to Caribe Hilton Hotel in Puerto Rico, which is still on track for a soft opening in mid-December this year as our team has been working tirelessly to restore this iconic property. To-date, we have received $60 million, including $45 million received over the past eight weeks as we have ramped up the restoration work. We have also received $7 million of business interruption proceeds, which is included in the $60 million. When netted against carrying cost and other expenses, we recorded approximately $5 million of the BI proceeds as EBITDA in the quarter. Over the coming weeks, we expect to receive another $25 million advance, which includes another portion of BI. This would increase our cash proceeds received to-date to $85 million. And when added with our $11 million deductible, will have totaled $96 million against the combined damage and BI claim as currently estimated to be a $168 million for the resort property. For modeling purposes, we want to note that the EBITDA related to business interruption receipts and our original guidance is $8 million, equating to a full year’s worth of EBITDA from the Caribe Hilton. As just discussed, we have reported net BI proceeds of $5 million thus far and we expect to receive additional BI funds this year and in early 2019. Overall, we remain confident that our insurance coverage is sufficient to cover the vast majority of the total cost of damage and business interruption resulting from last year’s hurricane in excess of our deductibles. We continue to work with our insurance representatives and other advisors to process our insurance claims in an efficient and timely manner. That concludes our prepared remarks. At this point, operator, we’d like to open up to questions. In the interest of time, we’re asking all participants to limit their response to one question and one follow up. Operator, may we have the first question please?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Rich Hightower with Evercore. Please proceed with your question.

Hi, good morning, everyone.

Good morning, Rich. How are you?

I’m doing well. Thanks, Tom. Tom, I want to start with the market for transactions. Obviously, Park has had a lot of success with Phase 1 and the first part of Phase 2 of the asset sale program. So, maybe just segmenting the overall transaction market, can you talk about what you’re seeing in terms of what we might refer to as secondary markets or assets versus maybe some of the more higher RevPAR, more iconic asset that Park over time wants to gravitate to. Just what are you seeing in those different segments, cap rates, depth of the buyer pool, valuation and so forth?

I think one of things, Rich, I want to point out is just keep in mind how laser-focused we’ve been on the internal growth strategies. We really think that by executing that well, we think that’s really kind of our three value principles which you’ve heard me talk about many times. Our operational excellence, I think you checked the box. You look at prudent capital allocation, I think we continue to demonstrate that. I think [ph] ancillary is a cash funded probably as well as can be executed. Obviously, the stocks are up [Technical Difficulty] since that, Sean and team have done a fabulous job on balance sheet. So, those guiding principles really guide everything that we do. We will always keep those at the center. And when we think about kind of the next phase, what we’ve always concluded is that as we seek to sort of recycle capital and reshape the portfolio, doing that we’ve now sold 13 assets, we’ve got another 7 or 8 out at the various stages of the process. And the ultimate plan is that we’ll take those proceeds from say Phase 2, recycle those in a tax efficient way probably through the 1031 and to be able to match fund and to be able to use that opportunity for brand and operating diversification. Wonderful relationship with Hilton. They know, and we know that it’s important that we broaden that first to have to or at least clearly being able to expand into both Marriott and Hyatt family of brands. So, stay tuned. There is nothing to report today. That’s clearly a priority for us as we move forward. We are constantly monitoring the transaction market. No doubt that those more iconic assets certainly gotten our lot of attention. I do think as we continue to execute our plan, continue to improve obviously our multiple, our NAV up I think gives us the optionality to really be affordable and competitive player there. Also keep in mind that those other family of brands would love to have Park included. So, we still have assets that they either control or influence that allow us to be competitive. We work hard to try to find as many assets as we can sort of off-market. Rest assured that that first deal that we announced, we know that it’s important, it should be middle of the fairway, it should be compliant with our strategy, our focus on upper upscale and luxury and there are markets where we’re underrepresented, certainly DC, Boston, Miami, Southern California both LA and San Diego coming by and there are pockets certainly within center of the U.S. that we would also consider. I’d ask that at the right price. We’ve recognized that there could be a little bit of near-term dilution since that what we’re going to be selling our Phase 2 assets more versus what we’ll be buying, very thoughtful about that with the story, the plan that really minimizes any market. We are closed and plugged in and we’ll be ready to execute, we’re confident that we’ll certainly be in play.

Okay. Thanks for the color, Tom there. And then maybe just shifting to something that was said in the prepared comments. You’ve mentioned, and others have mentioned that the booking windows are lengthening with respect to group business sort of in the out years. Can you quantify that for us, just kind of give us a sense of what an average booking window for a sizable group looks like today versus where we were a year ago or two years ago, just so we have a sense of that?

I think a couple of things there to say, Richard. Let me get at it a little differently, I think it gets to the real part of your question. And that is, I think the economic environment is really, obviously it’s certainly due to regulation, tax reform on residential fixed investment spending which you heard me talk about earlier in prepared remarks, up 6.5% forecasted in 2018, again that’s up, continues to be up quarter-to-quarter here. If spread continues, it’s expected to be up, the latest forecast is around 4% in the 2019, historical high correlation with RevPAR is certainly over 90%. So, that provides a backdrop and it provides an environment where businesses are more likely to invest, spend. And what we’re seeing is, not only the short-term pick-up, but also the ancillary revenues. So, part of that I think ties into economic environment. We’ve talked -- you’ve heard me talk about whether or not we’re in sort of a super cycle kind of 10 years to 15 years, we’re obviously 9 years in this business cycle and additional business cycle is about 7 years that’s such a [ph] lenient recovery. I think it’s fair to say, and I think we’ve lost a reasonably confidently that this side will have at least a couple of more years, if not more. But one of the things that I would note is that you’re seeing a shift in my view from U.S. growth, shifting from say consumer to business led. And I think that really gets those businesses investing, getting their men and women back on the road, getting meanings and having more people attend in the ancillary spend. That’s I think what we’re seeing and what some of our peers are seeing. I do think Park is uniquely positioned to take advantage of that given the fact that we’ve got iconic properties, we’ve got 10 assets with over a 125,000 square feet of meeting space and it gives us the optionality to really grow our business. And I think the second quarter is just really a great example of that. We’re firing on all cylinders. We had all of the avenues open up of ancillary revenue. Bob Tanenbaum and his team, asset management team in combination with our operating partners at Hilton are clearly laser-focused on maximizing the opportunity that our properties cover. A quarter doesn’t make a year, but we’re really pleased that at the Park work is paying off is really useful.

Okay. Thanks, Tom.

Our next question comes from the line of Smedes Rose with Citi. Please proceed with your question.

Hi, thanks. Tom, you mentioned an additional…

Good morning.

Good morning. You mentioned an additional three to four non-core assets that you could also bring to market as well. Can you -- do you have a range of kind of what amount of EBITDA would be attached to those properties?

Yeah. All eight of them, Smedes, approximately would be in the $40 million range. Similar profile of what we saw largely in Phase 1 RevPAR that 30% to 35% below our portfolio average. Capital savings probably in the $90 million to $100 million. So, again, when you look at our portfolio, our top 25 assets really account for about 85% of EBITDA. And our strategy will be in a distant way to take that remaining 15% of EBITDA in an orderly way, some are more actionable today than others. And we’ve got seven to eight, we’ve got four that we’re currently marketing and other three to four that we’re in the process of getting ready to market there, cleaning our joint venture issues and lease issues et cetera. We are working aggressively to get it -- to get those assets sold as quickly as we can and again recycle that capital into higher growth markets. We really want to earn another flag. We’d really like to recycle that capital into asset or two in a higher growth market.

Okay. I wanted to ask you as well, just you noticed that the pace, group pace is up 9% for 2019, group obviously outperformed in the quarter, I think relative to at least our expectations. So, how much do you kind of attribute to the overall efforts that you’ve talked about just increasing your overall group exposure and where do you think that it will be as a percentage of occupancy next year say versus where it’s been historically versus just a recovery in some markets like San Francisco, which I think has been well [ph] telegraphed?

Yeah. No doubt that San Francisco is a great tailwind as we set up 9.2%. When you take San Francisco out, we are still up 6.8%. So, Hawaii is up 25% next year; New York is up another 4%; Orlando I think is up 5%. Our top 10 assets, which are really behaving like a top 10 to think about it, they’re up 10%. So, I would say two things again. In fact, and this is what we’ve been saying, those just aren’t words for us. They are the mission, we’re focused. We believe that we’ve got a great portfolio that incurred really an opportunity to leverage our national strength which is really going to be on the group side, layer in obviously transient business, some contract business and drive that incremental transient so that it’s a far more efficient sell that we showed the real benefit of that. As Rob has talked about, number we’ve hired 104 men and women that are exclusively focused on our portfolio, sort of business development managers, generating worth of $2 million to $2.5 half million in business. So, it’s certainly in the environment and corporate spending and investment in all of that is healthy, but we’re also getting more than our fair share of it, representing key evidence growth of 9%, which candidly, would not be surprised to that number increased here as condition still remained favorable. I think the one thing for listeners I think is really important is if you think back to New York, the great example, decision was made a few years ago, right from New York only to sort of take that, make it more of a transient, shrink the hotel, focus less on the food and beverage and ancillary catering and type of revenue, just sell loans. What probably made sense three years, four years, five years, six years ago before there was this onslaught of supply. What we concluded after two minutes that we’ve got the best group hotel in New York. So, always going to be new, from the dominated first choice there, and I think together with our partners we’re beginning, our partners with Hilton, we’re beginning to see real benefit of that. So, we’re going to do a 190 to 2,000 room nights, probably it’s the highest in the last four years to five years. That’s an example of really playing to your strength, playing focused there to be able to look through the booking pace even in New York now, we’re going to be up 7% here that’s embedded in that 4.7% in 2018 and that grows to another 4% or so next year. Third quarter will be our softest, we knew that coming into the year, but even that we closed the gap. So, it feels very good about what we’re doing, making good progress based on this prior lease that we’ve been communicating.

Great. Thanks for all that color.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning, everyone.

Good morning, Anthony.

Good morning. So, continuing on the group theme, you mentioned that you are taking some market share. Are your hotel taking share within their markets, are the markets themselves taking share from the other locations in the country? And going forward, do you think there is more group demand growth over time or do you expect that most of your growth would come from taking share from competitors?

No doubt that we’ve been taking -- we outlined in the prepared remarks, we’re taking share in our respective comp sets, but expect this to -- again when you think about the portfolio and our natural mapping if you will, we have 10 hotels with 125,000 square feet of meeting space surely make sense. I do think that we’re -- going back to my earlier comment about this part of the cycle being business led than consumer led, we’re seeing that really in some of the new week trends as well. So, mid-week RevPAR has been growing now faster than what we’ve been seeing over the weekend. So, I think 3.5% up to couple of digits north of 2%. So, that again, shows that non-residential fixed investment spend and corporate profit and you think lower unemployment which is forcing companies to think about what do I need to do, those dynamic men and women on my team. So, are they doing celebration, more training to understand it. So, you’re seeing I think across the board in even the pick-up that we saw on corporate group of 35%, it was really broad-based for our portfolio.

Got it. Thanks. And also, the resort and cancellation fee growth seem to be having a real impact on the bottom-line. How much more upside do you think there is to revenues and margins from those sources?

Rob Tanenbaum will answer that for you.

Anthony, we continued to buy additional opportunities with our resort fees, we’re adding new properties, Hilton Santa Barbara which is our recent conversion back on April 27 to the Hilton family. It’s starting -- it’s resort fee is $25 per day there. And we’re also improving and increasing our resort fees that sticks out of the short as well. So, we’re looking everywhere and anywhere and amenities that we’re offering in Short Hills to further push that. So, we believe our run rate comes along to 2019 opportunity.

Got it. All right. Thank you.

Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question.

Great, thanks. Hey, good morning, guys. So, on the margin front, how much of the increase was driven by expense savings versus operating leverage on that 6% revenue growth number?

Lukas, you were -- I wasn’t able to hear you. Please repeat the question please?

Sure. So, on the margin front, how much of the increase there was driven by expense savings versus just operating leverage on a 6% revenue growth trend?

I don’t have that exact number, you know I’m pretty good, but not remembering the numbers. I would say probably a 60-40 is my initial, but we’ll certainly research that and get back to you.

Okay. And then secondly, New York seems to be rebounding pretty nicely after a tough couple of years. I’m just curious, do you have any color on what’s driving the improvement there or is it just that all the other substitute markets have seen substantial ADR growth and New York’s kind of lagged on that front or what’s kind of driving that?

I think there a couple of things that play in New York. I mean, look, New York has largely missed this cycle. It’s been obviously the big increase in supply versus in sort of on the select service side, 35% to 40%. So, you really haven’t had sort of a pricing power. And if you saw Lukas probably back to 2011, 141 of these sort of super compression days and dropped down in 2016 to about 88, so about a 38% decline there. So, you’ve had I think a really circular shift in New York. We made the conscious decision here at Park that we were going to play to our natural strength and again focus on being the best group house [Technical Difficulty] our business to group and payer and obviously contract business and then efficiently and it’s changing, and I think second quarter is just a great example of really the hard work, the plan, it takes time to go to full pace. And so, we’ve been doing that with our partners at Hilton and look forward to our positioning as we move forward. New York is a great market. We’re still running 5% occupancy. So, supply is still getting into work and I believe close to 90% last quarter and we love New York long-term. I also take the initiative to certainly help regulate, level the playing field with some of the shadow supplies also helping as well, never really thought that. We don’t mind the competition, but we certainly want the playing field to this level. We pay taxes, we file safety [ph], we get a pay requirement. I think now as the shadow supply is being limited and drifted and contained that also I think will help the competitive landscape in New York as well.

Awesome. Very helpful. Thank you.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning, guys. Congratulations, Tom. Good quarter. A couple of questions here. You noted the big increase in collection of cancellation fees, I think you said up 65% or something like that. I’m just wondering if the cancellation policy by Hilton is actually having an impact on the number of cancellations? Sean Dell’Orto: Bill, it actually is -- what’s really happening when you think about it, it’s changing the way that guests are booking hotels now. It’s allowing our inventory to be available to us sooner -- closer to day of arrival. So, it really has -- it changes [Technical Difficulty] some of the airlines did, changing the way the business was happening here, but number of cancellations are definitely not up.

All right. That’s helpful. The second topic is, I think we’re kind of lapping the stop clicking around marketing campaigns. So, two part question. Number one is, is it working, has it worked, has it effectively steered the bookings over to the website in your portfolio? Number two is, are we seeing a narrowing of the ADR differential, pure discounts to get people to book direct?

Yeah. I’ll answer in a couple of different ways. So, I think Hilton and Marriott have given their brand segmentation, given their global sales, given their royalty programs and I was looking the other day at Hilton, I think Hilton had two years ago, 2.5 years ago when I joined Hilton for my second college union, it was spinning apart. I think there was 53 million members in the royalty program and it think it's worth to mentioned now 78 million [Technical Difficulty] expected to be north of a 100 million. So, Marriott is well north of a 100 million today. And now our occupancy growing from say 50% to almost 60% of that now being royalty, plus given the optionality they have through all of the channels, whether its cards or the credit cards or through engagement. So, no doubt that it is cheaper, more efficient. One of the things that [Technical Difficulty] customer acquisition costs more that we can push back demand through those channels and more that the brand had engage, customers certainly want that engagement, they want digital key on check-in. That engagement, that personalized service is only going to increase over time. And I think those dominant brands really have full arsenal available to them are powerful and more useful. We’re clearly seeing the benefit of that and expect that over time.

Okay. Do you have seen -- have you seen a material change in the booking -- in bookings moving over to their website?

Yes. Certainly, without question, there has been a shift.

Okay, perfect. Thanks. That’s it for me.

Our next question comes from the lien of Shaun Kelly with Bank of America. Please proceed with your question.

Hi, good morning, guys. So, I just wanted to ask about, obviously the group up strategy has paid big dividends. So, could you just remind us at a high level, what’s your kind of overall anticipated group mix across the portfolio and maybe for the top 10 assets, but for 2018? And then given the big resurgence in San Francisco kind of any clue on where you think that mix is going to end up for 2019?

Yeah. If you think about it, Shaun, we said we’re up 400 basis points. So, it’s been huge in the second quarter, but we said even for the year, we have 30 basis points and probably around 30.5%, 31%. So, what we -- there is still a huge upside in this initiative and that’s one of the things we certainly want to stress. We’re making progress. As we’ve said, we think in the next couple of years, we’ve been moved there from 31% to 35%. Also, it’s going to vary as we continue to shrink the portfolio and obviously unload some of the non-core assets. So, we think this is critical for us, we’re demonstrating that and we’re firing on all cylinders like this in the second quarter incremental revenue will get the incremental flow through. We also said that look, if you look at margins, we needed to be at 2.5% before we thought we could really grow margins on a positive. Clearly, we’re moving in that. If you look at our revised guidance, we’re 2.5% obviously for the midpoint, we’re obviously now expecting margins to be positive. So, we feel really good about where we are in this journey. And I think 35% is achievable. I think the timeline I would say probably in that 2020 range plus or minus. We’ve -- I would say respectfully think that over the last 18 to 19, 20 months I would say that I think we’ve exceeded every key metric from recycling capital to H&A trade to Gladstone’s departure, to tend to reshape the portfolio, to the back office and moving off of that -- off of Hilton’s back office, I think team here is working hard and the goal that we’ve set, we’ve met or exceed shorter timeframe.

And Tom, would getting 2019 will be the biggest step function in kind of let’s call it 30% to 35% move, just given San Francisco and maybe -- or is there anything else meaning space expansion in Orlando or anything else that you need to see that jump?

Yeah. As I said, I think if you’re looking for 35, Shaun, I’d be closer to say 2020. So, we think about it internally. But when you look at Orlando and Bonnet Creek, I mean we’ve got I think just the junk there. We are going to add the additional meeting platform which will make us more competitive against strong peers there. And candidly, we’re also looking Hilton to exploring a Hilton plus brand, certainly more than that and we’re thinking as part of that we’ll also certainly be able to upgrade that overall facility which will improve not only for leisure and transient side, but also on the group side as well. So, I clearly see 2019 being a step up. I don’t think that 2019 gets us all the way bigger, I think it’s probably closer to 2020, 2021.

Understood. Very clear. Thanks a lot. Solid quarter.

Our next question comes from the line of Robin Farley with UBS. Please proceed with your question.

Hey, this is Jake on for Robin. So, you’ve mentioned…

How are you? Q - Unidentified Analyst Good. So, you mentioned compression in New York last year, couple of years. Can you tell how compression is trended on kind of a portfolio level and maybe around some other markets? And with supply kind of topping in coming years, how do you see the compression outlook going forward?

There is lot embedded in that question. If you look at where we ended the quarter, probably up 86% occupancy, looking where the industry is, there is clearly some pricing power that’s building. I also think again having that tailwind of solid leisure coupled with a stronger business transient and certainly stronger group gives us really the optionality in many markets to put it again to push and look at compression. Clearly, as we think about next year San Francisco is going to be significant when you add $1.2 million plus or minus of city wides coming there, up 60%, 65% to 70% depending on who you believe. And we’re going to be up 17%, a lot of that in-house group. So, huge compression opportunities there. New York is not anywhere near it was back in the 2011 timeframe. But we benefit obviously from Hawaii for those compression opportunities there, we’ll be at 25% next year, we already run 95% occupancy. So, that will give us an opportunity to our top 10 by and large being up 10% in next year. It’s certainly better than that, I won’t name [Technical Difficulty] but also it will give us opportunities for compression as well.

Great. Thank you.

There are no further questions in queue. I’d like to hand the call back to management for closing comments.

Thank you so much. On behalf of the Park team, we wish you all a great summer. And look forward to seeing you in the upcoming conferences and certainly on our next earnings call 90 from today. Have a great summer.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.