Park Hotels & Resorts Inc. (PK) Q4 2018 Earnings Report, Transcript and Summary

Greetings. Welcome to Park Hotels & Resorts fourth 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]. Please note, this conference is being recorded. I would now turn the conference over to your host, Ian Weissman, Senior VP of Corporate Strategy. Mr. Weissman, you may begin.

Thank you operator and welcome everyone to the Park Hotels & Resorts fourth quarter and full year 2018 earnings call. Before we begin, I would like to remind everyone that many of the 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 fourth quarter and full year 2018 operating results and an update on our capital recycling efforts as well as establish guidance for 2019. Sean Dell'Orto, our Chief Financial Officer, will provide detail on our fourth quarter financial results and 2019 guidance, in addition to providing color on the value-add CapEx projects we plan to kick off in 2019. Rob Tannenbaum, 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. 2018 was another exceptional year for Park and its shareholders as we successfully achieved the strategic goals we outlined 12 months ago. For are our internal growth efforts, we focused on operational excellence by improving profitability across our portfolio through a combination of RevPAR growth, grouping up strategies and margin expansion. As a result, our operational results came in above expectations, with the portfolio generating solid RevPAR growth of 2.9%, while our initiatives to aggressively asset manage the portfolio contributed to the 60 basis point increase in our margins, materially outperforming our peer set on average. With respect to capital allocation, we successfully recycled 13 non-core assets for gross proceeds of $519 million, greatly enhancing the overall quality of our portfolio, while lowering our exposure to international markets to just 1% of total EBITDA. Finally, in 2018, we returned over $900 million of capital to shareholders in the form of dividends and the HNA stock buyback, taking our total return of capital figure to nearly $1.9 billion since spinning out from Hilton a little over two years ago. Overall, these efforts have allowed Park to generate superior shareholder returns, outperforming our hotel REIT peers by nearly 1,400 basis points and the broader REIT index by nearly 400 basis points, while significantly narrowing the valuation gap with our peers. Overall, I couldn't be prouder of our success and in particular the hard work and dedication put forth by the entire team at Park. As I look ahead to 2019, I remain confident in our ability to continue achieving our objectives. While we recognize there is heightened concerns about slower economic growth and ongoing cost pressures, we believe Park is well-positioned relative to our peers as we have prepared ourselves to reap the benefits of strong group demand across several of our key markets. As we have noted in the past, grouping up will be a key focus for Park over the next couple of years and should help to support above industry average RevPAR growth through 2020. Additionally, fueled in large part by the success of our grouping up efforts, we expected to continue narrowing the margin gap with our peers, forecasting another 30 basis points of absolute margin growth at the midpoint of our guidance range in 2019. Turning to our portfolio's performance. I am pleased with our overall results for both the quarter and full year 2018. Comparable RevPAR growth was 2.9% for the year, which was at the top end of our guidance range with the fourth quarter RevPAR growth topping 3.6% or nearly 100 basis points ahead of consensus. Our comparable hotel adjusted EBITDA margin increased 40 basis points during the fourth quarter and improved by nearly 60 basis points for the year, helping to continue closing the margin gap with our peers. Our asset management team has done a terrific job partnering with Hilton and sourcing both revenue and cost-saving opportunities across several of our key properties, as witnessed by our growth throughout the quarter and the year. These initiatives continue to remain a key driver for our internal growth story. Within our revenue segments, group was up 3.8% for the quarter and 5% for the year. At this time last year, we had expected pace to be approximately 3% in 2018 and we are very pleased with the increase in group pace throughout the year. On the transient side, comparable revenue increased 1.7% for the quarter and was down just 0.1% for the year. The fourth quarter was boosted by a healthy increase in the business transient segment, which was up 4.2% and was partially offset by 0.4% decrease in leisure revenue. Overall, 2019 is off to a very strong start with January RevPAR up approximately 6% or 3%, when stripping out San Francisco. February is also trending above 7% and we expect the first quarter to realize about 4% to 5% RevPAR growth. Looking more closely at our quarterly performance across our core markets. Standouts include Key West with RevPAR up nearly 32% or 290 basis points better than we had forecasted driven by strong transient demand. We remind listeners that the hotels were closed for 12 days in the fourth quarter of 2017 following Hurricane Irma, which hit the island in September of that year. San Francisco also surprised to the upside with the Hilton Union Square and Park 55 reporting RevPAR growth of 13.6% during the fourth quarter, both increasing share within the comp set. Hilton Chicago was also strong with RevPAR growth exceeding 6% for the quarter due to strong group production which helped to drive higher transient rates. Offsetting these gains were softer results at our Hilton Hawaiian Village Hotel with the property reporting a 2.3% decrease in RevPAR during the quarter driven by slightly weaker group and continued fallout from softer international wholesale demand. Our hotels still grew share during the quarter to 107% or by 500 basis points, continuing a trend we have seen all year. Also, our Bonnet Creek hotels in Orlando reported a 0.2 RevPAR gain for the quarter as the complex faced tough year-over-year comps due to strong demand related to displaced residents from Hurricane Irma in the fourth quarter of 2017. Looking ahead to 2019. I remain very optimistic on the fundamentals of our business and particularly our strong group pace. Group pace for 2019 is up over 10% with Hawaii and San Francisco both clear standouts with group pace up 23% and 17%, respectively, while momentum is expected to continue into 2020 with our portfolio's overall group pace up just over 9% next year. Additionally, while convention room nights are down in Chicago, New York, New Orleans and Orlando this year, our group pace across each one of these markets remains positive. Turning to San Francisco. With the Moscone Center renovation complete and convention room nights up 78% to $1.2 million, we expect the city to be among our top performers in 2019, with RevPAR growth forecasted to be in the mid to upper single digits. In Hawaii, we expect our two hotels to collectively generate RevPAR growth above the top end of our 2019 RevPAR guidance, specifically at our Hilton Waikoloa Village Hotel, group pace is up nearly 80% with the hotel benefiting from two separate group buyouts while facing easier year-over-year comps following disruption related to last year's volcanic activity, which negatively impacted income by approximately $5 million in 2018. At the Hilton Hawaiian Village, results are expected to be driven in part by a forecasted increase in group pace of roughly 8%, coupled with favorable booking trends in Asian wholesale business, a reversal of the trend we experienced last year. A testament to the team's efforts to proactively group up business in an otherwise soft citywide year is best illustrated by both Chicago and New York, two markets which are expected to witness a 30% plus drop in citywide room nights in 2019. Despite these challenges, our group pace in Chicago was up nearly 8%, while in New York we are expecting group pace to be up north of 6% with the hotel also expected to benefit from solid increases in transient demand led by contract and business transient. Our Orlando portfolio should generate positive growth in spite of some of the anticipated renovation displacement during the fourth quarter as we expect to break ground on the meeting space expansion at our Bonnet Creek Complex that will be delivered during the second half of 2021. Collectively Hawaii, San Francisco, New York, Chicago and Orlando account for over 60% of our comparable hotel adjusted EBITDA lending support to our positive view on 2019 fundamentals. Another standout in our portfolio is the Hilton Santa Barbara Resort, which continues to gain additional momentum and should post very strong results following last year's brand conversion. Moving on to our capital allocation initiatives. Building on last year's success, Phase 2 of our non-core asset sale program is well underway, having recently reported the sale of the Hilton Squaw Peak Resort for $51 million, with net proceeds of approximately $48 million to be used for general corporate purposes, which could include funding future ROI projects. As it relates to additional sales, we remain committed to our capital recycling efforts with the potential for another five to eight non-core hotels in various stages of the marketing process. Turning toward 2019 guidance. While the U.S. economy remains on firm footing supported by a strong job market, healthy corporate profits and a sturdy consumer, it is hard to ignore the potential headwinds our industry faces in the wake of slower global growth, wage pressures and the risk of an ongoing trade war with China. That said, lodging fundamentals remain sound especially for those companies with the right geographic footprint. We believe Park is uniquely positioned to benefit from proactively grouping up across many of our core markets, including generating strong in-house group demand, thereby offsetting the impact of weaker citywide calendars across much of the U.S. With 80% of our group business on the books for this year, we remain cautiously optimistic on 2019. Accordingly, we are establishing comparable RevPAR guidance of plus 2% to plus 4% for the full year 2019, with a comparable hotel adjusted EBITDA margin range of zero to plus 60 basis points. While cost containment and ancillary income will remain an important driver of the margin story, results will now be more heavily weighted to our grouping up efforts. For the full year 2019, despite losing approximately $20 million is result of the expired ground lease at Chicago O'Hare in addition to residual income from the 14 assets we sold over the prior 12 months, we anticipate adjusted EBITDA to be in the range of $745 million and $775 million. We expect adjusted FFO per share to be in the range of $2.91 to $3.05. Sean will provide further details in his remarks on some of the other key assumptions driving our earnings guidance. And with that, I would like to turn the call over to him.

Thanks Tom and welcome everyone. Looking at our results for the fourth quarter, we reported total revenues of $686 million and adjusted EBITDA of $184 million, while our adjusted FFO was $147 million or $0.73 per diluted share. On a full year basis, we reported total revenues of approximately $2.7 billion, adjusted EBITDA of $754 million and adjusted FFO of $603 million or $2.96 per diluted share. Turning to our core operating metrics. For the fourth quarter, we reported comparable RevPAR of $171 or an increase of 3.6% versus the prior year. Our occupancy for the quarter was 79.7% or 60 basis points higher while our average daily rate ended the quarter at $214 or an increase of 2.8% year-over-year. These topline results produced comparable hotel adjusted EBITDA a $176 million, while our margins increased 40 basis points to 28.2%. For the full year 2018, our comparable portfolio produced a RevPAR of $174 or an increase of 2.9%. Our occupancy for the year was 82%, up 50 basis points while our average rate was $212 or an increase of 2.4% versus the prior year. These topline results produced hotel adjusted EBITDA of $716 million for a comparable portfolio with margins improving nearly 60 basis points year-over-year to 28.8%. Moving to our balance sheet. We remain in great shape with no major maturities until 2021 and net debt to adjusted EBITDA at just 3.7 times. We have over $1.2 billion between our untapped revolver and cash on hand, giving us ample liquidity to execute on the right opportunities. Turning to the dividend. With Q4 earnings coming in at the high-end of our expectations, we paid a Q4 dividend of $1 per share, which included a $0.30 per share component related to excess gains from assets sold during 2018. Our Board recently declared our first quarter dividend of $0.45 per share to be paid on April 15 to stockholders of record as of March 29, representing a 4.6% increase in our quarterly regular rate dividend. Similar to last year, we are targeting a full year payout ratio of 65% to 70% of adjusted FFO with a potential top up dividend to be paid in the fourth quarter. With respect to CapEx, excluding the amount related to Caribe Hilton, we invested $41 million in our hotels during the fourth quarter, about half of which was for guest facing areas, taking our full year CapEx spend to $147 million or roughly 6% of hotel revenues that we targeted at the beginning of the year. For 2019, we continue to target 6% maintenance CapEx spend while our ROI pipeline is expected to add an additional $25 million to total capital expenditures for the year. Given the increased CapEx spend, we expect renovation displacement to negatively impact RevPAR performance by approximately 70 basis points in 2019. But note that this displacement is already factored into our guidance. We are very excited about the renovation projects at both the Bonnet Creek Complex in Orlando and The Reach in Key West with targeted returns in the high teens for both. As a reminder, total ROI spend at Bonnet will be approximately $70 million to $80 million over the next 24 months. At The Reach, the scope of the project includes rebranding the hotel from a Waldorf Astoria to a Curio. In addition to a comprehensive rooms renovation and a restaurant reconcept. Total ROI spent for this project is estimated at $10 million and we expect construction to occur during the slower months of Q3 and Q4 this year. We hope you will be able to join us for a Key West property tour, we and several of our peers are hosting in early April, where we expect to have a model room to showcase. Turning to 2019 earnings guidance. I would like to provide a few more details on some of the key assumptions driving our 2019 adjusted EBITDA and FFO guidance. We would like to point out that there will be some seasonality in our quarterly performance with Q1 expected to be among our strongest quarters given easier year-over-year comps coupled with very strong group pace during the quarter. On the flip side, Q2 will likely work out to be one of our weaker quarters as several of our major markets face tough year-over-year comps, including San Francisco, Chicago and New York. Recall that group revenues during the second quarter of 2018 were up over 17% and therefore, group pace is likely to be flat to down slightly during the second quarter. We feel very good about the back half of the year though with strong group pace overall and with exceptionally soft performance expected in Hawaii, San Francisco and New York. On the margin front, while expense growth in 2019 will likely be 50 to 100 basis points higher than the 2.5% increase we witnessed last year, we are forecasting margin growth of 30 basis points at the midpoint this year, due in large part of healthy increases in F&B and catering revenues, one of the benefits of a strong group base, coupled with high single digit increases in ancillary income including parking revenues. From a cost perspective, our asset management team, working in partnership with Hilton, continues to focus on all available areas in order to reduce controllable expenses. Just a couple housekeeping issues to make sure you take a note. First, as we have disclosed previously, the ground lease at our Hilton Chicago O'Hare property expired at the end of 2018 and as expected, the city is taking back the 860 room property. The hotel accounted for roughly $13.5 million of EBITDA contribution last year. On a positive note, RevPAR, margins of the property ran considerably lower than our consolidated portfolio average to the net effect of removing the hotel from the comparable portfolio is an approximate $1.10 percent increase in average RevPAR for 2018, while comparable hotel adjusted EBITDA margin is positively impacted by approximate 20 basis points. Additionally, we are adding the Hilton Waikoloa Village Hotel back into our comp set for 2019 since the plan to give back the remaining 466 rooms in the Ocean Tower does not incur until the end of this year. Recall that the initial transfer of rooms incurred in 2017. So there is a clean year-over-year comparison of the hotel's performance in 2019 versus 2018. Finally, I want to provide you with the latest on our redevelopment efforts at the Caribe Hilton in Puerto Rico. The property currently remains closed with the reopening of resort expected to occur in May 2019, which will include most of the guest rooms and F&B outlets and all of the meeting space, common areas and amenities. Regarding the insurance claim, during the fourth quarter, we received $10 million of insurance proceeds related to business interruption taking full year EBITDA for the property up to $11 million after netting out carrying cost and other expenses. This also includes a portion of BI related to the impacted month in 2017. Total insurance proceeds received to-date, including the property damage side of the claim, are $115 million. With the property remained closed the next few months, we expect to receive additional BI proceeds this year. As a reminder, the hotel generated approximately $8 million of EBITDA on an annual basis prior to the hurricane. That concludes our prepared remarks. We will now open the line for Q&A. To address each of your questions, we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please?

[Operator Instructions]. Our first question comes from the line of Bill Crow from Raymond James. Please proceed with your question.

Hi. Good morning guys.

Hi Bill. How are you?

I am good. Thank you for asking. Tom, what is the downside of grouping up? What are you giving up? And is that a strategy that's only really effective later in the cycle?

It's a great question, Bill. And we don't really think they are mutually inclusive. We think by grouping up particularly with our top 10 assets, really the top 25 assets, that will really playing to our natural strength. It's a real competitive advantage for us long-term. So as you think about 2018 as an example, the group dropped about 5% for the year. Transient, essentially for us was a little bit of a flat. But our contract business was up, obviously. It's about another 5% of our business, up north of 21%. So effectively what we are doing is, we are shrinking the hotel. We are anchoring our business with really high quality group business, helped with the fact that we are layering in contract business and then we can more efficiently manage transient and price it accordingly, plus all of the other ancillary revenue income that we get while advantage really these large group house. So we actually think it is prudent business model. In the past, a lot of the hotels were really more focused on transient. We think this is really our core strategy moving forward. And candidly, I think we are proving it up. The strength that we expect in 2019 and we don't think this is a one-hit wonder. We think that this continues into 2020. So also, when you look out and see both in 2019 and in 2020, whether or not we get citywide years across many of the major markets, we were proactive and added funds in this a couple of years ago identifying and feeling and partnering with our partners at Hilton and just being laser focused on grouping up our business. So we see this as a competitive advantage and again plays into the national strength that we have at Park.

Yes. Thanks. And speaking of Hilton. Could you maybe frame the risk reward involved in taking the Hilton Bonnet Creek and putting a brand-new brand on that property? And what are you getting from Hilton in order to do that?

It's a fair question, Bill. I would say, look, about that resort, we think we have got huge upside there. Over 400 acres, championship golf course, 1,500 rooms. And Orlando, as you know, is a bit of an arms race. So adding more meeting space is going to be critical to our long-term success. So we are going to commence obviously with the rooms redo, redo the lobby at the Hilton, clearly add more additional meeting space both at the Hilton and at the Waldorf and then again we have got great confidence in our partners at Hilton. And as you think about the need for a Hilton-plus brand, assuming it does that and meeting planners have said that they want that sort of upgraded experience. We think Bonnet Creek is a great example of that and we are confident in its long-term success. So there is always a risk but I think Hilton has got a demonstrated track record in being able to launch new brands and really this is sort of a brand extension and a brand upgrade at Hilton. So you are not really taking away from the core benefit of the Hilton.

Okay. Thank you for your time. I appreciate it.

Thanks.

Our next question comes from the line of Rich Hightower from Evercore ISI. Please proceed with your question.

Hi. Morning guys.

Good morning Rich. How are you?

Good. Thank you Tom. So a question here with respect to the 2% to 4% RevPAR guidance. Can you just help us understand the key variables between the low end and the high end? And are those asset specific catalyst in either direction? Or is something more broad than that?

As you think about the year and again, as I mentioned in our prepared remarks, we benefit obviously from a strong group pace. Hawaii, again going to be up north of 23%, group pace. We expect that Waikoloa is going to up almost 80% in group there. Hilton Hawaiian Village will be up about 8%. So really that will be a very strong performer for us, probably mid, slightly above probably mid to above that RevPAR growth. San Francisco is going to obviously have a very strong year. As you know, citywides be up, certainly north of $1.2 million up and up 78% plus or minus. We expect there that we will probably going to do at probably 7% to 9% range and see how the year unfolds. It's off to a great start so far. Clearly, we think Chicago is going to have a strong year in group pace there with New York City. So overall, it's pretty well diversified. It's not just dependent on those two markets. So we feel comfortable where we are. And if any indication, again, we are coming on the heels of first quarter becoming again sort of a 1% or 1.1%, I think, growth in 2018 there. So as we think about this year, we are going to have a very strong first quarter, as we mentioned, 4% to 5% RevPAR. We expect third quarter be strong as well as second quarter. We have got tough comps there. We had such strong group sale last year. We comfortable with it, Rich. There are things that can happen geopolitical but when you think about the group pace that we have, obviously, the layering in the contract business, which also continues to be strong and we are cautiously optimistic and are very comfortable with the guidance that we provided.

Okay. So the low end of the range then, just to characterized that, is more of a macro cushion, it sounds like, up against all of the other positive indicators you have mentioned?

It's a very fair statement. But remember, we were up 10% plus or minus here on little over 30% of our business. So we feel we have got a solid anchoring there, that low end for sure.

Okay. Got it. And then my second question here, as you have seen the company is trading trading multiple rerate progressively since the company was spun out from Hilton a couple years back. Are you noticing more acquisition opportunities, past the initial screen as you think about external growth this year?

Yes. For sure, Rich. Listen, this is all part of a master plan for us. As you think about and we thought very carefully about our priorities in the first two years. And again, the internal growth story, we were anchored and obviously recycling capital, we have sold 14 assets for $570 million. Obviously, we used $348 million in asset buy back for 14 million shares as part of the HNA trade. If you look at our stock performance since the HNA trade, we are growing dividends. We have got to be up north of 40%, outperformed our peers 1,400 basis points, both look on 2018 and if look at two years, it's even greater than that. So very proud of the work that we have done. We made great progress in obviously the ROI project that we talked about converting the Fess Parker DoubleTree to a Hilton. The Bonnet Creek work is going to begin. And we obviously are going to be converting The Reach this year. And starting the conversion process on the DoubleTree San Jose, converting that to a Hilton. We have made great progress on a number of initiatives on the margin front and we have demonstrated. There were a fair number of naysayers out there. And we said, we would grow margins 75 basis points in 2018. Now we delivered certainly 60 basis points from an absolute side and continue to close that gap and now feel the grouping up, which as we just talked about from the previous question, we continue to make great progress there. So all of that provides us with the optionality to reshape the portfolio, to begin to go on offense. And we are going to be very thoughtful about it and disciplined about it and we will continue to look, whether that's single assets, whether that's a portfolio or whether that's other transactions. We are clearly not going to be selling stock and we are trading. We are not going to issue stock at, I would say, a discount to NAV. I think you know me and you know the discipline that I bring to the process and the team certainly shares that. I think we have demonstrated that we are a very prudent capital allocator. So we are excited about the growth prospects. And candidly, it's important for us to also show both the brand and operating diversification. So we would love to be able to fold in from a Marriott brand or a Hyatt brand or perhaps other brands at the appropriate time and at the appropriate price. So we love our positioning and we love the great opportunities that we have as we move forward.

Great. Thank you.

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

Hi. Thanks. I just wanted to make sure, in your guidance for margin growth in 2019, does that include the 20 basis points lift from the exclusion of the Chicago O'Hare Hotel?

Hi Smedes, it's Sean. It does not. I mean it's a comparable set year-over-year. So O'Hare will not be in our year-over-year looking at that.

Okay. And then I wanted to just talk a little bit more about the group pace. It is strong compared to peers for 2019. I was just wondering, is there anyway you could maybe talk about it with San Francisco and then for the rest of the portfolio? And normally, you wouldn't break that out, but it seems like San Francisco so strong this year and next year that it would be helpful to know how much of that is driving the growth?

Yes. Specifically, Smedes, to answer your question, getting a sense of group pace in terms of our other key markets, is that your question?

Yes.

So again, as we mentioned, Hawaii up 23%, San Francisco 17.2%, Chicago up nearly 8%, New York, again, up 6.4%. Keep in mind, both Chicago and New York, as we said in the prepared remarks, the citywides are down, both well north of 30%. So again, in that soft market, we were proactive, we were having fun and again we were grouping up. So again, showing the proactive teamwork, leadership, focus from the men and women at Park coupled with our operating partners at Hilton. So we have got a long lead time there. So we were looking at this two or three years ago. It wasn't just six months in this process. So, really proud of the discipline and how hard the team has worked here. Hence, reason that we are getting the results and we continue to outperform our peers on these matters. And with that, again, New Orleans up 3%. New Orleans was also down about 20% this year but we were up 3%. Orlando was down 5%, citywides were up about 2.2%. So D.C. is down and we are also down. We are not down as far as our many of our peers vis-à-vis there. So again, a concerted effort, proactive and to group up and to play to the internal growth strategies that we have been talking about nonstop for the last two years. We are bearing the fruit of that hard work.

Okay. Yes. Thanks for the color.

Our next question comes from the line of David Katz from Jefferies. Please proceed with your question.

Hi David.

Hi. Good morning everyone. I just wanted to go back to the opportunities for acquisitions in that landscape. Has pricing gotten stiffer? What kind of term landscape are you seeing? And what would you say are the two biggest obstacles for getting something done this year? Is it finding the right thing? Is it finding the right price? How should we think about that? Thank you.

It's a great question, David. Look, we are open for business. Clearly, in the first two years and the Safe Harbor and certainly other tax issues that we had to be really sensitive to, but even more important than that, we thought obviously, as a new public company, we had to earn our stripes to be able to make sure that we have the operational discipline and then through all those initiatives that I have outlined, we really, I think, are on a much better footing. We have, obviously, got a much stronger multiple today than we had two years ago and that certainly gives us optionality. We will continue to look opportunistically for single asset deals that fit our criteria. And brand and operator diversification are a big part of that. We will continue to you look at portfolios that make sense and we not opposed to M&A. We have said that and one of the big attractions for this opportunity for me and for Park is, as we think that this industry and our sector is really right for consolidation and at the appropriate time, certainly want to be a participant in the process. What we are not interested in, we know that there are some other large portfolios that are out there and their pricing and forecasts and sub-forecasts, we are not a buyer of that kind of real estate. In this pricing cycle, we don't think it's prudent. We don't think they are disciplined. We certainly aren't looking to lever up. We certainly want to stay north of five times net debt to EBITDA, as we have said. And we were well south of four times today. So we do have the flexibility, whether it's single asset or a small portfolio or M&A in the right situation could make sense. We are not planning to issue equity, unless obviously the stock is trading at or above NAV. That's certainly something that we would be more open to.

Can we just go back to the size issue for one second, if that's all right? Are there circumstances where something that's in the $5 billion, $6 billion category a possibility for you?

Yes. Again, you are asking a hypothetical. If it's structured in an appropriate way and it makes economic sense and it's a premium. Yes, it's hard to imagine a $5 billion deal talking about a potential large portfolio that we all know is being marketed. I don't see that being a fit for us. There's certainly could be other stock or stock deals that, if priced right, could make sense and be of scale.

Got it. I just wanted to understand the boundaries. Thanks for your answers.

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

Hi. Hello, everyone.

Good morning Anthony. How are you?

Good. There seem to be a differences in the demand growth in the corporate transient and corporate group segments with group doing well, to your benefit. Have you seen this divergence in price cycles? And how long could it last, do you think?

Yes. It's a great question. I think, look, if you think about the economic climate, obviously, we are getting late in the natural business cycle, right. We are getting 10 years here on lodging, plus or minus. We think historically trough-to-trough is about 11 years, trough-to-peak it's about seven years. And look, we had anemic growth early in the cycle and they are still running them. They still are. I know there are some who believe that a recession is likely in 2020. We certainly don't share that view. And you look at the economic data, I think, which came out today, obviously, our GNP is about 2.6%. I think non-residential fixed investment spending was up about 6.2% in the fourth quarter and still expected to be up 4%. So that clearly continues to provide a backdrop. What we are also finding is that it's the companies with low employment is they are looking to continue to train via the appropriate incentives, continue to motivate their workforces that we are still seeing that corporations are still spending money on their group needs. And again given our natural competitive footprint, plus from a geographic standpoint and from an access standpoint, I think Park is really positioned to take advantage of that. Transient has been choppy. And we are excited as we look back to 2018 and for us relatively flat, slightly up in total, but our group business was up 5%. Our contract business again growing 21%. So we think that's just appropriate. We are playing to our strength and using the appropriate levers. But as the cycle continues to lengthen, it will be pockets that are choppy, but we really like our positioning certainly in 2019 and in 2020.

Got it. Thanks. And moving on to acquisitions. Looking at the peer group, most of the deal activity is focused on smaller hotels, resorts and increasingly independent hotels. What's your type of hotels in your portfolio? I know you have preferred brand historically. But could you see adding some large, independent or boutique hotels for the future?

No secret, Anthony. I am a strong believer in brands, have made that. And obviously having worked for three of the Marriott companies and having worked for Hilton as well, I have got a strong understanding. I would say that they have got a long-term competitive advantage given the brand segmentation, given their loyalty program. I think Hilton has got now 85 million members in their loyalty program, plus or minus. And I know Marriott is somewhere in the $120 million range and more than 50%, if not 60% of their occupancy is coming through those are powerful historical systems. So I am a brand guy and we believe here at Park in the strength of brands. And we embrace this offering which is another way they ask you tie in to those portals in a very distinctive way. So as we think about our strategy, it's really upper upscale and luxury hotels, top 25 markets in dream destinations. Really, we have a bias towards those bigger group houses for all the reasons that we have been talking about on the call. We are not opposed to on independent opportunities and will probably look to partner or have those tied into one of our preferred brands and certainly have the Marriott and Hilton on the top of that list. But we look forward to expanding our relationship with Hyatt and with others as well.

Great. Thank you.

Our next question comes from the line of Chris Woronka from Deutsche Bank. Please proceed with your question.

H. Good morning guys.

Good morning Chris.

Good morning. I want to ask on the margins. How did 2018 unfold relative to your expectations on core inflation on the core expenses? You guys obviously beat your guidance. So I am trying to figure out how much of that was due to expense pressures not being as bad? And how much of it was due to maybe your initiatives?

Rob is going to take that question for you.

So Chris, overall in 2018, our operating expenses were up 2.5%. And really, it was a combination of controlling our expenses throughout. We spent a great deal of time driving revenues and looking at our premium room category. We have had great success throughout our portfolio. To give you a quick example, in San Francisco, 85 rooms we recategorized from standard rooms to a new room category and have generated over $700,000 of revenue alone. We had similar success in Boston Logan, converted 148 rooms to a new room category. And we are actually looking at other hotels as well including Embassy Suites in Austin to be forthcoming. So the other parts that we are looking at here is our pricing, not only in between category, but also within the categories to see how do we further drive revenues to help further reduce our cost control there. And our pricing within the various booking windows, when we look at pricing going on 30, 60, 90 days, we really believe there's opportunity to further drive our rent there. And then from a cost side, we have been renegotiating our contracts throughout great opportunity. Our team in Honolulu are doing an amazing job with an elevator contract saving over $1.5 million over the life of the contract of four years. So we are really working with our teams to think differently as we look forward there. We are also combining our management position, reducing our food costs and also taking operations in-house. And a great example of that is that in Key West, we took our beach and pool operation in-house. We saw an increase in our guest service satisfaction. But more importantly, additionally excuse me, we had the availability of having a run rate of $200,000 coming down to EBITDA. So we are really thinking throughout our process here, how do we work together to further drive our revenues into the bottomline.

Great. That's great color Rob. Thanks. Just I will try to sneak in one more acquisition question, if I can. And it's really, how important is it to you guys that if we are talking a single asset that you have kind of a story to a hotel? And I guess the real question is, are you willing to do transformative things at this point in the cycle? Or do you think you are looking more for yield that's already there?

Yes. It's a fair question, Chris. I would say that an asset was in place the cash flow forming with an embedded story, whether that's through the asset management initiative, some of which Rob just outlined, whether it's a property needing capital infusion. So you are doing something transformative, taking a deep turn at this point in the cycle is not something that we are likely to do. It's something that you take on, in my view, sort of earlier in the cycle rather than later in the cycle. Those also tend to be better plays for many of private equity platforms in sort of, what I would call, traditional REIT food. So you will see us continue to be as we have demonstrated. I remind listeners that discipline and the track record and how prudent we have been on capital allocation, we are going to be very thoughtful. We are going to be disciplined. We are going to remain compliant with our guiding principles, operational excellence, group capital allocation, a low-levered balance sheet and never going to deviate from that discipline. And that discipline, as we demonstrated, has delivered outperformance, significant outperformance vis-à-vis our peers.

Okay. Very good. Thanks guys.

Our next question comes from the line of Gregory Miller from SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. Good morning. I am on the line for Patrick Scholes. Good morning. First question, I have a related question on your margin plan. Could you provide some color as to how much further you still have to go on margins to get to a relatively stabilized level similar to your peers?

Now listen, that's an ongoing, I mean keep in mind, we continue to reshape the portfolio, right. So when you think about it, we have got now 52 hotels, really the top 25 hotels that really account for about 90% of the value. You can expect that we are going to continue to sell non-core assets and recycle that capital, either in the higher growth markets or alternatively into buying back stock, if it made sense and when it's opportunistic for us. So a credit and Rob didn't breakout or walk you through our half-dozen initiatives. We need to say on behalf of Rob and the great work that we are doing in our asset management team. We have probably got 20 initiatives. And we continue to work that depending on the hotel situation and we continue to have success with that disciplined focus and making sure that we are taking advantage of it. There is a gap and we closed it, we believe, about 110 basis points vis-à-vis our peers and it's still probably just south of 300 basis points. Obviously given our portfolio, 60% of them being union, our cost structure is different. We think that's really embedded into the DNA of our culture continuing to seek ways to improvise. As we said another 100 basis points this year, cost structure's obviously rising. But we are confident that we can still have positive margin growth at least 30 basis points certainly given that backdrop.

Great. Thanks for that. And on another topic, could you remind us about your demand mix from the U.K and thoughts about potential impact from Brexit, especially to the gateway markets that you are in and particularly a potential impact to transient demand?

Now when you think about it, right, the dollar is down about 10% vis-à-vis the euro. If anything, you can take out Hawaii and we saw a slight increase in international demand. And so from that standpoint, we are encouraged. Obviously Hawaii is still dependent on what's happening partially coming out of Asia. So a little bit of a wholesale concerning the reduction last year, we expect that that's going to rebound this year. So we are cautiously optimistic. And we don't see any real falloff at this point as we look out. And what we saw in 2018, look out, we saw growth in Chicago, we saw the growth in New York. So we are cautiously optimistic as we move forward.

Great. Thanks. Appreciate that.

Our next question comes from the line of Stephen Grambling from Goldman Sachs. Please proceed with your question.

Good morning. Thanks. I guess my follow-up on the --

Good morning.

Good morning. The brand diversification topic. I guess how do you quantify the benefits from diversifying away from Hilton while balancing the unique benefits from your relationship that have helped support the playbook since the split?

Yes. So it's a great question. I would just say that, if you look at long term, having a diversified platform and by diversified, I mean that in terms of brand family, in terms of operator, is terribly important and for us long term. When you think about the evolution of all of those to where they are, that brand diversification, I think, is very important. Also being able to look at different best practices that you are seeing from the brands and you are also seeing from other operators. So we look forward to that. Now we do have a unique relationship today. We are partnering on a daily basis. We have got a dedicated team within Hilton that we are working with. And clearly, that's bearing significant fruit to us. But long-term our vision is to be the preeminent lodging REIT. In order to do that, we clearly want to have a diversified platform for the brand operator and look forward to getting our first deal done with Marriott, with Hyatt and with others over time.

So would anything change then with the relationship with Hilton?

Nothing would change. In my past life, Stephen, I was a large Hilton, Marriott and Hyatt franchisee and we had 16, 17 management companies. I don't see us getting to that level of management companies. It makes the closing process a little more difficult. It makes the asset management a little more challenging. But I would tell you that the men and women at Park are really looking forward to that and excited about really continuing to strengthen these relationships beyond Hilton. I love our partnerships with Hilton and obviously, as we have continued to demonstrate, it is going very, very well.

That's helpful color. And maybe one other quick follow-up on consolidation. It seems that bigger consolidation across the space tend to come under a life event for management teams or differing view by one management team versus another on either the cycle or the willingness to navigate the next leg of the cycle. Do you feel like there has been a change in either of these factors across the space that may be creating opportunities?

Yes. Well, listen, I have been talking about it for probably north of a decade now as many of the listeners know and still a passionate believer. I think it's inevitable. We are the most fragmented in a sector that is ripe for consolidation. It will happen at the appropriate time. We saw last year with Pebblebrook and LaSalle. We saw it the year before with RLJ and FelCor. And I think others will begin to look for dance partners at the appropriate time. Social issues tend to be the biggest impediment. But at the end of the day, capital is going to go to the most efficient manager. It's just not efficient to have 16 or 17, whatever the number of lodging REITs that we have today. And over time it's going to change, in my view.

Helpful. Thanks. Best of luck this year.

Yes. Thanks so much.

Our next question comes from the line of Brandt Montour from JPMorgan. Please proceed with your question.

Hi. Good morning everyone. Thanks for taking my questions. So you talked about group a lot and you have been proactive over the last two to three years giving professional tours, going out and getting that group business. I was just wondering, are you seeing the market getting more competitive, maybe running into some of your peers out there, putting more resources in this business and really going out and getting that in-house group business?

It's a great question. I would say, every situation is different. In our portfolio, we saw immediately as a competitive advantage and there was a gap there. So we set out on that journey. It takes time to do that. So for others, it took perhaps all of the day, it will take them some time to catch up, in our view. Obviously, with Ryman and Colin Reed and his very talented team are being in there. We are front of this. That's really the nature of the business. But we are not seeing them any more today than normally. I think we suspect that both Hilton, Marriott area and Hyatt and other big platforms that are managing it better in normal business case, certainly, fighting for share on that side of the business. But that business is so large, there's enough growth and capacity for all of us here.

Got it. That's helpful. And then, to the extent that, on the same topic, to the extent that, the convention calendar may reverse in 2020. How aggressively are you booking up 2020 group room occupancies? Or at least, what's the philosophy on booking that far out and potentially forgoing compression-like pricing later on?

Yes. Again, as I said earlier, it's really a fundamental challenge for us. If you think about 2020 as an example of yet another year where citywides are going do certainly not as strong as what we have seen in other periods. So there's Hawaii and they were up 34%, New York, we are up 31%, San Francisco, we are up 7.9%. And I think in the Bonnet Creek, our resort in Orlando, up another 5.5%. So again, for us, the thesis is, anchor our business with group, layer in some contract businesses which allow us to most efficiently price transient grow the ancillary revenue. Think about San Francisco. We have got a full city block. We have got 3,000 rooms. So having that anchored group business, for us, is a really prudent move coupled with having a certain amount of contract business. Think about obviously our Hilton Hawaiian Village campus there, we have got 2,900 rooms. So again, for us it's just a prudent business decision to continue to grow business appropriately and then layer in that transient.

Great. Helpful. Thanks. Good luck on great results.

Great. Thank you.

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

Hi Robin.

Great. Thank you. Hi. How are you? You commented the group up 10% for 2019 and I think last quarter you had talked about it being up 12%. So I am just wondering, if bookings slowed in the fourth quarter? Or if there was just something about the timing of that, up 12% in Q3 that compared to the 10% now? Thanks.

Nothing that visible, Robin. We have continued strong anchored again up 10%. We feel good very good about our positioning. Part of that's just the year-over-year evolving. And again, just look out to 2020, as we mentioned, we are up north of 9%. So noting, no deceleration. We are not seeing cancellations increase. They are very good and we have got 80% of our business on the books for this year. So feel very good about our position for 2019.

Okay. Great. I don't know if you would give like bookings that came in Q4 versus the prior year for group? And then just my other follow-up, I also wanted to ask on, you mentioned leisure down 0.4% and I am just wondering is that because group took up inventory that would have gone to that? Or is there something else going on there with leisure in your view? Thanks.

The reality is that I think that the transient has been choppy. Leisure, really has been stronger, if you think about this cycling and business in transient has somewhat lagged. So a little bit of a reverse effect, right. We were up business in transient about 4.2% in the fourth quarter and it was really down. Again, there's nothing as we look out and see the transient pace. The transient pace continues to be strong across most of the segment. So we have been having a diversified portfolio. We are comfortable with the guidance and the direction of the business in 2019.

Okay. Great. Thank you.

We have reached the end of the question-and-answer session. And I would now like to turn the call back to management for closing remarks.

Well, it's great to be with all of you today and look forward to seeing many of you at the Citi conference and in the weeks and months ahead. Team here at Park continues to work hard and we are excited about the opportunity in 2019 and beyond.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.