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Edited Transcript of PK earnings conference call or presentation 1-Aug-19 2:00pm GMT

Q2 2019 Park Hotels & Resorts Inc Earnings Call

MC LEAN Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Park Hotels & Resorts Inc earnings conference call or presentation Thursday, August 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian C. Weissman

Park Hotels & Resorts Inc. - SVP of Corporate Strategy

* Robert D. Tanenbaum

Park Hotels & Resorts Inc. - EVP of Asset Management

* Sean M. Dell'Orto

Park Hotels & Resorts Inc. - Executive VP, CFO & Treasurer

* Thomas Jeremiah Baltimore

Park Hotels & Resorts Inc. - Chairman, President & CEO

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Conference Call Participants

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* Charles Patrick Scholes

SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Anthony Guarino

Green Street Advisors, LLC, Research Division - Senior Equity Research Associate

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Neil Lawrence Malkin

Capital One Securities, Inc., Research Division - Analyst

* Richard Allen Hightower

Evercore ISI Institutional Equities, Research Division - MD & Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Smedes Rose

Citigroup Inc, Research Division - Director & Senior Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, ladies and gentlemen, and welcome to the Park Hotels & Resorts Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Ian Weissman. Thank you. You may begin.

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Ian C. Weissman, Park Hotels & Resorts Inc. - SVP of Corporate Strategy [2]

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Thank you, operator, and welcome, everyone, to Park Hotels & Resorts' second quarter 2019 earnings call.

Before we begin, I'd 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. Actual future performance, outcomes and results may differ

materially from those expressed in forward-looking statements. Please refer to the documents filed by Park with the SEC, specifically the most recent reports on form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statement.

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 2019 operating results, a summary of our capital recycling efforts, an update on our previously announced pending acquisition of Chesapeake Lodging Trust and finally an update on our 2019 earning guidance.

Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our second quarter financial results, additional color on our earnings guidance and an update on our 2 exciting ROI projects, Bonnet Creek and The Reach.

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.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [3]

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Thank you, Ian, and welcome everyone.

Consistent with our prior quarters, the second quarter was incredibly active at Park as we remain laser focused on maximizing shareholder value over multiple fronts. As always, we have been relentlessly focused on our proactive approach to asset management, partnering with our operators to deliver outperformance in any environment. We continue to make significant strides on our capital allocation efforts, selling 3 additional noncore assets during the quarter, further improving our high-quality portfolio while also beginning work on 2 important ROI projects: the Bonnet Creek meeting space expansion and the conversion of The Reach resort to a Curio. And finally, we have been thoroughly preparing for the pending acquisition of Chesapeake Lodging Trust, which is currently expected to have a mid-to-late September close with a Chesapeake special shareholder meeting to consider and vote on the proposed merger expected to take place on September 10.

We remain incredibly excited about this transaction. The combination with Chesapeake is a compelling opportunity to accelerate several of our long-term strategic goals, including brand, operator and geographic diversity, while positioning the company to drive superior risk-adjusted earnings growth over the long term.

Over the last 2 months, the team has toured each of the Chesapeake hotels and conducted extensive property reviews with on-site senior leadership. We continue to have strong conviction in our underwriting and see upside in both revenue generation and additional expense savings. We are reaffirming our initial expectation of an incremental $24 million of EBITDA in 2020 and a total of $34 million of EBITDA upside in 2021, inclusive of our annual G&A savings of $17 million.

Additionally, given Chesapeake's outside exposure to markets such as San Francisco, Chicago and Southern California, which are poised to benefit from strong citywide business and/or renovation tailwinds in 2020, bolting on the Chesapeake portfolio should add an incremental 80 basis points of top line growth to Park's legacy portfolio next year.

Chesapeake also has made meaningful progress on the anticipated sales of its 2 New York City assets. As noted in Chesapeake's recent press release, both hotels are under contract to a single buyer for total proceeds of $138 million or a 6% cap rate with an expected close prior to our acquisition of Chesapeake.

The sale of these 2 assets by Chesapeake will further delever the balance sheet of the combined company going forward. Overall, we have strong conviction about the opportunity, and we remain confident in the long-term benefits of this acquisition.

While the transaction offers additional levers to generate incremental shareholder value, it does not divert our attention away from the significant embedded value within Park's core portfolio. We remain laser focused on aggressively asset managing the portfolio and expect to continue narrowing the margin gap with our peers.

Turning to operations. In the second quarter, comparable RevPAR for the portfolio increased 0.8% against a very difficult year-over-year comparison and a challenging demand environment. As expected, group revenues declined by 1.7% during the quarter, a direct result of lapping the strong 18% growth rate in group revenue we produced last year.

Softer citywide calendars across several of our key markets were partially offset by healthy production in markets like San Francisco and Orlando with group pace up nearly 13% and 4%, respectively. Looking forward, we expect group to remain strong for the second half of the year with overall pace forecasted to increase over 15%.

On the transient side, revenues increased 1.1% driven by a 4.6% increase in leisure demand but offset by a 2.5% decline in business transient demand. Despite a relatively healthy economic backdrop, beginning in May, business transient occupancy started to decline, which we believe reflects some corporate uncertainty in light of the ongoing trade war with China. That said, we have not witnessed a material change in fundamentals with group and leisure trends still healthy and supply in check across most of our key markets.

Furthermore, we continue to outperform our comp set as we grew market share during the second quarter at more than 65% of our hotels by an average of 350 basis points, equating to nearly $15 million of market share growth for the portfolio.

In terms of margins, comparable hotel adjusted EBITDA margin contracted by only 90 basis points in the quarter to 31.3%. Our asset management initiatives are clearly evident in these results as we capped comparable expense growth to just 2.5%, a notable accomplishment in today's low-RevPAR, high-labor cost environment.

Looking at our core markets. Our second quarter results were primarily driven by strength in Key West, San Francisco, Hawaii and Santa Barbara, which was partially offset by softness in Seattle, New Orleans, Chicago and New York.

Key West was our top-performing top 10 market this quarter, posting a 5.4% RevPAR growth in a clear signal that demand has not only recovered since Hurricane Irma but surpassed 2017 pre-storm demand levels.

In San Francisco, despite facing a very difficult year-over-year comp, our 2 hotels continue to exhibit considerable strength, reporting a combined RevPAR increase of 4.5%, outperforming the broader San Francisco market by 320 basis points. Group revenues were up 13%, which is particularly impressive considering group revenues increased 55% in the second quarter of 2018.

In Waikoloa, our hotel exhibited a strong recovery from last year's volcanic disruption, posting a 4.5% RevPAR growth during the quarter on solid transient demand. We are expecting a stellar group quarter in Q3 at Waikoloa with group pace up approximately 525%. The hotel is forecast to be our top performer over the back half of the year with RevPAR growth projected to be north of 30% on average.

I also want to highlight our Hilton Santa Barbara Beachfront Resort, which continues to ramp up and exhibit strong performance on Park's up-branding and renovation of the asset, a project which was completed during the second quarter of 2018. The hotel grew RevPAR by 29% over 2018, and group catering contribution was up 22% during the quarter, further highlighting the success of repositioning by Park. Congratulations to the Santa Barbara team who have done a terrific job ramping up post renovation, driving over 1,000 basis points of margin improvement at the property during Q2.

We continue to believe there are a number of other significant value creation opportunities like this one throughout our portfolio.

Offsetting these positive second quarter results was the underperformance at our 2 Seattle airport hotels, which together produced a RevPAR decline of nearly 11%, placing a 40 basis points drag on total portfolio RevPAR. Excluding Seattle, our comparable RevPAR growth would have been 1.2% for the quarter. Okay, we have since made leadership changes at our Seattle properties.

Other softer markets included Chicago, New York and New Orleans, all of which reported declines in group demand that proved difficult to offset with transient.

Looking ahead, we expect group to rebound with double-digit pace projected for all 3 hotels over the back half of the year.

On the capital recycling front, I'm very pleased with the progress made during the second quarter, having closed on the sales of 3 noncore domestic assets for combined gross proceeds of $166 million, which will be used to meaningfully produce net leverage ahead of our proposed merger with Chesapeake. We have now sold a total of 18 assets for over $750 million in proceeds since spinning out of Hilton, while Park has returned over $2 billion in capital to shareholders.

In addition, subsequent to year-end, we entered into a contract to sell our Conrad Dublin hotel at very attractive pricing with the deal expected to close by year-end. Total proceeds for the sale are $130 million with our joint venture interest totaling $62 million.

Demand for the -- for hotel real estate among private equity buyers remain strong, and we continue to explore noncore asset sales to further delever the balance sheet. Consequently, we expect to begin a marketing process on 2 to 3 Chesapeake hotels in the coming months while we are also actively marketing the sale of our Hilton Sao Paulo one of our last remaining international hotels. Gross proceeds for all 4 hotels are estimated to be between $375 million to $425 million, which, together with the other completed or announced Park and Chesapeake hotels sales, would reduced the combined companies' net debt-to-EBITDA leverage ratio to approximately 4x and be a clear signal to our commitment to maintaining a low levered balance sheet.

Turning to our outlook for the remainder of the year. Park is well positioned for relative outperformance. While transient trends across the U.S. have been choppy, Park's proactive efforts to group up our portfolio should help us continue to post sector-leading growth over the next 2 quarters. With RevPAR growth over the back half of the year expected to average around 3%, Q3 is projected to be the stronger of the 2 remaining quarters of 2019 with group pace up over 25%. San Francisco should remain one of our top markets along with Key West and Waikoloa. And finally, we expect healthy margin expansion in the second half of the year as we continue to focus on our asset management initiatives and take advantage of proactively grouping up the portfolio.

Despite our relative strong positioning, global macro concerns have weighed heavily on fundamentals across the industry with annual RevPAR growth forecasts contracting across several of our key markets, primarily in the business transient segment. But this is the back drop: we are readjusting our full year RevPAR estimates down by 75 basis points at the midpoint to 2% to 3.5%; for margins, we are lowering our guidance to a new range of flat to plus 50 basis points or down by 25 basis points at the midpoint partially due to increased property insurance premiums. Sean will provide additional details on our updated guidance.

And with that, I will turn it over to Sean.

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Sean M. Dell'Orto, Park Hotels & Resorts Inc. - Executive VP, CFO & Treasurer [4]

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Thank you, Tom.

Looking at our results for the second quarter. We reported total revenue of $703 million and adjusted EBITDA of $207 million. Adjusted FFO was $164 million or $0.81 per diluted share.

Turning to our core operating metrics. Our comparable portfolio produced a RevPAR $192 million or an increase of 0.8% compared to the second quarter of 2018. The entire increase related to improved occupancy.

Our occupancy for the quarter was 86.6%, up 0.7 percentage points over last year. Our average daily rate was flat at $221.

These top line trends resulted in hotel adjusted EBITDA of $208 million for our comparable portfolio, while our comparable hotel adjusted EBITDA margin was 31.3%, which was a 90 basis point decrease over the prior year.

In addition to the choppiness Tom discussed earlier, second quarter results were negatively impacted by a $5 million shortfall due to delayed timing of business interruption insurance proceeds for the Caribe Hilton, which reopened on June 19 and incurred a $4 million EBITDA loss as expenses ramped up for the reopening. Subsequent to the quarter, the carriers authorized an additional $10 million advance, which we expect to receive in the coming weeks. We continue to work with the insurance carriers and adjusters to close out the claims for both Caribe and Key West. As such, we maintain our expectation to receive the BI proceeds embedded in our full year guidance.

Further on guidance, we are lowering our full year adjusted EBITDA by $17 million at the midpoint to a new range of $735 million to $760 million, while our adjusted FFO guidance drops by $0.08 per diluted share at the midpoint to a new range of $2.86 to $2.98 per share. Note that our guidance does not take into account our pending acquisition of Chesapeake or any additional asset sales at this time.

We thought it might be useful to bridge you from our Q1 guidance to our most recent forecast. First, $9 million is related to the lost EBITDA from the 3 hotels we sold in late June. Second, our additional $5 million was due to a higher-than-expected property insurance expense that Tom alluded to earlier. And finally, the additional adjustment is related to a moderately more cautious outlook for the balance of the year, which is reflected in our reduced RevPAR and margin guidance.

Turning to the balance sheet and the financing of the Chesapeake acquisition. As we mentioned when we announced the transaction, a debt financing commitment has been secured in the form of a $1.1 billion delayed draw term loan consisting of an $850 million, 5-year tranche and a $250 million, 2-year bridge tranche, although we anticipate only needing the former to close the transaction as the balance of the cash need is expected to be funded from the previously announced Park and Chesapeake asset sales and cash on hand. Upon closing, we anticipate pro forma net leverage at the combined company would be approximately 4.4x, which assumes Chesapeake's completion of the New York hotel sales discussed earlier.

Turning to dividends. On July 15, we paid our second quarter cash dividend of $0.45 per share. And as of last Thursday, our Board declared our third quarter cash dividend of $0.45 per share. This dividend currently translates into an implied yield of 6.8%, maintaining our position as one of the highest-yielding stocks in the lodging REIT sector.

Finally, I wanted to provide a brief update on 2 exciting ROI projects currently under way: the expansion of the meeting platform at the Hilton and Waldorf at Bonnet Creek in Orlando and the repositioning and rebranding of the Waldorf Astoria Reach Resort in Key West to a Curio. At Bonnet Creek, we are adding over 90,000 square feet of gross meeting space, which will include 52,000 square feet of new ballroom and pre-function space at the Hilton and 11,000 square feet of new ballroom and pre-function space at the Waldorf. Total spend is estimated to be $85 million with targeted returns in the high teens. We expect the Waldorf meeting space to open in early 2021, while the Hilton meeting platform should be up and running in early 2022.

At the Reach, we expect to start construction in the coming weeks and anticipate the hotel to be closed until early December. The scope of the

project will include a complete guestroom renovation and a comprehensive renovation of the public space, including a new restaurant. With the hotel closed for 4 months, we expect comparable portfolio RevPAR growth to be negatively impacted by 20 basis points for the year, equating to approximately $2 million of earnings disruption, which continues to be factored into our guidance.

Total spend for the rooms and public space renovation is approximately $9 million with targeted returns in the high teens.

These projects illustrate embedded value in our portfolio that we are able to unlock, and we are continuing to explore similar opportunities across our portfolio.

That concludes our prepared remarks. At this point, operator, we'd like to open up to questions. (Operator Instructions) Operator, may we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [2]

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Can we just talk about Chesapeake really quickly? I know it's been a while -- a few months since you've announced it. Can you just tell us what you've learned since then and what you've uncovered under the hood and what that means for the $24 million and $34 million?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [3]

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We appreciate the call. As -- and as said in the prepared remarks, we certainly believe it's a compelling and unique opportunity to combine both companies. I would certainly drive you back to the previous statements an disclosures that we've made. Obviously, it provides for us sort of improved portfolio quality, gives us the brand and operating diversification. It gives us the standard and improved sort of geographic footprint. It improves our growth rate for next year, as I outlined in my prepared remarks. And we also believe that there's embedded upside, ROI, margins sort of opportunities to group up as well. And as we've said previously again in our public disclosures, we believe that it is accretive for us in both 2020 and 2021, and we certainly also get the benefits of scale.

Where we are in that process, as I also mentioned in the remarks, Rob Tanenbaum and other members of our very capable asset management team have been out and -- with representatives of Chesapeake in meeting -- having on-site meetings. I'm reluctant to go into those details. Chesapeake is still an independent company. We have set up now and filed a proxy issue, and a shareholder vote is -- Chesapeake shareholders is scheduled for September 10.

As we've also said and I noted in the prepared remarks, we expect the transaction, assuming it is approved by shareholders, that it would close in mid to late September. Obviously, we are excited about Chesapeake's announcement, and they're selling, obviously, those 2 New York assets as part of the original plan.

And regarding our additional due diligence, as I said confidently, we are reaffirming our initial underwriting and are confident that those synergies that we identified, $24 million in 2020 and $34 million in 2021, we believe, are achievable. And we're confident. We have great conviction over this opportunity.

Other than that, David, I hope that there are no more additional questions. We would really draw you to all the public filings. As you can appreciate, just given where we are in this transaction, we'd certainly want you to [accept] it.

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Operator [4]

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Our next question comes from Richard Hightower with Evercore.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [5]

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So I guess, Tom, to follow up on the question around Chesapeake and in the context of reaffirming the targets that you mentioned, how much of those original targets were predicated on demand patterns or what have you as of 90 days ago? And given maybe the -- whatever magnitude of shift you think we've seen in demand patterns since then, I mean, how much of those targets was predicated on things that are specific to the industry or the things that are specific to Park's asset management? Maybe just break that down for us and give us a little more color around the level of conviction, if you don't mind.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [6]

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Yes. I -- it's a delicate balance here. And so let me talk about sort of the broader economy. Look, there's no doubt that we and I think our peers have all noticed that there's been a little bit of softening and choppiness particularly on the business transient side. We made the strategic decision a few years ago to really be focused on our internal growth strategy, right, recycling capital, we've sold 18 assets now for $750 million; obviously continuing on the ROI projects which we've talked about; continuing to improve margins where we've made great progress on that front; and then of course, grouping up really for this portfolio by Park, really, I believe, a game changer.

What we always liked about Chesapeake irrespective of market conditions was that we could bolt on that portfolio and continue to implement our guiding principles, if you will, as it relates to asset management. We believe over the intermediate and long term that creates tremendous value for shareholders.

But market conditions are choppy for now. I personally don't believe, and I think as you think about the abundance right now, there's really little risk of a near-term recession, right? RevPAR still looks good in the 1% to 2% range, GDP above 2%, lower rates are probably lower for longer, low unemployment, an improving savings rate for the consumer, the consumer is in good shape, consumer balance sheets are solid, low inflation probably continuing certainly indefinitely. I would tell you the one thing that probably concerned me the most is sort of nonresidential fixed investment spend. The fact is they turned a little negative although still slated to be positive for the year. That's obviously something that we're watching very, very carefully. But we would still say that we don't see a recession. And over the long term, we are very confident that this transaction makes sense, again along the lines, as we've said, in all the public documents and all the disclosures. So hopefully, that answers your question. And for us at Park, we're focused on the long term. We are committed to creating a long term, sustainable platform that creates significant value for shareholders.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [7]

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Okay, Tom, I do appreciate that color. One other question. It is a shorter-term-focused question but maybe you just answered it. But just related to the guidance for the back half of the year, the midpoint came down 75 basis points. But as you had said earlier, it still implies roughly 3% implied growth for the second half. You threw out some pretty strong group pace numbers for 3Q and 4Q. But maybe how much of that 3% forecast could be at risk if we see continued degradation on the transient side, maybe stacked up against the group pace that you've already formed?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [8]

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Yes. So it's a very good question, Richard. But the reality, and I think part of the reason why we wanted to lower guidance, was really that factor on the transient side. It can be -- given the softening that we certainly saw in -- largely in June that has certainly continued a little bit in July, I would also note to listeners that we expected July to be relatively soft, and now our internal forecasts are a little softer. For us, given the group pace that we have, again 25%, we're expecting a very strong August and September. So we'll be watching that carefully.

We feel confident, based on where we sit today and what we know, that the guidance -- the revised guidance makes sense. I would also note, as you did, obviously at 3% on the back end, we are still significantly outperforming our peers in terms of their RevPAR growth rate partly because of all the initiatives that we've worked so hard on.

I would also note in the second quarter, while disappointing, and we certainly don't like to -- we like to be a beat in every situation, I think if you really isolate, we really had significant underperformance in Seattle. That rests with us and our operating partner. We take responsibility for that. But if you take that out, we're really, end of the quarter, at 1.2%, and we would have exceeded -- we would have been at least a beat through all the other key metrics. So I'd like to point out occasionally you have a footfall. You have a bad quarter, you make a mistake. We clearly had that in Seattle, and we take responsibility.

If you then broaden it and look a little deeper at the second quarter, we really saw sort of the fall-off. New York, even though the line go with (inaudible) slightly even. San Francisco is slightly on the margin even though they were up 4.5%. And even in Chicago, we just saw a little bit in that business transient that just gave us a little pause that we thought we should be more cautious as we look out in the second half of the year.

We're also seeing, and we believe a lot of this is just driven by the uncertainty given the trade war right now. And candidly, we think businesses' CEOs, those men and women are just being a little more cautious. We don't see a recession, and we all see a fundamental shift. But we certainly see a need to just be -- they're being a little more cautious, and it's -- clearly it's affecting travel on the margins.

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Operator [9]

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

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [10]

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I wanted to ask you. So you talked about the strong group pace through the back half of '19. I was just wondering if you could give us an update on your thoughts about the group pace in 2020. And what percent of rooms will go into group? And are you -- will that be kind of the level that you have to be at going forward given the sort of grouping up process? And do it excluding Chesapeake.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [11]

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Yes. We clearly don't -- we are excluding Chesapeake. We don't have that information. As you may recall last quarter, I believe, we were in that 4% to 7% range group pace. I'd say now for 2020, we're in the 2.5% to 4% range. So a slight pullback at this point. But again, that's an evolving and moving target. And keep in mind we're having such a very strong group pace this year. And if you take out San Francisco, obviously San Francisco was pretty strong, we'd certainly be on the higher end of that range just given the tough comps that we'll have next year given the strength that we're seeing in San Francisco. It's still a real focus for us, Smedes. It's something that we're working on carefully with our partners -- our operating partners. And we believe that it really is a competitive advantage, particularly for our top 10 assets, anchoring our business with group, layering in contracts. And that will allow us to more efficiently yield out our transient and obviously drive against our sources of revenue. So we're committed to this. We think it makes a difference and (inaudible) is part of the reason why we think we've had outperformance over our peers over the last few years.

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Smedes Rose, Citigroup Inc, Research Division - Director & Senior Analyst [12]

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Just kind of on that. So you mentioned the very strong group bookings at Waikoloa. Is that, I don't know, sort of onetime in nature? Or is there a shift at that asset to really move it to much more of a group house maybe versus where it was previously?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [13]

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Well, part of the strategic initiative going back to the spin was to sort of rightsize the properties. So as you know, we're giving back and transferring 600 keys, plus or minus, to HGV and then we're rightsizing the hotel operations. We think it's a more efficient box with 600 keys, plus or minus, plus given the meeting space that we have. These -- what we have this year, which certainly happens in Hawaii, you get these incentive travels that -- and large commitments. We haven't had 2 groups that are essentially buying up the hotel. So it's significant. I wouldn't necessarily say it's onetime, but it's certainly not annual business. That's going to be a huge benefit for us ever since we talked about the group pace, obviously, in the back half of the year. And Hilton Hawaii, Hilton now Waikoloa will be our strongest performer in the second half, and it is significant and it's certainly beneficial.

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Operator [14]

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Our next question comes from the line of Patrick Scholes with SunTrust Robinson Humphrey.

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [15]

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You noticed -- you noted group up 25%. I'm just wondering what's the offsetting percentage on transient. And I imagine that transient is a lower-rated type of transient but just wondering how does that balance out.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [16]

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Are you asking, Patrick, for the year, for the quarter? Tell me. You can...

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Charles Patrick Scholes, SunTrust Robinson Humphrey, Inc., Research Division - MD of Lodging, Gaming and Leisure Equity Research and Analyst [17]

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For the comparables. I think. You said for the rest of year, group was up 25%. I'm just wondering how does that balance out with the transient room nights that you're giving up with the mix shift.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [18]

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Yes. Let me answer it this way. We are 25% in Q3. We're up 6% in group pace in the fourth quarter. Third quarter was slightly down from last quarter in what we thought. But the fourth quarter was up. So again, transient is still choppy and I would say still net positive. We were up 1.1%. We are making the strategic decision now to trade some transient for group particularly given the nature of our portfolio from the points that we've made, right? We'll -- again, anchoring our business with group, layering in contracts. Contacts was up 11%. We're making that. We think it's more efficient for our portfolio. Transient then we can more efficiently price it, and it's certainly the right thing for Park as we move forward. And we’ve demonstrated that in those periods, where we have really strong group. We've had more expected transient. We didn't have that in the second quarter. We knew that. But we were also lapping a very strong performance in the 2018 second quarter.

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Operator [19]

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

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [20]

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Just to ask a little bit more about the group issue. I guess some of the strength in Q3 is a function of the calendar and maybe some holiday shifting to Q4. So just thinking about the visibility on Q4 group business, I guess how much -- or when you think about last year that may be some in the year, for the year group business came in, in Q4? Or I guess I'm trying to understand if it's -- if you think it would be a function of lower attendance or in the year, for the year as we approach Q4 where there could be some risk in the group outlook.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [21]

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Robin, Rob's going to answer that question for you.

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Robert D. Tanenbaum, Park Hotels & Resorts Inc. - EVP of Asset Management [22]

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Our Q4 pace improved over the last quarter by over 100 basis points. So we're, let's say, comping (inaudible) in the marketplace. And given the shift -- the holiday shift, which is going into October -- we don't see it checked until October. September 30 and then October 17 (inaudible). But overall, we don't see it can turn out to be (inaudible) Q4 pace. And our transient pace in Q4 is also strong as well.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [23]

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Okay. And then the commentary about the 2020 group pace. I think you said a quarter ago it was up 4% to 7%. Now it's up 2.5% to 4%. I -- assuming that includes the higher numbers that were on the books a quarter ago, can you maybe give us a sense of what the pace of new bookings just in the quarter -- in the last quarter itself was? In other words, the sort of current rate rather than the in the cumulative pace?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [24]

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Yes. Robin, it continues to be encouraging. Again, a real focus for our team and certainly our partners at Hilton. And -- but it's going to evolve. And clearly, in that 4% number, we've got some pending business that we've put into pending and hasn't been signed yet. But I'd say we've got 62% of our business on the books for next year, and we're about 96%, so to be more than -- many months out and has 62% for us is the -- is comparable and really comparable to what we saw last year and the previous years. So we feel good about our position right now.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [25]

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Okay.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [26]

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That being...

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [27]

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Lastly...

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [28]

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Yes?

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [29]

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Oh, go ahead. I'm sorry.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [30]

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No. Finish your question.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [31]

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Oh, I was just -- so the last thing was just to clarify. I think in your remarks, I think I heard that you mentioned market share up 350 basis points at 65% of the portfolio or some combination like that. Do you have that figure for the full portfolio, the market share change?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [32]

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Yes. It's what's -- it's 350 basis points for our comp hotel. So it's 24 out of our 37 comp hotels gained share in the second quarter. We're very, very proud of that. And that's just a lot of work and blocking and tackling from our asset management team partnering with our operators, and we feel very good about that. So despite a choppy quarter, despite a quarter, obviously, that we knew we were lapping a tough group and obviously that softer transient, we still gained significant share in the quarter.

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Operator [33]

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Our next question comes from the line of Neil Malkin with Capital One Securities.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [34]

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Just a question on Orlando, obviously a big market for you guys. There is a pretty significant or a large project that's going to be delivered, I believe, later in this year and then another phase early next year at Universal. I think it's well over 2,000 rooms. How are you thinking about that in terms of getting ahead of it, maybe getting some more group on the books or more heads and beds ahead of that? Or is that kind of a market where you kind of need to wait and see just given the size of it? How are you thinking about that?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [35]

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Yes. I would say a couple of observations, Neil. We love Orlando. And particularly, we love our 3 assets there, particularly Bonnet Creek. Bonnet Creek is really underrepresented from a meeting space standpoint. We've known that. We've missed out on a lot of group business as a result of that. We've carefully studied the market. We're going to be adding obviously 2 ballrooms, 1 adjacent to the Waldorf, and expanded about 40,000 to 50,000 square foot ballroom at the Hilton. We're also going to be reconfiguring the golf course and also will be adding a lot more outside of meeting and event space that we're really excited about. So we also, as part of that, agreed with Hilton to up-brand Signia. It'd be 1 of the 3 Signias. So we love our positioning there with 400 acres given the proximity that we have. We've got an expanded relationship with Disney.

If you look at Orlando, Orlando is one of the top 5 conventional markets. I don't see and we don't see that changing at any point in the near future. If you look at the amount of room nights coming through citywide, about 1.9 million in '19. I think it's going to be about 1.8 million in 2020, so still solid.

It doesn't -- from a competitive standpoint, new product is added from there and certainly interesting resorts that's being talked about with Universal. If you think about what's happening with Disney in Phase 1 and Phase 2 with Star Wars, we just see long term that there's going to be considerable growth there. We love our positioning and certainly aren't fearful of additional competition

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [36]

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No. I appreciate that. Then last one from me on the renovation opportunity. You've obviously -- Tom has some -- had success at your former company who's sort of repositioning or re-envisioning. Just wondering if you could elaborate on the additional opportunities you alluded to, or maybe Rob, with regard to more ROI type of opportunities within your legacy portfolio. And then maybe as you've looked at Chesapeake a little bit more, do you see more or additional ROI opportunities there?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [37]

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Yes. We'll stay away from the Chesapeake given the fact that they remain an independent company. Obviously, we're waiting for the shareholder vote in September. And more to come assuming that we get a favorable vote there.

As it relates to Park, really excited, as both Sean and I mentioned, about The Reach, converting that to a Curio that work will start soon. That will be done by early December. You see the results that we're getting from the Hilton in Santa Barbara. It's been a huge success for us.

The other 2 that we're beginning to evaluate is we've got the DoubleTree in San Jose. Great real estate, well, really well located to a lot of significant demand generators. We are going to explore converting that to a Hilton. And then of course, we've got the Doubletree in Crystal City at the front door of Amazon's office complex and expanded the development here in the Arlington and the D.C. area. And we certainly are working with -- internally and also with Hilton about the redevelopment of that asset and converting that brand -- that as well possibly to a Hilton, but we can also co-brand that as well. So we are very excited. Those are just 2 that we think are going to be significant contributors to Park going forward.

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Operator [38]

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

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [39]

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I want to ask you. It's, I think, pretty clear to a lot of us that the Hilton brands are outperforming recently or perhaps for several quarters now. And the question is kind of how do you guys look at that going forward. How do you underwrite the legacy Park assets in terms of that you’ve been out punching for some time now. Does that kind of automatically continue or does, if Marriott doing a lot of things right, does that eventually kind of erode that advantage? Or how do you underwrite looking forward?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [40]

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Yes. Chris, it's a great question. I obviously, as many of the listeners know, I worked for Hilton twice, and I've worked for 3 of the Marriott companies. So I have pretty strong feelings about this. I have believed for some time having those 2 strong, formidable companies being -- one here in the D.C. area, being competitive, pushing each other. As a result of pushing each other to be better, we think that's going to be great for the entire industry. We believe passionately one of the motivations for us as part of the Chesapeake deal was obviously to have the brand and operating diversification. What that does is you get all of that good best practices that you see from the other brands, from other independent operators, from the brand operators. And we believe that over the long term, that makes us also a better owner, and we think we can make our partners better managers, better franchise owners. And we also say the same thing for Hyatt, who we have tremendous respect for. So we're really excited to be moving and diversifying over time.

There are going to be pockets where one is outperforming the other. But when I think -- when you think about Marriott, Hilton and also Hyatt, you think about the growth.

When I was -- when I rejoined Hilton 4 years ago, they had 53 million members in their loyalty program. I think Chris announced last week there are 94 million, plus or minus, now about 63% of their occupancy. That is really formidable. I think Marriott is north of 120 million and probably growing. So when you think about that engagement and that opportunity and that loyalty, the real benefit, most importantly, are those RevPAR premiums. Both of those brands are averaging about a 14% premiums over their competitors in particular. As an owner, we want, obviously, the right real estate. We also want the right brands. And of course, we want to generate those RevPAR premiums in theory that you're generating to more revenue, higher margins and then hopefully more return on investment.

So we're excited about it, not fearful. Clearly, Hilton has had an incredible run. Chris and his team have done a fabulous job, and I would expect I'd see no slowdown in all of that. And then Marriott is still working through transition issues, obviously, with the Starwood integration, but I certainly wouldn't bet against them. And I know that they're also going to be formidable moving forward.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [41]

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Okay. Great, great color. Appreciate that, Tom. And just the follow-up is on San Francisco where I think it's pretty well understood that the group numbers are very strong, and I think that kind of gets you through at least 20. And not to pick too much, but I think we have seen the transient. It does seem to be something going on, on the transient side in San Francisco. And do you have any thoughts on that on why -- kind of given what we think is a pretty strong backdrop for the industries that are out there, why San Francisco is struggling on transient?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [42]

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Yes. Look, I think it's a fair question, but let's all sort of keep it in perspective here. I mean you're looking at 1.2 million on citywide room nights there. That probably drops down to 1 million. Probably close to 1 million in 2021 as well and, based on forecasts today, probably down about 800,000. Looking at the low watermark was '17 and '18, obviously, during the renovation at 600,000 to 700,000; and of course back in '16, still 900,000. So given the destination, the amount of limited new supply, San Francisco and in our view, continues to be a very strong market as we look out. There are some issues, the homeless, some housing, some other issues that I think certainly the city is addressing and working through, but we certainly remain bullish. And even our own forecast, we fully expect that RevPAR for the year is probably going to be somewhere in the 8% to 9% range in -- where in industry it's probably in the 1% and change. So we still feel very good even if there's a little bit of pullback in the transient. I think it goes back to my earlier comment that I think CEOs, I think those men and women right now are just pausing. There's a little bit of caution. I think people want clarity as it relates to some of these outstanding issues and particularly on the trade matter. But again, we don't see a recession. We're not fearful of that in the near term. Hopefully just a soft patch. Hoping we'll get clarity. But the fundamentals of the business are still sound.

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Operator [43]

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

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [44]

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I just want to follow up on that. And Tom, do you think San Francisco can be positive next year given the tough comp and the decline in the convention nights? And also, I would like to get your perspective about New York in 2020 relative to maybe the broader industry. Is it another year of an underperform? Or is it an outperform? Or what do you see there?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [45]

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Yes. Great questions, Bill, and I was going to speak with you. I would still see that despite the tougher comps coming in San Francisco, certainly I don't expect it's going to be 8% or 9%. But keep in mind just on the citywide you're still looking at about 1 million. That's about 16% down from where we are today but still over the last high watermark, which had been in 2016 when you take out 2019. So still a solid year. I would say it's probably low to mid-single digits would certainly be the range, but that can also change depending on the operator. As we look out, clearly we're still staying positive about group pace. It's not going to be in the range, the 20% that we're seeing this year, but we still are very bullish and are still focused very much on that group of strategies in San Francisco.

I would see San Francisco as a stronger performer vis-à-vis New York. Let's be honest, I think that New York has really missed this cycle. I'm hoping as the supply will peak next year at about 4% I believe (inaudible) report, the city still runs high occupancies in the 85%. We just don't have the pricing power. And obviously, I think that candidly, it comes back to owners and operators needing to do a better job, yielding a little more courage as we look out in New York. Long term, bullish for New York, but I would still say that it would be a slight underperformer as we look out.

Our group pace next year since then is up, and we're really pushing to get north of 200,000 room nights as we look out to New York next year. It's as strong, and we're up, I believe, about 30%, plus or minus, in group room nights for next year.

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Operator [46]

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Our next question comes from the line of Shaun Kelley with Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [47]

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So I just wanted to ask -- yes, most of my questions have already been covered, but maybe a little bit more color, Tom, or -- if you could, on just what you're seeing on some of the activity outside -- sort of outside the room spend. I mean obviously, you're doing great on the overall group bookings side. It looks like that's going to continue for the back half. Are you seeing any just behavioral changes as it relates to outside the room spend and/or attrition, cancellation? Just kind of how are the groups performing once you're actually getting them on property relative to your expectation?

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Robert D. Tanenbaum, Park Hotels & Resorts Inc. - EVP of Asset Management [48]

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It's Rob Tanenbaum. In terms of group contribution, we were really pleased to see the growth that we experienced in Q2. We were at 1.1% increase in (inaudible) contribution. And if you consider the (inaudible) group room nights, that's rather impressive.

I'll give you 3 quick examples of -- we have several hotels that experienced an increase on -- in group contribution on a lower group base. (inaudible) with New Orleans, New York, 20% group contribution. 2 (inaudible) or 2 hotels now are at 26% and 34%, respectively, and Waikoloa with about 53% group contribution. We're very pleased with that increase.

You asked about the increase in our resort spend at the Park (inaudible). So overall, our out of -- non-room revenue at least (inaudible) the portfolio got the quarter.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [49]

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And are you getting commitments when you're signing up the groups? Are you getting commitments for again, spend, better minimums, larger blocks? Anything again on the behavioral side as it relates to the booking patterns?

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Robert D. Tanenbaum, Park Hotels & Resorts Inc. - EVP of Asset Management [50]

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Sean, nothing has changed in terms of the booking pattern and the behaviors associated with it.

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Operator [51]

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

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David Anthony Guarino, Green Street Advisors, LLC, Research Division - Senior Equity Research Associate [52]

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This is David on for Lukas. I noticed that there was a $10 million gap between the sales price of those 3 hotels you sold in June from the first quarter earnings release. Was there maybe a change of buyer's expectations for underwriting those assets? Or was that something different? And then if you can maybe just tie that with your comments earlier about the strength in the transaction market, that'll be great.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [53]

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Yes. No, I mean, we sold the 3-pack originally under contract for $175 million, closed for $166 million candidly related to some due diligence matters with 1 hotel. Again, all 3 noncore assets, RevPARs that were 35% to 40% below our portfolio average. And we saved about $50 million in deferred CapEx by not proceeding and holding. Again, consistent with our strategy, which we've communicated and which we've had success with is to sell noncore. We've now sold 18 assets for $750 million. When you add up all the deferred CapEx also that we had saved, it's about another $250 million. So we really think we've created significant value for shareholders.

That particular asset was a real outlier, a really difficult asset with some complicated issues. It really is not the right asset for Park and the type of portfolio that we're looking to build and was a better fit for the private equity buyer given their strategy. So I'm pleased with the transaction.

As you may also recall, what we said in our combined documents is that we were looking to sell -- we were hoping that with Park selling our 3-pack and then Chesapeake obviously selling their 2 assets in New York, that we could generate proceeds net of $300 million. We're pleased to say that we're in that range and then that's a positive for the combined company, again assuming it gets approved by shareholders.

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David Anthony Guarino, Green Street Advisors, LLC, Research Division - Senior Equity Research Associate [54]

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Great. And then if you could just kind of elaborate a little more maybe on your comments in your prepared remarks about the strength in the transaction market. Is that more buyers coming to the table? Is that pricing kind of coming in higher than you thought?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [55]

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Very -- I would say there's plenty of liquidity both on the equity markets and on debt capital. So we don't see that at all being a hindrance to getting deals done. And in fact, we received a ton of inbound calls from whether that's private equity, whether that's other REITs, whether that's family offices, whether that's owner operators. We think it's a very healthy environment.

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Operator [56]

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Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back to management for closing comments.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [57]

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Thank you. It's Tom Baltimore. Enjoy the rest of your summer. We've enjoyed our discussion. We're looking forward to talking to you at the end of our third quarter, and hopefully we'll see many of you up and about in our various meetings in the subsequent weeks and months.

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Operator [58]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.