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Edited Transcript of PK earnings conference call or presentation 28-Feb-19 3:00pm GMT

Q4 2018 Park Hotels & Resorts Inc Earnings Call

MC LEAN Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Park Hotels & Resorts Inc earnings conference call or presentation Thursday, February 28, 2019 at 3:00:00pm 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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* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Bennett Smedes Rose

Citigroup Inc, Research Division - Director & Analyst

* Brandt Antoine Montour

JP Morgan Chase & Co, Research Division - Analyst

* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* David Brian Katz

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

* Gregory Jay Miller

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Richard Allen Hightower

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

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Stephen White Grambling

Goldman Sachs Group Inc., Research Division - Equity 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. Welcome to Park Hotels & Resorts Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I'll now turn the conference over to your host, Ian Weissman, Senior VP of Corporate Strategy. Mr. Weissman, 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 the Park Hotels & Resorts Fourth Quarter and Full Year 2018 Earnings Call.

Before we begin, I would like to remind everyone that many of our comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

In addition, on today's call we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. You can find this information, together with reconciliations to the most directly comparable GAAP financial measure, in yesterday's earnings release as well as in our 8-k filed with the SEC and the supplemental financial information available on our website at pkhotelsandresorts.com.

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a brief 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 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'd 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. 2018 was another exceptional year for Park and its shareholders as we successfully achieved the strategic goals we outlined 12 months ago.

For 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 noncore assets. The gross proceeds are $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 on capital figure to nearly $1.9 billion since spinning out from Hilton a little over 2 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 concern 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 for the next couple of years. It 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 expect 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 2019. 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 up 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 it 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, 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 Parc 55 reporting RevPAR growth of 13.6% during the fourth quarter, both increasing share within the comps 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've 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 in 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 2 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 2 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 the Asian wholesale business, a reversal of the trend we experienced last year.

A testament to the team's effort to proactively group up is in an otherwise soft citywide year is best illustrated by both Chicago and New York, 2 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 in 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 II of our noncore 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 5 to 8 noncore 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 0 to plus 60 basis points. Our 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 as a 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'd like to turn the call over to him.

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

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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. Our average daily rate ended the quarter at $214 or an increase of 2.8% year-over-year. These top line results produced comparable hotel adjusted EBITDA of $176 million, while our margins increased 40 basis points to 28.2%.

For 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 daily rate was $212 or an increase of 2.4% versus the prior year. These top line results produced hotel adjusted EBITDA of $716 million for our 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 3.7x. 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 weight dividend. Similar to last year, we are targeting a full year payout ratio of 65% to 70% of adjusted FFO and 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 desk facing areas, taking our full year CapEx spend to $147 million, or the 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 Norwegian Key West, with targeted returns in the high-teens for both.

As a reminder, total ROI spent 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 re-concept. Total ROI spend for this project is estimated at $10 million, and we expect construction to occur during the slower months of Q3 and Q4 of this year.

We hope you are available to join us for our Key West property tour we and several of our peers are hosting in April -- in early April, where we expect to have a model room to showcase.

Turning to 2019 earnings guidance, I'd 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 to 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 of housekeeping issues to make sure you've taken note. First, as we've disclosed previously, the ground lease at our Hilton Chicago O'Hare property expired at the end of 2018. And as expected, the city has taken back the 860-room property. The hotel accounted for roughly $13.5 million of EBITDA contribution last year.

On a positive note, RevPAR margins at the property ran conservatively lower in our consolidated portfolio average. So the net effect of removing the hotel from the comparable portfolio is an approximate $1.10 increase in average RevPAR for 2018, while comparable hotel adjusted EBITDA margin is positively impacted by approximately 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 wanted 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 the resort expected to occur in May 2019, which will include most of the guestrooms and F&B outlets and all 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 costs and other expenses. This also includes a portion of BI related to the impacted months in 2017.

Total insurance proceeds received to date, including the property damage side of the claim, are $115 million. With the property remaining closed for 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. (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 Bill Crow from Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [2]

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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?

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

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It's a great question, Bill. We don't one, think, they're -- say they're mutually inclusive. We think by grouping up, particularly with our top 10 assets or really even our top 25 assets, to really play to our natural strength, it's a real competitive advantage for us long term. So if you think about 2018 as an example, though we were up, group, it was up about 5%, I would say for the year. Transient essentially for us was a little better than flat. But our contract business is up obviously -- it's about another 5% of our business, north of 21%. So effectively, what we're doing is we're shrinking the hotel. We're anchoring our business with really high-quality group business, coupled with the fact that we're 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 by taking advantage of really these large group houses. So we actually think it's the prudent business model. In the past, a lot of hotels were really more focused on transient. We think this is really our core strategy moving forward. And candidly, I think we're proving it out. 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. And also when you look out and see, both in '19 and in '20, while they're not great citywide years across many of the major markets, we were proactive and got in front of this a couple of years ago, identifying that and fielding it, partnering with our partners at Hilton and just being laser-focused on grouping up our business.

So we see this as a competitive advantage, again thanks to the natural strength that we have at Park.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [4]

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Yes. And speaking of Hilton, can 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?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [5]

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It's a fair question, Bill. I would say, look, we love that resort. And we think we've got huge upside there, over 400 acres, championship golf course, 1,500 rooms. Yes, Orlando, as you know, is a bit of an arms race. So adding more meeting space here is going to be critical to our long-term success. So we're 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've got great confidence in our partners at Hilton. And as you think about the need for sort of a Hilton-plus brand, assuming it does that, the 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. There's always a risk, but I think Hilton has got a demonstrated track record being able to launch new brands. And really, this is sort of a brand extension and a brand upgrade of Hilton. So you're not really taking away from the core benefit of Hilton.

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Operator [6]

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Our next question comes from the line of Rich Hightower from Evercore ISI.

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

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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 catalysts in either direction or it's something more broad than that?

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

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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 -- clearly, Waikoloa is going to be up almost 80%, includes there Hilton Hawaiian Village will be up about 8%. So clearly, that'll be a very strong performer for us, probably mid-, slightly above probably mid- to -- above that in RevPAR growth. San Francisco is going to be having a very strong year as you know, citywides being up certainly north of $1.2 million, and out of the 78% plus or minus we expect there. And we're probably going to do probably 7% to 9% range, 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 group pace there and New York City. So overall, it's pretty well diversified, it's not just dependent on those 2 markets. So we feel comfortable where we are. And if any indication again that we're coming on the heels of the first quarter will be coming against sort of a 1% -- 1.1% of end growth in 2017 -- excuse me, 2018 there. So as we think about this year, we're going to have a very strong first quarter, as we mentioned, kind of 4% to 5% RevPAR. We are -- can expect the third quarter to be strong, while second quarter you've got tough comps there due to such strong improvements there last year. We feel comfortable with the way things look. There are things that can happen geopolitical, but when you think about the group base that we have, obviously, the layering in the contract business also continues to be strong. And we are cautiously optimistic and are very comfortable with the guidance that we provided.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [9]

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Okay. So the low end of the range then just to, kind of, characterize that is more of a macro cushion. It sounds like, kind of, up against all the other positive indicators you've mentioned.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [10]

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That's a very fair statement. But remember, we're up 10% plus or minus here on below that 30% of our business. So we feel we've got a solid anchoring there at that low end for sure.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [11]

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Okay. Got it. And then my second question here. As you've seen the company's trading multiple re-rate progressively since the company was spun out from Hilton a couple of years back, are you noticing more acquisition opportunities? I'm sorry, past the initial screen as you think about external growth this year?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [12]

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Yes, for sure, Rich. I mean, listen, this is all part of a master plan for us. If you think about the way we thought very carefully about our priorities in the first 2 years and again we have a strong growth story. We were anchored and obviously, recycling capital. We sold 14 assets for around $570 million. Obviously, we used $348 million of that to buy back 14 million shares as part of the HNA trade. If we look at the stock performance since the HNA trade, dividends we've got to be up north of 40%, outperformed our peers, 1,400 basis points both look in 2018, if you look 2 years at it will be greater than that. I'm very proud of the work that we've done. We've made great progress on, obviously, a lot of projects that we've talked about converting the Fess Parker DoubleTree, Chile Hilton, the Bonnet Creek work that's going to begin. We obviously are going to be converting The Reach this year and starting the conversion process on DoubleTree San Jose, converting that to a Hilton. And we've made great progress on a number of initiatives on the margin front, as we demonstrated. There were a fair number of naysayers out there, and we said we'd grow margin 75 basis points in '18 where -- and we delivered certainly 60 basis points on an absolute side and continue to close that gap and now really 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 as we reshape the portfolio to begin to go on offense. And we're going to be very thoughtful about it and disciplined about it. We'll continue to look whether that's single assets, or whether that's portfolios, or whether that's other transactions. We're clearly not going to be selling stock and -- where we're trading. We're not going to issue stock at, I would say, at a discount to NAV. I think you know me, you know the discipline that I bring to the process and the team certainly shares that. I think we've demonstrated that we're very prudent capital allocators. So we're excited about the growth prospects. And candidly, it's important for us to also show that brand in offering diversification. So we'd love to be able to fold in on Marriott brand, at our Hyatt brand and perhaps other brands at the appropriate time and at the appropriate pricing.

So we love our positioning and we love the great opportunity that we have as we move forward.

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Operator [13]

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

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [14]

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I just wanted to make sure, in your guidance for margin growth in '19, does that include the 20 basis points lift from the exclusion of the Chicago O'Hare airport hotel?

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Sean M. Dell'Orto, Park Hotels & Resorts Inc. - Executive VP, CFO & Treasurer [15]

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Smedes, it's Sean. It is not. It's obviously, a comparable set year-over-year. So O'Hare would not be another year, looking at that.

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [16]

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

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [17]

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Yes, specifically Smedes, to make sure I understand your question, getting a sense of group pace in terms of our other key markets. Is that your question?

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Bennett Smedes Rose, Citigroup Inc, Research Division - Director & Analyst [18]

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Yes.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [19]

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So again, as we mentioned, Hawaii, up 23%; San Francisco, up 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 [rerouting funds.] And again, we were grouping up. So again, showing the proactive teamwork, leadership, focus from the men and women in Park, coupled with our operating partners at Hilton. So we've got a long lead-time here. So we were looking at this 2 and 3 years ago, it wasn't just 6 months ago in this process. So really proud of the discipline and how hard the team has worked here. Hence, the reason that we're getting the results and we continue to outperform our peers on the -- on these matters. And with that, again, New Orleans up 3%. New Orleans is also down about 20% this year but we're up in 3%. Orlando is down 5%, citywides, we're up about 2.2%. D.C. is down and we are also down. We are not down as far as many of the peers are vis-à-vis there.

So again a concerted effort. Proactive into group up and we played to the internal growth strategies that we have been talking about nonstop for the last 2 years. We're bearing the fruit of that hard work.

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Operator [20]

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Our next question comes from the line of David Katz from Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [21]

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I just wanted to go back to the opportunity for acquisitions in that landscape. Has pricing gotten stiffer? What kind of term landscape are you seeing? And what would you say are, kind of, the 2 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?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [22]

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That's a great question, David. Look, we're open for business. Clearly, the first 2 years and the Safe Harbor and some of the 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. We need to make sure that we have the operational discipline. And then through all those initiatives that I have outlined, really, I think, are on much better footing. We've actually got a much stronger multiple today than we had certainly 2 years ago, and that certainly gives us optionality. We will continue to look opportunistically for single asset deals that meet our criteria. And brand and operating diversification are a big part of that. We'll continue to look at portfolios that make sense. And we're not opposed to M&A. We said that, and one of the big attractions to this opportunity for me, for Park, is we think that this industry and our sector is really ripe for consolidation. And at the appropriate time, we certainly want to be a participant in that process.

What we're not interested in, we note there are some other large portfolios that are out there and their pricing and forecasts and sub forecasts, we're not a buyer of that kind of real estate. In this pricing cycle, we don't think it's prudent, we don't think that's disciplined. We certainly aren't looking to lever up. We certainly want to stay north of 5x net debt-to-EBITDA, and as we've said, well south of 4x 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 for us. We're not planning to issue equity. Unless we see the stock trading at or above [NB], then it's certainly something that we would be more open to.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [23]

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

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

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Yes. Again, you're asking a hypothetical. If it's structured in an appropriate way and it makes economic sense, and it's accretive, 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 certainly could be other stock or stock [deals] that, if priced right, could make sense and be of scale.

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Operator [25]

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Our next question comes from the line of Anthony Powell from Barclays.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [26]

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

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [27]

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Yes. It's a great question. I think look, if you think about the economic climate, obviously, we're getting late in the national business cycle, getting 10 years lodging plus or minus. We think historically trough-to-trough is about 11 years, trough-to-peak it's about 7 years. Look, we've had anemic growth early in the cycle, and they're still running room, there's still lag. I know there's some who believe that a recession is likely in 2020. We certainly don't share that view. And if you look at the economic data, which I think came out today, obviously, GDP is up 2.6%. I think nonresidential fixed investment spending is up about 6.2% in the fourth quarter and still expected to be up 4%. That clearly continues to provide a backdrop. What we're also finding that it's the companies with low employment is they are looking to continue to train, to provide the appropriate incentives to 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. The transient has been choppy and as I cited, as we look back to '18 and for us relatively flat, slightly up in total. But our group business was up 5%. Our contract business again has grown 21%.

So we think that's just appropriate. We're playing to our strength and using the appropriate levers. But as the cycle continues to lengthen, the -- they are -- it will be pockets that are choppy. But we really like our positioning, certainly in 2019 and on in 2020.

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Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [28]

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

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [29]

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No secret Anthony, I am a strong believer in brands. Having worked for the Marriott companies and having worked for Hilton twice, I've got a strong understanding. I would say that they've 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 north of 50%, if not 60% of their occupancy coming through those are powerful systems. So I'm a brand guy, and we believe here at Park in the strength of brands. So -- and we embrace the soft brands, which is another layout. I see the timing in those portals in a very distinctive way.

So we -- as you think about our strategy, it's really upper upscale and luxury hotels, top 25 markets in dream destinations. We really have a bias towards those bigger group houses, for all the reasons that we've been talking about on the phone. We're not opposed to independent opportunities and we'd probably look to partner or have those tied into one of our preferred brands. And certainly have Marriott and Hilton on the top of that list. But we look forward to expanding our relationship with Hyatt and others, as well.

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Operator [30]

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

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [31]

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I want to ask on the margins. How did 2018 unfold relative to your expectations on, kind of, a core inflation on the core expenses? You guys obviously beat your guidance. So I'm 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?

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

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Rob is going to take that question for you.

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Robert D. Tanenbaum, Park Hotels & Resorts Inc. - EVP of Asset Management [33]

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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 category, we've had great success throughout our portfolio. To give you a quick example, in San Francisco, 85 rooms, we categorized from standard rooms to a new room category and have generated over $700,000 of revenue alone. Have similar success in Boston Logan, converted 148 rooms to a new category. And we're actually looking at other hotels as well, including Embassy Suites in Austin to be forthcoming. So the other part that we are looking at here is our pricing not only in between categories, but also within the categories as we 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 on the cost side, we've been renegotiating our contracts throughout. Great opportunity. Our team in Honolulu are doing an amazing job on an elevator contract, saving over $1.5 million over the life of the contract over 4 years. So really working with our teams we think differently as we look forward there.

We're also combining our management position, reducing our food costs and also taking operations in-house. 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, and additionally, excuse me, we had the availability of having a run rate of $200,000 coming down to EBITDA. So we're really thinking throughout our process here, how do we work together to further drive our revenues and the bottom line?

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [34]

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Great. That's great color, Rob. Just I'll try to sneak in one more acquisition question, if I can, and it's really how do you -- how important is it to you guys that if we're talking a single asset that you have kind of a story to the 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're looking more for yield that's already there?

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

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

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Operator [36]

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Our next question comes from the line of Gregory Miller from SunTrust Robinson Humphrey.

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Gregory Jay Miller, SunTrust Robinson Humphrey, Inc., Research Division - Associate [37]

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I'm on the line for Patrick Scholes. First question, 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?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [38]

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Listen, I -- that's an ongoing I mean, keep in mind we continue to reshape the portfolio, right? So when you think about it, we've got now 52 hotels, really the top 25 hotels, and they account for about 90% of the value. You can expect that we're going to continue to sell noncore assets and recycle that capital, either into 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 break out or walk you through our half-dozen initiatives. We need to say on behalf of Rob and the great work that we're doing in our asset management team, we've probably got 20 initiatives. And we continue to work that, depending on the hotel situation, and we continue to have success with it but that disciplined focus and making sure that we're taking advantage of it. There is a gap and closed it we believe about 110 basis points vis-à-vis our peers, and that's still probably just south of 300 basis points. Obviously, given our portfolio, 60% of them being 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're confident that we can -- that we're positive margin growth, at least 30 basis points, certainly given that backdrop.

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Gregory Jay Miller, SunTrust Robinson Humphrey, Inc., Research Division - Associate [39]

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Great. And on another topic. Could you remind us about your demand from the U.K? And thoughts about potential impact from Brexit, especially to the gateway market that you're in and particularly the potential impact to transient demand?

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

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Now when you think about it, the dollar is down about 10% vis-à-vis the euro. If anything, you take out Hawaii, we see -- we saw a slight increase in international demand. And so from that standpoint, we're encouraged. Obviously, Hawaii is so dependent on what's happening partially coming out of Asia, so a little bit of a wholesale concerning the reduction last year and we expect that's going to rebound this year. So we're cautiously optimistic, and we don't see any real fall off at this point, as we look out. And what we saw in '18 look out, we saw growth in Chicago, we saw the growth in New York. So we are cautiously optimistic as we move forward.

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Operator [41]

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Our next question comes from the line of Stephen Grambling from Goldman Sachs.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

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I guess, my follow-up on 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 playbooks since the split?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [43]

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Yes. So it's a great question. I would just say that if you look -- 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, terribly important. And for us, long term. When you think about sort of the evolution of all those to where they are, that brand diversification, I think, is very important. Also being able to look at different best practices that you're seeing from the brands and you're 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've got a dedicated team in Hilton that we're working with, and clearly that's bearing significant fruit to us. But long term, our vision is to be the preeminent lodging REIT. We clearly want to have a diversified platform of brand operator and look forward to getting our first deal done with Marriott, with Hyatt and with others over time.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [44]

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So would anything change then with the relationship with Hilton?

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

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Nothing will change. In my past life, Stephen, we had -- that was a large Hilton area and Hyatt [meeting] 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 in Park are really looking forward to that and excited about really continuing to strengthen those relationships beyond Hilton. I love our partnership with Hilton, and obviously as we've continued to demonstrate, it is going very, very well.

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Stephen White Grambling, Goldman Sachs Group Inc., Research Division - Equity Analyst [46]

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That's helpful color. And maybe one other quick follow-up on consolidation. It seems that bigger consolidation across the space tends 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?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [47]

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Yes. Well, listen, I've 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 and if it's [a sector] that is right for consolidation, it will happen at the appropriate time. We saw last year, a couple working with 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.

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, that value is going to change in my view.

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Operator [48]

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Our next question comes from the line of Brandt Montour from JPMorgan.

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Brandt Antoine Montour, JP Morgan Chase & Co, Research Division - Analyst [49]

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So you talked about the group a lot and you've been proactive over the last 2 to 3 years, to giving professional tours, going out and getting that group business. I was just wondering, are you seeing the market getting more competitive, maybe coming into some of your peers out there putting more resources in this business? And we're going out and getting that in-house group business?

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [50]

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It's a great question. I would say every situation is different. In our portfolio, we saw immediately, it's a competitive advantage. And there was a gap there so we set out on a journey, and it takes time to do that, so [perhaps all of the day and] it will take them some time to catch up, in our view. Obviously, [with Lyeman and Tom Reeves] and his very talented team are being in the [right inventory the first one that really is] the nature of the business. But we're not seeing them any more today than normally, and I would suspect that both Hilton [area] and Hyatt and other what are the big platforms that are managing, they are, in a normal business case certainly fighting for share on that side of the business, but the bed business is so large. There's enough growth and capacity for all of us here.

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Brandt Antoine Montour, JP Morgan Chase & Co, Research Division - Analyst [51]

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

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [52]

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

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Operator [53]

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

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [54]

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

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

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

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [56]

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Okay. Great. I don't know if you'd 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'm 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?

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

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I don't -- the reality is, I think that the transient has been choppy. Leisure really has been stronger if you think about the cycling business in transient has somewhat lagged. We saw a little bit of a reverse effect, we were up transient about 4.2% in the fourth quarter, and it's moving down. And again, I don't -- there's nothing, as we look out and see the transient pace, the transient pace continues to be strong across most of the segments. So we've been having a diversified portfolio, but we're comfortable with the guidance and the direction of the business in 2019.

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Operator [58]

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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.

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Thomas Jeremiah Baltimore, Park Hotels & Resorts Inc. - Chairman, President & CEO [59]

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

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Operator [60]

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