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Edited Transcript of PK earnings conference call or presentation 2-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Park Hotels & Resorts Inc Earnings Call

Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Park Hotels & Resorts Inc earnings conference call or presentation Thursday, March 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian Weissman

Park Hotels & Resorts, Inc. - SVP, Corporate Strategy

* Tom Baltimore

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

* Sean Dell'Orto

Park Hotels & Resorts, Inc. - EVP, CFO and Treasurer

* Rob Tanenbaum

Park Hotels & Resorts, Inc. - EVP, Asset Management

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Conference Call Participants

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* Anthony Powell

Barclays - Analyst

* Ryan Meliker

Canaccord Genuity - Analyst

* Bill Crow

Raymond James - Analyst

* Brian Dobson

Nomura - Analyst

* Robin Farley

UBS - Analyst

* Patrick Scholes

SunTrust - Analyst

* Lukas Hartwich

Green Street Advisors - Analyst

* Steven Grambling

Goldman Sachs - Analyst

* Shaun Kelley

Bank of America - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Park Hotels & Resorts fourth-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, March 2, 2017. I would now like to turn the conference over to Ian Weissman, Senior Vice President of Corporate, Strategy, and Investor Relations. Please go ahead.

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

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Good morning and welcome to the Park Hotels & Resorts fourth-quarter and full-year 2016 earnings call.

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

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

Additionally, it is important to note that all financial results will be discussed on a pro forma basis, which takes into account post-spin adjustments, including the new management fee structure and presents the results of our portfolio as it stands today. Reconciliations to the closest GAAP financial measure in our combined consolidated financial statements, which were paired on a carveout basis and do not contain these pro forma adjustments, may be found in the supplemental financial information available on our website.

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a brief overview of our corporate strategy, a review of our operating fundamentals, and the Company's outlook for 2017. Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our 2016 performance and outlook for this year, as well as discuss our balance sheet, liquidity position, and dividend policy.

In addition, Rob Tanenbaum, who heads up asset management, will be joining for Q&A. Following our prepared remarks, we will open up the call for questions.

With that, I would like to turn the call over to Tom.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [3]

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Thank you, again, and welcome, everyone, to Park Hotels & Resorts' inaugural earnings call. It has been an exciting journey these past several months working towards the Company's launch, and I am very proud of what we've accomplished.

In just nine months, we have assembled a superb team of men and women with tremendous talent and experience. We have also assembled an impressive, best-in-class Board of Directors.

We have formulated a strategic plan, which includes attractive opportunities for both organic and external growth. We have recapitalized the balance sheet, providing Park with ample liquidity and flexibility to execute on that plan, and finally we have completed the spin from Hilton with Park now operating as a standalone independent company. Today, Park owns 67 premium branded hotels and iconic resorts with over 35,000 hotel rooms, which from the outset makes us one of the largest lodging REITs. The size and scale of our portfolio, including the irreplaceable nature of many of our properties, combined with our significant growth profile, provide us with a competitive advantage to help drive outsized returns.

We are laser-focused on our underlying goal of creating value for shareholders. To ensure that, we have established three guiding principles which will steer our strategy and operational decisions. These include operational excellence, prudent capital allocation, and conservative balance sheet management.

In terms of operational excellence, we own an impressive portfolio of hotels, and while portfolio profit margins have significantly improved over this cycle, we believe there remains significant embedded value that can be unlocked through a consistent and proactive asset management program.

With respect to prudent capital allocation, we will continue to reinvest in our portfolio to both maintain its quality and enhance its value through ROI projects.

We will also employ an active capital recycling program, which will include culling the bottom 15% to 20% of our portfolio, while remaining disciplined on acquisitions targeting only those external growth opportunities which meet or exceed our return expectations.

In doing so, we will strive to maintain a low levered balance sheet of 3 to 5 times with a target of 4 times net debt to adjusted EBITDA throughout the cycle with long-term aspirations of achieving an investment grade rating.

Finally, and most importantly, we will look to return capital to shareholders, beginning with our first quarterly dividend of $0.43 per share that we announced earlier this week based on the most recent share price, and assuming a 65% to 70% FFO payout ratio, Park investors currently have a very attractive yield of approximately 7% or over 200 basis points higher than our lodging REIT peer average.

Now let me turn our focus towards operational excellence. While Hilton has done an outstanding job improving property level profit margins over the past several years, we maintain that there is still plenty of opportunity for us to improve our margins across our consolidated portfolio and to narrow the margin gap that currently exists between Park and our peer set. After a thorough review of the portfolio, we estimate there is approximately 150 to 200 basis points of hotel EBITDA margin upside we can capture over the next few years through an active asset management strategy with 75 basis points targeted for 2018 and another 100 basis points in 2019.

I remind investors that for every 50 basis points of hotel EBITDA margin gap we close, that translates into $14 million of incremental EBITDA or an estimated $160 million of value creation assuming an 11.5 multiple. To lead this effort, I am thrilled to have Rob Tanenbaum on the leadership team at Park. Rob is a superb executive and widely respected with a stellar track record for maximizing hotel operating performance. At Park, we truly believe that no man or woman stands alone, and we remain focused on assembling a best-in-class team and providing them with the tools that will help to contribute to our collective success.

While we are still formulating the specifics of how we are implementing it, I want to walk you through our asset management strategy, which will be driven by both revenue generation and cost containment initiatives. Our biggest opportunity on the revenue side is to shift the mix of demand to drive additional group business throughout the portfolio. More specifically, our group contribution is currently 31% of the mix across our top 25 assets, and we believe there is additional opportunity to further expand this position given the extensive meeting space platform at these properties. Our goal is to improve our mix of group business by 400 basis points over the next 2 plus years to 35%, which we believe should drive higher rate growth and more income on the catering side.

We are also keenly focused on how we can further improve the capture rate at our retail food and beverage outlets by understanding both the popularity and the opportunity of our current offerings. We believe we can also drive incremental ancillary revenues through our large retail and parking platforms. We have dedicated resources to Rob's team to focus on these initiatives, including the hiring of a Director of Leasing and the addition of a Director of Revenue Management. We have also initiated weekly revenue management calls and dedicated on-site meetings, which should translate into additional revenue generation ideas and action plans over time.

On the cost side, our Drive for 65 mantra is alive and well at Park, targeting an incremental house profit flow-through at 65% of every additional revenue dollar generated.

In addition, we are implementing thoughtful cost containment plans by decreasing controllable expenses and benchmarking key performance indicators, including food and beverage cost productivity and property operations.

To assist the team in this effort, we have added a Director of Engineering to help identify and implement cost containment strategies on the property operations side. We recognize these initiatives will take time. However, we are committed to realizing sustainable margin improvement which we expect will lead to meaningful value creation for shareholders over the next 18 to 24 months.

We are pleased with the collaboration and partnership with our hotel operating teams and fully expect to uncover additional opportunities as we work more closely together over the coming months, and we look forward to sharing our progress with you.

Our second growth lever is identifying and executing on ROI projects within the current portfolio.

As we seek to identify these opportunities, we will target returns in excess of 15% to 20%. We will pursue some projects this year, while others will be executed over a longer-term horizon. We continue to make progress on our larger scale initiatives that we have previously shared with you and plan to provide more details on these projects when we have more definitive capital plans outlined. I will add, however, that we have initiated design and preconstruction work for the addition of 40,000 square feet of meeting space at our Bonnet Creek complex in Orlando, a project we believe will add $10 million of EBITDA, delivering returns in excess of 20%. The project delivery date is early 2020.

Other significant projects we plan to initiate this year include the conversion of the DoubleTree Fess Parker hotel located in Santa Barbara, California to a Hilton, which would reposition the asset to generate more group demand. We also evaluating a potential repositioning of the Waldorf Astoria Reach resort in Key West to a Curio.

Finally, while less dramatic and visible, we will continue to execute smaller projects that will lead to outsized returns, including the addition of 12 rooms at our Bonnet Creek complex as we look to recapture otherwise vacant space in both the Waldorf Astoria and Hilton properties. The conversion is expected to be completed at the end of the first quarter and is expected to generate an incremental $500,000 in annual EBITDA resulting in an IRR over 30%.

Finally, we have the opportunity to use Park's size and liquidity for strategic acquisitions. Over the long term, we are committed to growing the size of our platform and believe we have a tremendous opportunity to do so through a combination of single asset and portfolio acquisitions. However, our near-term efforts are going to be concentrated on the first two levers I mentioned -- operational excellence and ROI projects -- where we can create more immediate value.

From a fundamental perspective, 2016 was a choppy year for lodging with Smith Travel reporting US rev par up 3.2% for both the fourth quarter and the year. Despite concerns over hotel development, demand still slightly exceeded supply with US supply growth at just 1.6% for the year versus demand growth of 1.7%.

With respect to Park Hotels exposure to new supply, in the US, we should continue to benefit from below average supply growth over the next several years given our footprint in supply-constrained markets such as Hawaii and San Francisco. Overall, we estimate that our portfolio faces just 2.2% annual supply growth over the next two years or 50 basis points below our lodging REIT peers.

For our consolidated hotel portfolio, RevPAR grew by 0.5% for the year on a currency neutral basis, driven by a 2.1% increase in rate that was offset by a 1.3% decline in occupancy as softer conditions in Chicago during the first half of the year coupled with challenges in New York City, Orlando, and Washington DC weighed on results. For the fourth quarter, RevPAR slipped a bit, down 0.8% with a decline in occupancy accounting for most of the decrease. With rates essentially flat during the quarter, rooms revenue decreased 2%, although there continues to be healthy gains in food and beverage revenue with an increase of 2.2% driven by banquets and catering.

As our major markets, Hawaii, which accounts for approximately 24% of our hotel adjusted EBITDA, was by far the best performer in 2016 with RevPAR growth of 5.9% for the year, followed by our Northern and Southern California markets. This generated RevPAR growth of 3.5% and 3.3% respectively.

In 2017, we expect Hawaii to have another strong year with RevPAR growth trending in the low to mid single digits. In San Francisco, the ongoing renovation at the Moscone Convention Center, will reverse some of the recent positive trends, but we remain positive on the market longer-term. Furthermore, with our nearly 3000 rooms and 167,000 square feet of meeting space, we expect our complex of hotels, the Hilton San Francisco Union Square and the Parc 55, to experience less than 100 basis point drop in RevPAR in 2017. Better than the forecast given by CBRE for the overall city and materially outperforming expectations recently set by several of our lodging lead peers.

In Florida, we owned six hotels that account for 15% of hotel adjusted EBITDA. RevPAR was down 3.4% for the year due to both Hurricane Matthew in October, as well as increased concerns over Zika in both Central and South Florida, with much of the weakness felt during the fourth quarter with RevPAR down 8%. Overall, however, the outlook for 2017 is materially better with low single digit RevPAR growth expected.

Additionally, Chicago and New York were among our softest markets in 2016 with RevPAR growth slipping 5.1% and 4.3% respectively. New York which accounts for approximately 7% of our hotel adjusted EBITDA did not fare much better during the fourth quarter with RevPAR down 4%, and the outlook for full-year 2017 is for New York to remain challenging as new supply issues remain. Chicago improved in the fourth quarter with RevPAR up 2.4%, and we expect to deliver positive RevPAR growth in 2017 in the low single digits.

With respect to group, which accounted for 29% of demand for our portfolio, 2016 was a challenging year due to the soft citywide calendar in Chicago during the first half of the year, coupled with the impact of the Moscone Center renovation in San Francisco during the second half of the year.

Looking ahead to 2017, group pace is up 0.5%. However, if you exclude Northern California, pace is up almost 2% over last year with 75% of our group business for 2017 already on the books, a comparable level at the same time last year.

Additionally, we continue to be encouraged on the group catering contribution, which we expect to be up almost 4% in 2017. For our top 10 portfolio, which accounts for 65% of hotel adjusted EBITDA, RevPAR growth in 2016 was 0.6% for the year, driven by 1.9% increase in rates and a 1 percentage point decline in occupancy, while fourth-quarter RevPAR declined 1.7% with occupancy down 0.2 percentage points and rate decreasing 1.5%.

Our Hilton Waikoloa was our best performing asset during the fourth quarter with RevPAR up 24% due to strong in-house group demand followed by the Parc 55 and Hilton Chicago, which experienced RevPAR growth rates of 4.6% and 4% respectively.

Our assets in South Florida -- the Waldorf Astoria Orlando and the Waldorf Astoria Casa Marina -- were among our weakest performing assets during the quarter with RevPAR falling 13.2% and 7.7% respectively as in-house group did not repeat combined with increased concerns over Zika and the impact of Hurricane Matthew.

The 2017 outlook for our top 10 assets is for slightly positive RevPAR growth led by the Hilton Hawaiian Village, coupled with stronger performance out of Orlando, Chicago, and New Orleans assets, all producing low to mid-single digit RevPAR growth. Offsetting our growth will be continued headwinds in New York, despite the added benefit of additional group and catering business being transferred over from the Waldorf Astoria, which will close on March 1 to undergo a major renovation.

We feel very good about our footprint as we head into 2017 and even better about our hands-on approach to asset management, which should help drive relative outperformance this year.

Looking at January, we are already off to a strong start with January revenues up mid-single digits and RevPAR growth of nearly 4%. The relative outperformance has been widespread with material year-over-year improvements witnessed in Northern California, New York, Chicago and, of course, DC with the inauguration accounting for 90 basis points of the improvement. Hawaii was very strong with RevPAR growth up nearly 7%, while Florida RevPAR performance was up nearly 4% in January.

Strong group trends were the primary driver with room revenue mix shifting from lower rated transient to higher rated group in January. We witnessed particular strength across our top 10 portfolio with RevPAR up 5% over the prior year period.

As we look ahead to 2017, it is hard to ignore the dramatic turnaround in investor sentiment following the change in administration and the potential implications on lodging fundamentals over the next couple of years. While we have yet to witness an inflection point in operating fundamentals commiserate with the move in equity prices and improvements in business sentiment, I am encouraged by the impact that potential tax cuts, deregulation, and infrastructure spend may ultimately have on the US economy.

That said, our guidance excludes any potential benefit from changes in Washington as we are just not seeing it yet on property.

Additionally, while we remain cautiously optimistic on the year, the hotel sector faces particular challenges given the continued strength in the US dollar and the potential fallout from the administration's proposed travel ban. As a result, given the continued lack of visibility in our sector, we are establishing comparable RevPAR guidance of 0% to plus 2% for the full year of 2017 with a comparable hotel adjusted EBITDA margin range of negative 100 basis points to flat. We note, however, that our guidance does not take into consideration any potential margin improvement from the initiatives undertaken by our asset management team, which we expect to materialize over the next 12 to 24 months. For the full-year 2017, we anticipate adjusted EBITDA to be in the range of $725 million and $765 million, while FFO will be in the range of $2.65 to $2.81.

Now I will turn the call over to Sean.

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Sean Dell'Orto, Park Hotels & Resorts, Inc. - EVP, CFO and Treasurer [4]

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Thanks, Tom. Before I begin, I just want to remind investors that, as noted by Ian in his opening comments, all results I will discuss today are on a pro forma basis.

Looking at our results for 2016, hotel adjusted EBITDA was $750 million compared to $778 million in 2015 or a decrease of 3.6%. Total hotel revenues increased 0.3% against a 1.9% increase in total hotel expenses, resulting in hotel adjusted EBITDA margin declining 110 basis points on the year. Property tax increases, mostly stemming from the reassessments of the properties acquired in the Waldorf 1031 exchange, accounted for approximately 20 basis points of this decline.

Turning to the fourth quarter, hotel adjusted EBITDA was $177 million, down from $187 million a year ago. We achieved a hotel adjusted EBITDA margin of 26.5%, which is down 150 basis points from the prior year. Across our top 10 assets, EBITDA fell 3.9%, while margins also declined 150 basis points. We attribute roughly 20 basis points of the decline in both instances to the same property tax adjustments.

In terms of CapEx, we invested $227 million during 2016, which equates to more than 8% of total hotel revenues. The vast majority of this investment was focused on guest-facing areas such as rooms, lobbies, FMV outlets, and meeting space. Key projects to highlight within the top 10 portfolio include the completion of the multiyear renovation at the Hilton Chicago downtown, the completion of the third of five phases of guestroom renovations at the Hilton New York, and the third of fourth phases of guestroom renovations at the Hilton San Francisco Union Square, as well as the repositioning of the lobby, lobby bar, and installation of the urban kitchen grab-and-go concept at that hotel.

Other notable projects include a complete renovation of the Embassy Suites in Washington DC in conjunction with the conversion of three of its floors to timeshare units and that repositioning of the lobby and atrium at the Embassy Suites in downtown Austin, Texas.

Since 2011, over $1.3 billion has been invested to maintain and upgrade this portfolio with above average spending to make up for reduced capital investment levels during the last downturn. Going forward, we expect maintenance CapEx to be approximately 6% of revenues on average with no deferred maintenance CapEx anticipated.

Turning to our balance sheet, we are in great shape. We have just over $3 billion of consolidated debt outstanding with a weighted average maturity of just under eight years at an all-in cost of 3.7%. Overall, our net debt to adjusted EBITDA ratio is just under 4 times with interest coverage above 6 times.

In terms of liquidity position, we have almost $1.2 billion available funds between available cash and capacity under our $1 billion undrawn revolver.

As Tom noted, on Monday, we announced that our Board of Directors had declared our first quarterly dividend of $0.43 per share, which, based on current stock prices, translates to a robust yield as significantly higher than the lodging REIT peer average. As we have stated before, our policy is to distribute 100% of our cash flow income, which we believe will translate to 65% to 70% of FFO adjusted for items that we have disclosed in our earnings release and supplemental. Therefore, assuming the midpoint of our FFO guidance range and the midpoint of our FFO payout estimate, we would expect the annual dividend to be approximately $1.84 per share. To the extent our quarterly cash dividend is insufficient to meet our distribution requirement for the year, we would expect to pay a fourth-quarter true-up dividend in January of the following year. We will continue to evaluate our dividend level with our Board as we progress throughout the year and as we gain better insights into 2018.

Finally, I would like to provide a few more details on our earnings guidance. First, as previously disclosed, prior to the spin, we transferred 600 rooms at our Hilton Waikoloa property to Hilton Grand Vacations for conversion to timeshare inventory over the next three years. Park will have the full use of these rooms to sell its hotel inventory until HGV receives its permits and begins construction on its first space, which is expected to remove 150 rooms from service by the middle of the second quarter. The second and final phase will remove the balance of the rooms, the timing of which depends on HGV sales pace for the first space. However, we expect that all 600 rooms will be removed from Park's hotel inventory no later than the end of 2019.

We believe the reduced size of the resort, which has historically run its occupancy levels at less than 70%, will help to yield revenues more effectively.

It is also important to note that the hotel expects to benefit from ancillary revenues generated from the use of the hotel resort amenities by the HGV owners and guests. Considering this, we project that the annual EBITDA production from the Hilton Waikoloa will be negatively impacted by approximately $7 million to $8 million in 2017 while the total impact projected for the 600 rooms on an annualized basis is between $16 million to $18 million.

Second, with respect to share count, since the stock portion of the $551 million E&P dividend is yet to be determined, we have provided per share guidance that assumes an 80% allocation of that amount to our stock at an average share price of $26. Therefore, we estimate an additional 17 million shares for a diluted weighted average share count of approximately $215 million in 2017.

Finally, we expect that general and administrative costs, excluding share-based compensation and spend separation costs, will be approximately $45 million. We estimate separation costs to be $11 million this year, which include costs to develop financial systems, HR platforms, and other items necessary to transition from Hilton support infrastructure.

That concludes our prepared remarks. We will now open up the line for Q&A. In an effort to address each of your questions, we ask that you limit yourself to one question and one follow-up.

Operator, maybe have the first question, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Anthony Powell, Barclays.

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Anthony Powell, Barclays - Analyst [2]

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Hi. Good morning, everyone, and congrats on the spend.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [3]

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Good morning, Anthony. How are you? Tom Baltimore.

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Anthony Powell, Barclays - Analyst [4]

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Very good. That's a lot for all the detail you gave on both the markets and your margin opportunities. Just on San Francisco, your outlook seems to be a bit more optimistic than most. Can you give us some more detail on why you are so optimistic on your portfolio performance there? Do you have any data on room nights booked in your group segment year over year? Just more color there will be great.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [5]

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I will provide a brief summary, Anthony, and then Rob can provide some more detail. I think it's important to note that we are fortunate obviously to have 3000 rooms in a really fortress position there, 167,000 square feet of meeting space between the two properties, and I think we've got a great operating team there.

So, if you look at the displacement coming out of the Muskogee Center, I believe it is down about 31% or about 300,000 room nights this year. Our team has already -- the impact on our properties is about 36,000 room nights. We have already replaced about 26,000 room nights. Coupled with the fact that as we look out, our group pace is only down about 2.2%. So we are comfortable that we are reasonably well positioned vis-a-vis our peers as we look out.

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [6]

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Good morning. It's Rob Tanenbaum. On top of Tom's note there, we are also thrilled about just the condition of our (inaudible) recent renovations that have been completed, including the lobby and the lobby bar (inaudible) which is our 45th rooftop lounge, and all those areas seem to be well received. Not to mention the fact that three out of our four phase room renovations have been completed. (inaudible) at the back end of that as well.

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Anthony Powell, Barclays - Analyst [7]

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All right. Great. And just on the margin opportunity, you mentioned a lot of revenue opportunities on group mix and parking. What are some of the near-term easier cost opportunities you see in the portfolio over the next 12 to 18 months?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [8]

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Yes, I would say, Anthony, as we pointed out in the prepared remarks, obviously the group-up strategy is going to be terribly important to us. We think that's broad. When we think about our portfolio, keep in mind we've got 25 -- we've got six assets with more than 125,000 square feet of meeting space. And if you look across the portfolio, take New York as an example, we are running their 150,000 square feet of meeting space, but only 24,000 -- only 24% on the group side.

So we think that there's a great opportunity there, for example, to continue to group up, and again that allows us to change the mix of business and give us much better flow through and a much better mix from that standpoint. That's just one as we look out.

There are lots of other cost-containment opportunities that Rob and his team are working on. I want to caution investors and listeners to recognize we know there's a great opportunity, we know it's going to take time, and again, we have laid out what we think the next two years of 75 basis points of improvement in 2018 and then another 100 basis points coming through in 2019.

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Anthony Powell, Barclays - Analyst [9]

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All right. Great. That's it for me. Thank you.

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Operator [10]

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Ryan Meliker, Canaccord Genuity.

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Ryan Meliker, Canaccord Genuity - Analyst [11]

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There were just a couple of things I wanted to highlight. And, first of all, Tom welcome back. We missed you.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [12]

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I appreciate that. I'm glad to be back, and as you know, this was the -- just too compelling for me to pass up. I'm excited (laughing) team that we have.

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Ryan Meliker, Canaccord Genuity - Analyst [13]

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Yes, great. So the first thing was you talked about the Waikoloa 600 rooms that will be leaving the portfolio or effectively have left the portfolio. It sounds like you effectively still own them until the timeshare conversion is in place or as it finally executes, is that correct?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [14]

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Yes, that is correct. Obviously there is -- as Sean carefully walked out, this process will unfold over the next three years, and so we have been careful. And hopefully I think there was some confusion that obviously we would lose all of the EBITDA, this year all $40 million of what occurred last year. That is not the case. Again, we expect that the impact this year will be approximately $7 million, and we remind listeners to certainly recalibrate that as they evaluate Park as they move forward. So this process will take time. We are working collaboratively with our partners over at the HGV as they, one, work through the permitting, and then work through, obviously, the renovation process.

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Ryan Meliker, Canaccord Genuity - Analyst [15]

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And if I recall correctly, there were also 25 rooms at the Hilton New York that were supposed to be transferred to HGV as well at the spend. Did that get executed and you effectively don't receive any income from those rooms going forward? Just wanted to make sure I understand that correctly as well.

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Sean Dell'Orto, Park Hotels & Resorts, Inc. - EVP, CFO and Treasurer [16]

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Yes, Ryan. This is Sean. We are -- that is going forward, and we will lose probably about $1 million with the loss of those hotel rooms. That will be towards the end of the year, so affecting this year. Some of the -- we will have to convert some suites. In other parts of that, (inaudible) suites to make up for some of the suites we are losing them and converting. There will be a disruption at the hotel as well with that. But in the end, it is certainly a little bit less going forward impact relative to what we're going to see at Waikoloa.

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Ryan Meliker, Canaccord Genuity - Analyst [17]

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Sure. I just want to make sure I know how to model it. And then just last thing I wanted to ask about was obviously acquisitions and being a consolidator has been a big focal point of the Park story. As we think about 2017, are there material restrictions for your ability to acquire capital recycled across your portfolio? Obviously I know you are not shelf eligible, so equity capital is going to be harder to come by in 2017, but you have got some leverage capacity. Are there other restrictions, and then in terms of selling assets, how are you limited based on the REIT conversion?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [18]

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That's a great question, Ryan. We are not precluded off from recycling capital. There is the five-year building gain, most likely to the extent that we sell an asset. Obviously we have looked at 1031 net assets. That would really be the approach there.

In terms of the priorities and this is really important for us in our -- for this team and for me. Really, this is a marathon not a sprint. We've got a wonderful team in place. We're going to continue to build credibility. We know the best way to do that is to post good numbers and beat and exceed and certainly earn your trust and confidence over time. So really the two priorities -- and we were very careful to outline this in my prepared remarks -- is really the operational excellence and then looking for those ROI opportunities.

We are not opposed on the acquisition side. We have plenty of capacity. As Sean pointed out, we've got about $1.2 billion, both the revolver of $1 billion and $200 million in incremental cash. There are some limitations in terms of our ability to be able to raise equity. There is generally a safe harbor of at least six months. But to the extent that there was an attractive opportunity in theory, we could recycle capital. We could in theory lever up, but it would have to be something that was truly compelling. Met our strategic goals, gave us the opportunity to probably expand both brand and operator, and of course, the returns would have to be very, very attractive for us.

So there will be time for that. The beauty of this opportunity and one of the things that's most compelling for me is really, as you think about the growth profile, there really are four levers available to us. The embedded ROI opportunities that we talked about, clearly single asset acquisitions over time. I do want to point out again that we are going to be focused on upper upscale and luxury assets and top 25 markets and premium resort destinations. And the opportunity for M&A. Don't see that in the near term. That will come at some future point and, Of course, then that brand and operator diversification. But in the near term, we're going to be focused on operational excellence and on the ROI opportunities.

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Ryan Meliker, Canaccord Genuity - Analyst [19]

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Fantastic. Thanks for all the added color. Appreciate it, Tom.

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Ryan Meliker, Canaccord Genuity - Analyst [20]

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Bill Crow, Raymond James.

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Bill Crow, Raymond James - Analyst [21]

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Good morning, guys. Congrats on getting through that -- getting past the starting line here.

Start with New York, if I could, and just two-parter there. Can you quantify the benefits you are getting from the expected closing of the Waldorf and how many group roommates you have directly transferred and how that is working?

And the second part of that question is that was one hotel where the food and beverage evolution started with the grab-and-go, and I'm just wondering how many more opportunities you have within the portfolio, especially the larger hotels to implement something similar to that?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [22]

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Rob is going to answer the question.

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [23]

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Hi, Bill. With regards to the Waldorf impact on Hilton New York, we see about $13.2 million of definite business. 70% of that is catering, 3% edge rooms.

With regards to your question about how many roommates, approximately 11,000 room nights over the next four years, the majority of which are falling into 2017 and 2018, and the majority of the catering is falling into 2017 right now. The team has done a fantastic job shifting that business over and further building those relationships now that the Waldorf is closed.

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Bill Crow, Raymond James - Analyst [24]

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And the food and beverage opportunity?

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [25]

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For our food and beverage opportunity, as we look through the portfolio, we just recently put in a grab-and-go in Atlanta, and what we did is we had a limited coffee and doughnut bar and replace it with the appropriate sized grab-and-go. Our first month of operation resulted in revenue product pipeline increasing 110% to $3.89. That translates, though, to approximately 425,000 annual revenue from (inaudible) project, which is almost $100,000 more than we originally anticipated and IRR north of [35]. So we're looking at installing grab-and-gos in Miami and we just did one in Boston. So we're looking at flex hotels throughout the portfolio. We feel very confident that it's an opportunity that we can address with each and every property.

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Bill Crow, Raymond James - Analyst [26]

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Great. And then Tom, finally for me, are there more opportunities to shrink your boxes by selling more rooms to Grand Vacations at an arm's length transaction value?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [27]

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We will look at that over time, Bill. It's not something that I would say is on the screen right now. Clearly the Embassy Suites here in DC, New York, obviously Waikoloa. As Sean pointed out in his prepared remarks, I mean that hotel obviously had 1200 rooms again running 70% occupancy. It makes sense to shrink it. They are the right partner with that. We will get ancillary spend and benefit from that over time. It allows us to better yield manage the property.

So we think long-term again as we pointed out, the incremental cost to us in year one and 2017 is about $7 million in EBITDA. So we do want to stress that and make sure listeners are comfortable with that. This will take time over the next three years, but we really think that was the right execution for that property.

We will look. We will be opportunistic. Clearly our top 25 assets account for north of 80% of our EBITDA. So you will look for us to recycle -- you can expect us over time to recycle capital, continue to improve the portfolio, and grow. This is a long-term growth vehicle that all the men and women on this team are signing up to and really excited about our future.

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Bill Crow, Raymond James - Analyst [28]

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Okay. Thank you.

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Operator [29]

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Brian Dobson, Nomura.

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Brian Dobson, Nomura - Analyst [30]

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Just a quick follow-up question on the comments that you had on group and banquet trends in 2017. I guess could you elaborate on that a little bit? Specifically which regions are the strongest and what you think is driving it? And also, what is your sensitivity for every 100 basis points of group business that you add to your mix? What type of EBITDA benefit do you expect to see from that?

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [31]

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Certainly. Good morning, Brian, it's Rob Tanenbaum. The benefit that we see throughout the portfolio we believe is 400 basis points in group demand, and the opportunity that comes from that, that one is -- enhanced our group catering contribution -- our group catering revenue, excuse me, as our group catering contribution is $168 per group room night. So that is a very strong number in relationship to group portfolio, but we feel that this is a great benefit to us there.

We also believe that through adding additional groups to the mix, we're going to be able to reduce the level of discount pricing throughout the portfolio and inherently grow the average rate, be a bottom-up approach. So this -- the two factor is what the group said, and we're very excited about it.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [32]

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Let me also say in fairness to Rob, and obviously the -- we have been public for now 60 days, and the team has really come together. We are excited. If you just look at sort of the work plan right now so far, that will only continue to expand and grow, and we will share again additional initiatives as time unfolds here on both this year and beyond. We feel very confident about our ability to again be able to move margins here over the next two years.

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Brian Dobson, Nomura - Analyst [33]

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Great. Thank you very much.

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Operator [34]

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Robin Farley, UBS.

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Robin Farley, UBS - Analyst [35]

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Great. Thanks. Just on your margin targets adding 75 basis points in 2018, 100 basis points in 2019, what kind of RevPAR environment are you assuming in those with the idea that normally if you need to grow RevPAR 2% to keep margins flat? Is that going to be 75 basis points of improved costs, or is that actually a net increase in margin, and if so, what RevPAR is assumed in that?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [36]

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Robin, that's a great question, and good morning to you. I think one of the things we all have to do is step back a little bit, right? We are -- if you look at this cycle, we are already 80 months into it. Certainly on this side of the aisle, we are cautiously optimistic as we see tax reform may be likely. Obviously less regulation, more fiscal spending. GDP might accelerate. I think even more important, the thing that really excites me is, as I look out at business investment spending, there is a high correlation between that and lodging room demand. About 92%, 93%.

So, if you look last year, this investment spending was down negative, about 0.4%. The forecast this year is for it to be up certainly 3%. That is huge and could provide a great tailwind.

Corporate profits also -- the other side of that also growing this year relatively flat to negative last year. So, if you get that tailwind and it extends this cycle two years or beyond, that could be a very healthy environment to really support what we want to do. I do think you'll see a combination as we think about the 75 and 100 of cost containment, but I think it will be weighted more towards really the revenue mix and the shift.

I think, as Rob and team and as we have looked so far, we think that is huge opportunity there. We have got these iconic assets with huge capacity and a real competitive advantage and really irreplaceable in many respects. We've got to figure out a way -- as you look at New York with 150,000 square feet of meeting space, as you look at San Francisco again with 168,000, as you look at Chicago with 190,000, there it is just huge embedded opportunities, and we have got, collectively working with our partners at Hilton, to continue to figure out ways to yield that better. They are on board with this, they are aligned, and we're excited about the future to be able to move those needles, and if we get that economic tailwind and backdrop, that we think can accelerate that growth for us.

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Robin Farley, UBS - Analyst [37]

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Actually so I guess I had understood or thought that the margin improvement was going to be driven by the different cost programs just through managing the assets. But it sounds like if I understood what you are saying directly, it's really more of an improved revenue mix towards group, not necessarily expense reduction that is driving those margin improvements.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [38]

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I think that is fair. Weighted a little more towards that revenue mix and shift, but cost containment will be a part. There's always opportunities. I do think Hilton if you look over the last five, six years and certainly this cycle, they've done a good job, but you can't cost cut your way to growth forever. So you've got to figure out a way to grow the top line and find that balance. I think Rob and the team understand that and are working accordingly.

The other thing I would point out is that there is a gap today, whether it's 250 basis points plus or minus between us and some of our peer average and from an EBITDA margin standpoint. So, again, if we can move 50 BPs, that results in about $160 million of value creation for shareholders. So we are laser focused on this. It will not happen overnight, and again, we think we laid the foundation. We chip away at it this year and begin to see that improvement as we look out 2018 to 2019.

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Robin Farley, UBS - Analyst [39]

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Okay. Great. And if I can ask just a follow-up. You commented a little bit on the M&A outlook or different levers for your growth. Another large REIT in the last quarter has gone from having a strategy being a net seller to maybe being a net acquirer. Some other REITs looking at the consolidation potential. Is that -- it sounds like that is not something that you think Park sees happening in the next 12 months. It sounded like your comments about both single asset and M&A were not necessarily anything that you would expect in the near-term.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [40]

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I think that's a fair statement, Robin. Let me provide little clarification here. Clearly over the next six to nine months here as we launch, we are focused on the two initiatives that we talked about: operational excellence and, again, the embedded ROI opportunities that we believe can yield value.

Make no mistake about this, that I would not have taken this assignment -- this is a dream opportunity for me -- if I did not think there was a huge opportunity for growth over time.

I would also caution -- I know some of my peers have been a little bullish. We are in the eighth year of this cycle. We are all optimistic, including us, but we have yet to see it materialize from the operating fundamentals. So while some may say they are net buyers, we will see how really active they will be. We have the capacity, we have the team, we continue to look and underwrite, but I think the likelihood of us executing on something in the near-term on an acquisition is probably not high.

We also think there's an opportunity to continue to evaluate the portfolio and call some of the bottom portion of the portfolio to recycle that capital most likely through a 1031 into higher growth markets. So make no mistake that over the intermediate and long-term, this is very much a growth vehicle.

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Robin Farley, UBS - Analyst [41]

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Okay. Great. Thank you very much.

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Operator [42]

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Patrick Scholes, SunTrust.

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Patrick Scholes, SunTrust - Analyst [43]

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Can you comment on what you are seeing if anything as a result of the travel ban or foreign exchange? Certainly this has been gaining a lot of traction in the press. There is an article in the New York Times, an other just in the last day or two on that. What you are seeing, and I'm just curious because in my RevPAR checks, I have definitely seen a bit of a hiccup into inbound US urban markets. I'm wondering what you are seeing on your end.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [44]

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I would say right now, Patrick, we're not seeing much. As you look across our portfolio, our international business is about -- the overall portfolio is about 15%. You take out Hawaii, it's about 12%. I do think if you step back and look at what the Department of Commerce had put out a few months ago, look over the compound annual growth rate from 2000 to 2015 was about 2.8%. They were expecting that over the next five years to increase to about 4%, going from, I believe, about $77 million to north of $90 million.

So for those countries that have been targeted or potentially targeted, I don't know that there is a lot of inbound traffic. So right now we are -- when we look at those traditional markets coming out of the UK, coming out of Canada, coming out of Asia, we are not seeing a slowdown at this time. We are watching carefully, and again, we've got a very diverse portfolio and other than Hawaii is 30%. But even that, a good portion of that is really coming out of Japan, and that's been reliable for 25 years. I think the average growth rate there is about 1.1% in visitation.

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Patrick Scholes, SunTrust - Analyst [45]

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Okay. Thank you for the detail on that.

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Operator [46]

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Lukas Hartwich, Green Street Advisors.

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Lukas Hartwich, Green Street Advisors - Analyst [47]

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Tom, I'm just wondering longer-term, how do the international assets fit into the portfolio and the strategy of the Company?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [48]

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Good question, Lukas. I would say if you looked historically at the REITs that have ventured into the international game, I'm not sure they have really got real credit for it. I would say in the near-term for us, we're going to be US centric. If you look at our portfolio again, 67 assets, 55 of those wholly-owned, 12 joint ventures. We have 15 that are international assets that account for approximately 7%, 8% of our EBITDA. Probably half of those that we look to cull and to perhaps recycle out of over time. We will look opportunistically to do something attractive, but I think you can expect us in the near term to be really US centric and US focused for our growth.

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Lukas Hartwich, Green Street Advisors - Analyst [49]

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That's helpful. And then the renovations in 2017, should we expect to see any drag on RevPAR from that or operations in general?

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Sean Dell'Orto, Park Hotels & Resorts, Inc. - EVP, CFO and Treasurer [50]

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I would say just bottom line, Lukas, it's about -- disruption is about $8 million on EBITDA for 2017 relative to the projects that are happening, but we ultimately had projects that were happening last year that are rebounding. So we kind of look at it on a year-over-year basis as kind of a wash.

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Lukas Hartwich, Green Street Advisors - Analyst [51]

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Perfect. That's it for me. Thank you.

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Operator [52]

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Steven Grambling, Goldman Sachs.

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Steven Grambling, Goldman Sachs - Analyst [53]

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Just had two quick follow-ups. I guess first on the margins, given you have a pretty wide range of property margins across the portfolio, how much of the cost saves that you have identified are really property specific versus portfolio wide, and do you anticipate any of those savings in the guidance this year? Thanks.

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [54]

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Stephen, it's Rob Tanenbaum. Good morning. With regards to the savings, it shouldn't -- we are really pushing out into 2018 and 2019. And we believe -- we are just getting -- we are only 60 days into the program. So we are just getting our hands around each and every asset and (inaudible) what we found, and we have amazing groups -- amazing people at each property. We really enjoyed our meetings with them, and we feel that there is a great partnership that will allow us to further drive our opportunities here.

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Steven Grambling, Goldman Sachs - Analyst [55]

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Fair enough. And then I guess, Tom, you mentioned being cautiously optimistic. Are there any areas or I should say industries in your corporate trends that you are seeing that lead you to be a little bit more positive? Are you seeing any signs that there's meetings or group business that's coming back? Thanks.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [56]

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Yes, I would say that the two things that give me a lot of optimism, as I said earlier, is really the business investment spending. And if you look back and see the impact and now that correlation and it's a higher correlation then even what we've seen historically with GDP. So if you see that recovering to that 3% range, that could provide a huge tailwind for the industry and particularly for Parks. So we are really excited about that.

I would say the other is corporate profits. And if you see corporate profits and you again then see the sentiment and consumer confidence continue to improve, that will bode well for our industries. So we are cautiously optimistic. As I said in the prepared remarks, not seeing it yet, but we are optimistic as we move forward.

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Steven Grambling, Goldman Sachs - Analyst [57]

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Great. Thanks. Best of luck.

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Operator [58]

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Shaun Kelley, Bank of America.

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Shaun Kelley, Bank of America - Analyst [59]

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Hey. Good morning and congratulations on completing the spin here. So I just want to stick with the whole margin set of questions. So, Tom, you mentioned in response to a prior question, you quantified some of the GAAP to peers. And I think you've been pretty clear that you think the biggest opportunity near-term is to group up and shift your mix.

My question is just, as we think about that, it doesn't seem like your mix is dramatically different than where a lot of the peers are today. So I'm just kind of curious, is that what can really help narrow the gap, or is that something different, and then what in your mind is the biggest bucket of opportunity to really narrow the gap relative to peers?

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [60]

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I will take the first part, Shaun, and then Rob will jump in here. I do want to point out that it's important to think about this portfolio. It's -- particularly our top 10 assets and those six assets with over 125,000 square feet of meeting space. I am not sure, quite candidly, for many of our peers that they have that kind of footprint and they have that kind of capacity.

So we think as we look across -- again, Rob and just getting on board and just setting up the program, we look at that and see huge opportunity to remix the business to take advantage of that footprint.

We also think that's a very good defensive play against some of the other threats. AirBnB, etc. There's always going to be the need for people to meet, to gather, to celebrate, and when we have that footprint in fortress positions, no one has the position that we have in our view, and you should think about New York or Chicago or New Orleans and the proximity to many of those. Like New Orleans, for example, being adjacent to the convention center and having an 8-acre parcel in between us and also the convention center. San Francisco, where you've got 3000 rooms adjacent to each other and 168,000 square feet of meeting space.

So we look at that and say that is a huge competitive advantage. We've got to figure out a way to activate the real estate, take advantage of it, partner with our partners at Hilton. There will be other operators over time, and that's where I think Rob and his team are really focused on. And, again, we are laying out a program today. It is early and we will continue to report out to you over time. Very confident in the opportunity. Very confident in our ability to be able to close that gap with our peers.

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Rob Tanenbaum, Park Hotels & Resorts, Inc. - EVP, Asset Management [61]

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Shaun, the other opportunity that comes with that grouping out as seen earlier is the fact that we are going to be able to essentially shrink the house. We will be able to further drive the average rate by bringing up the average rates less discounting. In addition to -- given our strong group catering contribution of $168 per group room night, that (inaudible) additional value for our shareholders.

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Shaun Kelley, Bank of America - Analyst [62]

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Great. Okay. That is really helpful. And then I guess as we think about the rooms removal and thank you for the very clear guidance on that specifically, as we think about that, is that a little bit of a margin headwind given that I assume as you remove rooms, they are probably getting removed at a pretty significant margin. And I assume that is contemplating guidance, but is it material or is it actually not big enough given the size of your portfolio?

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Sean Dell'Orto, Park Hotels & Resorts, Inc. - EVP, CFO and Treasurer [63]

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Shaun, this is Sean. I would say just quickly to look to the latter part of the question, yes, I would say it is not in the grander scheme of things the portfolio (inaudible) yes. You're going to have a little deterioration there because you're going to set these rooms down. Ultimately, there's going to be inefficiencies so that you are going to have some disruption as the work is going on. You're going to have obviously carry, which will be pro rata shares when they take the rooms. But in the end, I would agree that there's going to be disruption to the margins as we get through 2017.

As you get into 2018 and 2019, when ultimately that construction is done on those 150 rooms and you pass the disruption from the one that we still maintain, you kind of get to the point where now you're getting extra fees from HGV owners who are going to be on-site, extra revenues from [FNB] outlets that they're going to be going to.

So, as you get into 2018 and 2019, with construction no longer happening for that period, until such time we are selling out and want to take that next phase, you are getting an incremental revenue in. And so you kind of ultimately are yielding a more efficient box, but you're also getting all these ancillary benefits and some cost share and reimbursement from HGV on the property as a whole. So you definitely get to be a little more incremental in benefiting from that in the kind of GAAP for us.

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Shaun Kelley, Bank of America - Analyst [64]

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Great. Thank you very much.

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Operator [65]

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At this time, there are no further questions. I would like to turn the call back over to Mr. Baltimore for any additional or closing comments.

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Tom Baltimore, Park Hotels & Resorts, Inc. - Chairman, President and CEO [66]

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Thank you, operator. Really appreciate everybody taking the time today. I just want to take a moment to thank our partners over at Hilton and HGV and all of the men and women who worked on the spin on the Park side, as well as all of the external advisors, consultants, lawyers. It was a yeoman's job and to think all that we have accomplished over -- since I rejoined Hilton nine months ago, but, more importantly, those men and women who have been working on this for the last few years. It's quite an accomplishment, we are proud, we are excited and we look forward to our next call in another 60 days.

So I hope to see you. Look forward to connecting soon.

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Operator [67]

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Ladies and gentlemen, this concludes the Park Hotels & Resorts conference call. You may now disconnect. Thank you for using AT&T Teleconference Service.