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Park Hotels & Resorts Inc. (PK) Q4 2018 Earnings Conference Call Transcript

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Park Hotels & Resorts Inc.  (NYSE: PK)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Park Hotels & Resorts Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (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.

Ian C. Weissman -- Senior Vice President of Corporate Strategy

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.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 non-core assets, the gross proceeds of $519 million, greatly enhancing the overall quality of our portfolio, while lowering our exposure to international markets to just 1% of total EBITDA. Finally, in 2018, we returned over $900 million of capital to shareholders in the form of dividends and the HNA stock buyback, taking our total return on capital figure to nearly $1.9 billion since spinning out from Hilton a little over two years ago.

Overall, these efforts have allowed Park to generate superior shareholder returns, outperforming our hotel REIT peers by nearly 1,400 basis points and the broader REIT index by nearly 400 basis points, while significantly narrowing the valuation gap with our peers. Overall, I couldn't be prouder of our success and in particular the hard work and dedication put forth by the entire team at Park. As I look ahead to 2019, I remain confident in our ability to continue achieving our objectives.

While we recognize, there is heightened 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 and should help to support above-industry average RevPAR growth through 2020. Additionally, fueled in large part by the success of our grouping up efforts, we 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 2018. Comparable RevPAR growth was 2.9% for the year, which was at the top end of our guidance range with the fourth quarter RevPAR growth topping 3.6% or nearly 100 basis points ahead of consensus. Our comparable hotel adjusted EBITDA margin increased 40 basis points during the fourth quarter and improved by nearly 60 basis points for the year, helping to continue closing the margin gap with our peers.

Our asset management team has done a terrific job partnering with Hilton and sourcing both revenue and cost-saving opportunities across several of our key properties as witnessed by our growth throughout the quarter and the year. These initiatives continue to remain a key driver for our internal growth story.

Within our revenue segments, group was up 3.8% for the quarter and 5% for the year. At this time last year, we had expected pace to be 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 with RevPAR up nearly 32% or 290 basis points better than we had forecasted, driven by strong transient demand. We remind listeners that the hotels were closed for 12 days in the fourth quarter of 2017 following Hurricane Irma, which hit the island in September of that year. San Francisco also surprised to the upside with the Hilton Union Square and 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 two hotels to collectively generate RevPAR growth above the top end of our 2019 RevPAR guidance. Specifically at our Hilton Waikoloa Village Hotel, group pace is up nearly 80% with the hotel benefiting from two separate group buyouts, while facing easier year-over-year comps following disruption related to last year's volcanic activity, which negatively impacted income by approximately $5 million in 2018.

At the Hilton Hawaiian Village, results are expected to be driven in part by forecasted increase in group pace of roughly 8% coupled with favorable booking trends in Asian wholesale business, a reversal of the trend we experienced last year. A testament to the team's effort to proactively group up is in an otherwise soft citywide year is best illustrated by both Chicago and New York, two markets, which are expected to witness a 30% plus drop in citywide room nights in 2019. Despite these challenges, our group pace in Chicago was up nearly 8%, while in New York we are expecting group pace to be up north of 6%, with the hotel also expected to benefit from solid increases in transient demand, led by contract and business transient.

Our Orlando portfolio should generate positive growth in spite of some of the anticipated renovation displacement during the fourth quarter, as we expect to break ground on the meeting space expansion at our Bonnet Creek complex that will be delivered during the second half of 2021. Collectively, Hawaii, San Francisco, New York, Chicago and Orlando account for over 60% of our comparable hotel adjusted EBITDA, lending support to our positive view 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 2 of our non-core asset sale program is well under way having recently reported the sale of the Hilton Squaw Peak Resort for $51 million with net proceeds of approximately $48 million to be used for general corporate purposes, which could include funding future ROI projects.

As it relates to additional sales, we remain committed to our capital recycling efforts with the potential for another five to eight non-core hotels in various stages of the marketing process.

Turning toward 2019 guidance. While the U.S. economy remains on firm footing supported by a strong job market healthy corporate profits and a sturdy consumer, it is hard to ignore the potential headwinds our industry faces in the wake of slower global growth, wage pressures and a risk of an ongoing trade war with China.

That said, lodging fundamentals remain sound especially for those companies with the right geographic footprint. We believe Park is uniquely positioned to benefit from proactively grouping up across many of our core markets, including generating strong in-house group demand, thereby, offsetting the impact of weaker citywide calendars across much of the U.S.

With 80% of our group business on the books for this year we remain cautiously optimistic on 2019. Accordingly we are establishing comparable RevPAR guidance of plus 2% to plus 4% for the full year 2019 with a comparable hotel adjusted EBITDA margin range of zero to plus 60 basis points. 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.

Sean M. Dell'Orto -- Executive Vice President, Chief Financial Officer and Treasurer

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 3.7 times. We have over $1.2 billion between our untapped revolver and cash on hand, giving us ample liquidity to execute on the right opportunities.

Turning to the dividend. With Q4 earnings coming in at the high end of our expectations we paid a Q4 dividend of $1 per share, which included a $0.30 per share component related to excess gains from assets sold during 2018.

Our board recently declared our first quarter dividend of $0.45 per share to be paid on April 15th to stockholders of record as of March 29th, 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 Curio in addition to a comprehensive rooms renovation and a restaurant reconcept. 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 but Q1 is 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 faced 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. To address each of your questions, we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question please?

Questions and Answers:

Operator

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

Bill Crow -- Raymond James -- Analyst

Hey good morning guys.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Hey Bill, how are you?

Bill Crow -- Raymond James -- Analyst

I'm good. Thank you for asking. 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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.

Now if you think about 2018 as an example, so we were up grouped, it was up about 5% 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 seeing both in 2019 and in 2020, where 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 partnering with our partners at Hilton and just being laser-focused on grouping up our business. So, we see this as a competitive advantage and again playing to the natural strength that we have at Park.

Bill Crow -- Raymond James -- Analyst

Yes. Thanks. 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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. 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 a 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 of 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.

Bill Crow -- Raymond James -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Thanks.

Operator

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

Rich Hightower -- Evercore ISI -- Analyst

Hey morning guys.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Morning Rich, how are you?

Rich Hightower -- Evercore ISI -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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% and group pace we expect that -- clearly Waikoloa is going to be up almost 80% includes there Hilton Hawaiian Village will be up about 80%. So, clearly that'll be a very strong performance for us probably mid slightly above probably mid -- above that in RevPAR growth.

San Francisco has got -- obviously have 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 two markets. So, we feel comfortable where we are. And if any indication, again, we're coming on the heels of the first quarter becoming against sort of a 1% -- 1.1% I think 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 -- and 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 it, Rich. There are things that can happen in 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.

Rich Hightower -- Evercore ISI -- Analyst

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 mentioned.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 -- that low line for sure.

Rich Hightower -- Evercore ISI -- Analyst

Okay, got it. And then my second question here. As you've seen the company is trading multiple rerate 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 plan in the first two years and again, the internal growth story. We were anchored and obviously recycling capital. We sold 14 assets for $570 million. Obviously, we used $348 million of that to buy back 14 million shares as part of the HNA trade.

If you look at the stock performance since the HNA trade including dividends, we've got to be up north of 40%, outperformed our peers 1,400 basis points both look in 2018, if you look two years, it will be greater than that.

I'm very proud of the work that we've done. Made great progress on obviously the ROI projects that we've talked about regarding the Fess Parker Double Tree to a Hilton the Bonnet Creek work that's going to begin. We obviously are going to be converting The Reach this year and starting the urgent process on Double Tree 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 2018 where -- and we delivered certainly 60 basis points on an absolute side and continue to close that gap and that grouping up which as we just talked about from -- maybe it's a 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 going off it. And we're going to be very thoughtful about it and disciplined about it. We'll continue to look whether that's single assets, whether that's portfolios or whether that's other transactions. We're clearly not going to be selling stock 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 both that brand in offering diversification. So we'd love to be able to fold in on Marriott brand, in our Hyatt brand and impress 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.

Rich Hightower -- Evercore ISI -- Analyst

Great. Thank you.

Operator

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

Smedes Rose -- Citi -- Analyst

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

Sean M. Dell'Orto -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, 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...

Smedes Rose -- Citi -- Analyst

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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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?

Smedes Rose -- Citi -- Analyst

Yes.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 is sitting 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 men and women in part coupled with our operating partners at Hilton. So we've got a long lead time here. So we were looking at this two and three years ago it wasn't just six 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. We're up in 3%. Orlando was down 5% citywide, we're up about 2.2%. D.C. is down and we are also down. We are not down as far as many of our peers are vis-a-vis there. So again a concerted effort. Proactive into group up and we played though the internal growth strategies that we have been talking about non-stop for the last two years. We're bearing the fruit of that hard work.

Smedes Rose -- Citi -- Analyst

Okay. Yeah. Thanks for the color.

Operator

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Hi David.

David Katz -- Jefferies -- Analyst

Hi. Good morning everyone. 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 two biggest obstacles for getting something done this year? Is it finding the right thing? Is it finding the right price? How should we think about that? Thank you.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

That's a great question David. Look, we're open for business. Clearly, the first two 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 two 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 have said that and one of the big attractions to this opportunity for me the Park is we think that this industry and our sector is really right 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 five times net debt-to-EBITDA, and as we've said, we were well south of four times today. So we do have the flexibility, whether it's single asset or a small portfolio or M&A in the right situation could make sense. We're not planning to issue equity unless we see the stock trading at or above any day. It's certainly something that we will be more open to.

David Katz -- Jefferies -- Analyst

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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yeah. Yeah, again, you're asking a hypothetical -- it's structured in an appropriate way and it makes economic sense and it's a premium. Yeah, 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 fit for us. There's certainly could be other stock or stock deals that could make sense and be of scale.

David Katz -- Jefferies -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Sure.

Operator

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

Anthony Powell -- Barclays -- Analyst

Hi. Hello, everyone.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Good morning, Anthony. How are you?

Anthony Powell -- Barclays -- Analyst

Good. Good. 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 diverged in price cycles and how long did it last do you think?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yeah. 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 seven years.

Look, we've had anemic growth early in the cycle and they're still running them. They're still laying. I know there's some who believe that a recession is likely in 2020. We certainly don't share that view. And you look at the economic data, I think which came out today. Obviously, our GNP about 2.6%. I think non-residential fixed investment spending is up about 6.2% in the fourth quarter and still expected to be up 4%. So that clearly continues to provide a backdrop.

What we're also finding is that it's the companies with low employment is they are looking to continue to train by 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 geographic standpoint and from an access standpoint, I think Park is really positioned to take advantage of that. These transient has been choppy and we're excited as we look back to 2018 and for us relatively flat, slightly up in total. But our group business was up 5%. Our contract business again 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 -- they are -- it will be pockets that weren't choppy. But we really like our positioning certainly in 2019 and on in 2020.

Anthony Powell -- Barclays -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

No secret Anthony, I am a strong believer in brands, have made that and obviously having worked for the Marriott companies and having worked for Hilton, 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 more than 50%, if not 60% of their occupancy coming through those are powerful of historical 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 lay out. 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 toward those bigger group houses for all the reasons that we've been talking about on the phone.

We're not opposed to an independent opportunities and 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 higher and leverage as well.

Anthony Powell -- Barclays -- Analyst

Great. Thank you.

Operator

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

Chris Woronka -- Deutsche Bank -- Analyst

Hey good morning guys.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Good morning Chris.

Chris Woronka -- Deutsche Bank -- Analyst

Good morning. 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Rob is going to take that question for you.

Robert D. Tanenbaum -- Executive Vice President, Asset Management

Chris overall in 2018 our operating expenses were up 2.5%. And really it was a combination of controlling our expenses throughout. We spent a great deal of time driving revenues and looking at our premium room category, we'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 days, 60 days, 90 days we really believe there's opportunity to further drive our rent there.

And then from the cost side, we've been renegotiating our contracts throughout great opportunity. Our team in Honolulu are doing an amazing job with a elevator contract saving over $1.5 million over the life of the contract over four 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?

Chris Woronka -- Deutsche Bank -- Analyst

Great. That's great color Rob. Thanks. 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yes I -- that's a fair question, Chris. I would say that an asset was in place the cash flow forming an embedded story whether that's through the asset management initiative some of which Rob just outlined, whether it's a property needing capital infusion. So you are doing something transformative, taking a deep turn at this point in the cycle is not something we're likely to do.

It's something that you take on sort of earlier in the cycle or 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 and never going to deviate from that discipline. And that discipline as we demonstrated has delivered outperformance -- significant outperformance vis-a-vis our peers.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Very good, thanks guys.

Operator

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

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

I'm on the line for Patrick Scholes. Good morning. 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 non-core assets and recycle that capital either in the higher growth markets or alternatively into buying back stock, if it made sense and when it's opportunistic for us.

So a credit and Rob didn't breakout or walk you through our half-dozen initiatives. We need to say on behalf of Rob and the great marketer 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 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-a-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.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Great. Thanks for that. And on another topic, could you remind us about your demand for 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?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Now when you think about it the dollar is down about 10% vis-a-vis the euro. If anything you can 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 project's 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 2018, look out, we saw growth in Chicago, we saw the growth in New York. So we are cautiously optimistic as we move forward.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

All right. Great. Thanks. Appreciate it, Tom.

Operator

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

Stephen Grambling -- Goldman Sachs -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Good morning.

Stephen Grambling -- Goldman Sachs -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yes. So it's a great question. I would just say that, if you look at long term, having a diversified platform and by diversified, I mean that in terms of brand family, in terms of operator, 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 within 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. To able to do that we clearly want to have a diversified platform for the brand operator and look forward to getting our first deal done with Marriott, with Hyatt and with others over time.

Stephen Grambling -- Goldman Sachs -- Analyst

So would anything change then with the relationship with Hilton?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Nothing will change. In my past life, Stephen, we had -- that was a large Hilton area and Hyatt franchisee and we had 16, 17 management companies. I don't see us getting to that level of management companies. It makes the closing process a little more difficult. It makes the asset management a little more challenging.

But I would tell you that the men and women in Park are really looking forward to that and excited about really continuing to strengthen this relationships beyond Hilton. I love our partnerships with Hilton and obviously, as we've continued to demonstrate, it is going very, very well.

Stephen Grambling -- Goldman Sachs -- Analyst

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 there?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 in a sector that is right for consolidation. It will happen at the appropriate time.

We saw last year with couple working with LaSalle, we saw it the year before with RLJ and Bell Corp. 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 be 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 -- its going to change in my view.

Stephen Grambling -- Goldman Sachs -- Analyst

Helpful. Thanks. Best of luck this year.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yeah. Thanks so much.

Operator

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

Brandt Montour -- JPMorgan -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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 that journey. It takes time to do that, so obviously perhaps all of the day it will take them some time to catch up in our view.

Obviously, Lyman (ph) and (inaudible) leading his very talented team are being in the right -- I think they are are front of this. That's really the nature of the business. But we're not seeing them any more today than normally. I think we suspect that both Hilton area and Hyatt and other really big platforms that are managing that better in normal business case, certainly, fighting for share on that side of the business, but that business is so large. There's enough growth and capacity for all of us here.

Brandt Montour -- JPMorgan -- Analyst

Got it. That's helpful. And then, to extend that same topic, if you 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 philosophy on booking that far out and potentially forgoing like compression-like pricing later on?

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Yeah. Again, as I said earlier, it's really a fundamental challenge for us. If you think about 2020 as an example of yet another year where citywides are going do not as -- certainly not as strong as what we've seen in other periods. So there's Hawaii and we're up 34%; New York, we're up 31%; San Francisco, we're up 7.9%. And I think in the Bonnet Creek, our resort there in Orlando, up another 5.5%.

So, again, for us it is -- the thesis is, anchor our business with the group, they are in some contract businesses and which allow us to most efficiently price transient grow the ancillary revenue. Think about San Francisco.

We've got a full city block. We've got 3,000 rooms. So having that anchored group business, for us, is a really prudent move coupled with having a certain amount of transient -- of contract business. Think about obviously our Hilton Hawaiian Village campus there, we've got 2,900 rooms. So again, just -- for us it's just a prudent business decision to continue to grow business appropriately and then layer in that transient.

Brandt Montour -- JPMorgan -- Analyst

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Great. Thank you.

Operator

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

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Hey, Robin.

Robin Farley -- UBS -- Analyst

Great. Thank you. Hi. How are you? 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, up 12% in Q3 that compared to the 10% now? Thanks.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Nothing that visible, Robyn. We've continued strong anchored again of 10%. We feel good very good about our positioning. Part of that's just the year-over-year evolving. And again just look out to 2020, as we mentioned, we're up north of 9%. So noting -- 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 feel very good about our position for 2019.

Robin Farley -- UBS -- Analyst

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? Thanks.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

I don't -- the reality is that I think that the transient has been choppy. Leisure, really has been stronger, if you think about this cycling and business in transient has somewhat lagged. So a little bit of a reverse effect, right? We were up business in transient about 4.2% in the fourth quarter and it's really down.

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. We're comfortable with the guidance and the direction of the business in 2019.

Robin Farley -- UBS -- Analyst

Okay. Great. Thank you.

Operator

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.

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

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

Operator

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

Duration: 62 minutes

Call participants:

Ian C. Weissman -- Senior Vice President of Corporate Strategy

Thomas Jeremiah Baltimore -- Chairman of the Board, President and Chief Executive Officer

Sean M. Dell'Orto -- Executive Vice President, Chief Financial Officer and Treasurer

Bill Crow -- Raymond James -- Analyst

Rich Hightower -- Evercore ISI -- Analyst

Smedes Rose -- Citi -- Analyst

David Katz -- Jefferies -- Analyst

Anthony Powell -- Barclays -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Robert D. Tanenbaum -- Executive Vice President, Asset Management

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Brandt Montour -- JPMorgan -- Analyst

Robin Farley -- UBS -- Analyst

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