Park Hotels & Resorts - Earnings Call - Q2 2020
August 6, 2020
Transcript
Speaker 0
Greetings and welcome to Park Hotels and Resorts Second Quarter twenty twenty Earnings Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ian Weissman, SVP, Corporate Strategy.
Please go ahead.
Speaker 1
Thank you, operator, and welcome, everyone, to the Park Hotels and Resorts second quarter twenty twenty 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 may discuss certain non GAAP financial information such as adjusted EBITDA. You can find this information together with the reconciliations to the most directly comparable GAAP financial measure in the morning's earnings release as well as in our eight ks 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 an update on Park's current operations in addition to his thoughts on the industry as a whole. Sean DeLorto, our Chief Financial Officer, will provide a brief review of our second quarter results as well as an update on our balance sheet and liquidity. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.
Speaker 2
Thank you, Ian, and welcome everyone. I want to start by saying that I hope all of you and your families remain safe, healthy and well. Without a doubt, the last five months have been the most challenging period the lodging industry has ever faced. With travel grinding to a virtual standstill, made mandated stay at home orders and restrictive travel policies across the world. While The U.
S. Began a gradual reopening in early June, COVID-nineteen cases continue to rise and with widespread uncertainty, travel demand remains largely depressed. With social distancing practices still very much the norm, businesses have encouraged employees to remain at home and many school districts will implement virtual or remote learning for students, both of which are major impediments to business travel. We don't expect a meaningful increase in demand until medical solutions, including vaccines and therapeutics are in place. And we are encouraged by the global race underway and the pace of vaccines in development, including several that are moving into Phase three trials.
Despite these challenges, our team remains committed to executing our action plans to mitigate our losses and bolster our liquidity. We moved quickly in March and April as we suspended operations at 38 of our 60 hotels, dramatically reduced our capital spend by over 75% and drew down our $1,000,000,000 from our revolver. We further solidified the balance sheet by amending our corporate credit facility to obtain covenant relief and substantially increased our liquidity with a $650,000,000 bond issuance. Through the combination of these actions, we ended the quarter with over $1,600,000,000 of liquidity available, a $300,000,000 increase from the end of the first quarter and reduced our monthly cash burn rate to $65,000,000 assuming all hotels have suspended operations or a 23% reduction from our original estimate. This equates to over two years of runway under the most severe circumstances, which keeps Park well positioned to navigate the disruption from the pandemic.
While we recognize the situation remains extremely fluid as stay at home and travel restrictions continue to fluctuate, our focus has shifted to the recovery phase as we begin the process of reopening our hotels. Generally speaking, there are a number of factors we consider in determining when to reopen a hotel and at what capacity, including state and local ordinances, demand and booking trends, airlift capacity, the potential to consolidate operations with neighboring park hotels and ultimately the cost benefit of opening versus remaining closed. Accordingly, as restrictions started to ease in June, we reopened 10 hotels during the month, followed by another 10 hotels in July, all of which were done relatively quickly and with minimal startup cost. Currently, we have 42 of our 60 hotels open, accounting for approximately 53% of our total room count. Over the balance of the third quarter, we expect to open an additional 11 hotels, bringing our total open count to 53 hotels by September 30, accounting for almost 80% of our total room count.
And with most of the remaining suspended hotels opened by year end. Turning to broader operating trends, we've seen pressure across all segments and markets with leisure transient and drive to locations performing better on a relative basis. Hawaii remains one of our more challenged markets with the state extending its mandatory fourteen day quarantine restriction for travelers through at least September 1, while also requiring inbound travelers beyond that date to provide proof of a negative COVID-nineteen test. On a positive note, however, Japan recently included Hawaii on an exclusive list of just 12 countries and regions they have designated as safe travel partners, With Japan accounting for more than 1,500,000 visitors to Hawaii in 2019, this is an important step forward, given how meaningful Japan is to Hawaii tourism. In 2019, inbound travel from Japan accounted for nearly 19% of total demand across our two Hawaiian hotels.
Turning to San Francisco, which is among the most challenged hotel markets in the country. The mayor ordering all hotels closed with the exception of those housing first responders and essential workers. The outlook over the back half of twenty twenty remains challenged with all major citywides either canceled or scaled back and with the majority of the city's largest business transient players electing to keep associates at home for the foreseeable future. On the group side, we are working to rebook canceled events. However, most are targeted in the second half of twenty twenty one or beyond at this point.
South Florida was a relative bright spot in the portfolio with both of our Key West hotels and the Royal Palm Hotel in Miami opening in early June. Demand trends have been relatively healthy for the drive to leisure properties with occupancy trending in the 30% range for Miami and north of 45% in Key West for the month of June. Notably in Key West, ADR impressively remained flat year over year. Finally, in Orlando, our Bonnet Creek complex, which was closed for the entire second quarter, opened its doors on July 1. Group demand is virtually nonexistent across the Orlando market, but I'm pleased to report that our property team successfully negotiated a large contract at the Waldorf Orlando Hotel for media and other ancillary demand tied to the restart of the NBA season.
Effectively buying out the resort through early October, accounting for $5,000,000 of incremental revenue. This demonstrates the tremendous resilience, perseverance and creativity of our local sales teams as they try to find ways to identify and capture demand. As another example, the Hilton New Orleans Riverside, we looked outside of the box for alternative sources of revenue and successfully negotiated a block of roughly six ninety rooms for Xavier University of Louisiana to serve as an auxiliary student housing for its fall and spring semesters, filling approximately 42% of a hotel, which traditionally relies on a group mix of 65% to 70%, while accounting for incremental $7,000,000 in revenue. We also continue to look aggressively at each department to improve efficiency and reduce costs as we seek to rightsize the operating model for the future. More specifically, we are in the process of complexing operations across several key markets, looking to partner with neighboring hotels with similar operators to consolidate management positions where it makes sense.
We hope to provide further updates on our progress in the coming months ahead. While there are many factors outside of our control that are having a profound impact on our industry, I can assure you that the Park team is laser focused on successfully navigating through this crisis, working hard to strategically position the company for an eventual recovery. We took the difficult but necessary steps to drastically cut costs across the portfolio, while raising enough capital to more than adequately cover our liquidity needs in the interim. On the other side of this health crisis, we believe you will find an industry that should benefit from significantly less hotel supply and more profitable hotel operating model as brands and owners work collectively to permanently take cost out of the system and strong pent up demand from both business and leisure travelers. Finally, I'd like to offer my sincere thanks to all of our team members and operating partners who have truly stepped up throughout this time and have displayed all of our core principles as we all weighed tirelessly through these uncharted waters.
Park has a seasoned and experienced team of men and women, and this is not our first crisis. And with that, I'd like to turn the call over to Sean, who will provide some more color on our balance sheet and liquidity.
Speaker 3
Thanks, Tom. Turning briefly to our second quarter results. We ended the quarter with a 96% RevPAR decline, with the majority of our hotels closed during the quarter. For those hotels that remained open, we witnessed slightly better results each month with occupancy averaging 14% in April, 20% in May and increasing to 30% in June. In July, after opening an additional 10 hotels, occupancy improved to 36%, further highlighting the gradual ramp up in demand.
Top performers in July include our Doubletree Durango Hotel at 87% occupancy, Hilton Seattle Airport at 62%, Casa Marina in Key West averaged north of 51%, while our Hilton Santa Barbara Resort also exceeded 51% occupancy. Looking out over the balance of the year, we expect operating performance to remain challenging as continued concern over COVID-nineteen is creating an overhang for both leisure and business travel. Group revenues are anticipated to be down 95% in the third quarter, and we are assuming a similar decline for the fourth quarter as events continue to be canceled. That said, more than 20 of this year's group cancellations have already rebooked into future years with another 30% in the pipeline. Overall, we expect performance will continue to be driven by our suburban and drive to leisure hotels, which currently account for approximately 40% of our room count.
Turning to the balance sheet. As Tom noted in his comments, one of our key priorities has been to fortify our balance sheet to allow us to effectively manage through this crisis, recognizing that its ultimate duration is still unclear. Due to our actions, the balance sheet remains in excellent shape with over $1,600,000,000 of liquidity available as of the end of the second quarter, consisting of $1,300,000,000 of cash and over $300,000,000 of availability on our $1,000,000,000 revolver. With 42 of our hotels now open, we are currently modeling a cash burn of approximately 50,000,000 to $55,000,000 per month, which extends the liquidity runway by another five to eight months, taking us well into 2023 based on current operating levels. In May, Park successfully issued a total of $650,000,000 of five year bonds, callable after two years with a 7.5% coupon.
Originally targeting a size of $500,000,000 the bond offering was upsized by $50,000,000 while in market and then further increased with a subsequent tack on offering of $100,000,000 which priced above par due to positive market demand. A portion of the proceeds were used to repay $319,000,000 on the revolver and $69,000,000 of our $700,000,000 term loan maturing in December of next year, with the rest of the proceeds remaining on our balance sheet. We were extremely pleased with the execution of our inaugural corporate bond offering as it not only allowed us to bolster our liquidity during very uncertain times, but also demonstrated our ability to access alternative sources of capital, which will be a key differentiator for Park as we navigate the current operating environment and continue to address our near term maturities. As a result of the offering and subsequent debt repayment, net debt as of the second quarter totaled $4,100,000,000 As we look out over the next twelve months, Park's financial goals include maintaining significant liquidity to operate under the most severe conditions, further minimizing our monthly cash burn through a combination of efficiently reopening hotels and reducing carrying costs, addressing Park's near term debt maturities in the coming months, which includes $681,000,000 outstanding on our revolver and our $631,000,000 term loan, both due December 2021 and finally, depending on the progress of the recovery in state of capital markets, beginning the process of deleveraging the balance sheet.
That concludes our prepared remarks. We will now open the line for Q and A. Operator, may we have the first question, please?
Speaker 0
Session. Our first question comes from Ari Klein with BMO Capital Markets. Please go ahead.
Speaker 4
You and good afternoon or good morning.
Speaker 5
You talk about the
Speaker 4
seasonality and how you expect that to maybe impact occupancy post the summer given the heavy new year demand you've seen so far?
Speaker 6
Can you repeat the question? It's difficult to hear you. I know you're breaking up a little Sorry
Speaker 4
about that. Can you just talk about seasonality and how you expect that to trend post the summer when perhaps leisure demand slows down a
Speaker 5
little bit?
Speaker 6
Yes. I think the reality of if you think about our portfolio, obviously, our product type and then obviously our distribution, clearly, the second half of the year will continue to be a challenge for Park. And the reality is, as I said in my prepared remarks, you're not going to really see, I think, a meaningful increase in demand for our portfolio and candidly for the industry until we have medical solutions in place, whether that's vaccines and or therapeutics and confidence is really restored. We're encouraged. As I said, I think there's a lot of there's a global race underway.
I think there are five or six different solutions that are in the Phase three of the trials. And so as we sort of think about third quarter, to answer your question directly, we're probably looking to be down again, probably north of 80% in RevPAR and clearly picking up in the fourth quarter slightly better than that. But the second half of twenty twenty will certainly continue to be a challenged year for us. If anything, given what's happening, could make a case leisure demand could in fact get extended into the third quarter. There's about 14,000 rooms or about 47% of our portfolio where it's a strong drive to.
So we do expect as people continue to have cabin fever and want to get out, that we'll certainly benefit from that. No doubt, the second half of the year will continue to be challenged until those medical solutions are in place and confidence is restored.
Speaker 4
Got it. And then it sounds like you're doing more contract business here, which you've seen from others as well. How much more opportunity do you see for the remainder of
Speaker 3
the year there? And can you just
Speaker 4
talk about rates the rates you're seeing on those?
Speaker 3
This is Sean. Mean we are definitely seeing more contract in the mix. I think this time last year, so looking at June, the mix for revenue for contract is about 5%, and we're around 15% for this June. So clearly more contract. That's been a base of business that we've relied upon through for the hotels that remained open through since the pandemic started, and certainly have great relationships with the cruise airline cruise and the like that we've maintained and managed to maintain and even picked up in certain markets.
So I think that's going to be a focus for us going forward. Mean we ultimately need that layered in. We like it layered in even during good times for some of the size of our hotels. So that will continue, and we'll certainly be aggressive in looking at. I think as you look at the rate for that, it generally held up okay, I'm considering, but still down 1520%, as you look kind of
Speaker 7
year over year for June.
Speaker 4
All right. Thank you.
Speaker 0
Our next question comes from Dani Assad with Bank of America.
Speaker 8
Hey, good morning, everybody. Good morning. Morning, Tom. So So my question was, I mean, Sean just kind of touched on it a little bit at the end there, but can you maybe help walk us through kind of how rates held in across the portfolio? I'm assuming there's a dispersion between your drive to resorts and the rest of the portfolio, but any color you could provide there would be helpful.
Speaker 3
Yes. I think obviously looking at ADR across the portfolio is challenging because of the mix shift. I think obviously, haven't talked about contract and with that extra emphasis on contract, I mean contract typically is anywhere from 25%, 30% below what we see in group in overall leisurebusiness transient. So definitely a mix shift there contributing to it. But as you look at some of the drive to resorts, I mean Costa Marina in Key West year over year for the month was up 3%.
Reach was around the same, slightly down. And Santa Barbara's held up okay, I think slightly down like 10% or so. So I think generally in those markets, we've seen certainly strong performance with rate and exceptionally better than expected performance on the occupancy side as well. Saw that in June and even into July building well until the resurgence happened. I think we were probably looking at the Key West assets being north of 30% occupied and really kind of fell down to 50%.
So that's had an impact. But I think rate, again, it's more of a mix element. But as you look at certain components, even within those components, there's a mix element there, too. But you're probably seeing rate anywhere down from 20% to 30%.
Speaker 8
Got it. And then just as my follow-up, some of your peers have given us just kind of an indication of how much of the group business on the books that's being canceled is kind of getting rebooked into future periods. Can you maybe give us just some color on that, anything that you have in terms of group business and maybe like the pipeline kind of how that's been behaving? And that's it for me. Sure.
Speaker 3
I think it's actually probably consistent with others I said we have we've seen about twenty twenty one percent of our room nights that were canceled in 2020 so far rebooked into later years. I'd say about half of that's been rebooked into 'twenty one and 'twenty two. Thankfully, not a lot in 2020. So we don't certainly expect that to ultimately come to fruition. Pipeline, there's 30% of that canceled 2020 cancellations that are sitting in the pipeline right now.
Ultimately, I think taking a wait and see approach. So certainly, I think that's going to be a good tailwind for everybody when the vaccines kind of come through. Think you kind of have people kind of making decisions at that point to rebook into these kind of future years.
Speaker 8
Got it. Thanks a lot, Sean.
Speaker 0
Yes. Next question comes from James Rhodes with Citi.
Speaker 9
Hi, it's Smedes. I wanted to ask you, Tom, you talked a little bit about in your opening remarks changing the operating model, which is something a lot of the owners have been focused on in this environment. How are the brands, I guess, terms of making meaningful changes to the way the operating model can work? And I guess specifically, thing that's kind of come up is eliminating housekeeping during a guest stay, even post pandemic. And I'm wondering, does that make a pretty significant difference in terms of operating margin?
And are there other kind of big moves potentially on the table that would change your ability to put up better margin even in a lower revenue environment?
Speaker 6
Yes, it's a great question, Smedes. I would tell you that this crisis, one of the benefits coming out of what's obviously a horrible situation for all of us is that there's incredibly better collaboration, communication among the brands and owners to really rightsize the business. And I kind of put them in really three sort of buckets. And you touched on one, obviously, no housekeeping for stayovers. I'd probably modify that and say limited or no housekeeping.
The reality is that it protects the guests and employees. I think that mindset is probably going to continue post pandemic. They'll probably will end up with some sort of opt in or opt out depending on the market and the scenario. But there's no doubt from a customer preference standpoint, customers are speaking and the evidence is there. So as a result of that, there clearly are going to be savings there and we believe pretty significant.
But if you also combine that with sort of reimagining room service, going with probably a limited menu and probably a delivery only or pickup, sort of a drop and knock, if you will. Again, when you're having little contact with certainly the guests, which is again the preference for many. I also think more contactless front desk and really continuing to see an expansion of Digital Key at Hilton and the equivalent obviously MobileCheck and then Marriott and Hyatt and others have. I think you're going to continue to see that. I think those three buckets, if you will, are a huge opportunity in the industry.
And if you take our portfolio and if you assume we get 100 basis points or if we're lucky to 300 basis points, you're looking at probably $30,000,000 to $90,000,000 a year in sort of operational savings when you look at a pre COVID environment. So I think there's a huge opportunity there. I also think there's the opportunity for complexing. We are in discussions with our operators about whether our common managers across ownership groups in certain markets can we combine whether it's a general manager or other management staff or there are other operating costs that we can combine to really take cost out of it. I know Marriott and both Hilton are passionate, committed to this.
And I know that they're also working to take cost out above the property as well. So we are all in on this concept. We think it makes sense. It's going to benefit the industry. There will be complexities to every one of these initiatives, really the passion and motivation is there.
So we are encouraged as we move forward.
Speaker 9
Okay. And then in your opening remarks, too, you just said less hotel supply going forward. Were you talking about the potential for new development? Or is it your view that a significant piece of the existing in place inventory won't reopen?
Speaker 6
Yes. I think that it's a fair statement, Smedes, just given the dire circumstances that we all find ourselves in, that there will be owners who are either extended, obviously, on the debt front, unable to meet debt service. I think delinquencies are already up by 21% in the industry. So as you look across markets, you have to believe in New York as an example, Some are talking about perhaps 10% or 20% of the supply for a market that already has 135,000 rooms plus or minus. That's significant.
As you think about Chicago, perhaps even San Francisco, depending on how long obviously the pandemic lasts, you have to believe that there will be certainly a reduction in supply. There will be owners that I think probably not only throwback the keys, but others that look to convert to other uses. So we think that will be a tailwind when we get through this. We also think as you think about that providing somewhat of an opportunity for more pricing power, which really the industry is, as we all know, has really lacked that certainly in the latter part of this last cycle. So we think that that's going to be a net positive coming out of it.
Again, every market will be a little different, but I think there certainly are a number of markets that are fair to say that we'll see a reduction in supply. We're talking about U. S, we're not talking about outside of The U. S.
Speaker 2
Okay. Thank you
Speaker 9
very much. Appreciate it.
Speaker 6
Thanks, Smedes.
Speaker 0
Next question comes from Anthony Powell with Barclays. Please go ahead.
Speaker 7
Hi, good morning. So question on the regulatory environment in some of your largest markets. To what extent do you think some of the local governments are looking to try to get things open maybe in the fall or winter? Or do you think there's a risk that some these markets will stay closed for much longer even into the first half of next year as some of them have been very conservative in terms of opening?
Speaker 6
Yes, it's a great question. I would say the most challenged is probably going to be Hawaii. If you think about Hawaii, the administration there, I think, in fairness, has done an excellent job. I think there are only about 2,600 cases, and they've only had twenty seven deaths. Unfortunately, they have seen a slight uptick this week, I think two hundred cases on Monday, Tuesday and one hundred and forty cases plus or minus on Wednesday.
So I know the governor and the abundance of caution continues to manage the state carefully. That as you know, that opening there has been pushed back a few times. Currently, we're planning on September 1. We haven't heard anything to the contrary. It would not surprise us if that one were to get pushed back.
I think as it relates to San Francisco, the mayor has stated kind of a Phase three, I think, begins on August 13. So we would expect to sort of begin that. We're not planning we've got six hotels there. We've opened two. There's one that we will open this month.
The others will wait for really more growth and more acceleration in demand before we would open. We would certainly expect perhaps that to be in the September, October timeframe. But again, as I said in my prepared remarks, we are carefully managing, one, our desire to open hotels and make sure that we can do it safely and profitably or at least lose less money than we currently are as we manage our cash burn rate. The team has done a great job, as you know, bringing that cash burn rate down from what we thought $85,000,000 down to 65,000,000 as Sean said in his remarks, it really the actual cash burn rate is really in the 50,000,000 to $55,000,000 giving us really another five to eight months of runway. So Park's got well north of two point five years of runway here, we think, the most extreme scenario.
Speaker 7
Got it. And maybe switching gears to just asset sales and transactions. What are you seeing in the market right now? And would you consider bringing some assets to market in the back half of this year or early next?
Speaker 6
Yes. We are really focused, Anthony. I'd say, as Sean pointed out, there are really four priorities for the Park team. Clearly, reopening hotels, as I just mentioned, in a thoughtful, profitable way. We're obviously minimizing our cash burn rate.
Secondly, continuing to reduce that cash burn rate. Third, addressing our near term maturities. Given the great success we had with our covenant relief and then again our bond offer, Park has a lot of optionality given our scale. We continue the fourth would be continuing to evaluate non core asset sales. Remind listeners that we sold 24 assets for 1,200,000,000.0 obviously over the last few years, including 14 assets internationally.
We've never stopped in discussions with prospective buyers for our non core asset sales. We would you'll see us continuing to have those discussions. And when we can get the COVID discount narrowed some, you'll see us contract and with an objective, obviously, of using those proceeds to reduce leverage. It is not it is our preference as we've done to continue. And even post Chesapeake, we had sold about $470,000,000 in assets pre COVID.
So we were really well on our way of continuing to sell noncore assets.
Speaker 7
Is the COVID discount still about 20%? Or is that closed any recently?
Speaker 6
Yes, I think it's closed. I think probably 20% to 30%, depending on the market and the asset, Anthony. But I think down from probably 30% to 40 But it continues to narrow. As we get closer and there's more evidence that there will be therapies and vaccines, and we believe that and we certainly believe that the global race underway is going to yield that, that will provide the confidence for people to know we're going to get to the other side of this pandemic. Thank you.
Thank you.
Speaker 0
Next question comes from Bill Crow with Raymond James.
Speaker 2
Morning. Thanks. Tom, how are the guests reacting to the changes operationally and from a labor perspective as they go to especially some of your high end hotels?
Speaker 6
Yes, it's a great question, Bill. I think and I chose my words carefully when I said earlier that I think you'll see sort of limited to no kind of housekeeping for stayovers. Clearly, as you think about luxury, I think that limited will be limited and it will be really on a case by case. It would not surprise me if the law offers an example that we largely continued housekeeping. I think that guest is going to demand for and candidly prepared to pay for that incremental service, whether that's embedded in the rate or whether there's a supplemental charge.
But I think these preferences that we're talking about, many of them will certainly in the near term, I think, be permanent, if not longer. And as we think about, obviously, advances in technology, which already exist here in contactless front desk and using digital key, clearly on housekeeping, people are not going to want people in their room. We're seeing that. And then room service. Room service, again, as you get to a luxury product, you'll have to find what is the right model for that particular asset.
But I think generally speaking, this sort of delivery only and kind of a drop in NOK is really going to continue to take certainly gain momentum, and we're not seeing any resistance at all to that.
Speaker 2
All right. Perfect. Quickly,
Speaker 6
could
Speaker 2
you just talk about the economics of using a hotel for student housing?
Speaker 6
Well, if you think about New Orleans as an example, we're a hotel that runs 65% to 70% group and clearly where there's not a lot of demand. And I credit our operating partners at Hilton for and our asset management team for being so proactive and reaching out. And in this case, the operating model is there will not be room service. There will not be housekeeping. There will not be a food and beverage component.
It really is providing them with that room product, which is what the university wants and which is what the students want. So we found that balance. I don't recall the actual rate for that business. Sean may provide that in a second. But I think it really made sense and the incremental benefit to us about $7,000,000 in incremental revenue is really not a big cost component.
So the flow through here is going to be really good for us. And we are looking for similar opportunities in many other markets as we move forward, Bill.
Speaker 3
Yes. If I could add to that, Kyle is right. I mean the flow through, you kind of add back to the fact that you're not paying you're doing housekeeping and the like. And you're not taking you're not paying the acquisition cost of that customer, right? It's direct.
I mean, kind of add that you kind of gross that rate back up. I think you kind of get to where you kind of see a contract room. And again, you think about this asset in New Orleans as an environment over the next nine months, heavily grouped city, you take out 40% of your rooms for this on a hotel that relies on 70% as group, I think it's certainly the right trade to make in the near term.
Speaker 0
Our next question comes from Neil Malkin with Capital One Securities. Please go ahead.
Speaker 5
Hey, Neil. Hey, guys. Just maybe a higher level question or way to think about it. You talked about the vaccine or another therapy or something like that being in pretty late stage trials, which we can all agree is fantastic. However, there's still going to be time it takes to get commercialized, distributed, get public buy in or inoculation.
And then it's also about corporate and individual comfort. So maybe if you could just talk about or share some initial thoughts on your view for what the largest corporate accounts you have, what their stance is or how you think that will actually play out in terms of seeing demand come back when we do have a vaccine? Because it's obviously going to be more of a going to take longer than, oh, we have a vaccine and then tomorrow all the groups come back, right? It's a process mentally as well as objectively. So any thoughts would be great.
Speaker 6
Yes. Look, it's a great question. I think I'd make a couple of comments here. I think the first is that like you and I think all the listeners, I believe passionately in the American spirit, the American will. I also believe here in this particular matter where we've got a global pandemic and you've got this global race underway.
You've also got the federal government investing billions of dollars. And as you know, they're already manufacturing with many of these prospective vaccines with the hope that some or all will hit and that they'll have capacity there. What none of us can predict, and you hit the nail on the head, is really going to be the adoption rate. But if the medical professionals are coming out and they are communicating that these therapies and our vaccines are safe and they're advising that we're going to take it, you have to believe that the vast majority of Americans will to get to the other side of this so that we can resume our normal lives of going to work, going to restaurants, going to movies, traveling. That human interaction that we're all star for that is really not being replaced by Zoom and WebEx and some of the other devices.
So I my personal belief is that the adoption rate will be high. And you're right, they'll take some time. I think as Congress addresses the liability issue, as you think about companies and schools and governments, they're really afraid. And part of that limiting the liability once we get to the other side of that, people are anxious to resume their lives. So is that our first quarter?
Is it if we have them approved by November, I certainly don't think it's December and everybody's back to the old normal. But I certainly can believe that by first quarter, assuming the adoption rate is going as planned and as recommended, you would start to see the beginning of companies bringing people back, travel resuming. I still believe that leisure will be ahead and that will follow obviously by business transient and group. I think the long pole in the tent will be grouped until people really again feel safe and confident. Companies are probably going to continue to be careful and cautious with that.
We'll have to continue to rightsize and think creatively about our business as we're doing in New Orleans, obviously, taking 40% of the business and essentially using it as an auxiliary for a university. We'll do what's necessary in the interim to continue to gain revenue and certainly reduce our cash burn rate.
Speaker 3
Yes, I appreciate that.
Speaker 5
I understand it's a tough question, but I'd just like to hear your thoughts. Sean
Speaker 6
We're glad to share. What? I said glad to share them.
Speaker 5
Yes. So Sean, it seems like the covenants you have from the waivers or the I'm sorry, the restrictions for the waivers are pretty strict, but you also talked when you talked about selling non core assets. I'm just wondering, maybe can you just walk us through like what are you not allowed to do? What can you do? Like maybe the salient points that are that you have to adhere to during your waiver period?
Speaker 3
Sure. Ultimately, we do have I think typical restrictions you're going to you expect to see no buybacks, no dividends and the like there. We're certainly able to kind of manage our operations refinance. In terms of the current debt, we can certainly do that for refinancing purposes. But for the kind of additional debt outside of that or as you sell assets, there is a repayment waterfall.
And that kind of drives it and ultimately looks to pay down credit facility debt. There's a mix between revolver and term loan. So it's a mix between still liquidity on the revolver side with some permanent capital reduction, permanent debt reduction as well. So yes, there are restrictions in terms of while they've given granted us relief, the quid pro quo is to kind of behave in a way to kind of keep the cash in the system in a way. And so that's kind of what we ultimately adhere to.
I mean part of it too for us was extending our credit facility out a year and getting 100% approval on that as well as getting liquidity. And we were able to accomplish all that, too. So I think we have plenty of room to operate. We have a $200,000,000 general investment bucket we can utilize. We can do asset sales in a tenthirty one without any restriction there.
And we can we ultimately can if we were to raise equity, we'd have up to $500,000,000 to use for other purposes besides paying down debt at this point. So I think we certainly feel like we had enough optionality and flexibility given the circumstances.
Speaker 5
Yes. No, I appreciate that. And then one quick housekeeping, I guess, along the same lines. The you said you guys deferred principal and interest on some of your mortgages. A, how much is that saving every month?
And then B, is that in your new cash burn rate?
Speaker 3
That is not. What we ultimately do with our cash burn rate, both have theoreticalized it as we assumed all offices are closed and kind of what we're seeing currently with majority of the assets open, it's more of kind of an accrual base. We're not we don't want to get into the mode of that people try to guess at working capital. So we're still counting those kind that kind of interest carry in our cash burn. But ultimately, it's the things we've gotten concessions on thus far are kind of a lot in the Chesapeake portfolio.
And so it doesn't amount to a lot, but it's about 4,000,000 to $5,000,000 of deferral across a kind of a three- to six month period.
Speaker 5
All right. Thank you, guys.
Speaker 6
Yes. Thanks.
Speaker 0
Next question comes from Gregory Miller with Truist Securities. Please go ahead.
Speaker 10
Good morning, Tom and Sean. Hey. My first question, to my understanding, there is pending U. S. Legislation that may shield businesses from liability if people get sick from COVID-nineteen.
I believe this letter was signed or supported by HNLA amongst other groups. I'm curious how do you see corporate travel demand progressing if this bill is passed?
Speaker 6
Well, the majority leader, Greg, on this morning. I caught part of it on TBC. Think made it abundantly clear that the pending legislation, this next phase would not happen without having some sort of liability limitation across businesses, schools, governments, etcetera. And so I think it's an important cornerstone. I think what's more important is to get this overall bill passed, get the additional support that's needed for small business, the unemployment insurance and then again continue to support all of the positive work that's happening on the medical front.
I think all of that combined will I think provide the confidence to really accelerate the pace. There's no doubt that companies at this point are being careful and cautious, no different than what we're all doing. We've got a skeleton crew here at our office and essentially everybody is working remotely. People are making it work. I think we're all anxious to get to the other side as quickly as we can.
But I think it takes all of those components, which I think will really accelerate with clearly the vaccine and or therapies being a paramount. That's going to provide really the confidence that's going to give all of us the ability to come out of the bunker and begin to resume our lives again.
Speaker 10
Great. Thanks very much. One other question that I have. I appreciate all the great disclosure in the supplemental deck with the reopening dates that you provided. And given the labor costs and operational challenges with the cleaning ordinance that was passed in San Francisco, And I read your editorial in the San Francisco Examiner.
I'm curious how the cleaning cost ordinance combined with operational costs in your modeling today, how that factors into your plan to reopen dates within the market?
Speaker 6
Yes, it's a great question. We at Park were actively involved in, I think, pointing out to the city of San Francisco along with American Wetzelmological Association and other owners and other peers that this was really bad legislation. We've got a safe stay by the association. We obviously have a clean stay by Hilton, committed to clean by Marriott, the equivalent across all the brands. The great men and women on the operating side know how to clean a hotel and secure its safety.
So we really thought candidly that this bill was it's nothing more than a jobs bill. It's not a safety bill. I'm confident, Greg, at the end of the day, when we get the vaccine, when we get the protocols in place where people feel safer, the reality is that we're in a global pandemic. These local officials, including the unions are desperate. They're panicked.
They're trying to just protect jobs. I don't like the tactics, but we understand the issue. And I think what's most important is that we prepare to reopen. We have the appropriate protocols in place to keep our employees and our guests safe, but that at the end of the day, don't have mutually assured destruction and that we're thinking positively about the interim and long term about our great business. I'm confident that clear heads will prevail and we'll get to a balance that really matters and that continues to uplift this business and at the same time taking cost out of it.
Guests are speaking and guests are clear about what they want. They want more flexibility on the housekeeping, whether it's opt in or opt out. There's no doubt that they want to bypass the front desk. You're not going to be able to stop these advances in technology. Think the industry has got to work together with labor in certain markets and across the industry to find the right balance.
We don't take these things personally. We are confident that we'll find the right balance and we will reopen our hotels in San Francisco among other cities. And these are the great cities of the world and people want to visit and travel to, and our employees continue to provide the great service that they've always provided.
Speaker 10
Thanks for the great insights,
Speaker 7
and I look
Speaker 10
forward to being on the road hopefully soon at your hotels as well.
Speaker 0
Next question comes from Stephen Grambling with Goldman Sachs.
Speaker 11
Good morning. Thanks for taking the question. Hey, how are you? So on and as we think about financial leverage longer term, and also just hearing a number of your peers have been reprioritizing reinvestment into the base business or base hotels. How are you thinking about a re ramp in CapEx as things normalize within that capital allocation priority?
And is there any kind of catch up that may need to happen as properties reopen?
Speaker 6
Yes. We've always taken a position on CapEx of about 6%, certainly given our portfolio and the size and scale. So we obviously, as you can expect, given where we are in the pandemic, we made the appropriate decision to really reduce CapEx by 75%. As we begin to ramp up, we clearly will be a little bit of catch up. We'll assume that'll probably ramp up, whether that's an incremental one hundred two hundred basis points, whether we take that to 7% or 8% temporarily.
We'll do what's necessary, but we continue to fire life safety, emergency capital. We continue to monitor and carefully. We've got a very capable design and construction team. We continue to monitor our assets and to make sure that things are in good order. Over the intermediate and long term, we believe there are a number of embedded ROI opportunities within our portfolio.
Obviously, Bonnet Creek, as you know, we've started the expansion there, the meeting space. We've obviously deferred that for now and the rebranding of that asset. Clearly, we'll continue to look at our asset in San Jose and converting that from a Doubletree to a Hilton. We obviously have the Doubletree in Crystal City, which is at the front door of the Amazon facility there at the second headquarters. So we've got a lot of optionality and a lot of great upside in this portfolio that we look forward to really getting at as we move forward in the future.
Speaker 11
Thanks. And as a follow-up to some of your comments earlier, I guess given the structural changes that you do anticipate in the business model in some cases, how might these changes influence what might be deemed core versus noncore assets?
Speaker 6
Yes. That's a great question. I would say one of the things that I think is important is to not overreact. I think first and foremost on the parts side, we are confident in our strategy. Again, upper upscale and luxury hotels in top 25 markets and premium resort destinations, We have conviction over that.
You think about our assets in Hawaii, the Hilton Hawaiian Village, 22 acres, 2,900 rooms, world class fortress, five towers. You could never replicate that in today's world. Think about the assets that we have in the CBD in San Francisco or the New York Hilton or the Chicago Hilton. These are well located bullseye real estate. Having said that, we also believe that you want to follow the demand and that those markets having huge barriers to entry, demand will come back.
Clearly, there will be other markets that as we think about the shift in growth, you have to believe that Austin, Nashville, other markets like that will continue to grow and expand. And clearly, we'll look at expanding our footprint into those. We probably don't want any one market to be more than 10% to 12% in a perfect world. Clearly, Hawaii accounts for more of that today. But part of the benefit of the Chesapeake is that we were able to bolt on 16 assets that really give us brand, operator and geographic diversification as well.
So you'll clearly look for us to do more of that in the future as we get to the other side of this pandemic. But there's no abandonment. We're not retreating now and looking to go purely all suburban because the suburban seems to make the most sense today. The analogy that I would use is think about several years ago when everybody thought independent hotels in New York were the right thing to do and everybody rushed to buy independent hotels. I don't think that strategy worked out so well for many people.
You see a panic out of the Park team here. We believe in our with conviction in our current strategy. We'll pivot, we'll adjust, we'll recycle noncore assets, and then we'll continue to look at those other pockets and areas where there are growth opportunities.
Speaker 11
Makes sense. Thanks so much.
Speaker 6
Yes.
Speaker 0
Next question comes from Brandt Montour with JPMorgan.
Speaker 12
Hey, good morning, Thanks for taking my I'm just curious if you mind sharing July sort of RevPAR metrics, just given all the moving pieces you want to bridge the 2Q with the sort of 3Q guidance post you gave?
Speaker 3
For July, July RevPAR, what's it been down? July RevPAR is from a flash standpoint here, down 88%.
Speaker 6
Down 88%. But if you look sequentially, June occupancy was up about 9.4%. We grew July occupancy to 14.7%, but July was down 88%.
Speaker 12
Great. Okay. And then just looking out to the second half, and I don't want to split hairs, but I'm just curious, what is driving the confidence that 4Q would be better than the 3Q in terms of RevPAR?
Speaker 6
Well, one, would think, by the September, we said we expect that 80% of our hotels open. So clearly having getting closer to north of 80%, whether that's 90% or 100% by fourth quarter. Having more hotels open certainly gives us the opportunity, whether it's through contract business, whether it's through ancillary revenue, whether again we're beginning to see a slight more confidence again on the medical side where we will begin to pick up. No doubt second half is going to be challenged. I don't want to imply.
I think as you know, we're down 96% here in the second quarter. We would probably expect to be down north of 80% in RevPAR in the third quarter. And then clearly in the fourth quarter, that should certainly moderate, whether that's down 60% to 70%, somewhere in that range. But again, that would only be a really hard guess at this point.
Speaker 12
Okay, great. And then but aside from that, in the fourth quarter versus the third quarter, there's no seasonal difference. I mean, Medical Solutions aside, if that doesn't happen for us, seasonality wouldn't dictate necessarily any lift fourth quarter over third quarter.
Speaker 6
No, no, there's no look, you could make the case that perhaps leisure gets extended a little bit. Look, it's a difficult environment. People you see more and more evidence of people resisting the cabin fever and beginning to get out, whether that's drive to, whether it's spending time, even those sales meetings, consultants. So you are seeing some evidence. It's on the margin.
People are beginning to begin to travel certainly a little more. At the end of the day, as I said in our prepared remarks, I think it really comes down to the medical solutions will be the game changer.
Speaker 12
Fair enough. Good luck. Thanks.
Speaker 0
Thanks. Next question comes from Chris Woronka with Deutsche Bank.
Speaker 13
Hey, good morning, guys.
Speaker 6
Good morning, Chris.
Speaker 13
Hey, good morning, Tom. Question for you, Tom. How much I mean, worry at all about rate integrity? Or how do you look at rate integrity going forward with the industry looks a lot different than it did eleven, twelve years ago. We've had M and A.
We've had a lot more pushed towards direct bookings. But if there's some piece of group or corporate that's missing for a couple of years, how do you look at things like rate negotiations? Also understanding that there could be positive offsets on supply side, right? How do you see the rate situation shaking out for the next couple of years? I know that's a crystal ball type question.
Speaker 6
Yes. It's a great question, Chris. One, if you think about the last cycle, I think the frustration that all of us would have, right, is we never really saw the pricing power for all the points that you made. And I think supply contributed to it. I think clearly, the OTAs clearly played part of that.
And the other part is that the business is so fragmented. I think the opportunity here as we think about rightsizing, I think there's the opportunity again with supply. You have to believe there's going to be a contraction. We can argue how much, but clearly this distress is going to create a distraction for a reduction in supply for some period of time. I also think when we come out of it, if we're able to rightsize the operating model, that gives us the opportunity as well to think about customer acquisition cost.
Can we continue to think about ways to provide a different level of value and service? And can we go to let the airlines have gone more a la carte on some items? The airlines retrained us in their process. I don't know why hotels can't also do the same. These are the types of things that I know we're talking to the brands about and our operating partners, and I know that other owners are doing it as well.
We should use this crisis, as painful as it is, to get on the other side with a much better product, much leaner operating model and hopefully a more viable business for all of us as we move forward. There's better communication and collaboration today in these topics than I've seen in my north thirty years in this industry.
Speaker 13
Great. Very helpful, Tom. And then just a follow-up on the capital allocation decisions. Is there a key indicator you look for if equity is going to be a part of the equation? Is it you can't get asset sales done, which I think would be unlikely, but or is it more opportunistic?
Is there a certain number? Just trying to get a sense as to remember that there was a ton of equity issued coming out of that last downturn to shore up balance sheets. That ended up being a very good liquidity event for the industry.
Speaker 6
Yes. It's a fair question, Chris. I would say the reality is and if you think back in a period of time, which I remember, I also happened to be on a few other public company boards, and I think a number of companies that made that capitulation trade did so because they had to, whether it was showing up their balance sheet or alternatively, they perhaps had a use of proceeds. I think as it relates to Park and where we are, we will be laser focused on continuing to manage our liquidity. And it's based on the great moves that the team has made, a lot of credit to Sean and to the team, clearly on a very successful bond offer.
We have obviously enough liquidity for the next two, two point five years. There's no need for us to do any kind of equity offering at this point. As we get beyond, hopefully we get the vaccine, we get more clarity, we see an acceleration in demand, we would think about equity offerings at a much later date as a potential growth vehicle, not because of we think there's a need for any kind of equity offering in the near term. Equity would be the last thing that we would want to do at this point, given where we are and candidly where we trade. We trade at a significant discount to NAV, a significant discount to replacement costs.
It makes no sense at all for us to do any kind of equity offering and certainly something that would be so dilutive to our current shareholders. So we would be adamantly opposed to that.
Speaker 13
Okay. Very helpful. Thanks, Tom.
Speaker 0
Next question comes from Robert Farley with UBS. Thanks. Question I've had since this how are you? My question since the start of the call, it's going to sound like a follow-up to one of the previous questions because you touched on it a little bit. But I wonder if you could give just a little more color on what your usual mix of business and leisure transient is in Q4 versus Q3, just how that transitions between quarters in a typical year?
Speaker 3
The contract was always had always been kind of about 5% or so on a revenue mix basis. As we kind of looked at Q3 versus Q4, apologies, just kind of give me one second here. But if you look Q3, Q4, I think it's generally been it's generally held about the same. I'm looking at it as of right now. It's pretty much from a revenue standpoint last year, pretty much spot on the same from a revenue standpoint.
So from a group, it was kind of high. It was almost 28.5% or so, transient about 64%, contract about 5%.
Speaker 0
But I meant the, sorry, the split between leisure transient and business transient as you go from Q3 into Q4?
Speaker 3
I don't have that in front of me.
Speaker 0
Just thinking about obviously as leisure, it seems that's where the demand is focused in Q3 and just kind of how that would typically look going into Q4, the degree to which you become maybe more dependent on the business transient side of things?
Speaker 6
Yes. I think historically, Robin, it's probably on the margin a few percentage points, Sean and team will look at it. We'll get back to you to make sure that we have adequately answered your question. I don't think it's going to be that significant.
Speaker 0
Okay. Thank you very much. That's it. All my other questions have been asked. Thanks.
Next question comes from Lucas Hartwich with Green Street. Please go ahead.
Speaker 7
Thank you. Good morning.
Speaker 6
Good morning, Lucas.
Speaker 10
Good morning. Tom, I'm curious, do you think this experience permanently increases the risk premium for big box hotels?
Speaker 6
Look, it's probably easy to make that statement today given what we've all been through. I mean, I would say if you think about generations, the benefit, I think, of having obviously these big group hotels anchored the way you deal is the multiple sources of demand, right? You've got leisure business transient. You've got embedded group, in house group. You have the ability to really take advantage of citywides and you have all of those wonderful events that occur, certainly religious, family, etcetera, weddings.
So I would say the diversity of sources of revenue. I would also say the fact that there are huge barriers to entry to being able to replicate. Think of how few big box hotels are getting constructed. It'd be near impossible to really replicate the portfolio that we have across many of the major cities in The U. S.
So clearly, we take it on the chin right now given, one, our product type and given our distribution. But I would also say that when we get to the other side of this, whether that's three months, six months or nine months, Park is going to be incredibly well positioned with an improved business operating model, I think tremendous pent up demand and I think the opportunity for us to have outsized years of growth. It's not happening right now given the reality of what we're faced with, but we are encouraged and confident that we will get to the other side.
Speaker 10
That's really helpful color. Thank you. And then my other question is for Sean. I'm just curious about the prospects for extending the sort of revolver and the term loan that are due late next year.
Speaker 3
Yes, very confident. We do kind of coming off of the bond amendment that we did in May. Can look to reengage and work through that with our banks. Already having conversations with them with our leads. And again, Tom mentioned the optionality we have, and we're looking certainly to kind of utilize that as we explore our options with that and certainly expect to have further reports on that through the after the third quarter.
Speaker 10
Perfect. Thank you.
Speaker 0
I would like to turn the floor over to Tom Baltimore for closing comments.
Speaker 6
Appreciate all of you taking time today. We look forward to having our third quarter call in late October. Stay safe, be well, and look forward to talking with you all soon. I can't wait to the days that we could be together in person meeting.
Speaker 0
This concludes today's conference. Thank you for your participation.