Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Park Hotels & Resorts Inc. (NYSE:PK)
Q3 2018 Earnings Conference Call
Nov. 2, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Park Hotels & Resorts third quarter 2018 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Ian Weissman, Senior Vice President, Corporate Strategy for Park Hotels & Resorts. Thank you. You may begin.

Ian Weissman -- Senior Vice President, Corporate Strategy

Thank you, operator, and welcome, everyone to the Park Hotels & Resorts third quarter 2018 earnings call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements.

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

This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of our third quarter 2018 operating results, preliminary observations for 2019, and an update to our full-year 2018 guidance. Sean Dell'Orto, our Chief Financial Officer, will provide further detail on our third quarter financial results, an update to our balance sheet, and additional color on our expected fourth quarter dividend, and our insurance claim. Rob Tanenbaum, our Executive Vice President of Asset Management, will be joining for Q&A. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Thank you, Ian, and welcome, everyone. We posted another solid quarter. Highlighting the ongoing strength of our portfolio, comparable RevPAR for the portfolio increased 2.6%, driven by healthy transient demand, while our comparable hotel adjusted EBITDA margin increased 10 basis points. These results include some impact to our performance from the volcanic activity and storms in Hawaii, and a labor strike in Chicago. Combined, these events lowered comparable RevPAR by 60 basis points, and comparable margins by roughly 30 basis points, and reduced EBITDA by approximately $3 million for the quarter.

Despite these events, I remain very optimistic on the fundamentals of our business. The fourth quarter should be one of our strongest quarters of the year, with that momentum expected to carry into 2019. While there has been some concern over weaker citywide calendars next year across several major U.S. cities, one of Park's key advantages is the strength of our group business, and we believe Park remains very well-positioned in this regard for a few reasons.

First, we have some of the largest group-oriented hotels in the sector, with 8 hotels offering over 125,000 square feet of meeting space. This platform allows us to book a considerable amount of our demand in-house, with only a third of our group business generated from citywide conventions. Second, there is a favorable setup in a number of our key markets going into next year, and we anticipate strong group performance in Hawaii, Orlando, and especially San Francisco, as the Moscone Center will be fully renovated and operational by the end of this month.

Finally, the strength of our group pace reinforces our optimism. Our 2019 group pace is up nearly 12%, and over 9% when you exclude San Francisco, demonstrating our continued success in grouping up across our Top 25 hotels, with most of that growth generated on the demand side. Of particular note is the impressive pace for corporate group, which is up over 20%.

Additionally, our transient business continues to improve, with the pace of business transient revenues accelerating in the second half of this year, supported by favorable macro-economic fundamentals. Simply put, the setup for Park is 2019 is very good.

Turning to third quarter operations, we are pleased with our results this quarter, as they illustrate that our portfolio has an effective strategy at targeting both group and transient segments that can deliver strong results, while further highlighting the benefit of our aggressive approach to asset management and commitment to driving margins higher. To further highlight this point, our comparable hotel adjusted EBITDA margin has increased an impressive 60 basis points year-to-date, which is among the highest rate of improvement in the sector against a comparable RevPAR growth of 2.7%. I remind listeners that break-even margins in lodging typically require at least 2.5% to 3% RevPAR growth rate.

Diving deeper into our business mix this quarter, transient RevPAR was positive across both business transient and leisure segment. Despite weather-related disruption in Hawaii, leisure increased 0.8%, while business transient increased 1.2%. As expected, group business was relatively flat, with revenues down 20 basis points during the third quarter. There were, however, several markets with healthy group performance, including San Francisco, which was up 10.8%, and Hawaii and Downtown Chicago, which were up 7.6% and 6.1%, respectively. New York and New Orleans were both down, as New York faced weak citywide demand, while New Orleans faced difficult year-over-year comps in July following very strong in-house group during the third quarter of 2017.

We are also pleased with the continued improvements to group pace. This time last year, group pace for 2018 was trending flat to slightly negative, while we now expect current pace for the year to finish up 4.8%. This trend highlights the underlying strength of not only the group segment, but the economy as a whole. With corporate profits continuing to improve, up over 16% in the second quarter, following the tax cuts which went into effect on January the 1st, coupled with the continued improvements, and consumer confidence, and non-residential fixed investments, which were up over 8% in the second quarter, it is clear that the U.S. economy is healthy and businesses are spending more on corporate travel.

Finally, contract business was up an impressive 24.5% in the quarter, as we continue to build bigger bases within our hotels to ultimately yield up on transient demand. This has been an effective strategy for us all year, and we believe that it will continue to be an important tool for us as we seek to maximize our business mix moving forward.

Reviewing our major markets, our two San Francisco hotels continued their strong performance from last quarter, posting RevPAR growth of 5.8% in the third quarter, with strong production in margins as a complex improving roughly 160 basis points. Looking forward, we expect a solid fourth quarter with RevPAR in the mid-single digits, despite citywide convention weakness that projects room nights to be down close to 30%.

Overall, our San Francisco complex should see group revenues increase in the mid-teens for 2018, which is more than double the group pace expectation set at the beginning of the year. We believe this is a direct result of our focused resources we have targeted toward identifying opportunities and capturing in-house business. In addition, group pace for our two assets is up over 21% to over 257,000 room nights for 2019.

Facing easier year-over-year comps due to the impact from Hurricane Irma last year, Key West was among our portfolio's best-performing markets during the quarter, with our two hotels posting a combined RevPAR growth of 12.5%, and margin improvement of approximately 360 basis points. As a reminder, our two hotels were closed for much of September 2017 as a result of a hurricane; our Casa Marina resort did experience some disruption in the third quarter related to remediation work from last year's hurricanes, which is now complete.

Overall, it appears that demand in the market has generally recovered and the outlook for the fourth quarter is favorable. Our Orlando hotels had a tough year-over-year comparison this quarter, as our Bonnet Creek assets housed displaced residents from Hurricane Irma in the third quarter, and into the beginning of the fourth quarter of last year. Bonnet Creek complex recorded a 5.7% RevPAR decline for the third quarter, although fourth quarter RevPAR should improve. The outlook for the Bonnet Creek complex in 2019 is considerably better, with group pace up roughly 6% despite a projected 6% drop in citywide room nights.

Turning to Chicago, I want to start out by first commending the team in Chicago for their dedication and hard work during the labor strike which impacted the hotel during the third quarter. Hilton General Manager John Wells and his team did an unbelievable job ensuring hotel operations ran smoothly throughout the strike so the hotel could serve its guests. I am pleased to report that both sides reached an agreement and all employees are back to work. In spite of the strike, we posted very solid results, with our Hilton Chicago reporting an 8.6% increase in RevPAR, driven by double-digit RevPAR increases in July and August that continued the momentum from the second quarter. Note that September performance at the hotel was impacted by the citywide strike that lasted for 23 days. If you were to exclude the impact of the strike, RevPAR at the hotel would have been up 11.6%, while margins would have been roughly 280 basis points higher.

Turning to Hawaii, RevPAR growth at our Hilton Hawaiian Village asset was up 0.2%, or slightly weaker than we had anticipated, as results were negatively impacted by Hurricanes Lane and Olivia, and disruption from the two hurricanes, as well as Typhoon Jebi, which disrupted demand from Asia, placed a 180-basis-point drag on RevPAR performance during the quarter, with some of that weakness expected to bleed into the fourth quarter. That said, 2019 should be a very strong year given improved airlift to the island, strong forward bookings from Asian wholesale producers, and an extremely favorable group pace of over 25% next year.

Regarding our capital recycling efforts, as we announced on our last call, we are in the early stage of Phase 2 marketing for a handful of non-core assets. At this point, we do not have any new information on the volume of sales or expected timing of any transactions. As we have demonstrated, we will continue to be disciplined and focused in our approach, and we will keep you posted on our progress as it unfolds in the months and quarters ahead.

Turning to guidance, in the fourth quarter we expect another strong quarter, with results driven by continued strength in San Francisco, Chicago, and Key West, while we expect to see better results in Hawaii, Orlando, and New York City. Given our positive view on fundamentals over the balance of this year, we are tightening the range of our comparable RevPAR forecast by 15 basis points at the midpoint to a new range of 2.4% to 2.9%, while comparable hotel adjusted EBITDA margin is being increased at the midpoint by 10 basis points to a new range of +25 basis points to 55 basis points improvement for the year.

In spite the third quarter weather and strike-related disruption, we are keeping the midpoint of earnings guidance unchanged, although we are tightening our guidance ranges with adjusted EBITDA now forecasted at $735 million to $755 million, while FFO tightens to $2.86 to $2.94 per share.

Before turning the call over to Sean, I want to reemphasize that we are excited about our portfolio's outlook for the remainder of the year and the setup into 2019, and firmly believe that your group-oriented portfolio will continue to drive meaningful results. Our team remains focused on executing our internal growth strategies, and committed to generating outsized total returns for shareholders.

With that, I wanted to provide additional guidance on our fourth quarter dividend. While our final fourth quarter dividend remains subject to Board approval, we currently expect the dividend to range between $0.95 and $1.05 per share, approximately $0.65 to $0.75 per share of which relates to our normal dividend payout amount for the fourth quarter 2018, and the remaining $0.30 per share of which relates to additional gains from this year's asset sales.

I will now turn the call over to Sean, who will elaborate more on the dividend, as well as the other matters concerning the portfolio and balance sheet. Sean?

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

Thanks, Tom. Looking at our results for the third quarter, we reported total revenues of $652 million, and adjusted EBITDA of $168 million. Adjusted FFO was $132 million or $0.65 per diluted share. Turning to our core operating metrics, our comparable portfolio produced a RevPAR of $175, or an increase of 2.6% during the third quarter. Our occupancy for the quarter was 83.8%, up 20 basis points over last year, while our average daily rate was $209, or an increase of 2.3% versus the prior year.

These top-line trends resulted in comparable hotel adjusted EBITDA of $166 million, while our comparable hotel adjusted EBITDA margin was 27.7%, which was a 10-basis-point increase over the prior year. In spite of inflation concerns, especially around labor costs, with U.S. unemployment running at 3.7%, our asset management and hotel operating team together have done an exceptional job at keeping a cap on costs, with overall expense growth expected to be approximately 2% for the year. Our Top 10 hotels produced RevPAR growth of 1.7%; however, if you were to exclude the Hilton Waikoloa Village Resort, which was negatively impacted by Hurricane Lane and the Kilauea Volcano eruption, RevPAR performance for the group would've been 2.1%.

Moving to our balance sheet, Park remains in solid financial shape, with close to $1.4 billion of liquidity, including our $1 billion undrawn revolver, while net leverage on a trailing basis pro forma for the assets sold earlier in the year is currently at 3.8x, below the midpoint of our targeted range of 3 to 5x.

Turning to dividends, on October 15th, we paid our third quarter cash dividend of $0.43 per share. As Tom mentioned earlier, we expect to distribute between $0.95 to $1.05 per share for our fourth quarter dividend, which includes our normal top-off fourth quarter payment amount ranging from $0.65 to $0.75 per share, plus an additional $0.30 per share related to excess gains from the asset sold earlier this year. As a reminder, our intention is to pay out 65% to 70% of adjusted FFO on an annualized basis, which represents this fourth quarter normal payout amount.

Excluding the additional $0.30 per share related to gains from asset sales, our normalized dividend yield for 2018 is approaching 7%, among the highest in the sector. Note that the actual amount of the total fourth quarter dividend will be approved by our Board of Directors by mid-December, as a record date prior to the end of the year and a payment date occurring in the middle of January 2019.

Finally, we'd like to provide an update on our restoration efforts at the Caribe Hilton in Puerto Rico. Due to various factors affecting the schedule, which are not surprising given the circumstances, we are targeting a soft opening of mid- to late first quarter 2019, with roughly half of the rooms available at that time, and a grand reopening of a historic hotel expected toward the latter part of Q2. We would like to recognize our design and construction team and the teams on the group for their tireless efforts on this complex project.

Regarding the insurance claim, to date we have received cash advances totaling $105 million, including $65 million received during the third quarter, as the restoration work and claims process has intensified. In terms of business interruption proceeds, to date we have received $15 million, which when applied against carrying costs and other expenses, nets to roughly $5 million of EBITDA year-to-date through the third quarter. The adjusters and insurance carriers have been helpful in keeping pace with our schedule and cash needs, and we expect to receive additional funds in the fourth quarter for both the damage side of the claim, as well as business interruption proceeds.

That concludes our prepared remarks. At this point, operator, we'd like to open up for questions. In the interest of time, we're asking all participants to limit their response to one question and one follow-up. Operator, may we have the first question, please?

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. Our first question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

William Crow -- Raymond James and Associates -- Analyst

Good morning, everybody.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Good morning, Bill. How are you?

William Crow -- Raymond James and Associates -- Analyst

I'm good, thanks. Let me start with the fourth quarter. Pretty bullish on RevPAR growth. I think you said mid-single digits. So a two-part question. No. 1, what does October look like to date? If you could give us some idea there. Then No. 2 is, are the results going to benefit from specific issues and challenges last year? We're all trying to get a run rate here after some calendar issues and weather issues, etc. over the last few months. So maybe you can help us think about the run rate.

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

It's a great question, Bill. First thing is obviously October we think will be the strongest month in the fourth quarter. We do expect the fourth quarter will be our second-best quarter for the year. As you may recall, we were up 4.3% second quarter, and obviously the 2.6% and 3.2% if you were to exclude obviously the disruption in strikes, etc. But October, our preliminary RevPAR number is approximately 6%. There's some strong performance coming out of San Francisco. Obviously, we've got a strong group pace there. Chicago, double digits there. Continues to perform well. New Orleans is having a great month as well. Solid group pace there. New York, even New York up 6% in, again, October. Again, these are preliminary numbers. And Orlando, again, having a strong booking pace, so sort of 8% to 9% as well. That's broad-based.

Obviously, a little bit as we alluded to in the prepared remarks, expect Hawaii, obviously the wholesale continues to be a little slow. Given some of the activity, I expect that to bleed a little bit, although we're very optimistic about Hawaii as we look to 2019 and beyond. Obviously, November, December solid, but certainly we don't expect them to be the same kind of number that we're seeing in October. Feel good. Again, as we noted, having both business transient and leisure transient up in the third quarter and having that continue into the fourth quarter is very encouraging. So I like our positioning as we close out the year, and love our positioning as we look to 2019.

William Crow -- Raymond James and Associates -- Analyst

Great. My follow-up is this. You certainly have talked before about industry consolidation and your desire to participate in it, but it feels to me like maybe you've been a little bit slower to build dry powder to sell assets. I know you've got some on the market right now, but can you talk about the pace, your desire to continue to shift the portfolio composition?

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

I might push back politely on that, Bill. I think if you step back, we have really been focused on our internal growth strategy, recycling capital. Keep in mind, we've already sold 13 assets this year for about $520 million. As you may recall, we used the first 12 of those for about $379 million. We used $350 million of that for the H&A secondary, where we bought back 14 million shares at a huge discount NAV. We continue to make progress obviously on our ROI project.

Obviously we've been laser-focused on improving margins and grouping up. We really believe that by executing those internal growth initiatives and doing it successfully, that's going to continue to strengthen (1) our credibility, (2) we hope to see a corresponding increase in the multiple, which really allows us to then go on offense. I have been a strong advocate for consolidation. Nothing has changed. I'd have taken this opportunity with the kind of enthusiasm that I have, but as you know, those things tends to be episodic and lumpy. I think we are positioning the company for long-term success, and clearly plan and expect to be a participant at the right time.

Obviously, the last two deals that have been announced are [inaudible] deal and now obviously the pending [inaudible] is a positive. We are the most fragmented sector out of all the landscape, and I do think that there are advantages of scale. Regarding our next phase of assets, we are -- if you think about it, remember our Top 25 assets really account for about 90% of the EBITDA. We do have some legacy assets and we'll break those. We've got a lot of trains running. We've got 5 to 8 that we're currently at various stages, none that are far enough along to report out, but we are making progress against our initiatives on continuing to recycle capital.

William Crow -- Raymond James and Associates -- Analyst

Okay, great. I'll follow up with you in person next week. Thanks.

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

Look forward to seeing you.

Operator

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

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Hi, Anthony.

Anthony Powell -- Barclays Capital -- Analyst

Hi, good morning. You mentioned that you expect your group pace for this year to be up 4% to 5% compared to flat pace at this time last year, which is a good increase over the past 12 months. What drove that? Was it all end of the year pickup or was there stronger than expected attendance at events?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

I think it's a combination, but I really want to give a lot of credit to Rob Tanenbaum and our asset management team, and really working in partnership with Hilton. We believe that we have a natural strength here, and that as you think about these hotels really continuing to group up, continuing to build our contract base allows us to shrink the hotels and yield our transient a lot more effectively to really grow all of our ancillary sources of revenue. I think you saw near-perfect execution of that in the second quarter, where we had huge group increases there. Obviously, we knew the third quarter was going to be a little softer, but even there we had a fair amount of business that we picked up in the quarter for the quarter and when we think about fourth quarter, our group pace is up about 2.8%, and 4.8% for the year. Again, very bullish on as we look to our setup and our positioning in 2019 and beyond.

Anthony Powell -- Barclays Capital -- Analyst

Is that contract growth, is that included in your pace or excluded in your group pace? Just for clarification.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Yeah, it's excluded.

Anthony Powell -- Barclays Capital -- Analyst

Okay. All right. So your group pace for next year is up 12%, which is obviously good. How do you expect that number to come in, I guess, when we're looking back 12 months from now?

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

We feel great about it. If anything, we expect and hope that would grow. But I think even if it's at 12%, keep in mind in our prepared remarks, we made the comment about 2019 citywide. If you just look at three or four markets, Honolulu is going to be down citywide next year 23% of room nights, 7 fewer events; Orlando down 6%, 6 fewer events.

While Park in our Hilton Hawaiian Village, we're up 25% our in-house group business. Orlando we expect to be just Bonnet Creek up 6%, but if you look at all three assets, we're expecting group pace to be up 11%. Even New Orleans expected to be down, for us to be slightly up. Of course, San Francisco, just had a significant year, as we all know, with citywide room nights being up 74% to 75%, plus or minus, up to $1.2 million, and our group pace for the two hotels, the city block that we have with 3,000 rooms, up north of 21%. So we really do like our positioning as we look out [inaudible].

Anthony Powell -- Barclays Capital -- Analyst

What percent of your expected group room nights are in the books now?

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

Anthony, it's 70% on the books right now. That's about 500 basis points greater than same time last year. The

Anthony Powell -- Barclays Capital -- Analyst

All right, great. Thank you.

Operator

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

Smedes Rose -- CitiGroup Capital Markets -- Analyst

Hi, thank you.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Hi, Smedes.

Smedes Rose -- CitiGroup Capital Markets -- Analyst

Hi. I wanted to ask a little bit, I guess about labor, which is in the spotlight a lot lately, going into 2019. I guess specifically, first of all, if you guys have any union contracts coming due next year? Then I think the bulk of your workforce is subject to labor contracts, and I'm wondering if you could just share what kind of the contract increases in labor are for next year and if that actually puts you at a relative advantage to maybe some of your peers who, kind of going potentially higher market rates or increases? Just maybe some color around that as we think about next year.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Yeah, if you think about it, and Rob and Sean can fact check me here, but I believe about 10,000 of the associates working on property, obviously they're employees of Hilton but managing the assets are represented by CBAs, and probably about 60% of our EBITDA. I also think it's important to note that Hilton has enjoyed really strong, long-term relationships with our union partners and Park has done nothing but continue to strength that and take advantage of that. So we think we're well positioned. Obviously, the Chicago matter has been resolved.

Obviously, there are current negotiations that we expect that will occur. They could occur as we finish up 2018 or bleed into early '19. Really in Boston, that the hotel in Logan and, of course, San Francisco, and in Hawaii and Honolulu. We are in a good position there. If you think about what happened in Chicago, the results were really what we expected and what we had budgeted, and that's really in the 3% to 4% range. Every negotiation will different. The package and corresponding work rules will be adjusted as well. But really enjoy -- I think we're -- and typically those contracts are 5 years, so when you look out to that, when those are set and agreed to gives us really a good footprint as we move forward on the labor side. We're cautiously optimistic there, Smedes.

Smedes Rose -- CitiGroup Capital Markets -- Analyst

Okay, thank you. I just wanted to ask too, obviously the group bookings performing really well into next year. Is that coming primarily post the change in the way the third-party brokers are paid, or do you think part of that was pulled forward with those changes? Or any kind of changes in booking patterns you're seeing there?

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

I think as Rob just pointed out, 70% of that is already on the books. The other thing I would point out is if you look at our trend during the year, last quarter we said 9.2% and that was before obviously the expiration. Could there have been a little bit of a tail there? Perhaps. But also keep in mind it's really been a strategic focus of ours and [inaudible] to group up and to take advantage of the natural positioning of this portfolio.

Smedes Rose -- CitiGroup Capital Markets -- Analyst

Great. Okay, thank you.

Operator

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

Richard Hightower -- Evercore ISI -- Analyst

Good morning, everyone.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Good morning, Rich. How are you?

Richard Hightower -- Evercore ISI -- Analyst

I'm good. Thanks, Tom. I appreciate the prepared comments, Tom, where you said that only a third of your group business is dependent on the citywide. I think I had that correct. So you're a little more insulated than perhaps the average group-oriented hotel in your comp set. But if it's possible, could you kind of help us understand the overall impact to your portfolio next year in terms of the citywide calendar being down? If you wanted to give us sort of a run rate on RevPAR growth in basis points, what the difference is, notwithstanding the fact that you guys were able to replace a lot of that independent of the citywide calendar itself?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Rich, I don't have that information available. I tried to in one of the earlier questions to give you a little bit of color there. Again, if you take some isolated cities -- Honolulu being down 23% on room nights, we don't expect we're going to be impacted at all, given the strong in-house group that we have. If you take even Orlando as another example, again, going to be down 6%. If you take our three hotels there, we expect to be up 11%. So just given the hard work that we've done in advance of that and knowing this would be a challenging citywide calendar year, a lot of credit to our asset management team and really our [inaudible] getting out in front of it. Even a New Orleans is going to be down double digits. We're still expecting to be up low to mid-single digits in group pace. So we'll follow up and make sure you get that. But I think the positioning for us vis-à-vis a lot of our peers, I think we're in a much stronger position.

Richard Hightower -- Evercore ISI -- Analyst

Okay, great. I appreciate that additional color, Tom. My second question, in terms of the capital recycling targets and everything, can you give us a sense of what you're seeing from your perspective on the buy side? I'm going back to the time of the spin. I think one of the original, part of the thesis was the buyer pool for the assets, the larger group, big box assets that you're targeting, the buyer pool is thinner, cap rates are generally wider. I'm just putting that in context of capital flows into real estate and into hotels are still very robust in general. Do you think that part of the thesis is still correct? Have you seen cap rates narrow between some of the bigger hotels versus smaller hotels? What are you seeing there?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

I think intuitively you would expect, obviously, if you're talking about bigger convention center hotels or luxury results, obviously just given the capital outlay. The checks are going to be bigger. I do think if they limited buyer pool, generally speaking, it's going to be either REITs, it's going to be private equity, it's going to be high net worth or sovereigns, family offices, so it is certainly competitive. There's no doubt about that. I think that's certainly one of the things that we've observed. I think the debt markets are still open and still attractive.

I think it's important to keep in mind the journey that we're on at Park. Remember, two years ago, we didn't have a name and office, and a fully filled out staff. Think about the wonderful progress that the team has made in that, both in recycling capital, both in just dividends alone. Think about dividends we've distributed, about $1.3 billion already in dividends. That does not include the potential dollar at the midpoint that we're talking about in fourth quarter. That also doesn't include the $350 million return of capital in terms of the H&A buyback.

So we've been very thoughtful about building out the team, being thoughtful, reshaping the portfolio, which then allows us again to go on offense. We expect to be here in the long-term, so you'll see us competing like many of our peers, but we still don't think the buyer pools, that finite type of asset is the same as in my past life, upscale limited service or assets that are trading at $50 million or up.

Richard Hightower -- Evercore ISI -- Analyst

Got it. Thank you, Tom.

Operator

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

Stephen Grambling -- Goldman Sachs -- Analyst

Thanks. I guess two follow-ups, one on Rich's question. Are you seeing any change in the availability of those big box assets you'd be interested in acquiring? Do you sense any change in seller expectations amid the recent market volatility? Then second, if you could just give us a sense for how you're thinking about competitive supply growth over the next, call it two to three years. Thanks.

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

There's a lot embedded there. I think regarding the number of assets, I think there are a number of assets that people are testing the market with. I think the competition you have in this environment that you're also competing with seller indifference or sellers can refinance as a way to reposition the asset or essentially sell the asset by refinancing. I don't think people are desperate, but I certainly think there are a number of hotels and natural partners for us that we look forward to doing business with as the years and months unfold.

Regarding the supply picture, demand continues to outpace supply. This isn't -- if you think back to what we saw in other cycles. Remember, in the last 50 year's we've had 6 recessions, right? But we've only had really 5 years, and I think in 3 specific recessions where we've had negative RevPAR. Obvious, the Great Recession, we obviously had the S&L prices. We had 9/11. Even in this environment, there's still running room in the cycle. I know we had a little bit of a blip there in September, but I think if you take Houston out of that, things are still, there's still running room.

One year, two years, three years, your guess is as good as mine. But certainly, as we look out to see what we're looking at into the fourth quarter, as we look into 2019, even our group pace for 2020 I think is in the 9% range. So we're cautiously optimistic that there is running room. It is getting more difficult. Construction costs are rising. Materials, labor, I think quality. So there's no doubt that it's keeping somewhat of a lid on supply and certainly where we're playing in the upper scale in the luxury sector.

Stephen Grambling -- Goldman Sachs -- Analyst

That's great color. Thanks so much.

Operator

Thank you. Our next question comes from the line of Patrick Scholes with SunTrust Robinson Humphrey. Please proceed with your question.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Good morning, just a quick question. Any remaining residual issues from the strike that you saw at your hotels? And then are there ongoing at some of the Marriott properties. Are you picking up any business from that?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Regarding the strike we had in Chicago, no residual issues at all. Everything has been settled. We're thrilled to have those men and women back. No ongoing issues, tensions, etc. A non-issue there. I'm reluctant to comment on where Marriott, I've actually not been following the play-by-play of that. Obviously, that will get resolved at some point, and there's nothing of any significance that we're seeing in terms of residual business to Park into our portfolio.

Patrick Scholes -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you. That's it.

Operator

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

Chris Woronka -- Deutsche Bank -- Analyst

Good morning, guys.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Good morning, Chris.

Chris Woronka -- Deutsche Bank -- Analyst

Good morning. I want to ask you a bit of a longer-term question which hopefully will be refreshing for you. As we think out about the current portfolio you have, we are cycle-agnostic. CapEx, we've heard from one of your peers that they're going to be stepping up on CapEx and it's targeted in ROI and everything. Where do you guys sit with current portfolio? Can you tell us if there have been any discussions with Hilton about larger projects coming down the road?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

It's a fair question. If you think about our portfolio, as I said earlier, again, really those Top 25 assets account for about 90% of EBITDA. Obviously, our Top 10, that iconic portfolio accounts for about 65%. We really want to be spending the money where we're making the money. The other thing that's unique about our portfolio are all these embedded ROI opportunities that we have. If you look at New Orleans, obviously we've got 9 acres there. Two parcels there on the river. I think that creates additional opportunities for us.

Bonnet Creek, as we talked about, we're planning to add another 70,000 square feet of meeting space. Plus Hilton is working on a Hilton Plus brand that we think our Hilton Bonnet Creek would be a great conversion opportunity. We are having preliminary discussions about both. Obviously, we converted [inaudible] DoubleTree to a Hilton, and we're seeing lift there. There are a few others in the portfolio where we think will make strategic sense, will create ROI opportunities at terms that we think will be in the high teens to low 20s. The reach is [inaudible] and Key West is another that we're looking at and that we'll [inaudible] at some point. A lot of work and thought going into it.

We want to be very thoughtful about how we're investing that capital. You've got to be careful sometimes when the plans come forward with their new initiatives. Those can be costly and there could be some trial-and-error with that. We certainly look forward to partnering with Hilton as they propose things and we revamp some technology, etc. We also want to be very targeted as to where we're spending capital and making sure we're getting significant return on investment for that.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. That's very helpful, Tom. A quick housekeeping question, probably for Sean. How do we think about the Caribe? I think you mentioned in the press release you're kind of up a net $5 million year-to-date. How do we think about that compared to what the hotel should generate when it reopens on an annual basis? Is there a give or a take for next year?

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

It won't necessarily get too much into next year. We always talked about this year being about $8 million, which is what we had forecast for the property prior to the hurricane hitting in '17. So we've targeted our business interruption claim process to match that expectation. As we get into next year, we'll certainly look to have business interruption continue while we remain effectively as a construction project through middle to end of Q1, and then even until we open up the main building about halfway through the year. So we'll still have some business interruption we'll look to bring in.

The question will be how much will we ramp up the property in the market that's there? Certainly, it's a little bit hard to predict at this point, given the conditions. But ultimately when we get open, I know this is an iconic property and one where I think when it ultimately gets open and makes a name and helps bring some visitation back to Puerto Rico. But it'll be a little hard to predict. We'll get a little more educated on that give you guys a little better stance as we get into early next year and give out our guidance.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very good. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Brandt Montour with J.P. Morgan. Please proceed with your question.

Brandt Montour -- J.P. Morgan -- Analyst

Hey, everyone. Good morning. Can you hear me?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

How are you? Yes, we can hear you.

Brandt Montour -- J.P. Morgan -- Analyst

Thanks so much for taking my question. Just curious on margins and your big picture margin goals. I was just wondering if you could give us an update on that, and specifically if the acceleration in the group pace that you're seeing, how that stacks up against the internal expectations and slide in those goals?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

I'll remind a little bit of background, and Rob can give you a little more granular detail. Keep in mind last year we were able to move margins about 47 basis points, about $12.5 million. This year, we've had a goal of 75 basis points, and again, about $20 million, and again, another 100 basis points next year. As Sean mentioned in our prepared remarks, we're up RevPAR 2.7% year-to-date, and now we're up 60 basis points despite the fact that obviously there's been noise with weather and a strike.

I'm really, really proud of the team. Just the number of initiatives that we have under way. I think we've got 20, plus or minus, and both from a revenue standpoint, cost savings, menu pricing, room pricing. Just a number of great things that Rob and the team are working on in partnership with Hilton that have paid dividends. As we look and continue to group up, we think that, but we're not at all retreating from what we've said vis-à-vis margins, and expect to continue to meet the goals that we've outlined.

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

Brandt, I'll just add on to that. Just to give you a great example, just from a room classification opportunity. At our Park 55 Hotel, we categorized 85 guest rooms and in this quarter alone, Q3, we generated $274,000 of revenue from that recategorization, which added $3 to the average rate. A customer in a hotel, we took back the reach operation. That will generate an annual quarter million dollars of EBITDA to us. So we're looking at everything and anything. We continue, our objectives remain the same. We're very excited as we go forward here.

Brandt Montour -- J.P. Morgan -- Analyst

Okay, great. Thank you. Then one more on the asset recycling topic if I may. How has in-bound interest from overseas buyers been trending, given the strength of the dollar and geopolitical noise and the like? Then maybe you could just talk about what you're seeing from the major buckets of buyer sites out there right now?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Yeah, there's still, to your point, given where the dollar is to the Euro, there's still a lot of activity through [inaudible] and we've sold 13 assets this year, 10 of those have been international. We've reduced our international footprint from 5% down to about 1.5%. Some of those remaining, we've got 4 international assets. They're on the list of assets that we'd like to move over time. Some of those are more actionable to date than others. But the buyer pool both internationally and domestically is still strong. Debt markets are attractive. Again, it's trying to find the right buyer for the right situation. We want to make sure that we maximize the value for shareholders. These are not fire sales. These are assets that don't fit our long-term, but we want to make sure, again, we're selling at the appropriate price.

Brandt Montour -- J.P. Morgan -- Analyst

Got it. All right. Great, thanks, guys.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

My pleasure.

Operator

Thank you. Our next question comes from the line of Shaun Kelly with Bank of America. Please proceed with your question.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Good morning, everyone. Just really one follow-up that I think is probably more of a clarification. Just going back to the prepared remarks and all the detail you guys gave on the group pace statistics. I was trying to reconcile. I thought there was a comment that said something about finishing up at 4.8%, but I don't know if that's a comparable period to what some of the other numbers that you've talked about that were really strong. So did I catch that number correctly? Or could you put that number just in context relative to the 12% you see right now? I think it was up 9% excluding San Francisco?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Yeah, the 4.8%, Sean, is really just for 2018. Obviously, the 12% is the group pace for 2019, of which it's 9%, a little over 9% if you back out San Francisco.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Okay, so the 4.8% is for this year?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

The 4.8% is for this year.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Great. And just the only other question I had was then, I think this is again just a clarification because I think you mentioned it earlier. The pull-forward, the group commission sales change at Hilton, which I think went into place somewhere like October 1st, it doesn't seem like you guys are going to see much of a deceleration, even though I think Hilton called out that they expect their numbers to slow a little bit. That's really just a result of how well you guys are doing on the group-up strategy? Is that sort of the right summary?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

That's the take-away, Shaun. It's been one of our key priorities. Again, working in partnership with Hilton, I think the track record shows. If you look at the group pace that we've been announcing, it continues to grow. Would there have been some negligible impact as a result, obviously, of that deadline? Perhaps. But we're really not seeing that.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Last thing would be, if you hit those numbers, Tom, what would this take your overall group mix toward versus your -- I think you've given some guidelines of where you'd like to get the group mix to over a longer period of time. Where would you be in '19 if you hit these types of numbers?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

That's a great question, Shaun. If you think we're at 31%, now we're a little over 30%. We want to go from 31% to 35% by 2020. If you look at prior peak, we were up at about 38% group. So we're hoping, obviously, that we get an incremental 100 basis points. Maybe a little more, maybe 150, but it's probably somewhere in that 100 to 150 basis points against the 400 basis point goal.

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Great. Thank you very much guys.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Thank you.

Operator

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

Robin Farley -- UBS Securities -- Analyst

Great, thanks.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

Hi, Robin. How are you?

Robin Farley -- UBS Securities -- Analyst

Hi, how are you? Just to follow up to your comments about making investments, spending money where you're making money and all of that. I understand that you're selective with the kind of investments you make. Since you're so much [inaudible] focused on the Top 25 properties. But is there any room do you think to, just based on what we're seeing some other REITs in the market negotiating to have the brand and management give financial help and incentives for the REITs to make these kinds of investments. Do you think there's opportunity for you to get a similar incentive?

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

It's a fair question, Robin. Obviously, I've been in the business a long time, as you know. Having worked with three of the Marriott companies and for Hilton twice. Those tend to be done as complex negotiations. I know one of our peers is probably from what they've announced, had similar conversations with another brand. My experience has been with brands, if there's certain initiatives that they want done, they can contribute dollars to that. They can provide preferred returns and also lower fees. All of that comes into play. We've certainly [inaudible] open to those as well when they make sense. But I do want to stress to the listeners though that we are really targeting our ROI projects that we know can create tremendous value for the shareholders.

We're seeing it already in [inaudible] conversion to a Hilton. Obviously, we expect the same. We expect tremendous success with Bonnet Creek as we look to add more meeting space and really give the property a lift up as we raise the brand in that sort of Hilton Plus concept, once it's been fully defined and announced are great examples of that. We think those are dollars well spent. There will be other initiatives. Technology and other things come to mind that we certainly will be open to talking with our current partner, Hilton, and future partners as well about those types of initiatives. But again, they have to make economic sense. They have to meet our return expectations.

Robin Farley -- UBS Securities -- Analyst

That's helpful. Thank you. Maybe just one last one. Just thinking about the Hilton book direct initiative. Can you give us a sense of where OTA mix and cost is for you versus a year or two ago?

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

Sure, Robin. During Q3, our OTA mix was 14%, up about 70 basis points. Year-to-date, it's up about 70 basis points as well, 12%. The increase though, when we look at it, it's really driven by two hotels that we were placing demand leverage to wholesale room nights, as well as non-repeating groups. So we were using that as another demand lever for us. But if you take those two specific out, our portfolio mix is down year-over-year when you normalize for these two unique situations.

Robin Farley -- UBS Securities -- Analyst

Okay, great. Thank you very much.

Operator

Thank you. Mr. Baltimore, there are no further questions at this time. I'll turn the floor back to you for final comments.

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

We appreciate the opportunity to discuss our third quarter results. We look forward to seeing many of you next week in [inaudible]. Safe travels. We'll catch up soon.

Operator

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

Duration: 57 minutes

Call participants:

Thomas J. Baltimore, Jr. -- President and Chief Executive Officer

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

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

Ian Weissman -- Senior Vice President, Corporate Strategy

William Crow -- Raymond James and Associates -- Analyst

Anthony Powell -- Barclays Capital -- Analyst

Smedes Rose -- CitiGroup Capital Markets -- Analyst

Richard Hightower -- Evercore ISI -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Brandt Montour -- J.P. Morgan -- Analyst

Shaun Kelly -- Bank of America Merrill Lynch -- Analyst

Robin Farley -- UBS Securities -- Analyst

More PK analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Park Hotels & Resorts Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Park Hotels & Resorts Inc. wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Motley Fool Transcription has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.