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Park Hotels & Resorts Inc. (NYSE:PK)
Q3 2020 Earnings Call
Nov 06, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to Park Hotels & Resorts, Inc. third-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ian Weissman, senior vice president, corporate strategy.

Please begin, sir.

Ian Weissman -- Senior Vice President, Corporate Strategy

Thank you, operator, and welcome, everyone, to the Park Hotels & Resorts third-quarter 2020 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 adjusted EBITDA.

You can find this information together with reconciliations to the most directly comparable GAAP financial measure in this morning'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 an overview of Park's current financial position as well as an update on operations; Sean Dell'Orto, our chief financial officer, will provide a brief review of third-quarter results as well as more detail 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.

Tom Baltimore -- Chairman and Chief Executive Officer

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. Unfortunately, the pandemic is continuing across much of the globe, and its impact has been profound on our industry. As we have adjusted and adapted to this new reality, I am pleased to report that Park has made significant progress on its near-term objectives while keeping an eye toward longer-term opportunities and more widespread travel resumes.

Since the onset of COVID-19, our priorities have been clear. First and foremost, to ensure the health and safety of our employees and hotel guests; second, reduce our burn rate by aggressively asset managing the portfolio, including the responsible suspension and subsequent reopening of hotels; and third, strengthen the balance sheet by raising additional liquidity, eliminating near-term debt maturities and extending debt covenant relief to a point when we believe the challenges of the COVID-19 virus will largely be behind us. I'll start with the proactive decisions we made to bolster our balance sheet and liquidity during the quarter. We worked diligently with our financial partners to further fortify our balance sheet and ensure the company is well-positioned to successfully navigate these unprecedented times by executing a strategic capital raise and extending our near-term debt maturities.

Accordingly, in mid-September, Park launched our second corporate bond offering, successfully raising $725 million of eight-year secured notes at very attractive pricing and eliminating the risk of impending debt maturities and liquidity concerns. I am incredibly proud of the collective efforts of our team and our partners to make impactful changes in such a short period of time. Finally, as it relates to the balance sheet, we remain focused on continuing to selectively sell non-core assets with net proceeds expected to be used to pay down debt. While the bid-ask spread remains wide, there is a significant amount of capital on the sidelines, and we anticipate a more active transaction market once the path to recovery is more apparent.

Turning to operations. Since March, our team has been focused on mitigating the impact of severely diminished hotel demand. We have undertaken several initiatives in order to reduce our monthly burn rate and maximize efficiencies in a low-demand environment. During much of the second quarter, our actions were largely defensive as we suspended operations at 38 of our six hotels at the height of travel restrictions and reduced operations at several others, ending the quarter on a more positive note with our first set of hotel reopenings in June.

During the third quarter, as we witnessed pockets of increased demand across our portfolio and moved closer toward a recovery, we opened an additional 14 hotels, including our 1,500-room Bonnet Creek complex of hotels in Orlando, which exceeded 30% occupancy during the quarter and the 1,600-room Hilton New Orleans Riverside, which averaged 42% occupancy. Among our drive-to leisure markets, occupancy for the quarter averaged over 30%, up from 8% in the second quarter. Key West continued to post very solid results with occupancy averaging 57% for both properties for the quarter. In fact, our Casa Marina resort in Key West, along with our Hilton resort in Santa Barbara and the Hyatt Regency in Mission Bay in San Diego, all impressively held rate relative to last year, supporting the appeal to drive leisure resort locations.

Our teams also continue to find areas of incremental demand, such as the NBA-related business at the Waldorf Astoria at Bonnet Creek as well as university-related demand at the Hilton and New Orleans, which resulted in $9 million of revenue for the quarter. Thus far in the fourth quarter, we have opened two additional hotels, the Caribe Hilton in Puerto Rico in the Hilton Lake Buena Vista in Orlando, and we currently plan to open both Hawaiian hotels in the coming weeks. In mid-October, the state of Hawaii began accepting proof of a negative COVID test taken within 72 hours of departure to bypass a mandated 14-day quarantine. Data from these first few weeks show strong demand with airline loads at over 50% and forward trends for airlift to the state are also encouraging with Hawaiian airlines reporting that they expect to reach over 50% capacity by December while both United and Southwest expect to significantly ramp up flights into Hawaii over the next two months.

Based on these initial positive receptions and as we continue to monitor the demand patterns in reaction to these testing protocols, we currently plan to open the Hilton like a lower village around mid-November, and we expect to open 793-room Rainbow Tower at the Hilton Hawaiian Village by mid-December. All combined, we would expect to have 50 out of our 60 hotels opened by year end and with those hotels representing 74% of our total rooms. In terms of the remaining 10 suspended hotels, four are in San Francisco. The city's lengthy restrictions on travel has suppressed leisure demand, and it's irresponsible healthy building ordinance has added unreasonable incremental cost.

And with higher occupancy thresholds needed in New York and Chicago, coupled with little or no business across these markets during the winter months, the New York Hilton Midtown and the Hilton Chicago will remain suspended through the rest of the year and likely through most of Q1 in 2021. As I emphasized on our last call, we do not expect to see a meaningful increase in demand until vaccines and therapeutics become widely available. Given this current situation, we remain disciplined in our approach to hotel reopenings, moving forward only when the economic benefits outweigh the cost in order to preserve our liquidity. Turning to forward trends.

While our property teams and brand partners are working hard to generate demand and reassure the public that the hotel brands have instituted top-of-the-line cleanliness standards, ongoing concerns over the surge in cases through the winter months will likely dampen both business transient and group demand over the balance of this year. Overall, we expect leisure to continue to outperform during the fourth quarter and net positive for Park with 40% of our hotels located in drive-to locations as we continue to witness solid trends among our resorts in markets like Key West, Santa Barbara and San Diego. We are also encouraged by the expected reopening of our properties in Hawaii and the initial airlift to the state indicating that there is indeed pent-up demand for leisure-related travel to Hawaii. We do note that just this week, the state of Hawaii changes policy and now allows travelers from Japan to also bypass quarantine with a proof of negative COVID test.

So we are hopeful that this will lead to a similar rebuilding of demand from Japan over the coming weeks and months. On the group side, there was little demand for the balance of 2020, and group bookings in the first half of 2021 continue to weaken as meeting planners look to cancel their events a quarter or two in advance. However, group pace for the second half of 2021 is holding it clearly dependent on medical solutions being available by early next year. Over 25% or 450,000 room nights of the COVID-canceled group business has been booked into future years with approximately 6% booked into the second half of 2021 and 5.5% booked in 2022.

In this environment, we are laser-focused more than ever on cost savings and opportunities to reimagine the business model. As a result, we took the very difficult, but necessary steps, to reorganize property-level management across our portfolio, which will result in $70 million of savings on an annualized basis, equating to a 200-plus-basis-point improvement in margins based on 2019 revenue levels. While these savings are significant, we also continue to work with our brand partners to identify ways to eliminate cost from the business model, including revisiting both operational and capex brand standards, complexing positions, reinventing the food and beverage model and reducing above-property expense allocations. I'm very proud of our progress to date, and we'll continue to keep you apprised of additional initiatives and the expected improvements to the bottom line.

While there are many challenges still ahead, I am reassured by the incredible work our team has done to date in managing through this crisis and positioning Park to successfully navigate through this through the other side. I also believe in our country's resilience and do not believe that virtual mediums will replace the fundamental need people have to connect in person. While we have limited near-term visibility on when demand will return to normal, we have an incredibly strong platform with high-quality assets that should realize outsized benefits and operating leverage as demand recovers, and we will continue to work tirelessly to serve our stakeholders and position Park for long-term success. 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.

Sean Dell'Orto -- Chief Financial Officer

Thanks, Tom. Turning briefly to our third-quarter results. We ended the quarter with an 86% RevPAR decline as several of our big-box hotels remained suspended during the quarter. That said, we continue to witness incremental improvements in demand with hotel occupancy for consolidated opened hotels, improving sequentially from 30% in June to 32% in July, 39% in August, 42% in September and 43% in October.

To no surprise, our drive-to leisure resorts experienced solid demand with occupancy averaging 45% in September. While open hotels in airport and suburban locations reported September occupancy of 40% and 30%, respectively, occupancy at our open urban hotels averaged 45% in September, although the strength was driven, in large part, by the Hilton New Orleans Riverside, which recorded 74% occupancy for the month, mostly due to university-related demand. Overall, our encouraging results further highlight our strategic and disciplined approach to hotel reopenings, which takes into account restrictions set by state and local ordinances, airlift capacity, demand and booking trends, alternative sources of demand like we captured in both New Orleans and Orlando and consolidation of demand into neighboring Park hotels. This is another great example of the collaborative effort between our operating partners and asset management team which helped to drive these great results.

In terms of profitability, as of September, one-third of our 39 open consolidated hotels were at breakeven EBITDA or better, producing a combined EBITDA of $3.2 million with top-performing hotels, including the Hilton Santa Barbara, which generated $1.5 million of EBITDA; Casa Marina, which exceeded $500,000; and Hilton Riverside of approximately $350,000, thanks, in large part, to the Xavier University business, which is expected to remain with the hotel through May 2021. As demand improved, so did our monthly burn rate, which improved from $59 million during the second quarter to $50 million for the third quarter, helping to further extend our overall liquidity to over 30 months. Looking out over the balance of the year, the operating environment is expected to remain challenging with group revenues projected to be down over 90% and RevPAR declining over 80% with a slight improvement in demand as occupancy should continue to improve another 150 basis points from the third quarter. Turning to the balance sheet.

As Tom noted in his comments, we are incredibly pleased with our ongoing efforts to fortify the balance sheet, having executed another very successful bond offering in late September, issuing $725 million of eight-year bonds at a very attractive 5.875% coupon and three times oversubscribed. The transaction, which further demonstrates our ability to access alternative sources of capital, had several intended effects, including helping to further enhance our liquidity, improving our debt profile by extending near-term maturities and also further diversifying our capital sources while reducing our exposure to bank debt, which provide us with a longer runway to successfully navigate through this crisis. Specifically, net proceeds from the offering were used to fully repay a $631 million term loan maturing in December 2021. We also successfully negotiated a two-year extension of a majority of our revolver, which was also set to mature in December '21.

Finally, given the ongoing uncertainty around the slope of the recovery, we successfully negotiated additional covenant relief, pushing out covenant testing until March 31, 2022. As of quarter end, the balance sheet is in very solid shape with net debt totaling $4.2 billion, while our liquidity stood at $1.6 billion, including $474 million available on our revolver. That concludes our prepared remarks. We will now open the line for Q&A.

[Operator instructions] Operator, may we have the first question, please?

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question conference Smedes Rose with Citi. Please proceed with your question.

Unknown speaker

Hi. Good morning. This is [Inaudible] on for Smedes.

Tom Baltimore -- Chairman and Chief Executive Officer

Good morning.

Unknown speaker

Just are you thinking about a more meaningful way to deleverage, whether bringing in capital partners or looking at asset sales?

Tom Baltimore -- Chairman and Chief Executive Officer

It's a great question. First, if you think historically about the Park playbook, obviously, a low-levered balance sheet has really been part of our DNA brought after the Chesapeake deal, and we had about $470 million in asset sales. And we brought our debt down -- net debt to EBITDA down to about 4.2 times. We obviously have had to lever up slightly given the global pandemic that none of us planned for, but it is clearly our intermediate and long term to get down to a sub- four level.

We've made a great progress over the years, selling 24 assets, including 14 international. So it's a very seasoned and experienced team as it relates to transactions. We are in active discussions on asset sales. As we've said on the previous call, we thought the COVID discount was too wide.

It was 30% to 40%. There's a tremendous amount of capital that's sitting on the sidelines, less debt capital available right now. But we do believe that that COVID discount is going to narrow, and we are cautiously optimistic that you will see asset sales from us in the coming months. And the use of those proceeds will be to delever and continuing to strengthen the balance sheet and our liquidity profile.

We do not, at this point, see the need for any operating partners this time, and we certainly do not see the need for a dilutive equity offering at this time.

Unknown speaker

Great. And then just one follow-up. Just the way you're thinking about strategy, would you want to reduce your exposure to large group assets?

Tom Baltimore -- Chairman and Chief Executive Officer

It's easy to look today and see, obviously, given the fact that, obviously, Park's got more exposure in certainly some of the most affected markets. But I would also say that when we get on the other side of this, and I do believe passionately, one, in the great men and women in the scientific community that are working on medical solutions. And that once we've got the medical solutions in place and hopefully the adoption rate rising and that people are back to living in more normalized, that having the footprint that we do in some of these great cities will be really a strategic advantage for Park. So we'll look around the edges in cull of certain markets, and there are obviously some markets in the Southern belt that I think are improving in terms of their status and the risk-return nature of investments there, but I certainly wouldn't bet against a New York long term or a Boston or a D.C.

or Chicago or even San Francisco, in L.A., and Hawaii for that matter. I really do think that there will be significant demand over time. And clearly, there are huge barriers to entry in terms of getting new development done, and so I really see those as real advantages for Park over the intermediate and long term. More painful for us today, but as we get to the other side, that advantage for Park will be a huge tailwind.

Unknown speaker

Great. Thank you.

Operator

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

Tom Baltimore -- Chairman and Chief Executive Officer

Hi, David.

David Katz -- Jefferies -- Analyst

Hi. Good to hear everyone's voices. Hope you're all doing well. And this may be a follow-up to the answer you just gave, Tom, which is thinking about the long-term value versus the near- and intermediate-term value of urban hotels and what your collective view is around business travel and the trajectory of that recovery, just balancing the long term with the near term of getting to your goal of leverage and other financial metrics, just urban versus not.

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. David, it's a fair question. And obviously, in part of the answer based on our strong belief that the urban centers are still going to be a very attractive investment thesis. I'm reminded of many years ago, there were a lot of people that needed the bet that we ought to be in independent hotels in New York and other markets at the expense of branded hotels, and I don't think that worked out as well for many people that made that singular bet.

And I would respectfully submit, when you think about New York, it's incredibly challenged today. But when you think about the reset that's going to occur, I know Barry Sternlicht said that he'd thought perhaps 50% of the hotel supply would go away, but let's assume that it's only 25% and certainly based on the run-up that we saw in supply over the last decade. And given the fact that the municipality is also putting additional restrictions in place that will make it more difficult to construct. We have to believe that one of the greatest cities of the world will come back.

It will be choppy right now, and we're obviously in the eye of the storm. So it looks easy to save us run from it, but I do think it would be intermediate and long term that it's a city like that. And again, those cities I mentioned, I do believe that we're going to come back. It naturally leads to your follow-up question that's regarding kind of remote working.

I do believe, obviously, that Zoom and others have had an impact. I would say that they are the beneficiaries of what's happening today, but you never lose the benefit of having people together, whether that's a sales call, whether that's the personal connection, whether that's the group meeting. And even those companies that I think are going to perhaps use a little more -- be a little more flexible and remote working, I could make an argument for you that the need for group business will be even greater the need to bring their people together for celebrations, for incentive plans, for recognition, for training. And I think that would, in fact, make our meeting platform in many of these major cities even more valuable.

So we like our footprint. Would we cull some exposure in some markets? Sure. We certainly like -- have a little less exposure in parts of the West Coast. We were blessed with two extraordinary resorts in Hawaii, Hilton Hawaiian Village, that you could never replicate.

And given the footprint, the 22 acres, the nearly 3,000 rooms, it's an incredible story over 60 years and generation still going. I would bet that that will be -- continue to be a great investment thesis for generations to come. So hopefully, that answers your question.

David Katz -- Jefferies -- Analyst

You have. And if I may sort of follow that up and just overlay those comments around the notion of how your definition of non-core versus core may have evolved over the recent past. I'd love to hear your thoughts on that, too, please.

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's another great question, David. If you look at the portfolio, clearly, we sit today with 60 hotels. Our top 30 hotels that we also refer to and provide data on, obviously, account for about 90% of our value.

I would say, respectively, if you would compare us to perhaps our closest peer and our host, I think our top 30 compare really well to their top 40. I think those really capture the investment thesis and where we're focused. As I mentioned, there are markets that I think will continue to grow and perhaps will be beneficiaries of perhaps some population migration. I would see Denver as certainly picking up.

I would see Austin continuing in parts of Texas. I would say, Nashville. So clearly, those are markets that I think will be -- become a little more attractive. You can say Nashville has certainly had an onslaught of supply, but I could see those being extensions of where we're investing today.

But I certainly would not be walking away from oceanfront in Miami or the footprint that we have in Hawaii, San Francisco or certainly, the resort that we own jointly, conventional hotel. We own jointly with Sunstone in San Diego. So clearly, we tend to be focused on brands. We believe it's a brand team and certainly believe that Hilton Marriott and Hyatt certainly [Inaudible] and given the ones they have today, we expect that, that's only going to change and continue to expand over time.

David Katz -- Jefferies -- Analyst

Thank you so much. Appreciate it.

Tom Baltimore -- Chairman and Chief Executive Officer

Yeah. Thank you.

Operator

Our next question comes from Rich Hightower with Evercore. Please proceed with your question.

Rich Hightower -- Evercore ISI -- Analyst

Hey, good morning guys.

Tom Baltimore -- Chairman and Chief Executive Officer

Good morning, Rich.

Rich Hightower -- Evercore ISI -- Analyst

So Tom, I think you may have helped answer my question here, but just on a couple of your CMBS assets. So if my arithmetic is correct, there's close to maybe $450,000 a key of CMBS debt on Hawaiian Village. Obviously, it's an irreplaceable sort of asset, and there's a lot of value in that. But maybe if you could just comment on the -- your view of long-term value of that asset in relation to the debt.

And then likewise, I think this morning, I saw just a blur of that Hilton Union Square Parc 55 CMBS has placed on a CMBS watch list. Now I'm sure that's just the technicality. And if you're still current on debt service, it's probably not a big deal. But maybe just some additional color behind that as well, if you don't mind.

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. A couple of things, Rich. If you look at the entire portfolio, we estimate replacement cost, and that's probably the -- all 60 assets, but let's just sort of focus on the top 30. You're about $16.5 billion.

So you're somewhere at about $770,000 a key when you look at that. And where we're trading today, somewhere south of certainly $7 billion all in enterprise value, so we're trading at a discount to replacement cost somewhere between 65% and 70%. Those are eye-popping numbers. And when you think about something like Hilton Hawaiian Village with, again, five towers, nearly 2,900 rooms, 150,000 square feet of meeting space, another 150,000 square feet of retail, impossible to replicate that.

Obviously, we've got the CMBS mortgage of about $1.275 billion doesn't mature at again some time until '26. We are not, at all, worried about that. We think that's an asset that will continue to grow and be the dominant performer that it has been for generations. That's one.

Regarding San Francisco, we're obviously the two assets there. We're in the eye of the storm right now. Sean can correct me in terms of the amount of debt, I think it's $400 -- I guess.

Sean Dell'Orto -- Chief Financial Officer

$725 million.

Tom Baltimore -- Chairman and Chief Executive Officer

$725 million over of the two assets. We are current building to the cash burn rate or debt service for all of our assets. We are covering without issue. We see no issue in the near term there.

There are no other issues that we need to be concerned about. That will mature in 2023. And we certainly believe with confidence, given all the great work happening in the scientific community that that will be in the rearview mirror, that both themselves will be reopened and performing as well as they have the sort.

Rich Hightower -- Evercore ISI -- Analyst

OK. I appreciate that color, Tom. And then just a question on future supply. Obviously, there's a lot of discussion right now between owners and brands and maybe in the context of operating expense savings, the owners for the first time in a long time have maybe gained some of the upper hand in those negotiations.

But if you listen to the brands on their calls, obviously, the new unit growth sort of post-COVID engine is cranking as we speak. And so how do you think about that particular issue, even if there's a lull in supply in the next sort of near term? How do you think about it over the longer term?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's a great question, Rich. And I -- as you know, given my background, having worked for three of the Marriott companies and having worked for Hilton twice, I perhaps have a unique perspective in brands, our wonderful brand partners, they create brands, and they're all about distribution. I think we were getting out of balance right before COVID, and I don't think perhaps you and many of your peers would disagree, I think, this crisis is forcing a reset and a wake-up call.

While their businesses are capital light, their businesses are also dependent on having a really healthy ownership community. The owners and the franchisees have been hurt, and they've been hurt hard. I suspect that you will see these supply numbers continue to reduce over the near and intermediate timeframe. I think there'll be less debt capital.

I think you're going to see less development, and so I would respectfully refute some of those pretty optimistic growth scenarios they have. In the select-service side, that business has become more and more like a commodity and newer, fresher wins. So for those older assets, I do think you see a replacing. But in terms of the supply growing at the kind of clip that we've seen in the past, I just don't -- I don't think the math will compute.

And I feel pretty strongly about that. I also think that this crisis has really forced all of us to rethink the operating model. And as we pointed out in our prepared remarks, we've already taken $70 million in cost out. That's over 200 basis points and that's non-union hotels.

That hasn't even gotten to the point of what I think is a real opportunity to sit down with those employees, represented by CBAs and find a better balance there. And I think this crisis is going to really force that kind of dialogue as well. If you look at supply and the impact it has on Park, we have given our footprint much less supply risk than almost all of our peers, so we see that as a competitive advantage as we move forward. But clearly, in New York, take your pick, is it 25% or 50% of the supply that goes away, look at Chicago, there will be certainly significant reduction there.

There's going to be more distress and more pain if there's going to be conversions. Is that conversions into residential, is that into workforce housing, is that going to be homeless shelters. There's going to be a reduction in supply that's naturally going to come out of what's an extraordinarily unprecedented impact on on our industry.

Rich Hightower -- Evercore ISI -- Analyst

All right. Thanks for the comments. Tom.

Tom Baltimore -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Anthony Powell -- Barclays -- Analyst

Hi. Good morning. Just a question on Hawaii. In terms of what do you think in terms of demand there, and where those customers are being sourced in the U.S.? And maybe on Waikoloa, is the Big Island still not opting into the testing program? And how is that maybe impacting demand for that property versus your Hawaiian Village property?

Tom Baltimore -- Chairman and Chief Executive Officer

Anthony, all great questions. Clearly, the governor lifted the 14-day quarantine. And in mid-October, he replaced it with the 72-hour negative test to have approved to a negative test. He's also doing that for Japan, as we announced during our prepared remarks.

Let me frame COVID for a second for listeners. There's been about 15,000 cases in all of the Hawaii, among the least impacted across our grade nation and only 219 deaths. Now I don't want to minimize that any loss of life is horrible. When you look at the scope and the devastation, it's really been pretty minimal on the islands of the Hawaii.

We do believe that there is significant pent-up demand, and if you look historically, there's always been really short booking patterns. To answer your question, a lot of the demand, coming West Coast. And as we look out and as we said in our prepared remarks, Hawaiian is already providing good data. The Q4 schedules are looking at probably 35% to 40% of the 2019 levels.

They expect to be about 50% in December. United and Southwest are also significantly ramping up over the next two months, and they expect the Hawaiian airlines, so they expected the summer 2021 to be 15% to 25% lower in the 2019 level, so also encouraging. For us in the Hilton Hawaiian Village, we're going to open in mid-December the Rainbow Tower and Hilton Hawaiian Village will, I hope, to open here in the next week or so. But in the Hilton Hawaiian Village, if you just think about the Rainbow Tower, one of the five towers that we will open, they're looking at probably 600 the nearly 800 rooms selling out or selling it 600 of the 800 during the week with Christmas.

Now that may only be 20%, 25% of the overall campus, but we're only opening one tower. So that's a really good signal and a very good start. ADR probably down about 20%, but that's encouraging. And if you think about Hilton Hawaiian Village, Hilton Waikoloa Village, we're looking at probably 200 to 300 of room nights in what's obviously been a reduced hotel [Inaudible] timeshare, 200 to 300 out of the 600 rooms applicable to the hotel.

So again, really good signals already, and I think really confirms that there's a lot of pent-up demand. So we remain encouraged. Hawaii, one of the special places, if you think historically, about 8.5 million visitors to the island and about 62% of that coming out of the U.S. and about 17%, about 1.5 million of that coming out of Japan.

So we're encouraged, and we think that this is a positive first step in that process. We also hear that, to your final question about the Big Island, and that we understand that the mayor is considering relaxing such as the second level of testing that only apply to 20% of the people that arrive and we begun randomly. So we also think that will be less of a burden and also will be an encouraging step as we move forward in this journey.

Anthony Powell -- Barclays -- Analyst

Got it. And maybe for Sean, I just wanted to confirm, when you were selling assets in the past, an issue was kind of a low tax basis of the portfolio. Given the losses this year, that probably shouldn't be an issue, but I wanted to confirm that your impairment that you took in the first quarter would be fully -- I guess, be able to use as losses to offset any taxable gains on asset sales in the future?

Sean Dell'Orto -- Chief Financial Officer

Anthony, good question. Related to -- we have a five-year period after the spin, where we are subject to building gain tax. So any kind of losses we take operational essentially would not offset Big, but thankfully, that only extends through the beginning of next year. So the assets we sell today, or in the next 12 months, would ultimately be ones where we kind of feel like we have a efficient solutions there, whether it's 1031 or whether it might be kind of Chesapeake as at what we have on the basis from the transaction from last year.

So in the near term, we still kind of -- are eyeing on net limitation longer term. Obviously, we'll have losses that will continue to carry through and we can use to offset gains going forward as it relates to distributable income for dividends.

Anthony Powell -- Barclays -- Analyst

Got it. Thank you.

Operator

Our next question comes from Ari Klein with BMO Capital. Please proceed with your question.

Ari Klein -- BMO Capital Markets -- Analyst

Thanks. So of the remaining hotels that are closed, can you talk a little bit about the San Francisco market specifically and how you're thinking about when to open there given some of the unique challenges in that market?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. I think Sean did a great job in the prepared remarks, kind of walking through. I mean, we are being incredibly disciplined about the metrics we're looking at in terms of demand patterns. If you think about San Francisco, we've got the JW Marriott opened, the Hyatt Centric.

They never closed. So we had medical personnel. We got airline crew. We have first responders.

Both of those hotels have been averaging occupancy in the third quarter and on high 20s. And that, in fact, has continued even until October for the 28%, 29%. So that's a good sign we're being able to maintain. But given the fact that there's a little or no citywide business, there's no -- little or no business transient.

You've got remote work being strongly encouraged or mandated by the city, growth in the remaining four hotels, just doesn't make sense at this point, and we actually will lose less money by keeping them closed. And again, one of our primary objectives is continuing to keep the cash burn rate as low as possible, and you've seen the great progress that we've made here. Regarding the healthy buildings ordinance, I think our remarks were clear. It is unfortunate.

It's not a safety bill. It's nothing more than a job's bill, and it is not helpful for either our associates and workers or guests, and we will continue to monitor, and we think demand is sufficient. We'll make the assessment against whatever incremental operating costs there are before we reopen. So this is a very experienced team of men and women.

We're going to be thoughtful about how and when we reopen, and we believe in San Francisco over the long term, no doubt, one of the great cities of the country, it will recover. We will get to the other side of this. We think in the near term, it's really important to be prudent and disciplined in the reopening process.

Ari Klein -- BMO Capital Markets -- Analyst

And then just a quick follow-up on Hawaii. I know it's early with that change to Japan specifically, but have you seen any -- from a booking window standpoint? Any kind of initial demand trends from that market?

Tom Baltimore -- Chairman and Chief Executive Officer

We -- no, we haven't. Again, it's early. And again, this is what we hear, and this is recent in terms of Hilton Hawaiian Village. If you think historically, in terms of the visitation there, about 30% of the business into HHV, HWV, in the Waikoloa, about 30%, 63% of our international demand, about 223 room nights, if you look back to 2019, were from Japan.

So over the last 30 years, it's been stable. It's been reliable. We fully expect that that will continue, but it's too early, I think, to give that -- give anymore data there. Clearly, as we gave some color on what we're seeing already, particularly the holiday season is very encouraging coming, again, mostly the U.S.

and coming really out of the West Coast.

Ari Klein -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

Our next question comes from Dori Kesten with Wells Fargo. Please proceed with your question.

Dori Kesten -- Wells Fargo Securities -- Analyst

Thanks. Good morning everyone.

Tom Baltimore -- Chairman and Chief Executive Officer

Hi, Dori. How are you?

Dori Kesten -- Wells Fargo Securities -- Analyst

I'm good. How are you?

Tom Baltimore -- Chairman and Chief Executive Officer

Great.

Dori Kesten -- Wells Fargo Securities -- Analyst

So I think most would agree that prior-peak EBITDA for The Reach should return before prior-peak RevPAR, and some have thrown out and Chesapeake gains in margins can be 100 to 200 basis points. Is there anything specific to your portfolio, whether asset size or location or gains, you expected but hadn't yet realized from Chesapeake that could put you out of that range, either plus or minus?

Tom Baltimore -- Chairman and Chief Executive Officer

You broke up a little bit, Dori. Maybe you can just ask the question again to make sure.

Dori Kesten -- Wells Fargo Securities -- Analyst

OK. So I was saying that I think the expectation is prior-peak EBITDA for Reach should return before prior-peak RevPAR, and some have thrown out that the gains in margins could be 100 to 200 basis points. And so I was just asking, is there anything specific to your portfolio, whether it's gains that you expected from the Chesapeake portfolio but haven't yet realized, location or asset size that could put you out of this range, either positive or negative?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. I think it's a great question. If you think back to our Chesapeake deal, we made the observation that there were $24 million in synergies. We had realized about $20 million of that by February.

And that was both overhead and that was both redoing management contracts. So we were well on our way there. We were confident given the tailwind that we saw, the tailwind that we saw both in renovated properties, both in applying my asset management strategies so we were very, very encouraged there. And we still are, over the long term.

I think a couple of big things that are going to help as part of the reset to the point that we made about $70 million in expenses that we've already taken out of the business, again, based on 2019 levels. That's well over 200 basis points in margin there, so I don't disagree with the colleagues if they use the range of 100 to 200 basis points. I might even be a little more aggressive and say that Park could be on the higher end of that as we look at it. I think there's a real reset that's occurring.

One of the things -- one of the nice benefits coming out of this crisis is that the open, honest dialogue between owners of the brands and recognizing that we've got to have a reset. We've got to add advances in technology. Obviously, there's going to be stay -- less stay-over cleaning in some form of fashion depending on what guests like. Clearly, there's going to be a reset on food and beverage.

I think much of this is going to end up and going to be either semi-permanent or permanent, which I think are also going to continue to improve margins over the intermediate and long term. So I have no problem saying confidently 100 to 200 basis points in margin benefit. And I think on the Park's side that we'd be on the higher end of that.

Dori Kesten -- Wells Fargo Securities -- Analyst

Perfect. Thank you.

Tom Baltimore -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Neil Malkin with Capital One Securities. Please proceed with your question.

Neil Malkin -- Capital One Securities -- Analyst

Good morning, everyone.

Tom Baltimore -- Chairman and Chief Executive Officer

Good morning.

Neil Malkin -- Capital One Securities -- Analyst

First question, with the brand standards and a lot of the changes happening, it seems like it's the out-of-room revenues or outlets that are going to be most impacted. Just wondering in some of your larger hotels, group-oriented hotels, what do you think happens to that space? After those things are shut down or reduced or whatever you call it, how do you plan to get economic use out of the space? One of the things we've heard is that as office footprints shrink, they will turn to hotel space as a sort of same-day or temporary office meeting space. Just curious on your thoughts because that's a big component of your total revenues.

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's a great question, and I think your comments are really spot-on. I think what you're going to see, and we're already seeing evidence of that, whether it's a day office, whether it's setting up for incremental training. Do we end up being more of a satellite for a lot of the -- for the offices and people decide well, I'll need less office space, and I can recapture some of that, whether it's training, whether it's celebrations, whether it's incentive travel, I can recapture some of that by taking over or utilizing the expansion -- the expanded meeting space that many of us have, and particularly on the Park side.

We see that being a huge advantage for us, in particular, many of the urban centers. So we see that as a real net positive. And that, in many respects, can be far more profitable depending on how it's structured and perhaps on the food and beverage business as you know, which historically, the Banquet business has been profitable, but other parts of it have been less profitable. So we see that as an opportunity moving forward.

Again, this crisis has forced all of us think differently. What we've done with the NBA, what we've done, obviously, with the Xavier University of New Orleans. We have just been as creative as possible, and everybody is forced to think out of the box here while finding incremental sources of revenue.

Neil Malkin -- Capital One Securities -- Analyst

OK. Other one for me is maybe a broader question, Tom. Just in terms of being a public REIT, public lodging REIT, I mean, if you look at the lower margin of the asset class cyclicality, obviously wilder swings in public equity pricing. And you also layer on top the need to have to pay out a significant part of your precious capital, and the fact that you have to -- you're mandated to use third parties to manage your hotels.

I mean, does it -- do you ever think about the pros and cons of being public? And do you think it makes sense long term for hotel REITs to remain public?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's an interesting question. Obviously, it's a fair one to ask right now, and we're in the worst of times. But having been in this business for a long time and also having run a private equity platform, look, I think the access to public markets, whether that's on the equity or the debt side, I also think given the scale and, candidly, the lower cost of capital at some point in the cycle.

This certainly is a very viable platform. Tougher today, but I think we all understand why it's tougher. I do think that the crisis really gives us an opportunity for a reset, and I think that there's an opportunity to continue to expand and build on that in the future. We will do what's in shareholders' best interest.

And so we -- I always said that -- and that includes whether that's selling assets, selling the company, we will do what's in shareholders' best interest and create the most value.

Neil Malkin -- Capital One Securities -- Analyst

Appreciate it, Tom.

Operator

Our next question comes from Brandt Montour with J.P. Morgan. Please proceed with your question.

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

Good morning, everyone. So just a quick question on some of the stats you guys gave in your release. On just the open hotels, looking at August and September monthly results, looks like you guys found some pretty nice gains in occupancy there, and then into October. But then rate retrenched a little bit, and it looks like that's a comparable set of hotels.

So just curious, sort of broader elasticity -- price elasticity of demand that you're seeing, was that sort of by design to take pricing back down? Or is it more of a function just of mix moving into the fall?

Sean Dell'Orto -- Chief Financial Officer

Brandt, I mean, kind of a quick answer to that is really truly is in the New Orleans Riverside impact, given the Xavier contract we had in there and the amount of rooms they've taken, which is, obviously, as we mentioned, a great piece of business for a hotel that is mainly relied on group business that won't be there certainly through the first half of next year. So that business came online mid-August, ramped up as the students came across [Inaudible]. So it's really about a 400 to 500-basis-point impact to the portfolio on a given month, but that hotel alone to the rate. So if you kind of removed that, you kind of see things more in line, or more normalized on the rate decline.

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

That's really helpful. And then just a follow-up. Curious how the game plan -- what the game plan is for bringing back sort of opex as you move above the breakeven level for your hotels, which those 37 hotels in September did do. So just curious, what the strategy is, are you going to be managing for a breakeven for the next several points of occupancy or are you going to be trying to maximize cash flow?

Sean Dell'Orto -- Chief Financial Officer

I think that's the name of the game is kind of the zero-based buildup aspect here, so we're going to be very much focused on every kind of oxygen point level as to how we're bringing back any expenses. I think as we look at quarter over quarter, if you look at the flow-through as we've opened hotels and rent hotels, on the room side, we're 80% on flow-through and on F&B, which is, obviously, not bankrupt in catering. It's just the outlets, we're flowing through about 40%. So we're very, very smart as we kind of build up and ramp up the occupancy.

And these hotels, they will continue to do so. So that's -- just because we breakeven doesn't mean we start opening up the expense line items. We need to make sure to be -- we're maintaining our share. We need to make sure that we are appealing to the guests and their needs.

So certainly some conversations at certain times about whether or not we're augmenting the offerings. And on the F&B side, we're very thoughtful about that and the amenities we're providing to the guests. But clearly, we're seeing some -- we're getting certainly some views as we open up some of these hotels are operating at 60% to 70% occupancy that we kind of garner some of the learnings there to kind of apply to other assets and they kind of come through, but very thoughtful on how we do that, so we don't really have a lot of numbers and answer to give you at this point, Brandt, but I think certainly it's going to be very disciplined as we bring this business back.

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

Got it. Thanks for the comments. Good luck.

Operator

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

Chris Woronka -- Deutsche Bank -- Analyst

Hey. Good morning, guys.

Tom Baltimore -- Chairman and Chief Executive Officer

Good morning, Chris. How are you?

Chris Woronka -- Deutsche Bank -- Analyst

I want to ask you about group business kind of in '22 and '23, and I know it's very early. But I mean, Tom, do you think that no matter where '21 ends up, it's transition year, doesn't really have anything to do with what you'll earn in '22? Do you think there's a possibility that group comes all the way back, whether it's '22 or '23, and you actually have a higher group concentration than you did in, say, '19?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. Chris, it's a great question. And as I said in my prepared remarks, we don't believe that demand is really going to accelerate until the vaccines and therapies are in place and, candidly, widely adopted. So if you believe that we get favorable announcements here in the next few months, and we'll begin in the distribution process, and we certainly would see the second half of '21 getting better, but just given -- with the tentatives and the discussions, what we hear, '22, '23, and I think some of the rhetoric coming out of our peers as well, but there will be a lot of pent-up demand for both social business, group business, convention business.

And so if that provides, I think, encouraging signals for '22, '23, and beyond it, we could get back to 2019 levels on the group side a little faster. No doubt on the leisure side, you're going to see that continue to accelerate. Another [Inaudible] the business transient side, I think, comes back. That will probably be a little slower as we all talk about how it ramps up, but again, that need for people to be together to have that interaction is not going to go away, and we've survived in this business.

OTAs and video conferencing and the jet age of being able to go travel on same day to come home. We've all heard all of those. We're going to continue to destroy the lodging business and [Inaudible]. And we have no doubt that the business -- the core business will come back and -- once we get on the other side of medical challenges today.

Chris Woronka -- Deutsche Bank -- Analyst

That's helpful, it sounds encouraging. The other question is, as we think about you and your peers reimagining the cost structure at some of these full-service hotels, I guess, particularly the urban ones, how much do you see the line blurring between select-service, especially newer select-service and full service? And the question in that is, will the rate integrity be able to hold up if service levels are different?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. Another great question. Clearly, the value proposition has to be there. And so when you think about how the food and beverage experience may change, how room service may change, I think the reality is that the customer wants that limited touch point and probably more of that knock and drop.

And I think that could be a net positive from a profitability standpoint. As you know, the room service has not been terribly profitable. I think on the banquet and how the meeting platform is going to change, I think there'll be other sources of revenue. So I don't see the full-service business getting to a commodity business if we manage it the right way.

I think on the select-service, and obviously, I know that sector well. It's becoming more and more of a commodity, just given the amount of supply, the secret's out. And so I do think, and given our footprint, where our assets are located and the optionality that we have, we're very encouraged. As we look to the future, very tough environment today as we look out of intermediate and long term, really like our footprint, really like this portfolio, particularly the core 30 hotels.

Chris Woronka -- Deutsche Bank -- Analyst

OK. Very helpful. Thanks, Tom.

Tom Baltimore -- Chairman and Chief Executive Officer

Thank you.

Operator

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

Stephen Grambling -- Goldman Sachs -- Analyst

Thanks. Two questions. First, what are your thoughts on engaging in another timeshare conversion is a potential source of capital especially given the strength in leisure? And then second, what changes do you think are being considered or should be considered in the structure of management and franchise contracts to better align owner managers and brands?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. Two great questions. I think the timeshare business and given how resilient it is and given, obviously, the growth we're seeing in leisure, I think it's another benefit of the Park portfolio. I think it provides optionality for us in a number of situations that not lost on us, and you will continue to see us explore that.

So again, having our footprint, given the size, given the distribution, and that could be timesharing into our resi and residential fees. So a great question. And clearly, something that we will continue to explore. I would rather not get into negotiations and how we think about it, but I would also say that the value proposition, the capital-light business model, it only works if they have a healthy owner community.

There are lots of costs that we think, whether it's through the loyalty programs, whether it's through allocation, sales and marketing, whether it's distribution, I think this is forcing all of us to rethink that. Sean Dell'Orto and our asset management team have just done a phenomenal job. And if you think about the $70 million, that's just labor. That's not even on the allocation side.

And so we think there are a lot more -- to put it bluntly, a lot more excess cost in the system that we need to work collaboratively with our brand partners to -- and our management companies to take cost out the business.

Stephen Grambling -- Goldman Sachs -- Analyst

Those are both helpful. One very quick follow-up on the timeshare side. I mean, where do you think timeshare and resi valuations are versus pre-COVID and versus where you're seeing the COVID discount in the hotels now?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. I don't have that information, Steve, with me. It's a fair question. As you can tell, just by the great progress we've made, we are laser focused on our priorities, reopening hotels, getting the cash burn, working on our balance sheet and extending out maturities.

Keep in mind, we were proactive and had a need to, given our debt profile. But to go back to back the way we did on the covenant relief and a lot of credit to the men and women on the Park team. This team knows how to execute and that's where our focus has been. You'll see us continue to explore on non-core asset sales where we also had a strong track record, and you'll also see us continue to look for creative ideas, whether it's timeshare resi or whatever, but given the footprint we have, there's a lot of optionality, a lot of embedded value in this portfolio.

And as I said earlier that we're trading at 65% to 70% discount to replacement costs. We know we'll work a lot more than where we're trading today, and we will prove it out over time.

Stephen Grambling -- Goldman Sachs -- Analyst

That's great. Thanks so much.

Operator

Our next question comes from Robin Farley with UBS. Please proceed.

Robin Farley -- UBS -- Analyst

Great. Thanks. A lot of my questions have been asked already. Just circling back to the asset sales.

I know you had talked about seeing the long-term value in the core markets that you're in, but I'm just curious whether your plan for asset sales -- are there more assets now you're likely to sell than what you had been thinking about pre-COVID?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's a fair question, Robin. Look, we are constantly coming through the portfolio. And as Sean mentioned there, we do have some assets that have a historical low tax base.

We have some assets [Inaudible] that are higher. There are some that we think are assets that are more attractive to a family office, private equity. So all of that goes into the sausage maker as we're engaging in a dialogue. We've had a lot of success selling assets, as you know, the 24 since the spin that we've sold and 14 international, all of which were highly complex and whether the legal tax and European locations.

So we are always in discussions. Where we have been hesitant is that we're not going to sell at 30% to 40% discounts. We don't have to. We have the liquidity.

We can get to the other side, but we also know that these gaps are going to narrow, particularly as we get more visibility, and you'll see us pounce and be prepared to move quickly, and look, there will be a natural culling. There are some markets where it's just not long term for us. There are other markets that are great markets, but we'd like to reduce our concentration. And so you'll see us continue to be thoughtful and disciplined about the decisions we make as a team.

Robin Farley -- UBS -- Analyst

OK. Great. Thanks very much.

Operator

Our next question comes from Lukas Hartwich with Green Street. Please proceed with your question.

Lukas Hartwich -- Green Street Advisors -- Analyst

Thanks. Good morning.

Tom Baltimore -- Chairman and Chief Executive Officer

Good morning.

Lukas Hartwich -- Green Street Advisors -- Analyst

Just a quick one for me. So on the operating efficiency front, do you think there are lessons learned that will be able to be applied to group operations once those -- we get into a normal environment where people aren't having group events?

Tom Baltimore -- Chairman and Chief Executive Officer

Yes. It's a great question, Lukas. We're spending -- again, a lot of credit to Sean and our asset management team, the men and women there and our operating partners. We are starting with a blank canvas, just rethinking whether it's labor, whether it's how we can adapt technology.

And again, we're getting that response and desires from customers as well. So I think you're going to continue to see more and more efficiencies come out. We can improve. We can get a reset.

We can reimagine this business, and it certainly could be far more profitable as an investment thesis as we move forward in the intermediate and long term.

Operator

At this time, we've reached the end of the question-and-answer session. I would like to turn the call back to Mr. Baltimore for closing remarks.

Tom Baltimore -- Chairman and Chief Executive Officer

Thanks all of you for taking time today. We hope that you and your families will stay safe and be well. We look forward to continuing the discussion with many of you at our upcoming Nareit virtual meetings, and be well.

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

Ian Weissman -- Senior Vice President, Corporate Strategy

Tom Baltimore -- Chairman and Chief Executive Officer

Sean Dell'Orto -- Chief Financial Officer

Unknown speaker

David Katz -- Jefferies -- Analyst

Rich Hightower -- Evercore ISI -- Analyst

Anthony Powell -- Barclays -- Analyst

Ari Klein -- BMO Capital Markets -- Analyst

Dori Kesten -- Wells Fargo Securities -- Analyst

Neil Malkin -- Capital One Securities -- Analyst

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

Chris Woronka -- Deutsche Bank -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Robin Farley -- UBS -- Analyst

Lukas Hartwich -- Green Street Advisors -- Analyst

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