While company officials promised a solution to a $735 million loan that was due for two hotels in the near future, Park Hotels & Resorts executives said “all options are on the table” and the possibility of a return of the keys to the real estate would not rule out.
The $725 million, CMBS fixed rate loan at the Hilton San Francisco Union Square and Park 55 San Francisco — a Hilton hotel — is due in November and is currently paying interest at 4.11%. President and CEO Thomas Baltimore Jr. said during the Real Estate Investment Trust’s first-quarter earnings call that a non-disclosure agreement prevented him from going into the details of Park’s plans, but additional executives are “in discussions with the service provider and all options are being evaluated.” Wells Fargo is the servicer of the loan.
“I stress that all options are being explored and we expect this to be resolved by the summer,” he told analysts after being specifically asked about the possibility of abandoning the properties. “See, these are never cut and dry. So hypothetically if we were to return the keys there would be debt relief and the income we would have we could shield, certainly most of it but not all of it. In theory this would result in a potential dividend payout of around $150 million to $200 million . And it obviously reduces our leverage.”
Sean Dell’Orto, Park’s executive vice president, chief financial officer and treasurer, said during the call that an extension of the current loan is also being considered and the company’s executive team “remains confident that we will have a resolution by early summer will have”.
The ability to exit these two hotels — which together have 2,945 rooms — would represent a dramatic shift in strategy for Park. Baltimore has touted the company’s strong presence in San Francisco as a key differentiator from other hotel-focused REITs and a competitive advantage since the company’s spin-off from Hilton in early 2017.
In addition to the Parc 55 and the Hilton San Francisco Union Square, the company also owns the 344-room JW Marriott San Francisco Union Square and the 316-room Hyatt Centric Fisherman’s Wharf in San Francisco, as well as several other hotels in the Bay Area: the 505 The DoubleTree 360-room Hotel San Jose, 360-room Hilton Oakland Airport, 245-room DoubleTree Hotel Sonoma Wine Country, and 224-room Juniper Hotel Cupertino.
Baltimore said he remains in regular contact with officials in San Francisco, in large part because of the 42-hotel company’s outsized presence in the market, and he remains upbeat about the city’s long-term prospects, despite a slower recovery than several others large markets and a lack of inbound travel from Asia.
He said several macro trends would continue to play in the city’s favor going forward. The recent growth in artificial intelligence could portend another tech boom in general, and he added that much of it was and will be “anchored in San Francisco.”
“San Francisco has historically been a high-beta market, so it’s going through these boom and bust periods,” he said. “This is clearly a tougher time now but we are seeing that she is certainly starting to recover. I think the recovery will take a little longer.”
Baltimore said there have been some signs of life regarding large group gatherings in the city, which Park’s portfolio of big-box hotels would benefit from. He also said the city is about to make some changes that would make it more attractive as a tourist destination.
“The Moscone Center has been talking about rate cuts, and we think that’s a good idea,” he said. “We think a national marketing campaign is another good idea that we have communicated. The ambassador program has been incredibly well received.
While the first quarterPark’s hotels reported revenue per available room of $158.84, representing a 36.5% year-over-year increase for the portfolio. The increase was largely due to a 14.2 percentage point increase in demand to a 65% load factor for the quarter. The company also saw its average daily rate rise 6.6% to $244.38.
The REIT posted net income of $33 million for the quarter, up 158.9% from the loss of $56 million in the first quarter of 2022.
Baltimore also pledged a continuation of a plan to sell smaller non-core assets in Park’s portfolio and forecast assets of between $200 million and $300 million during 2023. In February, the company sold the 508-room Hilton Miami Airport for $118.25 million at a cap of 6.2% based on 2019 net operating income.
At press time, Park stock was trading at $12.30 per share, up 4.3% year-to-date. The NYSE Composite rose 2.3% over the same period.
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