• Wed. Apr 24th, 2024

Park CEO Won’t Rule Out Handing Back Keys for San Francisco Hotels


May 1, 2023
Park Hotels & Resorts officials said all options are on the table for dealing with $725 million in maturing debt tied to the Parc 55 San Francisco (pictured) and the Hilton San Francisco Union Square, including handing back keys to lenders. (CoStar)


While company officials promised a resolution on a $725 million maturing loan covering two hotels in the near future, executives with Park Hotels & Resorts said “all options are on the table” and would not dismiss the possibility of handing back the keys to the properties.

The $725 million, fixed-rate CMBS loan on the Hilton San Francisco Union Square and Park 55 San Francisco — a Hilton hotel — is slated to mature in November and currently carries an interest rate of 4.11%. Speaking during the real estate investment trust’s first-quarter earnings call, President and CEO Thomas Baltimore Jr. said he couldn’t get into the specifics of Park’s plans moving forward due to a confidentiality agreement, but added executives are “in discussions with the servicer and all options are being explored.” Wells Fargo is the servicer of the loan.

“I emphasize all options are being explored, and we expect to have this resolved by the summer,” he told analysts after being asked specifically about the possibility of giving up the properties. “Look, these are never cut and dry. So if we were, hypothetically, to give back the keys, there’s a forgiveness of debt and the income we would have we are able to shield, certainly most of that, but not all of that. It would result in a potential dividend payout of $150 million to $200 million approximately, in theory. And it obviously reduces our leverage.”

Park Executive Vice President, Chief Financial Officer and Treasurer Sean Dell’Orto said during the call that extending the current loan is also under consideration and the company’s executive team “remains confident we will have a resolution by early summer.”

The possibility of walking away from those two hotels — which collectively have 2,945 rooms — would mark a dramatic shift in strategy for Park. Baltimore has touted the company’s heavy presence in San Francisco as a key differentiator from other hotel-focused REITs and a competitive advantage since the company’s spinoff from Hilton in early 2017.

In addition to 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, along with several other Bay Area hotels: the 505-room DoubleTree Hotel San Jose, the 360-room Hilton Oakland Airport, the 245-room DoubleTree Hotel Sonoma Wine Country and the 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 outsize presence in the market, and he remains bullish on the city’s long-term prospects despite a slower recovery than several other major markets and a lack of inbound travel from Asia.

He said several macro trends still play in the city’s favor going forward. The recent growth in artificial intelligence could portend another boom for tech broadly, and he added a lot of that is and will be “anchored in San Francisco.”

“San Francisco historically has been a high beta market, so it goes through these periods of sort of boom and bust,” he said. “This is clearly a tougher period now, but we are seeing it certainly begin to recover. I think that recovery is going to be a little more elongated.”

Baltimore said there have been some signs of life in terms of large group meetings in the city, which is something Park’s portfolio of big-box hotels would be poised to benefit from. He also said the city is on the verge of making some changes that will make it more appealing as a destination.

“The Moscone Center has talked about lowering rates, and we think that’s a good idea,” he said. “We think a national marketing campaign is another good idea we’ve communicated. The ambassador program has been incredibly well-received. Conditions are improving, and they’re far better than I think has been reported.”

During the first quarter, Park’s hotels reported revenue per available room of $158.84, which marked a 36.5% year-over-year spike for its portfolio. The increase was largely driven by a 14.2 percentage point jump in demand to 65% occupancy for the quarter. The company also had a 6.6% increase in average daily rate to $244.38.

The REIT posted $33 million in net income for the quarter, which represented a 158.9% increase over the $56 million loss recorded in the first quarter of 2022.

Baltimore also promised a continuation a plan to sell off smaller, non-core assets from Park’s portfolio, projecting somewhere between $200 million and $300 million in asset sales through the course of 2023. In February, the company sold the 508-room Hilton Miami Airport for $118.25 million at a 6.2% cap rate based on 2019 net operating income.

As of press time, Park’s stock was trading at $12.30 a share, up 4.3% year to date. The NYSE Composite was up 2.3% for the same period.

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