Park Hotels Should Continue To See Several More Years of Strong Growth

Senior Analyst

Kevin Brown

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

In the short term, the coronavirus significantly impacted the operating results for Park's hotels with high-double-digit revPAR declines and negative hotel EBITDA in 2020. However, the rapid rollout of vaccinations across the country allowed leisure travel to quickly recover, leading to significant growth in 2021 and 2022. We think the company should continue to see strong growth as business and group travel also recover to prepandemic levels with Park eventually returning to 2019 levels by the end of 2024 in our estimate.

However, the hotel industry will continue to face several long-term headwinds. Supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Finally, while the shadow supply created by Airbnb doesn’t directly compete with Park on most nights, it does limit Park's ability to push rates on nights where it would have typically generated its highest profits.

Still, we think Park does have some opportunities to create value. Management has only had control of the portfolio for three years, and we think there is some additional growth that can be squeezed out of current renovation projects. The Chesapeake acquisition should provide an additional source of growth as the company drives higher operating efficiencies across this new portfolio. We also think the pandemic created additional opportunistic ways for Park to increase margins across the portfolio.

Business Strategy & Outlook

We assign Park Hotels & Resorts a no-moat rating. Park's portfolio of upper-upscale and luxury hotels are high-quality assets in major urban and resort locations. However, Park does not own a controlling share of hotel rooms in any given market and Park's assets aren't differentiated enough from other offerings to command any outsize market power. Since hotel accommodations are elastic in demand and most consumers are price-sensitive, competitors can easily steal occupancy by offering low rates, which happens immediately as hotels turn over their tenants each night. Even if Park had significant concentration in a given market and differentiated assets, the barriers to supply are extremely low and competitors can easily copy winning design concepts, erasing any economic gains made by the company. As a result, the net operating income levels and the revenue per available room and margin increases the company achieves on its properties compared with the initial capital investment produce returns that are below WACC, leading us to conclude that there is no support for a moat for the company. 

Hotel REITs like Park could potentially benefit from an efficient scale moat source. Efficient scale would require that the company's hotels dominate their submarkets by effectively and efficiently serving the market's needs. However, the number of hotels and hotel rooms in any given submarket set this bar extremely high. Online travel agencies like Expedia and Priceline provide travelers with constantly updated information about competing hotels while metasearch companies like TripAdvisor provide ratings and recommendations, allowing consumers to find the combination of hotel segment, brand, location, and price that best suites their tastes. Even though the hotel market is fragmented by brand and service level, the number of hotel rooms available in any given submarket would still make it difficult to have pricing power given that customers' preferences are fluid and they are willing to trade down for a lower price or trade up for a similar price. 

Park may have a significant presence in major metropolitans among the upper upscale, Hilton-branded options, but it does not come close to a critical mass needed to dictate the market rate. For example, two of Park's largest hotels, including its biggest hotel, are in Hawaii with 3,970 rooms, but that only represents a fraction of the 44,431 hotel rooms spread across 153 hotels in the state at the end of 2017. Even drilling down to submarkets, Park owns the largest hotel on Waikiki Beach, the 2,860 room Hilton Hawaiian Village Waikiki Beach that has more than 1,200 rooms than the next largest hotel, but this hotel still must compete with a total of 23,697 hotel rooms in that submarket. Even though Park's RevPAR growth for its Hawaii hotels has been above its portfolio average growth, the RevPAR growth for Park's hotels are only in line with the numbers reported by the state. This demonstrates that the company doesn't have the pricing power to drive higher revenue and earn the outsize economic profits we would expect from a company with an economic moat.

If a hotel company had a moat, we should be seeing stronger NOI growth at this point in the economic cycle. Occupancy for the total hotel industry across the U.S. stood at 66.2% at the end of 2018, eclipsing the peak occupancy level seen at the peak of the prior two economic cycles of 63.4% in 2006 and 63.3% in 2000. Occupancy for the upper upscale segment is even stronger, north of 74% at the end of 2018, and Park has reported even better occupancy that averaged 82.0% for its same-store portfolio in 2018. Early in the economic cycle a hotel must attract consumers with cheap rates to encourage them to travel. However, as the hotel starts to consistently fill up the hotel should start to be able to raise rates, especially on the last few customers that book a room that pushes occupancy toward 100% for a given night. Thus, we should see RevPAR growth driven by occupancy growth early in the cycle that gives way to RevPAR growth driven by rate growth at the end of the cycle. However, during this extended economic cycle we have seen rate growth decelerate as hotels have approached the occupancy peak. RevPAR grew around 5% between 2011 and 2015 through a combination of occupancy and rate growth, but as occupancy leveled off in 2016 we have seen the pace of average rate growth slow for the U.S. total market and the upper upscale segment. Since occupancy gains increase variable costs while average daily rate increases go straight to the bottom line, we would normally expect to see significant EBITDA margin gains at this point in the cycle. While Park has done a good job in 2018 in containing costs, the lack of rate growth has led to lackluster margin growth and thus low NOI growth. If the company had an economic moat we would expect to see continued, outsize economic profit growth, and the bottom-line numbers are further proof that this company does not have a moat.

Supply growth is a major reason for the reduced revenue growth seen over the past few years. Barriers to entry are very low for hotels in major metropolitan areas as cities encourage economic development that revitalizes an area and brings tourism dollars and taxable income to the city. Even markets thought of as having high barriers to entry due to lack of available land like New York City have seen significant supply growth. New York City has averaged 5% supply growth since 2013, and that trend should continue for at least two more years as the city continues to approve mid-block upscale and midscale hotels in the most desired submarkets. This has kept New York City's RevPAR growth below the national average over this time frame, and Park's Manhattan portfolio saw negative RevPAR growth in 2016 and 2017 and remained below the portfolio average in 2018 as a result of high supply. Despite the multiple business and tourism demand drivers for New York City, many REITs are reducing their exposure to the city and redeploying their capital into other markets with prolonged demand drivers but lower supply growth expected over the next few years. Other top MSAs where REITs like Park own hotels that will experience supply above 3% over the next few years include Houston, Denver, Seattle, Miami, and Dallas, and the majority of the largest cities are expected to have supply growth higher than the U.S. hotel industry average. Therefore, we expect supply will more than offset demand for the next few years, and hotel companies will have difficulty pushing rates to generate significant NOI growth.

We use an adjusted ROIC calculation to determine if a company historically has shown or is forecast to have the characteristics of an economic moat. After adjusting the ROIC calculation to use maintenance capital expenditures instead of accounting depreciation, we calculate that in 2018 Park had an adjusted ROIC approximately 410 basis points below our 9.6% WACC. The adjusted ROIC remains below our WACC estimate through all of our forecast for the company. This affirms our view that Park should be assigned a no-moat rating.

None

Economic Moat

Park Hotels & Resorts

Park Hotels & Resorts, Inc. operates as a real estate investment trust, which owns and operates hotels and resorts. It operates through the Consolidated Hotels and Unconsolidated Hotels segments. Its portfolio of hotels and resorts include the Waldorf Astoria Hotels and Resorts, Conrad Hotels & Resorts, Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites by Hilton, Hilton Garden Inn, Hampton by Hilton, and Curio. The company was founded by Conrad Hilton in 1919 and is headquartered in Tysons, VA.

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