Hotel Recovery Is Slowing but Still Producing Solid Growth for Park Hotel's Portfolio

Senior Equity 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 its international hotels and 23 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.

The coronavirus pandemic hit the operating results of Park's hotels significantly 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 recover quickly, leading to significant growth in 2021 and 2022. Growth decelerated in 2023, though the company continues to report improving occupancy and rate growth for most of the portfolio. We think the company should continue to see solid growth as business and group travel continue to recover slowly with Park's hotel revenue eventually returning to 2019 levels by 2027 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. Last, while the shadow supply created by Airbnb doesn’t compete directly with Park on most nights, it does limit Park's ability to push rates on nights where it would typically generate its highest profits.

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. 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 the extended economic cycle that ended in 2019 we saw rate growth decelerate as hotels 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 saw 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 in the final few years of the cycle. While Park did a good job in 2018 and 2019 in containing costs, the lack of rate growth led to lackluster margin growth and thus low NOI growth. If the company had an economic moat we would have expected 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 prior economic cycle. 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 averaged 5% supply growth between 2013 and 2020 as the city continued to approve mid-block upscale and midscale hotels in the most desired submarkets. This 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 and 2019 as a result of high supply. Despite the multiple business and tourism demand drivers for New York City, many REITs are reduced their exposure to the city and redeployed 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.

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 2022 Park had an adjusted ROIC of approximately 420 basis points below our 9.6% WACC. The adjusted ROIC remains below our WACC estimate through all of our forecasts 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.

Earnings data Q3 2020

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Park Hotels & Resorts reports robust Q1 performance and navigates challenges

Park Hotels & Resorts delivered strong Q1 results, particularly in urban markets and Hawaii, while also demonstrating financial resilience through increased adjusted EBITDA forecast and strong liquidity position. However, challenges related to expense management, potential tax implications, and increasing costs need to be carefully navigated. Despite these challenges, the company sees opportunities in the recovery of larger group markets, the Japanese traveler market, and potential asset sales.

Park Hotels & Resorts Reports Solid Q2 Performance Amid San Francisco Challenges

Despite challenges in San Francisco and moderated EBITDA expectations, the overall performance was solid, especially in Hawaii. The company is focused on optimizing its portfolio and improving liquidity through asset sales.

Park Hotels & Resorts Exceeds Q3 Earnings Expectations, Eyes Expansion

Park Hotels & Resorts delivered strong Q3 performance driven by Hawaii and urban markets, with a focus on operational excellence and capital allocation. While facing challenges related to renovations and ROI work, the company sees opportunities in expanding its portfolio and potential acquisitions in new markets. Overall, the company remains optimistic about its future growth profile.

Park Hotels & Resorts exceeds Q4 expectations, eyes growth opportunities

Park Hotels & Resorts delivered a strong performance in Q4 2023, with positive RevPAR growth and increased group revenues. The company is optimistic about 2024, focusing on key markets and capital expenditure projects. Challenges include Hawaii's temporary slowdown, but opportunities lie in strategic renovations and asset management.

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Park Hotels' (PK) Q1 results to reflect adverse impact of the coronavirus pandemic with reduced travel demand and substantial increase in the number of corporate group cancellations.

Park Hotels (PK) to Report Q1 Earnings: What's in Store?

This high-end hotel operator had a great April, but that's really not saying much when you look at the big picture.

Why Park Hotels & Resorts Jumped 20% in April

Virgin Galactic

Here's why Park Hotels & Resorts and Virgin Galactic are strong buys right now.

2 Small-Cap Stocks With Big-Cap Potential

Gilead Sciences

Marriott

Wyndham Hotels & Resorts Inc

Wyndham Destinations Inc

Will Gilead's new drug reopen America for business -- and hotel stays?

Why Hotel Stocks Are Surging Today

Investors need to pay close attention to Park Hotels & Resorts (PK) stock based on the movements in the options market lately

Is the Options Market Predicting a Spike in Park Hotels & Resorts (PK) Stock?

Hyatt Hotels

A deep recession won't be good for business.

Why Hyatt, Marriott, and Park Hotels Stocks Are Sinking Today

Royal Caribbean Cruises

Ruth's Hospitality Group

Here are three stocks that are all down over 60% thanks to COVID-19.  Will they bounce back?

About to Buy Penny Stocks ? Look at These 3 Companies First

Park Hotels & Resorts (PK) saw a big move last session, as its shares jumped more than 10% on the day, amid huge volumes.

Park Hotels & Resorts (PK) Surges: Stock Moves 10% Higher

Investors need to pay close attention to Park Hotels (PK) stock based on the movements in the options market lately.

Implied Volatility Surging for Park Hotels (PK) Stock Options

Gaming and Leisure Properties

Host Hotels & Resorts

Vici Properties

REITs may not be a safe space if the coronavirus outbreak continues.

Why Hotel and Casino REITs Got Crushed Yesterday

American Airlines

Churchill Downs

Planet Fitness

Six Flags

Urban Outfitters

Flying, much like taking the subway to work, is a giant moving petri dish of germs and unhealthiness. It’s not surprising that airline stocks as a group have lost 14.8% in the past week with American Airlines (NASDAQ:AAL) leading the pack.

7 Services Stocks to Buy on Coronavirus Weakness

Ryman Hospitality Properties

Sunstone Hotel Investors

Simon Property Group

Lodging REITs have been particularly affected due to massive cancellations by both businesses and vacationers amid the coronavirus outbreak.

Coronavirus-Led Mass Cancellations Hit Hotel REITs Hard

Macy's

Annaly Capital

Seagate Technology Holdings PLC

Sunoco

Who isn't looking for income? With the Fed cutting rates again, cash in the bank is returning almost nothing.

5 Top Stocks with Dividend Yields Over 5%

5 Top  Stocks with Dividend Yields Over 5%

Park Hotels & Resorts Inc. (PK) CEO Tom Baltimore on Q4 2019 Results - Earnings Call Transcript

AGNC Investment

Cedar Realty Trust

GEO Group

Hersha Hospitality Trust Class A

Macerich

RLJ Lodging Trust

Taubman Centers

Vanguard Real Estate ETF

5 High-Yielding REIT Sectors, Four To Own And One To Avoid

Park Hotels & Resorts Inc. (PK) delivered FFO and revenue surprises of 4.35% and 3.38%, respectively, for the quarter ended December 2019.

Park Hotels & Resorts Inc. (PK) Q4 FFO and Revenues Beat Estimates

Ares Capital

DoubleLine Income Solutions Fund

Macquarie Infrastructure

New Residential Investment

NuStar Energy

Sabra Health Care

It may sound old to read that investors love dividends. That is something the public is just going to have to learn to deal with.

8 Dividend Picks With at Least 8% Yields and Projected Upside for 2020

A Realistic Look At Whether Park Hotels & Resorts' 9.4% Dividend Yield Is Affordable

Broadmark Realty Capital Inc.

City Office REIT

CoreCivic

Iron Mountain

Plymouth Industrial REIT

Tanger Factory Outlet Centers

7 Lucky High-Yielding REITs For 2020

CyrusOne

Urban Edge Properties

Ventas

Retire Rich With REITs... 2.0

Brookfield Property Partners

Healthpeak Properties Inc

Extra Space Storage

The Top 10 REIT SWAN-A-Bees For 2020

Park Hotels & Resorts Inc. (PK) CEO Tom Baltimore on Q3 2019 Results - Earnings Call Transcript

There must be more than one catalyst that drives this strong buy conviction, and oftentimes there’s a large dose of sentiment going the opposite direction.

3 High Yielding REITs Poised To Profit

Park focuses on owning hotels and resorts in the luxury and upper upscale segments.

You Better Buy Park Hotels & Resorts Before You Pass Go

News for Park Hotels & Resorts Stock (PK)