Park Hotels & Resorts Inc. (NYSE:PK) was spun-off by Hilton Worldwide Holdings Inc. (HLT) in 2017 and headquartered in Tysons, VA, owns and manages hotels and resorts in the U.S.
Investors who are looking for exposure to the U.S. hotel industry may be interested in this REIT as it appears to be a good addition to a dividend portfolio considering the outlook for the industry in 2024. The dividend is well covered, the business is conservatively financed exhibiting strong liquidity, and the stock is trading at a slight discount to tangible book value, practically offering the management for free.
Portfolio & Outlook
The REIT’s portfolio consists of 43 hotels that aggregate 26Κ rooms and are spread across 16 states, with the highest concentration in Hawaii and Orlando which together bring in almost half of EBITDA:
Its revenue mainly comes from room bookings, but it also generates a significant portion from food/beverage services and ancillary hotel offerings:
The business is further diversified by customer type as a significant portion of revenue is generated by transient business and groups:
While there is a significant reliance on two states, I don’t think it is a great risk. In January 2024, room demand in Hawaii was represented by 1.3 million room nights, a 3.7% YoY increase. Room supply was 1.7 million room nights, only 0.1% higher than the same month the previous year. And Orlando, the most-visited U.S. travel destination, is witnessing a recovery as RevPAR has already marked some YoY growth in 2023 and is expected to increase further as demand growth persists and the supply pipeline remains limited.
That being said, the hotel industry in the U.S. as a whole is facing many headwinds to RevPAR growth this year, based on CBRE. Also, in a scenario of economic downturn, Park Hotels may be affected more as most of its portfolio is upscale/luxury and RevPAR is more resilient when it comes from upper-midscale hotels because guests usually trade down.
Performance
By looking at the long-term operating performance, it is clear that except for the hiccup during the pandemic, this is a stable business. However, growth was slow before that:
Of course, it has been recovering since 2021, with revenue reaching and exceeding prepandemic levels and FFO per share on its way there.
More recent and relevant KPIs highlight this recovery too as RevPAR in the last quarter was $178.25, 4.11% higher than in the same period last year. ADR also exhibited growth, increasing by 1.85% to $250.93. In 2023, RevPAR and ADR increased by 8.7% and 1.3% YoY to $178.62 and $245.80, respectively.
The ADR growth lagging RevPAR growth suggests higher occupancy and, sure enough, the occupancy rate of Park Hotels increased from 67.8% in 2022 to 72.7% in 2023; that’s also higher than the average of 63.6% projected for U.S. hotels this year.
FFO in the last quarter was also 15.6% higher YoY at $0.52 per share. For 2023, FFO per share increased by 32.5% to $2.04, indicating a significant impact of revenue recovery on the bottom line.
And these trends seem that they are going to persist as management has updated its guidance based on the stronger-than-anticipated results in the first quarter of 2024. Specifically, adjusted EBITDA is expected to range from $655 million to $695 million, a $10 million increase at the midpoint. AFFO per share is also forecast to increase by about $0.05 at the midpoint to a new range of $2.07 to $2.27 per share. These changes represent a YoY adjusted EBITDA and AFFO per share growth of 2.5% and 6%, respectively.
Leverage & Liquidity
In October, 2023, Park Hotels strategically defaulted on a $725 million non-recourse loan that was secured by the two Hilton San Francisco hotels it owned. Following this, the improved leverage of the REIT resulted in the S&P Global raising its credit rating from B to BB-.
Today, about 50% of its assets are funded by debt and after adjusting for the $725 million loan, Park Hotels sports a debt/EBITDA ratio of 5.45x. Its interest coverage of 2.8x (weighted average interest rate is 5.24%) and $378 million in liquid assets (4.16% of total assets) also highlight its strong liquidity.
Additionally, the REIT currently has access to a $950 million revolver which can be increased by up to $500 million; this matures on December 1, 2026 and has a one-year extension option. This allows the company to deal more easily with the upcoming mortgage maturities of ~$1.5 billion in 2026 which represent 42.4% of the debt. The amounts due in 2024 and 2025 are much more manageable at 1.6% and 8.46% of total debt, respectively.
It’s also noteworthy that the company recently redeemed the 7.500% Senior Notes due 2025 of $650 million and issued the 7.000% senior notes due 2030 at an aggregate principal amount of $550 million.
Dividend & Valuation
PK currently pays a quarterly dividend of $0.25 per share, resulting in a forward yield of 6.55%. With a payout ratio of 47.43% based on the last quarterly AFFO annualized, this looks very attractive. The distribution record is what you would expect from a hotel REIT, in that it had to suspend payments after the pandemic hit and until it made sure that it could safely reinstate the dividend:
But due to the seasonal nature of hotel REITs, the guidance, and the general outlook for the industry, one is justified to expect the realization of a higher yield from a potential special dividend here.
The share price is also reflective of good value. This is established by PK’s FFO multiple which is currently the lowest among its most relevant peers:
Stock | P/FFO |
PK | 7.01 |
APLE | 8.75 |
SHO | 11.36 |
DRH | 8.59 |
Average | 8.92 |
The shares are also trading at a slight discount to tangible book value ($16.36) which is unjustified considering the prospects and the fact that you don’t pay any premium for the management. Speaking of which…
Management
We need to also note a few things about the management before we go over the risks. First, each one of the managers and directors owns less than 1% of the common shares and there have been no meaningful open-market share purchases by them recently. However, that is offset in a way by other useful management quality indicators.
First, the highest compensation package in 2023 appears to be shareholder-friendly. The CEO’s $10.8 million compensation package in 2023 seems reasonable considering both the operating results and that it only represents 1.44% of the cash NOI generated in 2023. Further, Park Hotels has a history of consistently realizing capital gains on property dispositions since 2017 when it was spun-off. Last, in 2023 the board approved a stock repurchase program that allows the company to repurchase $300 million until February 2025 and during the last year, it repurchased $180 million worth of shares.
Also considering the prospect of reducing the cost of debt, deleveraging, and continuing to buy properties at good prices, I believe that management can keep providing value to shareholders beyond the dividend payments.
Risks
However, there are some risks we need to highlight. First, we already mentioned that an economic slowdown can affect the performance of the properties more because these are upscale/luxury; as a result, the REIT may miss its targets which poses a significant risk for the shareholders. That also creates a risk for the dividend as the company may opt for a suspension or cut.
And though it’s evident that Hawaii and Orlando are good markets to be concentrated in, there is still a risk here if certain events make travel to those destinations less attractive in the future. Even if such potential events don’t affect the REIT’s bottom line in hindsight, they nevertheless constitute headline risk and they may lead to increased selling pressure.
I also find the opportunity risk present here worth mentioning because the stock price has increased significantly since the 2023 low of ~$11. The shares were trading close to TBV even back in 2020 before the pandemic so there is no reason to think that the current risks are what prevent the market from assigning a premium to tangible book value; trading close to TBV seems to be normal for this REIT even when it’s profitable. Investors should gauge if the potential gains they can at least make from dividends are worth a potential opportunity cost.
Verdict
In any case, I believe that the prospects outweigh the risks here. This is a conservatively financed and undervalued REIT that should trade closer to what its peers are these days based on FFO considering the portfolio’s quality, revenue diversification, and overall positive outlook for the Hawaii and Orlando markets. Therefore, I rate PK a buy.
What do you think? Do you own this REIT or intend to? Let me know and I’ll get back to you soon. Also, please leave a comment if you found this post useful; it means a lot! Thank you for reading.
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