Park Hotels & Resorts Inc.

Moat: 2/5

Understandability: 1/5

Balance Sheet Health: 3/5

Park Hotels & Resorts Inc. is a lodging real estate investment trust (REIT) that owns and operates a portfolio of hotels and resorts, primarily under premium brands and focused on stable and upper-upscale lodging properties.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Park Hotels & Resorts is one of the largest lodging REITs, with a diverse portfolio spanning across the U.S., Hawaii, Europe, and other key travel destinations. The company focuses on owning upper-upscale and luxury hotels, often associated with well-known brands such as Hilton and Hyatt.

Revenue Streams:

  • Rooms Revenue: The core of PK’s revenue is derived from renting hotel rooms to guests, influenced by factors like occupancy rates and average daily rates (ADR).
  • Food and Beverage Revenue: Revenue from in-hotel restaurants, bars, and banquets
  • Other Hotel Revenue: Includes other revenue streams, such as parking and other guest amenities.
  • Management Fees: Revenue is also generated by managing hotels for other property owners.

Industry Trends:

  • Cyclicality: The lodging industry is highly cyclical, heavily influenced by macroeconomic trends and travel patterns. Economic downturns, such as the pandemic, can severely reduce both occupancy and pricing power.
  • Post-Pandemic Recovery: The hospitality industry is still in recovery mode post-pandemic, with travel patterns and preferences continually evolving. There is significant volatility and uncertainty in the global travel market currently.
  • Inflation & Labor: The industry faces considerable challenges related to increases in costs. These include labor, utilities and supplies.
  • Competition: The hotel sector is highly fragmented with global chains, franchises, local brands, and independent operators all competing for guests. Therefore, brand loyalty is a must to have.
  • Technological Innovations: New technology is changing and influencing many aspects of the hotel industry, including online bookings, customer experience, and data analytics.
  • Changing Consumer Preferences: Younger generations are placing an increasing importance on sustainability and authentic local experiences, pushing traditional hotels and brands to adapt.

Competitive Landscape:

  • PK competes in a highly fragmented market, with strong competition coming from other major lodging REITs, global hotel chains, and various independent hotels.
  • The company’s main competitors are Host Hotels & Resorts and Pebblebrook Hotel Trust.
  • The competitive factors include brand reputation, loyalty programs, property locations, amenities, and service quality.
  • In the current market environment, competition has also arisen from the growing number of alternative and private lodging providers such as AirBnB.

What Makes PK Different?

  • Focus on High-Quality Assets: PK’s strategy of primarily owning premium and luxury hotels allows it to command higher prices and attract a different type of clientele.
  • Strategic Locations: By focusing on properties in gateway cities and major tourist destinations, Park Hotels benefits from increased occupancy.
  • Strong Brand Relationships: The close ties with brands like Hilton and Hyatt offer a large advantage in attracting guests and negotiating favorable contracts.

Financial Analysis

Financial results of REITs are very different from that of a normal company. REITs have to pay out most of the profits as dividends and have different types of expenses, accounting rules, and debt ratios. So, keep that in mind and try to look into the specifics of how each business works.

Revenue Analysis:

  • Positive Trends: In 2022, all revenue categories showed a strong increase year-over-year. Occupancy rates and revenue per available room (RevPAR) increased substantially. This was due to a sharp rebound in travel after the global lockdown.
  • Significant Increase in Revenues: The 2022 total revenues totaled to $4.6 billion. This was nearly a 70% increase compared to the $2.8 billion made in 2021.
  • Positive Q1 2023: Hotel revenues were up 13.1% for Q1 2023 YoY, however, occupancy dipped slightly but was mainly a result of the company’s portfolio optimization efforts in exiting some less profitable properties.

Profitability:

  • Profitability Increasing: In 2022, both EBITDA and profits were dramatically higher compared to 2020 and 2021, reflecting the significant rebound in the lodging industry. However, the net income attributable to stockholders was still a negative at -$177 million due to continued higher depreciation costs.
  • Margin Pressures: Inflation in the cost of labor, insurance, and goods/supplies are a continuous source of pressure on margins.

Capital Structure:

  • High Debt Levels: Like other REITs, PK carries a high level of debt which is mainly tied to the large scale acquisitions the company has undertaken through time. Total debt stood at $4.3 billion.
  • Increased Credit Facilities: The company had amended existing credit facilities and issued new bonds, to give themselves flexibility to withstand market volatility. In December 2022, the Company entered into an amendment of its existing $1.55 billion revolving credit facility, and in July 2022 issued a $600 million 8.250% Senior Notes due 2027.
  • Ample Liquidity: The company has ample liquidity for its operating expenses and other investment needs. As of December 31, 2022, they held about $1.1 billion in cash and cash equivalents.

Financial Trends

In the most recent earnings call, Q1 2023, the CEO has pointed out that they are seeing very strong demand, and the company has a solid outlook for the full year. There is a continuing improvement in the travel market. Occupancy rates have increased in January and February as well as demand in business travel, that is coming back at a fast pace, is helping the company see growth. The revenue growth is primarily attributable to the group and convention segment. There is also a high number of international travelers returning to US. They expect to see significant growth in the second quarter of the year.

Moat Rating: 2 / 5

PK’s moat is limited as it primarily relies on location and scale. Location, while beneficial, does not create barriers to entry on its own, as new hotels can be built in attractive destinations (albeit, with high investment requirements). Scale alone is often not enough for strong long-term results, given the ease with which new hotel properties and independent operators can enter the market. However, having long relationships with well known brands like Hilton is a big differentiator for them which could help them maintain their market share.

  • Intangible Assets (Brand Recognition): PK benefits from the strong reputations of the brands it operates, such as Hilton and Hyatt, which is an intangible advantage that offers it better pricing power. However, this advantage is partially counteracted by the ability of other operators to use these popular brands to open competitive venues.
  • Switching Costs: The switching costs for guests are quite low, and if a hotel offers a better option then clients will quickly change allegiance. This makes long-term high profitability difficult to achieve.
  • Cost Advantages/Economies of Scale: PK does have some cost advantage due to its large scale which allows it to distribute costs over a broader base, but this advantage isn’t that hard to replicate.
  • Network Effects: Network effects are not as relevant in this industry. Even if the major companies have a network, that does not impact the decision of their clients directly.

Risks to the Moat:

  • Economic Cycles: The hospitality sector is highly sensitive to macroeconomic conditions. Down cycles can quickly impact travel and tourism, and this, in turn, can reduce hotel occupancy and pricing power.
  • Disruptive Innovation: New alternative lodging providers can offer direct competition and capture some of the market share of the industry.
  • Intense Competition: There is lots of competition in the hospitality industry which means that any advantages can be nullified by the competition.
  • Increased Debt Levels: Higher debt levels may limit the company’s ability to withstand economic uncertainty.
  • Operational Challenges: Increasing costs due to inflation and other factors can decrease profitability. Additionally, managing a large portfolio of geographically dispersed hotels with varying operating standards is difficult.
  • Technological Disruption: Failure to keep pace with new technology and consumer trends can reduce customer satisfaction, resulting in lower returns over time.
  • New Supply: New hotel development in key markets can also impact the pricing power and occupancy rates of existing businesses.

Business Resilience:

  • Geographic Diversity: PK’s geographical diversification gives some resilience, as any single region is unlikely to severely impact the company’s revenues.
  • Established Brands: Brands with loyal clients allow for higher chances of recovery if there is any temporary trouble.
  • Revenue Diversification: PK’s revenue sources include not just room revenues but F&B and other streams as well. This makes the company less dependent on occupancy.

Understandability Rating: 1 / 5

The business model of a hotel REIT is quite simple, they buy and manage hotels and collect rent. The industry has some complexity to it as it has many nuances and micro-trends that have to be taken into account during any analysis of these businesses. The high levels of debt that most REITs use also makes it more complicated to understand the financials. This business is very complicated on the financial side, with high leverage and complicated valuation and also on the qualitative side, as the economic outlooks and changing tastes are very hard to follow. Therefore, it’s not easily understandable.

  • The company’s business and revenue model are well known and easily explainable.
  • The financial side of the business is very complex, with high debt and accounting for non-cash expenses.
  • The many outside influences like economic outlooks, macro trends, and customer preferences, make the business more complicated.

Balance Sheet Health: 3 / 5

As a REIT, the company relies on external funding to pay for its operations and maintain the asset base, making a high degree of debt normal and expected. However, there is a degree of risk of default in heavily indebted companies.

  • High Debt Levels: Park Hotels has high amounts of debt, which make the balance sheet less healthy. The total debt is at 4.3B, this needs careful attention.
  • Sufficient Cash and Liquidity: While carrying a high amount of debt, the company has sufficient cash and equivalents to meet the short term liabilities.
  • Improving Leverage: The management aims to reduce leverage and get its debt-to-EBITDA to 4-6x. Which will significantly reduce risk for the company.
  • Asset Quality: PK owns high-quality hotel assets, which provide a certain backstop to their debt.