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Hotel REITs have largely felt the brunt of the effects from COVID-19. In this article, I’m focused on Park Hotels & Resorts (NYSE:PK), which, as seen below, has seen its shares crater by 60% since the start of the year.
(Source: YCharts)
While this would undoubtedly attract bargain hunters, I believe a well-balanced view is necessary before making an investment. As such, I evaluate whether if the stock presents an attractive investment at the current price, so let’s get started.
(Source: Company website)
A Look Into Park Hotels & Resorts
Park Hotels & Resorts owns and manages a premier collection of hotel and resort properties across the U.S. Its 60 properties are primarily located in the gateway markets of the Northeast, Southeast, and the West Coast. Among its top properties are the Hilton Hawaiian Village in Waikiki, Hilton San Francisco at Union Square, and the Casa Marina, a Waldorf Astoria resort. Park Hotels’ properties can be categorized into the following segments: Resorts (12 properties), Prime City Center (21), Convention (7), and Strategic Airport & Other (20)
Park Hotels’ latest Q3’20 results showed continued weakness, as RevPAR (revenue per available room) was just $26.14, representing an 86% YoY decrease. It is, however, an improvement from the $7.85 RevPAR that the company saw in Q2’20. Occupancy also improved sequentially, from 20.8% during Q2’20 to 36.4% during the latest quarter.
Looking forward, I’m encouraged by the increased air travel, and continued re-openings through the remainder of the year. This is supported by management noting that airline loads are at over 50%, with Hawaiian Airlines (NASDAQ:HA) reporting that it expects to reach over 50% capacity by December, while both United (NASDAQ:UAL) and Southwest (NYSE:LUV) expect to significantly ramp up flights into Hawaii over the next two months.
All combined, management expects 50 out of the company’s 60 properties to be opened by year-end, with those hotels representing 74% of total rooms. As such, I expect to see continued sequential improvement in the Q4 results, especially considering the holiday travel season and pent-up consumer demand.
Despite this optimism, I believe it will take some time before Park Hotels can return to profitability. I think this rings particularly true for Park’s convention business segment, as many companies have not even fully re-opened their offices, let alone authorize corporate travel. This is supported by management’s sentiment during the Q&A session of the recent conference call, in which it referred to the 2022 to 2023 time frame for a meaningful return of business travel.
Focusing on Park’s Q3 financials, as seen below, EBITDA remains negative, with a $89M loss, compared to the $180M EBITDA that Park Hotels generated in Q3’19. This was, however, an improvement from the $122M EBITDA loss that the company saw in Q2’20.
(Source: Q3’20 Earnings Presentation)
Meanwhile, Park Hotels has plenty of liquidity to weather the current challenges, with a cash balance of $1.2 billion, and an additional $474M in remaining capacity on its revolving line of credit. At the end of Q3, Park had drawn $1.075 billion on its revolving credit line, and extended the maturity date for $901M of the aggregate commitments under the Revolver to 2023.
As seen in the EBITDA statement (above the prior paragraph), Park Hotels’ interest expense increased by 79% YoY, from $33M in Q3’19 to $59M in the latest quarter. I see the usage of debt (i.e. the revolving credit line) to fund operating expenses to be a financial headwind for the company, even after pandemic conditions improve, as this debt will have to be repaid, eventually.
Turning to valuation, it appears that Park Hotels’ shares are trading rather cheaply, at a price-to-tangible book value of just 0.48. As seen below, the stock had traded a ratio around ~1.0x before the start of the pandemic. It should be noted that tangible book value has declined by 12% since the end of 2019, from $24.41 at Dec ’19 to $21.53 at Sept ’20. Looking forward, I expect the decline in tangible book value to moderate, as operating metrics gradually improve, as we saw in Q3.
(Source: Seeking Alpha)
Investor Takeaway
Park Hotels has seen its business crater since the start of the pandemic. The latest quarter has shown some improvement in the operating metrics, and I expect Q4 to improve further, given a continued improvement in travel and the holiday season. However, I do see a challenging road to profitability ahead for Park Hotels, especially in the business travel segment. Meanwhile, enterprising investors may find value in the low valuation of the share price, considering the low price-to-tangible book value. Considering these factors, I have a Hold rating on the shares, as I believe risk-averse investors may want to wait for a better entry point.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
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