EUR 850.00 For Business Accounts Only

Morningstar | Management at Park Hotels Could Drive Fundamentals Higher Despite Challenging Environment

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 spin-off, the company has sold 10 international hotels and three lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Since the company has not acquired any new hotels to-date, all of the company's hotels are still under Hilton brands. Instead, Park has used some of the proceeds to buy back shares and has over $400 million available to acquire assets, pay down debt, or buy back more shares.Numerous issues will make it difficult for Park to drive outsized growth over the next few years. While occupancies are at all-time highs, rate growth is limited due to the increased price discoverability provided to consumers by online travel agencies and review websites. Supply levels in many key markets keep revenue growth down even as demand growth remains healthy. While the impact of alternative lodging options like Airbnb on Park's urban, high-quality and business-focused hotels is limited most nights, it does limit Park's ability to push rates on nights where it would have typically generated its highest profits. With the economic cycle stretching out, expense growth has picked up and made it harder for Park to drive net operating income growth.Still, we think Park does have some opportunities to create value. Management has only had control of the portfolio for two years, and we think there is some additional growth that can be squeezed out of applying the best practices learned from decades of experience to drive revenue higher and implement cost-saving efficiencies. The company would benefit from diversification of hotel brands while narrowing its focus on high-growth markets, which we think it can do through acquisitions and further dispositions of noncore assets. It may need to wait until the next recession to find the right buying opportunities, but the cash on hand should eventually be deployed in a way that creates value for shareholders.