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Morningstar | Park Hotels Announces Acquisition of Chesapeake Lodging Trust, Reports Strong 1Q Results

In addition to reporting first-quarter results that saw strong fundamental growth, Park Hotels & Resorts announced that it is acquiring Chesapeake Lodging Trust in a combined cash and stock deal valued at $2.7 billion. As a result of the deal and the first-quarter results, we are raising our fair value estimate for no-moat Park to $33 from $31. Park is paying $11 in cash and a fixed 0.628 in Park common shares for each Chesapeake. Given each company's closing price on May 3, this represents an 8% premium for Chesapeake, a good deal from Park's perspective. The deal has already been approved by the boards of both companies and is expected to close in either the third or fourth quarter of 2019.

Chesapeake's 18 pro forma hotel portfolio is a good match for Park as it matches Park's upper-upscale focus while diversifying Park away from entirely owning Hilton-branded hotels with several Hyatt, Marriott, IHG, and independent hotels. Our concern about Chesapeake was that it was a high-quality but small portfolio burdened by the large general and administrative costs being a public company. While we don't think Park realizes the full $17 million in G&A savings it’s projecting, Park can run the portfolio much more efficiently than Chesapeake. We like the increased diversification and efficiency of the combined company and favor this deal for Park.

First-quarter operating results for Park came in ahead of our expectations. Same-store occupancy was up 50 basis points to 79.5%, daily rate was up 3.9%, revenue per available room was up 4.5%, and hotel EBITDA was up 9.0%, all ahead of our expectations for the first quarter. However, certain G&A and tax expenses were more front-loaded in 2019 than we were expecting, so Park missed our adjusted funds from operations estimate by $0.06, with a reported $0.67 figure for the first quarter. Still, we view Park's internal growth as a positive, and it gives us confidence in raising our fair value estimate for the company.

We think the acquisition of Chesapeake does a good job of increasing Park's overall quality. Chesapeake currently has the second-highest average revPAR and EBITDA margins among publicly traded REITs. While Chesapeake and Park plan to dispose of the two New York City assets before the completion of the merger and these are among the highest revPAR assets in Chesapeake' portfolio, the 18-hotel pro forma portfolio still improves Park's average quality. Twelve of Chesapeake's hotels would rank among Park's top 25 highest revPAR-producing assets, and the combined entity has an average revPAR 3.5% higher than Park's stand-alone portfolio.

Park also believes that there is further upside potential from Chesapeake's portfolio as it believes that several asset-management initiatives like food and beverage profitability enhancement and increasing other ancillary revenue could lead to $8 million of additional EBITDA in 2020, another $9 million of EBITDA in 2021, and another $8 million to $12 million possible from other sources. This is all in addition to the $17 million in G&A savings Park anticipates immediately recognizing as it reduces the G&A burden on the portfolio from $19 million a year to $2 million in annual G&A costs. While we are conservatively projecting lower EBITDA upside, $6 million in EBITDA gains in 2020 and another $7 million in 2021, than Park currently considers, as enhancements from mergers are typically harder to achieve than the acquiring firm initially believes, we do recognize that the merger increases Park's growth prospects with further upside contemplated in our bull-case scenario.