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Morningstar | Strong Top-Line Results for Park Hotels in 4Q and 2019 Guidance Ahead of Peers

Hotel fundamentals for Park Hotels & Resorts exceeded our expectations for the fourth quarter. Management's top-line guidance is ahead of its peers but in line with our estimates after adjusting for a few moving parts. The strength of Park's portfolio gives us confidence in our $31 fair value estimate for the no-moat-rated company.

Revenue per available room for the same-store portfolio was up 3.6%, well ahead of our 2.5% assumption, as Park was able to push both rate and occupancy. Park was also able to control expense growth in the quarter, leading to EBITDA margin gains of 40 basis points and hotel EBITDA growth of 5.8%, significantly better than our 2.3% EBITDA growth assumption. However, because of higher general and administrative costs along with lower-than-anticipated income from unconsolidated hotels, Park's adjusted funds from operations of $0.73 were in line with our estimates, though this was still well ahead of consensus estimates.

Management's guidance for 2019 was a welcome surprise despite it being in line with to slightly below our estimates, as we have been disappointed by guidance provided by the company's peers. RevPAR is expected to range between 2.0% and 4.0% with our 3.1% near the midpoint. However, our 60-basis-point estimate for margin growth is at the high end of management's guidance for 0 to 60 basis points of margin expansion, suggesting expenses will be harder to control this year. After adjusting for the return of the Hilton Chicago O'Hare upon the expiration of ground lease and the just announced sale of the Pointe Hilton Squaw Peak Resort for $51 million subsequent to quarter end, our current $753 adjusted EBITDA estimate is in the middle of management's range of $745 to $775. However, our adjusted FFO estimate of $3.10 is above the high end of management's range of $2.91 to $3.05, though we think there are steps management could take to reach a higher figure for 2019.

As of the end of 2018, Park is sitting on $410 million in cash, a figure that should only grow given the recent disposition of a hotel for $51 million. Management's guidance currently does not include any acquisitions or any further dispositions. On the call, management said that they were going to be very disciplined about acquiring assets and that they would not issue equity, given that they are trading at a discount to net asset value. We commend them for taking this approach, as we agree that they shouldn't dilute portfolio quality or shareholder value and should instead wait for the right opportunity. However, were management to find a good opportunity, they could create value by properly using its cash balance.

Our model has Park buying back shares given that they are currently trading below our $36.50 NAV estimate and management showed a willingness to do this in 2018 by repurchasing 14 million shares for $348 million. Removing that assumption from our model reduces our AFFO estimate for 2019 to $3.02, putting it within management's guidance. It is possible that Park remains disciplined through 2019, making their current guidance look reasonable, but it is also possible that an opportunity comes along at some point this year that provides them a chance to create additional value for shareholders.