(Park Hotels – Hilton Waikoloa Village, HI)
COVID’s economic fallout has undoubtedly hit certain industries harder than others. Among the worst-hit are travel-related industries that have seen extreme declines in revenue with little respite from government stimulus. Among these is the REIT Park Hotels & Resorts which trades under the ticker (PK).
Park Hotels and Resorts owns hotel and resort properties across the country and is one of the largest publically traded lodging REITs. The company has been hit hard by the virus (more specifically its social and economic fallout) and ended Q2 with a staggering 96% decline in revenue as it was forced to close over half of its hotels.
The company ended the quarter with $42M in revenue and -$145M in negative operating cash flow as you can see below:
This is a situation so extreme that it is unlikely Park Hotels had made a plan for it. That said, the company is making an effort to navigate the crisis in such a manner that will ideally keep it from declaring bankruptcy. This includes cutting CapEx by 75%, taking $1B from its credit revolver and issued $650M in bonds. According to the latest transcript, the company’s management believes this equates to over 2 years of runway if need be.
A Look at Park’s New Balance Sheet
Park currently has effectively zero revenue and must still pay many of its past expenses. It is likely that revenue has increased from its Q2 level with some reopenings, but as you likely know, lasting reopenings are few and far between, particularly in areas with higher tourist demand (i.e Hawaii).
Park has managed to avoid a liquidity crisis by raising a large amount of capital. This has caused its total liabilities to assets to rise to over 50% and its financial debt to $5.1B. This is a bearish factor but it is offset by the company’s extremely strong $1.18B in working capital. See below:
Luckily, Park Hotels did not have an extreme debt load before the crisis so they have adequate room to increase leverage. The company saw roughly -$150M in negative operating cash flow last quarter. I believe this quarter and even Q4 may be similar. Revenue may increase, but Park had abnormally low property expenses in Q1 at $150M. It usually posts quarterly property expenses of $400-$500M so I believe this figure will rise such that it offsets any increases in sales. We can safely assume few people are willing to go to a hotel with zero amenities and still be charged at the same price.
Given this, I believe the company will lose an additional $400-$600M in total operating cash flow which should be counted against its working capital from a NAV standpoint. The assumption here is roughly negative $150M in Q3 and Q4 with lower but still negative figures into 2021. In other words, I do not expect Park Hotels to see a full recovery until a year from now. Even then, few people will likely make vacation plans until they know with certainty that amenities will be open.
Park Hotels’ NAV Estimate
In normal times, Park has an annual NOI of around $700M, which is its operating income before depreciation. Lodging Cap Rates are usually at the high end around 9-11%, so this gives us an estimated property asset value of roughly $7B. On top of that, we have roughly $1.4B in other tangible assets against $5.7B in total tangible liabilities. This gives us an estimated equity value of $2.7B. I then deduct $500M in expected forward COVID-related losses which give us an estimated Net Asset Value of $2.2B or $2.15B after deducting minority interest. This corresponds to an estimated share valuation of $8.92.
This is a good sign that Park Hotels is currently trading near fair value since its current market capitalization is $2.25B which is well within the margin-of-error of my NAV estimate. Of course, there is high uncertainty surrounding this figure with the most significant assumption being my $500M estimated forward loss due to COVID. The longer Park is unable to operate, the more these losses will compound as staff leave to find new jobs.
Overall, I believe it is likely that Park’s equity will survive the current situation. The company is in an awful situation, but its management was wise to not take on too much leverage in normal times, giving it adequate room to safely increase debt in order to survive today.
That said, its upside opportunity from here appears generally low and the company does not appear to be undervalued. If the crisis ends by Q3 as perhaps a vaccine is available or lockdown/slowing efforts are ended then PK is likely undervalued by 10-20%. If the crisis continues into Q1-Q2 of next year and the 2021 summer vacation season is negatively impacted, losses may compound. Chiefly, if temporarily laid-off workers find new permanent jobs, then Park Hotels will be unable to fully reopen facilities for some time. This would likely result in long-lasting deterioration which would bring PK’s fair value lower.
There is also the question of credit downgrades and financial covenants. The company currently has a lower B rating and will likely have issues with its covenants. Precedent suggests that most lenders are not too stringent with certain covenants since it is assumed most firms will eventually see income recover. Still, Park is unlikely to have a dividend or buybacks for quite some time. Indeed, paying dividends with borrowed money is rarely a good long-term idea.
Overall, PK could be a value opportunity but it could also be a trap at its current price. If the stock were to fall to the $5-$7.50 range, it would almost certainly be a buy, but I believe the stock is currently trading at its fair value all factors considered.
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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.