11/14/2018

Valuation Driven Buy Idea: Park Hotels & Resorts Inc. (NYSE: PK)

Below is an investment idea that was released to our clients on July 9th, 2018 from our Quarterly Focus Buy List. This list is designed to highlight 5-7 new buy ideas every quarter that are attractively priced and have a clearly identifiable short-term catalyst. Our analyst team delivers a short report on each name as well as a custom model to help our clients with fresh buy ideas that have been researched and vetted.

Overview:
Park Hotels & Resorts Inc. is a lodging real estate company. The Company operates through ownership segment, which includes all of its hotel properties. As of March 31, 2018, the Company’s portfolio consisted of 44 hotels and resorts with over 25,000 rooms located in the United States and international markets. Its portfolio includes hotels in areas, such as New York City, Washington, D.C., Chicago, San Francisco and London; resorts in leisure destinations, including Hawaii, Orlando and Key West, and a range of properties adjacent to gateway airports, such as Los Angeles International, Chicago O’Hare, Boston Logan and Miami Airport, and select suburban locations. The Company’s brand affiliations include Conrad Hotels & Resorts, DoubleTree, Embassy Suites, Hampton, Hilton Hotels & Resorts, Hilton Garden Inn, Curio – A Collection by Hilton, and Waldorf Astoria Hotels & Resorts.

Business:
PK is organized as a real estate investment trust (REIT) and maintains a fairly even mix of resort, airport, urban and suburban assets. As of March 31, 2018, the firm’s property mix consisted of: Resort – 9 hotels; 6,728 rooms; Urban – 12 hotels; 10,216 rooms; Airport – 13 hotels; 6,357 rooms; Suburban – 10 hotels; 2,427 rooms.

These properties attract both consumer and business clients. A majority of the firm’s properties are run as Hilton affiliates, and in particular, are good value-branded hotels. Hilton partnerships such as the DoubleTree, Garden Inn and Hampton Inn brands have emerged as interesting value brands over the past few years. The hotels offer basic necessities and collect ancillary revenues for things that were formerly free of charge such as a room with a fridge or a view, internet, and breakfast. With this setup, the hotels can carry the Hilton brand name, while charging slightly less than competitors such as the Hilton main brand, or Marriott. We believes that strong hotel performance should help drive and/or maintain property value, even in a rising interest rate environment.

Catalysts

US Economy:
The US economy is in one of the strongest periods of growth in history. Stocks are at record highs, unemployment is near record lows, and GDP is also at record levels. Additionally, real personal income in the US hit records in the first half of 2018. The strength of the economy and individual income should yield robust demand for hotel space in the near term.

Business Transformation:
During the first half of 2018, PK sold 13 properties to consolidate operations. Many of these properties were in international markets, as the company is striving to focus on its core US ventures. The results have paid off so far: EBITDA Margins rose to 32% in Q1 2018 from ~20% in Q1 2017 (although a fair amount of this increase was due to gains on property sales). The firm also believes that it can fetch good pricing for the hotels it is shedding. For example, in May 2018, PK sold its joint venture in a 601-room Hilton property in Berlin for roughly 20x last year’s EBITDA. We believe moves like this will benefit the firm by freeing up liquidity or providing funds for more share buybacks. In the first quarter of 2018, PK repurchased ~14 million shares. Additionally, going forward, the remaining core US properties should yield higher margins for the company.

Conclusion & Model:
PK owns a unique set of hotel and resort properties, mainly in the US, with a diverse mix of locations geographically and within cities, suburbs and airports. The current strength of the US economy, along with the firm’s plan to focus on its core US properties, should give PK’s assets robust demand, and drive margins higher in the near term. We believe that the next 3-6 months should be a great time to own PK. AFG’s model for PK makes two significant assumptions. First, forecasts for sales growth over the next two years are slightly lower than consensus figures. AFG believes that this is necessary, as we want to be conservative about the drop in sales over the upcoming quarters from the shedding of non-core properties. Second, EBITDA margin forecasts for the current year are up due to the expected gains on sales, but drop to 22% in 2019 (slightly higher than 2017 figure of ~20%), reflecting higher expected margins from the core properties.


KEY ARTICLES IMPLEMENTING AFG’S RESEARCH:

How to Win with AFG Company Analysis
Balancing AUM Growth and Portfolio Management Trade-offs
Insights Using A Fundamental And Quantitative Approach To Investing
Linking Corporate Performance to Value
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