PK - Park Hotels: I'm Betting On A Rebound With This 7% Yield

Summary

• Park Hotels & Resorts is seeing a strong recovery in hotel operating fundamentals, driven by increasing travel demand.
• Management has done a good job of deleveraging the balance sheet and reinstating a meaningful dividend.
• Investors betting on a rebound may want to give Park Hotels a hard look for income and growth.

The Lodging segment is arguably the most responsive REIT class to an inflationary environment, given that they can change their rates on a daily basis. With travel now having largely rebounded to pre-pandemic levels, I believe this asset class remains largely ignored by the market, especially considering how far they remain below their near-term highs.

This brings me to Park Hotels & Resorts ( PK ), which as shown below, remains well off its 52-week high of $20.58. In this article, I highlight why income investors may want to give PK consideration at current levels, so let's get started.

Why PK?

Park Hotels is the second largest hotel REIT, with a diverse portfolio of leading hotels and resorts across 47 premium brands and 30,000 rooms. Unlike hotel REITs like Chatham Lodging ( CLDT ), which focuses on business travel, PK has a more well-rounded exposure to leisure (35% of revenue), business travel (29%), and group settings for conferences (31%).

As shown below, the popular tourism state of Hawaii represents a quarter of PK's revenue, followed by other key business, conference, and tourism destinations including San Francisco, Orlando, New Orleans, and Boston.

Meanwhile, PK's management recently posted an encouraging preview to Q4 results, with November 2022 RevPAR (revenue per available room) being up by 49% YoY to $156, and sitting just 11% shy of 2019 levels. Also encouraging, occupancy was a respectable 67% in November, up 16% YoY and sitting just 14% shy of 2019 levels.

Looking ahead to December and January results, I would expect for the positive trend to continue. This is supported by the following analysis from Hoya Capital, which has indicated robust growth in TSA checkpoint levels, with January now trending above pre-pandemic levels, as noted below:

As illustrated through TSA Checkpoint travel volume data - a key high-frequency indicator that we've tracked throughout the pandemic - travel demand in the U.S. has steadily recovered since bottoming in mid-2020, pushing through periodic interruptions from new COVID variants, major weather events, surging fuel prices, vaccine mandates for international travel, and broader economic headwinds. Travel demand recovered to within 10% of pre-pandemic levels in the back half of 2022 as several years of pent-up leisure demand helped to offset a sluggish business and group travel recovery - and pushed above 100% for the first time in early January.

Also, Hoya Capital believes that business travel is evolving from pure business cities to destination cities. This is driven by an increasing work-from-home and hybrid office culture, facilitating the need for in-person team meetings in destination cities, which as shown earlier, Park Hotels excels at.

Meanwhile, management has done a good job of deleveraging the balance sheet, as the net debt balance of $3.9 billion sits $300 million below where it was at the start of 2022. PK also carries a safe long-term debt to gross assets ratio of 38% and has $1.9 billion in liquidity, giving it plenty of funding capacity to weather potential near-term challenges and fulfill its development / redevelopments as noted during the last conference call :

We've got the DoubleTree project in San Jose and converting that. It's in a planning phase now. Given the uncertainty, we clearly are committed to getting the Bonnet Creek resort and that expansion done, and it's well underway.

And as we mentioned, the Waldorf ballroom will open next month. And obviously, the Hilton, Signia in about another 13 months plus or minus. And then we're also are completely renovating the guest rooms the public space and of course our world-class golf course as well. Casa Marina, we've had enormous success with the reach the sister property there. We expect that we will have at least that if not better with a complete renovation of the Casa Marina as well.

Importantly for income investors, the dividend is back at a $0.25 quarterly rate. This comes out to a 56% payout ratio based on analyst expectations for $1.80 FFO per share in 2023. Comes out to a respectable 7% dividend yield with the potential for raises down the line.

Lastly, PK appears to be undervalued at the current price of $14.20 with a forward P/FFO of 9.6 based on 2022 FFO/share estimates, and a forward P/FFO of 7.9 based on 2023 estimates. Analysts have a consensus Buy rating on the stock with an average price target of $16.31 , implying potential for double-digit returns in the near term.

Investor Takeaway

Park Hotels & Resorts is seeing a strong recovery in hotel operating fundamentals, and this is set to continue with positive trends from TSA checkpoint levels in December and January. Plus, management has done a good job of deleveraging the balance sheet and reinstated a meaningful dividend that equates to a 7% yield at the current price. As such, investors betting on a rebound may want to give PK a hard look at current prices.

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