As the pandemic is now behind us, people are getting back to enjoying vacations and travel, which bodes well for the hospitality industry. Park Hotels & Resorts, one of the largest publicly traded lodging REITs, holds a diverse portfolio of iconic hotels and resorts in prime city center and resort locations, boasting over 29,000 rooms.
Let’s dive into the fundamentals. The company’s revenues are almost back to their pre-pandemic levels, with the revenue generated per available room (revPAR) just 1% away from its 2019 highs, excluding San Francisco. Speaking of which, Park Hotels & Resorts is shedding its San Francisco assets to focus on more robust markets that support revenue growth. Analysts expect the company to continue growing sales at an annual rate of around 5% in the medium term.
Now, let’s talk about the financial side of things. The funds from operations (FFO) metric, which measures the cash flow generated by a REIT, has faced some challenges since 2016. However, as the company recovers from the pandemic, it expects its adjusted FFO (AFFO) to increase by 28% in 2023. Analysts predict that Park Hotels & Resorts will keep growing its FFO at an annual rate of approximately 12% in the medium term.
Of course, as dividend growth investors, we care about those juicy dividends! While the company reduced its dividend during the pandemic, the current quarterly payout of $0.15 seems relatively safe. It pays out only 21% of its AFFO as dividends, leaving room for other financial activities while maintaining an attractive yield of 4.4%. As the AFFO grows, investors should expect mid to high single-digit dividend growth.
Now, onto the exciting part – valuation! Park Hotels & Resorts looks quite undervalued, trading at a deep discount compared to its net asset value (NAV). It’s currently trading at a price-to-AFFO ratio of 6.6, while the real estate sector averages around 14 times AFFO. Also, the company’s shares are trading 43% below their NAV, making it a compelling investment opportunity.
As with any investment, there are some risks to consider. Park Hotels & Resorts carries a high debt level, which could become problematic as interest payments increase. Additionally, the lodging segment is sensitive to economic downturns, and higher interest rates may impact travel demand. Furthermore, the company’s stock trades at a significant discount to NAV, which could affect investor and creditor trust, making it more challenging to raise capital.
I believe Park Hotels & Resorts is a BUY, though it’s not without its risks. The company has stabilized and is recovering from the pandemic, presenting growth opportunities with its diverse high-end assets and strategic management.