Company Reports

The REIT sector in the US offers many companies that should see relatively stable cashflow growth over the next several years. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years with many reaching historical levels of net operating income growth, the REIT sector underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that is due to the sector’s negative correlation with interest rates, as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. Still, we still view many of companies in the US REIT sector as being undervalued as the companies should continue to produce solid long-term growth.

Despite a rally over the past two months, we still view the US REIT sector as being undervalued. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors led combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past three years, with many reaching historical levels of net operating income growth, the REIT sector has underperformed the broader equity markets in 2023 and into the first half of 2024. We believe that the cause has been due to the sector's negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, interest rates have fallen since the end of July, leading to a rally for the REIT sector. We believe that US REITs will continue to see share price movements that are inverse of interest rate movements.

Park Hotels & Resorts reported second-quarter results that were relatively in line with our expectations, leading us to reaffirm our $25 fair value estimate for the no-moat company. Occupancy was only up 0.1% to 77.1%, while the average daily rate increased 1.8% in the second quarter. Combined, revenue per available room increased 2.0%, which was in line with our estimate of 2.1% revPAR growth. However, total revenue growth, which includes food and beverage revenue and other hotel revenues, was up 3.2% in the second quarter. Hotel operating expenses were up 3.1%, so hotel EBITDA margins increased 10 basis points to 29.9% and hotel EBITDA increased 3.4% in the quarter. Park reported adjusted funds from operations of $0.65 per share in the second quarter, which was a penny better than our $0.64 estimate for the quarter and 8.3% higher than the $0.60 figure reported in the second quarter of 2023.

The US REIT sector remains significantly undervalued, in our perspective. While the pandemic hurt REIT valuations in 2020, the recovery of fundamentals across most sectors combined with low interest rates led to strong total returns in 2021 and early 2022. However, despite fundamentals continuing to perform well over the past two years, with many REITs reaching historical levels of net operating income growth, the sector has underperformed the broader equity markets over the past two years. We believe that the cause has been the sector’s negative correlation with interest rates as income-oriented investors rotate out of the sector, higher rates lower the value REITs can create with external growth, and property valuations fall in line with higher rates. However, we don’t believe that higher rates significantly change our fair value estimates for the sector. Additionally, interest rates are down from the October 2023 highs, and REIT share prices have generally inversely followed the movements of the US 10-year Treasury.

While the hotel industry saw a rapid recovery from the coronavirus pandemic as people sought to resume normal travel plans as soon as possible, growth across the hotel industry has mostly stagnated over the past two years. Leisure travel returned to near prepandemic levels in 2021, but high inflation in 2022 and 2023 caused many consumers to prioritize paying for rising costs on necessities like food and rent over additional vacation travel. Therefore, while business and group travel continue to slowly recover, weakness among leisure led to occupancies across the hotel industry stagnating approximately 5% below the 2019 peak. The average daily rate continues to rise across the industry, but the growth over the past two years has been in line with inflation. With flat occupancy growth and decelerating rate growth, revPAR growth for the industry has fallen to flat to low single digits thus far in 2024. However, we believe that as inflation falls, leisure travel will stabilize and eventually return to the prior peak and, combined with the continued recovery of business and group travel, future years should see revPAR growth closer to 3%.

Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complementary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

First-quarter results for no-moat Park Hotels and Resorts were better than our expectations, giving us confidence in our $26 fair value estimate. Occupancy improved 350 basis points to 70.9%, though that is still below the 76.2% level reported in the first quarter of 2019. Average daily rate grew 2.5% year over year, leading to revenue per available room growth of 7.8% that was ahead of our 4.4% estimate for the quarter. Meanwhile, hotel operating expenses only grew 5.1%, leading to hotel EBITDA margins expanding 190 basis points and hotel EBITDA growing 16.0%. As a result, Park reported adjusted funds from operations, or FFO, of $0.52 per share in the first quarter, which was eight cents better than our $0.44 estimate and 10 cents better than the $0.42 figure reported in the first quarter of 2023.

Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

Park Hotels and Resorts reported fourth-quarter earnings that were better than we anticipated, leading us to reaffirm our $26.50 fair value estimate for the no-moat company. Occupancy increased 150 basis points year over year to 71.0% in the fourth quarter, though that is still below the 79.6% figure reported in the fourth quarter of 2019. Average daily rate only grew 1.9%, but that is an improvement over the decline reported in the past two quarters. Combined, revenue per available room, or revPAR, grew 4.1%, relatively in line with our estimate of 3.8% growth, and is now 2.5% higher than the fourth quarter of 2019. However, hotel operating expenses increased an even higher 5.9%, leading to hotel EBITDA margins falling 80 basis points to 27.5% and hotel EBITDA only growing 2.1% in the fourth quarter. While funds from operations, or FFO, came in at just $0.28 per share in the fourth quarter, adjusted FFO was $0.52 when the company accounts for the one-time interest expense penalty and tax expense associated with the company’s exit from the Hilton San Francisco hotels, which was higher than our $0.44 estimate.

Park Hotels & Resorts is the second-largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all its international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper-upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Third-quarter results for Park Hotels and Resorts were relatively in line with our expectations, leading us to reaffirm our $26.50 fair value estimate for the no-moat company. Occupancy increased 250 basis points year over year to 73.9% in the third quarter, though that is below the 84.5% occupancy figure the company reported for the same portfolio of hotels in the third quarter of 2019. Average daily rate fell 0.5% year over year, though is up 6.9% over the third quarter of 2019. As a result, revenue per available room increased 3.0% year-over-year, which is slightly below our estimate of 6.1% growth and is now just 6.4% below the figure reported in the third quarter of 2019. The company reported same-store revenue growth of 3.9%, hotel EBITDA margin growth of 30 basis points to 26.3%, and hotel EBITDA growth of 5.0% for the quarter. This led to Park reporting adjusted funds from operations of $0.51 per share in the third quarter, a penny better than our $0.50 estimate and nine cents better than the $0.42 figure the company reported in the third quarter of 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 23 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Park Hotels and Resorts reported second-quarter results that were relatively in line with our expectations, leading us to reaffirm our $26.50 fair value estimate for the no-moat company. Occupancy increased to 74.4% in the second quarter, up 390 basis points from 70.5% in the second quarter of 2022. However, the average daily rate slightly declined in the quarter, down 0.2% year over year. As a result, revenue per available room was up 5.3%, relatively in line with our estimate of 4.5% growth. Hotel EBITDA margins fell 310 basis points to 27.7% in the second quarter, though that was slightly better than our estimate of 27.2% hotel EBITDA margins, leading to a hotel EBITDA decline of 5.7% that was better than our estimate of a 9.5% decline. Park reported adjusted funds from operations of $0.60 per share in the second quarter, and while that is a penny below the $0.61 figure the company reported in the second quarter of 2022 it was 2 cents better than our $0.58 estimate.

First-quarter results for no-moat Park Hotels and Resorts were slightly better than we anticipated, leading us to reaffirm our $26.50 fair value estimate. Occupancy improved to 65.0% in the first quarter from 50.8% in the first quarter of 2022. Average daily rate was up 6.6% year over year. As a result, revenue per available room improved by 36.5% in the first quarter, in line with our estimate of 37.6% growth. EBITDA margins improved 550 basis points to 24.2%, which was better than our estimate of 21.7% EBITDA margins. Therefore, Park Hotels reported hotel EBITDA growth of 81.2% that was slightly better than our estimate of 76.2% hotel EBITDA growth. Adjusted funds from operations came in at $0.42 per share, which was 9 cents better than our $0.33 estimate and significantly above the $0.08 figure reported in the first quarter of 2022.

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Park Hotels and Resorts reported results that were slightly ahead of our expectations, leading us to reaffirm our $26.50 fair value estimate for the no-moat company. Occupancy improved to 67.7% from 52.1% in the fourth quarter of 2021, though that is still below the 80.6% level reported in the fourth quarter of 2019. Average daily rate increased 12.7% year over year and 8.4% over the fourth quarter of 2019. As a result, revenue per available room, or RevPAR, increased 46.7% year over year, which is slightly better than our estimate of 41.7% growth and is just 8.9% below the 2019 level. EBITDA margins improved 620 basis points year over year to 25.8%, also slightly better than our estimate of EBITDA margins of 24.6%. Park reported adjusted funds from operations, or FFO, of $0.45 per share in the fourth quarter that came in 4 cents above our $0.41 estimate and 40 cents ahead of the $0.05 figure the company reported in the fourth quarter of 2021.

Park Hotels & Resorts is the second largest U.S. lodging REIT, focusing on the upper-upscale hotel segment. The company was spun out of narrow-moat Hilton Worldwide Holdings at the start of 2017. Since the spinoff, the company has sold all the international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic, gateway markets. Park completed the acquisition of Chesapeake Lodging Trust in September 2019, a complimentary portfolio of 18 high-quality, upper upscale hotels that should help to diversify Park's hotel brands to include Marriott, Hyatt, and IHG hotels.

Third-quarter results for Park Hotels and Resorts were relatively in line with our expectations, leading us to reaffirm our $28 fair value estimate for the no-moat company. Occupancy improved to 71.7%, better than the 50.8% figure reported in the third quarter of 2021 but still below the 84.2% level reported in 2019. Average daily rate was up 14.6% year over year and up 7.2% compared with the third quarter of 2019. As a result, revenue per available room, or revPAR, was up 61.7% in the third quarter, in line with our estimate of 63.4% growth, and is now only 8.8% below the figure reported in 2019. Hotel EBITDA margins also improved in the third quarter, up to 25.9% compared with 20.5% in the third quarter of 2021 and slightly better than our estimate of 25.4% hotel EBITDA margins, though that is still below the 28.5% level reported in the third quarter of 2019. Park reported adjusted funds from operations of $0.42 per share in the third quarter, 2 cents better than our $0.40 estimate, 40 cents better than the $0.02 number reported in 2021, but still below the $0.68 figure reported in 2019.