Park Hotels Earnings: Makes Progress Toward Exiting Two Financially Underwater San Francisco Hotels

Third-quarter results for Park Hotels and Resorts PK 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.

Park continues to make progress in exiting the two Hilton hotels it owns in San Francisco. The company announced that the hotels have been placed into a court-ordered receivership, which therefore means Park no longer has an economic interest in the hotels and will no longer financially support the operations of the hotels. The $725 million mortgage loan on the two hotels matures in November, so Park will also very soon no longer have any interest payments on the two hotels. Given that Park paid $6 million in interest expense for the mortgage on two hotels that combined to only generate $1 million in hotel EBITDA in the third quarter and that the San Francisco market is likely facing a long, slow recovery, we believe that management made the hard but smart choice to give up control of the hotels, which should create value for shareholders.