Park Hotels Earnings: Results in Line With Expectations; San Francisco Hotel Debt Payments Stopped

Park Hotels & Resorts PK 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.

Park announced that it has stopped servicing the $725 million mortgage loan secured by the company’s two San Francisco hotels, the Hilton San Francisco Union Square and the Parc 55 San Francisco, that is set to mature in November 2023. Park is working with the lender to determine the best course of action, but anticipates any result will lead to the removal of both hotels from the company’s portfolio. While we don’t have an estimate for the value of the two hotels, we assume that the company’s own valuation on the two assets has fallen well below the $725 million debt outstanding on them. Therefore, while Park will likely be forced to pay some fees and interest penalties, the lender foreclosing on the assets will ultimately be a positive for Park shareholders as the reduction in interest payments will likely be greater than the reduction in EBITDA.