Park Hotels & Resorts Q1 Earnings: The Recovery Is Coming Along Nicely

Summary

• Park Hotels & Resorts has seen some impressive results lately, especially in early 2022.
• Occupancy rates are on the rise and its revenue and cash flow picture continues to improve as a result.
• PK stock still makes for an attractive opportunity for investors to explore since the firm is likely to achieve a full recovery.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

Marko Geber/DigitalVision via Getty Images

Few industries have been as negatively affected by the COVID-19 pandemic as the hotel industry. Many of the players in this space were financially devastated for a long while. And only now are we beginning to see a true recovery in that market. Given the uncertainty of what the future holds, it makes sense for investors to be wary of buying into this space. But for those who don't mind diving in, the rewards could be significant. One player in the space that has performed remarkably well recently has been Park Hotels & Resorts (NYSE:PK). Although it would be accurate to say that the business is still far from being fully recovered, the overall trajectory for the firm is attractive. Add on top of this the fact that shares of the business, assuming a full recovery, do look appealing as well, and investors would be wise to consider this as a valid opportunity.

Park Hotels & Resorts - Recent developments are solid

Back in July of 2021, I wrote an article about Park Hotels & Resorts wherein I discussed the opportunity the company offered to investors. I lauded the company’s attractive portfolio of assets, a portfolio that includes 48 consolidated lodging real estate assets, plus 6 additional ones that are jointly owned with other parties. In all, the company's portfolio has over 32,000 rooms, with over 86% of these rooms classified as either luxury or upper upscale in nature. At the time of the writing, I said that shares of the business were trading on the cheap if we assumed a turnaround would take place. Ultimately, I concluded that this might result in attractive upside. At the end of the day, I ended up rating the company a ‘strong buy’, which indicates that I believe it has the potential to generate returns that significantly outpace the market. Since then, the results have been excellent. While the S&P 500 has dropped by 4.9%, shares of Park Hotels & Resorts have generated a return for investors of 5.4%. That translates to a 10.3% spread.

Author - SEC EDGAR Data

The great thing for investors is that this move higher was not random. Instead, it was attributed to attractive fundamental performance by the company. When I last wrote about the firm, I did not have data covering all of 2021. Now, I do. For the year as a whole, Park Hotels & Resorts generated revenue of $1.36 billion. This compared favorably to the $852 million generated in 2020, but was still well below the $2.84 billion the company achieved in 2019. Much of this improvement came down to strong occupancy. You see, in 2020, the company saw its occupancy rate plunge, with April of that year being the lowest at 3.9%. In 2021, the business was already slowly recovering, with an occupancy rate of 26.6% for the first quarter of the year. That number grew to 52.5% by the final quarter of 2021, even hitting 55% in December of that year.

The company has improved in other ways as well. During 2021, for instance, it generated a net cash outflow of $137 million. Although this may not sound great, it was better than the $438 million in cash the company lost in 2020. FFO, or funds from operations, grew from a negative $500 million in 2020 to negative $163 million in 2021. On an adjusted basis, this number improved also, going from a negative $389 million to negative $136 million. And finally, we have EBITDA. This was actually positive in 2021 to the tune of $142 million. That compares to the negative $194 million lost in 2020.

Author - SEC EDGAR Data

What's really great for investors is that the company's recovery continues. On May 2nd of this year, management announced financial results covering the first quarter of the company's 2022 fiscal year. Revenue surged to $479 million. That compares to the paltry $165 million the company generated in the first quarter of 2021. It also beat analysts’ expectations by $58.47 million. Occupancy really continues to climb at a nice rate. According to management, the occupancy rate across the company’s 48 consolidated properties came in at 51.9%. The low point was the 40% that the company achieved in January. This jumped to 52.9% in February before climbing further to 62.9% in March. On top of this, management expects the company's occupancy rate to continue climbing, with the figure likely hitting 70.1% for all of April. Management has not provided any guidance for the entirety of the 2022 fiscal year. But they do see the situation improving for the entirety of the second quarter.

Just as the company reported strong results on its top line, it also posted generally impressive figures for its bottom line. For starters, FFO per share came in at $0.08. Though this may not sound like much, it did beat expectations by $0.09 per share. For the second quarter of this year, management anticipates adjusted FFO of between $0.40 per share and $0.49 per share. That compares to the $0.08 per share the company generated in the first quarter and is up from the negative $0.48 per share the company reported the same time last year. In absolute dollar terms, FFO for the company came in at $13 million for the quarter, while the adjusted FFO figure was $18 million. That compares to the negative $115 million and negative $113 million, respectively, that the business generated one year ago. Meanwhile, EBITDA for the company totaled $82 million during the first quarter. That compares to the negative $49 million achieved in 2021’s first quarter. For the second quarter of the year, management expects EBITDA to be between $160 million and $180 million.

Clearly, the picture for Park Hotels & Resorts is improving rapidly. Some of this anticipated future improvement also comes from the fact that management is going to re-open their 1,024 room Parc 55 San Francisco property on May 19th. But the majority of the improvement seems to be coming from a recovery in demand for experiences like what this business offers. In terms of pricing the company, that picture is rather difficult. Although the company has five fewer consolidated properties and one fewer unconsolidated properties than it did at the end of 2019, perhaps the best approach to valuing the firm would be to assume an eventual recovery back to those levels. Of course, to get there, the company would need to achieve the same kind of occupancy rate, about 82.7%, that its properties enjoyed back then.

Author - SEC EDGAR Data

If we assume that the company does eventually make a full recovery, shares look quite attractive. The price to operating cash flow multiple of the firm would be 9.3. The price to FFO multiple would be lower at 8.4, while the price to adjusted FFO multiple would come in at 7.7. And finally, the EV to EBITDA multiple for the firm would be about 11.5. I even stripped out $100 million in cash flows from each of these metrics to account for the loss of properties and shares still look appealing, with these multiples adjusted to 11.7, 10.2, 9.3, and 13.2, respectively. To put this in perspective, I decided to compare the company to five similar firms. I based my analysis on the multiples those companies were trading at back in 2019 as well. On a price to operating cash flow approach, these firms ranged from a low multiple of 7.6 to a high multiple of 12.7. Using the EV to EBITDA approach, the range was from 10.3 to 14.6. In both of these cases, two of the five companies were cheaper than our prospect. Using the adjusted figures, only one of the firms, from a price to operating cash flow perspective, is more expensive than our target. For the EV to EBITDA scenario, this also holds true.

Company	Price / Operating Cash Flow	EV / EBITDA
Park Hotels & Resorts	9.3	11.5
Ryman Hospitality Properties (RHP)	12.7	14.6
Apple Hospitality REIT (APLE)	9.5	11.6
Pebblebrook Hotel Trust (PEB)	8.9	12.3
Sunstone Hotel Investors (SHO)	10.8	10.3
RLJ Lodging Trust (RLJ)	7.6	11.1

Click to enlarge

Takeaway

Based on all the data provided, I do believe that a full recovery, or something close to it, is almost certain for Park Hotels & Resorts. In addition to that, I would make the case that shares probably have some additional upside potential. Because of the returns the business already generated, I do not feel it is necessarily a ‘strong buy’ anymore despite being as attractive from a pricing perspective as it was in my last article. But I do think it is worthy of a ‘buy’ designation right now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.