Kevin Brown: We have initiated coverage on two new hotel REITs, Park Hotels & Resorts at a fair value estimate of $31, and Pebblebrook Hotel Trust at a fair value estimate of $39. We also cover Host Hotels & Resorts and assign all three companies a no-moat rating.
All three companies compete primarily in the upper upscale segment of hotel brands in urban, gateway markets. The portfolios for these companies are located primarily in central business districts or near convention centers, so the majority of their bookings come from business travelers or group business, which are both relatively insulated from the rise of alternative accommodation competition from platforms like Airbnb.
The main differences between the companies are the hotel brands and the management teams. Host owns mainly Marriott- and Starwood-branded hotels and the management team is focused on repositioning the portfolio to fewer, higher growth markets. Park was spun out of Hilton in 2016 and is still 100% concentrated on Hilton brands, so management wants to diversify their portfolio through acquisitions while maximizing operating efficiencies in the current portfolio. Pebblebrook owns independent and boutique portfolio that management is looking to renovate and improve the portfolio just acquired from the completed merger with LaSalle Hotel Properties.
All three companies are trading at slight discounts to our fair value estimate. However, we assign a high uncertainty to the hotel REITs as we enter the final stages of the current economic cycle. There is upside in these names as we are at all-time highs in occupancy, which could translate to high rate and margin growth. However, issues like the increasing importance of online travel agencies, supply growth, and the potential of a recession weigh on both fundamentals and the stocks. Considering that hotels trade up or down as the U.S. economic outlook changes, we warn investors that investing in hotels can lead to a wild ride.