Undervalued by 50% and Yielding Nearly 5%, This REIT Is a Buy

Park Hotels & Resorts PK took a significant hit during the pandemic. But as leisure travel has rebounded to prepandemic levels, we expect the company to enjoy several years of above-average growth as business travel recovers too. Park Hotels makes our list of the seven most undervalued REITs with high dividend yields. The REIT is also one of our analysts’ 33 undervalued stocks this quarter and one of Morningstar U.S. market strategist Dave Sekera’s four stocks to buy in the third quarter.

Park Hotels & Resorts is the second-largest U.S. lodging real estate investment trust; it focuses on the upper-upscale hotel segment. Since spinning off from Hilton Worldwide in 2017, Park has sold all its international hotels and 15 lower-quality U.S. hotels to focus on high-quality assets in domestic gateway markets. The 2019 acquisition of Chesapeake Lodging Trust diversified Park’s brands to include Marriott, Hyatt, and IHG hotels. The coronavirus significantly affected operating results for Park’s hotels, with high-double-digit declines in revenue per available room and negative EBITDA in 2020. However, the rapid rollout of vaccinations allowed leisure travel to quickly recover, leading to significant growth in 2021 and 2022. We think the company should continue to see strong growth as business and group travel also recovers to prepandemic levels, and we expect Park to return to 2019-level results by the end of 2024.

Key Morningstar Metrics for Park Hotels & Resorts

• Fair Value Estimate: $26.50
• Star Rating: 5 Stars
• Economic Moat Rating: None
• Uncertainty Rating: High

Economic Moat Rating

Park’s hotels are high-quality assets in major urban and resort locations. However, Park does not own a controlling share of hotel rooms in any given market, and its assets aren’t differentiated enough from other offerings to command any outsize market power. Since hotel accommodations are elastic in demand and most consumers are price-sensitive, competitors can easily steal occupancy by offering low rates, which happens immediately as hotels turn over their tenants each night. Even if Park had significant concentration in a given market and differentiated assets, the barriers to supply are extremely low and competitors can easily copy winning design concepts, erasing any economic gains made by the company. As a result, the net operating income levels and the revenue per available room and margin increases the company achieves on its properties, compared with the initial capital investment, produce returns that are below the weighted average cost of capital, leading us to conclude that the company has no economic moat.

Read more about Park’s moat rating.

Fair Value Estimate for Park Stock

Our $26.50 fair value estimate implies a 7.2% cap rate on our forward four-quarter net operating income forecast, a 14 times multiple on our forward four-quarter funds from operations estimate, and a 3.0% dividend yield based on a dividend payment of $0.80 per share in 2022. Our assumptions about growth in revenue per available room, food and beverage, other revenue, and expenses drive total company annual same-store net operating income growth averaging 7.5% across our 10-year forecast. We believe Park will start to acquire high-quality hotels at an average 6.5% cap rate and selectively dispose of noncore hotels at an 8.5% cap rate to partially fund its external growth each year. We estimate Park’s net asset value to be approximately $22 per share based on an 8.0% nominal cap rate assumption.

Read more about Park’s fair value estimate.

Risk and Uncertainty

Park’s portfolio consists mostly of Hilton brands and thus is heavily concentrated in a single hotel operator. Hotel performance is sensitive to factors that affect the overall tourism and travel industry, particularly for Park’s properties in popular destination markets. Significant changes in currency exchange rates or acts of terrorism have historically affected hotel demand—and Park’s operations. Hotel supply has been elevated in many of the biggest markets, and that is likely to continue for a few more years. Online travel agencies and online hotel reviews create immediate price discovery for consumers, preventing Park from pushing rate increases. Also, Airbnb has created a shadow supply of lodging stock that competes with traditional hotels.

Read more about Park’s risk and uncertainty.

Park Bulls Say

• Potentially accelerating economic growth may prolong a robust hotel cycle and benefit Park’s portfolio and performance.
• Low leverage gives Park greater financial flexibility to be opportunistic with new investments or return more capital to shareholders through dividend growth or share buybacks.
• Park’s management identified several enhancement initiatives that it can execute to drive EBITDA higher on the acquired Chesapeake portfolio.

Park Bears Say

• Significant new supply in several of Park’s core markets and rising interest rates will pressure the company’s performance and valuation.
• The growing adoption of home-sharing services like Airbnb and online travel and rating sites like Expedia may erode pricing power and profitability.
• A wave of millennial travelers will dictate future trends in lodging demand, potentially faster than Park and its conventionally branded portfolio can adapt.