Morningstar has assigned a ‘Buy’ rating to Park Hotels & Resorts (NYSE: PK), establishing a fair value estimate of $23, reflecting a potential upside from the current price of $15.09. As one of the largest U.S. lodging REITs with a focus on upper-upscale hotel properties, Park Hotels continues to demonstrate resilience in a recovering market despite economic uncertainties. Morningstar highlights Park Hotels' strategic asset portfolio, commitment to domestic markets, and strong operational performance as key drivers for long-term growth. Investors are advised to monitor Park's financial maneuvers, which include portfolio refinements and margin improvements, while considering associated risks.

Business Strategy and Growth Potential

- Strategic Portfolio Focus: Park Hotels & Resorts, spun off from Hilton Worldwide in 2017, has streamlined its portfolio to high-quality domestic assets in major gateway markets. The company's asset optimization strategy includes selling international holdings and lower-quality U.S. hotels to focus on premier, upper-upscale properties.
Recent Acquisitions and Upgrades: The acquisition of Chesapeake Lodging Trust in 2019 has diversified Park’s brand mix to include Marriott, Hyatt, and IHG properties. Moreover, renovations completed in 2022-2023 are expected to drive higher revenue per available room (RevPAR) and improve EBITDA margins, enabling Park to outperform industry benchmarks in certain segments.

Growth in Leisure Travel: Leisure travel recovery, bolstered by increased occupancy and pent-up travel demand, has provided significant revenue support. Despite a slower pace in 2023 and 2024, Park Hotels continues to report improved occupancy rates across its portfolio.

Financial Performance and Valuation

- Revenue and EBITDA Margins: Park Hotels posted a revenue increase of 3.2% for Q3 2024, while operating expenses rose by 6.1%, slightly impacting the EBITDA margin. As renovation-driven RevPAR gains materialize, Morningstar anticipates EBITDA margin improvements to slightly exceed pre-pandemic levels over the next few years.
Fair Value Estimate: Morningstar’s fair value estimate of $23 per share suggests a 7.6% cap rate on projected net operating income and a multiple of 11 times funds from operations (FFO). At the current price-to-fair value (P/FVE) ratio of 0.66, Park Hotels appears undervalued, offering investors a favorable entry point in the REIT sector.

Capital Allocation and Debt: Morningstar rates Park’s capital allocation as exemplary, with debt levels aligning with REIT industry averages. Park’s net debt-to-EBITDA ratio is projected to stabilize at 6.2 times in 2025, a sound position that provides flexibility for acquisitions and shareholder returns.

Economic Moat and Competitive Landscape

- Lack of Economic Moat: Morningstar assigns Park Hotels a "no moat" rating, citing limited pricing power and high competition in the lodging sector. Despite owning iconic assets, the portfolio does not achieve sufficient market concentration to command premium pricing.
Competitive Pressures: Increasing supply, particularly from alternative accommodations such as Airbnb, may restrict Park’s ability to push rates during peak periods. Additionally, online travel platforms add pricing pressure by increasing rate transparency, making it challenging for Park to significantly enhance margins.

Operational Scale: Although Park owns landmark properties like Hilton Hawaiian Village, these assets represent a small fraction of market capacity, limiting the company's ability to leverage scale advantages.

Market Position and Risk Factors

- Operational Risks: With properties concentrated in major urban and resort markets, Park faces exposure to fluctuations in the travel and tourism sectors. Economic downturns, exchange rate variations, and geopolitical events could impact demand, particularly in high-profile destinations.
Supply and Demand Imbalances: The influx of new hotels and short-term rentals in key markets may outpace demand, creating occupancy and rate challenges for Park Hotels. Morningstar expects supply growth in Park’s core markets to exert long-term pressure on its ability to raise prices and achieve higher occupancy levels.

Interest Rate Sensitivity: REITs are generally sensitive to interest rate changes, and higher rates can affect REIT valuations by reducing the attractiveness of dividend yields. For Park Hotels, an increase in rates may raise financing costs, impacting profit margins and cash flow.

Target Price and Investor Considerations

- Target Price and Valuation Outlook: Morningstar’s fair value of $23 reflects Park’s operational improvements and anticipated RevPAR growth driven by recent renovations. This valuation accounts for the company’s efficient capital allocation and revenue potential within a recovering hotel market.
Investor Takeaway: Park Hotels offers an opportunity for investors seeking exposure to the lodging sector, supported by its focus on high-quality assets in top U.S. markets. However, given the high level of market competition and limited pricing power, investors should approach Park Hotels with a view toward long-term market normalization rather than rapid gains.