PK - Park Hotels & Resorts

[jckund]

Lots of discussion here about retail/commercial REITs, but haven't seen much on hotel REITs. Obviously, this sector is getting hit hard but the sell-off appears pretty uniform without much consideration for the specifics. Kudos to valueinvestor for bringing PK to my attention, but I went ahead and did some digging on it. Unlike a lot of players in this space that operate a portfolio of major hotel brands in mid-tier cities or ok hotels in major cities, PK has a high quality portfolio of 60 hotels, mostly Hilton. 17 have ground leases, they own the land on the rest. It's a fairly even split between resorts and metropolitan business areas (20% Hawaii, 15% SF, 11% Orlando, then NO, NYC, Boston...), and I understand that earnings will be suppressed for a while, maybe even causing a number of hotels to close permanently, which is why I want the high quality stuff.

 

So anyway, I get the sell-off rationale: hotels trending to zero occupancy for the next 3+ months, liquidity constraints, likely a dividend cut hurting REIT investors and triggering a fund sell-off there. This will also certainly hurt demand for the foreseeable future, but I feel it's too shortsighted. I'm looking 3-5 years down the road... I did a few simple analyses on both short-term liquidity and asset value. Maybe this warrants an even longer post, but here are my rough calcs:

 

On liquidity, I assumed zero revenue for all of 2020 (and no variable costs associated with it). They have to be generating something this year, but let's be super conservative. $320M of cash + $1B revolver draw - $70M capex - $120M interest - $1B fixed cash expenses (assuming no cuts here) - $108M of Q1 dividend being paid is roughly flat. So they'd have no cash on hand, assuming they cut the dividend for the balance of the year. Not necessarily pretty, but this is a worst case and I presume they can either upsize the revolver or tap the capital markets (albeit expensively) if they should need more capital. Again, there's no way revenue/GM is $0 this year, and I'd be shocked if they haven't cut some degree of the fixed expenses (corporate/SG&A personnel).

 

On asset valuation, just looking at book value (which always undervalues older properties on the books) gives me a $18.68 NAV per share, which incorporates the cash/debt position contemplated above... $9.6B of property (they own most of the land too!) + $0 cash - $5.1B of debt = $4.5B... ~240m shares outstanding. They have consistently sold properties for gains, further supporting my thinking that the properties are undervalued on the books.

 

This stock is trading around $7 per share, which seems like more than enough cushion. I'm no expert on this sector, but what am I missing? Has anyone else done work in this space?

 

[thepupil]

moving my response to you from another thread to here.

 

Background: I took a brief look at hotel REITs late last year when all of them were trading at big discounts to NAV and printing good marks by selling to PE funds. they were a popular HF short on a threefold thesis 1) long-term secular disruption from Airbnb 2) rising labor costs from immigration enforcement/tight labor market 3) poor earnings momentum.

 

I concluded the entire space was at a discount to what PE guys were paying and that HST had the best balance sheet, an increasingly high quality portfolio, was the scale player with strong ties to the franchisors (their HQ is across the street from MAR's in Bethesda as they are the old PropCo from MAR). I concluded I'd buy HST if I had to buy one, but I ddidn't buy any of them (thankfully I found enough ways to lose money in REITs).

 

My thoughts are pretty much the same now, which is why I responded to you with the below. But I haven't had time to really go through it. I think with hotel REITs I'd just be lazy/skittish and buy the safest biggest one. but that probably doesn't have the highest upside.

 

 

orporate debt: $1.4 billion + whatever they need to borrow to get through this

market cap : $1.7 billion

 

$3.1 billion + for the corporate entity

$2.4 billion of asset level debt, of which $1.2 billion is Hilton Hawaiian Village.

they seem to own about 30,000 rooms at share (that is a very rough calc done with my eyeballs trying to account for JV's).

On a consolidated basis the EV is about $5.5 billion or $180K per room.

 

About 7000 of their 30,000 rooms ahve asset level leverage.

 

So another way to view it is to look at the corporate EV of $3 billion and assume they have to hand back the keys, so $3 billion for 23,000 rooms.

 

That's $130K per room, but I'd point out that it looks like some of their most valuable assets are the ones that are encumbered, including their top 2 in Hawaii/SF

 

Pre-corona Revpar is about $277.

Host Hotels top 40 assets do about $227 (2/3 of EBITDA) the whole company does about $184 revpar. althought "total revpar" is more for HST. I'm not sure what number is apples to apples. HST has a bifurcated portfolio with some huge assets that are very valuable (the three hyatt hotels bought for $700K / room, the south beach bought for $1.4 million / room, the Don Cesar, etc.) on a weighted average basis it's lower quality (maybe) than Park, but that's because of huge scale and its ownership of some more mid range stuff, which from a data/importance to the franchisors standpoint is a small positive.

 

Host trades for $200K / room, but just drew down their revolver completely, so they have a $2.8 billion cash horde, virtually no asset level leverage and the cleanest balance sheet int the space.

 

I think what you may be missing is that HST is potentially a better risk reward. Although I did all of that on the fly and I could hear an argument for Park in that someone like HST could buy Park. No one will buy HST because it's the big kahuna.

 

On a mark to market consolidated basis, Park has 70% debt 30% equity balance sheet (again all this was quickly done). On a mark to market casis HST has a $7 billion market cap and $2.5 billion of net debt or so (so more like 70/30).

[jckund]

moving my response to you from another thread to here.

 

Background: I took a brief look at hotel REITs late last year when all of them were trading at big discounts to NAV and printing good marks by selling to PE funds. they were a popular HF short on a threefold thesis 1) long-term secular disruption from Airbnb 2) rising labor costs from immigration enforcement/tight labor market 3) poor earnings momentum.

 

I concluded the entire space was at a discount to what PE guys were paying and that HST had the best balance sheet, an increasingly high quality portfolio, was the scale player with strong ties to the franchisors (their HQ is across the street from MAR's in Bethesda as they are the old PropCo from MAR). I concluded I'd buy HST if I had to buy one, but I ddidn't buy any of them (thankfully I found enough ways to lose money in REITs).

 

My thoughts are pretty much the same now, which is why I responded to you with the below. But I haven't had time to really go through it. I think with hotel REITs I'd just be lazy/skittish and buy the safest biggest one. but that probably doesn't have the highest upside.

 

 

orporate debt: $1.4 billion + whatever they need to borrow to get through this

market cap : $1.7 billion

 

$3.1 billion + for the corporate entity

$2.4 billion of asset level debt, of which $1.2 billion is Hilton Hawaiian Village.

they seem to own about 30,000 rooms at share (that is a very rough calc done with my eyeballs trying to account for JV's).

On a consolidated basis the EV is about $5.5 billion or $180K per room.

 

About 7000 of their 30,000 rooms ahve asset level leverage.

 

So another way to view it is to look at the corporate EV of $3 billion and assume they have to hand back the keys, so $3 billion for 23,000 rooms.

 

That's $130K per room, but I'd point out that it looks like some of their most valuable assets are the ones that are encumbered, including their top 2 in Hawaii/SF

 

Pre-corona Revpar is about $277.

Host Hotels top 40 assets do about $227 (2/3 of EBITDA) the whole company does about $184 revpar. althought "total revpar" is more for HST. I'm not sure what number is apples to apples. HST has a bifurcated portfolio with some huge assets that are very valuable (the three hyatt hotels bought for $700K / room, the south beach bought for $1.4 million / room, the Don Cesar, etc.) on a weighted average basis it's lower quality (maybe) than Park, but that's because of huge scale and its ownership of some more mid range stuff, which from a data/importance to the franchisors standpoint is a small positive.

 

Host trades for $200K / room, but just drew down their revolver completely, so they have a $2.8 billion cash horde, virtually no asset level leverage and the cleanest balance sheet int the space.

 

I think what you may be missing is that HST is potentially a better risk reward. Although I did all of that on the fly and I could hear an argument for Park in that someone like HST could buy Park. No one will buy HST because it's the big kahuna.

 

On a mark to market consolidated basis, Park has 70% debt 30% equity balance sheet (again all this was quickly done). On a mark to market casis HST has a $7 billion market cap and $2.5 billion of net debt or so (so more like 70/30).

 

Thanks for the thoughts. Agree, there are some secular headwinds (AirBnB being one, labor being the other but perhaps less so now). Another is just general hotel oversupply with a lot of new builds coming to market in recent years. Don't love the space anywhere close to NAV, just thought it got interesting at these levels with such a discount at hand. So it seems a deeper dive would involve me picking apart the individual hotel assets and trying to assign values via transaction comps (on a value per room basis). I looked briefly at HST as well, definitely a cleaner/safer balance sheet. It just wasn't trading at nearly the same NAV discount (and probably for good reason) so I looked the other way. I wanted a two-sided bet on both book value margin of safety and future earnings reversion, and HST mainly just offered the latter.

[EricSchleien]

Lots of discussion here about retail/commercial REITs, but haven't seen much on hotel REITs. Obviously, this sector is getting hit hard but the sell-off appears pretty uniform without much consideration for the specifics. Kudos to valueinvestor for bringing PK to my attention, but I went ahead and did some digging on it. Unlike a lot of players in this space that operate a portfolio of major hotel brands in mid-tier cities or ok hotels in major cities, PK has a high quality portfolio of 60 hotels, mostly Hilton. 17 have ground leases, they own the land on the rest. It's a fairly even split between resorts and metropolitan business areas (20% Hawaii, 15% SF, 11% Orlando, then NO, NYC, Boston...), and I understand that earnings will be suppressed for a while, maybe even causing a number of hotels to close permanently, which is why I want the high quality stuff.

 

So anyway, I get the sell-off rationale: hotels trending to zero occupancy for the next 3+ months, liquidity constraints, likely a dividend cut hurting REIT investors and triggering a fund sell-off there. This will also certainly hurt demand for the foreseeable future, but I feel it's too shortsighted. I'm looking 3-5 years down the road... I did a few simple analyses on both short-term liquidity and asset value. Maybe this warrants an even longer post, but here are my rough calcs:

 

On liquidity, I assumed zero revenue for all of 2020 (and no variable costs associated with it). They have to be generating something this year, but let's be super conservative. $320M of cash + $1B revolver draw - $70M capex - $120M interest - $1B fixed cash expenses (assuming no cuts here) - $108M of Q1 dividend being paid is roughly flat. So they'd have no cash on hand, assuming they cut the dividend for the balance of the year. Not necessarily pretty, but this is a worst case and I presume they can either upsize the revolver or tap the capital markets (albeit expensively) if they should need more capital. Again, there's no way revenue/GM is $0 this year, and I'd be shocked if they haven't cut some degree of the fixed expenses (corporate/SG&A personnel).

 

On asset valuation, just looking at book value (which always undervalues older properties on the books) gives me a $18.68 NAV per share, which incorporates the cash/debt position contemplated above... $9.6B of property (they own most of the land too!) + $0 cash - $5.1B of debt = $4.5B... ~240m shares outstanding. They have consistently sold properties for gains, further supporting my thinking that the properties are undervalued on the books.

 

This stock is trading around $7 per share, which seems like more than enough cushion. I'm no expert on this sector, but what am I missing? Has anyone else done work in this space?

 

Here's a discussion on Hotel REIT's, specifically in Japan. Sat down with Jeremy Raper who is a very smart investor and very well versed in Japanese markets. I hope you find value in this!

 

Warmly,

 

Eric

 

https://ericschleien.com/podcast/japanese-hotel-reits/

[thepupil]

jckund, I guess what I'm asking is

 

are you sure that HST isn't as cheap or only slightly more expensive on an asset level / unlevered basis?

 

All else equal, I try to find the biggest unlevered/asset level discounts to ensure that there's not a chance that I'm right on the value of the assets, but wrong on whether I own them for the recovery.

 

Let's take two identical buildings both worth $100, both trading for $70 in the public market. One has $50 of debt and the other is unlevered. The unlevered company is at a 30% discount to NAV. the levered is at a 60% discount to NAV. ($70/100=0.7 vs $20/$50=0.4)

 

I'm asking if Park is at a bigger discount to Host on an unlevered basis. I think it is, but not by that much.

 

I'm not saying "all leverage is bad" and one way to manage risk would be to buy a smaller position in a more levered company so you get the upside without putting a lot of capital at risk. I'm just questioning your premise of Park being cheaper.

 

Just pulled up a Feb sell side on Park that cites its "outsized balance sheet risk" as reason for bearishness.

 

 

[thepupil]

Lots of discussion here about retail/commercial REITs, but haven't seen much on hotel REITs. Obviously, this sector is getting hit hard but the sell-off appears pretty uniform without much consideration for the specifics. Kudos to valueinvestor for bringing PK to my attention, but I went ahead and did some digging on it. Unlike a lot of players in this space that operate a portfolio of major hotel brands in mid-tier cities or ok hotels in major cities, PK has a high quality portfolio of 60 hotels, mostly Hilton. 17 have ground leases, they own the land on the rest. It's a fairly even split between resorts and metropolitan business areas (20% Hawaii, 15% SF, 11% Orlando, then NO, NYC, Boston...), and I understand that earnings will be suppressed for a while, maybe even causing a number of hotels to close permanently, which is why I want the high quality stuff.

 

So anyway, I get the sell-off rationale: hotels trending to zero occupancy for the next 3+ months, liquidity constraints, likely a dividend cut hurting REIT investors and triggering a fund sell-off there. This will also certainly hurt demand for the foreseeable future, but I feel it's too shortsighted. I'm looking 3-5 years down the road... I did a few simple analyses on both short-term liquidity and asset value. Maybe this warrants an even longer post, but here are my rough calcs:

 

On liquidity, I assumed zero revenue for all of 2020 (and no variable costs associated with it). They have to be generating something this year, but let's be super conservative. $320M of cash + $1B revolver draw - $70M capex - $120M interest - $1B fixed cash expenses (assuming no cuts here) - $108M of Q1 dividend being paid is roughly flat. So they'd have no cash on hand, assuming they cut the dividend for the balance of the year. Not necessarily pretty, but this is a worst case and I presume they can either upsize the revolver or tap the capital markets (albeit expensively) if they should need more capital. Again, there's no way revenue/GM is $0 this year, and I'd be shocked if they haven't cut some degree of the fixed expenses (corporate/SG&A personnel).

 

On asset valuation, just looking at book value (which always undervalues older properties on the books) gives me a $18.68 NAV per share, which incorporates the cash/debt position contemplated above... $9.6B of property (they own most of the land too!) + $0 cash - $5.1B of debt = $4.5B... ~240m shares outstanding. They have consistently sold properties for gains, further supporting my thinking that the properties are undervalued on the books.

 

This stock is trading around $7 per share, which seems like more than enough cushion. I'm no expert on this sector, but what am I missing? Has anyone else done work in this space?

 

Here's a discussion on Hotel REIT's, specifically in Japan. Sat down with Jeremy Raper who is a very smart investor and very well versed in Japanese markets. I hope you find value in this!

 

Warmly,

 

Eric

 

https://ericschleien.com/podcast/japanese-hotel-reits/

 

Eric, I may HAVE to buy 8963 simply because it is called "Invincible Investment Corporation". That's awesome.

[EricSchleien]

Lots of discussion here about retail/commercial REITs, but haven't seen much on hotel REITs. Obviously, this sector is getting hit hard but the sell-off appears pretty uniform without much consideration for the specifics. Kudos to valueinvestor for bringing PK to my attention, but I went ahead and did some digging on it. Unlike a lot of players in this space that operate a portfolio of major hotel brands in mid-tier cities or ok hotels in major cities, PK has a high quality portfolio of 60 hotels, mostly Hilton. 17 have ground leases, they own the land on the rest. It's a fairly even split between resorts and metropolitan business areas (20% Hawaii, 15% SF, 11% Orlando, then NO, NYC, Boston...), and I understand that earnings will be suppressed for a while, maybe even causing a number of hotels to close permanently, which is why I want the high quality stuff.

 

So anyway, I get the sell-off rationale: hotels trending to zero occupancy for the next 3+ months, liquidity constraints, likely a dividend cut hurting REIT investors and triggering a fund sell-off there. This will also certainly hurt demand for the foreseeable future, but I feel it's too shortsighted. I'm looking 3-5 years down the road... I did a few simple analyses on both short-term liquidity and asset value. Maybe this warrants an even longer post, but here are my rough calcs:

 

On liquidity, I assumed zero revenue for all of 2020 (and no variable costs associated with it). They have to be generating something this year, but let's be super conservative. $320M of cash + $1B revolver draw - $70M capex - $120M interest - $1B fixed cash expenses (assuming no cuts here) - $108M of Q1 dividend being paid is roughly flat. So they'd have no cash on hand, assuming they cut the dividend for the balance of the year. Not necessarily pretty, but this is a worst case and I presume they can either upsize the revolver or tap the capital markets (albeit expensively) if they should need more capital. Again, there's no way revenue/GM is $0 this year, and I'd be shocked if they haven't cut some degree of the fixed expenses (corporate/SG&A personnel).

 

On asset valuation, just looking at book value (which always undervalues older properties on the books) gives me a $18.68 NAV per share, which incorporates the cash/debt position contemplated above... $9.6B of property (they own most of the land too!) + $0 cash - $5.1B of debt = $4.5B... ~240m shares outstanding. They have consistently sold properties for gains, further supporting my thinking that the properties are undervalued on the books.

 

This stock is trading around $7 per share, which seems like more than enough cushion. I'm no expert on this sector, but what am I missing? Has anyone else done work in this space?

 

Here's a discussion on Hotel REIT's, specifically in Japan. Sat down with Jeremy Raper who is a very smart investor and very well versed in Japanese markets. I hope you find value in this!

 

Warmly,

 

Eric

 

https://ericschleien.com/podcast/japanese-hotel-reits/

 

Eric, I may HAVE to buy 8963 simply because it is called "Invincible Investment Corporation". That's awesome.

 

Exactly

[valueinvestor]

Bill Ackman bought PK.

 

Edit:

 

Taken a position not acquired.

[bizaro86]

I feel like pessimism is probably sufficient here. On the conference call, one of the analysts kept pushing on whether they would consider converting the New York Hilton into institutional housing for the homeless.

 

[valueinvestor]

I feel like pessimism is probably sufficient here. On the conference call, one of the analysts kept pushing on whether they would consider converting the New York Hilton into institutional housing for the homeless.

 

Damn. Haha.  :)

[valueinvestor]

Raising $500M