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Why Park Hotels & Resorts Stock Fell 10% in the First Hour Monday

By Reuben Gregg Brewer - May 11, 2020 at 11:54AM

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The REIT reported earnings, and they didn't please investors one bit.

What happened

Shares of Park Hotels & Resorts (PK -3.82%), a hotel real estate investment trust (REIT), dropped from the get-go on Monday, falling as much as 10% within an hour of the market opening. The reason for the drop was pretty obvious: The REIT reported earnings in the morning. 

So what

Hotels, even the high-end variety that Park owns, have an effective lease length of one night. So when the economy hits a rough patch, the impact on hotels is incredibly quick. COVID-19 started to become an issue early in the year, but really began to pick up steam in the second half of the first quarter. Thus, Park Hotels & Resorts' first-quarter earnings only tell part of the story of how bad the business is today.

A man looking at a line crashing through the floor beneath him

Image source: Getty Images

That story isn't very good. Revenue per room in the first quarter was down roughly 20% year over year. Adjusted funds from operations (FFO), which for REITs is like earnings for an industrial company, fell by roughly two-thirds. The closure of more than half of its hotel portfolio and limitations at those that remained open have restricted the REIT to only about 15% of the rooms it would normally have available. The dividend has now been reduced to zero. All ugly news.   

The company has taken steps to improve liquidity and deal with the COVID-19 headwinds. But hotel performance dropped off materially at the end of the quarter, and that doesn't augur well for the second quarter. Investors are right to be worried here, with even Park Hotels & Resorts saying the outlook is murky at best. Unfortunately, things will probably get worse before they start to get better.   

Now what

In tough economic times, hotel REITs like Park tend to get hit quick and hard. That's on clear display today, with more pain likely in the months and quarters ahead. Although economies around the world are starting to reopen, the process is expected to be slow. Travel and hotel stays are likely to take material time to come back to anything close to normal. Only aggressive investors should be looking at Park Hotels & Resorts, or any of the hotel REITs, today.

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