Why Park Hotels & Resorts shares fell 10% in the first hour on Monday

What happened

Shares of Park Hotels and Resorts ( PACKAGE 1.25% )hotel confidence in real estate investment (REIT), fell early on Monday, dropping as much as 10% less than an hour after the market opened. The reason for the drop was fairly obvious: the REIT announced its earnings in the morning.

So what

Hotels, even the high-end variety that Park has, have an effective rental term of one night. So when the economy goes through a tough time, the impact on hotels is incredibly quick. COVID-19[female[feminine started to become a problem at the beginning of the year, but really started to gain momentum in the second half of the first quarter. So Park Hotels & Resorts’ first-quarter earnings tell only part of the gravity of the business today.

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This story is not very good. Revenue per room in the first quarter was down about 20% year-over-year. Adjusted operating funds (FFO), which for REITs is equivalent to the profits of an industrial company, fell by about two-thirds. The closure of more than half of its portfolio of hotels and limitations on those that remained open limited the REIT to only around 15% of the rooms it would normally have. The dividend is now reduced to zero. All bad news.

The company has taken steps to improve liquidity and weather headwinds from COVID-19. But the performance of hotels fell significantly at the end of the quarter, which does not bode well for the second quarter. Investors are right to worry here, with even Park Hotels & Resorts saying the outlook is bleak at best. Unfortunately, things are likely to get worse before they start to get better.

Now what

In tough economic times, hotel REITs like Park tend to be hit hard. This is clearly visible today, with more pain likely in the months and quarters to come. Although economies around the world are beginning to reopen, the process is expected to be slow. Travel and hotel stays will likely take some time to return to anything close to normal. Only aggressive investors should look to Park Hotels & Resorts, or one of the hotel REITs, today.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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