The once-thriving city of San Francisco is caught in a "doom loop"...

The Bay Area metropolis used to be one of the most popular cities for Big Tech companies. That helped drive rent prices, salaries, and the overall economy higher pre-pandemic.

Today, things are different. The pandemic fueled a new work-from-home environment. Folks no longer need to live near the office. And many have moved away from San Francisco to escape the high cost of living.

Now, tech companies are moving out as well. Offices are emptying, the city's tax base is starting to vanish, and there's no sign the business environment is going to get any better.

This doom loop has hollowed out once-vibrant areas of the city.

And it gets worse... Hotels are starting to close up shop, too. One of the largest hotel real estate investment trusts ("REITs") in the U.S., Park Hotels & Resorts (PK), recently announced it was pulling out of San Francisco.

Park Hotels ceased making payments toward its $725 million commercial mortgage-backed security loan maturing in 2023. The debt was secured by its two San Francisco hotels, the Hilton San Francisco Union Square and the Parc 55 San Francisco.

This means the company will mail back the keys of these two massive hotels... which happen to be pillars of the city's once-thriving convention-center hotel scene.

Park Hotels' management said it's in the best interest of the shareholders to reduce the company's exposure to the San Francisco market. According to CEO Thomas Baltimore Jr., the city's path to recovery "remains clouded and elongated by major challenges."

On the surface, it appears the company just doesn't think these hotels are viable because of the current economic climate. And it's letting someone else run the show as a result.

But a look under the hood tells an entirely different story.

Today, we're going to show you the real reason the company is getting out of the San Francisco market. As you'll see, it's not what Park Hotels is leading you to believe...

It's not about San Francisco at all...

Park Hotels wants to build this as a San Francisco narrative – not an industry or financials narrative.

According to management, this is a strategic move in reaction to San Francisco's weakening economy. Yet, a deeper look makes us think this might just be Park Hotels trying to cover up the reality of its situation...

Park Hotels' financials aren't in the best shape. So the company is just doing what it can to save itself... nothing strategic. It wants to make sure it can cover its upcoming financial obligations.

We can leverage our Credit Cash Flow Prime ("CCFP") analysis to see if there's a real risk of Park Hotels not being able to meet its future payments. The CCFP helps us compare a company's obligations with its cash position and expected cash earnings.

In the chart below, the stacked bars represent Park Hotels' obligations each year for the next seven years, including this year. We then compare these obligations with the company's cash flow (the blue line) as well as its cash on hand at the beginning of each period (the blue dots).

A look at Park Hotels' CCFP shows the company has a ton of debt coming due in three of the next four years.

Check it out...

To cover this year's debt, Park Hotels is going to have to use the rest of its cash. By 2025, it might not have any refinancing options available to it at all...

Park Hotels looks worse than many other REITs...

The company recently reinstated its dividend at $50 million per quarter. And the CCFP shows that it might now struggle to afford its current maintenance capital expenditures ("capex"), dividends, and interest expenses.

That's the case for many REITs today. And most of them should be able to refinance. REITs can easily borrow from banks because they have plenty of valuable assets to put up as collateral.

Park Hotels is different, though. It has shown it's willing to stop making payments and mail the keys in. Even though banks still get compensated when that happens, they'll likely be more cautious with a company like this.

Park Hotels may keep trying to find other ways to cover its obligations, like it's doing now. This may include selling assets, settling for bank debt with restrictive terms, or even more drastic solutions.

Something is going to have to give soon. And shareholders won't be happy when it does...


Rob Spivey
June 28, 2023