Playa Hotels & Resorts: Occupancy Growth in the Dominican Republic Encouraging (NASDAQ:PLYA)

Investment Thesis: I am revising my review of Playa Hotels & Resorts from Hold to Buy.

In a previous article in December, I made the argument that while Playa Hotels & Resorts (Nasdaq: Yes) saw encouraging growth in its average daily rate, but occupancy pressures remained and future growth will depend on the degree to which the company can improve RevPAR growth across its portfolio and reduce its net debt to EBITDA ratio.

Since my last article, the stock has seen a slight decline of just under 2%:

The purpose of this article is to evaluate whether Playa Hotels & Resorts has the potential to renew the upside from here – taking its recent earnings performance into account.

performance

When looking at Q1 2024 earnings results (as released on May 6, 2024), we can see that across Total Portfolio – Occupancy increased significantly to 85.1% from 70.8% in the prior year quarter.

This resulted in a more than 20% increase in bundle net RevPAR over the same period, even though bundle net RevPAR was up just 0.1% over the same period.

When looking at the comparable portfolio – which compares the performance of existing resorts across different time periods (in this case, excluding Jewel Palm Beach and Jewel Punta Cana), we can see that it was once again the resorts’ overall net access price that was driving growth – with The same was up 4.4%, occupancy was up 2.6%, and package net RevPAR was up 7.8%.

From a geographic standpoint, we see that the Dominican Republic has shown the highest growth in RevPAR on a percentage basis and is the second largest region in terms of number of rooms in the portfolio. The region also saw a particularly strong improvement in occupancy – from 51.1% to 83.7%.

However, the Yucatán Peninsula is the largest in terms of number of rooms and is also the largest in net revenue owned. Below is a breakdown of net owned revenues by quarter for the Yucatan Peninsula.

We see that net owned revenue was up just over 8% compared to the prior year quarter. Additionally, we see that for 2023 – each quarter (except Q3) showed improvement in net owned revenues compared to the previous year.

However, the Dominican Republic showed a faster growth rate in overall owned net revenues, with 18% growth compared to the previous quarter. Below is a breakdown of net owned revenue by quarter for this region.

The fact that we have seen a faster growth rate throughout the Dominican Republic has been encouraging. While the Yucatan Peninsula showed higher group net available room revenue and a higher level of net owned revenue overall – we see that the growth rate in revenue was slower than in the Dominican Republic.

Given the improvement in occupancy and RevPAR seen throughout this region, this allows Playa Hotels & Resorts to not be overly reliant on the performance of the Yucatán Peninsula to drive overall revenue growth.

From a balance sheet perspective, we see that the net debt to EBITDA ratio has been declining over the past couple of years as well, which is encouraging and shows that the company is continuing to boost its earnings without having to increase its net debt in order to survive. Financing such growth.

Click to enlarge

Source: Figures derived from historic Playa Hotels & Resorts earnings reports. Net debt to adjusted EBITDA ratio calculated by the author.

Looking to the future and risks

I previously mentioned that, in my view, further growth for Playa Hotels & Resorts will depend on whether the company can 1) see a rebound in RevPAR growth across its portfolio in the Yucatan Peninsula and Pacific Coast, and 2) reduce its net debt to EBITDA ratio. .

We see this being the case, and the growth in RevPAR and occupancy across the Dominican Republic segment of the portfolio has been particularly impressive.

Going forward, I believe the Dominican Republic has the potential to be an important driver of overall company growth. Last year, ForwardKeys reported that the Dominican Republic was the top-ranked destination in terms of international arrivals and saw international visitors grow by 14% in 2023 compared to 2019.

As such, the fact that Playa Hotels & Resorts has strong exposure to the Dominican Republic puts it in a great position to capitalize on growth across this market.

I previously made the argument that Playa Hotels & Resorts was trading at fair value – on the basis that its EV-to-EBITDA ratio, EBITDA per share, and price were trading at levels similar to those seen in 2019.

However, we can see that since last December – both price and company value to EBITDA have declined while EBITDA per share has continued to see growth.

Given the encouraging growth we saw in Dominican Republic and Yucatan Peninsula revenues, as well as the 15.2% growth we saw in Adjusted EBITDA compared to the prior year quarter, I see the stock as having the potential for the price to rebound to its previous high. The lowest is at $9.60, possibly above the $10 level if earnings growth continues on the current trajectory.

Over the past year, we also see that the P/E ratio has declined while earnings per share have continued to rise – suggesting that the stock is trading at a more attractive value on an earnings basis.

P/E ratio

We also see that Playa Hotels & Resorts is trading at a higher P/E ratio compared to peers GreenTree Hospitality Group (GHG) and Monarch Casino & Resort, Inc. (MCRI).

Compare P/E ratio

However, I view the higher P/E ratio compared to its peers as a reflection of rising investor confidence – with expectations of higher earnings growth per share compared to its peers. Furthermore, since we have seen EV/EBITDA and P/E ratios decline in absolute terms over the past year – I see the stock trading at a more attractive value compared to the previous year.

In terms of potential risks to the stock at this time, my view is that the potential flatness in growth across the Dominican Republic could be a drag on overall revenue growth in the short to medium term. For example, while we have seen strong growth in this market – we see that occupancy in the region has risen to 83.7% from 51.1% in the previous quarter – bringing it in line with other regions.

In this sense, occupancy growth is at risk of plateauing, and we have already seen that RevPAR growth was primarily driven by occupancy, while the net average daily room rate fell -4.5% compared to the previous year quarter, the largest decline on record. Launching in any region. . In this regard, there is a risk that RevPAR growth will plateau if we see a decline in the level of occupancy growth and the company does not have the ability to raise prices further without seeing a decline in demand.

Conclusion

In conclusion, Playa Hotels & Resorts has seen impressive revenue growth throughout the Dominican Republic, with Yucatan Peninsula revenues also remaining strong. Although there is a risk that we will see a plateau in growth across the Dominican Republic, my view is that the company remains on a good trajectory for overall revenue and earnings growth. In this regard, I am revising my review of Playa Hotels & Resorts from Review to Buy.