Yes and no, but I think you need to do it in reverse order. Take Rhodes, gift it to the pope. Take another island and hold onto it. Now take Rome. If the Papal States only has Rhodes as another territory, it'll relocate the capitol there. Then gift him another territory for peace. Yes, they can supposedly get you on boats, but only if you go close to them. They won't be wandering.
Of course, post patch, you have to worry about the Papal Monster (tm). The pope seems to be naval invasion-happy, along with every other faction. After installing the patch he got up off his laurels and went a-conquering in Africa, all on his own, in my last game. Nobody gave him any territory. He just loaded up an army on the ships and sailed down to Tunis to go after the Moors.
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