Description

Overview

Ryman Hospitality Properties (NYSE: RHP - $39.77) is a ~$3.2 billion lodging company with a unique focus on large group meetings and conventions. 

In May of this year, RHP completed a strategic review process and announced:

1)REIT Conversion: Will reorganize from a C-Corp to a REIT by December 31, 2012

2)Brand Sale: Sold its Gaylord hotel brand to Marriott International (MAR) for $210 million

3)Incentive Driven Management Agreement: Entered into a long term property management agreement with Marriott, with fees determined by property level earnings

RHP’s REIT conversion is transformational, and will create significant value for shareholders through cost synergies, revenue growth, and a new focus on return of capital to shareholders.

Currently valued as a C-Corp, RHP is trading at a 25-50% discount to its lodging REIT peers, despite better operating metrics, a more stable/predictable business, and a higher quality asset base.

Post conversion, RHP will institute a dividend of at least $2.00/share, and which is likely to be in the range of $2.50 – $3.00/share.

At peer EBITDA multiples, RHP offers 30% upside.  At the low end of peer dividend yields, RHP offers 50% upside.  At EBITDA multiples of other short duration lease operators, RHP offers 80% upside.  Current valuation is protected by a ~7% yield.

 

What is RHP?

RHP owns four lodging properties in Nashville, Washington DC, Dallas, and Orlando and a collection of tourist attractions in Nashville.  RHP has a unique focus on the large group / meeting market, generating 75% - 80% of revenues from group bookings.

                                            Gaylord                Gaylord                Gaylord                  Gaylord               Radisson

Summary                             Opryland             Palms                    Texan                    National               Nashville

Year completed                     1977                       2002                       2004                       2008              to be managed

Location                               Nashville              FL                            Dallas                    Wash DC           by 3^rd party        

Rooms                                  2882                       1406                       1511                       1996      

Meeting space (sq ft)             640k                       400k                       400k                       470k      

Atriums                                9 acres                  4 acres                  4 acres                  2 acres

F&B Outlets                          17                           9                              11                           10

Retail Outlets                        25                           9                              7                              5             

 

2011 business mix            Group   Transient

RHP                                  78%        22%

National Average               35%        65%

 

In total, these are four unique 1,400+ room convention style hotels in attractive, non-Vegas markets.  RHP owns some of the largest hotels in the United states.

 

Summary Financials

                                                2006       2007       2008       2009       2010       2011       2012       2013

Organic Sales                         722         748         931         873         770         952         1,001     1,032

Revenue synergies                                                                                                                         46

TOTAL SALES                         722         748         931         873         770         952         1,001     1,078

Organic Ebitda                       126         138         186         173         137         206         238         248

Cost synergies                                                                                                                              40

Revenue synergies margin                                                                                                             25

TOTAL EBITDA                        126         138         186         173         137         206         238         313

Ebitda margin %                    17%        18%        20%        20%        18%        22%        24%        29%

FFO/Share                          $0.62         $4.83       $3.36     $3.32      $1.75       $2.48      $2.43      $4.92

AFFO/Share                       ($6.15)       ($8.86)   ($6.22)     $2.08     ($2.37)     $0.37      $0.68     $3.95

 

Summary capitalization                                

Share price                                         $39.77

Shares                                                  57.0

Market Cap                                        $2,267

Cash                                                      24

Note receivable                                      145

LT Debt                                                 1,179

Net proceeds from MAR                           69

TEV                                                   $3,208

 

Investment thesis

1. Unique group meeting assets drive stable, predictable cash flows, meriting premium valuation

         –RHP customers typically book 2.3 years in advance vs. 4 months for the average lodging REIT,driving earnings stability and visibility

         –Cancellation fees smooth earnings in economic downturns

     2. REIT conversion and Marriott transaction provide catalyst and significant upside

         –Material long term tax savings

         –Management estimates $33 - $40 million of recurring cost savings

         –Marriott platform (expanded sales force, Marriott Rewards program, sophisticated yield management) will accelerate RevPar growth, with revenue synergies likely to exceed cost synergies over time

     3. Compelling valuation with significant margin of safety

         –RHP is the least expensive REIT in the lodging sector despite superior operating metrics and greater cash flow predictability

         –Trading ~7% prospective dividend yield, RHP will likely have the highest dividend in the lodging REIT universe

         –Initiation of dividend in February will attract yield focused investors and serve as a catalyst

In summary, these are premium assets, trading at a discounted price, with a near term catalyst.

 

Unique Assets with Highly Differentiated Value Proposition

RHP operates four of the ten largest meeting/hotel spaces in the country and two of the three largest such hotels outside of Las Vegas.  (see table) –

Top 10 Largest US hotel meeting spaces -                                            

                                                                Meeting

                                                                space (000 sq ft)

Venetian                                                    2,250

Mandalay                                                   1,296

Gaylord Opryland                                        640

MGM                                                          600

Gaylord National Resort                               470

Marriott Orlando                                         450

Rosen Shingle Creek                                   445

Gaylord Texan                                            400

Gaylord Palms                                            400

Hilton Anatole                                            345

 

Portfolio of properties allows meeting planners to rotate through the network -

           –Approximately 50% of core group customers rotate meetings throughout the Gaylord network of hotels

 

RHP’s Group Meeting Business Drives Earnings Stability

 Approximately 65% of RHP’s expected room nights are booked at the beginning of the year, with the average group booking made 2.3 years in advance. 

         -In contrast, transient focused REITs book and recognize the vast majority of revenues in the current period, creating greater near term economic sensitivity. 

Additionally, contract cancellation fees provide RHP with a profit buffer to smooth earnings through economic cycles.

        -RHP generated $21 million of cancellations fees in 2009 (12% of EBITDA), stabilizing earnings.

Throughout a lodging cycle, RHP should outperform peers while incurring less volatility –

RHP RevPar growth vs Industry Composite Average                       

                Average               RHP

2006       8.7%                      12.3%

2007       6.6%                      5.1%

2008       -2.2%                     -0.6%

2009       -18.8%                  -9.9%

2010       4.9%                      9.9%

2011       7.1%                      0.6%

2012       6.1%                      3.9%

 

RHP is More Stable than its Lodging REIT Peers

RHP’s revenue and EBITDA are significantly less volatile than those of its traditional lodging peers.

Given the resilient nature of its business model, RHP resembles a hybrid of more traditional REITs (5 to 10 year average lease) and lodging REITs (3 to 6 month average advance booking). see tables -

2009 Revenue and EBITDA decline                                                          

                                                  Revenue              EBITDA

Lodging REITS                             -20.0%                  -34.0%

RHP                                              -6.0%                     -7.0%

Shopping Center REITS                  -4.0%                     -8.0%

                                                             

Years of Avg Lease Life/Years Advanced booking                                                             

Lodging REITS                    0.5         

RHP                                   2.3         

Shopping Center REITS       5.8

In summary, RHP’s business model and stability are more analogous to shopping center REITs than lodging REITs.

 

RHP Should Trade at a Premium to Lodging Peers            

Given their higher earnings volatility, lodging REITs trade at a discount to REIT peers with greater revenue and dividend visibility.

We believe that RHP’s differentiated business model merits a premium valuation, and should trade between REITs with relatively shorter duration leases (shopping centers) and traditional lodging REITs. 

As shown below there is substantial room for a potential re-rating -

2013 EV/EBITDA                               

Student Housing              24.7x

Diversified                       21.9x

Apartment                       20.3x

Self storage                     19.8x

Regional Mall                   18.9x

Healthcare                       18.5x

Industrial                         18.2x

Freestanding retail            17.7x

Specialty                          17.5x

Shopping center                17.1x

Office                               16.9x

Mixed office/industrial        16.2x

Manufactured homes         15.9x

Lodging reits                    12.7x

RHP                                 10.2x

 

On December 31, 2012 RHP will complete its transition from C-Corp to REIT

–This REIT conversion will generate significant tax savings and attract a new shareholder base

As part of the REIT conversion, RHP sold the management rights to its 4 properties and the Gaylord brand to Marriott International for $210 million

Corporate   Structure	Old co C-Corp	Newco REIT
Corporate Tax Rate	42%	None
Dividend	None	~6% - 7.5% Yield
PF AFFO	~$55M	~$220M
Sales Force Size	~100	~3,000
Loyalty Program	NA	38M+ Marriott   Rewards Members
Business Mix	80% Group /20%   Transient	70% Group /30%   Transient
Targeted Occupancy	Low 70s%	Low 80s%
RevPar Growth	Low Single Digit	Mid Single Digits+

 

Significant Cost Synergies from Marriott Transaction

 As part of the divestiture of its hotel operations, RHP expects to recognize certain cost savings, which it initially estimated to be $33 - $40 million annually.

 We believe these estimates are likely conservative

  –On its Q3 2012 call, management suggested cost savings were likely to come in above the high end of guidance

 

Meaningful, Underappreciated Revenue Synergies

Expanded sales force -

      - As a small company with only four properties, RHP’s group sales force consists of approximately 100 people. Pro forma for the transaction, Marriott’s 3,000 person group sales force will be responsible for    bookings

            –RHP currently has no international presence, while Marriott has the #1 position in US bookings of international groups

            –RHP has limited traction with smaller executive groups, which tend to operate through corporate contracts with national vendors such as Marriott

Increased Transient Focused -

         Given its large group orientation, RHP has neglected its transient/leisure business despite having first-rate assets in leisure markets

            –Marriott has over 38 million loyalty members through its Marriott Rewards program, which should drive significant traffic

            –RHP properties will now be featured on marriott.com, which drives 20% of all Marriott traffic and skews heavily towards leisure/transient business

            –Average RevPar uplift when Marriott assumes management of an independent hotel and folds property into its Autograph collection has been 10%

Street Expectations –

           Despite proven Marriott track record, Street estimates currently assume no revenue synergies

 

As a REIT, RHP will Become a Return of Capital Story

As a REIT, RHP will no longer pursue large scale development of convention center hotels as a means of growth

–$800 million, 1,500 room Colorado project scheduled for 2015 open put on hold

–RHP is now focused on returning cash to shareholders

 

This will Attract REIT Focused Investors

REIT investors have a significant presence in other lodging REITS, but minimal ownership of RHP (see table)

Large REIT Shareholder Ownership -                                         

HST        41.0%                  

DRH       34.0%                  

HT           33.0%                  

LHO        28.0%                  

SHO       22.0%                  

RHP        8.0%                    

PF for the transaction, RHP will be the 2nd largest lodging REIT and is likely to be included in most REIT Indices -

The transition to a more traditional REIT investor base will occur once the REIT conversion becomes official at year end, and will be accelerated by new dividend guidance that will be announced at RHP’s February investor day

 

Attractive Valuation with Significant Margin of Safety

RHP is the least expensive REIT in the lodging sector –

EV/2013 EBITDA                               

BEE                         14.2x

FCH                        13.2x

DRH                       13.3x

HST                        13.5x

LHO                        13.6x

SHO                       12.8x

PEB                        13.7x

INN                        11.6x

HT                           12.3x

RLJ                          11.0x

CHSP                     10.4x

RHP                        10.2x

Superior Operating Metrics, Discounted Valuation –

RHP has amongst the highest RevPar/Key and EBITDA/Key in the industry, which tend to be correlated with premium valuation –

2011 RevPar/Key

BEE         338

RHP        305

PEB        258

LHO        225

HST        216

CHSP     182

SHO       181

DRH       174

AHT        120

FCH        119

HT           109

CLDT      103

RLJ          103

HPT        92

INN        58

 

RHP        25

BEE         25

LHO        23

PEB        23

HT           18

CHSP     18

SHO       17

HST        16

HPT        16

DRH       15

AHT        14

CLDT      12

RLJ          12

FCH        9

INN        5

 

RHP also has the lowest leverage of its REIT peers –

Total Debt / 2012 EBITDA Estimate

AHT        10.4x

FCH        8.5x

BEE         7.2x

CLDT      7.0x

SHO       6.4x

INN        5.7x

CHSP     5.6x

HT           5.1x

RLJ          5.1x

DRH       4.9x

PEB        4.6x

HST        4.4x

HPT        4.0x

LHO        3.9x

RHP        3.3x

 

RHP Trades at a Significant Discount to Replacement Cost –

                                                Replacement    

                                                Cost ($MM)       

Gaylord Opryland                            1,550    

Gaylord Palms                                   675        

Gaylord National Resort                    1,000    

Gaylord Texan                                   675        

Proposed Colorado                             800        

Nashville                                           150        

Total                                                 4,050    

RHP’s assets trade at a 30% discount to replacement cost, excluding hotel startup losses

–Permitting and constructing a 1,500 room hotel typically takes more than five years

 

Dividends Provide Substantial Valuation Support

RHP’s Current Yield is misleading.  As it has not yet paid an ordinary dividend, RHP has not hit the screens of yield oriented investors.  Initiation of a dividend will be a major catalyst for RHP.

In order to qualify for REIT status, RHP must pay out a dividend of $2.12/share (90% of estimated net income).  However, in light of RHP’s current discounted valuation, management believes that returning excess cash flow through a higher dividend payout is prudent

     –The Board will officially set its dividend policy in advance of the Company’s investor day in February

     –We believe the announced dividend is likely to be $2.50 to $3.00/share, implying a dividend yield of 6.3% - 7.5%

At current levels, RHP will have the highest lodging REIT yield and one of the highest yields in the REIT universe –

SHO                       0.0%

FCH                        0.0%

BEE                         0.0%

HST                        2.2%

PEB                        2.4%

LHO                        3.4%

RLJ                          3.6%

DRH                       3.7%

CHSP                     4.7%

INN                        5.1%

HT                           5.3%

RHP MIN CASE  6.3%

RHP HIGH CASE 7.5%

At a $59 stock price, RHP would trade at a 5% dividend yield, the high end of its lodging REIT peers.  By re-rating as a REIT and increasing EBITDA under Marriott management, RHP has ~50% upside.

 

•Asset concentration

•Marriott transition disruption

•Macro uncertainty impacting large group meetings

•Potential tax changes to REIT status and dividend taxation

•Dividend policy not yet set

Catalyst