RHP: GROUP LODGING A BRIGHT FUTURE NOVEMBER 11, 2014 Todd Jordan tjordan@ @hedgeye.com David Benz dbenz@hedgeye.com Felix Wang, CFA fwang@hedgeye.com 1
CALL TO ACTION RHP has traded roughly flat (better than the sector) since earnings. However, we feel better about the story following earnings and our meeting with the company at NAREIT. Bottom line: RHP has more nights on the book and significantly higher RevPAR and the Group outlook is probably stronger than investors believe. With an attractive valuation and several upcoming catalysts including continued strong earnings, the stock looks attractive here NAREIT MEETING TAKEAWAYS 1) Street still modeling FD share count incorrectly many analysts using 58 million share count and NOT the proper 50.8 million. We ve confirmed again that the company s anti-dilution efforts have offset the convertiblee bond maturity 2) Attractions business structure and value to be addressed over next 3-12 months should be value creating 3) Group nights on the book: 5.15 million nightss (1.8 years of occupancy) at RevPAR of $325 which equates to $1.8m of revenues 4) Country Music Awards a likely catalyst for Q4 group booking nights = potential upside 5) Dividend should increase in Q1 2015 to $0.65/ /share from current $0.55/share SHARE COUNT We have repeatedly pointed out that, as a result of the maturity and payoff of RHP s convertible notes, there will be no additional dilution to current shareholders related to the maturity of the convertible notes. Despite management assurance and outright guidance, we understand some sell-side analysts continued to inaccurately model the outstanding share count. For us, the math and algebra are very clear. The fully diluted share count is 50.8 million. We pride our research on a better process and a better understanding of the math behind the numbers. Not only didd management confirm our diluted share count as correct during our NAREIT meeting, but managemen nt is also very awaree of the incorrect share count used by analysts and will address with analysts over the coming days/week.. That said, let us illustrate our point and reason for repeatedly focusing on this issue. The significance of this modeling error not only flows through incorrect per share estimates but more importantly through valuation analysiss as well. Since RHP s Q3 2014 earnings call last week, we vee seen other analyst research reports. We recently read a report where an analyst is forecasting 58.3 million shares outstanding on a forwardd basis. The analyst then carries forward the 58.3 million shares in his valuation framework which results in a target price of $58/share. However, were this analyst to model and forecast 50.88 million shares for future quarters (the 2
correct share count), the resulting target price (all thingss held constant) would be $65.955 let s call it $66/share for simplicity or a 14% higher target price as compared to the $58/share. Said differently, the upside is 33% at $66/share and not 17% at $58/share. ATTRACTIONS SEGMENT UNDERVALUED Management indicated it is taking steps to realize the value of the Attractions segment. History speaks clearly. Over their tenure, this management sold its interests in Bass Pro Shops, ResortQuestt International and the hotel operating company to Marriott, and converted to a REIT. That said, much time, energy and effort is spent by analysts and investors to ascribe an imputed valuation to the Attractions segment. We believe management is reviewing all options for this segment. Anecdotally y, the Hedgeye GLL research team knows various entertainment and media focused funds who are actively buying both musicc rights as well as content at low to midteens multiples. Not only does RHP own and operate the Ryman Auditorium, Grand Ole Opry, and WSM radio station - a clear channel (not the company) AM frequency broadcast station, but also 3,000 hours of programmingg content as well as retail brand (Grand Ole Opry) which could be concepted into a broader consumer offering potentially to retaill stores, restaurants, etc. FORWARD BOOKI INGS = $$$$ $ RHP has approximately 5.15 million nights booked for all future arrival dates. Based on 7,794 rooms at the Big 4 Gaylord Convention hotels, the 5.15 million room nights equates to more than 1.8 years of occupancy currently on the books for all future arrival dates. That s some serious base loading of occupancy. We think these 5.15 million group room nights are booked at an average RevPAR of $325- $350/night. By comparison, year-to-day average RevPAR as of September 30, 2014 was $309.52. We feel good about the $325-$350/night RevPAR for two reasons: 1) management again reiterated 2015 booked room rates are up high single digits over 2014 s rates; and 2) given recent commentary about groups buying up or spending more on F&B as they get closer to arrival date a commentary we heard often during Q3 2014 earnings calls as well as during our NAREIT meetings we believe the $325-$350 could ultimate be conservative as groups opt for higher levels of food, beverage and catering spend just prior to arrival. 3
GROUP BOOKINGS Q4 2014 As we previously noted, we expect Q4 2014 group bookings to be very strong, +15% Q4 2014 over Q3 2013, which translates into 887,000 nights booked in Q4 2014, and resulting in nearly 2.3 million nights booked during 2014, a 5.6% increase versus 2013. Following the Country Music Awards on Wednesday evening, we believe the company booked 50,000 to 100,000 room nights mostly at the Gaylord Opryland Hotel. Nashville is hot and our conversations with group meeting planners indicate Nashville is one of the three most desired U.S. destinations for group business and meetings. Importantly, RHP and MAR management teams hosted 50 of Marriott s internal corporate/group meeting planners at the Country Music Awards and we view this cooperative action as an outward sign MAR and RHP are now working more closely to drive MAR group businesss to the big four RHP hotels. NASHVILLE TO RECEIVEE A BOOST? Based on conversations with the company, we expect Nashville airport to announce additional flight arrivals and departures over the coming months including a significant lift addition between London and Nashville as well as augmented domestic service by low cost carriers. DIVIDEND We forecast a significant increase in the quarterly dividend during 2015 from the current $ 0.55/share/ /quarter to $0.65/share/quarter. Management is very clear on their dividend payout: shall be the greater of 100% of taxable income or 50% of AFFO. Our math is also clear - 2015 s dividend should be $0.65/share. This dividend hike might be greater than current Street expectations. VALUATION RHP is undervalued versus its peers in our opinion. Today, RHP trades at 11.5x 2015 EV/EBITDA versus the peer group average of 14.5x 2015. 2015 dividend yield of 5.3% is below the comp group of 4. 1%. We think fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the increased dividendd as mentioned above. Total return potential could exceed 40% over the next 12-18 months. 4
CONCLUSION Following NAREIT, we expect investors to more fully appreciate the very strong outlook for RHP both in terms of nights on the books at significantly higher ADRs,, as well as a potential value realization for the Attractions segment and the significant growth in the dividend. Finally, our own proprietary research indicates a potentially stronger group outlook than that probably contemplated by the Street. DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeyee Risk Management is not a broker dealer and does not provide investment advice for individuals. This research doess not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation n is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied uponn research conducted by Hedgeye Risk Management s employees, which is based upon sourcess considered credible and reliablee within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon whichh it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com. 5