HEDGEYE EDGE
The Street may not be bearish on RHP but are they bullish enough? We don’t think so and look at consensus for evidence of the RHP underappreciation. Estimates are likely too low for Q3 but we’re more focused on 2022 and 2023 where we see the need for positive revisions. In a normal recovery, Group is last to recover, and the Street seems to be anticipating that this time around as well. However, these are not normal times and our forward looking data and other analysis suggests a surprisingly strong group and convention slate for the next couple of years.
Unlike our views on RHP, we remain negatively disposed toward most of the rest of the hotel complex as corporate transient continues to lag leisure and pressure hotel RevPAR through the shoulder periods. However, RHP’s outperforming exposure (geography and asset type) and access to the leisure customer bridges the company nicely into yearend so we’re less concerned on the near term for the company. Looking further ahead, consensus expectations for the out years do not fully reflect the EBITDA and FCF power inherent in RHP’s leisure, group, and undervalued entertainment business. RHP is the anti-REIT and deserving of more credit, both in the form of higher estimates and multiple expansion. RHP = Best Long Idea at Hedgeye.
q3 | expecting a beat, but fwd commentary more important
RHP might be the most consequential release/conf call of all the hotel REITs, at least on the positive side of the ledger. The company likely generated more EBITDA than most of its peers in Q3’21, but this quarter won’t mark the real inflection just yet. Covid was still a factor, especially on groups and close-in cancellations, but RHP is also exposed to leisure, which is good, and it’s markets are generally outperforming. Overall, we see the company putting up a healthy Q3 beat vs. consensus. Performance at RHP’s flagship Opryland and Palms properties and its Entertainment segment should be the standouts on the quarter, but the forward commentary and setup for ’22 could steal the show. RHP has visibility into its business that is unmatched by most companies in GLL, and we think that visibility should spur an optimistic tone, judging by what we’re seeing in real time data and forward indicators.
outlook | BOOKINGS SETTING UP FOR A “V” IN ‘22
The overall hotel industry faces deceleration growth across most major markets which could spark a more negative tone from management teams on their upcoming Q3 earnings calls. However, with Covid retreating, strong pent up demand for conventions and group meetings, and reported Group RevPAR accelerating beyond historical norms, the Group part of any discussion should prove positive. Moreover, our industry proxy for booking “leads” already implies strong underlying demand, so there’s even more reason to stay optimistic that RHP’s forward looking commentary will remain very bullish and assuage skeptical investors. We’re not so sure the overall outlook for the rest of the hotel REIT complex will be as rosy due to their reliance on the corporate transient customer but RHP is negligibly exposed to that lagging segment. See our recent hotel industry earnings preview for a contrast vs RHP.
Let’s review the checklist. Favorable Group industry set up? Check. Favorable Leisure demand set up? Check. RHP exclusively exposed to these segments? Affirmative. As our recent Fireside chat with RHP CEO Colin Reed indicated, RHP is likely outperforming the broader group industry in terms of forward bookings, so we think the tone on RHP’s call will be more positive than the industry. CEO Colin Reed had recently discussed with us about how they’ve strengthened their operations through Covid and including retaining and beefing up their salesforce, which ostensibly has given them a leg up through this recovery. In addition, RHP’s market exposure (leisure markets that are more business friendly), and finally, their fresh and product / hardware should yield market share gains.
The path forward is a compelling one for RHP. Among the hotel REITs we cover, RHP has the best potential to drive a very sharp “V-shaped” recovery. Given its book of business and implied forward occupancy that it can yield against next year and the year after, there’s very few full service hotel owners that will have as steep of a 2nd derivative in their business as RHP.
Not featured below, but we estimate that RHP’s Entertainment segment will handily outgrow its ’19 annual EBITDA by next year, too. Further, by ’23, we wouldn’t be surprised to see the Entertainment business doing $70MM+ in EBITDA – the robust return of live events + leisure demand, the growing popularity of the Ole Red concept, and the eventual monetization of its content and following should pay big dividends for RHP shareholders.
The analyst community is catching onto the RHP story but is still much too low on its out year EBITDA forecasts. We’d suspect they’re discounting a slower Group recovery, which in our view is not supported by data and sentiment among the meetings industry. From our vantage, the positive estimate revision cycle will have some legs for at least a quarter or two.
For more insights on our long term views of RHP’s positioning, both geographic and customer centric, please see our August deep dive for more information (HERE).
CONCLUSION | GROWTH & VALUE ALL WRAPPED INTO ONE
Q3 results, in isolation, may not be a major catalyst for the stock, but RHP’s enhanced disclosure and conference call should be a spark for the stock. RHP has outperformed much of the hotel REIT spectrum since we added the stock to our long list back in July, but we see more value from here. In fact, we see a lot more value and upside from here. Industry leading market positioning, a beefed up salesforce, and a set of assets that are facing virtually zero incremental competition for the next few years. The setup calls for a very fertile environment for same-property EBITDA growth, but we don’t think RHP will balk at the idea of reinvesting and expanding the moat(s) around its existing assets. So, a growing base of hospitality EBITDA + a rapidly growing Entertainment segment, and the stock trades at a discount to peers? Therein lies a big opportunity for investors looking to gain leverage to a real “reopening” stock.
As a reminder, RHP has been at this outperformance game for quite some time and as we continue to study their strategy and markets, we see this trend continuing. RHP is the hotel REIT with the most highly visible path toward growing EBITDA vs their ’19 base, and that inflection is not far off. Under fairly conservative valuation assumptions, we see upside in the stock into the $105-$110 range, which would be good for ~30% upside from current. RHP = Best Idea Long.
