MAR/GET CALL NOTES

Acquisition of Gaylord's brand and hotel management business looks like a solid deal for MAR

CONF CALL NOTES 

  • Assumes that MAR will begin managing their hotels after their shareholder vote in 3Q12
  • During the past 4 years, GET feels like the value of their equity doesn't reflect the value of their company
  • Given the limited access to capital now, it is very difficult to develop new resorts
  • Their cost structure is currently inefficient.  Failure to act on GET's part would likely resort to a takeover by another entity below intrinisic value which would likely undertake similar tactics to reduce expenses. 
  • They believe that the hospitality industry is still in the early innings of a recovery and that their assets will be worth a lot more a few years down the road.  As a REIT, their investors will benefit from a large dividend and improvement in cash flows.
  • GET had an auction of their brand and feel like this deal reflects the best value to their shareholders by allowing them to reduce operating costs and convert to a REIT.
  • MAR's management expertise should help them improve occupancy and drive additional transient demand to their property.
  • GET will no longer pursue large scale developments.  Once GET converts to a REIT, they will pursue other growth strategies consistent with their new structure. 
  • See positive trends in their lodging business, however, their overall outlook on the business has not changed.
  • There were 3 other management companies that bid on their management company/ brand

Q&A

  • GET believes that their large shareholders would approve of this transaction
  • How did they estimate the fee reduction? 
    • Have $45-50MM of overheard that they allocate to their hotels - i.e. central services
    • Think that there will be $16-17MM of savings at the corporate level
    • $20MM of savings after management fees by outsourcing management costs
  • GET already does a great job of managing occupancy in the 70s and since these are existing assets, they don't really pose a conflict to MAR's existing managed properties
  • MAR is not interested in buying GET's real estate
  • GET's Board unanimously approved the transaction 10-0
  • GET will post an investor presentation on their website with pro-forma 2013 estimates based on consensus analyst estimates in 24 hours
  • GET's credit statistics will improve because of improvements in cash flow generation from this transaction
  • GET's core expertise - Group business
    • GET light - potential of 500-600 room hotels with meeting space
    • Think that their is great growth potential from their existing assets
    • Potential from leisure business addition from MAR's existing customer base
  • MAR expects to earn incentive fees starting in 2013 and thinks that they are paying 8x for fees
  • This is a more accretive transaction than MAR buying stock
  • They are optimistic for the future growth of the GET brand but will likely take a long time given the scale of these assets
  • GET expects to hear from the IRS on the private letter ruling within the next week.  80/20 distribution is fairly standard.
  • The $210MM is the net proceeds from the deal.  GET will have about a $50MM tax bill after using up their NOL.
  • GET views that this transaction will materially improve their FCF and funds available for distribution. They are still in the process of developing a dividend policy though.
  • MAR thinks that they are paying 8-9x 2013 EBITDA for this deal
  • Not sure what the impact of this deal will be on their capex plans for 2013
  • Incentive management fees will be based on a pooled amount from the 4 assets. They are going to be getting a share of the EBITDA above a threshold target.
  • Multiple is 10x base fees in 2013 and expect that incentive fees will be in the money in 2013 so that takes down the level as well
  • The GET properties will be integrated into the MAR system
  • GET's floating rate debt is at historically unprecedented low rates and they don't see that rates will be increasing over the next 12 months.  Doesn't really make sense to convert that debt to fixed immediately and increase their borrowing cost by 4%. However, they will move their debt to 50/50 fixed/floating over the next 18 months.
  • If GET acquires resorts that they believe will benefit from the GET brand, then they will be talking to MAR about managing those assets
  • If GET can figure out a way to do Aurora that will get branded into a GET hotel and be MAR managed, that's their only obligation to MAR
  • Believe that they have the knowledge and expertise to meet meeting planner demands that can generate good returns. So GET does anticipate acquiring smaller "convention/group" hotels.
  • The $55MM of one-time costs are all cash
    • Conversion costs
    • Moving over systems 
    • Transaction costs
    • Severance and transition costs
    • Banking fees
  • They will be materially reducing the number of GET employees at the corporate level
  • The Opry, Ryman, Grand Ole - nothing will change there. They will continue to focus on growing those brands as they have in the past.
  • GET assumes that thier multiple will stay around 11x - similar to their C-corp.  However, quality REITs trade very differently (i.e. they do think that they can get a valuation premium). Their RevPOR on their assets is as good as any REITs and their leverage will be at a healthy level. They will also have a good dividend yield. 
  • Private equity has a 20-25% IRR hurdle rate and tend to bottom fish.  GET believes that the value of their assets will be worth a lot more in a few years and so it's much better to hold onto them rather than fire-sell them today.
  • MAR doesn't anticipate managing the assets until October 2012
  • There are fixed specific targets above which MAR will earn incentive fees which are similar to 2012 numbers
    • There is a cap of 20% of operating profits off of which MAR can earn incentive fees
  • GET's revenues are around $1BN so management fees are around $20MM
  • GET's aggregate costs to manage their hotels are about $60MM (central cost allocation and overhead). There will be a whole slew of efficiencies.  MAR's scale should help them save $8-10MM on just procurement costs. They spend $50MM+ a year on marketing. They spend $15-18MM/year on technology and money on accounting systems and reservations systems. Their current system was built not to increase too much with each hotel addition - MAR has thousands of hotels so it makes sense that they have much better cost leverage.

HIGHLIGHTS FROM THE RELEASE

  • MAR has agreed to purchase Gaylord Hotels brand and the rights to manage its four hotels for $210MM 
  • Following the transaction GET will convert into a REIT effective 1/1/2013
  • "Terms of the management agreement call for Marriott to manage the four one-of-a-kind properties under the Gaylord Hotels flag. Marriott will receive a management contract with an initial 35 year term, 2% base management fee, and an incentive fee linked to improvement in hotel profitability." 
    • We estimate that management fees in 2013 will be roughly $13MM, excluding incentive fees
  • GET "anticipate[s] annualized cost synergies, net of management fees, will total approximately $33 to $40M. In addition, we believe we will have a unique competitive position in the hospitality REIT marketplace with a well capitalized balance sheet and a relatively predictable FFO (funds from operations) stream.” 
  • "As a REIT, the company will adjust its investment approach on the Aurora, Colorado hotel and convention center project. The company will no longer view large scale development as a means for growth and will not proceed with the Colorado project in the form previously anticipated. The company will re-examine how the project could be completed with minimal financial commitment by Gaylord during the development phase."
  • "By year-end, the company plans to issue its shareholders a special, one-time taxable dividend of its undistributed earnings and profits, after receiving a private letter ruling from the Internal Revenue Service (IRS). GET estimates the amount of the earnings and profits distribution to total approximately $415 to $450M. Gaylord intends to pay 80% of the dividend in shares of Gaylord common stock and 20% in cash." 
  • GET "expects to incur approximately $55M in one-time conversion, transaction and severance expense."
  • "Gaylord expects to hold a special meeting of stockholders in Q3 of 2012 for the purpose of voting on shareholder proposals that will facilitate becoming a REIT, amendments to its Certificate of Incorporation or other restructuring."