Adding to Hedgeye Best Ideas. Conference call on Monday September 22nd.
CALL TO ACTION
We are adding RHP to the Hedgeye Best Ideas as a long. Amid a very favorable fundamental backdrop for domestic hotels, RHP is the REIT with the greatest exposure to the group segment. Our research indicates group could show the most upside versus expectations this year and next. Indeed, we expect Q3 and Q4 earnings beats for RHP and we enter the 2015 fray above the Street once again. RHP appears undervalued versus its comp space and with the potential for a major dividend increase and better earnings, we see the potential for a total return of 40% over the next 12-18 months.
We will be hosting a conference call on Monday September 22nd at 11am to review our investment thesis in more detail. Please email for call details.
- Investors should be bullish regarding RHP’s leading exposure to the group segment
- Our primary research suggests the group outlook is stronger than the consensus view and should lead to positive 2014 and 2015 earnings revisions
- Street overestimating share count, resulting in a $0.25-0.45 AFFO/share understatement on the incorrect share count alone
- Marriott affiliation is an advantage that offsets the single tenant risk
- EV/EBITDA valuation discount of over 3 turns looks attractive
- A likely dividend hike that should improve current yield of 4.7% - already above industry average
The lodging C-corps (the operators) such has Hilton, Marriott and Starwood for the past two quarters have noted a recovery in bookings and events associated with group travel. Ryman Hospitality Properties, “RHP,” is the lodging REIT with the greatest exposure - approximately 80% of total bookings are group bookings. We also see a recovery in food and beverage spend. We believe the lodging sector will continue to experience stronger fundamentals on a prolonged trajectory. This in turn will result in better revenues, EBITDA and dividend growth for RHP. Today, RHP trades at a discount to its lodging REIT peer group.
RHP is the REIT with the greatest exposure to the recovery in Group Bookings & increased F&B spend. Recent comments from the hotel c-corps (operators) indicate the group bookings segment is strengthening. Here are some comments made during Q2 conference calls:
- Group Rate +5% systemwide and will pick up in H2 with M/HSD growth in 2H14 and ancillary group spend was +14% during Q2
- Big 8 hotels will have margin uptick driven by group position
- Group demand is looking very good. Marriott Hotel group bookings made in the second quarter for the next 12 months increased 8%.
- Marriott hotel brands reported group RevPAR of roughly 3% in the quarter, but MAR estimates it would have been up roughly 5% excluding the timing impact of the shifting Easter holiday.
- For full-year 2014, group booking pace of the Marriott brand in North America remains up about 5%.
- Group booking pace is very strong in the third quarter.
- Q2 group business booked for next 12 months: +8%
- July/August huge bookings months for group
- Group pace trending +8% for 2015
- Group pace good for in the year, for the year, but slower for 2015 but still mid-single digits range is on par with historical booking trends
- Host Hotels & Resorts
- Group booking pace very strong: revenues tracking 6% higher
- Group IQFTY up 14%
- Seeing a significant increase in corporate business, especially in Q2
- IQFTQ room nights up 9%, rest of 2014 nights up 5% translates into revenues up 14%.
- ADR significantly higher YoY
Over the past two weeks, we have called meeting planners and group agents across the country in an effort to take a current pulse of the lodging business and group booking trends. As a result of our conversations, we are more upbeat and have conviction that lodging fundamentals remain very strong.
Specifically, we learned the group booking window is lengthening; however, the hoteliers are holding back inventory to yield up ADR with the transient segment. Consequently, hoteliers are creating a greater in the quarter for the quarter or in the year for the year business strategy. Categorically, all groups are spending significantly more on hotel rooms. Due to substantially higher ADRs in primary cities, many agents indicated a willingness by groups to travel to secondary and tertiary cities or going to the suburbs to save on absolute rate but at higher rates relative to prior years at booked hotels.
Regarding food and beverage budgets, all agents indicated F&B budgets are increasing but several agents noted larger budgets because of more attendees. Interestingly, Nashville, Denver and New Orleans were top cities most often mentioned for desired destinations. Las Vegas was often mentioned as a desired destination but very difficult to book due to casino hotels extracting “unnecessary” and “outrageous, miscellaneous fees”.
Gaylord hotels are viewed as a great and viable alternative to Las Vegas, West Coast, & New York convention centers. Also, Gaylord group rates are typically $50 to $100 lower per day than Las Vegas, San Francisco, San Diego or New York. As a result, the group meeting planners (and attendees) have more dollars to spend on food and beverage dining/events.
THE MARRIOTT SYSTEM
Marriott International is the operator of Gaylord hotels. Marriott is able to draw upon its more than 40 million Marriott Rewards members worldwide for group or transient bookings. Marriott dominates the large group booking and distribution network with nearly 70 convention hotels worldwide. Marriott’s system is ranked #1 preferred brand for booking large meetings requiring 200 to 2,000 rooms. On a more local basis, more than 11 million Marriott Rewards members live within 300 miles of a Gaylord Hotel to in-fill transient nights at Gaylord hotels.
On a yield basis, 1% of occupancy = 50% flow through while 1% of ADR = 85% to 90% flow through. Higher transient ADRs coupled with higher occupancy, lifts RevPAR. The resulting higher RevPAR has a significant flow through to EBITDA and FCF. Finally, Marriott’s operating system also affords better purchasing power than the former Gaylord's owned and managed systems.
The culmination of the stronger group bookings trends, higher ADRs, optimized transient yield strategy coupled with Marriott’s operating system offset any single tenant risk issue for RHP.
FORECAST ABOVE STREET (EXCEPT SHARE COUNT)
For 2H14 and 2015, based on our primary research for continued strength in the group segment coupled with the optimization of the Marriott operating strategy, forecasts are higher than the Street and guidance. We believe that management has been conservative with Q3 and Q4 guidance, possibly due to the upcoming conversion date of the company’s Convertible Senior Note.
We forecast significant dividend growth for RHP from $2.30/share current annual dividend (or 4.6% current yield) to $2.60/share in 2015 and increasing to $3.00/share in 2016.
THE STREET HAS THE SHARE COUNT WRONG
The most misunderstood aspect of the RHP model is how the street models outstanding shares for RHP related to the 3.75% Convertible Senior Notes, maturing October 1, 2014.
- Unlike the many analysts on the sell-side, we are NOT modeling an increase in share count, nor are we modeling an equity issuance to address the maturity. We have seen several models that include a higher share count assumption that could be related to the retirement of the Convertible Note.
- Every 1 million of additional diluted shares reduces 2015 FFO/share and AFFO/share by about $0.08-.09/share. We think the Street is approximately 3-5 million shares too high in their diluted share count for 2015.
- As of June 30, 2014, $229.461 million of notes remained outstanding
- The Convertible Notes are convertible through the close of business on September 29, 2014 pursuant to the indenture
- Concurrent with the offering of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to its common stock with counterparties affiliated with the initial purchasers of the Convertible Notes, for purposes of reducing the potential dilutive effect upon conversion of the Convertible Notes.
- “The Balance Sheet Two Step”: On September 29, 2014 (prior to the end of the current quarter), the Company will draw down $229.461 million (assuming no change since June 30, 2014) on its corporate credit facility (revolver) and hold the proceeds as “cash” as an asset on the balance sheet. Then on October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash".
- The equity share count should not increase materially despite the conversion due to the prior hedge transaction.
RHP is undervalued versus peers in our opinion. Today, RHP trades at less than 11x 2015 EV/EBITDA versus the peer group average of 14x 2015. RHP trades at a 2015 dividend yield of 5.5% versus 4.1% (excluding BEE dividend yield) based on our forecasted dividend for RHP. Fair value for RHP is $66-68/share based on RHP reaching 13x EV/EBITDA valuation levels next year plus the current 4.7% current dividend yield (forecasted to increase significantly over the next six months). Total return potential could exceed 40% over the next 12-18 months.
RHP is the REIT with the greatest exposure to the group segment which is where we see the most upside vis a vis Street expectation. Thus, current earnings are likely to be exceeded and dividends raised. RHP is undervalued versus its comp space and we see the potential for a total return of >40% over the next 12-18 months.