TODAY’S S&P 500 SET-UP – September 19, 2014
As we look at today's setup for the S&P 500, the range is 20 points or 0.76% downside to 1996 and 0.23% upside to 2016.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Hedgeye Financials co-heads Josh Steiner and Jonathan Castelyn discuss why they took Bank of America off their Best Ideas list and offer up three other long ideas.
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Hedgeye CEO Keith McCullough explains during today’s institutional call why we might be heading into Quadrant 4 of his model. That’s when both growth and inflation slow. Here’s how to position yourself.
Takeaway: Buy RHP for exposure to hotels, a better than expected group outlook, and an attractive dividend yield/valuation
Adding to Hedgeye Best Ideas. Conference call on Monday September 22nd.
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.
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:
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.
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.
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.
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