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CALL TO ACTION

Today RHP begins the process of redeeming the convertible notes that mature this Wednesday, October 1, 2014 as well as satisfying the derivative complex set-up to offset the dilution.  As result, the lower outstanding share count vs the Street should become more transparent.  

We reiterate our RHP – Best Ideas Long thesis as found in our Sept 18, 2014 note "RHP: RIDING THE GROUP HORSE TO HIGHER EARNINGS".  The majority of RHP’s revenues are from the group travel segment of the lodging industry.  We expect that segment to outperform sentiment over the next few years leading to higher EBITDA and FFO which should boost this undervalued stock.

DETAILS

  • The Convertible Notes were convertible through the close of business today (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.
  • Today, (prior to the end of the current quarter), the Company will draw down $229 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. 
  • On Wednesday, October 1, 2014 (Q4 2014), the Company will retire/payoff the Convertible Senior Notes with the "cash" (drawn off the revolver).
  • The equity share count should not increase materially despite the conversion due to the prior hedge transaction.

VALUATION

RHP is undervalued versus peers in our opinion.  Today, RHP trades at 11x 2015 EV/EBITDA versus the peer group average of 14x 2015.  RHP trades at a forecasted 2015 dividend yield of 5.5% versus 4.1% for peers.  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.

CONCLUSION

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