|Shares Out. (in M):||51||P/E||19||17|
|Market Cap (in $M):||3,181||P/FCF||12||10.75|
|Net Debt (in $M):||1,500||EBIT||225||250|
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Over the course of 2017, Ryman Hospitality Properties (RHP) will begin the implementation of the strategic plan for its entertainment division that it has been devising over the past couple of years. This will put the wheels in motion for the entertainment division to be spun-off or sold during the next couple of years; thus, isolating the company’s unique and irreplaceable suite of lodging assets. The CEO, Colin Reed, is 68 years old. Ever since RHP converted to a REIT, Reed has utilized the cash received from his quarterly dividends to buy more of his company’s stock. Over the past couple of years, he has increased his holdings to 1.2 million shares. He has proven to be a shrewd and disciplined capital allocator and very shareholder friendly as he has taken advantage of dislocations in the market to repurchase stock for the company. Clearly, his interests are aligned with his shareholders.
We believe that Ryman is a catalyst rich investment opportunity which should culminate in a sale of the company and the shares appreciating by 66% to approximately $100 per share over the next three years. This would represent a 20%+ CAGR including dividends.
RHP owns and operates 4 large hotel/convention center properties: Opryland in Nashville, National in Washington DC, Texan in Dallas and Palms in Orlando. These are four of the top six largest non-gaming hotels in the country. Each hotel holds more than 1,500 rooms and 400-650k sq. ft. of meeting and exhibit areas. These large assets cater to group business, which represents 73% of bookings. An attractive characteristic of group business is that a large percentage of capacity is booked on average 2.5 years in advance which provides nice visibility. RHP requires deposits upfront and charges fees to protect against cancellations. This enables the company to outperform peers during industry downturns. In 2009, the company’s revenue and EBITDA declined by 10% and 9% respectively, which compares to declines in the lodging REIT index of 22% and 38%, respectively.
RHP is substantially insulated from supply issues facing many hotel companies due to its focus on the large group market. Absent the company’s new 1,500 room Denver property, there is no new supply of large group-oriented hotels opening in the next several years outside of Las Vegas. Meanwhile, demand for convention space and large group meetings continue to grow at a healthy pace. The company’s asset base benefits from the “law of large numbers” with regards to the size of groups. In 2013, meetings with 1,000 or more attendees represented 32% of group demand but in 2015, they represented 37% of group demand. RHP’s bookings mirror this trend as 49% of RHP’s bookings in 2016 were associated with meetings of 1,000 or more on peak room nights, which is an increase from 44% in 2015.
Due to this favorable supply/demand imbalance for large group hotels, Ryman’s results outpaced the broader lodging industry in 2016 by growing RevPAR an estimated 3.5%. On its 3Q16 call held on November 1, management disclosed that for the next two years, the company had 38% points of occupancy already booked, which compares favorably to the 33% that it had booked at the same time last year.
There are various drivers/growth initiatives in place which should enable the company to continue to grow the hospitality RevPAR at a 3%+ growth rate over the next 3 years. At the National, the company is building a world-class ballroom on the banks of the Potomac which opens in May 2017. Most noteworthy, the MGM casino, which is located down the street from the National, had a very solid opening in December. It is estimated that the casino will attract 18,600-20,200 daily visitors to National Harbor. The MGM was not permitted to build more than 308 hotel rooms at the property and most of the overflow demand for hotel rooms will flow to the National. We expect the incremental transient guests will help to fill the National on weekends, holidays and summertime when group demand is lighter. In addition, the casino will increase the appeal of National Harbor as a group destination. Over time, we believe the MGM property will add 10 points of occupancy to the National and also bolster average room rates.
RHP recently unveiled plans for a $90 million indoor/outdoor waterpark at the Opryland which will appeal to group customers while also serving as a major demand inducer for families and adult leisure guests looking for upscale recreation options. We believe this project will drive increased outside-the-room spending and additional points of premium-rated transient occupancy by enticing visitors to extend their stay in Nashville. This attraction should help RHP to bridge the wide transient ADR gap (35% lower or $70/night) of the Opryland vs. the rest of the Nashville market. In addition, the company has been turning away business at the Texan and as a result is adding 300 new guest rooms, 86,000 square feet of new meeting space and expanding its pool over the next year.
Finally, the Gaylord Rockies, of which RHP owns a 35% interest, is under construction and is set to open at the end of 2018. This 1,500 room hotel will have the largest meeting space square footage per room by a factor of 3 in the Denver area. During 2016, RHP has booked 230,000 room nights, of which 84% are new to the state of Colorado and over half were multiyear contracts. Importantly, 24% are new to Ryman hotels and this property represents the first property opening in the Western part of the country; therefore, this property should induce western-based groups into the brand. Importantly, the addition of a new property will alleviate the company’s asset concentration risk.
At the heart of the company’s Entertainment division is the iconic Grand Ole Opry, which is a 4,400 seat venue the home to approximately 130 concerts each year and the Ryman Auditorium, which is designated as a National Landmark and is home to approximately 200 shows every year. It is worth noting that the over the years, the company has accumulated rich content, including videos of over 80,000 performances as well as various TV shows and specials. In addition, the company owns other tourist and F&B attractions throughout Nashville.
Management believes that its entertainment assets are under earning and in a great position to capitalize on the swelling popularity of country music across the country. Over the past few years, management has been deliberately planning a strategy to grow its Entertainment earnings and 2017 is when we will see the fruits of these efforts.
In April, Ryman will open its first “Opry City Stage” in Times Square which will be a four-level food, beverage and entertainment complex focused on country music. Ryman also recently announced plans to launch a restaurant/entertainment concept in downtown Nashville called “Ol Red” in partnership with Blake Shelton, the country music singer and coach on “The Voice.” Both the “Opry City Stage” and the “Ol Red” should be high-return projects, and we believe these concepts can be taken to many other markets over time.
We believe that in 2017, the company will announce a partnership with a major media company to launch an over-the-top channel focused on country music and the country music lifestyle. Marrying the scalability of these types of businesses with the 110 million country music fans in the country, one could envision a scenario where significant earnings could be generated within a relatively short period of time. For example, Crunchyroll, a website in the US that delivers East Asian focused content has over 700,000 subscribers paying $6.95 per month. Furthermore, Glen Beck’s OTT offering, Theblaze, has 400,000 monthly subscribers paying $9.99 per month. We think a JV with Viacom, the owner of CMT, which has 85 million subscribers, would make a lot of sense for both parties.
Earnings at the Entertainment division have doubled since 2012. Management’s goal was to double earnings again over the next four years from $35 million of EBITDA in 2016. We think that by the exit of 2017, the division will have enough of an increased growth trajectory that it could be spun off as a separate company.
In summary, following the spin-off of the entertainment division, Ryman’s unique and irreplicable hospitality asset base will stand out as an attractive takeout candidate. Assuming 3% RevPAR growth at the hospitality segment and a modest 5% growth rate at the entertainment division, free cash flow should grow from $4.70 per share in 2016 to approximately $7.00 per share in 2020 while the dividend will increase from $3.00 per share to approximately $4.50 per share. With this earnings power, we think the value of the company should appreciate to $100 per share over the next 3 years.
Spin-off of the entertainment division
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