Year-to-date the Lodging/Resort sector has been the best overall REIT sector. With Total Returns of almost 24%, the daily rental model seems to be enjoying the benefits of being a distantly related REIT to the ones with longer term contractual leases. It seems that the threat of rising interest rates has put downward pressure on the REITs that look like bonds; however, the Hotel REITs are now seeing sunnier days with leases that are marked to market every single day.
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We all know that hotels are cyclical assets and they are generally market driven. As a result, the Hotel REITs are not considered the most durable dividend class as they are more commonly owned for growth. In addition, Hotels require a riskier operational element that means that expenses weigh on the sustainability of the dividend.
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A few days ago I was in San Francisco attending REITWorld and I decided to check out a panel of leading Hotel REIT CEOs. While listening to the expert panelists I became interested in the unique value proposition presented by Ryman Hospitality's (RHP) CEO, Colin Reed. I took a few notes and I decided that I would research the company in greater detail.
Ryman Hospitality - A New REIT with a Twist
Just over a year ago (October 1, 2012) Gaylord Entertainment Company converted to a REIT by gaining support of 74% of its shareholders. Two of the largest owners - TRT Holdings (formerly the largest shareholder) and Gabelli Funds - were needed to make the deal fly and after some tough negotiations Ryman Hospitality began operating as a REIT (effective January 1, 2013).
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Smaller (than its peers) in terms of the number of assets, Ryman owns and operates a network of four upscale, meetings-focused resorts totaling 7,795 rooms that are managed by world class lodging operator Marriott International, Inc. (MAR) under the Gaylord Hotels brand.
These four resorts consist of the Gaylord Opryland Resort & Convention Center in Nashville, Tennessee (Gaylord Opryland), the Gaylord Palms Resort & Convention Center near Orlando, Florida (Gaylord Palms), the Gaylord Texan Resort & Convention Center near Dallas,Texas (Gaylord Texan) and the Gaylord National Resort & Convention Center near Washington D.C. (Gaylord National).
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In addition to the resorts, Ryman-owneassets managed by Marriott include Gaylord Springs Golf Links (Gaylord Springs), the Wildhorse Saloon, the General Jackson Showboat (General Jackson) and the Inn at Opryland (renamed from the Radisson Hotel at Opryland), a 303-room overflow hotel adjacent to Gaylord Opryland. Ryman also owns and operates a number of media and entertainment assets including the Grand Ole Opry, the legendary weekly showcase of country music's finest performers for nearly 90 years; the Ryman Auditorium, the storied former home of the Grand Ole Opry located in downtown Nashville; and WSM-AM, the Opry's radio home.
The majority (93% as of 2012) is derived from Ryman's Hospitality division and a smaller percentage (7%) from the Opry and other Attractions.
Each of Gaylord Hotels properties has at least 400,000 square feet of meeting, convention and exhibition space, food and beverage options and retail and spa facilities within a single self-contained property. The owned assets include a network of four upscale, meetings-focused resorts totaling 7,795 rooms that are managed by worldclass lodging operator Marriott.
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These four resorts are central to Ryman's value proposition and in particular the large group meetings sector of the hospitality industry. Here is a snapshot of the extensive meeting space:
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In January I will be attending a Ryman property - the Gaylord Palms Resort & Convention Center near Orlando, Florida - while attending The MoneyShow . I was a guest at the hotel last year and I was extremely pleased with the facility and customer service. The rooms (at the Gaylord Palms) were attractive and I look forward to my visit in January.
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Also, the environment at the Gaylord Palms was especially pleasing and I must boast about the amenities and entertainment value. On a scale of 1 to 10 I would give Gaylord Palms a 9.
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The most unique thing about Ryman Hospitality is the fact that the REIT owns 4 out of the top 10 convention hotels in the US. As you can see below, 3 out of the top 4 convention hotels are located in Las Vegas and Ryman has a balanced portfolio in other strategic gateway cities.
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As I found out while a guest at the Gaylord Palms, a customer does not have to leave the hotel. Ryman seeks to attract an "all-under-one-roof experience" and that requires premium service and quality. As part of the differentiation Ryman attracts customers that enjoy a high space-to-room ratio.
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This snapshot below illustrates the Ryman advantage - the most meeting space per room.
With only four hotels over 1,000 rooms, Ryman maintains a large presence in the group segment among its REIT peers.
Ryman's Unique Revenue Mix and Visibility
Ryman's resort assets are custom-built to serve meeting planners, resulting in a customer mix that provides visibility and protection. . With nearly 1.8 million meetings held annually in the US, the meetings market is a $263 billion segment of the hospitality industry (source: Ryman Investor Presentation). Recessionary conditions in the national economy have resulted in economic pressures on the hospitality industry; however, beginning in 2010, the trend began to reverse, and the conference industry has begun to stabilize
The large group segment has the "highest barrier to entry" attributes and the segment should see limited supply growth in next 3-5 years. The economic downturn was exacerbated by room supply influx - roughly 13k rooms between 2008 and 2009 (297,000 sq. ft. of meeting space came online in 2009 in the Orlando market alone). Alternatively, new supply has limited dedicated meeting space that must rely on convention center customers.
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As mentioned above, Ryman's Opry and Attractions segment continues to perform very well and as evidenced by record third quarter financial performance (in terms of revenue and profitability). For the quarter (Q3-13), the segment generated revenue of $21.9 million and adjusted EBITDA of $6.6 million, representing an adjusted EBITDA margin of 30.3%.
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Due to the unique attributes of the Opryland asset, it's likely that at some point Ryman may opt to spin-off or sale the trophy property. Here's what Colin Reed, the CEO, had to say (on the latest earnings call):
We see our Attractions segment here in Nashville continuing to grow. And the reason for it is that Nashville is a big-time growing tourism city. Tomorrow night, we have the CMAs here, it's going to be a big, big event. There'll be a lot of people in town, a lot of customers in town. And we are -- we will continue to look at ways in which we can create value. And at some point in time, this Attractions business probably does need to be put aside from -- not put aside, that's the wrong word, have -- be operating separately as a business from a typical traditional real estate investment trust. You do not see these types of businesses married up with a real estate investment trust. And this is something we are constantly looking at. And it's, to me, the issue is when one does, not if one does it.
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Ryman's Strong Balance Sheet
Despite the unique asset orientation Ryman has one of the strongest balance sheets in the hotel sector. As illustrated below the company has low leverage (4.8x Debt to Adjusted EBITDA).
In addition, Ryman has exceedingly high interest coverage:
Ryman has no debt maturities until the third quarter of 2013 and limited capital expenditure requirements.
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As of September 30, 2013, Ryman had total debt outstanding of $1.17 billion and unrestricted cash of $52.1 million. During the quarter, the company settled its repurchase of $54.7 million in principal amount of its 3.75% convertible senior notes due in 2014, which were canceled, and settled the conversion of $1.2 million in principal amount of convertible notes that were converted by a holder. After these transactions, $304.1 million of principal amount of the notes remains outstanding.
Should I Buy Ryman With Only a 1-Year REIT Record?
This article provides some interesting analysis regarding Ryman's differentiated investment strategy; however, the key question is "should I buy Ryman today?"
First off, let's examine Ryman's track record for share growth. Since January 1st (2013) Ryman shares are up only 8.48%.
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Ryman is currently trading at $41.72 a share with a Price to Funds from Operations (P/FFO) multiple of 12.0x. That makes Ryman one of the cheapest REITs in the Hotel sector.
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One of the attractions to Ryman is the 4.79% dividend yield - one of the highest in the Hotel sector.
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Regardless of the price and yield, I can't accept the fact that there is risk. Ryman has a highly concentrated portfolio of 4 hotels and a majority of the daily rental income stream is associated with assets in Nashville. In order to mitigate the risk Ryman must diversify into other markets and provide more brand value. I can't accept the risk of owning a highly concentrated REIT that has volatility in geography and its underlying business model.
I plan to write an article later in the week on the Spin-Off of Ashford Hospitality Prime (AHP). By investing in higher-quality, higher RevPar hotels, AHP could be an interesting opportunity and a way to own choice hotels like the Capital Hilton in DC, the Tampa Renaissance, the Marriott Plano Legacy, the Hilton Torrey Pines, and four others.
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A few weeks ago I was in Chicago and my wife and I stayed at the Trump International Hotel and Tower®. Although there's no way to invest in shares of this privately-owned 92-story property (except if I win the lottery and buy the penthouse), I wanted to show you one of the most breathtaking views in the US. Without a doubt, the Trump property exceeded my expectations and now I know the difference between a 5 star luxury hotel and the Gaylord Palms. Regardless of the pillow comfort though, I know that I will "sleep well at night" knowing that I'm continuing to protect my principal at all costs, so I'll wait on Ryman to diversify.
REITs mentioned:(CLDT), (HST), (CHSP), (DRH), (LHO), (PEB), (HT), (AHT), (SHO), and (BEE).
Check out my monthly newsletter, The Intelligent REIT Investor and my NEW 3D portfolio (coming in December).
Source: SNL Financial, NAREIT, and Ryman Investor Presentation.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am long O, ARCP, VTR, HTA, CSG, GPT, STAG, ROIC, UMH, DLR, CBL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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