Business context and reporting period
Ryman Hospitality Properties, Inc. filed its Form 10-K for the fiscal year ended December 31, 2013, including fourth-quarter results. The company operates as a self-advised hospitality REIT following its January 1, 2013 REIT election. Its portfolio comprises four group-oriented destination resorts totaling 7,795 rooms, the 303-room Inn at Opryland, and Nashville entertainment assets including the Grand Ole Opry, Ryman Auditorium, General Jackson, Wildhorse Saloon, Gaylord Springs and WSM-AM.
Marriott assumed day-to-day management of the Gaylord Hotels properties and certain attractions during late 2012. Comparative results include predecessor Gaylord results through September 30, 2012, so some year-over-year comparisons reflect the REIT conversion, Marriott transition and changes in presentation.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $954.6 million | $986.6 million | Down 3.2% |
| Hospitality revenue | $878.5 million | $916.0 million | Down 4.1% |
| Opry and Attractions revenue | $76.1 million | $70.6 million | Up 7.8% |
| Operating income | $76.2 million | $(4.8) million | Improved from loss |
| Net income | $118.4 million | $(26.6) million | Improved from loss |
| Net income available to common stockholders | $113.5 million | $(26.6) million | Improved from loss |
| Fully diluted EPS | $1.81 | $(0.56) | Improved |
| Cash flow from operating activities | $137.7 million | $176.5 million | Down $38.8 million |
| Capital expenditures | $37.0 million | $95.2 million | Down $58.3 million |
| Total debt | $1.154 billion | $1.032 billion | Up $122.6 million |
| Unrestricted cash | $61.6 million | $97.2 million | Down $35.6 million |
Operating margin was approximately 8.0% in 2013 versus negative 0.5% in 2012. The improvement was driven principally by substantially lower REIT conversion costs, lower corporate expenses and reduced depreciation, rather than by revenue growth. Net margin was approximately 12.4%, but was significantly affected by a $92.7 million income-tax benefit, including a $64.8 million benefit associated with the REIT conversion.
- Hospitality occupancy was 70.7%, essentially flat year over year; ADR was $170.89, down 1.9%; RevPAR was $120.89, down 2.0%; and Total RevPAR was $297.22, down 3.8%.
- Net definite group room nights booked increased 7.6% to 1.591 million.
- Hospitality operating income declined 19.1% to $121.6 million, reflecting weaker group demand, lower outside-the-room spending and transition inefficiencies.
- Opry and Attractions operating income increased 6.4% to $14.2 million, primarily because of higher Grand Ole Opry attendance and additional shows.
- Marriott management fees totaled $18.1 million of base fees and $0.1 million of incentive fees in 2013.
Material changes versus the prior comparable period
- Hospitality revenue declined $37.5 million. Food and beverage revenue fell 4.7%, other hotel revenue fell 6.9%, and rooms revenue fell 2.3%.
- The group mix declined to 72% of rooms sold from 75%, while transient business increased to 28% from 25%. Outside-the-room spending declined 5.1%, primarily because of lower banquet spending and a less favorable customer mix.
- Gaylord National occupancy declined 3.2 percentage points to 64.5%, primarily because of reduced governmental and group business related to U.S. government sequestration. Severe winter weather and a water-main closure also affected results.
- Gaylord Texan revenue declined 6.7%, with lower occupancy, ADR, group demand and several large cancellations; weather and a rooms renovation further affected performance.
- REIT conversion costs declined to $22.2 million from $102.0 million in 2012. Corporate operating expenses declined $20.6 million to $26.3 million.
- The company refinanced its prior facility with a $1.0 billion senior secured credit facility maturing in April 2017, issued $350.0 million of 5% senior notes due 2021, redeemed $152.2 million of 6.75% senior notes and repurchased $54.7 million principal amount of convertible notes for $98.6 million.
- The company repurchased approximately 2.3 million common shares for $100.0 million and paid $76.4 million of cash dividends during 2013. Quarterly dividends were $0.50 per share, or $2.00 for the year.
- Fourth-quarter 2013 revenue was $266.1 million, operating income was $29.7 million and net income was $30.2 million, compared with fourth-quarter 2012 revenue of $266.3 million, an operating loss of $24.6 million and a net loss of $15.0 million.
Liquidity, debt and outlook
At December 31, 2013, the company had $61.6 million of unrestricted cash and $484.5 million available under its $1.0 billion credit facility, after considering $509.5 million of borrowings and $6.0 million of letters of credit. The facility bears interest at LIBOR plus 1.75% at year-end and is secured by substantially all major assets, including mortgages on the Gaylord Hotels properties.
- Approximately $304.1 million principal amount of 3.75% convertible senior notes was outstanding and scheduled to mature October 1, 2014. The notes were convertible through March 31, 2014 based on year-end trading conditions. Management stated that it expected to have adequate liquidity to address conversion or maturity.
- Management projected 2014 capital expenditures of $64 million to $66 million, including maintenance spending and a Gaylord Texan rooms renovation.
- Management stated that cash on hand and operating cash flow were expected to fund normal operations, interest, lease obligations, capital expenditures and declared dividends, with the credit facility available if needed.
- The company was in compliance with all debt covenants at December 31, 2013. Key facility requirements include maximum funded debt to asset value of 0.65 to 1.0, minimum fixed-charge coverage of 1.75 to 1.0, minimum implied debt service coverage of 1.60 to 1.0 and minimum tangible net worth of $660 million plus qualifying equity proceeds.
Management commentary, risks, contingencies and unusual items
- Management reported that 2013 in-the-year bookings were pressured by weakness in the group sector and difficulties associated with the Marriott transition. Booking trends improved in the second half, but further improvement was still required.
- Expected Marriott cost synergies were realized more slowly than anticipated, while system and procedural changes created operating inefficiencies.
- The REIT structure requires distribution of at least 90% of REIT taxable income and imposes asset, income and ownership tests. Failure to qualify could subject the company to corporate-level taxation and restrict future REIT re-election for several years.
- The dividend policy targets annualized distributions of at least 50% of adjusted funds from operations or 100% of REIT taxable income, whichever is greater, but the board may change the policy and debt covenants may restrict distributions.
- The company remains highly concentrated in U.S. group-oriented destination hotels and relies substantially on Marriott for property management, sales, reporting and brand execution. Weak group demand, government travel reductions, competition, cancellations, labor costs, severe weather and natural disasters could materially reduce cash flow.
- Gaylord Opryland remains exposed to flooding risk because of its location near the Cumberland River. The company increased flood insurance limits to $150 million and enhanced levee protection, but uninsured or underinsured losses remain possible.
- The Pension Benefit Guaranty Corporation questioned whether the REIT conversion constituted a cessation of management operations and whether accelerated funding or security for pension liabilities could be required. The company disputes that position and did not believe additional measures were warranted.
- Other unusual 2013 items included $3.0 million of impairment and other charges, a $4.2 million loss on extinguishment of debt, a $4.9 million charge related to modifications of convertible-note hedge and warrant arrangements, and the $92.7 million income-tax benefit.
Most important facts for an investor to verify
- Whether Marriott can convert the higher future booking levels into sustained occupancy, ADR, RevPAR and banquet-spending growth.
- The refinancing, repayment or conversion strategy for the approximately $304.1 million of convertible notes due in 2014 and the resulting cash needs or potential dilution.
- Compliance with credit-facility leverage, coverage and net-worth covenants, including the effect of dividends, capital expenditures and hotel valuations.
- Whether 2014 capital expenditures of $64 million to $66 million can be funded while maintaining the stated dividend policy.
- The portion of 2013 earnings attributable to the nonrecurring $92.7 million tax benefit and other unusual items, versus recurring operating performance.
- The status of the PBGC pension matter, REIT qualification and any remaining uncertainty regarding pre-REIT accumulated earnings and profits.
- Exposure to government-related business, group cancellations, labor costs, weather events and flooding at Gaylord Opryland.