Ryman Hospitality Properties, Inc. quarterly report, Q3 FY2012

Ryman Hospitality Properties, Inc. — Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and nine months ended September 30, 2012, with comparisons to the same periods in 2011. The company operated Gaylord resort hotels, the Radisson Hotel at Opryland, Opry and Attractions businesses, and corporate activities. On October 1, 2012, the predecessor merged into Ryman Hospitality Properties, Inc.; Marriott also acquired the Gaylord Hotels brand and management rights for $210 million and assumed day-to-day management of the resort hotels. Ryman planned to elect REIT status effective January 1, 2013.

Financial performance and key metrics

Metric	Q3 2012	Q3 2011	First 9M 2012	First 9M 2011
Revenue	$228.1 million	$225.2 million	$720.3 million	$682.7 million
Operating income (loss)	$(33.4) million	$13.8 million	$19.8 million	$59.8 million
Net income (loss)	$(26.7) million	$(1.6) million	$(11.7) million	$5.1 million
Diluted EPS	$(0.57)	$(0.03)	$(0.24)	$0.10
Operating cash flow	Not provided for quarter	Not provided for quarter	$129.3 million	$82.9 million

• Revenue increased 1.3% in Q3 and 5.5% for the first nine months. Hospitality revenue rose 0.4% in Q3 and 5.1% year to date; Opry and Attractions revenue rose 11.4% and 10.6%, respectively.
• Hospitality operating income increased 9.9% in Q3 to $27.9 million and 18.4% year to date to $114.4 million. Opry and Attractions operating income increased 34.0% in Q3 and 53.0% year to date.
• Consolidated operating results were reduced by REIT conversion costs of $51.4 million in Q3 and $57.8 million year to date, including $21.3 million of non-cash impairment charges.
• Hospitality occupancy was 71.8% in Q3 and 73.6% year to date; ADR was $161.93 and $168.25; RevPAR was $116.24 and $123.89; and Total RevPAR was $280.49 and $301.93.
• Net interest expense decreased to $15.1 million in Q3 and $43.9 million year to date, compared with $18.1 million and $60.3 million, primarily because of lower borrowing costs and 2011 refinancing charges.
• Q3 included a $16.6 million income-tax benefit versus a $0.9 million provision in 2011. The effective tax rate was 38% for Q3 and 6% for the first nine months, although management stated that the annual tax estimate remained subject to significant uncertainty.

Liquidity, debt and cash flow

• At September 30, 2012, unrestricted cash was $24.2 million, restricted cash was $1.2 million, and working capital was negative $156.5 million. Deferred revenue of $62.7 million represented a significant portion of current liabilities and generally does not require future cash payments.
• Total debt was $1.15 billion, consisting primarily of $665.0 million drawn under the $925 million credit facility, $360.0 million principal amount of 3.75% convertible notes, and $152.2 million of 6.75% senior notes. The company reported compliance with debt covenants.
• Credit-facility availability was $252.0 million after $8.0 million of letters of credit. A 100-basis-point increase in LIBOR would have increased annual interest expense by approximately $6.7 million based on September 30 borrowings.
• Operating cash flow of $129.3 million exceeded capital expenditures of $78.2 million. Financing cash outflows included the $185.4 million repurchase of 5.0 million shares, partially offset by $65.0 million of additional borrowings and $32.7 million of equity proceeds.
• On October 1, 2012, the company received $210.0 million from Marriott. Management anticipated approximately $10 million to $20 million of related federal income taxes, approximately $73 million of one-time REIT conversion costs excluding non-cash impairments, and approximately $61.9 million of cash requirements for the special distribution.

Material changes, outlook and unusual items

• The REIT conversion resulted in a fundamental change in the operating model: Ryman retained hotel ownership but transferred day-to-day hotel management to Marriott and expected to lease hotel properties to taxable REIT subsidiaries. Management projected annualized cost synergies of approximately $33 million to $40 million, net of management fees, but cautioned that savings and revenue improvements were not assured.
• The company abandoned or reconsidered several development initiatives, including the previously planned Mesa expansion, portions of the Gaylord Opryland expansion, the Aurora, Colorado project in its previously anticipated form, and a proposed Dollywood joint venture. Related capitalized costs were impaired or written off.
• Management declared a $6.84-per-share special earnings-and-profits distribution totaling approximately $309.7 million, payable December 21, 2012. Cash was capped at 20% of the total distribution, with the balance generally payable in common stock.
• The special distribution reduced the convertible-notes conversion price to $22.50 per share and increased the conversion rate. The notes were convertible through December 31, 2012, and the company intended to settle the face value in cash, subject to available liquidity.
• The Marriott transaction triggered asset-sale provisions under the 6.75% senior-note indenture. If proceeds were not used for permitted debt repayment, replacement assets or capital expenditures, the company anticipated potentially tendering for senior notes within 360 days.
• Management expected approximately $25 million of remaining 2012 maintenance capital expenditures plus approximately $2 million to complete the Grand Ole Opry flood levee. Planned 2013 capital expenditures were $50 million to $55 million.
• Key operating trends were mixed: Gaylord Palms performed strongly, Gaylord National improved, while Gaylord Opryland and Gaylord Texan experienced weaker Q3 comparisons. Net definite room nights booked declined 30.6% in Q3 but increased 17.2% for the first nine months.

Principal risks and contingencies

• Failure to qualify or remain qualified as a REIT could subject the company to corporate-level tax and restrict distributions for multiple years.
• The company must satisfy REIT distribution, asset, income and ownership tests; debt covenants may limit its ability to make required distributions, potentially requiring additional borrowing, asset sales or equity issuance.
• Hotel operating performance is concentrated in group meetings and conventions and, after October 1, 2012, in Marriott as the principal third-party manager. Weak demand, poor management execution, competition, labor issues or economic deterioration could reduce cash flow.
• Debt refinancing risk is significant because the convertible notes and senior notes mature in 2014 and the credit facility matures in 2015. The company also had a maximum potential contribution exposure of $16.9 million related to guarantees involving two Hawaii joint ventures.
• Other risks include flooding at Gaylord Opryland, natural disasters, environmental and accessibility compliance, information-security failures, interest-rate volatility, and potential dilution from convertible notes and warrants.

Facts investors should verify

• Completion and tax effectiveness of the REIT conversion, including ongoing compliance with REIT qualification requirements.
• Actual cash and stock composition, tax treatment and final amount of the special $309.7 million distribution.
• Use of the $210 million Marriott proceeds and whether the company was required to repurchase or tender for 6.75% senior notes.
• Post-transaction hotel performance under Marriott management, including occupancy, ADR, RevPAR, Total RevPAR and booking trends.
• Realization of projected $33 million to $40 million of annualized synergies and total REIT conversion costs relative to the $73 million estimate.
• Liquidity and refinancing plans for the 2014 maturities, convertible-note settlement obligations and future capital expenditures.