Whether it’s a traditional investment or a REIT, sometimes the most interesting time to consider buying the asset in question is when a significant change occurs. And there are rarely so many changes when a company acquires assets, disposal of assets or receipt of a strategic investment. One REIT that is currently undergoing significant change and that could offer attractive prospects for long-term investors is none other than Ryman Hospitality Properties (NYSE: RHP). With a focus on niche entertainment and hospitality assets, the company is definitely worth considering.
Understanding Ryman Hospitality Properties
Operationally, Ryman Hospitality Properties is a unique company. The company specializes in owning destination hotel assets for groups in the urban and resort markets. Its assets include a network of high-end meeting-oriented resorts that, at the end of the company’s last fiscal year, totaled 9,917 rooms. In addition to this, the company also owns and operates media and entertainment assets such as the Grand Ole Opry, Ryman Auditorium, WSM-AM, Ole Red and three Nashville-based properties which are currently managed by Marriott International (TUE). These three properties in question are Gaylord Springs Golf Links, the Wildhorse Saloon and the General Jackson Showboat. On top of that, the company also owns a 50% stake in a joint venture called Circle that creates and distributes a linear, over-the-top multicast channel dedicated to the country music lifestyle.
Having such a diverse set of trades can be fantastic for investors because if one particular market suffers, the others still have a chance to perform better. However, sometimes it makes sense for a company to monetize or restructure some of these assets. And that’s exactly what Ryman Hospitality Properties is doing right now. To start, we should discuss the easy part of what the company is doing. On June 1 of this year, management announced the completion of the purchase of Block 21, which is a mixed-use complex in downtown Austin, Texas that houses accommodation space, retail, office and entertainment, with some of the properties involved being the W Austin Hotel and the ACL Live at the Moody Theatre. This deal cost the company $260 million, of which $136 million was in the form of debt assumption, while the remaining $124 million was in cash. Using data from 2019, before the pandemic hit, this particular asset generated $16.5 million in EBITDA. This translates into an EV/EBITDA multiple of 15.8.
But that was only a small part of what the company is doing now. According to management, they have decided to combine Block 21 into the company’s OEG Attractions Holdings subsidiary. Following this achievement, the company will then sell a 30% stake in OEG to Atairos and NBCUniversal in a transaction valuing the subsidiary at $1.415 billion. If the entity in question can reach certain financial milestones, Atairos will contribute an additional $30 million in a move that will boost OEG’s implied enterprise value to $1.515 billion. It should be mentioned, however, that the transaction is a bit more complicated than a simple investment.
According to management, OEG has taken out a loan in the amount of $300 million. These proceeds, combined with the $293 million that Atairos and NBCUniversal are contributing in exchange for their 30% stake, will be added together and paid into a lump sum payment of $593 million to Ryman Hospitality Properties. Naturally, Ryman Hospitality Properties will also retain its 70% stake in OEG. these strengths, all combined, will cater to the popular and growing country music and lifestyle market. And while the entity will still be controlled by and under the Ryman Hospitality Properties umbrella, it will still allow the company to focus more on its own hospitality business.
The implied price paid for OEG is an EV/EBITDA multiple, if we exclude potential follow-on investment, of 19.1 if we use pro forma figures for FY2019. This assumes an EBITDA of $74 million . If instead we use the estimated numbers for 2022, we are looking at a multiple of closer to 16.8. Given that we know how this part of Ryman Hospitality Properties is valued by outside investors, the next logical question is how much the rest of the business is worth. Fortunately, we have some information that should help us make a good approximation.
As part of my analysis, I’ve considered the net debt impact this transaction is expected to have, and I’ve removed OEG’s equity value to see what the market currently values the rest of the company. Based on my calculations, using our 2019 numbers, we are looking at a price to operating cash flow ratio of just 10.1 for the company’s hotel assets. This assumes that management’s forecast for 2022 materializes. Meanwhile, the EV/EBITDA multiple is a bit higher at 16.1. The reason for this disparity relates to the fact that the pro forma net leverage ratio of the remaining assets of Ryman Hospitality Properties is expected to be approximately 6.0. This seems like a nice status quo for many REITs.
To put the pricing of these other assets into perspective, I decided to compare the company to five other hotel companies. On a price/operating cash flow basis, only four of these companies achieved positive results. But the multiples for them ranged from 15.1 to 33.6. Our prospect was the cheapest of the group. Of course, we still see some of these companies recovering from tough times. So, as part of my analysis, I also decided to look at these companies through the prism of their current price using 2019 results. The range here is a bit lower, between 7.6 and 11, 0. In this case, three out of five were cheaper than Ryman Hospitality Properties. Using the EV to EBITDA approach, the range was 12.8 to 112. In this scenario, only one of the five companies was cheaper than our prospect. But using the 2019 results, the range narrows to between 10.3 and 12.8. In this scenario, Ryman Hospitality Properties becomes the most expensive of the bunch.
|Company||Price / Operating Cash||EV / EBITDA||Price / Operating Cash Flow (2019 data)||EV / EBITDA (2019 data)|
|Ryman Hospitality Properties||10.1||16.1||N / A||N / A|
|Park Hotels & Resorts (PK)||N / A||38.4||11.0||12.8|
|Apple Hospitality REIT (APLE)||15.1||16.3||9.5||11.6|
|Pebblebrook Hotel Trust (PEB)||26.2||34.6||8.9||12.3|
|Sunstone Hotel Investors (SHO)||33.6||12.8||10.8||10.3|
|RLJ Lodging Trust (RLJ)||22.9||112.0||7.6||11.1|
Based on the data provided, Ryman Hospitality Properties is going through an interesting period. This can complicate understanding and valuation. But overall, it looks like the company got an attractive price for the 30% stake it sold. As for the hospitality industry, the valuation looks no worse than other players in the space. So in that regard, the stock might be more or less fairly priced. But given the overall trajectory the company seems to be on and the fact that its multiples aren’t ridiculously high, I’d say it’s a moderate “buy” at the moment.