I’m Putting Real Money on Ryman Hospitality

The latest buy for my Special Situations portfolio is Ryman Hospitality (RHP -0.58%). The company operates four of the top ten largest convention hotels in the U.S. and has recently converted to a REIT, making it much more valuable. On the next market day, I'll buy $2,000 of the stock.

The business
Ryman is fully concentrated in a sub-segment of the lodging industry, convention hotels, with the most top 10 convention hotels of any company. It owns Gaylord Opryland (Nashville, 3rd largest by meeting space), Gaylord National (Washington, D.C., 5th), Gaylord Texan (Dallas, 8th), and Gaylord Palms (Orlando, 9th). Its hotels boast about 75% more meeting space per hotel room than peer Sunstone Hotel Investors (SHO -2.08%) and 200% more than Host Hotels & Resorts (HST -2.50%) for hotels with over 1,000 rooms.

These assets are high-quality cash generators that produce stable cash flows, despite the typical cyclicality of the lodging industry. Why? Ryman's properties concentrate on groups and conventions that must books years in advance (average 2.7 years), meaning that the company has good revenue visibility but can also charge cancellation fees, helping to smooth revenue during tougher times.

With a recent deal struck with Marriott International (MAR -1.12%), that client mix will shift somewhat, but also help it to grow revenue per available room. Marriott is now providing distribution for Ryman's properties for transient stays -- a great move because Ryman gets access to the Marriott Rewards customer base of more than 40 million members. In addition, the Marriott deal allows Ryman to cut its own costs and increase cash flow.

Ryman has the best adjusted EBITDA per room, but trades at a multiple that is among the lowest in the industry. In addition, its balance sheet has among the lowest leverage and best interest coverage, meaning it has room (zing!) to expand the balance sheet to increase revenue. The premium segment also has substantially lower yields.

Source: Ryman investor presentation, February 15, 2013.

So while having the best metrics, it doesn't trade at the highest multiple.

The special situation
The special situations here are legion. Ryman has just converted to a real estate investment trust and was formerly called Gaylord Entertainment. While we're buying at a substantial premium to where the stock traded just a few months ago following a cash distribution, it looks like there's still upside given where comparables are trading and some of the catalysts below.

The company has decided to pay out 50% of adjusted funds from operations, a dividend that comes to $2 per share this year. The rest of that FFO goes to share buybacks, and the company has already authorized a $100 million buyback, more than 4% of shares at current prices. That means virtually all FFO is being returned to shareholders.

And management asserted that it would continue buybacks. According to CEO Colin Reed, "We are serious that this company trades, we believe, well below what it should trade at. And we will continue to deploy our free cash flow into the equity of this company until we are satisfied that this company is being valued where it should be." Just moments prior, Reed had said, "Until our multiple trades at or above the median for this industry, it makes no sense to me to go get all excited about going and buying some hotel in Timbuktu that doesn't have the same cash-flowing qualities and physical features that these assets that we own have today." That's a discipline that I love to see in my companies, and now we'll watch to see if management continues that discipline.

And what happens when buybacks are off the table? It implies the possibility for dividends to increase at an above-average rate.

But there are several more sources of value here. The company's credit rating was boosted three notches recently, and the company is working on refinancing for the long term at historically low rates. In addition, at the end of the month the stock will be added to REIT indices, which will likely cause further buying. Finally, the company has other valuable assets that could be monetized: the Grand Ole Opry, a country radio station, and Ryman auditorium.

In sum, we could see a stock price of $60 based on multiple expansion to 14 times EBITDA up to $66 based on a yield of 3%.

Risks
I don't foresee huge operational or business risks here. The company has good visibility into its operations, though a suddenly deteriorating economy could derail projections some. But 2012 occupancy of 73% is well below 2007's 78%, meaning revenues could expand if the economy improves.

My larger concern here is the notable presence of activist investors, because if they move out, the stock could quickly fall. GAMCO owns 11.4% of shares, Paulson owns 8.2%, JANA Partners owns 4.5%, Marcato Capital owns 3.6%, and Gabelli Funds owns 1.6%. That's quite the contingent of sharp minds focused on this stock, with many acquiring the stock in the low- to mid-$30s. If they sneeze, Ryman catches a cold. Their presence in the stock bears watching.

Foolish bottom line
With multiple exciting catalysts, Ryman looks like a great special situation. On the next market day, I'll be buying $2,000 of Ryman Hospitality in my Special Situations portfolio.

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