RHP - Ryman Hospitality: One Of The Few REITs Showing Strength

2023-10-20 09:14:21 ET

Summary

• Ryman Hospitality Properties has outperformed other REITs, with only a -1% decline in stock since January 2022 while the REIT index is down -30% during the same period.
• The company owns and operates conference hotels, including 5 of the 7 largest in the US, providing stability and predictability in its business.
• Ryman also operates entertainment businesses such as sports bars, concert venues, and restaurants, capitalizing on the trend of consumers spending more on experiences in recent years.
• The company has shown a lot of resiliency in recent years and seems to have fully recovered from the effects of the pandemic in 2020.

It's been a brutal year (and a half) for REITs across the board where almost every single major REIT sold off by 20% or more since January 2022 with some selling off by more than 50%. One of the few exceptions to this is Ryman Hospitality Properties ( RHP ) which has been holding on pretty well. The stock is down only -1% since January 2022 whereas the REIT index ( VNQ ) has been down by almost -30% during the same period. This is just one of the few factors that makes RHP a quality investment in my book.

The company has two segments. The company's hotel segment owns and operates a number of conference hotels. In fact, the company owns 5 of the 7 largest conference hotels in the US (excluding casinos) under its Gaylord brand. These hotels are so popular with conferencegoers that the average group advance booking window is 2.6 years. What this means is that conference groups book their rooms 2.6 years before the event on average in order to ensure a room. This also allows the company to have stability and predictability in its future business which is very important in the hotel business.

Other than large conference hotels, the company also operates a number of businesses related to entertainment and experiences such as sports bars, concert venues, restaurants, live event centers, and music halls. Some of these businesses are located inside the company's hotels while others have their own standalone locations.

For example, the company owns famous The Grand Ole Opry House located in Nashville, TN which can seat more than 4 thousand people and known for holding a variety of country music events. The company also owns Ole Red restaurant chain that offers live music along with food. Recently the company also acquired a famous venue called Block 21 in Austin for $260 million. The venue includes a theater with 2,750 seats, a 251-room hotel, and a number of office and retail spaces. The location takes up an entire block of downtown Austin.

Recent data shows an interesting trend where American consumers are holding back on spending money on physical goods but they are not holding back on spending money on experiences. Instead of buying new furniture, new clothes, and new cars, they are spending money on flying to new destinations, going to concerts, eating out, and other activities. A McKinsey study asked younger generations where they plan on spending their discretionary money in the near future most and some of the top categories were Restaurants, Travel, and Out-of-home Entertainment.

It was suggested that people would get sick of staying home during the pandemic and there would be temporary pent-up demand as soon as lockdowns and pandemic-related limitations end but demand has been strong for 3 years now. Maybe the pent-up demand wasn't so temporary after all and it may be the new normal where people want to go out and spend money on experiences, especially with the prevalence of social media these days. Looking at Instagram, one might be led to think that half of the country is on vacation at all times.

During the pandemic, Ryman got hit twice because a good portion of its revenues come from business travel and this type of travel was almost non-existent for a while even after all pandemic-related restrictions were lifted. In 2020 the company's revenues and profits took a huge hit but the company showed signs of recovery fairly quickly. By the end of 2022, its hospitality revenues were up 8.2% from 2019 levels even with lower occupancy rates. By 2022, the company was able to charge an average nightly rate that's almost 19% higher as compared to 2019. More importantly, the company's operating income rose 18.7% from 2019 to 2022 which showed signs of not only survival but also growth.

The company's entertainment segment also had a similar performance. In the 5-year period between 2017 and 2022, the company saw its revenues rise by an average annual rate of 16.5% even after including the effects of the pandemic. This is impressive but keep in mind that this also includes the acquisition of new locations as well as tailwinds from inflation, but still, it's definitely not bad.

The company had a history of growing dividends from 2012 up until 2020 but it got disrupted when the company had to cut dividends almost entirely to save costs and ensure that it can survive the pandemic. The good news is that dividends are back to growing as of this year and the company has already paid $1 per quarter so far this year and this is likely to continue on.

The company's newly reinstated dividend looks safe and covered by its income. The company's payout ratio is about 72-75% which doesn't leave much room for growth but the current yield should be safe. Of course, if the company can keep growing its income, it can also grow its dividends at the same rate.

Speaking of growth, in the last 10 years the company's FFO (funds from operations) grew by 223% even with the major disruption during the pandemic. As you can see below, the company was able to snap back and recover from the effects of the pandemic in a very quick fashion.

The company's valuation is not compellingly cheap but not expensive either. Its P/AFFO ratio is slightly above the sector average (15 vs 13) both on trailing and forward basis but perhaps it's justified given the company's strong track record of performance, its resiliency, its future potential, and its operating results. On a P/FFO basis the stock trades at just about where its sector average is. I would say that the company is currently fairly valued at its current valuation considering its profitability, strength of its brand name, growth prospects, and assets. If I had to pinpoint a fair value for the company I'd put it somewhere around $85-90 which is where the stock is right now. Keep in mind that "fairly priced" doesn't mean the same thing as "fully priced" which means there can be still an upside for the stock if the company continues meeting or beating growth expectations. My rating might change if we see a significant change or shift in consumer preferences where they go back to spending more money on materials and less on experiences. My rating might also change if I see some execution issues with the company's long-term growth story and if we see a prolonged and sustained weakness in the overall economy.

Moving forward I expect the company's growth story to continue as it continues to add more assets to its portfolio both through acquisitions and new constructions. The company is already working on building new locations for its restaurant chain and this is likely to bring additional growth for the company. As long as consumers are strong and they continue to prioritize experience-spending as they have been doing lately, the company's growth should continue. Of course, this is highly dependent on the strength of the economy and consumers as a whole. In the long run, the growth should continue at a decent rate during up-cycles with some slowdowns during down-cycles since this business is likely to be highly cyclical in nature since it relies on discretionary spending.

Since inception, the company outperformed the REIT index in total returns by a pretty safe margin even though its performance lagged the performance of the S&P 500 index during the same period. Actually, the stock's performance was very similar to the performance of the REIT index up until recently but there has been a gap between the two in the last few years as this stock held up very well as compared to other REITs as we mentioned above. This stock's recent resiliency definitely contributed to its outperformance.

Having said that, one of the biggest risk factors for this company is its rising debt levels. The company is constantly trying to create new avenues of growth by opening new locations or acquiring existing locations not to mention constantly updating and upgrading existing locations which can be very costly. The company currently has about $1 billion of liquidity and it's not at risk of servicing or paying off its debt but things could quickly change if interest rates kept rising or if the country were to enter a deep recession which could reduce people's entertainment spending significantly. This is probably the biggest risk in front of the company today.

I see this company as a decent play if you believe that the current trend of consumers spending more of their money on "experiences" will continue in the future. There aren't that many stocks to truly take advantage of this trend, and this well-managed company seems to be one of those opportunities. The stock is not exactly cheap but it's not expensive either. I'd say it's fairly valued and a decent entry point at the current price.

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