Ryman Hospitality Properties, Inc. Q1 FY2021 Earnings Call

Welcome to Ryman Hospitality Properties First Quarter 2021 Earnings Conference Call. Hosting the call today from Ryman Hospitality Properties are Mr. Colin Reed; Mr. Mark Fioravanti, President and Chief Financial Officer; and Mr. Patrick Chaffin, Chief Operating Officer. This call will be available for digital replay. The number is (800) 585-8367, and the conference ID number is 7986514. At this time, all participants have been placed on listen-only mode. It is now my pleasure to turn the floor over to Mr. Mark Fioravanti. Sir, you may begin.

Thank you, Maria. Good morning, everyone. Thanks for joining us. This call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements about the company's expected financial performance. Any statements we make today that are not statements of historical fact may be deemed to be forward-looking statements. Words such as 'believes' or 'expects' are intended to identify these statements, which may be affected by many factors, including those listed in the company's SEC filings and in today's release.

Thank you, Mark, and good morning, everyone. Well, another two months have passed since we last updated you, and I'm pleased to say that the green shoots we observed in the fourth quarter of 2020 continue to grow in the first quarter of '21. But before I walk through some of our company's performance metrics during this period, I'd like to point out two other recent developments related to COVID-19 that are really important, particularly to our company. As of May 2, more than 147 million Americans have received at least one COVID-19 vaccination dose, and 105 million have now been fully vaccinated. That is up significantly from the 63 million and 19 million totals when we last convened. Indeed, today, more than 40% of U.S. adults over the age of 18 are now fully vaccinated, and over 56% of the adult population has received at least one dose. It was only recently, in mid-April, that the vaccine became available to all adults, regardless of age or health status. The vaccine rollout has always been one of the biggest variables outside of our control, so we're very pleased with how it has progressed and what this means for our industry. The positive impact of this rollout was observed last week here in Nashville when the city announced that it will be lifting all restrictions on indoor venues, aside from a mask mandate. This is good news for the Opry House, Ryman Auditorium, the Ole Red in Nashville, the Wildhorse Saloon, and, of course, Gaylord Opryland, which stands to gain the most from the lifting of these restrictions than any other of our business units. Let's take a look at what's happening in our business, and there's a lot of good news to unpack in the trends that we are tracking. We published an investor supplement this quarter that goes into more depth on many of the points I'll mention. I urge you to obtain a copy of that supplement, as I will just touch on some of the highlights. Our hotels continue to outperform our expectations in a rapidly evolving environment. For the first quarter, we achieved 20.4% occupancy in our hotels, excluding the Gaylord National, which remains closed during the quarter. This was down sequentially from the 24.5% open hotels achieved in the fourth quarter of 2020. However, given how strong our fourth quarter has always been from holiday leisure travel, we expected the first quarter to be a little more challenging for this customer segment. The second quarter is off to a great start, as we surpassed 30% occupancy for the month of April, excluding the Gaylord National.

In the first quarter, the company generated total revenue of $84.2 million and a net loss to common shareholders of $104.5 million, or $1.90 per fully diluted share. On a non-GAAP basis, the company's first quarter consolidated adjusted EBITDAre was negative $22.4 million, and AFFO available to common shareholders was a negative $50.5 million, or $0.91 per fully diluted share. While these losses are all greater when compared to the fourth quarter of 2020, it's important to emphasize that our business demonstrated sequential improvement throughout the first quarter, and the quarter performed substantially better than we had anticipated. We had expected that the normal post-holiday seasonal decrease in leisure transient demand coming before large-scale vaccine distribution could lead to a larger decrease in revenue and profitability than we actually experienced. This was due to better transient occupancy and ADR, attrition and cancellation fee collection, better-than-expected early group turnout, and success in controlling expenses. These results reduced our cash burn for the quarter compared to our expectations. In February, we communicated that we believed our first quarter cash burn before capital expenditures would be in the range of $23 million to $26 million per month. Our actual cash burn for the first quarter averaged $17.9 million per month. As Colin described, we saw steady improvement in our cash burn, improving from January's $24.3 million burn through March at $10.8 million. Looking ahead, as the recovery continues, our cash burn will improve each quarter, though month-by-month results may have more sequential variability depending on where leisure holidays and the travel dates of groups still on the books fall on the calendar. We previously expressed our view that second quarter cash burn might fall in the range of the mid- to high teens; our latest data leads us to believe that it will be below that range, at approximately $10 million to $13 million per month, with most of the improvement coming in late May into June. In the third quarter, we believe that our hotel segment, entertainment segment, and our consolidated corporate results will be in positive territory for both adjusted EBITDAre and cash burn. In terms of liquidity, we ended the quarter with a zero balance on our revolving credit facility and $67 million of unrestricted cash on hand, for total liquidity of $767 million. Our overall liquidity was enhanced by the senior note offering we completed in mid-February, where we retired $400 million of 5% senior notes maturing in 2023 and replaced them with $600 million senior notes issue at 4.5% maturing in 2029. The upside of $200 million provided a measure of flexibility to make investments in our business during the pandemic disruption to position the company for the eventual recovery. As Colin mentioned, through the pandemic, we've prudently deployed capital at the Palms, National, and Rockies, entering the recovery cycle with a larger portfolio of hotels in better condition, allowing us to aggressively compete, grow market share, and generate solid returns. While we will continue to maintain an aggressive posture towards growth, we will do so with the intent of deleveraging our balance sheet. As our business levels and equity value return to pre-COVID levels, we will consider all capital market options, including the equity market, to fund recent or new growth opportunities as efficiently as possible. In terms of recent capital investments, we've completed the Gaylord Palms expansion. There are still punch list items to be closed out and invoices to pay, so we have approximately $15 million remaining to be spent. This project has come in on budget and on time with our initial projection. The completion of this expansion positions this property well for group recovery we're beginning to see. We're also making very good progress on the full guestroom renovation at the Gaylord National, with approximately $12 million remaining to be spent on this project. This project is anticipated to be complete in June, just in time for the property's reopening on July 1. Finally, in terms of the Gaylord Rockies transaction announced today, as Colin described, this deal carries a compelling set of strategic benefits to our company. At the same time, it's an attractive use of capital on its own terms. We intend to pay for the $200 million transaction price using cash on hand and on our revolver, which was paid down by $200 million of incremental liquidity that we raised in February. So we're effectively redeploying this incremental capital into a high-return opportunity. At a later date, we expect to revisit the $800 million property level debt, which matures in 2023 and explore interest savings opportunities. For this price, we're acquiring the 35% incremental economics of the hotel that we did not already own, including future expansion potential. We're also acquiring approximately 130 acres of land surrounding the hotel that was not part of the JV structure but was owned separately by our partners. This plan carries tremendous option value from a future development, anchored by the presence of the Gaylord Rockies. The greater Denver market is one we really love and has all the attributes you'd expect for a top-tier group meetings market. Denver International, located just 10 minutes east of the hotel, ranks as the fifth busiest airport in the country, with 69 million passengers in 2019, including 3.2 million international passengers. The state of Colorado ranked sixth for population growth over the last decade; its low tax burden and favorable economic incentive structures are long-term drivers of development and economic growth. We believe the impact of the Gaylord Rockies is only beginning to be felt in the region and will continue to spur more economic development and transform the area around our hotel. We view this transaction as a strategic commitment of capital to a market we find compelling. In terms of valuation, at a price of $210 million with the $800 million of debt on the property, this implies an asset value of approximately $1.4 billion. That's effectively a 12.5x to 13x forward multiple on a stabilized post-COVID-19 adjusted EBITDAre figure by the year 2023, excluding any hotel expansion, lowering our capitalization rate on net operating income to 7% to 7.5%. If we assign an approximate market value to the raw land purchase and deduct that from the applied hotel valuation, in our view, it’s more like a 12x to 12.5x multiple of a potential stabilized 2023 adjusted EBITDAre, or a 7.5% to 8% cap rate. The transaction should also be accretive to AFFO in its first full year and offer a low-teens IRR before any expansion, refinancing, or other strategic value that we can bring as sole owner. Considering our overall Rockies investment history since our initial preconstruction equity investment in 2016, we've acquired the Rockies for an implied multiple of around 10.3x to 10.8x projected 2023 adjusted EBITDAre. That's a great price and return profile for us, considering our view of the overall market and the strategic value we believe we can create on the site. In conclusion, I join Colin in emphasizing that we see encouraging improvements in all the key operating and financial indicators that we track across our businesses. While we are by no means over and done with the pandemic's impact on our businesses, we are beginning to get clarity on how the future will unfold as the vaccine continues to do its work. We are encouraged enough by what we see that we continue to put capital to work where we believe it will drive long-term value, whether that’s in expansions, enhancements, renovations, or acquisitions like the latest transaction. And with that, I'll turn it back to Colin.

Thanks, Mark. So, Maria, let's open the lines for questions. We've covered a lot of territory here this morning, and let's hear what our investors and the analyst community have on their minds. Thank you.

The floor is now open for questions. Our first question comes from Shaun Kelly of Bank of America.

Congratulations on the Rockies deal. Maybe just to start with that, thank you for all the clarity on the underwriting. Could you just talk a little bit more about the strategic vision and positioning here as it relates to both the land purchase and the opportunity around the hotel tower expansion, Colin? Just what's your thinking here? Does spending this money upfront change the timeline at all for the possible hotel expansion there, and how are you thinking about the opportunity set?

Yes, sure, Shaun. That's a really good question, and it's something that Mark and I and Patrick have spent a lot of time discussing with our board. Opryland here in Nashville gets about 13 to 15 million tourists annually. It has grown as a very good convention market. We have an airport that has somewhere between 13 million to 15 million deplanements/planements and has one international flight. Jumping to Colorado, the Rockies hotel is 1,500 rooms and the largest of its kind. It sits next to a mecca of tourism, being the Rockies, and next to Denver International Airport, which has 65 million deplanements/planements annually and multiple international flights a day. It's one of the fastest-growing tech centers in the U.S. Therefore, we believe we can replicate what we've done with Gaylord Opryland over time with the Rockies. This land purchase includes 120 acres; we are not likely going to lay out a plan six months from now and say we're going to go build this or that. We will do it with a developer, similar to what went on in National Harbor. We believe that over time, the Rockies can grow significantly—a hotel that could move to 2,500 rooms. Pre-COVID, we were going to expand it by 300 rooms because of the tremendous business this hotel was able to accommodate in its first year of operations. We're very excited about the Rockies. If it hadn't been for COVID, we would not have been able to purchase this interest as we did.

That's great. Given what we already know about unit-level economics there, it's super attractive. The second question, can we get an update on how the back half of '21 and '22 are filling in on what you've got on the books right now? Clearly, pace has been difficult because you're seeing the constant cancellation/rebook pattern. But are you seeing a more compressed calendar in '21 that is holding together as you look into the third and fourth quarter? More specifically, I think the number was 41% in 2022, how do you think that's going to firm up as we get 3 to 6 months from today?

I'm going to turn this question over to Patrick for a more detailed response. But before I do that, let me just say, what we're facing right now is the pace of change is unprecedented. The last 4 to 6 weeks have seen significant progress. We booked over 50,000 room nights for the year in just April—unheard of for the month. Our current bookings are accelerating, and cancellation rates are declining. As we approach the end of school for kids, despite various learning environments, I believe our leisure business will perform well. My sense is the latter part of this year will be good. Next year, if you look at our supplement, it amplifies how much we have booked, but these numbers don't factor in April's achievements. Patrick?

Yes. Hey, Shaun, this is Patrick. It's great to talk to you this morning. Just to add to what Colin said, we are seeing recovery come together. We started off discussing some SMERF groups, such as dance, cheer, and sports. We are now seeing pharma and medical sourcing starting to travel again. We’re encouraged that West Coast tech groups are booking for the latter half of 2021 and into 2022. They might not be doing user conferences yet, but internal sales meetings are beginning, which is promising. For the second half of 2021, we have about 786,000 room nights booked, translating to 21% occupancy. While that’s about half of where we were in 2019, it is still recovery. As the year progresses, we expect to see trends improve further.

I wanted to ask a bit more about corporate group bookings. Are you sensing that corporations are eager to spend less moving forward after essentially having no travel budget for the past year? Are you seeing changes in willingness to spend from corporate clients?

Pat, do you want to take that?

Sure. Yes, Smedes. What we're hearing from corporate groups is that they've largely been in lockdown and remain concerned for safety. They're watching the CDC and vaccine progression closely. However, there is a lot of pent-up demand for corporate gatherings as we head into the latter part of 2021. While they may initiate with smaller groups, there's eagerness to establish connections and promote a positive culture again, making the current demand promising.

Are you experiencing any labor issues, such as paying staff more to return or facing shortages?

As we've been reopening our entertainment business, we've successfully reached out to many on-call individuals we laid off. It has been somewhat challenging in our hotel business, but we have seen positive results. Until government unemployment benefits are curbed, many individuals find it appealing to stay home receiving those checks.

We've found that the individuals ready to return often seek guarantees about weekly hours. As we plan for the future, we ensure that, upon their return, we can offer consistent hours. This is contingent upon our group side's continued recovery. As business increases, we can assure former employees of opportunities and hours, and it improves our chances to attract them back.

Employers who have prioritized the well-being of their employees historically will have a distinct advantage for rehiring compared to those who haven’t maintained a people-centric culture. It might be tough to recruit, but we believe our focus on people will enhance our appeal over competitors.

As we think about the second half of this year and next year, Patrick, you've mentioned a return to more normal group compositions. Do you envision total RevPAR performance to be consistent, or are mix shifts potentially going to complicate comparisons?

Yes, Chris. The second half of 2021 will be choppy. We're observing the return of SMERF groups, and associations are re-engaging. Corporate bookings are recovering as well. For 2022, I believe the mix on our books suggests a return to a composition similar to 2019 levels. It remains to be seen how these groups will perform in terms of total spend when they are on site, but currently, the mix looks favorable.

In terms of the Rockies, we secured complete ownership and are considering expansion. The Texan's investment has yielded significant returns, and it remains an appealing site as we possess excess land. We will adjust expansion plans based on demand and grow as the profitability of the Texan hotel supports future investments. Historically, we have added amenities tailored to growing market needs.

At what point do you transition from expanding existing properties to new unit growth? With limited capital, how do you evaluate these opportunities?

Our approach is straightforward. We focus on our clients rather than just physical buildings in specific markets, which has led us to create five significant group houses with high leisure business. Our target market includes groups that rotate their conventions across various locations annually. We can host 75 to 100 such groups each year. Based on research, as of now, there are around 26,000 such groups in the nation. With five hotels, we only need a fraction of that demand, allowing us ample room to grow existing properties. Expansion tends to yield better return rates than constructing new establishments where we must build infrastructure from the ground up.

The barriers to entry in this sector work both ways when it comes to distribution growth, especially with acquisitions. We've looked at acquisitions in the past but maintained a disciplined approach to what we want. Previously, we weren't able to successfully underwrite opportunities when paired against prevailing capital costs in the market.

We are still interested in establishing a presence on the West Coast. We are tapping the heart of demand through the Gaylord Rockies. Expansion into that market would be welcomed, but we will act prudently in capital deployment.

Real quick, Colin. You mentioned strength in T plus 5 and T plus 6 from rebooking activity. Are these legitimate rebooking requests or simply clients paying cancellation fees? It seems rebooking for 2025-2028 doesn't qualify as direct rebooking.

In April, we booked about 190,000 room nights, the majority of which were new bookings rather than rebooks. We noted that 90% of these room nights were in T plus 0 through T plus 6. We believe this uptick indicates significant demand and healthy growth. Furthermore, if you consider our revenue with respect to 2019, we see a favorable comparison, with our recent production in April also reflecting growth.

We achieved aggregations of $16 million in Q4 and $10 million in Q1. Those are substantial figures reflecting our strong cancellation collections. Longer-term rebookings focus more critically on cash flow rather than just securing future bookings due to the timeframes involved.

The driving force behind the length of rebooking is the typical booking window of our customers. These are significant groups that already have their future meetings scheduled. All right, it’s top of the hour, Maria. I think we will shut it down now. If other analysts or investors have questions, they know how to reach us.

I prefer the environment we’re in now compared to the challenges we faced a year ago, and thank you all for joining us this morning. Maria, thank you.

Thank you. Ladies and gentlemen, this concludes today's call. You may now disconnect.