Ryman Hospitality Properties, Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Welcome to the Ryman Hospitality Properties' First Quarter 2013 Earnings Conference Call. Hosting the call today from Ryman Hospitality Properties are Mr. Colin Reed, Chairman and Chief Executive Officer; Mr. Mark Fioravanti, Executive Vice President and Chief Financial Officer; Mr. Patrick Chaffin, Senior Vice President of Asset Management; and Mr. Scott Lynn, Senior Vice President and General Counsel. This call will be available for digital replay. The number is [phone], and the conference ID number is 33784428. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Scott Lynn. Sir, you may begin.

[Scott J. Lynn:]

Good morning. Thank you for joining us today for the company's first quarter 2013 earnings call. 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 future financial performance. These statements may be affected by many factors, including those listed in the company's SEC filings and in today's earnings release. As a result, the company's actual results may differ materially from the results we discuss or project today. We will not publicly update any forward-looking statements, whether as a result of new information, future events or any other reason. We will also discuss non-GAAP financial measures today. We reconcile each non-GAAP measure to the most comparable GAAP measure in an exhibit to today's earnings release. I will now turn the call over to the company's Chief Executive Officer, President and Chairman, Colin Reed.

[Colin V. Reed:]

Thank you, Scott. Good morning, everyone, and thank you for joining us today. Let me start by saying that this quarter was, no doubt, one of the most complex quarters that we have ever dealt with, and Mark and I will do our best to describe the series of events that both positively and negatively affected the quarter, as well as several post quarter events that influence how we think about the year. Now the way we're going to deal with the many events is by discussing them one by one, and the order that we will do this is as follows

[Mark Fioravanti:]

Thank you, Colin. Good morning, everyone. I'll spend a few minutes this morning reviewing the financial highlights for the quarter, touch on the balance sheet and our refinancing activities and then our guidance for the year. On a consolidated basis, Ryman Hospitality Properties' revenue for the first quarter of 2013 was $222.1 million, a decrease of 6.2% from the prior year quarter, adjusted for the outsourcing of Hospitality retail operations. The revenue decline was driven by a decline in occupancy attributed to a decreased group and government business and a decrease in outside-the-room spending, primarily in banquets due to an unfavorable business mix versus the prior year quarter. During the quarter, the company generated income from continuing operations of $53.8 million or $0.81 per fully diluted share. Net income in the quarter includes $15 million in pretax expenses related to the company's conversion to a real estate investment trust, as well as a $66.3 million benefit for income taxes. The tax benefit is primarily due to the reversal of $137.4 million in net deferred tax liabilities associated with accelerated tax deductions taken on our real estate assets prior to our conversion to a REIT, partially offset by a valuation allowance of $76.1 million related to the net deferred tax asset of the TRS, primarily due to the book versus tax timing differences in the recognition of income related to the gain on sale of a management contract to Marriott. In addition, we reported a $6.7 million tax benefit related primarily to the reversal of liabilities associated with uncertain tax positions from the 2008, 2009 and 2010 tax years that were settled in the quarter. On a consolidated basis, the company generated adjusted EBITDA of $50.6 million and $23.5 million in adjusted funds from operations or AFFO per fully diluted share of $0.35. AFFO, excluding REIT conversion costs, was $34.9 million in the quarter or $0.52 per fully diluted shares. It's important to remember that the GAAP fully diluted share calculations do not consider the anti-dilutive effect of the company's purchase call options associated with our convertible notes. As a reminder, the dilution mechanics for the convertible notes, purchase call and sold warrants is available in the Investor Toolkit section of our website. Turning to the Hospitality segment. Driven by a 120-basis-point decline in occupancy, RevPAR declined 1.2% to $117.33 in the first quarter of 2013. After adjusting the prior year revenue for the outsourcing of retail operations, total RevPAR for the first quarter of 2013 declined 5.3% to $287.56. Gaylord Hotels in the year for the year cancellations in the quarter totaled 30,100 room nights compared to 8,817 room nights in the first quarter of 2012. As Colin mentioned, this increase was partially attributable to the significant government-related group cancellations in the Washington, D.C. market. Attrition in the quarter increased 3.8 percentage points to 8.3% versus the prior year quarter. During the quarter, Gaylord Hotels collected $1.8 million in attrition and cancellation fees. Compared to the prior year quarter, Hospitality segment adjusted EBITDA decreased 26% to $54.7 million. Hospitality adjusted EBITDA margin decreased 6.6 percentage points to 26.1%. The Opry and Attractions segment generated revenue of $12.5 million and adjusted EBITDA of $1.4 million. And with most of our corporate cost synergies in place, the Corporate and Other segment adjusted EBITDA totaled a loss of $5.4 million in the first quarter, a $6.1 million improvement when compared to a loss of $11.5 million in the prior year quarter. During the first quarter of 2013, the company incurred $15 million of costs associated with REIT conversion activities. Conversion costs in the quarter were primarily employment and severance related to additional employees leaving the company. Based on the current forecast, we're increasing our 2013 pretax REIT conversion cost estimate to $24 million to $25 million versus our previous estimate of $18 million to $20 million. This increase is driven primarily by higher-than-expected property-level employee equity compensation and pension settlement costs associated with the conversion to a REIT. Moving on to the balance sheet. As of March 31, 2013, we had total debt outstanding of $1,092,100,000 and unrestricted cash of $44.8 million. On January 17, we redeemed our remaining 6.75% senior notes at par at a cost of $152.2 million. Also during the quarter, the company repurchased and canceled approximately 1.3 million shares of its common stock for an aggregate purchase price of $55.7 million. Since the end of the first quarter, we completed the successful refinancing of our $925 million credit facility that was scheduled to mature in August of 2015. The increased and extended $1 billion credit facility will mature in April 2017 and is comprised of a $700 million revolving credit line, $154 million of which was drawn and closed, and a fully funded $300 million term loan. We were able to secure a favorable pricing on the facility with initial pricing set at LIBOR plus 1.75%. We also completed the private placement of $350 million of 5% senior unsecured notes due 2021, with aggregate net proceeds of approximately $342 million after deducting the initial purchasers' discounts and commissions and estimated operating expenses. Our year-to-date refinancing activities have improved our maturity schedule and provided balance sheet capacity and flexibility at attractive rates. On April 12, 2013, we paid our first quarterly cash dividend of $0.50 per share of common stock. We also announced our plan to distribute total annual dividends of approximately $2 per share in cash and equal quarterly payments in July -- in April, July, October and January, subject to the board's future determinations as to the amount of the quarterly distributions and the timing thereof. And now turning to guidance. As Colin indicated, the company is reiterating its 2013 full year RevPAR, total RevPAR, adjusted EBITDA and AFFO guidance. Please note that with the successful settlement of our uncertain tax positions in prior years, our adjusted EBITDA and AFFO guidance now contemplates an increased benefit from income taxes, which is offset by increased interest expense associated with our refinancing and share repurchase activities. Based on our current forecast of REIT conversion costs, we are reducing our guidance for AFFO after REIT conversion costs by approximately $6 million from $193 million to $207 million. And to account for our recent share repurchase activity, we have reduced the share count used in our AFFO per basic share and AFFO per basic share after REIT conversion cost guidance ranges. And with that, I'll turn the call back over to Colin for any closing remarks.

[Colin V. Reed:]

Mark, no. I think what we'll do is we'll open up the call for questions. Jackie, if you could do that, please. And we will take questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Bill Crow with Raymond James.

[William A. Crow:]

A couple of questions, Colin. The maintenance of the RevPAR and total RevPAR guidance for the year implies either the first quarter was in line with your expectations or you're more optimistic about the balance of the year. I guess, which one is it?

[Colin V. Reed:]

Well, the thing that caught us a little bit by surprise, Bill, in the first quarter was the government cancellations. The mix was something that, of course, we knew something about and was embedded within our plan. We've got about 50,000 more corporate room nights on the books for the rest of this year than we had at this time last year for this year, and -- for last year, sorry. But here's the thing also, that we are delighted with this level of activity that we have seen in the first quarter from our friends from Marriott and our existing salespeople that stayed with the company. If we continue to see the level of production that we have seen in the first quarter through the rest of the year, the year is going to be a decent year. We're also very pleased with what we have seen in the first quarter from leisure production. And then the other thing that you got to remember, Bill, is that once we told the world come June of last year -- or end of May last year, that we are going to sell our hotel brand to Marriott, and Marriott was going to be the manager, essentially, as we've discussed multiple times, our salespeople basically went into hibernation. And you saw our sales production in the last part of the second quarter, third quarter, fourth quarter of last year. We don't obviously expect that to happen this year. So we -- it's a combination of a decent book of business and a momentum we have in bookings as we look at the [indiscernible].

[William A. Crow:]

All right. On the quality of the bookings or the composition of the groups that are in there, can you kind of reassure us that the advanced bookings that were put on the books in the first quarter are going to be that corporate and association business? And then you made a comment about Marriott shifting its focus to the premium group and association business. I'm just trying to figure out where they were before they made that shift that your prepared remarks alluded to.

[Colin V. Reed:]

Yes, maybe those words weren't entirely well thought through. We had a very large meeting last Monday in Bethesda and -- with our friends from Marriott. And there were -- probably they brought 15 to 20 folks to the table. And we talked in detail about the activity that they have -- that they are applying to both the corporate market and also the small meetings market. And I think we all, Mark, Patrick and I, came away from that meeting feeling that they were focusing on that sector with a lot of diligence. And we heard probably a stronger emphasis on that sector in that meeting than we have historically heard. I think that's the way I would describe it. Mark, you've got any comments or Patrick?

[Patrick Chaffin:]

Yes. The only thing I would add just to Colin's comments back to one part of your question as far as what do we see and what was booked in the first quarter for the back half of the year, just to lend additional credence to that, we booked about 84,000 corporate room nights of what we booked in the first quarter. So in the year for the year, there was a high mix of corporate bookings that were captured in that first quarter, which is very encouraging to us because, as you know, corporate groups tend to spend more outside-the-room. And for our model, that is definitely the type of room mix we want to be capturing.

[William A. Crow:]

That's helpful. Finally for me, guys, we've heard from others, of course, about the negatives in D.C., but we've also seen the first quarter benefited from the inauguration, not as much as 4 years ago, perhaps. I know you were a big part of it 4 years ago. Did you not receive a similar benefit this year from the inauguration?

[Patrick Chaffin:]

Bill, that's a good question. We did receive benefit. It was all in the form of rates because it falls over a period that we can drive group business in-house. And so the benefit for us is on the rate side. And so if you look at the National, there was a rate lift in January for that hotel, but that really is the only true impact that we had.

[Operator:]

Your next question comes from the line of Kevin Milota with JPMorgan.

[Kevin Milota:]

I had a question as it regards to the percent of budgeted room nights that you have on the books. So the 588,000 advanced group room nights, how does that break down for '13, '14, and '15?

[Colin V. Reed:]

The production. Do you have those notes, Patrick, handy?

[Patrick Chaffin:]

Production. Yes. The -- okay. So the production that we did in the first quarter, the 558,000, Kevin, about 143,000 -- and I'm talking in terms of gross. About 144,000 fell into this year; about 78,000 are falling into 2014; 103,000 went into 2015; about 44,000 into 2016; and then beyond 2015, there's about 190,000 room nights that were booked.

[Kevin Milota:]

Okay, great. Just in terms of -- I know this is a stat that you provided in the past. But as the percent of revenue booked for the upcoming years, do you have that similar stat as it stands now?

[Mark Fioravanti:]

Yes. Right now, for 2014, Kevin, we've got about 39 points of occupancy on the books for '14. That's about 3 percentage points ahead of where we were last year. And if you look at the rate that those rooms are on the books at compared to where we finished '12, we're high single digits above that average rate.

[Colin V. Reed:]

And, Kevin, remember, we pointed out as well, we've only -- out of all of those room nights, the almost 40 points of occupancy, only 6,000, 6,500 of those room nights are government-related. So that is all good news.

[Patrick Chaffin:]

In the first quarter, we saw a lot of really good production into '15. '15 is just under about 30 points of occupancy, and we're heading into the corporate booking window now for that period of time. So we'll be looking to our sales team and the Marriott folks to really start driving into '15 as well and pushing it up as well.

[Kevin Milota:]

Okay, great. And then -- so those were the '14 to '15 numbers. For '13, do you have a similar stat?

[Colin V. Reed:]

How many room nights we've got on the books?

[Kevin Milota:]

Yes, just the occupancy on the books at this point.

[Patrick Chaffin:]

For '13, give me just one second, if you could, and I'll find that for you.

[Kevin Milota:]

Okay. No worries.

[Colin V. Reed:]

Is that the end of your question, Kevin?

[Kevin Milota:]

Yes. And then the last one just relates to the 22,000 rooms that you have from government. I mean, at this point, do you think there's substantial risk to those groups showing up? Or have we hit a point with the federal issues that you think you have a pretty good clarity in terms of if those rooms will actually show at the National?

[Colin V. Reed:]

Yes. We've obviously analyzed the living daylights out of these particular groups, and I think it's fair to say that we've taken a little bit of a haircut on those groups as we've done our forecast for the rest of this year. I think that's correct. Patrick, do you have that number?

[Patrick Chaffin:]

Yes, I do. Kevin...

[Colin V. Reed:]

Or do you want to get back to him?

[Patrick Chaffin:]

No, I've got it here with me. Thanks for giving me just a minute to pull it up. As you know, we had about 500,000 room nights traveled during the first quarter. And so for the rest of the year, we currently have about 1.1 million room nights on the books. So that is definitely in keeping with what we would expect at this point in the year.

[Colin V. Reed:]

And with a more favorable corporate mix.

[Operator:]

Your next question comes from the line of Andrew Didora with Bank of America.

[Andrew G. Didora:]

Colin, maybe could you speak a little bit more broadly about the visibility you have in your business model, maybe with a particular focus on National? I guess my question is, how much of the 9% occupancy decline at the property was actually contemplated in your budget? And then how much of that came as a surprise to you, guys?

[Colin V. Reed:]

The part that came as a little bit of a surprise to us was the 2 or 3 in the quarter, late in the quarter group, government bookings that we had canceled. We also had an attrition rate that was running a little higher than we had contemplated in our plan. But we knew in our plan that there was a mix shift that was going to negatively affect the first quarter. And so that would be the commentary I would make on this.

[Andrew G. Didora:]

Okay. And I know -- I think one of your responses to an earlier question was that you haircutted some of this government business for the rest of the year. I guess if governments continue to cancel at this pace, what is your confidence that you're able to replace this business as the year goes on?

[Colin V. Reed:]

Well, we only have 20-odd thousand room nights for the whole company in government business booked for the rest of the year. So we -- our leisure room nights, we produced in the first quarter 18,000 more in the first quarter than we did this time last year. We don't think with the limited amount of exposure the company has for the rest of this year, we don't think this is material to us.

[Patrick Chaffin:]

Yes. And to that point, we've redeployed a lot of the sales team that is focused on the Gaylord National. They are focusing more on short-term business that we know is not government-related, whether that be pharmaceuticals or financial services. And so we've got that team focused on looking elsewhere to drive additional room nights in the year and for '14 and beyond.

[Andrew G. Didora:]

Okay. And then my final question. I kind of just wanted to touch on the balance sheet. Colin, you went through a little over a half of your buyback authorization pretty quickly in 1Q. Just given where you price your credit facility and your recent senior notes offering, what is your view of adding some leverage here in order to buy back more stock?

[Colin V. Reed:]

Well, we'll see where things go. What we have told you all and what we've told the rating agencies and we've told our bank, we don't think it's appropriate to push our leverage much beyond 4.5x. And our pro forma has us -- for our '13 plan, has us operating less than that -- healthily less than that. So we'll see what happens here. But I think we've been pretty consistent that we like our equity. We like -- we think the future of this company looks extremely bright. And we believe we are trading at a material discount. And we'll see where things go here over the next month to 2 months. But -- and we'll be having these conversations with our board. But I don't think we're going to be done here at $100 million. We're going to continue to look at what evolves. That was a long-winded punt.

[Operator:]

Your next question comes from the line of Will Marks with JMP Securities.

[William C. Marks:]

I guess I wanted to ask just on the miss or the weakness in the first quarter. So when you guys gave guidance, it was right when we enjoyed Valentine's Day with you all. And the -- that was mid-quarter. So the big cancellations, which I think were responsible for what you say is the miss, were at that point. Can you just talk about -- or were sometime after that point. Can you talk about how this is a counterpart in terms of -- I imagine you got some nice cancellation fees out of it. Do they come all in the first quarter and the second quarter? That's for me.

[Colin V. Reed:]

Well, look, let's be clear. We didn't give you quarter-by-quarter guidance. We gave you guidance for the year. We've missed against your extrapolation of what you thought we were going to do. And yes, we've got -- we had 3 or so cancellations in the first quarter. That negatively impacted our business. But we've been pretty clear, the leisure side of our business is operating at a level that frankly is a little ahead of where we thought it was going to be. And we also -- if you recall on that February 15 meeting, when we got pressed about, "Well, where do you think Marriott is going to be in terms of group production?" We said we're going to take a pass on that right now. We believe over time that their group delivery model will -- because of the amount of people they have dedicated to this and the amount of corporate customers they have, the 130,000 customers that we talked about, we believe over time that, that will be material. Well, what has actually happened is we've taken apart this first quarter, and 17% of this 550,000-ish room nights have been produced through the Marriott system. So we are happy about what is going on here. So I know that's a long-winded way of saying we've missed against your expectations, we have a plan that knew there was going to be a mix shift. And we -- as we sit here today, I'm comfortable with our guidance.

[Mark Fioravanti:]

In terms of your other question, Will, we collected $1.8 million in the quarter in terms of fees. We've got about another $1.2 million of receivables on fees that we'll collect when those travel dates actually occur and those fees are due. And then in addition to that, we had a number of cancellations rebooked either for later years or for multiple years in the future. So that's kind of how the cancellation fees work through in the first quarter.

[Patrick Chaffin:]

And to give you a feel for how that's sort of built over the quarter, I mean, our occupancy, we actually finished January ahead year-over-year in occupancy, about 3.7 points. But then February and March were down 2.9 points in occupancy and 4.7 points, respectively. So as we stood at the end of January...

[Colin V. Reed:]

Against our plan.

[Patrick Chaffin:]

This is actually against year-over-year. So as we stood at Investor Day, there was still a lot of noise coming in the quarter that we really hadn't seen materialize at that point. But to Colin's point, the mix shift was definitely something we had already anticipated.

[William C. Marks:]

Okay. That makes sense. And just one follow-up to that is, when someone cancels on a fairly short notice like that, what is it? 100% of the room rate? 3/4 of the food and beverage minimum? Or can you just remind us approximately how that works?

[Mark Fioravanti:]

Yes. Typically, it is a portion of the room rate and the food and beverage minimum to keep us whole in terms of profitability. And to your point, Will, as you get closer in the travel date and when you're in the quarter for the quarter, typically, their full fees are due to us. One of the challenges, though, with this quarter, from a fee perspective and the reason why fees weren't as strong as one might anticipate is, is that one of the other challenges with government businesses is that they typically will not agree to cancellation fees or they will require significantly reduced cancellation fees.

[Colin V. Reed:]

And there's a reason for that, and that is, this is a short-term business, typically, government books within a 12-month window. And so they come to you and they say, "Look. I want to come next September. Do you have the whole?" The answer is yes. And they say, "Well, there's a different type of negotiation that goes on with government." But look, government is becoming an insignificant part of our forward book of business, and I don't think it's going to be material to us, prospectively.

[Operator:]

[Operator Instructions] Your next question comes from the line of Carlo Santarelli with Deutsche Bank.

[Carlo Santarelli:]

Just really quickly on the Easter shift and, obviously, how that would have impacted your business. I know Marriott gave some statistics on a monthly basis. Could you guys talk a little bit about how things changed for post of 1Q in April once you kind of adjust for that holiday?

[Colin V. Reed:]

Impact of Easter.

[Patrick Chaffin:]

Okay. Yes, I'm not sure [indiscernible].

[Mark Fioravanti:]

In terms of if it rolls from March to April, how it impacts April?

[Patrick Chaffin:]

Yes.

[Colin V. Reed:]

I don't know. I think what we'll do is we'll give you -- Patrick will get back to you on that question. I think our April numbers have not been -- I mean, I think -- let's get back to you because we're waffling, and I don't want to give you incorrect data. And -- if you don't mind on that question. The impact of group business shifting from the March period to the April period because Easter was in March, we'll give you that information, but we'll have to get back to you on it.

[Carlo Santarelli:]

Great. And then if I could, just one follow-up. With respect to the margins, obviously, a lot of moving parts, but some of the margins in the quarter looks like there were significant swings on a year-over-year basis. Are you guys seeing any unaccounted for pressures today relative to kind of when you outlined your guidance? Or are there any things on the cost side that might have crept up that was unforeseen?

[Colin V. Reed:]

Go on, Mark.

[Mark Fioravanti:]

No. I don't know that they were -- nothing has crept up kind of systemically that I would say was unforeseen. We had talked about earlier in the year the fact that we had a change in union benefits that was going to impact margins, as well as property tax increases. Obviously, we now have management fees that roll through the P&L at the property level. I think that the issue for us from a margin perspective is the continued ramp-up of property-level cost synergies. Those synergies are to come, as Colin outlined on this call -- on the call, with all the systems now in place. So we should see those margins continue to expand as we move through the years, and synergies are realized at the property level.

[Colin V. Reed:]

Okay. Maybe we'll go for one more, Jackie, and then we'll wind the call down and let -- if anyone has any subsequent questions, they know how to get a hold of us here at the company.

[Operator:]

We have no further questions.

[Colin V. Reed:]

Okay, excellent. Well, thank you, everyone, for coming. A complicated quarter and -- but I think the rest of the year and next year look very good for the company. So appreciate your time this morning and look forward to seeing you all at the upcoming conferences that we will be attending. Thank you very much, indeed.

[Operator:]

This concludes today's conference call. You may now disconnect.