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Executives

Colin Reed – Chairman & CEO

David Kloeppel – CFO

Mark Fioravanti – Sr. VP & Treasurer

Carter Todd – Sr. VP & General Counsel

Analysts

David Katz - CIBC World Markets

Bill Crow - Raymond James

[Kevin Maloda] - Bear Stearns

Will Marks - JMP Securities

Nap Overton - Morgan Keegan and Company

Jeff Donnelly - Wachovia Securities

Chris Woronka - Deutsche Bank Securities

Gaylord Entertainment Co. (GET) Q4 2007 Earnings Call February 7, 2008 10:00 AM ET

Operator

Welcome to the Gaylord Company’s fourth quarter 2007 earnings conference call. Hosting the call today from Gaylord Entertainment are Mr. Colin Reed, Chairman and Chief Executive Officer and Mr. David Kloeppel, Chief Financial Officer. They are also joined by Mr. Mark Fioravanti, Sr. Vice President and Treasurer and Mr. Carter Todd, Sr. Vice President and General Counsel. (Operator Instructions) It is now my pleasure to turn the floor over to Mr. Carter Todd. Sir, you may begin.

Carter Todd

Good morning, my name is Carter Todd and I am the General Counsel and Sr. Vice President for Gaylord Entertainment Co. Thank you for joining us today on our fourth quarter and year end 2007 earnings call. You should be aware that this conference call may contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 including statements among others regarding Gaylord Entertainment’s expected future financial performance. For this purpose any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors among others set forth in Gaylord Entertainment’s filings with the Securities and Exchange Commission and in our fourth quarter 2007 earnings release. Thus actual operations and results may differ materially from the results discussed or projected in the forward-looking statements. Gaylord Entertainment undertakes no obligation to update publically any forward-looking statements whether as the result of new information, future events or otherwise. I’d also like to remind you that in our call today we will discuss certain non-GAAP financial measures and our reconciliation of those non-GAAP financial measures to the most directly comparable GAAP financial measures has been provided as an exhibit to our earnings release and is also available on our website under the Investor Relations section. At this time I’d like to turn the call over to our Chairman and Chief Executive Officer, Colin Reed.

Colin Reed

Thanks Carter and good morning everyone. Well 2007 was quite a year for the economy and the hospitality sector and it’s amazing to me how much investor sentiment changed as the year unfolded and the financial dysfunction that our country experienced took hold and spread like wildfire. In this same time period the tone of questions from investors and analysts shifted from growth to survival and just like each previous economic downturn that I’ve witnessed over the last 20 years hotel multiples cratered but this time around at a much more rapid rate than I remember seeing in previous cycles. So how do I think about this and how would I describe where we are today as a company and what does the next year or so have in store for us?

Now before I get to this, let me be a pain and remind each of you about our differentiated strategy and why this is so important in times like this and why this positions us well for the future. As most of you know, every year we run our system between 75 and 80 occupancy points. About 80% of that occupancy is group business. The vast majority of this group business is booked literally years in advance of the customer’s arrival and as a reminder we have contracts for each group which guarantees both room and food and beverage minimums. Consequently as we go into each fiscal year by and large, our year’s occupancy has already pretty much been determined. Because of the incredible size of our convention centers we book so much more group business than our competitors, thus as we enter any given year we have disproportionately less rooms to fill than typical large box chain hotels that tend to compete with us.

So what does all this mean? It’s simply that the success of our financial performance in 2008 and 2009 was pretty much determined on how well we booked business for the years 2004, 2005, 2006 and 2007 and its for this reason we give you on a quarterly basis how many room nights we’re booking for future years. Now as a result of that brand’s performance and superior image with the meeting planning community our forward bookings have been really strong over the last few years particularly in 2007. So as we enter 2008 we have a high degree of confidence that this will be a good year for our company.

Confidence in our brand does not just stem from the basket of bookings we have our inventory. To the contrary. All the basket of bookings measures is where we stand today. To me the more important metrics are our STAR satisfaction, remember we call our employees STARS and our customer satisfaction levels. STAR and customer satisfaction are the leading indicator of customer retention and it’s because of these metrics I have enormous confidence for the prospects of our brand over the next few years. Simply put, as we enter this year we have industry leading STAR sat levels, remarkably low turnover and record high levels of customer satisfaction. Our reservoir of tentative and prospect bookings, i.e. customers with whom we are in various stages of negotiation are extremely good. Furthermore the work we have completed this last year on areas such as procurement and labor management will ensure our margin management will be first rate.

Economic conditions aside, our fundamentals are strong and partially for this reason we announced this morning a stock buy back for up to $80 million. So now let me talk about some of the material elements that influence our business.

First let me touch on group attrition. To remind you attrition is when a group turns up with fewer delegates than they booked. When this happens, and it happens from time to time for multiple reasons, we book the shortfall i.e. the actual room nights delivered versus the guaranteed block into other income. Thus this revenue does not influence room revenue or RevPAR. Now we told you at the end of the third quarter we had encountered more group attrition in the quarter than we normally see and for this reason RevPAR was a little soft. However, profitability was fine. This level of detail caused multiple questions about the trends pertaining to attrition and what we told you was that the modest spike in attrition was more about the specific nature of the groups booked in the third quarter than some underlying broad economic trend. Well you should know group attrition in the fourth quarter came back to normal levels and thus going forward we will only provide you with attrition trending data when we believe the numbers are outside of typical ranges.

Now let me switch gears and talk about the Gaylord National. As you know we are really looking forward to the opening late next month of what will be the very best convention hotel on the east coast. Now just like when Steve Winds Mirage opened in Las Vegas and fundamentally changed the casino experience and landscape in that market, our hotel once open, will set a new benchmark in the large convention resort experience in what is one of the most important markets in the country. We’ve been hard at work on our pre-opening processes. This last week we interviewed and/or screened over 15,000 people who want to work at this awesome resort. We made offers to over 1,300 people and during the next month intensive training and workshops will take place to indoctrinate these folks into our people centric culture.

As you will have seen from the year end release, meeting planners are voting in droves. In fact in the fourth quarter we booked almost 200,000 room nights for this hotel bringing the year’s production to over 400,000 room nights and as we near this opening we have a whopping 1.3 million room nights on the books. This is going to quite some place and one that will create a lot of value.

Now as we reported a couple of weeks ago we were recently informed by the general contractor for this project that due to amongst other things the escalation in man hours cost, the cost to complete this project could escalate by between $50 million and $80 million, higher than our previously reported budget. Now you can imagine our surprise at the magnitude of this number so late in the game and we’re taking this apart right now to determine its accuracy and what we do about it. However our primary focus has to be to get this hotel open and that’s exactly what we’re doing. We’ll keep you informed on the costs and particularly our strategy to deal with this.

Now let me return to some of our other growth initiatives. As regards Chula Vista, we continue to make progress in our discussions with the port authority in the city and are moving towards a decent agreement that will allow us to start the complex permitting process. At Gaylord Opryland, we’re in the layout and design phase for our announced rooms and convention center expansion and things are going according to plan. At the Gaylord Texan, we’re also making progress and are nearly complete on the final project scope and layout. We have made the necessary applications to the core of engineers which is required at this location and we are confident that we will be able to build and open this expansion by late 2010 in time for the January 2011 Super Bowl which will be held a few miles from the hotel. And I hope it’s as exciting as last week’s Super Bowl.

Now let me talk about La Cantera, the hotel in San Antonio that we announced the acquisition of in early November of last year. Frankly as a brand focused on the large meetings business we love the San Antonio market. Why? Because meeting planners want to go there. About a year ago we had indentified La Cantera as an asset that had enormous potential and had engaged in discussions with the owners at that time. We have concluded by the beginning of the fourth quarter of last year that this hotel had tremendous characteristics including it’s proximity to the airport, it’s infrastructure, the availability to grow this asset without huge disruption to the existing facility and that the City of San Antonio is business-friendly and tourist-focused. And furthermore, located in one of the top ten convention markets in this country so we negotiated a deal that we felt to be reasonable and one that would give us decent returns. We announced the transaction in late November.

Now most of us who are invested in this industry know what then transpired in the capital and equity markets with the result that hospitality stocks went into cardiac arrest. From the middle of November to the end of January our market cap declined by over $800 million as multiple [inaudible] industry contracted dramatically. Now as a side note, what’s interesting to me is that similar multiple contractions were evident in the months preceding the ’91 recession and the November, 2001 recession. But it’s also interesting how hospitality stocks so dramatically disconnect from the down trodden industrial index and the S&P 500 index at the time of the perceived recession.

As a management team we’ve always tried very hard to do what’s best for our shareholders and that led us to preannounce on January 22 of this year that we had decided to gain an extension in the closing of La Cantera to April 30 in order for us to find a significant partner. This decision allowed us to utilize this freed up capital to among things buy back up to $80 million worth of stock which we announced this morning. Frankly we can’t think of any better investment that will yield more attractive returns than our equity. We’re trading well below ten-year average multiple levels that our industry normally attracts and well below our asset replacement cost and we believe this decision to buy the stock back to be a very prudent move. Furthermore our confidence in our business strategy and the fundamentals we see in our hospitality brand, lead us to the conclusion that this is a wise investment.

As regards La Cantera two months of capital and equity market turmoil has not changed our perception of this high quality asset. What we know today is that meeting planners are very desirous of booking La Cantera as soon as the deal has been completed. As the next few months play out we will obviously update you as we make progress towards finding a major capital partner. I’m sure there’ll be some questions at the end here on that process.

Now last week David and I were visiting several investors in New York City and one of them asked me, “How do I feel about our company’s position going into 2008 versus the same time last year when our stock was trading in the $50 range?” My answer was this. All of the internal fundamentals of our company are stronger. STAR satisfaction, customer satisfaction and room nights booked, we have better cost control systems in place, no resort [quest], Bass Pro is [monetized], we have a new credit agreement with longer maturities and lower rates and we negotiated and announced expansion plans with large incentives for both Texas and Opryland. We have completed a three year major capital renovation at Gaylord Opryland that will allow us to elevate the rate structure at this hotel and of course Washington, which has record forward bookings, opens in a few weeks. And last but not least, our overall operating plan for 2008 is stronger than our results for this last year and this is reflected in our guidance. The year 2008 will be a decent year for us save some further major deterioration in our economy.

Now let me turn the call over to David who will go through the details of the financials and also touch on the [inaudible] section, David?

David Kloeppel

Thanks Colin. As Colin said 2007 was a busy and exciting year for Gaylord and the successes that we’ve had to date continue to set a good foundation for 2008 and beyond. The work that we’re doing to build and strengthen our brand is in direct response to the stronger demand we continue to see across our network of hotels. Our advanced bookings, the strength of our group business and our ability to command increasingly higher rates certainly represent our customers’ positive response to our unique hospitality offerings. Given the increasing demand we are experiencing for our business we will continue to focus on expanding our network offering additional out-of-room services and driving even higher levels of customer satisfaction all with the design of maximizing profitability for you our shareholders.

Now before I provide an overview of the financial performance of each of our hotels I want to address what I expect many of you participating on the call today are eager to better understand. That is, how a potential economic slowdown, particularly a slowdown in consumer spending might affect our business both in the near and long term. Let me describe a few attributes of our business that should frame this discussion and provide some insight into how we are thinking about our expected performance in 2008.

First the fundamentals of our business remain strong as Colin said. We entered 2008 with 70% of our room revenues for the year already contracted along with additional minimum guaranteed catering spends. Let me repeat that. We entered 2008 with 70% of our room revenues already on the books. We continue to see average daily rates increase as we book additional room nights proof demand for our properties continues to exceed our available inventory over many patterns and meeting planners are providing only limited anecdotal comments about reductions in budgets or spending based on their economic outlook. If you add to this that Gaylord National is expected to open to a 70% plus occupancy and solid flow through on it’s first month of operation then it becomes clear that our underlying business remains strong and provides a solid basis for our outlook into 2008.

Now second our leading performance indicators do not see just an imminent slowdown based on a changing consumer behavior. As Colin mentioned earlier we saw record advanced bookings this past year suggesting that meeting planners continue to make long term commitments despite any economic concerns they may have. While smaller short term bookings could be at risk of not materializing during a recessionary period the fourth quarter of last year showed little sign of this with us booking 133,000 room nights in the fourth quarter for 2008 arrival versus the prior year’s 107,000 booked in the fourth quarter of 2006 for 2007 arrivals. That’s about a 20% increase in room nights booked in the fourth quarter of the prior year for stays in the next year.

Our pipeline of tentative and perspective bookings remains at very high levels providing us the ability to fill many booking gaps that exist and additionally while we saw an increase in attrition during the third quarter of ’07 attrition levels in the fourth quarter stabilized in line with historic averages. I should also comment that January cancellations and attrition levels look very similar to the levels that we saw in January of 2007. Lastly discretionary spending levels for both meeting planners and guests at our properties remain strong with increased sales volume and pricing being realized across the brand and again I should comment, you’ve seen the fourth quarter result but I’ll also comment that January revenue per available room, outside-the-room spend I should say, grew at an over 5% pace versus the 2007 period.

The third point I want to make is that the broader economic environment for the hospitality industry remains favorable for continued growth. Hospitality demand continues to be strong across the industry with limited new supply opening in the next couple of years including the markets in which our properties are located. Now while a consumer recession could depress leisure transient occupancy and spending we have yet to identify a definitive trend that would suggest that non group business will under perform our expectations. Absent a geopolitical event our exposure for the balance of this year is limited to two things; the potential disruption caused by a substantial and extended reduction in consumer demand and a substantial drop in the year for the year net bookings. In other words from higher cancellation and attrition rates and lower short term group demand.

While we’ve seen limited impact from such a change in our performance in the fourth quarter recall that earlier in my comments I noted that short term demand as measured by room demand for the coming year booked in the fourth quarter was up almost 20% over the same period in 2006 and Colin also mentioned that attrition had returned to normal levels. So while we haven’t seen a significant impact in the short term in our fundamentals our good management and judgment requires that we do take a prudent approach and try to reset expectations to account for a slowdown which many analysts are expecting. And as such, we have adjusted our guidance for the full year which I’ll review with you after describing the 2007 results.

So now on to the results. Our hotel business continued to perform in the fourth quarter as expected with fourth quarter CCF up 16% for our hotel business and more than 11% for the company. For the year CCF was up 7% in our hotel business and up 5% on a consolidated basis. RevPAR and total RevPAR grew 2.9% and 4.9% for the quarter and 3.5% and 5.1% for the year respectively.

Opryland’s successful new food and beverage outlets and improved ICE! attraction along with higher ADR drove the property’s revenues to increase 4.4% to $87.2 million in the fourth quarter compared to the prior year and 1.7% for the full year 2007. RevPAR increased just under 1% and 3% for the quarter and full year respectively. Total RevPAR growth of 5.7% in the fourth quarter and 4.6% for the full year was driven by strong outside-the-room spending and a 3.5% increase in ADR. An 188.2% in CCF during the fourth quarter led to a 310 basis points increase in CCF margin at the property largely a result of continued focus on cost management at the property. For the full year CCF increased 1.6% to $71.9 million but remember that the full year result include a $2.9 million charge that the property took to terminate a lease. We don’t expect that to reoccur in the 2008.

Please note that the operating statistics for the fourth quarter of 2007 reflect 12,712 room nights out of available inventory compared to 9,610 in the year ago quarter and for the full year we had 48,752 room nights out of service because of our room renovation program at Opryland.

At the Palms we had a good performance with revenue up to $46.5 million compared to $43.3 million in the prior year quarter and increase of 7.5%. For the year revenue increased 2.9% to $181.8 million from $176.6 million in ’06. Occupancy growth in the quarter of nearly seven points offset a slight decrease in ADR and led to an 8.5% increase in RevPAR to $129.35. The Palms did a terrific job in adjusting its strategy over the last couple of years to grow group occupancy in seasonally weak periods and you see the benefit of that in this quarter. For the full year RevPAR increased 2.8% and total RevPAR increased by 7.5% to $359.45 for the fourth quarter driven by increased traffic to our dining and entertainment offerings. Fourth quarter CCF increased to $11.8 million and the margin at the Palms expanded 390 basis points to 25.4%, really a terrific performance by the Palms’ team in the fourth quarter. For the full year CCF increased 5.9% to $52.8 million with a CCF margin increase of 80 basis points to 29%.

The fourth quarter of the Texan was a solid performance posting $52.2 million in revenue compared to $51.3 million in the fourth quarter of 2006. RevPAR growth of 2.4% for the quarter and 4.9% for the full year was largely a result of a 3.1% and 4.2% increase in ADR for the quarter and the full year respectively. Total RevPAR grew 1.7% in the quarter and 7.9% for the full year largely a result of the continued success of our outside-the-room offerings at the Texan. CCF saw another quarter of growth with a 7.7% increase and 17.3% for the full year resulting in a 230 basis point jump in CCF margin compared to 2006.

Now to some detail on the Gaylord National, our soon-to-be completed convention hotel on the banks of the Potomac. As we look to open in the coming months Gaylord National’s occupancy is projected to be between 72% and 75% for 2008 and we expect CCF of between $50 million and $60 million. In the fourth quarter the property booked nearly 200,000 room nights, of additional room nights, which brought the cumulative number of net definite room nights for the property to approximately 1.3 million bolstering our confidence that this property will perform well out of the gate. We spent an additional $91.4 million on the property during the fourth quarter for a cost to date total of about $721.7 million and we remain on track to open in time for the arrival of our first guests on March 28.

Turning our attention to other growth matters, as Colin mentioned earlier we are in discussions at La Cantera with a variety of capital partners and will update the market as we progress in those discussions. And finally our development team continues to have dialogue in other markets about expanding the Gaylord Hotels’ brand as the enormous economic impact that our properties creates continues to be attractive in a variety of locations. We will update you, our shareholders, as those discussions warrant.

Moving on to the operating attractions business revenue in that business increased 11.5% to $20.7 million and 1.6% to $77.8 million for the fourth quarter and full year respectively compared to 2006. CCF decreased 14.4% to the prior year quarter and increased 14.1% to $12.4 million for the full year 2007.

We’re excited about our prospects for the company for 2008 and for the first time we will have a fully renovated Opryland Hotel and a newly constructed and open Gaylord National. The full year hotel segment guidance we supplied on our last earnings call was 5.5% to 7.5% growth in RevPAR and 5% to 7% growth in total RevPAR. We’re not seeing any changes in our operating fundamentals that would lead us to need to reduce guidance as we described earlier in this call however with the drum beat of a recession in the distance we think it’s prudent to reduce our full year guidance to 4.5% to 7% RevPAR growth and to 4% to 6% total RevPAR growth. We still anticipate booking 1.3 million to 1.4 million net room nights on a same store basis in 2008 and we’re affirming that Gaylord National CCF is expected to come in between $50 million and $60 million in 2008. Excluding the National hospitality CCF guidance is now $197 million to $207 million for ’08 and the Opryland attraction CCF is projected to be in the range of $13 million to $14 million. Finally corporate and other CCF guidance is expected to be a loss of $49 million to $46 million. And with that I’ll turn the call back over to Colin.

Colin Reed

Thanks David, rather than repeat what we’ve been saying here for about the last 30 minutes, why don’t we just open up the call for questions.

Question-and-Answer Session

Operator

Your first question comes from David Katz - CIBC World Markets

David Katz - CIBC World Markets

I wanted to sort of address the guidance issue just a little bit and if we could talk about your degree of confidence not that we profess to know what the depth of the recession will be, but what is your degree of confidence that we won’t have to come back and perhaps trim the guidance some more. How do we, help us pencil out particularly that other RevPAR aspect of your business that I think David mentioned is potentially an exposure. How deep a recession have you factored in to this new guidance that you have?

Colin Reed

Good morning David, what we have done is we’ve looked back to what happened to the group business in period like 2002, the year right after 911 when people, an event unprecedented in the history of this country okay, and we looked at the group behavior in that business and frankly to remind you and everyone else on the phone, in 2002 our Opryland Hotel had positive RevPAR growth of 4% over the previous year. Whereas the industry was off 2% - 3% right across the board. So we’ve looked at the group behavior historically to the last cataclysmic event and we’re pretty confident the groups are going to turn up and obviously as we pointed out and we point this out every quarter, I know it’s a pain in the neck, but we have contracts for almost 60 points of occupancy we have on the books this year. So that’s the first thing.

The second thing is we look at the current trends around transient, we look at the current trends around leisure, we look at what happened in 2002 to the Opryland Hotel and that’s how we built our model and look there’s one other thing that’s going on here. We keep talking about recession and we keep talking about transient business could fall off a cliff, but unlike 2002 the US dollar wasn’t trading at a low point against every single European currency and the reason why I think the big hospitality companies that happen to be positioned in gateway cities like New York are doing well is because tourism is flooding into this country. And we happen to have a hotel in Orlando, we’re opening a hotel in the nation’s capital in Washington and that gives us some degree of comfort. If we thought for a moment that there was risk in our guidance, real risk in our guidance, we would have trimmed it further but what we have been pointing out over the last five years, six years as we’ve been painfully going through this quarter by quarter conference call with all the analysts and the investors is that our business model is a little different to the rest of the industry in the sense that we have so much of our business contracted for and that’s what gives us confidence. David have you anything to add to that?

David Kloeppel

I would add to that David we obviously knew that 2008 was going to be a significant point of discussion on the conference call and kind of how we feel about 2008 and I would echo Colin’s comments that we’ve done an enormous deep dive of what we have seen historically in terms of cancellations and attrition, what we’ve seen historically in terms of additional group bookings and for one of our hotels, we have data that goes back a significant period of time and for the other two hotels a shorter period of time. But it takes us through some pretty deep recessions and I think we feel very good from a group perspective where we have kind of come out on guidance for 2008. Remember as Colin said, we come into the year with nearly 60 points of occupancy already on our books. If you look at cancellation experience we’ve had over the years there is not a huge amount of variability between a 2002 and a 2006. And if you look at attrition levels there’s not again a huge amount of variability between 2002 and 2006. So we feel comfortable, very comfortable on the group side of the business. And on top of that as we come into this year, we know we have some more favorable characteristics at our existing hotels around availability of attractive patterns that groups would like to book into. Normally when we come into a year and we’re thinking we’re going to run in the high 70s of occupancy most of the stuff we’re trying to fill in is holiday periods or lower demand periods. This year because of the way our booking patterns worked and because of the way our yield system works we have focused on holding back better patterns so as we’ve come into ’08 we’re going to benefit from that because we have some really good high demand periods remaining to be booked this year. So we feel very good about the group business.

On the transient side, that’s the piece we don’t have visibility to obviously just like anybody else, but we have made some positive changes in the past two, three, four months in staffing up our transient sales force and sales process and by putting new programs in place to help drive that transient demand, so we feel pretty comfortable with the 4.5% to 7% RevPAR growth. The other I think material thing that Colin I think referenced, but I’ll repeat is, remember we also have a measure of protection with our group business that a lot of other folks don’t. With 80% of our business coming from group business and it’s in contract form if we do see significant attrition we do have a measure of protection on the downside from a profitability perspective so I think we’re confident about RevPAR, I’d say we’re very confident about the CCF.

David Katz - CIBC World Markets

So just to make sure I, we’re characterizing this right, the guidance that we have today is really using a similar assumption set to post 911 period and you’re degree of confidence in what you have here is very high, right, and it’d be fair to call it a worst-case scenario?

Colin Reed

No because you have to tell us what on earth happens to this economy over the next 12 months. It’s not a worst-case scenario because we have no; I mean we really don’t understand frankly what is going to happen to this economy. I mean you can’t even get an economist to agree on this David, but what we have done is we looked to the bookings that we had on the books going into 2002, which were frankly no where near as good as the bookings that we have on the book today and we looked at the group behavior during that period of time and that’s one form of screening. The other form of screening that we do is we look at all of that tentatives and prospects, the contracts that we’ve got out. How much of that is short term? We look at as David said; we look at the patterns of availability. We’ve been spending over the last 12 months; we’ve spent so much time focusing on what we internally we call need-dates. These are the periods of time which historically have always had much lower group occupancy to them and you know we’ve had some very strong success particularly in the short term so I’m not going to use words like this is a worst-case scenario. It is a scenario based upon how we perceive the economy right now and how we perceive the strength of our business. Back in October last year, nobody could perceive or should I say, the middle of last year, nobody could have perceived what happened to the credit markets in this country. Nobody could have perceived that this sub-prime thing was going to spread virally through construction lending and other parts of the banking system. So we have no sense of what, we have opinions, but we don’t know what’s going to happen here but we believe our business is in very good shape right now to weather what comes at us and our systems for managing costs are very, very good.

David Katz - CIBC World Markets

One more quick one with respect to the share repurchase that is out there now, how did you think about deciding to do that versus let’s say you know leaving your debt levels where they are even trying to, focusing on reducing them, just from the context that there appears to be a fair amount of concern generally in our sector about company’s level of debt at this stage.

Colin Reed

Well again, obviously a very good question, but again this is the way in our simplistic minds we think about this. We have a good sense of what our cash flows are going to be this year, we have a good sense of what our cash flows are going to be next year and we don’t need to go back and articulate the answer to your last question about the level of confidence we have in the growth of that cash flows both this year and next year. And then when we step back and we look at the multiples that have been afforded to the hospitality sector over the last 18 years since the last recession and we look at the behavior of the investment community as there is this perception of recession taking place and multiples getting sized down into the eight times forward cash flow, eight and a half, nine times forward cash flow, we think that buying back stock that is trading at you know frankly historically low multiples of what we perceive that cash flow is to be, to be a very good prudent thing. And so our levels of debt are very manageable and our coverage ratios are very manageable and we think this is a good thing to do.

David Kloeppel

And let’s not forget David that a nearly billion dollar investment that we’ve been making for the past four years comes online this year and that’s something that gives us a significant opportunity to deploy some of that cash that that’s going to generate and return that back to shareholders through a share repurchase and also helps us [de-lever] at the same time. So you know if you look at kind of where we are from an interest coverage perspective we are in a very comfortable position by the end of 2008 and we get more comfortable by the end of 2009 clearly and we have a lot of confidence in what the business is going to do in 2008 and frankly in 2009. So we think it’s the right thing to do.

Colin Reed

And the other thing is David Kloeppel and also David Katz, is the way these expansions which is really the next two blocks of capital that we need to spend work will be that through most of this year we will be in the detail design process and therefore we won’t be spending large amounts of capital on these two expansions. God forbid if the world goes crazy here over the next 12 months we will just give consideration to the timing of those expansions. But we’ve got a lot of flexibility in our capital structure here. We don’t have any debt coming due for what three years David?

David Kloeppel

Yes, 2010.

David Katz - CIBC World Markets

Thanks very much.

Operator

Your next question comes from Bill Crow - Raymond James

Bill Crow - Raymond James

Just a couple of questions, three or four questions actually, surrounding the La Cantera resort property. First of all could you kind of talk about the interest of joint venture, potential capital partners in the project as you point out and had discussions? How many people are interested? What is the interest level? That sort of thing.

Colin Reed

Really what we don’t want to do is sort of create the perception Bill of a, sort of a public auction here. So put it like this, we’re enthusiastic about the number of people that have raised their hand, that have come to us unsolicited and also we’re enthusiastic about the quality of that basket and so I think we have a bunch of confidentialities out right now and we’re actively working on the most appropriate potential partner. And as we’ve said, the way our agreements work if at the end of the day there isn’t an acceptable deal to us we have the ability to walk from this location with a total, walk away deposit of $10 million plus the costs we’ve spent today which are relatively minor.

Bill Crow - Raymond James

But it sounds like just acquiring the asset, on balance sheet in its entirety is not, is no longer really a viable option, is that fair?

Colin Reed

Yes, I think that would be a fair comment.

Bill Crow - Raymond James

Okay, has there been any interest expressed either by your selves or by the potential partners as to including an existing property within the, with the San Antonio asset?

Colin Reed

The answer to that question is we haven’t tried to complicate the San Antonio process with that notion. That notion is a notion that we obviously find attractive anyway and I don’t think the San Antonio debate the issue that you inferred are mutually exclusive.

Bill Crow - Raymond James

Okay. And then…

Colin Reed

In other words, we don’t do one without the other. But I don’t think we’re going to be complicating putting them together.

Bill Crow - Raymond James

Okay, it sounded like maybe you’re slightly more optimistic towards Chula Vista and that getting started, does that have any role in the decision to seek a capital partner in San Antonio, are they related at all?

Colin Reed

No, don’t read into that. We are making decent progress with the port authority but we never anticipated not to. I mean these are decent people that share the same goals and aspirations that we have as do the City of Chula Vista. The wrinkle here has been with organized labor and you know we continue to communicate and we’ll see where that leads us but we have very clear views as to how we should ultimately do Chula Vista and we don’t believe it should be a closed shop process here. We’re working through the process but the San Antonio decision has no bearing whatsoever.

Bill Crow - Raymond James

Okay and then one final question, the reaction by the street to the San Antonio announcement in part I guess gave you an opportunity to repurchase some stock, does that sway at all your view of growth through acquisition in the future or is that just kind of an isolated event and maybe a big bite given the economy and the balance sheet.

Colin Reed

No we absolutely think that the La Cantera deal is a very good deal and you know if we were operating a year ago with unlimited credit and people trying to throw money at quality hotel assets it would have been, we would have done the deal but what happened here was frankly unprecedented. With the mark down in the credit markets and the fact that our stock went from trading at the mid to high 40s to mid 20s just, we said this is crazy, we have to preserve capital and use some of that to buy our stock back. This is an opportunity, a moment in time that we can’t let pass.

Bill Crow - Raymond James

Good decision and good call, thanks guys.

Operator

Your next question comes from [Kevin Maloda] - Bear Stearns

[Kevin Maloda] - Bear Stearns

Hoping you can provide some commentary, some relative commentary by property in terms of RevPAR guidance for ’08, you know where you see the different hotels coming in versus your total hotel RevPAR of 4.5% to 7%?

David Kloeppel

Sure for ’08, Opryland’s should be toward the higher end of the range on both RevPAR and total RevPAR. Palms should be mid part of the range, mid to high part of the range. Texan should be kind of middle of the range.

[Kevin Maloda] - Bear Stearns

Okay appreciate it guys, thank you.

Operator

Your next question comes from Will Marks - JMP Securities

Will Marks - JMP Securities

Good morning Colin, good morning Dave. I had a few quick questions on San Diego at this point if you were to move forward approximate timing of opening?

Colin Reed

Ah, I hate to do this to you Will, you tell me how long the California Coastal Commission is going to take and I’ll give you some good sense and then also whether we’re on side with the unions or off side with them and if we’re off side with them it’s a high probability we’re going hear through the legal process so I honestly its just right now, its one step at a time, one foot in front of the other and as we go through each step we’ll be able to articulate as to what should take place with the next step. I’m sorry to do that to you.

Will Marks - JMP Securities

That’s fine, I’ll just pencil in 2020.

Colin Reed

I think that if we haven’t been able to do what we need by the end of ’09 we will be, you’ll be hearing about other deals I’m sure before then anyway.

Will Marks - JMP Securities

Okay another question, on the revised guidance can you give any indication if that has to do, if 80% of your business is group does the revised guidance assume some cancellations and lower spending or is it all on the transient side?

David Kloeppel

Well when we kind of bracketed the range of 4.5% to 7% we clearly took into consideration what could happen to group activity and what has happened to group activity in prior periods, prior cycles where we’ve been in the same part of the cycle. So I would say the 4.5% to 7% assumes on the low end of the range that we experience negative affects of the recession on group activity as well as on transient activity.

Bill Crow - Raymond James

Okay and then on the group in the past have you seen spending slow considerably, and what should we look at in a slower economy. I guess I can understand the RevPAR but maybe not the total RevPAR?

David Kloeppel

Its somewhat challenging to compare the outside-the-room piece in ’02 to what it is today because we are a lot better today than we were in ’02. We have a much better internal sales function to sell the outside-the-room activities that we sell. We deliver such a better product than we did in ’02 and we have so much better customer satisfaction than we did in ’02. All that being said the ’02 experience was, we saw a fairly consistent level of outside-the-room spend in ’02 that we had seen in ’01. So 2000 was the peak I would say just from memory in Opryland in terms of outside-the-room spending and it decelerated somewhat into 2001 but 2002 showed those same kinds of levels. Our view for our business today is that, as I said we’re a lot better working with groups today than we were in the past and creating appropriate programs for them than we were in the past. Again on the bottom end of the range we are assuming that group activity will be affected to some extent both inside the room and outside-the-room based on slower economic activity.

Bill Crow - Raymond James

Okay and just one final question is most of the, or maybe you can apply it percentage of the outside-the-room spend part of the contract that includes the room rate.

Colin Reed

It’s group by group. Some groups have very high outside minimums; some groups have medium outside-the-room minimums. It really is very group specific but I would say the vast majority of groups have contractive, where they contract for banquets and lunches and dinners and organized events, there is always a minimum.

Bill Crow - Raymond James

Okay great. Thanks Colin, thanks Dave.

Operator

Your next question comes from Nap Overton - Morgan Keegan and Company

Nap Overton - Morgan Keegan and Company

A couple of things, first Dave could you share with us what your capital budget is for 2008?

David Kloeppel

For ’08 I think it’s about $350 million, it’s going to be between about $350 million and $375 million and that depends on how quickly we get through design and when we kick of construction on the expansions. That number I just gave you assumes that we kick off construction late this year but that’s not a necessity to meet the opening dates that we’ve set for our selves for the Texan in late 2010 and Nashville in early 2011. And that also includes the total of the $50 million to $80 million of surprise that we got from our general contractor last month related to Gaylord National.

Nap Overton - Morgan Keegan and Company

Okay and so that, about $220 million of that is Gaylord National, is that correct, remaining?

David Kloeppel

Roughly.

Nap Overton - Morgan Keegan and Company

Okay and then secondly [inaudible] in on their survival theme that you said questions had transferred to, quick math I think you had $410 million - $420 million left on your credit facility at the end of the year, $220 million of that will go to the National, finish the National project. If you were to complete the $80 million share repurchase and invest $25 million in equity at La Cantera that would leave you with about $100 million in availability left, is that math correct in the way you think about your liquidity situation?

David Kloeppel

Not quite because you haven’t factored in any operating cash flow for the year. So it’s more like $200 million.

Nap Overton - Morgan Keegan and Company

Okay.

Colin Reed

Minor point.

Nap Overton - Morgan Keegan and Company

It’s a significant point. Okay and then no rooms are out of service for the Opryland Hotel for ’08, is that correct?

Colin Reed

They’re done.

Nap Overton - Morgan Keegan and Company

They’re done.

Colin Reed

I mean we’re going to be doing five of the big suites over the next 24 months, but we won’t take them all out because we fill them with meeting planners and people with aspirations to stay in big suites but that’s about it, right David?

David Kloeppel

Right.

Nap Overton - Morgan Keegan and Company

And then just one last little point of clarification Dave you said those attrition fees don’t end up in RevPAR, they don’t end up in the total RevPAR numbers either, they’re just not in hotel revenues at all is that correct?

David Kloeppel

No they show up in other revenues.

Nap Overton - Morgan Keegan and Company

Okay.

David Kloeppel

So they’re part of total RevPAR.

Nap Overton - Morgan Keegan and Company

Alright. Thank you very much.

Operator

Your next question comes from Jeff Donnelly - Wachovia Securities

Jeff Donnelly - Wachovia Securities

David, you’ve always been able to give us a rule of thumb that you’ve got about 60% of occupancy on the books for any forward 12-month period, generally speaking are you able to give us that rule of thumb around how definite you’re actual CCF looks, whether it’s three, six or 12 months forward?

David Kloeppel

I’m not sure I understand the question.

Jeff Donnelly - Wachovia Securities

I guess I’m wondering if at any point in time, I know you guys don’t give quarterly guidance but are you able to look at your next forward quarter for example now looking at your Q2, and say we’ll at least I’ll make X in CCF, and at best I’ll do Y because if you’re bookings are affectively there and they have cancellation fees, I guess I’m thinking that whether it’s three months forward or 12 months forward you probably have some visibility that 80% of your CCF is, pick a number, is somewhat contractual that even if it all didn’t show up, you would still get the fees from it.

David Kloeppel

Yes I would agree with your logic. I can’t say that I’ve done that analysis and can tell you what that number looks like for the next two or three quarters though.

Jeff Donnelly - Wachovia Securities

Okay I’ll be sure to harp on you on that in the future. Colin as it relates to San Antonio I’m just curious, when you guys have discussions with perspective capital partners, private equity partners for an interest in a property, I guess you’re trying to get them to sign on to you’re underwriting it, you know 13, 15 times EBITDA are they in turn broadening that discussion back to you regardless of what your intentions are and instead asking about Gaylord as an entity, its seven to eight times EBITDA.

Colin Reed

We obviously don’t go there on calls like this and you know that. We’re not going to have any conversations like that.

Jeff Donnelly - Wachovia Securities

I’m just curious if they’re asking.

Colin Reed

I mean we’re not even going to comment on that Jeff and you know we can’t. So let’s just leave it at that but remember we keep talking about, the wise analyst community keeps saying we bought this at 15 times but do remember we have 800 acres of some of the finest real estate in the south of the hill country about 10 to 12 miles from the airport so you can look at the cash flows and extrapolate the multiple but there is an incredible investment opportunity and a growth opportunity here.

Jeff Donnelly - Wachovia Securities

Just a few last questions, Colin I’ve always thought of your hotels as hosting namely domestic organizations, what if any of your demand comes from actual foreign events or travelers?

Colin Reed

You know there’s a lot of, we do a lot of domestic companies that have international presence in operations and you know we, I know next week we have a convention here in Nashville where we’ve got just a lot of foreign folks coming in but we’re not focused right now on international companies conventions coming into US but it’s something that frankly if this dollar continues to trade where it’s trading, we had a Board meeting two days ago and we talked at length because we just brought a new Board member, a lady called Maria [Sastra], who runs Royal Caribbean’s South American operations and we were talking about the whole notion of international tourism into America and how we as a company tap into that. So this is something, you raise a good point it’s something that we’ve really got to get focused on. But to me that’s all upside.

Jeff Donnelly - Wachovia Securities

And just two last questions actually on the National, Dave what was CapEx in Q4 excluding National? And when do you receive your subsidies, when does that all play out?

David Kloeppel

CapEx in Q4 excluding National was about $10 million, actually excuse me $17 million. I did the math wrong. And the subsidy, the first $95 million of bonds are in escrow right now and have been accruing interest for about the last two years and those will be released to us out of escrow when we open. And the [inaudible] which is the $50 million will be issued to us when we open so all $145 million gets issued to us upon opening and we will begin accruing interest and collecting interest on those once we open.

Jeff Donnelly - Wachovia Securities

And do they consider that opening to be, what was it late March, March 28?

David Kloeppel

Yes correct.

Jeff Donnelly - Wachovia Securities

Okay, great thank you guys.

Colin Reed

Thank you and by the way for the analysts that are on the phone that cover us, we obviously will be sending invites to the opening so you can come see this magnificent hotel, it is quite different. One more question and then we’ll terminate the call and if there are other questions they can contact either David, myself or Mark separately.

David Kloeppel

We should put a limit on the number of parts to the question because Jeff Donnelly set a new record with six parts to his question.

Colin Reed

Most of which we couldn’t answer.

Operator

Your final question comes from Chris Woronka - Deutsche Bank Securities

Chris Woronka - Deutsche Bank Securities

I’ll try to keep to two but no guarantee on the parts, it was just interesting data point that 70% of your room revenue for ’08 is on the books heading into the year, can you tell us roughly what that was last year, is it similar?

David Kloeppel

It’s a little bit better this year than it was last year.

Chris Woronka - Deutsche Bank Securities

Okay, and then just related to that, is more of the revenue that you have on the books this year, is more of that contractually protected this year versus say ’02 or even ’06?

Colin Reed

Chris repeat that question please. Sorry David and I were having a sidebar conversation.

Chris Woronka - Deutsche Bank Securities

Sure, is more of that, how much of the revenue is contractually protected right now for ’08, is that similar to what it was in ’02 or ’06 or do you over time, are you getting more of that contractually locked in?

Colin Reed

It’s a higher occupancy percentage locked in at the commencement of ’08 than we had at the commencement of ’02 simply because we’re running about ten points higher occupancy in Opryland in ’08 than we ran back in ’02, because of the, just the bookings on the books but it is proportionately higher.

David Kloeppel

We also have a better, tighter contract than we had in 2002. One of the big things that Carter, our General Counsel, brought to us when we brought him on, but he really brought a focus on those contracts. Our legal department had been outsourced prior to Colin’s and my and Carter’s arrival at the company and consequently contracts weren’t getting quite the attention that they would having someone on staff and so Carter and his team have done a great job of tightening those contracts up, bringing up the levels of protection for our revenue.

Colin Reed

And they are for all intents and purposes, 100% consistent.

Chris Woronka - Deutsche Bank Securities

Okay very good and then final one is if Chula Vista moves forward how should we think about financing just in terms of (a) do you think with where we are in the world that you might look for a partner there and (b) is there any chance that you look for more incentive or maybe less incentive given some of the local economies are, just how should we think about big picture stuff on that, thanks

Colin Reed

Good questions, Chris, I think that we’ve consistently said we negotiate a deal on the incentives. The incentive’s really a byproduct of how much local taxes we’re generating. I think it would be one impossible to get more incentive and I think we, as an honorable company, I don’t think we would attempt to do that. The key though is what happens to the financing markets. We’ve got probably a good year of permitting processes here so we’ve got a year to see how these markets emerge. My sense is, is I know that there’s been huge dysfunction here but my sense is some parts of the capital markets will come back and we will determine the best way to finance this thing when this project gets you know, 12 months from now or however long the permitting processes take. But will we seek a partner on it? If that was the solution to the problem at the time, of course.

Chris Woronka - Deutsche Bank Securities

Okay, very good thanks guys.

Colin Reed

All right, I think we’ll terminate the call and as I said a couple of minutes ago, anybody that has any further questions can contact David or me or Mark Fioravanti at the company and thank you for joining us this morning and you know we live in interesting times but our company is well positioned to navigate through this dysfunction. Thank you very much indeed for joining us.

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Source: Gaylord Entertainment Co. Q4 2007 Earnings Call Transcript
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