Why would top investors disagree with management's new strategy? That is the question most shareholders should have had for the Gaylord Entertainment Company (GET) when the company's largest shareholders, TRT Holdings and Gabelli Funds LLC, represented by Mario Gabelli, began questioning management's new strategic plan.
Gaylord, headquartered in Nashville, Tennessee, operates in the hospitality and entertainment industry with a valuable collection of assets and hotel brand names. These brands consist of the Gaylord Hotels and the legendary music showcase theater, the Grand Ole Opry. Their other entertainment brands and properties consist of the Radisson Hotel Opryland, the Ryman Auditorium, the General Jackson Showboat, the Gaylord Springs Golf Links, the Wildhorse Saloon, and the WSM-AM radio broadcast station.
Gaylord announced intentions of reorganizing into a Real Estate Investment Trust (REIT) in late May 2012. On Tuesday September 25, 2012, shareholders OKed management's new strategic direction that has become a craze in the markets. Lately, REIT conversions seemed to be the strategy of choice for companies who own large real estate assets. Iron Mountain (IRM) (read about IRM in my previous analysis here), Cincinnati Bell (CBB), Lamar Advertising (LAMR), and many more have been found executing similar strategies. These companies have caught what seems to be a viral REIT fever.
For Gaylord shareholders, the new strategic plan consists of merging Gaylord into the new REIT entity, Ryman Hospitality Properties Inc., receive a special Earnings & Profit distribution and receive regular quarterly distributions as required in order to remain as a REIT. But shareholders have also decided to sell off the brands and management rights to the Graylord hotels to Marriott in exchange for $210 million. Ryman Hospitality Properties (RHP) will trade on the NYSE beginning October 1, 2012, ticker symbol RHP.
The $210 million transaction has gained a reduction in volatility and increased certainty as to the near term valuations for the management operation and direction for the hotel properties. What has been lost is an opportunity to increase shareholder value in 3 to 5 years. Maybe these shareholders had the right idea.
It is interesting to see this amount of backlash about Gaylord's new strategy from large shareholders, TRT Holdings and Gabelli Funds and they have good reasons to preventing this strategy from being executed. Mario Gabelli encouraged the Chairman and CEO Colin V. Reed to spin off "related" assets to the Grand Ole Opry - including the Opry House, the Ryman Auditorium, WSM-AM, Opry World, the Wildhorse Saloon - etc.
Recently, Sun Healthcare Group elected to execute a reorganization by converting property assets under a REIT structure. But instead of selling off their management operations, they decided to spin off this division as Mario would have liked.
Spinning off the management operations, Sun Healthcare Group Inc. (SUNH) reorganized property assets under a REIT entity, Sabra Health Care REIT Inc. (SBRA). Shareholders have benefited greatly. As of this writing, Sabra trades around an all-time high of $20.33. The management operations is currently an acquisition target.
Around December 2010, Sabra was priced at $15 a share, which I felt suggested high expectations for the company's future prospects. At the time, I calculated Sabra's fair value range around $9.00 to $11.00, not considering growth. Fast forward to October 2011, where it traded around $8.00 and hasn't looked back since then. Sun Healthcare traded to a low of $2.00, eventually becoming an acquisition target by privately held Genesis Healthcare for $8.50.
Another scenario has been well authored by a renowned investor. Mentioned by Joel Greenblatt in his book, "You Can be a Stock Market Genius," Marriott executed a transaction where the hotel properties were left in on company, Host Marriott, and the management contracts business was spun off as Marriott International. The REIT structure was not pursued in this case, but it stands that splitting the two operations represented an effective approach to increasing shareholder value.
A post mortem analysis suggests that there was a far better approach of returning value to shareholders than the current strategy of selling their management operations to Marriott International. Had we followed Mario Gabelli's strategy, we can identify the $210 million sale of the management operation gives a quick analysis to what a spunoff entity would have been worth. The deal suggests that a spunoff entity should trade a 16 times EBITDA. This is comparable to other competitors in the hospitality industry. But does not consider other related assets that would be reorganized under the figurative entity and what a CEO with the right incentives would do for a company generating roughly $20 million in revenue with high potential growth prospects through deal making.
Since shareholders voted with 85% approval, we simply have to move forward. Continuing forward with management's intentions, some back-of-the-envelope calculations show valuation ranges of $48.00 to a much more optimistic value of $102.00 considering the sporty 3% yield the lodging/resort REIT industry posted for the month of August 2012. The high end of the valuation may seem as a bit of a stretch. But combine the new mandates for QE3 with the FED looking to spend $40 billion a month and maintaining low treasury rates until 2015, Gaylord Entertainment or soon to be Ryman Hospitality Properties Inc.(I still cringe at hearing the new name), reaching $100 a share becomes more probable.
Additional disclosure: I am considering a position in LAMR and IRM. On October 1, 2012, Gaylord Entertainment will be merged into Ryman Hospitality Properties and trade on the New York Stock Exchange under the symbol "RHP"