News for the Hospitality Executive |
TRT Holdings, the Largest Stockholder of Gaylord, Sends Open Letter to Stockholders of Gaylord Entertainment Suggesting Rejection of Purchase by Marriott |
July 17, 2012 To the Stockholders of Gaylord Entertainment Company Re: Proposed REIT Conversion by Gaylord Entertainment Company (“Gaylord”) Dear Fellow Stockholders: Gaylord has recently announced a proposed transaction (the “Proposed Transaction”) whereby (1) Gaylord would sell to a Marriott subsidiary (“Marriott”) management contracts (as proposed, the “Marriott Agreement”) covering its four Gaylord branded hotels (the “Gaylord Properties”), and (2) Gaylord would then be merged into and converted to a REIT as the surviving entity and the owner of the Gaylord Properties (the new resulting REIT referred to herein as the “REIT Owner”). As the owner of almost 22% of the outstanding shares of Gaylord common stock and the largest stockholder of Gaylord, we have evaluated the Proposed Transaction and, based on the facts available to us, the Proposed Transaction does not appear to be in the best long-term interests of Gaylord and its stockholders. As more fully detailed below, it is our view that:
1. No Fiduciary Duty of Manager to Owner.
Hotel managers are generally deemed to be agents and fiduciaries of
hotel owners, which is extremely important to the rights of a hotel
owner and the duties of a hotel manager. Among other things, when a
hotel manager is a fiduciary of the owner, the hotel manager cannot
engage in self-dealing at the expense of the owner, and the owner has
the power to terminate the hotel manager. Under the Marriott Agreement,
however, Marriott does not agree to be the fiduciary of the REIT Owner.
In addition the agreement is governed by Maryland law, the home state
of Marriott, where the legislature passed a law several years ago that
provides that hotel managers are not fiduciaries to hotel owners. This
means that Marriott has the right to engage in self-dealing
transactions with the Gaylord Properties that profit Marriott at the
expense of the REIT Owner. In addition, if the REIT Owner determines
that Marriott is not properly operating the Gaylord Properties, or the
REIT Owner needs to sell one of the hotels but Marriott does not
consent to the sale, Marriott could take the position that the REIT
Owner had no power to terminate the Marriott Agreement. Marriott might
even file a lawsuit to prevent the REIT Owner from changing the
management of the hotels, which is what Marriott did in the much
publicized case of the Marriott Edition Waikiki Hotel in August of last
year. As the largest stockholder of Gaylord, we do not believe it is
wise to turn over management of the Gaylord Properties to a manager
that will not agree to put the owner’s interest ahead of the manager’s
interest.
2. Potential 65-Year Term. The initial
term of the Marriott Agreement is 35 years, and there are three
automatic ten year renewals, with extremely limited rights of the REIT
Owner not to renew. In our view, 65 years with no right of the owner to
terminate is excessively long term for a hotel management agreement,
and exceeds hotel industry standards. Most importantly, the lengthy
term reduces the rights of the owner to make changes in hotel
management that may be necessary to maximize the long term
profitability of the Gaylord Properties, or to terminate the manager if
it performs poorly or takes too much profit from self-dealing
transactions with the hotels.
3. Restrictions on Owner’s Rights to Sell
Hotels. The REIT Owner would have no right to sell any of the
Gaylord Properties without Marriott’s consent, and no right to
terminate the Marriott Agreement in order to allow a sale of any of the
hotels. In fact, the Marriott Agreement prohibits the sale of any of
the Gaylord Properties to any buyer that already owns 10 or more full
service hotels without Marriott’s consent — this could substantially
reduce the number of potential buyers for the hotels, and as a result,
reduce the sale price of the hotels. By withholding its consent for any
potential buyer of the Gaylord Properties, Marriott could force the
REIT Owner to retain ownership of the Gaylord Properties for the entire
65-year term. In the hotel industry, particularly with respect to large
hotels, it is common for the hotel owner to negotiate a right to
terminate the hotel management agreement upon a sale of the hotel,
usually with a reasonable termination fee. Without this right, it may
be impossible for the REIT Owner to sell one or more of the Gaylord
Properties, and at the very least it will significantly reduce the
market value of the Gaylord Properties, because there will be fewer
potential buyers. In addition, it creates additional incentives for
Marriott to act in its own self interest rather than the interests of
the REIT Owner.
4. Few Restrictions on Manager’s Rights to Assign the Hotel Management Agreement. Even though the REIT Owner has no ability to transfer its rights and obligations under the Marriott Agreement without Marriott’s consent, Marriott has the right to transfer its rights and obligations to anyone who buys the assets of the single purpose Marriott affiliate. This means that Marriott could sell the single purpose management entity to anyone it chooses, with no right of the REIT Owner to object, even if the new owner of the manager entity would manage only the four Gaylord Properties. If that happened, the REIT Owner would lose any benefits of being part of a larger hotel system. 5. Restrictions on Owner’s Right to Terminate
the Hotel Management Agreement Even Upon a Breach of Agreement by the
Manager. The Marriott Agreement does not allow the REIT Owner to
terminate the manager, even if the manager has breached the agreement,
unless and until the manager’s breach has resulted in a material adverse effect to the REIT
Owner, and a court has issued
a final binding order to that effect. Even if the REIT Owner does
obtain such an order, Marriott then would have the right to cure the
default - after the order was issued. The net effect is that it could
be extremely difficult, if not impossible, for the REIT Owner to
terminate Marriott - even if Marriott flagrantly and repeatedly
violates its obligations under the Marriott Agreement.
6. Manager’s Incentives Are to Maximize Profit
of the Marriott System as a Whole - not the Gaylord Properties.
The Marriott Agreement is designed to allow Marriott to operate the
Gaylord Properties to maximize the profitability of the Marriot system
as a whole. For example, the agreement specifically provides that
Marriott can substitute centralized programs for any services now
performed at individual hotels that Marriott determines can be provided
more efficiently and economically for the Marriott hotel system as a whole on
a system basis. This means that if Marriott desires to move the entire
marketing functions for the Gaylord Properties to a central location
that markets all Marriott hotels, Marriott has the right to do that. In
fact, that is just what Marriott has done with its “Sales Force One”
program for its existing Marriott hotels, by moving all hotel marketing
to a single location, and incentivizing the marketing department to
spread reservations among all Marriott hotels. The practical effect is
that some Marriott hotels have seen a significant reduction in their relative market
share, because they no longer have specific marketing staff dedicated
to maximizing the bookings at their own hotel. In addition, without
marketing staff on site at a hotel, it is difficult to market the hotel
to booking agents for group business, who want to make site visits and
discuss their event needs with staff at the hotel. Several Marriott
hotel owners have filed lawsuits against Marriott because of the damage
caused to their operations by Sales Force One. In one of these cases,
the hotel owner stated that: “That
single program has decimated most of the sales efforts undertaken by
the hotels themselves. It has ceded responsibility for generating
group, meeting, and transient business to employees whose loyalties lie
not with individual hotels, but with Marriott itself.”
7. No Right to Information on Hotel Employee
Compensation. The REIT Owner has ceded too much control to
Marriott by agreeing that all hotel employee records and compensation
information will not be disclosed to the REIT Owner. Wages and benefits
are a significant operating expense with approximately 8,000 employees
running the Gaylord Properties — and the REIT Owner does not even have
the right to know what those employees are being paid.
8. No Right to Opt Out of or Audit Chain
Service Charges. Under the Marriott Agreement, the REIT Owner is
required to accept all chain services provided by Marriott (including
programs like Sales Force One), with no limit on the cost of those
services, and the REIT Owner has no right to audit Marriott’s chain
service charges. In fact, Marriott even has the right to charge for the
development and overhead costs of chain services that Marriott
determines are fair, and to allocate these costs among all Marriott
hotels in a manner that Marriot determines is fair and consistent,
taking into account the level of services provided to each hotel. Chain
service charges typically represent a substantial additional cost to
hotel owners, and Marriott has a conflict of interest in determining
what a fair cost to allocate is. The owner receives no information
regarding how these costs are determined or allocated, so there is no
way for the owner to know if the amount of these chain services charges
are reasonable, and no way for the owner to opt out of receiving any
chain services. The REIT Owner is therefore forced to pay the costs of
programs that may not benefit the Gaylord Properties, and the REIT
Owner has no control of the quantity, quality or the cost of these
services.
9. No Right to Audit or Require Competitive
Bid for Other Services Provided by Marriott at a Profit to Marriott.
The Marriott Agreement allows Marriott and its affiliates to sell goods
and services to the REIT Owner at a profit to Marriott and its
affiliates, with no obligation to conduct competitive bidding, and no
obligation to share any discounts, rebates or cost sharing with the
REIT Owner. In addition, the owner has no right to audit the profits
that the manager and its affiliates receive from the goods and services
they sell to the hotels. This means that Marriott could make
substantial profits by selling goods and services to the Gaylord
Properties, in addition to the management fees already being paid to
Marriott — and the REIT Owner would have no right to object or to
require the manager to reduce the charges to the hotels. The only
obligation of Marriott is to issue an annual certification 90 days
after the end of each year that the prices charged to the hotels are
consistent with commercially competitive terms in the marketplace
relevant to the hotels, taking into account a number of subjective
standards that are determined by Marriott. With no right of the owner
to audit the profits that are being made by the manager, it is
difficult to understand how the owner could protect itself from
excessive charges by the manager.
B. REIT Conversion. We believe that if Gaylord goes forward with the Proposed Transaction and the onerous Marriott Agreement, the resulting small four-hotel REIT will not be in the best long-term interest of the stockholders. The following sets forth our concerns with the post-transaction REIT Owner: 1. Management Team. Why should
investors have confidence in the existing Gaylord management team that
negotiated the flawed, anti-owner Marriot Agreement? The management
team is not experienced in running a REIT, and we are concerned that
management overhead will be significantly above market.
2. Lack of Scale and High Overhead. Prior to the Proposed Transaction, Gaylord’s corporate overhead represented 2.28% of total assets, which would rank it 15th out of 15 public hospitality REITs. With the overhead savings identified in Gaylord’s own investor presentation, corporate overhead would be 1.70% of total assets, ranking the post-transaction REIT Owner 14th out of 15 against public hospitality REITs. 3. Growth Strategy. It will be difficult to grow in an accretive manner when competing with other hospitality REITs that have a lower cost of capital. The post-transaction REIT Owner’s cost of capital will be among the highest when compared to the public hospitality REITs. 4. Lack of Asset and Manager Diversification. We are concerned that the lack of asset diversification will negatively impact the market value of the REIT Owner. Furthermore, there are no other hospitality REITs that have all their assets managed by one manager, and under the Marriott Agreement, that manager is virtually impossible to replace. 5. Lack of Manager Alignment of Interest. Marriott operates other hotels that directly compete with the Gaylord Properties. Two of Gaylord’s most important assets, its customers and its brand, have the potential to be immediately diluted by Marriott shifting business to its other hotels. The Marriott Agreement provides no protection and no practical remedy to compensate the REIT Owner should this occur. 6. Inability to Sell the Gaylord Properties. As noted above, the Marriott Agreement is so restrictive in the REIT Owner’s ability to sell the hotels, that the market value of the Gaylord Properties is severely diminished. 7. Separation of Management of Attractions. We believe that Gaylord’s attractions are a key to the success of the Nashville hotel, and we are concerned that separation of management of the attractions from the management of the hotels will negatively impact business. C. The Process and the Alternatives. It appears that the RFP process that resulted in the Marriott Agreement was flawed and did not yield the optimal outcome for the REIT Owner. Furthermore, the Proposed Transaction is not the best long term decision for the stockholders and the status quo appears to be a better option. 1. The Process. We believe that
Gaylord and its management may have violated their duties to the
stockholders by making defective disclosures concerning the full scope
of the RFP Process and how the terms requested by Gaylord in the RFP
compare to the actual terms of the Marriott Agreement. We believe that
the RFP Process could have resulted in both more upfront money to
Gaylord and significantly more owner-friendly management agreement
terms for Gaylord.
2. The Alternatives. In its investor presentation, Gaylord stated that the Proposed Transaction would result in savings of $33 million to $40 million annually. We believe this savings can be achieved even without the Proposed Transaction. The company can go on a diet without having surgery. We would rather see Gaylord maintain the status quo and implement the savings without permanently impairing the value of the Gaylord Properties by encumbering them with the onerous, long term Marriott Agreement. There are growth strategies that Gaylord could employ that do not involve building new, large hotels. The status quo preserves the brand and the Gaylord Properties for a potential superior transaction when the timing is right. In summary, it appears that (1) the management agreement RFP process was flawed and poorly run, (2) the Marriott Agreement was poorly negotiated, (3) the prospects for a successful four hotel REIT Owner are dim, and (4) the status quo with improved efficiency is a better option. The Marriott Agreement is so onerous to the REIT Owner, that it is in the best long term interest of the stockholders to reject the Proposed Transaction. While there may not be an alternative transaction for Gaylord at the present time, we believe that Gaylord and its stockholders are better off maintaining the status quo and, accordingly, preserving options for a future value-creating transaction when market conditions and timing are more favorable. This proposed REIT conversion and burdensome management agreement eliminate any such future options for up to 65 years. There are significant cost reductions and value creation that could be achieved by simply operating more efficiently and pursuing less capital intensive growth strategies that capitalize on Gaylord’s operational expertise and brand. We intend to vote our shares against the Proposed Transaction and we urge you, our fellow stockholders, to do likewise. Sincerely, /s/ James D. Caldwell James D. Caldwell President |
For more information please contact: 420 Decker Dr. Irving, TX 75062 972-730-6664 |