RLH Corporation Reports Fourth Quarter and Year-End 2019 Results

Red Lion Hotels Corporation (NYSE: RLH), a hospitality company doing business as RLH Corporation which franchises midscale and economy hotels, today reported fourth quarter and year-end 2019 results.

Fourth Quarter Highlights

• Net loss attributable to RLH Corporation for the fourth quarter of 2019 was $(8.1) million or $(0.32) per share compared to $(7.4) million or $(0.30) per share in the prior year period. In the fourth quarter of 2019, the Company recorded an $8.7 million impairment charge related to its Americas Best Value Inn and Knights Inn brand names, which was partially offset by a $7.1 million gain on the sale of two joint venture hotels. In 2018, the Company recorded a $3.5 million impairment charge related to its Guesthouse brand name.
• Adjusted EBITDA for the quarter was $1.0 million, compared to $2.3 million for the prior year period.
• In the core franchised hotel segment, fourth quarter revenues grew 2.6% year-over-year to $15.3 million; Adjusted Core EBITDA was $1.6 million, compared to $1.4 million in the prior year period.
• Completed the sale of two joint venture owned hotels, Red Lion Hotel Atlanta Airport and Hotel RL Salt Lake City receiving approximately $16.7 million in net proceeds, after closing costs, property level debt repayments, and distributions to joint venture partners.

Full Year Highlights

• Net loss attributable to RLH Corporation was $(19.0) million or $(0.76) per share compared to net income of $1.3 million or $0.05 per diluted share in 2018. In 2019, the Company recorded a $14.1 million impairment charge related to its Washington DC hotel, and Americas Best Value Inn and Knights Inn brand names, which was partially offset by a $7.1 million gain on the sale, primarily from two joint venture owned hotels. In 2018, the Company recorded a $10.6 million impairment charge, and $42.0 million in gains on asset sales, primarily from owned hotels.
• Adjusted EBITDA for 2019 was $11.6 million, compared to $15.8 million for the prior year period.
• In the core franchise segment, revenues grew 10% year-over-year to $59.2 million. Adjusted Core EBITDA for 2019 was $4.2 million versus $0.6 million in 2018.
• For the year, the Company executed 169 franchise agreements comprised of 27 midscale hotels and 142 economy hotels, compared to 167 contracts signed in the prior year. Of the 169 contracts signed this year, 43 are for new locations, compared to 61 new locations in the prior year.

“We have focused our efforts on our core franchise business, relationship building, owner satisfaction, and lodging development are our key objectives right now,” said RLH Corporation Interim CEO John Russell. “Engagement with our existing franchisees is improving as we prioritize return on investment enhancing initiatives for our owners. We have a restructured and refocused franchise development group, which we believe will reinvigorate sales over time. In the near term, we anticipate terminations will likely remain elevated from average industry levels. We believe these rates will show improvement as the year progresses due to our efforts in owner satisfaction. Additionally, we are aligning the cost structure of the business to RLH’s current size, revenue and profitability.”

“On behalf of the RLH Corporation Board of Directors, we are committed to improving shareholder value by supporting the initiatives the RLHC management team is pursuing for franchise system stability and other opportunities that may become available,” said Carter Pate, Chairman of the Board of Directors.  “The Board also is continuing the permanent CEO search with a strong due diligence process and active candidates.” 

Fourth Quarter 2019 Financial Results 

The Company reported a net loss attributable to RLH Corporation of $(8.1) million or $(0.32) per share in the fourth quarter compared to $(7.4) million or $(0.30) per share in the prior year period. The year-over-year change was primarily related to gains from the sale of Company operated hotels in the prior year and a decrease in royalty revenue, partially offset by higher other franchise revenue and a decrease in SG&A costs. The Company recorded an $8.7 million impairment charge on intangible assets related to its Americas Best Value Inn and Knights Inn brands, which was partially offset by $7.1 million in gains on asset sales, primarily from two joint venture owned hotels.

Adjusted EBITDA for the fourth quarter was $1.0 million compared to $2.3 million for the fourth quarter of 2018. The change reflects lower contribution from the sale of the owned hotels in the prior year as well as lower royalty revenues due to the impact of franchise terminations.

Royalty fees decreased 20% to $4.6 million primarily due to terminated agreements in economy hotels. Other franchise fees increased 137% to $2.0 million, primarily due to liquidated damages from terminated agreements.

Selling, general, administrative and other expenses, which include franchise sales, operations and corporate costs and bad debt expense, decreased 9% to $7.0 million. The decrease was primarily driven by a $1.6 million decrease in stock compensation related to recent organizational restructuring and a $1.2 million decrease in labor costs, partially offset by a $1.2 million increase in bad debt expense and $1.1 million related to employee separation costs. 

Core Franchise Operations

The following table provides results for the Company’s core franchised hotel segment:

The midscale hotels achieved a RevPAR index of (1.2)% and (2.6)% for the fourth quarter and year ended December 31, 2019, respectively.  The economy hotels achieved a RevPAR index of 0.0% and 0.2% for the fourth quarter and the year ended December 31, 2019, respectively.

For the quarter, the Company executed 26 franchise agreements comprised of four midscale hotels and 22 economy hotels, versus 59 agreements in the year-ago period. Of the 26 contracts signed during the quarter three are for new locations. Franchise sales experienced some disruption in the quarter, as regulations require a franchisor to pause entering into new franchise agreements in the event of a change in certain leadership roles, such as a change in CEO. Contract signings resumed once new franchise disclosure documents were filed and approved by regulatory agencies.

Offsetting the new contracts in the quarter were 98 terminations which included six midscale hotels and 92 economy hotels.

Royalty revenue mix for 2019 was 70% from economy hotels and 30% from midscale hotels. Midscale hotels typically take three to 18 months to open and contain future royalty rate increases, generating franchise revenue growth.  For instance, midscale contracts for new locations signed in 2019, contributed in the year $0.07 million in royalty revenue and are expected to contribute approximately $0.8 million of royalty revenue for their first 12 months of fees after opening and application of incentives and fee deferments. Royalty rates on these contracts will increase annually by 10% to 20% for the following few years. Similarly, economy contracts for new locations, signed in 2019, contributed just $0.04 million in 2019 royalty revenues and are expected to contribute approximately $0.4 million of royalty revenue for their first 12 months of fees after opening and application of incentives and fee deferments. With the increases in midscale royalty rate as well as a higher count of midscale hotels, we anticipate that midscale hotels will account for 35% of the royalty mix in 2020.

Offsetting the new signings for the year were 274 terminations which included 23 midscale hotels and 251 economy hotels.

Balance Sheet and Liquidity

RLH Corporation finished the year with cash and restricted cash of $31.8 million including $4.1 million of cash and cash equivalents held by the joint ventures. The Company had debt of $32.6 million comprised of a $10 million revolving line of credit, and $22.6 million of hotel mortgages. As of December 31, 2019, the Company had a net debt to trailing 12 months Adjusted EBITDA ratio of 0.1 times. Adjusted free cash flow for the twelve months ended December 31, 2019 was approximately $14.0 million as compared to $(15.1) million for the twelve months ended December 31, 2018.

Hotel Sales

As previously announced, to increase focus on its franchising business strategy, the Company has been engaged in an ongoing hotel asset disposition program. During 2019, the Company sold, or is under contract to sell, four hotels, including the Red Lion Airport Hotel Atlanta, Hotel RL Salt Lake City, Hotel RL Washington D.C. and the Red Lion Hotel Anaheim. These four hotels contributed approximately $32.1 million in revenue and $5.0 million in EBITDA in 2019.

On November 18, 2019, the Company completed the sale of its Red Lion Airport Hotel Atlanta for $12.25 million in gross proceeds. The hotel was held in a joint venture. RLH Corporation received $4.8 million in net proceeds after closing costs and the repayment of property level mortgage. 

On December 20, 2019, the Company completed the sale of its Hotel RL Salt Lake City for $33 million in gross proceeds. The Company received approximately $11.9 million in net proceeds after closing costs, the repayment of property level mortgage debt of $11.0 million, and distributions to its joint venture partner.

Based on the two hotel sales in 2019, after the repayment of closing costs, property level debt and distributions to the joint venture partner, the Company netted $16.7 million.  Proceeds were used to retire the corporate level debt of $4.2 million.  

Subsequent to the end of the quarter, the Company completed the sale of its Hotel RL Washington D.C. for $16.35 million in gross proceeds. The Hotel RL Washington D.C. was held in a joint venture and all proceeds were applied toward the repayment of the secured term loan on the property and closing costs.

The Company has announced one hotel currently under a non-binding contract to be sold, the Red Lion Hotel Anaheim, California, which it expects to close in the first quarter of 2020.  The Red Lion Hotel Anaheim is wholly owned and unencumbered. 

In addition, the Company has listed its Hotel RL Baltimore for sale and is beginning the marketing process for the Hotel RL Olympia. The timing and proceeds of the hotel sales are subject to buyer negotiation, market conditions and the availability of buyer financing.

2020 Outlook

The Company is not providing financial guidance for 2020 at this time due to the following factors:

• Ongoing impact and timing of the remaining hotel sales
• Initiatives to improve franchise owner satisfaction and reduce termination trends
• Timing and associated transition costs for the implementation of G&A reduction initiatives
• Impacts of the hiring of a permanent CEO

The company anticipates signing 60 to 80 franchise agreements for new locations in 2020.

About RLH Corporation

Red Lion Hotels Corporation is an innovative hotel company doing business as RLH Corporation which focuses on the franchising of midscale and economy hotels.