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Red Lion Hotels Corporation (NYSE:RLH)

Q1 2013 Earnings Call

May 7, 2013 5:00 PM ET

Executives

Pam Scott – Director, Corporate Communications

Jon Eliassen – President and CEO

Julie Shiflett – EVP and CFO

Analysts

Whitney Stevenson – JMP Securities

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Red Lion’s First Quarter 2013 Earnings Release. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I now like to turn the conference over to your host, Ms. Pam Scott, Director of Corporate Communications. Please go ahead.

Pam Scott

Thank you, Rolla. Hello, and welcome to Red Lion Hotels Corporation’s First Quarter 2013 earnings conference call. With us today are Red Lion Hotels President and Chief Executive Officer, Jon Eliassen and Chief Financial Officer, Julie Shiflett.

Before we get started today, I want to remind you that our remarks today contain forward-looking information as defined by the SEC that is subject to a number of risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our Annual Report filed with the SEC on Form 10-K on March 14, 2013. Both reports are available at our website, redlion.com, or through the SEC website at sec.gov. We will also be referring to a number of non-GAAP measures. The reconciliation of these measures to their comparable GAAP measure is provided in the tables to the press release issued this afternoon. That release is also available in the Investor Relations section of our website.

I would like now to turn the call over to Mr. Eliassen.

Jon Eliassen

Thanks, Pam, and thank you all for joining us today on our first quarter 2013 earnings call. I will provide a brief review of the first quarter 2013 financial results followed by an update on strategic initiatives. Then I will turn the call over to Julie for more detail on the quarter and a balance sheet review. After that, we’ll open up the call up for Q&A with analysts.

For the purposes of our discussion today, we will be referencing our first quarter results from continuing operations on a comparable basis for all periods presented. This means the numbers we will discuss exclude the performance of the Red Lion Missoula and the Red Lion Hotel in Helena both located in Montana and the Red Lion Hotel Denver Southeast, all of which were sold in 2012 or early 2013. These three properties continue to operate as Red Lion franchise hotels.

We continue to make great progress in the quarter on a number of our strategic initiatives. Our strategy of driving rate growth is continuing to derive positive results. For owned and leased hotels ADR increased 3.7% year-over-year during the first quarter which goes a 1.3% increase in RevPAR. This reflects another quarter of good performance in transient room sales we again saw positive results from our marketing and sales programs including the snow ball of savings promotion which ran from December through the end of February to drive transient business to Red Lion during the winter.

In the few months since our new redlion.com website launched in January we have attained a positive impact on guest visits and reservations book through our system which is supporting our rate strategy. During the first quarter unique visitors to the site increased 17%. And more importantly we have seen a decline in discount priced reservations booked through our website and a much stronger contribution from our highest rated transient segment. We expect to see these positive trends continue to develop during our high occupancy summer travel months.

We are experiencing the benefits of our investment in our new website and our business intelligence tools both have allowed from our proactive revenue management taking advantage of pricing opportunities to improve our ADR for owned leased and franchised hotels. We also drove rate increases in the group segment with particular strength in our professional associations and organizations business. As we have indicated our strategy to drive rate growth in 2013 will likely come at the expense of some decline in occupancy. That expectation played out during the first quarter when transient occupancy declines from heavily discounted segments represented half of our overall 1.3% decline year-over-year. The balance of the reduction in occupancy came from a decline in lower rated permanent business.

For the full year we continue to expect RevPAR for comparable owned and leased hotels to increase 1% to 3% over 2012. We also had a great start to the year relating to our other strategic initiatives. We continue to complete asset sales as we expand our franchise network with signing a five Franchise Agreements three during the quarter and two subsequent to year end – quarter end. We have grown the number of rooms in our franchise division by 24% since October of 2012.

As we discussed in our last call we closed on the sales of Red Lion in Missoula, Montana on February 20th for approximately $2 million and we signed an agreement for the buyers to continue to operate the hotel as a Red Lion Inn & Suites. We also added the LVH in Las Vegas in March of 2013 as the first property to join the Leo Hotel Collection. Under this agreement we will generate fees on incremental room revenues from reservations made through specific Red Lion distribution channels including Red Lion.com. We began booking reservations in early March and we are developing additional marketing promotions for this property for future months.

Also in March, we signed a Franchise Agreement with the owners of our hotel in Kennewick, Washington. The Red Lion Inn & Suites Kennewick, which converted to Red Lion in April is a great limited service complement to our full service hotels in the Tri-Cities. The addition of this hotel expands our relationship with the owner who currently operates a Red Lion franchise property in Western Washington. On April 3rd we closed on the sale of the Pendleton, Oregon Red Lion Hotel for $2.25 million. The buyers also signed a Franchise Agreement so we will continue to maintain a brand presence in that market as well.

Just last week we announced we are expanding to a 10th state. We signed a Franchise Agreement with the owners of our hotel in Tempe, Arizona. The Red Lion Inn & Suites Tempe is expected to convert to our brand by the end of May. Our franchise success underscores the appeal of our new brand segmentation as well as the value we provide to our sales, marketing, support services and reservation distribution systems. As of today we have a total of 51 hotels in our system we have 26 currently owned and operated hotels, we have the LVH and the Leo Hotel Collection plus we have 24 franchise properties in the Red Lion Hotels and Red Lion Inn & Suites portfolio.

We are well in our way to our goal of the total of 30 or more franchised hotels by the end of 2013. We also completed our long-term goal to sell non-hospitality real estate. On April 25th we sold the Kalispell Center Mall for $11.6 million, this transaction included the attached hotel. We have signed a long-term lease for the hotel and we will continue to operate it as a Red Lion. Since we initiated our assets sales strategy just over two years ago we have sold seven properties including our commercial mall, in aggregate we have generated approximately $115 million in proceeds from these sales which has enabled us to reduce debt and lease obligations thus significantly enhancing our financial flexibility.

We are very pleased with the progress we have made this year in driving rate growth, expanding our hotel network and selling assets. We remain focused on these initiatives and on our operating performance.

With that I will turn the call over to Julie.

Julie Shiflett

Thanks Jon. Before I begin I’d like to once again state that any discussion of hotel operating results will be based on comparable hotels from continuing operations which exclude the hotel operations of the Red Lion in Missoula that we sold in the first quarter of 2013. The Red Lion hotel Denver, Southeast that we sold in the fourth quarter of 2012 and the Red Line Colonial Hotel which was sold in the third quarter of 2012 all of which continue to operate its Red Lion franchised hotels.

Hotel segment revenue of $25.5 million decreased to 0.5% year-over-year during the first quarter. Despite a 1.3% increase in RevPAR rooms revenue was essentially flat due to the impact of the leap year day in 2012. Food & Beverage revenue declined 4.8% primarily due to a decrease in allowance in restaurant sales in our full serviced hotels. First quarter hotel direct operating margin declined 340 basis points to 9.2% from 12.6% in the prior year period. As we indicated on our last earnings call we faced difficult margin comparisons at the first quarter 2012 results benefited from one-time labor cost adjustments which did not repeat in the 2013 period.

We also increased our SCM and SCO marketing spend this quarter to support the launch of our new website and booking engines. This $300,000 increase over the prior year contributed to the margin declines as did an increase in workers compensation claim cost of approximately $125,000. We will continue to see margin pressure in the second quarter compared to the prior year with increased sales and marketing expense at our hotels as we continue our focus on ADR growth.

Turning to the other segments, first quarter franchise revenue increased 16.1% to $1.3 million due to the expansion of the Red Lion Hotel Network through the success of our strategic growth initiatives in this business division. Net segment results improved slightly from the prior year period.

Entertainment segment revenue increased 33.6% to $3.4 million during the first quarter. Improved revenue and segment profitability for the quarter was primarily due to the timing and mix of shows. However, we expect the profitability of this division for the full year to be comparable to the prior year. Undistributed corporate expenses increased by approximately $425,000 in the first quarter as compared to the prior year. This increase is primarily due to labor cost adjustments in the prior year, which did not repeat in the 2013 period and increased legal costs.

For the consolidated company, first quarter comparable EBITDA from continuing operations before special items declined approximately $1 million year-over-year to a loss of $32,000. The decline was primarily due to lower profitability in the hotel segment and the increase in undistributed corporate expenses. At March 31, 2013 we had three assets classified as held for sale in the balance sheet the Red Lion Hotel Network, the Red Lion Hotel Pendleton and the commercial mall in Kalispell.

As John discussed, we closed on the sale of the Red Lion Inn Missoula for approximately $2 million in February. For modeling purposes, comparable EBITDA from continuing operations before special items for Missoula for the first quarter of 2013 was a loss of $99,000 and for the full year 2012 was a positive $150,000.

We also closed on the sale of the Red Lion Pendleton in April for approximately $2.3 million, which included stellar financing of $1.7 million, which comes due three years from the date of sale. For modeling purposes, the pro forma impact of the sale of Pendleton on comparable EBITDA from continuing operations before special items for the first quarter of 2013 was a loss of $209,000 and for the full year 2012 was a loss of $31,000.

Regarding the structure of the Kalispell Center Mountville as Jon mentioned, we entered into a lease agreement with the buyer under which, we will continue to operate the attached Red Lion Hotel. As a result, you will see an increase in our income statement in the hotel facility and land lease line of approximately $500,000 on an annualized basis.

In addition, we are able to stayed in other expenses of approximately $200,000 annually where previously reported in discontinued operations as part of the ownership of the Kalispell Mall. Going forward, this expense will be reflected in hotel operating expenses and will impact hotel operating margins. We continue to negotiate with interested buyers on our one remaining asset held for sale the Red Lion Hotel Network located in Oregon.

Turning to liquidity, as of March 31st, we had outstanding debt of $79.20 million, of which, $48.3 million was classified as current. As of March 31st, we were in compliance with all covenants, and we had no borrowings outstanding on the revolving line of credit. Subsequent to quarter end, we used a portion of the proceeds from the sale of the Kalispell Center Mall to pay down $8.8 million of outstanding borrowings on the credit facility. As of today, the credit facility has an outstanding balance of $500,000 and matures in June 2013. The $38.5 million of CMBS debt secured by nine of our hotel properties matures in July 2013.

As we announced in the 8-K filed on March 12th, we amended our existing credit facility with Wells Fargo to extend its maturity to June 30th to facilitate a combined and cost effective refinancing of this facility along with our CMBS debt. We also signed a commitment letter with Wells Fargo for a new credit facility secured by the currently pledged properties plus those currently securing the CMBS debt.

The new facility will include a five year term loan with a 15-year amortization with a balance of up to ($45) million and a two year revolving line of credit for up to $10 million. We will use the proceeds to refinance the maturing CMBS debt, invest in capital expenditures and for general corporate purposes. We expect to close on the new credit facility prior to June 30th. A stronger balance sheet and improved financing terms will give us more flexibility to take advantage of opportunities to reinvest in our owned hotels and continence to improve our guest experience.

First quarter 2013 capital expenditures totaled $2 million, primarily related to projects designed to improve the competitiveness of our hotels, including upgrades to our guest rooms and public spaces. We intend to invest a minimum of $10 million to $12 million in capital improvements during 2013. For example, during the second quarter, we will be investing $500,000 to upgrade our wireless internet to the newest standards at most of our owned hotels.

With the completion of our debt refinancing and the proceeds from our recent asset sales, our 2013 capital investment could increase up to another $10 million. However timing of these investments will depend on the scheduling and scope of projects as we enter our high occupancy season. We appreciate your interest in Red Lion. And with that, we are ready to take questions from analysts. We encourage our investors to reach out to us with any questions or comment by contacting Pam Scott to schedule a follow-up call with management. Operator?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And we’ll go to the line of Whitney Stevenson with JMP Securities.

Julie Shiflett

Hi, Whitney.

Whitney Stevenson – JMP Securities

Hi, there. Hi, good afternoon. How are you guys?

Julie Shiflett

Great.

Whitney Stevenson – JMP Securities

Good. I just have one question. I’m wondering if you could talk a little bit about the typical franchise agreements that you have been retaining on these hotels that your are disposing off? And maybe sort of how they differ from the lease agreement that you discussed?

Julie Shiflett

Can you clarify the question when you say the lease agreement we discussed the Kalispell lease agreement.

Whitney Stevenson – JMP Securities

Yes. Just sort of what the motivation has been behind the two different structures?

Julie Shiflett

Okay. Kalispell has been a very important market for us historically and that location has been a good location for our hotel network and the franchise the brand network. So, as we looked at selling that mall property, where the hotel is connected to the mall the opportunity to continue leasing that made it viable for us to have that just part of the bigger deal of selling the entire mall and be able to retain a presence in the Kalispell market. So, that would continue to be in the portfolio of what we call owned and leased hotels and could keep that as a Red Lion Hotel. The purchasers of that mall are commercial malls operators and we are continuing to operate that hotel as that is what Red Lion is focusing on in terms of operations.

On the hotels that we’ve identified and sold such as the Pendleton Hotel and the Missoula Hotel those hotels were hotels that really lent themselves to being owner operated or hotels that fit within a portfolio of other owners. But they were good – they are markets for Red Lion and those owners desire to maintain Red Lion flag and those franchise agreements are within our typical franchise terms and typical franchise contracts does that – does that answer your question, Whitney.

Whitney Stevenson – JMP Securities

Yeah, that’s perfect. Thank you.

Julie Shiflett

Thank you.

Operator

And no one else is in queue with questions; I would like to turn it back to the speakers for any closing remarks.

Jon Eliassen

Thank you very much. Again as Julie mentioned, we do encourage our shareholders to reach out to us and with any comments and any input that they have. So, if you would like to schedule a follow-up call in the next few weeks with Pam Scott, please contact her. So, again thank you operator for today and thank all of you, who have been on the line thank you for joining us today. And if you do have any further questions, please reach out to the company.

Operator

And ladies and gentlemen, this conference will be made available for replay after 5 p.m. today through May 21st. You may access the Replay System at any time by dialing 1 (800) 475-6701 and entering the access code of 291589. International participants may dial (320) 365-3844 with once again the access code of 291589. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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