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Red Lion Hotels (NYSE:RLH)

Q4 2013 Earnings Call

February 27, 2014 11:00 am ET

Executives

Pam Scott - Director of Corporate Communications

Greg T. Mount - Chief Executive Officer and President

Julie A. Shiflett - Chief Financial Officer and Executive Vice President

Operator

Thank you for standing by, and welcome to the Red Lion Hotels Fourth Quarter and Year End 2013 Earnings Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Pam Scott, Vice President of Communications. Please go ahead.

Pam Scott

Thank you, Cynthia. Hello, and welcome to Red Lion Hotels Corporation's Fourth Quarter and Full Year 2013 Earnings Conference Call. With us today are Red Lion Hotels President and Chief Executive Officer, Greg Mount; and Chief Financial Officer, Julie Shiflett.

Before we get started, I'd like 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 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. The report is available on 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 yesterday afternoon. That release is also available in the Investor Relations section of our website. For the purposes of our discussion today, we will be referencing our fourth quarter and full year results from continuing operations on a comparable basis for all periods presented. This means the numbers we will discuss exclude the performance of our previously owned hotels in Missoula, Helena, Denver Southeast and Pendleton, all of which were sold in 2012, or the first half of 2013. These 4 properties continue to operate as Red Lion franchise hotels.

I would like now to turn the call over to Greg Mount.

Greg T. Mount

Thank you, Pam, and thank you, everyone, for joining our call to review the fourth quarter and full year 2013 report. As you can imagine, the past 4 weeks have been immersive as well as enlightening, that I consider the adjustments to our near and long-term strategies. I'd like to take a few moments to share some insights and observations since joining the company, then I will turn the call over to Julie to present the fourth quarter performance and full year financial results. It's no secret that Red Lion is a brand that evokes positive sentiment from guests. This is due to its heritage and welcoming service culture for over 50 years. However, other brands have also won the hearts of their customers, which is why it is important we build upon that foundation and grow our presence from distribution.

Over the past 50 years, much has changed in our industry: new brands, rapidly expanding distribution, new channel management systems that drive demand and innovative operations. For us to continue effectively, we must optimize revenues by improving our technology and e-commerce strategies and more importantly, exceed the expectations of what our customers want today, and what they will want tomorrow.

Over the last few weeks, I've learned at Red Lion, we care and we have a penchant for making people happy. So what's next? While we are already on course to extend more innovation into our business technologies and guest offerings, we are stepping up our hyper-local strategy with the rollout of Local.Wise brand promise at the property level. With the activation of Local.Wise, customer preference becomes more than a catchphrase.

Also, we are adapting at each hotel service to a unique market with our Local.Wise positioning. For instance, this year alone, we have added industry-leading language translating -- industry-leading language translation services in our Anaheim Hotel to better serve the needs of our international guests.

Additionally, we expect to look at new advancements in digital marketing, revenue management and distribution services. Earlier this month, we announced the appointment of a Chief Marketing Officer, who will bring new strategies that appeal to all of our stakeholders. Bill Linehan is someone I have worked with over the years and has considerable knowledge and accomplishments in brand management, positioning and new brand launches. His understanding of digital marketing, loyalty, CRM, distribution systems and revenue management are also extensive. Bill's focus will be innovations in branding and revenue optimization that will have both short and long-term benefits to Red Lion.

We also announced the promotion of Harry Sladich, who will lead our operations and national sales team. Harry has a deep operations background prior to managing sales, marketing and distribution for Red Lion. I will also contribute my 25-year operational background to further support Harry and the team. Our focus will be to drive efficiencies and collaboration amongst our hotels as we align leadership with new result measurements that are focused in growing market share and capturing more guest preference. These efforts will be further supported by hotel-based incentive programs and professional development, cater to [ph] performance achievements and growth opportunities.

Another area of priority is the opportunity to expand Red Lion into key markets throughout the U.S. The brand's DNA plays well in the West, evidenced by our current portfolio of properties as well as our brand recognition and loyalty in our core market. And I believe we can do just as well in markets East of the Mississippi. With hotel owners across the country seeking alternatives to the more heavily concentrated and commoditized brands, we will be looking at major MSAs and gateway cities both in and beyond our core market to increase the pace of our planned expansion.

Soon we'll be announcing plans that will invigorate franchise development with additions to the team. We will also introduce new strategies that will further incent franchise development by sharing specific opportunities with investors and developers. And we will look for turnkey conversion opportunities, site and market studies that prioritize MSAs and expand relations with the development community to grow our distribution more rapidly.

In the meantime, we kicked off 2014 with the signing of a franchise agreement for an Inn & Suites in Tucson, Arizona. We continue to target the addition of 20 properties in 2014. These are just a few of the improvements that can make Red Lion more agile and adaptive to guests, the franchise community and our associates. The company has weathered the storm, improved its balance sheet along with retaining a remarkable talent base and loyal customers.

Now it's time for Red Lion to compete and expand its distribution. We will embrace our heritage and present true differentiation to both guests and owners. We will continue to win guests over every day and grow our customer base by delivering basic expectations of product and services while creating memorable moments.

In today's hotel environment, a sense of nimbleness to respond to stakeholders' needs is what it's all about. It's no longer what you say you are, rather what the consumer says you are. Technologies, marketing enhancements, a growing footprint and operational efficiencies will become the catalyst of our future. We will work to become more agile, changing how we work, leveraging technology through virtual solutions, as well as how and where we deploy our resources. By strategically deploying our resources, we can reduce overhead and improve efficiencies.

To accomplish this, we will work to deliver real-time information into the hands of our owners, managers and associates; providing more information will create synergies across all levels across the organization. I ask your support as we move quickly to introduce enhancements to our branding, franchise services and of course, our hotel operations. We are focused on improving our profitability and leveraging our company platform to grow the business. This will be done with the continued commitment of a wonderful group of associates and our board, along with introducing new relationships and development partners. The marketplace and economic conditions are currently in our favor. We want to take advantage of this environment and leverage our operating platform to expand the organization. We have momentum as we enter 2014, and I look forward to what the future holds for us at Red Lion.

With that, I will turn the call over to Julie to present our 2013 financials.

Julie A. Shiflett

Thanks, Greg. Good morning, everyone. Before I begin discussing the results, I'd like to once again state that any discussion of hotel operating results will be based on comparable hotels from continuing operations, which include the hotel operations of the formerly owned properties in Missoula, Helena, Denver Southeast and Pendleton, all of which were sold in 2012 or the first half of 2013. All of these properties continue to operate as Red Lion franchise hotels.

The properties also classified as discontinued operations include the company's previously owned commercial mall in Kalispell, Montana, the Red Lion Hotel Medford in Oregon, ownership of certain real estate in Sacramento California and a contract catering business in Yakima, Washington. Also classified as discontinued operations are the 6 properties currently listed for sale with 2 in Idaho: Twin Falls and Pocatello; and 4 in Washington: Kelso, Wenatchee, Yakima, and the Colombia Center Kennewick. And finally, our property in Eugene, Oregon, which was closed subsequent to year end.

Fourth quarter RevPAR for owned and leased hotels increased 2.8% year-over-year. We saw an impact from the government shutdown in October, which prompted us to expand our utilization of online travel agencies to maximize revenue during that period. As a result, occupancy increased 170 basis points during the quarter, albeit at a slightly lower ADR compared to the prior year.

For the full year of 2013, RevPAR for owned and leased hotels increased 3.1%. This was driven by a 3.9% increase in ADR, underscoring our stated focus on rate growth. Management of lower rated OTA channels and increases in our nonqualified retail revenues were the primary contributors to our ADR growth.

For 2014, based on the outlook for the markets in which we operate and currently available information, we expect RevPAR for comparable owned and leased hotels to increase 3% to 5% over 2013.

Full year hotel segment revenue of $102.8 million, increased 2.1% year-over-year, primarily due to the increase in rooms revenue driven by the strong rate performance. Hotel direct operating margin declined 80 basis points to 19.4% in 2013 from 20.2% last year. The modest decline primarily reflects the impact of increased sales and marketing expense focused on driving our ADR growth and unfavorable labor cost comparisons due to adjustments that occurred in 2012. With continued RevPAR growth, we expect hotel direct operating margins to improve in 2014.

Turning to our other segments. 2013 franchise revenue increased $2 million or 38% to $7.1 million. Segment profit increased $161,000 year-over-year. This revenue and profitability performance was primarily driven by the expansion of the Red Lion Hotel network and contractual royalty rate increases at some of our existing franchise hotels.

Entertainment segment revenue for the full year increased $274,000 to $9.4 million. We saw strong performance in ticketing operations as consumer demand has come back in some of the markets that we serve.

Segment profit increased $105,000 year-over-year. We expect continued revenue and profitability growth in this segment during 2014, due to a strong Best of Broadway series. The calendar 2014 line up includes the Spokane premiere of The Book of Mormon, as well as the return engagement of the popular broadway productions of Wicked in Spokane and The Lion King in Honolulu.

For the consolidated company, 2013 comparable EBITDA from continuing operations before special items declined 12% or $1.3 million year-over-year to $9.5 million. Increased marketing expense and unfavorable labor cost comparisons due to adjustments that occurred in 2012 contributed to the EBITDA decline. We also incurred $1.9 million in additional corporate expenses during 2013 primarily due to leadership transition cost including the special items of $582,000 related to separation cost of our former CEO and COO, as well as increased board cost and legal expenses.

I should point out that we recorded a valuation allowance against our deferred tax assets for the year in the amount of $5.9 million or $0.30 per share. This allowance reduces our deferred tax assets to an amount that is more likely than not to be realized. As a result of recording the valuation allowance, the effective tax rate on the loss from continuing operations for 2013 is 7.9%, compared to a 36.2% in 2012. We expect our tax rate for 2014 to be at or near 0 as we continue to consider the recoverability of our deferred tax assets.

As previously disclosed, we have listed 6 owned hotel properties in Idaho and Washington for sale and classified them as discontinued operations. The non-cash pre-tax impairment related to these hotels is $7.8 million.

Also in the fourth quarter, we agreed to assign our lease on the hotel property in Eugene, Oregon to a third party and to cease operating the hotel effective January 31 to make way for a retail development. The land lease expense associated with the Eugene property in 2013 was $372,000. The Eugene hotel has been classified as a discontinued operation, and the non-cash pre-tax impairment related to the disposition of that property is $1.1 million. Eugene's been a good market for Red Lion, and we're seeking opportunities to continue our brand in that area.

The properties listed for sale and the Eugene hotel are all older properties that would have required significant expenditures for future renovations. The properties currently contribute low to negative cash flow to the company.

As of December 31, we have $13 million in cash on the balance sheet and outstanding debt of $74 million, of which $3 million was classified as current. We were in compliance with all of our covenants of our credit facility, and we had no borrowings outstanding on the revolving line of credit. Our 2013 refinancing and reduction of debt resulted in interest expense savings of $1.4 million during the 2013 as compared to the prior year. With a stronger balance sheet and improved financing terms, we have more flexibility to invest in hotel revenue technologies, operating support and e-commerce programs and expanding our hotel network through franchising and development.

2013 capital expenditures totaled $13.2 million, primarily related to guestroom improvement projects designed to enhance our guest contact areas and maintain our real estate. We are committed to maintaining our hotel real estate and keeping it attractive to our customers in order to keep our hotels properly positioned in the markets.

As we enter 2014, we're reviewing our CapEx spending opportunities, including possible real estate investment through joint venture agreements or sliver equity. We plan to invest in opportunities that will grow our hotel network as well as serve the needs of our own portfolio. In addition, expanding -- expanded funding for these investments may come available as we sell our hotels currently listed.

As we complete the review of our CapEx investment strategy and timing of asset sales, we will make additional guidance available. We appreciate your interest in Red Lion, and with that, we will now turn the call over to Pam Scott, who will present our previously submitted questions. Pam?

Question-and-Answer Session

Pam Scott

Thank you, Julie. The first question is, what is the plan to use the proceeds from assets listed for sale? Can you give us a read on the order of magnitude of proceeds expected this year?

Julie A. Shiflett

Yes. The assets listed for sale are actually carried on the balance sheet at an estimated value of $18 million. So under our credit facility, we have to pay down approximately 50% of that in principal payments upon the sale of those hotels. So I'd estimate that we'll pay down approximately $9 million and have $9 million of additional proceeds available for use after that principal payment. As I mentioned, we're evaluating our CapEx in real estate investment opportunities and how we're going to utilize those proceeds. Greg mentioned, we're looking at growing our hotel network and part of that opportunity really is real estate investment for the organization, focusing on MSAs, larger urban markets that are saturated with our competitors' brands where Red Lion would be a really great alternative for brand conversion. And in supporting those efforts, we are currently recruiting franchise of sales and acquisition talent to join our senior management team in the near future. So in addition to the opportunity to take those proceeds and invest them in development opportunities, we also are looking at -- we're committed to keeping our own portfolio well maintained and attractive to our guests and properly positioned in our markets.

Pam Scott

Okay. Are you expecting any of these hotels to remain in the franchise system?

Julie A. Shiflett

So we had active interest on all of the hotels. They're listed for sale without the requirement to maintain a Red Lion Hotel flag. There are substantial property improvement, plans for each of those hotels, and so that is the main reason that we did not -- we listed those hotels without a flag and did not anticipate keeping them in the system. However, we've had a lot of interest from hotel buyers, interested in keeping them in the Red Lion system and making that investment in the hotel. So as we go through negotiating, we expect that there is the opportunity that some of those hotel owners might make that investment so that those hotels could stay in the system.

Pam Scott

Okay. Next question, what is the targeted number for franchise additions this year? And what regions are you targeting the gateway market or major MSA expansion strategy, just Western U.S. or broader than your current footprint?

Greg T. Mount

Yes, I think for us this year it's going to be opportunistic. We are going to look and move east of the Mississippi based on looking at MSAs and gateway cities. There are probably 80 top MSAs that tend to be more resistant to cycles and tend to recover sooner. And those are the markets that we feel that we need to be in as a brand and we will look at those on an opportunistic basis. As we stated, we are targeting 20 new locations. However, we may find the opportunity, with our focus on larger MSAs, to add hotels with revenues and room count that well exceed our most recent franchise additions.

Pam Scott

Okay. Next question, what is the outlook for margins at owned hotels in 2014? Has cost increases like labor and insurance mostly settled down? Any other concerns like property taxes or wages and benefits?

Julie A. Shiflett

I'm really looking forward to 2014 and hoping that we have very clean comparisons from margins between 2013 and 2014, without some of those onetime items that we had in 2012 that benefited 2012, such as the self-insured, medical insurance adjustment and nonrecurring labor adjustments that we've been talking about this year in comparing 2012 to 2013. As we move forward into 2014, with the continued RevPAR growth, we do expect to see improved hotel operating margins. On the subject of property taxes or wages and benefits, we do have some of our hotel markets where there are currently initiatives being considered to or have been approved to raise the minimum wage to $15 an hour or more. And we will continue to monitor those proposals and what impacts those may have on our margin as those move forward.

Pam Scott

Okay. Next, can you talk about your e-commerce platform? How is it different from what other brands are doing and what proprietary features do you offer owners?

Greg T. Mount

Sure. E-commerce and digital marketing for us, as an organization, is going to be an area of great focus. We are implementing a significant new branding initiative that will serve at a platform for all our marketing programs, especially e-commerce. This will be supported by an enhanced web presence, digital ad programs, social media to drive traffic, and we're going to look to increase our conversion from looks to bookings. It's also important to note that our e-commerce efforts are part of a larger ecosystem that drives bookings through outreach and capture efforts. It includes channel and distribution management, systems, digital marketing, revenue strategies, media placements and property-based sales efforts.

Pam Scott

Okay. Greg mentioned the value proposition to owners in the release. Can you review just what the value proposition is?

Greg T. Mount

I think for us, we're going to look to really carry our northwest heritage through our culture in the organization. And really as we move forward east, we're going to look to focus on that heritage and leverage the strong associates and the great service tactics and memorable moments that we're creating here in the West. We're going to look for owners. I think our proposition really falls in the -- unlike other brands, we don't have a significant comp concentration of hotels in major MSAs, which is an advantage to owners as they're looking for new brands to convert to.

Pam Scott

All right, thank you, Greg. And that was the last question.

Greg T. Mount

Thank you. Thank you, operator, for your service today. I'd like to thank our callers for joining us and look forward to many more opportunities to be of service to you. We look forward to updating you on our progress next quarter.

Operator

Thank you. And ladies and gentlemen, today's conference call will be available for replay. After 10:00 a.m. today until midnight, March 27. You may access the AT&T teleconference replay system by dialing (800) 475-6701 and entering the access code of 318821. International participants may dial (320) 365-3844. That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.

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