Red Lion Hotels Corporation (NYSE:RLH) Q2 2016 Results Earnings Conference Call August 2, 2016 5:00 PM ET
Evelyn Infurna – Investor Relations
Greg Mount – President and Chief Executive Officer
David Wright – Vice President & Interim Chief Financial Officer
Eric Wold – B. Riley & Co.
Alex Fuhrman – Craig-Hallum Capital Group
David Loeb – Robert W. Baird
Greetings and welcome to the Red Lion’s Hotel Corporation Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Ms. Evelyn Infurna. Thank you. You may begin.
Thank you. Welcome to RLHC’s second quarter 2016 earnings conference call. With us today are President and Chief Executive Officer, Greg Mount; and Vice President and Interim Chief Financial Officer, David Wright.
Before we get started, 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 actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in the Annual Report filed with the SEC on Form 10-K on March 1, 2016. The report is available on 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 today. That release is also available on the Investor Relations section of our website. For the purpose of our discussion today, we will be referencing our second quarter results on a comparable basis for all periods presented.
I will now turn over the call to Greg Mount, CEO.
Thank you, Evelyn, and thank you to all who are joining us today on our earnings call. We are pleased with our performance during the first half of 2016 despite a challenging industry backdrop. We are performing well even as we have undertaken meaningful change. We are in the early stages of a growth phase. We have delivered on our previously communicated strategy to transition to a predominantly asset like franchise model, launched and quickly growing an upscale brand, all are improving our financial performance. I’d like to take a moment to touch on the current lodging environment before getting into RLHC’s specifics.
For the industry, the second quarter RevPAR is up 3.5% with midscale up 3.2% and our economy brands up 3%. In comparison to the industry, our second quarter for 2016 same-store system wide RevPAR increased 4.3%. As we look at each of our segments, our franchise same-store midscale RevPAR increased 6% with most of the improvement coming from an increase in ADR. System wide economy same-store RevPAR grew at 7.7% which was assisted by the full deployment of the RevPak at these hotels. Our comparable company operated hotels’ RevPAR increased 1.5% compared to double digit RevPAR growth a year ago that benefited from reoccurring group bookings that did not repeat in this year’s quarter.
As I mentioned on our last call, we are undergoing an extensive renovation program. That is now substantially complete and we believe that the adverse impact on RevPAR of the renovations in its displacement will roughly be 100 basis points for the full year. During the quarter, we converted three of our properties to Hotel RLs, an important accomplishment for RLHC as we grow and diversify our footprint and raise awareness for the Hotel RLs on a national level. Salt Lake City, Utah and Olympia Washington now have a Hotel RL conveniently located in these capital cities. We are also pleased to celebrate the opening of our largest Hotel RL in Spokane later this month. Through these conversions, we are able to introduce an iconic and up and coming brands to cities where RLHC has current presence with a favorable reputation which further expands brand recognition to Hotel RL.
With the addition of these three, we now have 10 Hotel RLs in the system of which five are company operated and opened and five are executive franchise agreements undergoing development or conversion. Because our transformation to asset like models substantially complete, growing our network of hotels will be primarily through expansion of our franchise system. We anticipate continuous success in this endeavor as we believe that we have a differentiated offering for hotel owners and have positioned RLHC as an ideal company to select for converting brands. As we have discussed in the past, one of the points of differentiation is our proprietary suite of guest management systems, RevPak. Toward the end of the quarter, we launched Hello Rewards out enhancing our commitment to satisfy guest needs through the convenience of a digital travel companion. Through this app, we have redesigned the inclusive travel process in order to provide a more convenient experience for our guests from booking to checkout.
As we have mentioned on prior calls, the roll out of both RevPak and Hello Rewards guest recognition program will continue to evolve over time. By rolling out the app, we are in the early stages of enhancing our guest experience with new pre-stay interactions and even turning our mobile phone into a room key or a convenient way to order food and beverage or request services. In June, our Hello Rewards program had its larger new member increase since its inception over a year ago and we expect to continue that momentum. By changing our points based royalty program to a guest recognition program, we have made it easy for the member to receive three rooms and other partner perks no matter how they book their reservation. Our franchise pipeline is strong and we are in various stages of negotiation with a number of prospective franchisees.
We will continue to share our progress with you as these agreements are executed and hotels are opened or converted over the course of the second half of the year into 2017. We believe our number of franchisees will continue to increase at a steady pace as we finish this second half of the year, and we will be on track to hit our initiative of 100 hotels in 100 weeks. The progress we have made in the first half of 2016 is encouraging and we look forward to building on this momentum. We are pleased that in the first six months of 2016, our pace of actual and expected openings has been steady.
During the second quarter, we opened three hotels including the company operated Red Lion Hotel Atlanta airport and two franchise locations; the Red Lion Hotel in Jacksonville and a Red Lion Inn & Suites in Susanville, California. After the quarter ended, we opened a 323 room Red Lion Inn & Suites franchise conversion in Hattiesburg, Mississippi. We also converted three joint venture properties from Red Lion Hotels to Hotel RLs as previous mentioned. All of this activity is evidence of the continuing strengths of our brand recognition. We are pleased with the results of the quarter and for the first half of the year particularly given the challenging lodging environment, and I look forward to updating you on our progress in coming quarters.
I’ll now turn the call over to David Wright, who’ll provide you with more details on the quarter. Dave?
Thank you, Greg. Before we go into the results in further detail, I wanted to take a minute to discuss three housekeeping items. Yesterday our Universal Shelf Registration in the amount of $100 million was made public. Although we’ve been Shelf eligible, we’ve never had a Shelf Registration on file. Together with our Board, we believe that going forward, having an active Shelf Registration is a good corporate finance practice that will provide us with enhanced flexibility to act in a timely and efficient manner on potential growth opportunities. We view the flexibility it provides as a valuable option.
The second item relates to our hotel count. As you may have noticed, our franchised hotel count has decreased by 12 hotels net since January 1. These changes were primarily part of the GuestHouse and Settle Inn acquisition completed just over a year ago. As with every acquisition, there is an integration and reevaluation period. Some of these agreements that did not renew, no longer met our brand profile or they did not meet our expectations and standards for financial contribution. The good news is which we’re also giving you a sense of the magnitude of contribution, the five hotels added in the first six months of 2016 were more than replaced the revenue dollars lost from the 17 hotels that are no longer in our system on an annualized basis. The third item has to do with reference to a system-wide RevPAR that was presented in our release and discussed by Greg in his prepared remarks.
Given the various segments and product types that now make up the RLHC family of brands, we feel discussing our business to add system-wide is a better descriptor for providing color on our results consistent with the industry. We’ll continue reporting other segments as we have historically, but going forward, this metric will be one of the primary majors that we will be reporting. In fact, we are introducing system-wide same-store RevPAR guidance for 2016 and we will be reporting system-wide RevPAR beginning this quarter. We expect full year 2016 system-wide same-store RevPAR of 2.5% to 4.5% over 2015.
With that, I’d like to now turn to our second quarter results. Our system-wide same store RevPAR for the quarter was 4.3%. Our system-wide midscale franchise same-store hotels had strong performance for the quarter with a RevPAR growth of 6% driven primarily by an increase in ADR of 7.5% and a 90 basis point decrease in occupancy. The strength in our midscale segment can be contributed to the systems implemented over the last 12 months and their contribution to capture market share. RevPAR from comparable company operated hotels increased 1.5% driven by 40 basis points increase in occupancy and a full 1% increase in rate. Our economy brands product an increase in comparable RevPAR of 7.7% year-over-year for the quarter, assisted by having RevPak deployed and in place now for two full quarters.
Moving on to total consolidated RLHC revenue for the second quarter, the company generated $45 million, up $8.3 million or 22.8% from the prior year period. These results reflect increases in all of our segments, company operated hotels, franchise hotels and the entertainment business. Notably, our entertainment segment was up 240% year-over-year primarily due to the demand for the limited run of the Book of Mormon in Hawaii which ended in early May. Now turning to our segment level performance in more detail; our total company operated hotel division revenue was $32.2 million for the second quarter as compared to $30.3 million in the prior year.
Comparable same-store company operated revenue was flat quarter-over-quarter. On a comparable same hotel company operated basis, hotel gross operating profit margin was down 30 basis points to 34.9% for the second quarter of 2016. Our second quarter franchise segment revenue increased nearly $1 million or 27.9%, reaching $4.1 million driven by the significant gains in signing new franchises and a full quarter’s contribution from the GuestHouse acquisition. The franchise segment operating margin improved significantly 13.7% as compared to 0.9% in the comparable period in 2015, primarily due to the growth in revenue.
Contributing significantly to our revenues for the quarter was our entertainment, presenting and promotion business which drove 240% increase in revenue in the second quarter. As I mentined earlier, this was mainly due to the demand for our limited run in Hawaii for the Book of Mormon. Typically in the second quarter of the year, we don’t see much contribution from this segment of our business or growth in year-over-year revenues. Our revenue for this segment for the remainder of the year continues to post levels in line with what has contributed historically. The total of corporate, general and administrative expenses for the second quarter was $2.7 million, a decrease of $105,000 on a year-over-year basis. Our net tax expense for the quarter was once again negligible, reflecting the ongoing impact of our tax evaluation allowance. As we previously communicated, we expect our valuation allowance to continue at least through the end of 2016 and consequently, we estimate tax expense to be minimal throughout the year.
Adjusted net income per share for the quarter was $0.04 versus a loss of $0.02 per share for the second quarter of 2015, reflecting an increase to our adjusted net income of $1.3 million in the quarter. These results reflect the impact in success of our efforts across our brand portfolio. Our corporate repositioning is paying off and we’ll continue our progress toward positive earnings and improved cash flow for the full year. On a consolidated basis, adjusted EBITDA for the quarter was $6.4 million compared to $4.4 million in the second quarter of 2016. Our EBITDA has begun to show improvement and we expect our EBITDA to continue to improve as our renovations complete, the announced hotels are opened and signed franchises come down to our system.
From a balance sheet perspective, we ended the quarter with $27.4 million of cash on hand and an additional $10 million of restricted cash. We have $12.7 million in short-term investments and long-term debt on the balance sheet of $100.4 million at quarter-end, which as a reminder is all of the JV level. I touched on renovations on our first quarter call and wanted to provide additional color where they currently stand. The bulk of our CapEx was spent on the three hotels we converted from Red Lion[ph] hotels to Hotel RL. All of which are currently opened and are operating as RLs with Hotel RLs bookings grand opening taking place the middle of this month. Total capital expenditures since January 1 were $21 million, and if you recall, we expect capital expenditures in 2016 to range from $25 million to $35 million which will be funded predominantly at the joint venture level.
In closing, we’re updating our guidance to company operated same store RevPAR between 2% and 4% and reaffirming our EBITDA guidance of $17 million to $20 million. For CapEx as we just discussed of $25 million to $35 million, the majority of which will be funded through the joint venture debt and the addition of 25 to 35 new hotels in our system in 2016.
Now I’d like to open the calls to Q&A.
Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Eric Wold with B. Riley. Please proceed. Your line is live.
Thank you and good afternoon. Just thinking about couple of questions, one, thinking about the franchise pipeline I guess, one, can you frame are you talking about the pipeline being strong to discussions or give some sense of the mix of properties in discussion in terms of the five brands you operate, kind of where the demand is gravitating towards and where geographically we are seeing a demand around the U.S.?
Yeah, Eric, probably the a third or more is really tied up in our core brands which are really the Red Lion and Red Lion Inn & Suites. We are still seeing some strong activity around RL and the beginnings of some good activity around the GuestHouse and Settle Inn. But really for purposes of what you’re seeing in the pipeline, the bulk of it is really in the Red Lion brands, particularly in the midscale and midscale above food and beverage.
But from a geographic standpoint, it’s really – there’s no one area in particular I think we’re seeing a good mix across the whole country. We just announced a fairly large deal in Hattiesburg, Mississippi and at the same time, announced a sizable deal in Susanville, California. So I think you’re seeing a fairly wide bandwidth and really not a particular concentration and quite honestly some good activity east of the Mississippi.
And as that pipeline continues to grow and more and more of the locations open up over the next 12 to 18 months, is the current franchise structure and kind of spend level in place you’re strong enough to support that or do we need to see that ramp up at all over the next 12 to 18 months?
No, we’re in fact we are where we need to be from a cost standpoint and really have made that investment and don’t see any need to extend the costs in those areas to secure more business.
Perfect. And then last question for me, kind of falling on the Shelf filing yesterday, what are your thoughts on how the acquisition environment could look over the next couple of years? I know there’s no law consolidation out there, how would you frame the opportunity for things that Red Lion may be looking at in terms of – starting to take advantage of the strong cycle we’ve had, possible refinance issues next – few months any detail or frame around that would be helpful?
Yeah, I think that from our standpoint, this is really an opportunity for us to add a tool in our tool bag a lever to pull if and when we need it. At this point, there’s nothing on the horizon however, I think that from our perspective, there’s going to continue to be opportunities out there that we may or may not want to take advantage of and I think this tool allows us the opportunity to do that if we decide that that exists.
Perfect. Thank you.
Our next question comes from Alex Fuhrman with Craig Hallum. Alex, your line is live.
Great. Thank you very much. First off the bat is just want to ask about the lower RevPAR guidance, is that primarily related to the hotels that were undergoing the renovations in the first half of the year? And if you could comment is there any change on your thoughts for the back half of the year versus what your internal forecast have been going into that for the backhalf of the year?
Yeah, just to kind of to answer about the latter part of your question, we haven’t changed our guidance from $17 million to $20 million and we were seeing a very good strong group booking pace in our fourth quarter. So from that standpoint, we’re not changing that. I think what we felt was there’s been a little bit of a softening kind of across the board in demand and not necessarily in one particular area. And while it’s not a significant adjustment, we felt that it was the right thing to do but again, we’re not changing our EBITDA guidance from $17 million to $20 million.
Okay, that’s helpful. Thanks. And if you could just comment on the recent RL conversion in Olympia and Salt Lake City, I guess your first out west in market staff the Red Lion brand has been more well known. How have those two locations been received relative to the city you’ve been on the east coast, any learnings that you are going to apply that may be you can call it differently?
I think from a standpoint with Baltimore really being our first and D.C. is under renovation right now and kind of moving toward this completion, these hotels were really an actual conversion for us and the one that’s really been opened the longest and been more successful is Olympia. And the comments that we’ve gotten from the local markets and the regional market particularly from demand generators that have done business with us, may have not been doing business with us in the past for various reasons are all extremely positive and we feel that it is going to kind of take these assets to the next level.
So from that standpoint, we’re getting a fair amount of really good positive feedback. If you look at the online reputation comments even from Baltimore, you’ll see that the consumers absolutely love the product and we’re getting great accolades on the living stage and the programming that’s been going on in these hotels and really kind of the experience. And so, from a standpoint of learning, I think really for us it’s really kind of refining and getting our technology to mirror as we have gone through this process. We rely on a number of purveyors to help us complete that technology, loop and in some cases, we’ve had some struggles with those purveyors and so we had to adapt and change as we moved into some of these other brands and bring on other companies to help us execute. But that’s probably the primarily learning.
Great, that’s really helpful. Thank you, Greg.
You’re welcome, Alex. Thanks.
[Operator Instructions]. Our next question comes from David Loeb with Baird.
Good afternoon, Greg. I wondered if you could just talk a little bit more about that transient weakness, have you seen any or is it really kind of just caution about the second half?
Hey David, we have seen some softness and while it hasn’t been significant it’s been noticeable and really over time in the past that you’ve seen the market tracks feel more pressure. We’ve continued to see impacts in a market like Baltimore where kind of the political unrest continues to kind of rear its head continually and so you’ve seen a softness in some of those in that market in particular but, nothing that I would say is definitive but just the sensibility that it is a little bit softer.
Okay. And then just to go back to GuestHouse and Settle Inn, can you just talk a little bit about what your strategy is for growing those? Where do you see those going in – when do you expect that you’ll have an increasing franchising activities?
Yeah, we just ramped up our activities with those and we really wanted to wait until we got them on to our platforms and got through the standards and made sure that from a branding perspective that we have the right tools to go forward and at the same time, we wanted to make sure that we had the right hotels and the system that represents the brand as we see it going forward and those have really kind of started to come in line with us and we’ve really moved on our sales activity here just recently.
Our objective with these brands is really to continue in a very similar mow at some of our other brands which is really being a good conversion brand. And we think that there is a good opportunity out there with owners who are gen 1, gen 2 midscale brands that are out there that are facing some fairly significant pips and looking at not seeing a return on their invested capital. And we see that as an opportunity to be able to go out and convert them and that’s actually where we are starting to see some momentum as it relates to our franchising rate as we speak.
Okay, thank you.
I would now like to turn the floor back over to Greg Mount for closing comments.
Great. Thank you, operator. Thank you all for your time today. We look forward to speaking with you again in November and at this time, we are finished.
Thank you. Ladies and gentlemen, this conference will be made available for replay until August 16, 2016 at midnight. You may access the playback service at anytime by dialing 1-877-660-6853, and entering access code 13640744. International participants may dial 1-201-612-7415, and enter access code 13640744. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.
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