Red Lion Hotels Corporation (NYSE:RLH) Q1 2019 Earnings Conference Call May 9, 2019 9:00 AM ET
Dan Redmond – Vice President-Financial Planning and Analysis
Greg Mount – President and Chief Executive Officer
Julie Shiflett – Executive Vice President and Chief Financial Officer
Conference Call Participants
Alex Fuhrman – Craig-Hallum
Greetings and welcome to RLH Corporation’s First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation.
It is now my pleasure to introduce your host, Dan Redmond, Vice President of Financial Planning and Analysis. Thank you. Please go ahead.
Thank you. Welcome to RLH Corporation’s First Quarter Earnings Call. With us today are President and Chief Executive Officer, Greg Mount; and EVP and Chief Financial Officer, Julie Shiflett.
Before we get started, I want to remind you that the company’s remarks today contain forward-looking information that are subject to a number of risk factors that may cause actual results to differ materially from those expressed or implied. For a discussion of important risk factors, please see our most recent Form 10-K and subsequent reports filed with the SEC. Our Form 10-K and other filings are available on our website, rlhco.com, in the Investor Relations section or through the SEC website at sec.gov. These forward-looking statements speak as of today and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
The company will be referring to a number of non-GAAP measures. The reconciliation of these measures to their comparable GAAP measure is provided in the table of the press release today. That release is also available on the Investor Relations section of our website.
I will now turn the call over to Greg Mount.
Good morning, and thank you for joining us today. This quarter marked my 5-year anniversary of joining RLH. When I arrived, we owned 25 hotels and had 30 franchised hotels that generated $1.5 million in franchise revenue, contributing roughly 5% of our total revenues. Today, we are an asset-light franchise company with a franchise system of close to 1,300 hotels that generate $30 million in franchise revenue and contributed 50% of our total revenues. Our holdings are down to 8 hotels, several of which are actively marketed. We have come a long way and are excited about the direction we are headed.
With that said, 2019 is off to a terrific start. In the first quarter, we signed 56 new franchise agreements and had exceptionally strong performance in our USB growth. Our franchise divisional adjusted EBITDA grew by 51% and achieved franchise adjusted EBITDA margin expansion of 400 basis points to 28%.
For the first quarter, we reported EBITDA of nearly $1 million compared to $1.1 million a year ago, of which $855,000 was the EBITDA contribution from the sold hotels. The year-over-year EBITDA improvement of $800,000 is primarily from growth in our core franchise operations. These results certainly demonstrate the growth and broadening scale of our core franchise business.
With respect to our business development strategy, we are making headway in adding upscale brands, and 8 of our agreements signed in the quarter were for our USB segment. The team continues to concentrate efforts on conversion opportunities and newbuilds in this segment given the higher NPV contribution due to the typically larger-sized hotel and the longer contract wins. For example, new franchise agreements signed during the quarter in our USB segment have an average NPV that is 6x to 7x higher than the NPV of the SSB franchise agreements in the quarter.
Overall, the contracts we are entering into are generally of higher quality and more profitable franchises than those that are leaving our system. We think it is meaningful that the NPV of new franchise agreements we are signing significantly exceeded that of the termed agreements. For example, the average NPV of USB agreements signed during the quarter were over 50% higher than those that terminated, while the average NPV on SSB agreements signed during the quarter was 80% higher than those that terminated.
We continue to see terminations in the SSB brand. The vast majority of these hotels are at the end of their economic last cycles and their owners are choosing to go independent as opposed to switching to a competitor brand. These terminating hotels are not profitable to RLH, absorb valuable resources and are not expected to impact our progress due to their smaller size and limited ability to utilize the full spectrum of our franchise service offerings.
As RLH becomes more sophisticated, we are finding additional vertical revenue streams through our daily transactions. This revenue comes with little associated expense and is part of not only our current growth but a key part of our future growth. We believe that franchising is one part of the revenue model and that we must be focused on providing quality services and products to our owners that allow us to maximize the millions of annual transactions through both revenue generation and cost reductions. This becomes a real advantage for us given our platform’s ability to better monetize the end-to-end transaction.
With respect to our hotel segment, a number of hotels being managed are beginning to see operating improvements and stabilization. Our for-sale hotels are still in the marketing process as it is taking longer to convert offers into letters of intent and ultimately sale contracts. The volatility in rate and reversal of the Fed on rates staying lower or longer sent mixed signals to the market in the first quarter. Consequently, buyers were taking longer to come to the table. In fact, we believe this broader real estate transaction market condition as both real estate transactions and real estate transaction volume were down in the first quarter of 2019 by 22% and 11%, respectively, according to estimates by Real Capital Analytics. We are still confident that these hotels will be sold, but we now expect sales to occur in the second half of the year.
Moving on to our evolving team. During the quarter, we welcomed Vinod Sankar as our new Chief Digital Officer. We are excited about Vinod joining the team given his depth of experience in field of data analytics and strategy, process optimization and enhancement to the customer experience. He is already developing a framework for enhancing our revenue management system and for establishing evidence that hotels that use our revenue management have better results than those that don’t take advantage of it. Vinod’s analytical perspective will be valuable – will be a valuable element in our efforts to remain on the cutting edge of technology.
Our ability to remain nimble and provide a full suite of services for our hotel owners while enhancing the guest experience is heavily reliant on technology. Building a robust cloud-based platform like RevPak has been an important differentiator for us in enhancing hotel owner support and the guest experience. From keyless entry to Apple TV and mobile app room service, we have tried to remain at the forefront of providing guests with full convenience and functionality right from their smartphones. Our focus on technology is part of our DNA and a top focus for RLH.
On our last call, we shared with you the launch of RLabs, a travel technology-based innovator. Our first product rollout, Canvas Integrated Systems, built on further monetization of our architecture, is showing promise with strong interest from a number of independent hotel owners and operators. The early interest and economics are proving out our assumptions. There is more to come as we explore this new area and opportunity.
Before I turn the call over to Julie, I wanted to share RLH’s recognition as one of America’s best midsized employers. Over the last 5 years, we have been focused on creating a caring, collaborative culture internally and externally, extending to our brand and our franchisees. We are proud of being selected and believe that our corporate philosophy played a large role of being recognized.
RLH has always supported the communities we operate in by reflecting the unique local culture and history in the interior design of our mid-scale hotels as well as highlighting local cultural and entertainment venues to guests that reflect the unique fabric of our hotel surroundings. Part of our philosophy is also to support the communities we do business in through various local partnerships for charitable organizations such as Clean The World and soon-to-be-announced national platform with National Safe Place Network.
In the workplace, we take a thoughtful approach around our corporate culture, creating an environment of inclusion, maintaining environmentally friendly office and encouraging our associates to give back socially. We’ve recently summarized these and other initiatives on our website, and we invite you to learn more.
We’ve made a great deal of progress over the last 5 years, and we recognize that we have more work to do. We are proud of our achievements and focused on capitalizing on that opportunity ahead.
With that, I’d like to turn the call over to Julie.
Thanks, Greg. In support of Greg’s comment on culture, I want to call out the Women in Leadership and Learning initiative here at RLH Corporation. As a female executive, I appreciate the company’s support of women, minorities and diversity in all areas of our business, from the Board of Directors to our hotel employees.
And with that, I’m pleased to discuss our recent financial results. RLH Corporation reported net loss for the first quarter of 2019 of $4.1 million or $0.17 per share as compared to net income of $2.6 million or $0.10 per diluted share in the prior year period. The quarter-over-quarter change in net income was primarily due to a $14 million gain associated with the sale of 5 hotels during the first quarter of 2018. In addition, the change in net income reflects the impact of the sale of 4 additional hotels during the remainder of 2018. These hotel sales also affected our adjusted EBITDA for the first quarter of 2019, which remained relatively flat at approximately $1 million.
So bridging last year’s results to the first quarter of 2019, roughly $865,000 in EBITDA in the first quarter of 2018 was contributed by the sold hotels. On a year-over-year basis, nearly all of the EBITDA from the sold hotels was replaced by the growth in our core franchise business.
During the first quarter, franchise revenue increased almost 29% to $13 million driven by royalty fees, which increased over 34% year-over-year to $5.7 million. The strong performance of our franchise business was the result of the Knights Inn acquisition and organic growth. This strong top line growth drove franchise EBITDA margin expansion of 400 basis points year-over-year to 28% for the quarter. Our franchise margin is seasonally lower in the first few quarters of the year as we devote higher marketing spend to drive reservations to our network for the upcoming travel season.
Greg mentioned our efforts to track and report results with hotels using our revenue management systems. Our mid-scale and upscale brands have seen strong RevPAR improvement in Q1. Our stabilized USB hotels outperformed their respective RevPAR comp sets by 4.1% in the quarter. The hotels within this group, which used our revenue management services, saw a 6% improvement primarily driven by occupancy. Those using their own revenue management showed an improvement of 1.5%. This success in driving revenue for our hotel owners supports our growth goal for our USB portfolio.
Total revenue for all business segments for the quarter declined by 21% year-over-year to $26 million reflecting the impact, again, of our 2018 hotel sales. Our SG&A remained flat at $7.2 million for the first quarter. This is a decrease, though, from our Q4 expense of $8.5 million, reflecting the cost savings initiatives implemented during the latter half of 2018. Our marketing, reservations and reimbursable expense increased roughly 29%, reflecting the growth in our core franchise operations year-over-year. We anticipate that marketing, reservations and reimbursable revenues will offset this expense over the course of the year. As already mentioned, this expense is higher in the first half of the year than revenue as we do advertising and marketing spend to drive reservations for the summer travel months.
I would like to move on to a discussion of the sales and recapitalization of 2 of our joint venture hotels. As Greg touched on earlier, we continue to market our hotels in Atlanta, Washington, D.C. and Anaheim. The transaction market nationwide did stall in the first quarter, affecting the momentum of our marketing process. We are reviewing the offers as received with the objective of completing these sales as quickly as possible while still maximizing the value for our shareholders.
Also we did monetize a portion of the value of our Salt Lake and Olympia hotels where we are anticipating a longer-term restabilization. We placed $11 million of debt on Salt Lake City and $5.6 million on Olympia Hotel. RLH Corporation received $9.1 million from the proceeds of this debt. $4.2 million of these proceeds were deposited into restricted cash for our senior secured term debt and was applied to reduce that term loan balance to $5.2 million subsequent to quarter end. The balance of the loan proceeds to RLH will be used for general corporate purposes.
These financings are reflected on our balance sheet, and as of March 31, 2019, the company had approximately $61 million in indebtedness with a weighted average interest rate of 6.41% and a weighted average remaining maturity of 1.8 years. We finished the quarter with cash on hand of roughly $25 million and a net debt to trailing 12 months EBITDA of 2.3x.
To conclude with our guidance, we are reaffirming our guidance ranges for 2019 and would like to provide some color around certain items. We had a strong start to the year by signing 56 franchise agreements during the quarter and are well on our way to our guidance range of 160 to 200 franchise buyings. Our adjusted EBITDA guidance continues to be in the range of $20.5 million to $22.5 million, which includes the add-back of stock-based compensation.
As you are aware, the first quarter is traditionally our softest quarter from an operation standpoint, and as we move later into the year and we enter our busy travel summer season, we expect to see improvement in our hotel operations.
This seasonal impact on our company-operated hotel segment is expected to result in about 10% of the segment’s full year profits arising in the first quarter, and subsequent quarters are expected to generate approximately 30%, 40% and 20%, respectively, over the remaining quarters of the year.
Lastly, our SG&A guidance continues with the range of $29.5 million to $31.5 million, including stock compensation expense. As a reminder, our guidance does not contemplate the impact of additional hotel sales. As we sell our hotels, we will file an 8-K and we will update our guidance for intra-quarter activities during the subsequent quarter’s earnings call.
And that concludes our prepared remarks. We’d now like to open the call up for questions. Operator?
Thank you. [Operator Instructions] Our first question is from the line of Alex Fuhrman with Craig-Hallum.
Great. Thank you very much for taking my question and congratulations on a nice start to the year. Wanted to ask a little bit about the Salt Lake and Olympia hotels, and it sounds like continuing to think about those being sold just maybe a little bit later in the year. Can you talk about just the decision to recapitalize those hotels? I mean is that something you feel like needed to be done before they could be sold? Or is that just a way to add more capital here to the balance sheet before that happens? I’m just curious to get a little bit more color on that, please.
Thanks, Alex, and thanks for making time this morning to be on the call. The goal is – with Salt Lake City and Olympia was to add additional capitalization to the balance sheet. We had listed those hotels for sale in October 2017, and with working on the restabilization of those hotels before we relist them, we wanted to be able to take some of the cash and capital out to utilize for growth of our franchise business.
Okay. That makes a lot of sense. And then if I could ask about the RLabs business that you launched here in the first quarter. I mean seems like a huge opportunity just given how many hotels there are that could be part of your target market there. But on the other hand, I imagine you’re mostly going to be looking outside of the Red Lion franchise network for that service. So if you could talk a little bit about just kind of what your sales and marketing strategy is going to be. Do you have a plan at this point of how you’re going to be going after those hotels and really which hotels will be the priority? It would be very helpful if you could give us some more insight into that.
Yes. Happy to do that. We have been really addressing this based on our relationships, both with independent hotel owners as well as operators, third-party management companies. And myself and a few other folks have been on the road and have been in a number of meetings. At the same time, we have a team of specialists who then visit these hotels and work with those teams to identify a very complex set of pricing as to what they’re currently paying so that we can then analyze what their costs would be under the Canvas Integrated Systems.
And it’s working very well for us. We’ve yet to have a meeting where people weren’t very engaged. People are excited in fact about the opportunity. We have been able to look at hotels, small luxury, independent hotels as small as 50 rooms and just completed an analysis of 1,000-room independent hotel in Manhattan. And all of these hotels are showing an opportunity to fairly significantly reduce the costs and provide better services and quite frankly much better technology platforms such as mobile apps and other things that these independent hotels just don’t have access to.
So we’re very, very excited about it. We have a lot of activity going on. We don’t – this doesn’t – this isn’t adding any costs to us. We’re handling this at this point within the team. And the plan will be as we start to grow, we’ll start to expand our marketing effort. I think you’ll see us start to look at from strategic conferences both in Asia and in Europe because, again, we can deliver this, we have a cloud and we can deliver it basically anywhere in the world. So we’re very, very excited about it.
That’s great. Well, thank you very much, Greg. Thanks, Julie.
Great. Thank you.
This concludes today’s excuse me – question-and-answer session. I’d like to turn the floor back to management for closing comments.
Great. Thank you, operator. We’d like to thank everyone for joining us this morning. We appreciate your interest, and we look forward to speaking to you again in the near future. Have a great day.
This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.