Officials on RLH Corporation's recent earnings call told analysts 2018 was a year of strategic shifts, and they are looking ahead to 2019 with new ventures such as the launch of RLabs, a wholly owned subsidiary focusing on providing third-party tech services for independent hotels.
DENVER—RLH Corporation officials said 2018 was a year of strategic shifts as the company continued to sell off assets and grow its franchise revenues.
On its fourth-quarter and full-year earnings call, Greg Mount, president and CEO of RLHC, said the company executed 167 total franchise agreements for full-year 2018, with 58 of those completed during the fourth quarter.
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The company also sold nine hotels during 2018, generating gross proceeds of more than $116 million. Thanks to the company’s $27-million acquisition of the Knights Inn brand from Wyndham Hotel group in May 2018, its geographic footprint also expanded. That acquisition added more than 350 select-service hotels across the U.S. to RLHC’s franchise portfolio.
RLHC achieved 23% unit growth, expanding its franchised hotel network to nearly 86,000 rooms across 1,327 hotels.
“Overall, 2018, while noisy, as we sold the majority of our owned assets, has positioned us to take greater advantage of the high-margin franchising business. … Given our focused efforts and hard work, we have laid a solid foundation to build on in 2019,” Mount said.
He added that the company’s development strategy in 2019 and beyond will increasingly focus on adding to its midscale and upscale brands. Currently, nearly 67% of RLHC’s revenue is derived from its economy brands “providing a stable baseline for the company that is not susceptible to (revenue per available room) detraction,” he said.
By the end of the first half of 2019, RLHC plans to open two Hotel RLs—one in Miami Beach, Florida, and one in St. Louis. Mount said RLHC is “continuing to evaluate potential midscale and upscale acquisitions, where we believe we can leverage our technology and owner-friendly franchise structure to attract complementary brands.”
Over time, the company’s goal is to grow the royalties from the midscale and upscale brands at a faster rate than the royalties of the economy brands, the CEO said.
Launch of RLabs
On 5 March, RLHC launched RLabs, a wholly-owned subsidiary that will act as a lodging technology innovator. The company expects it will create additional asset-light revenue streams.
“RLabs will focus on the new revenue verticals for the hospitality industry, including end-to-end software, robotics and artificial intelligence,” Mount said. “This structure will allow us to leverage and monetize what we created for (RLHC) by primarily targeting upscale independent hotels.”
With the initiative, RLHC will offer third-party management companies the capability to bring brand-level resources to independent hotels across the globe, he said.
The company is already off to a strong start, Mount said, as it’s in agreement to provide services for seven upper-upscale independent hotels, such as the recently converted Monterey Tides hotel in Monterey, California.
“We’re really excited about this,” Mount said. “We have built a platform that’s been highly successful for us and our franchisees and have been recognized in the industry for that platform. We really felt there was a great opportunity to monetize what we’ve already built and to leverage it into a segment of the business that we think is greatly underserved, both from a technology standpoint as well as just sheer capabilities and then on top of that … cost.”
The goal is to keep these hotels independent for the most part, but for RLHC to be a resource to provide things such as mobile check-in and revenue management, he said.
“There’s approximately 80,000 independent hotels throughout the world that fit into this opportunity,” he added. “The great part about it is … we’re just monetizing on what we’ve already built. There’s not a lot of additional expense here for us.”
Mount said he’s seeing a “tremendous amount of interest” from independent hotels, especially those that are being encouraged to soft brand but are discovering the costs that come along with that are almost as much as going branded.
Most of these hotels are in high-barrier markets, he added.
Full-year performance, outlook
During Q4, RLHC reported a net loss of $7.3 million compared to net income of $1.5 million in the same quarter in 2017. The year-over-year loss was primarily due to the loss of profits from nine hotels sold during 2018 as well as “$3.5 million in non-cash impairment charge in the fourth quarter of 2018 on the Guesthouse brand and a $3.8-million-dollar non-recurring, non-cash benefit related to the Tax Cut & Jobs Act of 2017,” Julie Shiflett, the company’s new EVP, CFO and treasurer, said on the call.
Adjusted earnings before interests, taxes, depreciation and amortization from continuing operations was $2.3 million for the fourth quarter, compared to $3.6 million in 2017 for the same time period, according to the company news release.
Shiflett said the change in quarter-over-quarter and year-over-year net income and adjusted EBITDA is “primarily due to the sale of nine company-owned hotels for $116 million of proceeds.” She added those hotels contributed roughly $14.5 million dollars in EBITDA during 2017.
For 2019, RLHC expects the sale of the nine company-owned hotels in 2018 will reduce its profitability in 2019. The impact of the lost EBITDA from sales, she said, was partially offset by the 36% growth of franchise royalty fees.
“This double-digit improvement arose from organic growth and the contribution of the Knights Inn acquisition,” she said.
Total revenue for the quarter and the year declined by 27% and by 21%, respectively, which reflects the impact of the sold hotels. On the growth side excluding company operated hotels’ revenue, RLHC achieved a 19.3% franchise-related revenue growth for the quarter and a 10.8% franchise-related revenue growth for the year, Shiflett said.
This improvement reflects the 167 total franchise agreements executed during the year, she said. Looking ahead, the company hopes to execute between 160 and 200 franchise agreements in 2019, she said.
As of press time, RLHC’s stock was trading at $8.26 a share, up 1.72% year to date. The Baird/STR Hotel Stock Index was up 11.8% for the same time period.