On a second-quarter earnings call with analysts, RLH Corporation President and CEO Greg Mount touched on why he isn’t too worried about the current state of RevPAR in the industry, as the company adjusted its full-year guidance.
DENVER—Revenue per available room in the U.S. has decreased for the second time this cycle, but RLH Corporation President and CEO Greg Mount isn’t worried. He said a franchise business such as RLHC tends do better when the cycle turns.
Mount said he’s lived through a few industry cycles and has understood the impact of those, particularly
for a franchising organization.
“Quite frankly, the good organizations with the right cost base, which we believe we have built into what we’re offering owners, really tend do better during a turn,” he said on the company’s second-quarter earnings call with analysts Tuesday.
Owners seek not only some relief from the higher expenses versus the lower performance that they’re seeing, he said, they’re looking for greater opportunities to improve and at least maintain the earnings before interest, taxes, depreciation and amortization they’ve seen over the past few years.
“For us, that turn creates opportunities, and we feel that we’re in the right position to take advantage of that,” Mount said.
Despite any shift that may be looming in the industry, Mount remains focused on building and investing in a franchise business.
During the quarter, the company executed 40 franchise agreements, five of which were upscale and midscale hotels and 35 of which were select-service hotels. This brings the total for the first-half of 2019 to 96 new agreements, 30 of which are for new locations, according to the company earnings release.
Another 17 agreements had been signed since the end of June, Julie Shiflett, EVP and CFO of RLHC said on the call.
“We’re particularly pleased with this level of execution, as historically most of our signings occur in the latter part of the year, consistent with industry norms,” she said. “The number of signings in this quarter, while lower than the first quarter, exceeded our expectations.”
She said RLHC’s pipeline is active and signings are fluid, but can vary from quarter to quarter, so it’s key to evaluate the signings of contracts on a year-over-year basis instead of quarter over quarter.
Franchise revenues for the quarter increased 8% to $14.7 million compared to $13.6 million in the year prior, she said.
“The strong performance of our franchise revenue was a result of the Knights Inn acquisition and organic growth, primarily related to transactions fees and new revenue streams which we’ve added to our franchise agreements,” Shiflett said. “These increases were offset by terminated agreements.”
Some terminated contracts were for economy hotels that lacked brand standards and are now moving to an independent hotel status, she said.
Mount said tech investments continue to be key to RLHC’s success going forward. This includes the company’s recently launched guest management system, RevPAK, and its cloud-based hospitality management suite, Canvas Integrated Systems.
“We have never wavered from our core strategies over the last five years,” he said. “We have and will continue to make investments in our platforms and franchising.”
Canvas provides solutions for both customer-facing functionalities, such as reservations and keyless entry, as well as back-of-house functions including property and revenue management, he said.
Mount said RLHC has entered into seven agreements for Canvas and is “in discussions with many more independent hotels and third-party operators, as well as large timeshares and other (organizations).”
He said Canvas is being marketed primarily to third-party management companies that RLHC has relationships with, independent hotel owners and organizations of independent hotels.
Q2 performance, guidance changes
During the second quarter, RLHC reported a net loss of $2.8 million or 11 cents per share, Shiflett said, compared to a net loss of $2.3 million or 10 cents per share in the year prior. The change reflects prior-year hotel sales and current-year performance, she said.
Adjusted EBITDA was reported at $3.7 million compared to $6.6 million during the same period last year. Change in adjusted EBITDA reflects the growth of RLHC’s franchise business, offset by $2.6 million of EBITDA contribution from properties that were sold in 2018, as well as a $900,000 decline in the contribution of owned hotels in the current period, she said.
RLHC revised its guidance ranges for full-year 2019, which included raising the expectations for new franchise agreements to a range of 175 to 210. Selling, general and administrative expenses have also been revised to a range of $27.5 million to $29.5 million, which includes estimated stock compensation of $2.8 million to $3.2 million.
Adjusted EBITDA guidance remains in the range of $20.5 million to $22.5 million for full-year 2019.
“We are keeping our adjusted EBITDA guidance the same as the decline in SG&A spend is anticipated to be offset by the performance of our own hotels,” Shiflett said.
As of press time, RLHC’s stock was trading at $6.18 a share, down 23.9% year to date. The Baird/STR Hotel Stock Index was up 11.3% for the same time period.