RLH Corporation executives say the company is advancing its asset-light strategy by selling off hotels and integrating enhanced technology systems.
DENVER—RLH Corporation isn’t slowing down in its pursuit of an asset-light model, but rather taking a strategic approach that includes recruiting third-party management companies and taking unstable hotels off the market.
Overall, the company “could not be more pleased with how successful the hotel sales initiative has been,” President and CEO Greg Mount said during a third-quarter earnings call with analysts Monday.
Early in the third quarter, the company closed on sales of the Hotel RL Spokane at the Park in Spokane, Washington, and the Red Lion Hotel Port Angeles in Port Angeles, Washington, which combined generated proceeds of $54.5 million, he said.
Mount said three more hotels “have been added to the queue” to be listed and those sales are “moving ahead swiftly.” He said he’s confident those three—in Anaheim, California; Salt Lake City; and Kalispell, Montana—and an additional property in Atlanta will be sold in the first half of 2019.
“We estimate these four hotels will generate (more than) $70 million in proceeds,” he said, which will be invested into the company’s growing franchise network. He added that the Hotel RL Olympia in Olympia, Washington, has been taken off of the market to allow the property to stabilize during the slow season, but the company will revisit listing it again in 2019.
In keeping with its asset-light strategy, RLHC took full ownership of the Hotel RL Baltimore for $300,000 in October and announced HEI Hotels and Resorts would assume management, Mount said.
Baltimore has been a challenging market, he said. However, the property has been useful as a “lab” for testing new technology and refining brand standards, he said.
Mount said franchise contributions during the quarter have become “increasingly more dominant,” and of the nine hotels sold to date, the company will retain the flag on eight. RLHC is in the process of working with its partners to move operations of the remaining owned hotels to third-party management, again to put all focus on the franchising division, which Mount describes as the company’s “core business.”
Mount said RLHC will also continue to pursue franchise acquisitions, similar to its $27-million purchase of the Knights Inn brand from Wyndham Hotel group in May.
He said the company is focused on midscale and upscale acquisition opportunities.
“We feel that we’ve got a really good handle on economy, and we need to really grow our midscale and upscale platform and those are going to be our primary focus,” he said. “We haven’t changed from that direction at this point.”
In October, RLHC launched a redesigned brand website, which is providing “a wide range of ways to drive revenue to our franchisees,” Mount said.
In addition, RLHC’s rewards program, Hello Rewards, has been tweaked to drive down the overall cost of sales for franchisees.
“All our actions have been deliberate and focused on transforming (RLHC) into a dynamic, high-margin non-capital, intensive franchise-fee business model,” Mount said.
The company is seeing a shift in leadership as Douglas Ludwig resigned as EVP, CFO and treasurer in mid-October due to health reasons.
As RLHC searches for a new CFO, Nate Troup, current SVP and chief accounting officer, will serve as principal financial officer, Mount said.
Q3 performance, outlook
The company ended the third quarter with $8.9 million in net income, up from $2.8 million in the same quarter in 2017. Troup said the increase was spurred by asset sales during the quarter, along with strong performance in the company’s franchise division.
Organic growth and incremental contribution from the Knights Inn acquisition drove improvement in the franchise division, Troup said. Adjusted earnings before interest, tax, depreciation and amortization from continuing operations was $4.6 million, down from $11.4 million in Q3 2017, according to the company’s earnings news release.
The company attributes the year-over-year decrease in EBITDA to the impact from asset sales, which will continue to weigh on results until lost income is replaced by additional income from franchise contributions, Troup said.
For Q3 2018, franchise revenues were $15.1 million, up 19.1% year over year. A total of 132 franchise agreements were executed during the quarter, in addition to the Knights Inn acquisition, which executives said is in line with the goal of 150 to 200 for 2018.
RLHC revised its full-year 2018 guidance for franchise divisional profits to a range of $18 million to $19 million, and expects full-year franchise profit margin of between 33% and 35% “to reflect the timing of additions to our franchise portfolio,” Troup said.
As of press time, RLHC’s stock was trading at $10.89 a share, up 10.56% year to date. The Baird/STR Hotel Stock Index was down 8.41% for the same time period.