Analysts don’t see a trend in CEO changes at RLHC, ESA
 
Analysts don’t see a trend in CEO changes at RLHC, ESA
02 DECEMBER 2019 9:20 AM

Recent decisions by the boards of two publicly traded hotel companies to seek new leadership don’t reveal anything dire about the hotel industry overall, analysts say.

REPORT FROM THE U.S.—Two publicly traded U.S. hotel brand companies recently made leadership changes, but industry analysts say they don’t expect to see similar C-suite shakeups across the hotel industry.

The board of directors at RLH Corporation announced 8 November the resignation of president and CEO Greg Mount, stating that “the operational performance of the company has not progressed as anticipated.” Two weeks later, the board at Extended Stay America announced Bruce Haase, of ESH Hospitality and WoodSpring Hotels, was the new CEO, replacing Jonathan Halkyard.

As a shift in the economic cycle presents challenges for the U.S. hotel industry, the question is whether these recent moves are a sign of things to come.

Analysts said they believe the changes in leadership at RLH Corporation and ESA are isolated incidents specific to each company’s current needs.

Both companies pivoted their strategies over the last few years, ESA more recently than RLH, said Michael Bellisario, VP and equity senior research analyst at Baird. Sometimes when a pivot occurs, there’s a bit of a shorter leash, he said. A CEO might not be a franchising expert but someone with a real estate, capital markets or brand background, so they might not be the person best suited for that position.

ESA went private in 2007 and was over-levered and undercapitalized, he said. It went into bankruptcy, came out of bankruptcy and then was taken public. There were a lot of different owners, he said.

“You could argue the first several years that they were a public company; they were picking up the pieces from the prior years, so they weren’t necessarily in position to build out third-party growth in their early days, like some of the peers,” he said.

ESA has one brand, and it’s not a particularly niche one like Four Seasons Hotels & Resorts, he said. Over the next five years, companies like Marriott International and Hilton will continue to grow in the different parts of the travel spectrum with all the brands they offer. Scale has its benefits, he said.

RLH has a strong offering of brands in different chain scale segments, and it has focused on building a sales force that can sell those brands effectively, said Brian Dobson, VP of equity research at Instinet. The company needs to focus on making sales to small owners, such as families who decided to own and operate a hotel, he said.

“Their ownership demographic looks a lot more like Wyndham’s (Hotels & Resorts) ownership demographic than like the Hilton demographic, which has a tremendous amount of large institutions, financial institutions, that own their hotels,” he said.

Not a sign of things to come
Dobson said he cautions investors and the industry at large not to draw too many parallels between the management changes at Extended Stay America and RLH Corporation.

At ESA, the company had been undergoing a strategic review process and sought to drive growth in its brand to create the most shareholder value instead of selling the company, he said. Many people on the street took that to mean there was no ready buyer at the correct price for the company’s brand.

“At this stage, I think the board was looking for someone with experience operating a large extended-stay product, because at this point in the cycle (revenue per available room) is weaker,” he said.

This had more to do with a shift in circumstances regarding the potential sale of the company as well as operating results on a property level, he said.

At RLH Corporation, the board cited a lack of communication between its former CEO and Wall Street regarding potential changes and operating results moving forward, Dobson said.

“Given the reduction in guidance for this year, it was necessary for the board to take action,” he said. “They’re likely looking for someone with considerable experience communicating the message of a hotel company to Wall Street in an understandable fashion.”

During the last recession, there wasn’t a rash of CEOs getting fired when conditions worsened, said C. Patrick Scholes, managing director of lodging, leisure and gaming equity research at SunTrust Robinson Humphrey. Instead, many took the approach of battening down the hatches and trying to do the best they could in that environment. The outlook now does not match what led into the last recession, and regardless of the economy, leaders have to run their businesses to the best of their ability and work to succeed against the competition, he said.

Scholes said he doesn’t expect to see a rash of boards getting rid of their CEOs. However, stock underperformance in a rising market and amongst successful peers can compel companies to look for changes in leadership or put themselves up for sale, he said.

Company performance
Both RLH Corporation and ESA had stocks that were down while the S&P 500 has been at record highs, Scholes said, noting other C corps were experiencing record or near-record highs at the same time.

He said that relative underperformance likely perplexed shareholders and board members.

Hotel brands have been facing some specific headwinds that are affecting their business, but the stock market is at all-time highs in the later point of an expansion, Bellisario said.

“When your business or your stock price is underperforming, with that context, that backdrop, it makes a board rethink who’s running the company,” he said.

The best leading indicator is the stock price, he said. The stock with public market investors will do a good job determining whether earnings growth is happening or will happen, and the stock price will react accordingly, he said.

“That’s kind of the best poll for how a company is doing, especially when it’s a turnaround or strategy shift that’s occurring, and that’s what happened at (RLH),” he said, citing the company’s stock price increasing from $6 to $8 over a few years before hitting $14 per share and then coming back down.

A similar thing happened with ESA when its stock went from $12 up to about $22 and then to $14 all within about a year, he said.

If there is a parallel between ESA and RLH, it’s that both boards are seeking a CEO with a focus on driving franchise sales growth and communicating the company’s value proposition to future owners and Wall Street, Dobson said. Looking at other C-Corps, companies such as Marriott International and Hilton have held strong performance in challenging conditions, he said. Among the real estate investment trusts, Xenia Hotels & Resorts has had strong performance, and Host Hotels & Resorts has performed well despite its operating leverage during a slower RevPAR cycle, he said.

These companies have management teams that are well-respected on Wall Street and have strong communication skills regarding their plans for the future, he said.

“I think that in both (RLH) and Extended Stay, there was a question as to what the path for the core business was going forward, and that’s what drove the boards’ decisions in both cases,” he said.

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