Executives on RLHC’s second-quarter earnings call told analysts they are maintaining an aggressive approach during their transition to an asset-light or completely asset-free operating model.
DENVER—On RLH Corporation’s pursuit to become fully asset-light and move toward franchising upscale, midscale and economy hotels, it has executed 93 franchise agreements as of 30 June, according to executives on the company’s second-quarter earnings call.
“We knew heading into 2018, it would be a vital year for transition and transformation for (RLHC). The key elements that we focused on were significant changes to our business model, our balance sheet, our technology advantage and our brand’s development,” said President and CEO Greg Mount. “Our team has achieved a great deal on each of these elements in the first half of the year.”
Through July, RLHC has sold nine of the 11 remaining hotels out of the 18 previously listed in October. But with high confidence in market conditions, the company decided to “market three additional hotels in Anaheim, Atlanta and Kalispell (Montana) and anticipates gross proceeds in excess of $40 million,” according to the company release.
“Selling the nine hotels significantly reduces the risk in our business model and repositions our capital,” Mount said. “This will, as planned, transform RLH Corporation into a high-margin, non-capital-intensive franchise fee business model.”
EVP, CFO and Treasurer Douglas Ludwig said he is confident the company will close on the sale of the three additional hotels in the “coming months.”
Mount added the company is now positioned to use its cash reserves and capital capacity to grow its franchise business “more aggressively through targeted acquisitions.”
He credited the integration of 10 new franchise agreements from the Inner Circle Investments deal in March and the acquisition of Knights Inn brand for $27 million in May for “allowing us to capitalize on our growth opportunities in the future.”
Now that the Knights Inn acquisition and integration is complete, Mount said he has commenced a brand review to update brand standards to make Knights Inn more relevant to its travelers today.
“Our technology and revenue-management advantages will be meaningful to the Knights Inn owners, allowing them to improve their returns on invested capital as part of the RLH group,” he said. “We also see significant potential to grow Knights Inn’s franchise base.”
More than 600 markets have been identified where Knights Inn could expand and “create significant value for that brand,” he added.
Mount told analysts the company is constantly looking for more acquisition opportunities and the focus is on staying in the midscale and upscale segments.
“With the right (brand) we would definitely add it, even though this year we will be moving from 11 down to about nine brands, and we’re not opposed to adding another brand, but we will want to make sure that it strategically makes sense,” he said.
RLHC also focused its efforts on cost reduction on franchise operations with “the goal of increasing its divisional margins in 2018 by more than 600 basis points compared to 2017,” according to the release.
Ludwig said by selling the additional three hotels, the company is further reducing the maintenance capital it needs to spend on its asset base. He said he hopes by the end of the year RLHC will have reduced realized proceeds to offset the majority of the loan used for the closing of the Knights Inn acquisition.
HNA Group sells shares in RLHC
As Chinese conglomerate HNA Group has been on a selling spree of late, Ludwig noted on the call that HNA was RLHC’s largest shareholder—holding 3.8 million shares.
However, concern was raised during this quarter as RLHC was “unaware as to how (HNA) would sell its shares. This caused concern because they represent a significant overhang on Baird, and we believe trading volumes during the second quarter were reduced significantly because of that,” he said.
Through an overnight transaction on 14 June, Coliseum Capital Management and Vindico Capital became owners of those shares. Ludwig said the closing share price on 15 June was $12.20.
He said RLHC is pleased that this transition did not create any negative impact on the company’s share price.
The company reported net loss was $2.3 million for the quarter compared to a net loss of $66,000 in Q2 2017, which executives attribute to the lost income from seven hotels that were unloaded in the first half of 2018.
On the upside, executives said the second half of 2018 is expected to be “positively affected” by its acquisition of Knights Inn. It’s also expected that RLHC will benefit from cost reductions as it transitions out of an ownership model to franchise operations, executives noted in the release.
Midscale franchise revenue per available room increased 1.2% and about 80% of the company’s franchised hotels have a “fixed fee representing an important hedge against an economic downturn and providing stability of its base franchise revenues and cash flow,” the release states.
The company expects 2018 midscale systemwide RevPAR to grow 1% to 3% year over year and franchise divisional profit to fall in the range of $19 million and $20 million.
As of press time, RLHC’s stock was trading at $12.70 a share, up 29.6% year to date. The Baird/STR Hotel Stock Index was down 4.6% for the same time period.