DENVER—RLH Corp. has reported third quarter 2018 results. Some of the highlights from the earnings report include the following: franchise revenue rose to $15.1 million, up 19.1% year-over year; as of Sept. 30, the company sold nine hotels, which generated gross proceeds of more than $116 million; and RLH Corp. has executed 132 franchise agreements against its target of 150 to 200 for 2018, in addition to the Knights Inn franchises acquired in May 2018.
Other Highlights
- Net income for the three months ended Sept. 30, 2018 was $8.9 million or $0.35 per diluted share compared to net income of $2.8 million or $0.11 per diluted share in the prior year period.
- Adjusted EBITDA from continuing operations for the third quarter was $4.6 million, compared to $11.4 million for the year-ago period. The change in adjusted EBITDA was primarily due to the lost contribution from the nine company owned hotels sold during the year.
- Division profit from the franchise segment increased 55% to $5.9 million from $3.8 million in the third quarter of 2017. The franchise segment divisional profit margin expanded 900 basis points to 39.1%.
Of the remaining hotels being marketed, Salt Lake City, UT; Kalispell, MT; and Anaheim, CA, are in active stages of diligence. - The company launched state of the art and streamlined website redlion.com, which allows guests to book a room in as little as three clicks.
Greg Mount, RLH Corp. president/CEO, stated: “Our franchise business continues to achieve outstanding growth and success with 132 contracts signed so far this year in addition to our successful acquisition of Knights Inn. With this continued growth and our focus on expense management, our franchise margins have improved to 39% for the quarter. We also launched our new website and enhanced Hello Bucks rewards system, both of which simplify and improve the customer experience for reservations, information and rewards. The innovative website changes the paradigm of booking and creates more revenue opportunities for our franchisees. We replaced complex rate codes with a simple process: select a room, then customize your stay. This gives guests the opportunity to pick and choose from a menu of options to make sure their stay is exactly what they need. Our hotel asset sales have been a huge success and we completed nine sales by mid-July. In addition, we have several other hotels being marketed with strong interest, and we expect to see these sales close starting in the first half of 2019. Our asset-light strategy has allowed us to fluidly manage our human capital to areas where we can garner the highest returns positioning us to drive top-line franchise contribution and margin as we move ahead.”
Financial Results
The company reported net income of $8.9 million or $0.35 per diluted share in the third quarter as compared to $2.8 million or $0.11 per diluted share in the prior year period. The improvement in net income for the quarter was primarily due to the gain on sales from two hotel dispositions and meaningful improvement in the company’s franchise division, partially offset by a $7.1 million dollar impairment charge on Hotel RL Baltimore and the reduction in contribution of the hotel division as a consequence of its hotel asset sales.
EBITDA for the third quarter was $22.6 million as compared to $10.2 million in the same period 2017. Adjusted EBITDA from continuing operations in the quarter was $4.6 million as compared to $11.4 million in the prior year period. The change in adjusted EBITDA from continuing operations year over year was primarily due to the lost contribution from the hotels which were sold during the year.
Franchise Division
Franchise revenues in the quarter ended Sept. 30, 2018, increased 19.1% to $15.1 million from $12.7 million in the prior year as the company continued to expand its franchise network organically and through select acquisitions. Divisional profit improved by 55% while divisional expenses rose by 3.6% underscoring the benefits of scale and demonstrating operating leverage of a growing franchise network. Margins for the franchise division rose to 39%, for an improvement of 900 basis points over the quarter ended Sept. 30.
As of the date of this release, in addition to the Knights Inn acquisition, RLH Corp. executed 132 franchise agreements, which compares favorably to the company’s stated goal of executing 150 to 200 franchise contracts in 2018.
Franchisees across all brands continue to adopt RevPak, RLH Corporation’s system designed to enhance the owner’s profitability and return on investment. These proprietary tools amplify the ability to renew expiring franchise contracts, according to the company.
In October, RLH launched the redesigned redlion.com and it has been received positively by guests and owners, according to the company. Guests have seamless use of the website, which allows them to make reservations in three clicks, customize their stay, interact with the hotel and make last-minute changes to find the best deal available. The dynamic features of the website provide a wider range of ways to drive revenue to franchisees. Complimenting the launch of the new website, RLH upgraded its Hello Rewards currency to give members faster access to rewards while driving down overall cost of sale for franchisees and program operating costs for RLH Corporation. The new currency, Hello Bucks, works like cash with one Hello Buck equaling one Canadian or U.S. dollar. Members can apply Hello Bucks to their next reservation booked on redlion.com or save for a free night. Early feedback from owners on the new currency has been positive.
Hotel Division
Hotel division revenue for the quarter ended Sept. 30, 2018, was $20.9 million as compared to $38.3 million in the same quarter of 2017. The change in revenue is primarily due to the impact of the company’s transformative hotel sale initiative. Hotel division expenses in the quarter declined 40% year-over-year as a result of the sales. Margins for the hotel division contracted 7% reflecting the operating margins on the mix of hotels remaining in the portfolio.
RLH Corp. commenced a hotel asset sales initiative in the fourth quarter of 2017, marketing 11 of its owned hotels. To date the company has sold nine hotels; seven were sold in the first and second quarters of 2018, generating gross proceeds of $62 million, and an additional two hotels were sold early in the third quarter, which generated gross proceeds of over $54 million. Proceeds from the hotel sales were used primarily for the paydown of debt. Collectively, the sold hotels contributed $14.5 million to adjusted EBITDA in the full year ended 2017 and $3.3 million through the date of the respective sales in 2018. To further its full transition to an asset-light strategy, the company is moving to outsource the management of the remaining owned hotels to leverage efficiencies.
On Aug. 9, 2018, the company announced that it would be marketing for sale its hotels in Anaheim, CA, Kalispell, MT and Atlanta. The sale of these hotels is anticipated to generate gross proceeds in excess of $40 million.
On Sept. 6, 2018, the company elected to purchase the outstanding promissory note on Hotel RL Baltimore for a price of $13.6 million. In October 2018, the company purchased the third-party interest in this asset. Having control over this property gives management the flexibility for refinancing of the asset, operations and timing of a future sale.
Balance Sheet and Liquidity
RLH Corp. finished the third quarter with cash and restricted cash of $22.9 million and debt of $44.6 million comprised of mortgage loans of $25.3 million, a term loan for $9.4 million loan and a $10.0 million revolving line of credit.
On a year-to-date basis, the company’s indebtedness has declined by approximately 60% with the retirement of mortgage debt upon the sale of its hotels. The company’s debt is expected to continue to decline as it completes the sale of its owned and lease hold interest hotels.
Subsequent Events
On Oct. 18, 2018, the company reported that CFO Doug Ludwig resigned for health reasons.
