RLH Corporation Reports $8.1M Q1 Loss

DENVER—Red Lion Hotels Corporation had a loss of $8.1 million in the first quarter of 2020, but reported that it has taken significant steps to get through the pandemic.

“While the duration of the pandemic is unclear, we do know that the hospitality industry has a history of resilience, and the actions RLHC has decisively taken in the last two months will support the resilience of our brand as the impact of the pandemic subsides,” said John Russell, interim CEO, on an earnings call.

“At the start of the year, we were seeing positive results from the strategic plan we implemented to focus on our franchise growth. This was evident with the increase in signed contracts and decrease in terminations year-over-year. However, as the impact of COVID-19 became more prevalent across the industry, the effect of stay-at-home orders and the unprecedented reduction of travel stalled our positive momentum meaningfully and new signings have slowed in April. In response, we took difficult but decisive action that allowed us to best concentrate our focus on the long-term success of our franchisees and our company.”

He continued, “While occupancy is down significantly, the vast majority of the company’s franchise hotels have remained open and we have implemented programs to support our franchisees. Our franchisees are there to support the frontline heroes in this fight, including health care providers, long-distance truckers and traveling frontline workers. We applaud these heroes for their efforts and recognize our franchisees for continuing to offer respite to these essential workers.”

The company ended the quarter with nearly $38 million of cash and no corporate level debt. “We have taken significant steps to withstand this temporary disruption, including accelerating our reduction in cost structure,” said Russell. “As we navigate through this difficult time, we will continue to work with our franchisees to make sure they have the resources necessary to operate their hotels now, and a plan for their full return in the future.”

First Quarter 2020 Financial Results 

The company reported a net loss of $8.1 million in the first quarter compared to a net loss of $4.3 million in the prior year period. The year-over-year change is attributable to first quarter bad debt expense of $9.7 million largely resulting from the economic impact of COVID-19 on receivable balances, such as those associated with Inner Circle and other former franchisees, a $1.8 million asset impairment on the Red Lion Hotel Seattle Airport primarily due to the impact of COVID-19, a $1.3 million loss associated with the retirement of debt and $0.5 million of employee separation costs. This was partially offset by a $7.9 million gain from the sale of two hotel properties.

Adjusted EBITDA for the first quarter was a loss of $10.3 million compared to $1 million for the first quarter of 2019. The change reflects lower contribution from the sale of the owned hotels, lower royalty revenues due to the impact of franchise terminations and increased expenses primarily related to bad debt.

Royalty fees were $4.4 million compared to $5.7 million in the prior year quarter primarily due to terminated hotel agreements and the impact of COVID-19 on midscale brands, which generally pay royalties and marketing fees as a percentage of gross rooms’ revenues.

COVID-19 Update

The company has taken a number of steps in response to the pandemic, which include the following:

  • Reduced spend to enhance liquidity
  • Reduction of workforce and compensation across executive ranks, staff and board of directors
  • Consolidation of office space by closing the Spokane office and sub-leasing surplus office space
  • Suspension of nonessential CapEx programs

Measures to support franchisees:

  • Royalty and marketing fee deferral program for all brands
  • Temporary fee reduction for review responses, guest relations and other fees
  • Delay of capital intensive brand standards
  • Provided information on legislative relief that may be available to franchisees

On April 23, the company announced the receipt of $4.2 million in proceeds from a loan entered into pursuant to the Paycheck Protection Program. Subsequent to its receipt of those funds, the U.S. government issued new guidance, effective retroactively, that introduced significant ambiguity to certain eligibility requirements, particularly for publicly traded companies, according to the company. While the company believes that the eligibility requirements in place at the time of the loan application were met, it does not appear that the new eligibility requirements are met. The company made the decision to return the proceeds of the loan in May.

While the company saw solid momentum in franchise sales in the first quarter, as travel has been meaningfully impacted by COVID-19, the company saw a notable slowdown in agreements to date in the second quarter. On April 2, 2020, the company announced it has withdrawn its guidance of signing 60 to 80 franchise agreements for new locations in 2020 due to the impact of COVID-19.