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Red Lion Hotels Reports First Quarter 2010 Results

2010-05-06

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Hotel News Resource RevPAR for owned and leased hotels increased 4.9% year-over-year driven by sales initiatives

Red Lion Hotels Corporation (NYSE: RLH), a western U.S.-based owner and franchisor of midscale hotels, today announced its results for the first quarter ended March 31, 2010.

Highlights:

RevPAR for owned and leased hotels increased 4.9% year-over-year driven by sales initiatives
ADR held steady year-over-year in spite of industry rate discounting
Occupancy increased 220 basis points year-over-year in the first quarter
EBITDA before special items was in-line with the prior year

Total revenue during the first quarter was $34.3 million with revenue from hotels of $30.6 million; both consistent with the prior year period results of $34.6 million and $30.8 million, respectively. EBITDA before special items for the first quarter of 2010 was $1.7 million, compared to $1.6 million for the first quarter of 2009. Net loss before special items was $3.6 million in the quarter, or $0.19 per diluted share, compared to a net loss of $3.3 million, or $0.18 per diluted share, for the prior year period. Reported net loss attributable to Red Lion for the first quarter including special items was $4.4 million, or $0.24 per diluted share.

President and Chief Executive Officer Jon Eliassen commented, "We are very pleased to report a 4.9% increase in RevPAR at the outset of 2010, breaking the trend of RevPAR declines in the preceding six quarters, and in contrast with continued broader industry declines. During the first quarter, we executed on our strategy of capturing more business from the group and preferred corporate segments. We also drove higher rate in the transient segment. To further support our sales and franchise growth strategies, we added key executives in the first quarter with four senior management appointments."

Summary results for the three-month periods follow:

($ in thousands, except per share)
	Three months ended March 31,
	2010	2009	% change

Total revenue, as reported	$ 34,302	$ 34,597	-0.9%

Results before Special Items: (1)
EBITDA	$ 1,655	$ 1,633	1.3%
Net loss	$ (3,582)	$ (3,281)	-9.2%
Loss per share - diluted	$ (0.19)	$ (0.18)	-2.2%

Results as reported:
EBITDA	$ 436	$ 1,633	-73.3%
Net loss	$ (4,368)	$ (3,281)	-33.1%
Loss per share - diluted	$ (0.24)	$ (0.18)	-31.3%

(1) Excludes $1.2 million of cash and non-cash costs recorded in the first quarter of 2010 related to the separation of the Company's former President and CEO included with undistributed corporate expenses.

In addition, key hotel operating metrics on a comparable basis, and reported hotel revenues and operating margin for the first quarter ended March 31, 2010 and March 31, 2009, are highlighted below for owned and leased hotels:

First Quarter 2010 Results

Comparing the first quarter of 2010 to the first quarter of 2009, occupancy for owned and leased hotels increased 220 basis points to 48.2%. ADR held steady at $80.10 resulting in a 4.9% increase in RevPAR. Including franchised hotels, system-wide RevPAR on a comparable basis for the quarter increased 1.7% due to a 130 basis point increase in occupancy, partially offset by a 1.0% decline in ADR.

Revenue from hotels of $30.6 million was relatively level compared to the prior year period. Rooms revenue increased $0.8 million, or 4.1%. RevPAR for comparable owned and leased hotels increased 4.9% driven by business mix and revenue management initiatives. The focus on higher rated group and preferred corporate guests reduced the Company's reliance on bookings sourced from discount online travel agent channels.

As part of the Company's emphasis on long-term profitability, we are implementing changes to our food and beverage operations, including modifying offerings in select markets and emphasizing breakfast-inclusive room rate options. Primarily as a result of the implementation of these changes, food and beverage revenue declined $1.1 million in the quarter, or 12.0%.

Hotel direct operating margin declined to 12.7 percent during the quarter from 13.4 percent in the same period in 2009 due primarily to the increase in sales and technology resources to help position the Company to capitalize on an industry recovery.

Revenue from the franchise and entertainment segments and the related profitability of those operations were much the same year-over-year.

Liquidity and Balance Sheet

Capital expenditures during the quarter ended March 31, 2010 totaled $1.5 million. Capital expenditures during 2010 are expected to total $12.7 million for core investments in maintenance, technology and necessary hotel improvement projects, which reflects the Company's continued focus on investing as appropriate to maintain competitive guest services. All capital needs are expected to be funded with operating cash flow. As of March 31, 2010, the Company had approximately $4.3 million in cash and cash equivalents, and outstanding debt of $137.4 million.

Key Executive Additions

During the first quarter, the following appointments to key leadership positions were announced, underscoring the Company's commitment to its operational, sales and franchise growth strategies:

Harry Sladich was named Executive Vice President – Sales and Marketing
Richard Carlson was named Vice President – Lodging Development
Kenneth Shore was named Regional Vice President – Hotel Operations
Mark D. Mahoney was named Vice President – Managing Director of Spokane Hotels

Outlook for 2010

While first quarter RevPAR performance is encouraging, the Company remains cautious on its outlook for 2010 given limited visibility of the summer selling season which drives a majority of revenue and profit. The lodging industry as a whole remains in a period of considerable rate pressure given the aggressive marketing and sales environment and associated short booking windows. The Company hopes to see reversal of these trends later in 2010 and into 2011. Despite these general concerns, based on currently available information, the Company is increasing its guidance for 2010 as follows:

2010 RevPAR for Company owned and leased hotels is expected to be down 1% to up 2% when compared to 2009 annualized RevPAR;
2010 direct hotel operating margin is expected to range from flat to up 100 basis points; and
EBITDA is expected to be $28 million to $30 million, before any special items.

Chief Operating Officer George Schweitzer noted, "We are pleased with the results we have seen from our sales initiatives including our breakfast-inclusive room sales strategy. We expect to realize continued benefits from our sales and marketing investments as the year progresses. For the balance of 2010, we will continue to focus on our mix of business in an effort to drive RevPAR growth. With franchise growth another top priority, we are aggressively marketing the Red Lion brand to franchisees in the west as a strong alternative to less flexible national brands."

Red Lion Hotels Corporation
Consolidated Statements of Operations
(unaudited)
($ in thousands, except footnotes)

		Three months ended March 31,
		2010	2009	$ Change	% Change

Revenue:
	Hotels	$ 30,621	$ 30,804	$ (183)	-0.6%
	Franchise	558	537	21	3.9%
	Entertainment	2,478	2,523	(45)	-1.8%
	Other	645	733	(88)	-12.0%

	Total revenues	34,302	34,597	(295)	-0.9%

Operating expenses:
	Hotels	26,740	26,662	78	0.3%
	Franchise	578	614	(36)	-5.9%
	Entertainment	2,013	2,115	(102)	-4.8%
	Other	422	537	(115)	-21.4%
	Depreciation and amortization	5,226	4,957	269	5.4%
	Hotel facility and land lease	1,816	1,816	-	0.0%
	Gain on asset dispositions, net	(98)	(2)	(96)	nm
	Undistributed corporate expenses (1)	2,443	1,266	1,177	93.0%

	Total expenses	39,140	37,965	1,175	3.1%

Operating loss		(4,838)	(3,368)	(1,470)	-43.6%

Other income (expense):
	Interest expense	(2,236)	(1,847)	(389)	-21.1%
	Other income, net	37	39	(2)	-5.1%

Loss before income taxes		(7,037)	(5,176)	(1,861)	-36.0%

Income tax benefit		(2,658)	(1,890)	(768)	-40.6%

Net loss		(4,379)	(3,286)	(1,093)	-33.3%

Net loss attributable to noncontrolling interest		11	5	6	nm

Net loss attributable to Red Lion Hotels Corporation (1)		$ (4,368)	$ (3,281)	$ (1,087)	-33.1%

Net loss per share attributable to Red Lion Hotels Corporation-
	basic and diluted (2)	$ (0.24)	$ (0.18)	$ (0.06)
Weighted-average shares outstanding - basic and diluted		18,269	18,014

EBITDA (1,3)		$ 436	$ 1,633	$ (1,197)	-73.3%
EBITDA as a percentage of revenues		1.3%	4.7%

(1) Includes $1.2 million of cash and non-cash expense recorded in the first quarter of 2010 related to the separation of the company's former President and CEO, as discussed further in this release under Disclosure of Special Items.

(2) For the three months ended March 31, 2010 and 2009, all of the 995,027 and 1,220,943 options to purchase common stock shares outstanding as of those dates, respectively, were considered anti-dilutive due to the loss for the period. Likewise, all of the 44,837 convertible operating partnership units were considered anti-dilutive, as were the 154,885 and 46,018 units of unissued restricted stock outstanding.

(3) The definition of "EBITDA" and how that measure relates to net loss attributable to Red Lion Hotels Corporation is discussed further in this release under Non-GAAP Financial Measures.

Red Lion Hotels Corporation
Impact of Change in Accounting Principle on Consolidated Financial Statements
(unaudited)

In June 2009, the FASB issued changes to the consolidation guidance applicable to variable interest entities ("VIE") that became effective for us on January 1, 2010. Under the new guidance, we have determined the Central Program Fund ("CPF") now meets the definition of a VIE and should be included in our consolidated financial statements. For additional information on the CPF, see Note 2 of Notes to Consolidated Financial Statements for the year ended December 31, 2009, previously filed with the SEC on Form 10-K.

The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was created to provide services to all member hotels including certain advertising services, frequent guest program administration, reservation services, national sales promotions and brand and revenue management services intended to increase sales and enhance the reputation of the Red Lion brand. The activities of the CPF benefit our owned and leased hotels as well as our franchise properties, however, historically only the proportionate share of CPF expenses for our owned and leased hotels were recognized in our consolidated financial statements. Based on the new guidance, we will now include all of the expenses and other balances of the CPF in our consolidated financial statements, including revenue received from franchisees to support CPF activities. There have been no changes to the organization, structure or operating activities of the CPF since its inception in 2002.

The adoption of these changes were applied retrospectively, including the recording of the $1.0 million net of tax impact of cumulative effect of change in accounting principle as of the earliest period presented in this release. The consolidated financial statements included in this release have been adjusted to conform to the new treatment. The table below represents the impact on consolidation of the CPF for the three months ended March 31, 2010 and 2009, which added additional expense before impact of income tax of $346 thousand and $612 thousand, respectively.

		Three months ended March 31, 2010			Three months ended March 31, 2009

	($ in thousands except per share data)	Amounts			Amounts
		before	Impact of		before	Impact of
		CPF	CPF	As reported	CPF	CPF	As reported

Revenue:
	Hotels	$ 30,621	$ -	$ 30,621	$ 30,804	$ -	$ 30,804
	Franchise	265	293	558	275	262	537
	Entertainment	2,478	-	2,478	2,523	-	2,523
	Other	645	-	645	733	-	733

	Total revenues	34,009	293	34,302	34,335	262	34,597

Operating expenses:
	Hotels	26,668	72	26,740	26,403	259	26,662
	Franchise	138	440	578	136	478	614
	Entertainment	2,013	-	2,013	2,115	-	2,115
	Other	422	-	422	537	-	537
	Depreciation and amortization	5,226	-	5,226	4,957	-	4,957
	Hotel facility and land lease	1,816	-	1,816	1,816	-	1,816
	Gain on asset dispositions, net	(98)	-	(98)	(2)	-	(2)
	Undistributed corporate expenses	2,443	-	2,443	1,266	-	1,266

	Total expenses	38,628	512	39,140	37,228	737	37,965

Operating loss		(4,619)	(219)	(4,838)	(2,893)	(475)	(3,368)

Other income (expense):
	Interest expense	(2,236)	-	(2,236)	(1,847)	-	(1,847)
	Other income, net	164	(127)	37	176	(137)	39

Loss before income taxes		(6,691)	(346)	(7,037)	(4,564)	(612)	(5,176)

Income tax benefit		(2,531)	(127)	(2,658)	(1,681)	(209)	(1,890)

Net loss		$ (4,160)	$ (219)	$ (4,379)	$ (2,883)	$ (403)	$ (3,286)

Net loss per share		$ (0.23)	$ (0.01)	$ (0.24)	$ (0.16)	$ (0.02)	$ (0.18)
Weighted-average shares outstanding		18,269	18,269	18,269	18,014	18,014	18,014
EBITDA		$ 782	$ (346)	$ 436	$ 2,245	$ (612)	$ 1,633

The activities of the CPF are cyclical throughout any one year. For the quarter ended June 30, 2009, the activities of the CPF negatively impact EBITDA by $450 thousand as restated. However, for the quarters ended September 30, 2009 and December 31, 2009, EBITDA was positively impacted by $646 thousand and $394 thousand, respectively. The total impact on EBITDA for the year ended December 31, 2009 related to the CPF will be a negative adjustment of $24 thousand, compared to a positive impact of $105 thousand for the year ended December 31, 2008. We expect the net impact to be immaterial to full year 2010 results as well.

Red Lion Hotels Corporation
Reconciliation of EBITDA to Net Loss Attributable to Red Lion Hotels Corporation
(unaudited)
($ in thousands)

	The following is a reconciliation of EBITDA to net loss attributable to Red Lion Hotels Corporation for the periods presented:

		Three months ended March 31,
		2010	2009
EBITDA		$ 436	$ 1,633
	Income tax benefit	2,658	1,890
	Interest expense	(2,236)	(1,847)
	Depreciation and amortization	(5,226)	(4,957)
Net loss attributable to Red Lion Hotels Corporation		$ (4,368)	$ (3,281)


	NON-GAAP FINANCIAL MEASURES EBITDA is defined as net loss attributable to Red Lion Hotels Corporation before interest, taxes, depreciation and amortization. EBITDA is considered a non-GAAP financial measurement. We believe it is a useful financial performance measure for us and for our shareholders and is a complement to net loss attributable to Red Lion Hotels Corporation and other financial performance measures provided in accordance with generally accepted accounting principles in the United States ("GAAP"). We use EBITDA to measure the financial performance of our owned and leased hotels because it excludes interest, taxes, depreciation and amortization, which bear little or no relationship to operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to our company in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels and other operations cannot control. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe that EBITDA provides us and investors with information that is relevant and useful in evaluating our business. However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our long-lived assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile all EBITDA measures to net loss attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net loss attributable to Red Lion Hotels Corporation determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.