Red Lion Hotels Corporation (NYSE: RLH) yesterday reported second quarter 2019 results.
Second Quarter Highlights
- Net loss attributable to RLH Corporation for the quarter was $2.8 million or ($0.11) per share compared to a net loss attributable to RLH Corporation of $2.3 million or ($0.10) per share in the prior year period, primarily due to the disposition and lost revenue from hotels sold during 2018, partially offset by reductions in selling, general, administrative and other expenses.
- Franchise related revenues grew 8.0% year-over-year to $14.7 million.
- Adjusted EBITDA for the second quarter was $3.7 million, as compared to $6.6 million in the second quarter of 2018. The year-over-year change was primarily attributable to the elimination of the $2.6 million of EBITDA from the hotels sold throughout 2018, a $900,000 decrease in year over year hotel segment performance, partially offset by a $100,000 improvement in franchise EBITDA and $500,000 reduction in SG&A.
- Franchise Segment Adjusted EBITDA increased 2.4% year-over-year to $4.9 million while Franchise Segment Adjusted EBITDA margin was 33%.
- Executed 40 franchise agreements comprised of five upscale and midscale hotels and 35 select service hotels; bringing the total executed franchise agreements for the first half of the year to 96; of these, 30 are for new locations.
- Raised franchise license agreement expectations for 2019 to a range of 175 to 210 from the prior guidance range of 160 to 200 license agreements.
- Revised Corporate Selling, General and Administrative outlook to a range of $27.5 million to $29.5 million from a range of $29.5 million to $31.5 million reflecting a decrease in stock-based compensation, increased operating efficiencies and staffing adjustments.
“While still at an early stage, we are pleased with the progress and improvement in our core franchise business. Our full transition to a franchise company with higher quality, sustained and growing cash flow requires time and perseverance,” stated Greg Mount, RLH Corporation President and Chief Executive Officer. “Adjusted EBITDA in our core franchise business grew and we are on pace to exceed our prior year margins. A highlight in the second quarter was the signing of 40 high-quality franchise license agreements, which allowed us to raise our 2019 expectations.”
Mr. Mount continued, “We have grown our quarterly recurring core franchise revenue at a compound annual growth rate of 44% to over $14.7 million from $2.4 million, since 2014. In addition, Canvas, our cloud-based hospitality management suite product is meeting early success and we are seeing, as believed a 30% to 50% cost savings for customers and margins to RLH with the potential to rival our franchise business as Canvas grows. We have signed seven agreements thus far and are in discussions to further expand our pipeline of opportunities. This is just one example of another asset light product that can lead to additional long-term value creation for our stakeholders.”
Second Quarter 2019 Financial Results
The Company reported a net loss attributable to RLH Corporation of $2.8 million or $(0.11) per share in the second quarter as compared to a net loss attributable to RLH Corporation of $2.3 million or $(0.10) per share in the prior year period. The year-over-year change in operating results was primarily due to lower revenue from Company-owned hotels, versus the year-ago period, as a result of the sale of hotels sold during 2018, partially offset by reductions in selling, general, administrative and other expenses.
Adjusted EBITDA, which is adjusted for non-cash and certain one-time items, was $3.7 million for the second quarter as compared to $6.6 million in prior year period. The change in Adjusted EBITDA primarily reflects the growth of the franchise business offset by $2.6 million of EBITDA contribution from the hotels sold in 2018; a $900,000 decrease in year over year hotel segment performance, partially offset by a $100,000 improvement in franchise EBITDA and $500,000 reduction in SG&A.
Royalty fees increased 1.7% to $5.9 million primarily due to the Knights Inn acquisition. Marketing, reservations and reimbursables revenue, which are fees from franchised properties associated with the Company’s brands and shared services, increased 8% to $7.6 million due to an increase in transaction and reservation fees.
Selling, general, and administrative expenses, which include franchise sales, operations and corporate costs, continued to decrease with a 21% year-over-year decline to $6.5 million, reflecting the Company’s continued focus on leveraging technology, cost controls and payroll reductions including a decrease in stock-based compensation.
The Company executed 40 franchise agreements in the second quarter, 5 upscale and midscale hotels and 35 select service hotels, up 38% from executed franchise agreements signed in the prior year period. Year-to-date, the Company has signed 96 contracts including 13 upscale and midscale hotels and 83 select service hotels. Of the 96 contracts signed to date, 30 are for new locations that will be joining the RLH platform over the next 24 months. Our upscale and midscale franchise contracts typically contain future royalty rate increases, which allows our revenue to increase as our internal costs stay stable. For instance, midscale and upscale contracts are expected to contribute approximately 30% of our royalty revenue in 2019. With contractual rate changes, these same contracts will increase their future royalty revenue contribution by over 15% in 2020 and over 40% over the next three years.
BALANCE SHEET AND LIQUIDITY
RLH Corporation finished the second quarter with cash and restricted cash of $23 million including $6.1 million of cash and cash equivalents held by the joint ventures and debt of $56.5 million comprised of a corporate term loan of $5.0 million, a $10 million revolving line of credit and $41.5 million of hotel mortgages. As of June 30, 2019, the Company had a low net debt to trailing 12 months Adjusted EBITDA ratio of 2.6 times. Adjusted free cash flow for the six months ended June 30, 2019 was approximately $5.4 million as compared to the prior year period of $545,000 and $(15.1) million for the twelve months ended December 31, 2018.
The Company is providing updated guidance with respect to the number of franchise agreements and a reduction in Corporate Selling General and Administrative expenses. Revised expectations for 2019 do not contemplate incremental sales of the owned hotels. However, the Company expects that in the event of any sales of the remaining hotels, there will be a reduction in the Company’s profitability in 2019. As each sale closes, the Company will disclose the material terms of each transaction in an 8K filing including the historical Adjusted EBITDA relating to the sold hotel. In addition, the Company will provide updated guidance to account for the sales of hotels at the time it reports quarterly results.
- The Company is revising its expectations for executed franchise agreements for 2019. The Company now expects to execute between 175 to 210 contracts, an increase of 7% at the midpoint, from the prior guidance of 160 to 200 executed agreements.
- Corporate Selling, General and Administrative expenses are now expected to be in the range of $27.5 million to $29.5 million versus $29.5 million to $31.5 million prior. Guidance includes stock compensation expense.
- Adjusted EBITDA from continuing operations is expected to be between $20.5 million and $22.5 million in 2019, reflecting the decrease in corporate, selling, general and administrative expenses offset by the under performance of the remaining company owned hotels for the first half of 2019.
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