Q4 2019 Earnings Call
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Greetings and welcome to the R.L.A.H.C. fourth quarter 2019 earnings call.
At this time, all participants are in listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star and zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Nate true Chief Accounting Officer. Please go ahead.
Thank you welcome to our wage corporation's fourth quarter, and yearend earnings call with us today, or Jon Russell interim CEO, and Julie Shiflett, SVP and Chief Financial Officer.
Before we get started I want to remind you that the company's remarks today contain forward looking information that is subject to a number of risk factors that may cause actual results to differ materially from those expressed or implied.
For discussion of important risk factors. Please see our form 10-K to be filed with the FCC later today.
Our form 10-K, and other filings are available on our website or L.H.C.O. dot com and the Investor Relations section, where do the FCC website at <unk> Dot Gov.
These forward looking statements speak as of today, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
The company will also be referring to a number of non-GAAP measures reconciliation of these measures to their comparable GAAP measures is provided in the tables of our press release.
Release is also available on the Investor Relations section of our website.
Well now turn the call over to Jon Russell Interim Chief Executive Officer.
Good morning, all this is Jon Russell interim CEO oral age Corporation.
Thank you for joining us today to review our results for 2019.
I joined the oral each corporation in early December to lead and supports the management team and the implementation of two tactics to stabilize and energized the core franchise business.
And my short time at Arledge Corporation I've been extremely impressed with vibrant spirit of this company and up its franchisees.
Well 2019 was a challenging year were dedicated to oral age corporation being is driving franchise and branding enterprise.
With our strong brands and engage donors, we believe through our focus and hard work on three key priorities. We can return oral each corporation to stability and eventual growth.
These key priorities include.
Accelerating new franchise sales and franchise growth.
Delivering superior value when service to our franchisees to improve franchise retention.
And wanting the cost structure, our business to arledge corporations current size revenue and profitability requirements.
In short oral each corporation is going back to basics.
From the perspective of our owners this means evaluating and implementing common sense branch standards that have a return on investment for owners improving marketing spend <unk> brand contribution.
Executing targeted campaigns with input from the older community.
And providing refreshed focus on both owner and guest satisfaction.
These initiatives were created from feedback we solicited directly from our owners.
In order to improve retention and attract additional franchisees when you'd have a compelling proposition focused on improving owners return on investment.
The entire management team is focused on improving franchise relationship retention and growth.
To support these initiatives, we have launched campaign war, which dashboard or recruit new franchisees and <unk> and sell to existing franchisees.
Oh onboard and open as quickly as possible.
Hey, add value would operations training purchasing revenue management and marketing programs.
Our retained franchisees for positive growth.
War is our mission.
Making our our successful and profitable can enhance our ability to retain our current owners and attract new ones.
We've also realigned our franchise development and operations structure to achieve the dual goal of improving owner satisfaction to reduce terminations and to increase our development by increasing our end market presence in gateway markets.
Refining our go to market strategy and enhancing our approach to Onboarding and training.
As I mentioned earlier beyond the focus of our owners, we're committed to reducing and rightsizing our support structure.
Some initiatives on this front include consolidating office space and offshore or call center provider.
Reducing our administrator workforce and renegotiating outside service contracts to the current size of the organization.
In the near term these initiatives will have cost associated with implementation.
However, once completed we anticipate operating on a reduced cost structure that has been are aligned with the size and scope of our business.
While these changes are expected to have a positive impact once implemented they will take time to complete.
For example.
Consolidating our officers involves subletting our surplus space.
Oh sure our call center requires that we run our new call center in parallel with our current one and two are satisfied that he seamless switch without disruption to our owners can be completed.
Having to run two centers and Ken will temporarily increased costs incurred for the service offerings.
And changes to the composition of our workforce calories severance costs.
We anticipate incurring incremental costs in 2020 as we implement these changes the expectation of enjoying the full benefit and 2021 and beyond.
As part of our going back to basics and concentrating our efforts our core franchise business. We've made a tactical decision to pause further investment in campus and integrated systems.
When our loans was launched in campus was debuted our all age corporation entered into agreements for seven hotels with a goal 10 by the ended the year.
We ended 2019 with five hotels in the system and a veteran into one additional agreement in 2020.
Which is below our initial expectations.
We will continue to support the hotels that have elected to describe to cameras and to onboard other hotels that may have an interest in this product.
While we believe canvas is a viable in compelling service offering as part of our back to basics and focus on growing our franchise business, we will not be investing incremental resources to aggressively grow the surface at this time.
Turning to asset sales.
We successfully completed the dispositions of our Atlanta, and Salt Lake City hotels in the fourth quarter.
In Washington, DC in early February.
We continue to work on closing the sale of Anaheim by the end of the first quarter.
We are also committed to completing the sales of our remaining hotels, well, there lumpier and Baltimore now on the marketing process.
Before I discuss contract signings is important to provide you with some relevant information about franchise disclosure documents or FDD piece.
Regulations require a franchise or to pause entering into a new franchise agreements in the event of the change in related leadership.
Attract shining can resume once new F.D. deezer filed and approved by regulatory agencies for Red Lion. This meant that we added the market for most of November related to the change in the CEO and again in mid December related to my hiring as the interim CEO.
Without additional color, we signed 26, new franchise agreements in the fourth quarter, bringing our total for the year to 169.
Slightly below our guidance range of 175 to 10.
And we believe the primary cause of the shortfall was due to being out of the market for nearly two months.
Offsetting these signings were 98 terminations in the quarter and 274 for the year Julie will provide additional detail.
With respect to 22 point is important to recognize that we may experience. Another pause in contract signings has the board completes its process amending a permanent CEO.
When the CEO is named May once again be out of the market for short time until or 50 days, our updated re filed and approved.
Well there were numerous internal organizational operational changes at oral H. Corporation in 2019, we want to provide some perspective on our franchise system performance by putting it into context, what the rest of the industry.
In the third quarter, we discussed how the broad deceleration in the travel industry was having a negative impact on our hotels.
That pressure continued in the fourth quarter.
In the fourth quarter, our Midscale hotels achieved Revpar index of negative, 1.2% compared to S.T. ours National Revpar index results of negative 0.4%.
And our economy hotels, Revpar index was flat compared STR National index of 0.8% for economy hotels.
Our mid scale franchise hotels are primarily in secondary and tertiary markets that typically experienced higher impacts from downturn market trends.
For the year, our Midscale hotels achieved Revpar index had a negative 2.6% is compared to a negative 1.1% for the industry as reported by STR.
Our economy hotels achieved a 0.2% Revpar index for the year inline with STR economy reports also note are improving customer satisfaction scores for the year, we registered a 300 basis point improvement since 2018% to 73%.
We view both of these Revpar index and customer satisfaction scores as opportunities for improvement as we focused on our priority of delivering superior value and service to our franchisees.
Despite our internal challenges, we take confidence in our brands that are franchise system is performing similar to trends being observed nationwide, especially when you measure of performance to the industry overall for 2019.
That said, we're committed to improving Arledge Corporation path forward and are taking action to position Arledge Corporation for a more productive year ahead.
We strongly believe the initiatives, we have underway will have a positive impact overtime.
I'd like to thank you Arledge Corporation team for welcoming me and for working so diligently to get Arledge Corporation back to the basics with that I turn the call over to Julie Shiflett discuss our financial results.
Thanks, John.
Arledge Corporation reported a net loss for the fourth quarter of 2019 of $8.1 million or 32 cents per share as compared to a net loss of $7.4 million or 30 cents per share in the prior year period.
Year over year change was primarily related to the lots of income from the company operated hotels that were sold during the prior year.
And a decrease in royalty revenue.
Partially offset by higher other franchise revenue and a decrease in selling general and administrative costs.
In 2019, the company recorded an 8.7 million dollar impairment charge on intangible assets related to its America's best value in and nights and brands, which was partially offset by a $7.1 million gain primarily from the sale of two company owned hotels.
In the fourth quarter adjusted EBITDA came in at $1 million as compared to $2.3 million in the same period last year.
The decline was primarily driven by 1.4 million in lower contribution from owned hotels due to asset sales and performance for the year adjusted EBITDA was $11.6 million as compared to $15.8 million in 2018.
Our core franchise adjusted EBITDA in the fourth quarter increased to $1.6 million as compared to $1.4 million last year.
That concludes the add back a brand impairment charges and employee separation costs.
The year over year improvement was driven by higher marketing and reservations revenue.
For the full year 2019 core franchise, adjusted EBITDA rose to $4.2 million from $600000 in 2018.
Primarily driven by a full 12 months of royalty revenue from the nights in acquisition as compared to seven and a half months in 2018.
The incremental contribution from January to mid May 2019 for comparative purposes was approximately $1.8 million in royalty revenue from nights in.
Also contributing was an increase in revenues from reservation fees and reputation management programs.
As John discussed earlier, we signed 26, new contracts in the fourth quarter comprised of four Midscale and 22 economy hotels.
The 26, new contracts signed in the quarter three were for new locations.
You were far Midscale brands with 360 grams, and one was for our economy brands with 40 grams.
This was offset by 98 terminations comprised of six Midscale hotels with approximately 1300 rooms, and 92 economy hotels with approximately 5300 grams.
The 98 terminations represent approximately 6600 grams. The economy terminations were probably were predominantly comprised of 33 nights in hotels and 50 to a b b I hotels.
For the full year, we signed 169, new hotel contracts comprised of 27, Midscale hotels and 142 economy hotels.
Oh. This 43 were for new locations comprised of 16, Midscale hotels, and seven with 1700 rooms, and 27 economy hotels with 1500 grams.
These contracts will have faced conversions or openings over the next 24 months.
The contribution of new location signed an open in 2019 was $100000.
43, new locations will contribute an estimated royalty revenue of approximately $1.3 million for their first 12 months after opening and after application of incentives and fee deferments.
In 2018, we signed 51 new locations, excluding the package of 10 inner circle hotels.
The 2018, new locations contributed royalty revenue of $150000 for 2018.
And $500000 for 2019, and a pro forma contribution of $650000 for 2020.
In total the inner circle hotels contributed $900000 and $1.2 million in royalty revenue in 2018 in 2019, respectively, and we expect minimal contribution from these hotels in 2020.
Terminations for the year totaled 274 hotels comprised of 23, Midscale hotels with 3200 grams, and 251 economy hotels, but 15400 grams.
The 251 economy Hotel terminations 82 were in our nice N brand and 141 were for our HBV I brands.
The elevated level of terminations in the quarter and the year resulted from a mix of factors, including change of hotel ownership individual hotel financial challenges and monetary default.
The 2019 terminated agreements had royalty revenue of $1.9 million in the 2019 year and on a pro forma basis would have contributed royalty revenue of $3.6 million for 2020.
We are highly focused on bringing our termination rate more in line with the industry standards with regard to renewals or new contracts executed at the time of expiration or contract Windows, we achieved an 86% retention rate in 2019.
For the quarter, selling general and administrative costs were $7 million as compared to $7.6 million for the fourth quarter of 2018.
The decrease was primarily driven by a $1.6 million decrease in stock compensation.
And a $1.2 million decrease in labor costs.
Both related to administrative head count reductions or terminations.
Partially offset by a 1.2 million dollar increase in bad debt and a $1.1 million of employee separation costs.
Our marketing and Reimbursable expense in the quarter decreased to 7.2 million from $7.7 million.
And would have been flat, except for $400000 of employee separation costs in the prior year.
In the quarter, we were pleased to close the sales of our Atlanta, and Salt Lake City hotels as well as our DC hotel subsequent to year end.
After repayment of closing costs property level debt and distributions to our joint venture partner Arledge Corporation net it almost $17 million inline with our expectations.
Proceeds were used to retire the corporate term debt a $4.2 million.
These hotels contributed a negative $400000 in EBITDA in the fourth quarter and $2.2 million. It EBITDA for all of 2019.
We anticipate the Anaheim hotel sale will close in the first quarter of 2020.
The delay in closing the sale is related to various diligence items that are progressing towards completion.
We've also begun the marketing process for our Olympia and Baltimore hotels.
We continue to anticipate that cumulative net proceeds in the range of $32 million to $36 million from the combined 2019 and 2020 asset sales.
Red Lion Corporation will be using the cash proceeds from these assets.
To retire existing hotel in corporate debt.
Support the franchise system initiatives and other options in the best interests of shareholder value.
Arledge Corporation finished the year with cash and restricted cash of almost $32 million, including $4 million held by the joint ventures.
And debt of $32.6 billion comprised of a $10 million line of credit and $22.6 million of hotel mortgages.
Subsequent to year in $17 million at the hotel mortgage debt was retired with the sale of our D.C. Hotel in February.
As of December 31st 2018, the company had net debt to trailing 12 month adjusted EBITDA ratio of 0.1 times.
Adjusted free cash flow for the 12 months ended December 31st 2019 was approximately $14 million.
As compared to adjusted free cash flow of a negative $15.1 million for the 12 months ended December 31st 2018.
Given the programs, we're implementing with respect to our franchise sales in development initiatives.
We anticipate new location contract signings of 60 to 80 in 2020.
That is a goal of doubling in the prior year new locations signed.
Please note this refers to a new locations and not total contract signings as we've discussed in the past.
Given our limited visibility with respect to the timing and impact of cost reduction issue initiatives and the many moving parts. We believe it prudent at this time to forego providing any financial guidance for 2020 at this time.
That concludes our prepared remarks, and we'll now open the call for questions operator.
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Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from Alec.
Eric Wold of B. Riley FBR.
[laughter].
Thanks, Good morning area.
Good morning, So couple of questions.
Really not giving formal guidance for 2020, we try to get a sense it kind of via a broad out what kind of on a couple things I guess one.
<unk> kind of the health of the franchise base you gave guidance for.
I'm expected your new location.
Fringes agreements to be signing this year doubling last year.
Is there a sense or can you give it'd be a range of we think.
The number of franchise locations in there right now that would be at risk and being terminated maybe over the next 12 months as you can look at the health of them.
Yeah. Thanks, Eric for the question and thanks for being on the call. This morning, you know, we expect that the termination rate is going to remain above industry standards.
For the next couple of quarters, and real and then leveling out back to close to industry standards I'm in the last half of the year as we continue to work through a couple of he does the items that I discussed in the prepared remarks, such as the monetary default or health that those France.
<unk> hotels, but with all of the efforts that John and the new franchise development team have been generating related to.
Improving our owner satisfaction, reducing some of the.
Brand standards that do not create return on investment for our owners reallocating, our marketing funds to improving contribution all of those things have received very positive results and feedback from our owners a John and the team are having monthly meet.
Things with owners and getting very positive feedback. So we expect that as we move forward in the year that we'll have a positive impact on our termination trend.
Okay, and then on on as she they.
Yes, I was I know you're in the process of your rightsizing into more appropriate levels. You know you outlined a number that.
And the call any comments initially.
No I will take some time to do you. Obviously, you got to have kind of an internal target and kind of goal of where you think is appropriate.
Can you give us a sense of war that is versus kind of the usual high $20 million to $30 million. The are you kind of been running at where it's going to more realistic level that you'd be shooting to get to over the next call a couple of years.
I think one of the pieces that we've expanded disclosure on to assist with that is our EBITDA and adjusted EBITDA reconciliations that are in the last two tables at the press release and those both call out some of the onetime charges that are in our.
SGN, a like the employee separation and transition costs of 1.1 million our stock based compensation of almost 2 million. So taking out those items and then Ics and our fixed costs related to being a publicly held company and then the items that were.
Talking about office consolidation of all those pieces you know, we do expect to see S. DNA, reducing.
In a manner consistent with the size of the organization, we don't have a public target that we're disclosing at this time as we're continuing to work on that process.
And identifying new opportunities.
Understood. Thank you.
Thanks, Eric.
Our next question comes from Alex Fuhrman of Craig Hallum.
Great. Thanks for taking my question and good morning, everyone.
Good morning, Alex Thanks for joining again.
Of course, a one one question you I wanted to ask about the target of 60 to 80, new franchise locations, obviously that that would be quite an increase over what you saw in 2019 I'm wondering if you can give us a little bit more color on that where where the competence is coming from that that you'll be able.
To get such a big <unk> big increase in that a new franchise location number you know have you seen any any new franchise agreements signed year to date and then just thinking about the mix by brand is it is it fair to assume that that those new build new locations will be primarily America's best value when.
We have you seen or are expecting a that you know some of your other brands to participate significantly in that in that growth as well.
Yeah, Alex It that's kind of Russell.
We have no.
Leadership in place for our development team.
They're very focused around the country now and.
Are there keying on conversion opportunities from other brands, what we call up an outs in other words, some holiday as overhaul Dan's Ramada Sheraton sort of leaving the systems. So were targeted a very particularly on that Oh, we're also leveraging opportunities.
To generate to go into gateway cities like La Chicago, New York City, because they are great billboards for our our brands. So we sell off of those for a future shales, we have new instead, I was including referral incentives that we lost in Q1, encouraging existing owners and others.
To send us a lease that we can convert to the franchise sales. So all in all and this is mostly been launched in the first quarter up and we do anticipate we've seen some.
Definite movement at positive so we think that.
We think that we've got some good brands that have strength for for the future.
From.
You know Ali the mix of what we expect in the contract side, it's similar to the mix that weve been seen last year in terms of new locations and that's one of the things is that our guidance. This year is just new locations not overall contract signings.
And you know personally enthusiasm that I see in our lodging development team with the new leadership as well as the feedback that we're receiving from our current owners and with that feedback as John mentioned, we've launched the refer in received.
Uh huh.
Program to be able to get also some referrals in for new contract I'm I'm very excited and encouraged about the progress and I'm very confident in the goal that we have 60 to 80 hotel.
Okay. Thanks, that's it that's helpful. And then just thinking about the the listing for market the properties in Baltimore and Olympia. You know is is that in any way price dependent or or are you know is the goal to get that done quickly I'm. Just curious you know how long we should expect that that price.
Assessed to take if you're looking to do that quickly or if you're really just kind of being opportunistic and waiting for the right price.
That's a great question. We we believe we can get both of those under contract and sold by the end of this year. The you know just as we've discussed in the past the.
The market in Baltimore is and it will be a significant factor and the timing of that and the Olympia Hotel is a you know a size in a location that is really going to be looking for that specific buyer.
So finding that buyer its not opportunistic or you know price dependent in terms of you know we how that we're looking for it really high price. It's really the two factors that are going to impact our the markets and the size of that those hotels and where they are but initially at our process we're seeing.
In interest.
That's great thanks very much.
Thanks, Alex.
Our next question comes from Brian Dobson of Nomura Instinet.
Good morning, Brian.
Good morning, quite young the Callability point okay.
Touched on that question.
Right.
Commentary on a going out.
And the new contract signings.
I guess, what percentage of those are coming from existing brands versus the pool independent hotels.
That's a great question, Brian and I don't have that information in front of me. So you know all all look into that and will have a follow up on that.
Okay, great. Thanks, and then I guess, let's let's flip over to terminations for a moment of the terminations in your system in the fourth quarter [laughter]. Thank you your broader portfolio Revpar index in in other words are these generally lower performing.
Properties that are leaving your system or are they roughly in line.
Oh.
[laughter]. That's a great question also the Revpar that we discussed in the prepared remarks and that's in the earnings release is same store.
So the hotels that have terminated and left are not included in that one of the indicators that you can see of the quality of those hotels is the 300 basis point improvement that John talked about in our customer satisfaction. So that has come from two main pieces.
One hotels that are have a lower guest satisfaction lower quality scores lower quality hotels, leaving our system and to the reputation management program that we put in place I'm in the spring of 2019. So that's the indication I think of where those hotels are going.
Also John and I, both talked about in our prepared remarks that.
Hotels that actually had windows that their contract had a window for for renewal or they reached the end of the contract.
89% of those were retained by the company, 89% of those renewed or signed new contract with the with the company. So the majority of those hotels that are leaving our system are from change of owner or are leaving outside of a contract window and a lot of that would have to do.
With you know pressure in terms of reputation management monetary default those pieces.
Okay. Thank you Thats very helpful.
And then you know I understand that youre, but you're not going to be providing guidance for this year, but.
Can you give us some color on terminations. So far this year have you seen acceleration deceleration in the fourth quarter pace or is that is that roughly in line call that year to date, what you saw in fourth quarter third quarter.
Yes, the all of the initiatives that John talked about our mission of Roar, and you know increasing our outreach to the current owner base.
Including also you know reducing some of the non ROI returning brand standards and others has seen a positive impact in owner satisfaction and interaction and with that you know we expect to see the termination rate declining as we move.
Into the latter half of the year and I'm looking forward to reporting on Q1.
You know it right after we.
When we have the Q1 results.
Yeah sure what you're coming right now and then in terms of into the hotels that are leaving the system are they are they predominantly going to me national brand or are they predominantly.
Becoming independent assets or smaller chain assets, I guess, who is.
Who are these are these assets turning to.
Yeah.
Mostly they're turning to independents because in their minds a lot of the it said, hey, hey, less expensive alternate them don't know if that's the truth because the value that we provide a after brand is not there, but most of them are going to independents.
Alright, great well. Thank you for this additional color and we'll follow up offline.
Thanks, Brian.
There are no further questions at this time I would like to turn the floor back over to Jon Russell for closing remarks.
Yes, I want to thank you for joining us and and your questions. We look forward to speaking with you again, a in the near future and our mission is roared. Thank you.
Yeah.
This concludes today's conference call.
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