Q2 2020 Red Lion Hotels Corp Earnings Call

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Now my pleasure to introduce your host enrichment. Thank you you may begin.

Thank you welcome to Arledge Corporation second quarter earnings calls with US today, our Jon Russell, Chief Executive Officer, and Gary Coleman, Chief Financial Officer.

Before we get started I want to remind you. The our remarks today contain forward looking information that is subject to a number of risk factors that may cause actual results could differ materially from those expressed or implied.

For a discussion other important risk factors. Please see our most recent form 10-K filed with the FTC as well as subsequent filings, including our form 10-Q to be filed after today's call. Our form 10-K, and other filings are available on our website Arledge co dot com and Investor Relations section worked through the.

Yes, you see website <unk> sq feet dotcom.

These forward looking statements speak as of today, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. We will also be referring to non-GAAP measures reconciliations of these measures to their comparable GAAP measures are provided in the tables of our press release.

Really awful available on or after relations section ever website, I will now I'll turn the call over the John Rickel, Chief Executive Officer. Thank you Dan Good morning, all thank him for joining us today to review our results for the second quarter of 2020.

We hope that you and your loved ones remain helping shape during these challenging times.

Also like to take the opportunity to recognize the thank our team for their hard work focused and productivity. So that all age and continued to execute as planned and support our franchisee partners.

I'm pleased to share the 98% of our franchisees are open for business. Despite the challenges presented by the healthcare crisis, our franchisees are receiving frontline workers and drive to travelers with welcoming brands and stringent cleanliness protocols to keep guests shape.

The travel industry has been dealt an incredible below what the corona virus and its posting a large double digit revpar declines across all change scales.

We believe that our brands our position to be among the first I come back with their value offering and drive two locations and we are encouraged by our relative outperformance in the quarter.

STR data indicates that our revpar exceeded U.S. revpar for the second quarter.

U.S. Revpar was down 69.9%.

While our hotels posted a 51.8% revpar decline.

Performance in Revpar was driven by our economy brands with a 28.5% revpar decline as compared to 35 point.

Present for U.S. economy hotels.

Given our predominantly drive to location in secondary and tertiary cities. This performance, albeit early it's both encouraging and inline with our expectations.

In fact in July we saw a continuation of these positive trends with occupancy a 47.6% for our brands overall with our Midscale brands at 45.2% occupancy.

And our economy branch at 57.3% occupancy.

To assist our franchisees with cash flow and preservation, we initiated a royalty and marketing feed referral programs at the end of the first quarter.

With while these fee deferrals ended in June 30, other fee reductions and extended Pip deadlines continue.

On the corporate front, we remain focused on executing our roar initiatives, specifically franchise support in franchise retention efforts. We again are making positive strides with another 23% improvement year over year on terminations in the second quarter and a 27, 22% improvement for the first six months.

2020.

In the quarter, we signed 22 franchise agreements of which three work for new locations.

We see this pace as solid given the headwinds we faced in the second quarter related to cobot.

Including limitations on travel to meet with prospects and heightened underwriting standards for lodging, making it difficult for new franchisees to access capital.

Additionally, we were restricted from entering into contracts for 47 out of the 90 days in the quarter.

Sales were destructive three times during the quarter first was our FDD annual review period, which is planned unexpected the second was related to our reduction enforce and the departure of the former CFO and again with the appointment of Jericho our current CFO.

With that said for the first every year, we signed 92 total franchise agreements 19 for new locations.

This pace of signings, including many early we licenses for longer term contracts reflects the value that our franchisee season in our brands and even more exciting when considering the headwinds we faced.

We are encouraged by the progress we're making in spite of the challenges posed by the health crises.

We look forward to one cases are consistently falling.

The economy's fully reopened.

And travelers can resumed their plants.

I would like to thank our franchisees and everyone on the R.L.H. team for working tirelessly and I cannot wait to see what we can accomplish together in the days ahead.

Gary will now discuss our financial results.

Thanks, John Good morning, all thanks for joining the call today.

We're pleased with several key achievements in the second quarter.

We delivered positive adjusted and core adjusted EBITDA, We continued to make progress stemming the tide of terminations and we had another active quarter of signings.

Furthermore, the steps, we took to reduce expenses and preserve cash cap our balance sheet strong.

With that said the comparison of 2019 to 2020 results include the unusual number of hotel termination last year the sale of owned hotels.

And the effects of covert 19.

And the second quarter, we reported a net loss of $4 million or 16 cents per share.

This is a decrease from last year's second quarter net loss of $3 million or 12 cents per share.

As a reminder, 2019 results included eight owned and operated hotels four of which had been sold so are no longer contributing revenue and income.

The sell these hotels was part of our stated strategy to exit the owned and operated hotels space and to pivot to a full franchise model the cash generation and debt retirement from the cells served to meaningfully strengthen our balance sheet.

We have two hotels remaining to be sold Olympia and Baltimore.

Our second quarter net loss included $1 million and transaction and integration expenses.

These costs consist of payments to advisors engaged to review and respond to inquiries from interested parties, who recognize the value of are well positioned franchise network, including our coverage and drive to markets, which are seeing less impact from called bed and are expected to respond well to an economic recovery.

While we remain focused on executing iroar initiatives and supporting our franchisees were also committed to seriously evaluating all inquiries that are credible and that can provide value to our shareholders.

We earned second quarter, adjusted EBITDA of $260000 versus $3.7 million last year.

The decline in adjusted EBITDA is a function of us having sold the majority of our owned hotels.

Excluding the owned and operated hotels core adjusted EBITDA was $800000 in the second quarter compared to $1.1 million and the second quarter of 29 10.

The comparison includes lower revenue from the smaller portfolio franchise hotels and fewer travelers.

It is important to note the more than 80% of our royalty revenue is derived from fixed fees on a per room basis, while approximately 20% as from the variable gross room revenue.

This suggests that is terminations continued to improve and new signings gain traction revenue will stabilize then returned to growth.

For the royalty revenue generator that occupancy. We also believe we are well positioned to respond as leisure travel rebounds.

The vast majority of the fixed fee hotel that make up the approximately 80% of our royalty revenue our economy properties.

The segment is among the best Revpar performer and is not experiencing nearly as much co that impact as those hotels located in a major cities resort areas and airport locations.

This outperformance should be generating decent cash flows for our owners and provides us comfort and our cash collections and accounts receivables.

Additionally, the stronger performance maintains our owners financial health and overall satisfaction, which reduces terminations and generates more referrals and leads for our sales staff.

The economy community is very close net the owners are in close communication and their happiness is paramount to our success and retaining properties and gaining new deals.

The other factor in our favor is that per star economy brands are performing better than independent brands. This shows that during a downturn in the economy. It makes sense to join a recognizable brand like the ones and the Red Lion family and gaming utilization of our reservation systems advertising and contracts.

With group sales organizations and online travel agencies.

All of these factors give us confidence in being able to continue promoting roar further reduce terminations and sign new properties, thereby increasing our revenue.

We took aggressive actions in the first quarter to reduce expenses and to preserve cash through staff reductions temporary salary cuts across the entire organization vendor programs and space utilization, we reduced selling general and administrative expenses in the quarter, 28% from.

The previous year to $4.8 million in the quarter.

Turning now to our balance sheet liquidity at June 30, we had cash and cash equivalents on hand of nearly $34 million.

This is up $2 million from yearend, including net proceeds from the sales of our Anaheim and Washington D.C. hotels.

Cash was down $4.1 million on a sequential basis driven in part by a portion of the $1.1 million and franchise fee payment deferrals.

$300000 of severance and other costs incurred to implement cost savings and a portion of the advisory fees paid in the quarter. We expect to finish this year with cash on hand in the mid $20 million range, assuming no more hotel sales.

We are keenly focused on cash collections, given how dependent is on the health of our franchisees.

We offered a payment deferral program to help our franchisees whether the uncertainty we deferred collections April through June totaling $1.1 million with this amount now collectible in $125000 monthly increments from June July 2020 through March 2021.

We generated adjusted free cash flow of approximately $2 million in the first half of 2020, which compares to $5.4 million in the prior year period.

Cash flow from operations in the first half of the year was a use of $5.8 million, including negative working capital of $3.6 million.

The only data on our balance sheet is the $5.6 million mortgage on the hotel RL MPR.

The data actually sets in a joint venture of which we have a 55% equity interests.

Certainly it has been a tough 2020 for many and the hospitality industry has been significantly impacted.

During this period of uncertainty we will continue to focus on minimizing cash burn.

Constraining spending in investments.

And operating support to our employees and franchisees.

Our balance sheet as solid as we maintain a strong cash position with almost no debt.

We believe resilient travelers are returning to the Great American road trip feeling that automobile travel is safe and a welcome way to create funding for the family and to relive memories.

We see the Red Lion brand of hotels as well situated to benefit from this emerging trend offering exterior corridor clean places to stay conveniently located along the way to many destinations.

With that our prepared remarks are concluded and we're open for questions.

Thank you.

We will not be conducting question an authorization.

If you would like to talk a question. Please press Star then one any telephone keypad.

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Question.

We have a question from Alex from Craig Hallum.

Great. Thank very much for taking my question and congratulations on the strong results considering that the tough environment out there I wanted to ask about the you know the pace of your franchise termination and potentially finding new deal you mention that it sounds like in the first.

For the year, there was quite a bit of the year that that you were unable to do sign new deals and it sounds like you've been quite a few.

Even even despite that what's the appetite for reflagging, perhaps independent brands.

Signing up with with one of your brand in the back half the year with travel down from historic levels and the lodging industry, you know not not doing very well in general I mean, it is there is there an appetite for wicking brands and moving into the Red Lion Bam like you talk about.

To your expectations for the back half of the year.

Yes, Alex this is John good to talk to you again.

Yeah, we started off a very robustly in January February 1st two weeks in March with franchise sales.

And of course covert hit and then we got to slowdown and little bit of an impasse. There yeah. We did sell a few in the second quarter.

You know franchisees now owners are looking at our liquidity, making sure they pay their mortgages. So he light and power bills paid our employees and take care of family. So it did slow down.

But are the good news is our pipeline is very robust we did send out quite a few franchise disclosure documents in the second quarter and even this month in July so things look good that way as far as reflagging, our reflagging and door.

Flagging of independence.

This would be a very good there's a very difficult time to be out there all alone. So we see a.

Great opportunity to flag independence, because they're looking for support network, they're looking for revenue generation and cost containment. So we think thats a good market.

Our renewals or are strong in other words people want to stay in the family.

So I think that's a looks good.

I would tell you that as the you know we get into the into the third quarter I do see things picking up our franchise sales guys can.

People can now sells they can travel heretofore, it's been limited almost nothing.

So now they're there on the roads again still got some issues in California, and Texas and Florida.

But things are picking up and so we see opportunity as the in the second half of the year.

Great. That's really helpful. Thank them, then we'd love to talk about the what you're seeing in terms of occupancy in revpar. It sounds like you're doing a lot better than the industry overall and can you give us a sense of kind of what you're seeing for the back half the year in terms of bookings in in terms of what you're seeing now versus what.

You would normally be and it is there much predictive value. There you have there been more.

Bookings and then cancellations and curious to what extent, you're you're able to have visibility into the next few months, then and you have any any any visibility into into the fourth quarter as well based on booking.

The booking pace has picked up.

The booking windows are shorter now for particularly for leisure travelers, it's like 24 to 48 hours as the booking window.

Ed typically that's a lot longer but today, it's a lot shorter we're seeing fewer cancellations on particularly on the trench inside transient leisure. So we think that the leisure market.

It will continue well be steady and continue to improve.

No certainty there are still some uncertainties with how long the pandemic is make sure there's no spikes.

But out of our control, but as it stands today, we feel bullish on leisure market.

A little different on the corporate travel side and a corporate meeting side, that's going to be very slow to come back.

We'll see a little bit uptick is starting in September October November, but it's going to be as a long haul for that business segment.

And the anything any other question any other question on it.

No that that's good. Thanks, Thanks for that and then lastly, if I get if I get that you're two owned hotels in Baltimore and Olivia.

You got a lot of cash on the balance sheet very little that though <unk> doesn't seem like there's a there's a huge urgency to do monetize those but it is the plan that you know to sell those hotels that year had has the market for hotel assets I I imagine slowed down a little bit at that has that started to come back at all.

Hi, Alex. This is this is Gary good morning. Thanks for that question clearly our strategy is remains to sell those those two properties you haven't exactly right Theres no urgency with 33 $34 million of.

Cash on the balance sheet expected than this year are still in the in the mid $20 million range. My top priority is obviously cash burn and keeping an eye on that but there's just no urgency to sell those hotels. So we were happy to continue to market them look for the right opportunity and then by.

Our time and in hopes of a market in the hospitality recovery be able to realize more net proceeds on the solve those two properties.

That makes a lot of sample thank you and.

Good luck in the back half of the year.

Thanks.

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Thanks, everybody for joining us this morning, I'm really pleased with the result in the second quarter looking forward to continuing on the Roar path.

Through the back half of the year and look forward to updating everybody at our third quarter call. Thank you very much.

This completes today's teleconference.

Replay of today's call will be available and approximately three hours.

You can access the replay.

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