RLH Corporation continues its commitment to an asset-light business model while it invests in new franchise agreements. This strategy underpinned the company’s strong Q3, which also saw RLH turn its attention to growing in the midscale and upscale arenas while approaching acquisitions through an opportunistic lens.
“We're really seeing a good, solid increase in our midscale and upscale brands as we move forward. And we're also seeing as we execute the new agreements for assets that have ended their term or are in the process of being sold… from one-year to three- to five-year agreements,” Greg Mount, president and CEO of RLH Corporation, said during the company’s Q3 earnings call. “So for us, growing that midscale and upscale businesses is key, and it's a distant focus for us.”
So far in 2018, RLH Corporation executed 132 franchise agreements, nearing its target of 150 to 200 signed agreements for the year. This was in addition to the company’s $27 million acquisition of Knights Inn in May, which added roughly 350 existing hotels and 45 properties in development to RLH's portfolio.
Overall, franchise revenue is up 19.1 percent year over year, reaching $15.1 million, while division profit from its franchise segment increased 55 percent to $5.9 million from $3.8 million in Q3 2017.
The company also has sold nine hotels in 2018 as of Sept. 30, generating gross proceeds in excess of $116 million. Two standout transactions this past quarter included the Red Lion Hotel in Port Angeles and Hotel RL Spokane, both in Washington, with their combined sales totaling $54.5 million. The company also is shopping around hotels for future sales in Salt Lake City; Kalispell, Mont.; and Anaheim, Calif.
Related story: RLH Corporation sells Spokane Hotel RL for $35 million
RLH Corporation did break slightly with its asset-light strategy with the purchase of full ownership of the Hotel RL Baltimore Inner Harbor for $300,000 this past quarter. Alex Fuhrman, senior research analyst at investment banking firm Craig-Hallum Capital Group, questioned this decision, and Mount clarified that the purchase was made in reaction to the ailing Baltimore hotel market. HEI Hotels & Resorts has been tapped to manage the asset so that RLHC can focus on the franchising end of its business, Mount said.
“Baltimore is a market that's just been dreadful and continued to not see the recovery… I think everyone in Baltimore hoped that it would,” Mount said. “We felt that this asset for us is very strategic. It continues to be, for us, a proving ground and a science lab as we test our new technology and work on kind of the brand standards for that asset. We felt that moving forward and taking on our partners and paying off the current debt is the right move strategically for us and for our shareholders. At the same time, we're going to be coming back and look to place new debt on that asset. I think this will be one that will definitely hang around a bit longer.”
Also during Q3, RLHC relaunched its website, redlion.com, centered around a design decision allowing guests to book a hotel reservation in three clicks, interact directly with the hotel and make last-minute changes to bookings. The company also reworked its Hello Rewards loyalty program currency, simplifying its return rate so that one Hello Buck is equal to one Canadian or U.S. dollar.
Eric Wold, senior analyst at investment bank B. Riley FBR, asked if RLH Corporation was looking for future acquisition opportunities and, if so, in which segments. The acquisition of Knights Inn earlier this year was celebrated as a win for both RLH Corporation and Wyndham Hotels & Resorts, and Mount said his company will be looking for similar opportunities to grow its midscale presence.
“I won't say that we will never look at economy but we feel that we've got a really good handle on the economy [segment] and we need to really grow our midscale and upscale platforms,” Mount said. “Those are going to be our primary focus and we haven't changed from that direction at this point.”