Red Lion Hotels Corporation (NYSE: RLH)
RLH is a hotel
owner/operator and a franchisor of several brands (Hotel RL, Red Lion Hotels,
Red Lion Inn & Suites, GuestHouse, Settle Inn, America’s Best Value Inn,
Canada’s Best Value Inn, Signature and Signature Inn, Knights Inn, and Country
Hearth Inns & Suites) in the economy/midscale categories in US and Canada. Franchised
operations consist of 1,056 hotels with an approximate room count of 67,000 and
4 hotels owned/leased/operated are in various stages of sales. Over the last
few years, the company has transitioned from owning/managing hotel operations
to primarily hotel franchising.
Owned
Hotels:
Hotel
RL Baltimore Inner Harbor:
Located in Baltimore,
Maryland; has 130 rooms. No debt associated. Operated by a third party
management company and listed for sale.
Hotel
RL Olympia:
55% owned via RL venture.
Located in Olympia, Washington; has 193 rooms. Operated by a third party
management company. $5.6M debt associated with this property. It is in the
process of marketing to sell.
Red
Lion Hotel Kalispell:
Located in Kalispell,
Montana; has 170 rooms. No debt associated. Land leased and operated by Red
Lion.
Red
Lion Hotel Seattle Airport:
Located in Seattle,
Washington; has 144 rooms. No debt associated. Land leased by Red Lion and
operated by a third party management company.
Recently
Sold:
Hotel
RL Washington DC:
Recently sold, debt
associated with this property is gone.
Red
Lion Anaheim:
Red Lion Anaheim, CA was sold
for proceeds of $21.65M on March 2, 2020.
Franchising
Business:
Franchising business
economics are wonderful for the franchisors to operate since the franchisees
are putting up capital and execution to run the hotels day and night. Red Lion Hotels
(Franchisor) collects the royalties (around 5% of gross sales) as it provides
the brands to these hotel owners/franchisees. Red Lion Hotels also help them
with marketing and technological implementation for a separate fee. This
business can grow and produce more cash flows every year without adding any
capital from Red Lion. No wonder all these large hotel chains are focusing more
and more on franchising segment rather than owning and operating hotels. One
can see the economics of franchised hotels segment compared to the company
operated hotels below.
Business
Segment Financials:
Snapshot
of owned properties from the recent annual letter:
Debt
Profile:
All the current debt associated
with Hotel RL Washington DC is eliminated after the recent sale of the hotel. Here is an excerpt from the annual letter,
“On
February 7, 2020, we sold the Hotel RL Washington DC for $16.4 million. Using
proceeds from the sale, together with the release of $2.3 million in a loan
reserve held by CP Business Finance I, LP, RLH DC repaid the remaining
outstanding principal balance and accrued exit fee under the RLH DC Venture -
CPBF loan agreement of $17.7 million, plus a prepayment penalty of $0.6
million.”
Line of credit of $10M
will be paid from the proceeds of sales of Red Lion, Anaheim. Here is the
excerpt from the sale disclosure:
“Red
Lion Hotel Anaheim was wholly owned by the Company and unencumbered by a
mortgage. Proceeds after broker fees and customary closing costs will be
used to repay the $10 million credit facility. The remaining funds
of $10.8 million will be used to fund franchise growth opportunities
and for general business purposes.”
The only debt outstanding
for the company is $5.6M associated with the ‘RL Venture - Olympia’ property which
is currently being marketed for sale.
Valuation:
Owned
Hotel segment:
After the sale of Red
Lion Anaheim, they will have 4 hotels/650 rooms in ownership (including
pro-rata for 55% ownership RL venture Olympia). Even at the conservative level
of $40k - $50k/room (recent sales prices per room have been higher than that) can
be worth $30M.
Franchising
segment:
This segment produced
sales of $59M, EBITDA of $18M and pre-tax cash flow of $16M. This asset light/debt
free business and a perpetual royalty type income converts large amount of
EBIDTA to Free cash flow. Even on the conservative side, 10 times multiple of
EBITDA will command $180M valuation for this segment.
Net
cash:
After the sale proceeds
of Red Lion Anaheim, the company will have more than $42M in cash balance
against $5.6M in total debt, which puts the net cash at $36M.
Simply adding it together
will bring about a valuation of $246M against the current $60M market cap or an
Enterprise value of $24M (not counting the unsold hotels) against my
conservative valuation of more than $212M. If my assumption about the remaining
hotel sales is close to the reality, we are getting the franchising business
for better than free as the remaining company will have more cash than the
market cap.
Risks:
- Due the recent Corona virus epidemic, the hotel
room occupancy and total sales can be down for many months to few years to
come. It affects the royalty incomes proportionately.
- The business is seasonal within the year;
quarterly income may not represent the full year reality as the room rates and occupancy
vary substantially among 4 quarters.
- The market may be late to realize the
value, although I don’t see how that could be the case given their cash balance
relative to their market cap.
- The company may get acquired by someone/entity
for a cheap valuation and we don’t get the full value for our ownership. I
would definitely reject any such offers in my capacity as a shareholder even if
I have to use legal measures.
Large
Shareholders:
- Coliseum Capital Management LLC – 17.25%
- Dimensional Fund Advisors, Inc. – 8.18%
- BlackRock Inc – 6.86%
- Price Michael – 4.98%
- Royce & Associates, LP – 4.13%
Summary:
The company is
profitable, substantial net cash in the balance sheet (relative to the market
cap) and available at very attractive valuation. There are very few businesses
in the world such as franchising that have the ability to grow cash flows without
putting additional capital at risk. There were 25,208,983 shares of common
stock outstanding as of most recent quarter (4th Q 2019). The common
stocks are trading for ~ $2.4/share or $60M in market cap or less than $24M
enterprise value. For this, you get a hotel franchisor with 1056 hotels/67,000
rooms and 4 owned hotels/650 rooms. This is a very attractive opportunity for any
investor. In other words, the company may be selling for less than 1 times of pre-tax
earnings of a hotel franchisor with 1056 hotels and 67,000 rooms. In the next
few years, the company’s enterprise value could be worth more than 10 times of its
current price.
Disclosure: I own shares
of this company.
