UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172019
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o☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-13957
RED LION HOTELS CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
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| | | | |
Washington | | 91-1032187 | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | |
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1550 Market St. #350 | Denver | Colorado | 80202 | |
(Address of Principal Executive Offices) | | (Zip Code) | |
(509) 459-6100
Registrant's telephone number, including area code
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WashingtonTitle of each class | Trading Symbol(s) | 91-1032187Name of each exchange on which registered |
(State or other jurisdiction of
incorporation or organization) Common Stock | RLH | (I.R.S. Employer
Identification No.)
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| | |
1550 Market St. #350
Denver, Colorado
| | 80202 |
(Address of principal executive offices) | | (Zip Code)New York Stock Exchange |
Registrant’s Telephone Number, Including Area Code: (509) 459-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Webweb site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “accelerated“large accelerated filer," "accelerated filer,” and large accelerated filer”"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | o☐ | | Accelerated filer | | ý☒ |
Non-accelerated filer | | o☐ | | Smaller reporting company | | o☒ |
| | | | Emerging growth company | | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No ý☒
As of OctoberJuly 31, 2017,2019, there were 23,626,11125,117,263 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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Item No. | Description | Page No. |
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| PART I – FINANCIAL INFORMATION | |
| | |
Item 1 | | |
| Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016 | |
| Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 | |
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016Stockholders' Equity | |
| Condensed Consolidated Statements of Cash Flows | |
| Notes to Condensed Consolidated Financial Statements | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
| | |
| PART II – OTHER INFORMATION | |
| | |
Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
Item 5 | | |
Item 6 | | |
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PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements |
RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2017 and December 31, 2016(Unaudited)
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2019 | | December 31, 2018 |
| | (In thousands, except per share data) | | (In thousands, except share data) |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents ($9,599 and $5,134 attributable to VIEs) | | $ | 36,179 |
| | $ | 38,072 |
| |
Restricted cash ($12,620 and $9,211 attributable to VIEs) | | 12,946 |
| | 9,537 |
| |
Accounts receivable, net ($4,236 and $2,811 attributable to VIEs) | | 14,450 |
| | 9,196 |
| |
Accounts receivable from related parties | | 1,824 |
| | 1,865 |
| |
Cash and cash equivalents ($6,074 and $4,564 attributable to VIEs) | | | $ | 19,916 |
| | $ | 17,034 |
|
Restricted cash ($2,888 and $2,652 attributable to VIEs) | | | 2,890 |
| | 2,755 |
|
Accounts receivable ($1,362 and $1,064 attributable to VIEs), net of an allowance for doubtful accounts of $2,638 and $2,345, respectively) | | | 18,923 |
| | 18,575 |
|
Notes receivable, net | | 1,572 |
| | 1,295 |
| | 1,967 |
| | 2,103 |
|
Inventories ($455 and $447 attributable to VIEs) | | 631 |
| | 596 |
| |
Prepaid expenses and other ($1,141 and $1,008 attributable to VIEs) | | 5,156 |
| | 4,244 |
| |
Assets held for sale | | 4,285 |
| | 5,585 |
| |
Other current assets ($490 and $680 attributable to VIEs) | | | 4,738 |
| | 6,218 |
|
Total current assets | | 77,043 |
| | 70,390 |
| | 48,434 |
| | 46,685 |
|
Property and equipment, net ($173,377 and $179,609 attributable to VIEs) | | 204,131 |
| | 210,485 |
| |
Property and equipment, net ($71,902 and $74,250 attributable to VIEs) | | | 112,481 |
| | 115,522 |
|
Operating lease right-of-use assets ($12,909 and $0 attributable to VIEs) | | | 50,830 |
| | — |
|
Goodwill | | 9,404 |
| | 9,404 |
| | 18,595 |
| | 18,595 |
|
Intangible assets | | 51,306 |
| | 52,848 |
| |
Other assets, net ($177 and $64 attributable to VIEs) | | 1,843 |
| | 1,408 |
| |
Intangible assets, net | | | 59,124 |
| | 60,910 |
|
Other assets, net ($703 and $705 attributable to VIEs) | | | 8,696 |
| | 8,075 |
|
Total assets | | $ | 343,727 |
| | $ | 344,535 |
| | $ | 298,160 |
| | $ | 249,787 |
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| | | | | |
LIABILITIES | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable ($1,998 and $3,886 attributable to VIEs) | | $ | 5,555 |
| | $ | 8,479 |
| |
Accrued payroll and related benefits ($1,076 and $175 attributable to VIEs) | | 5,516 |
| | 4,590 |
| |
Other accrued entertainment liabilities held for sale | | 6,757 |
| | 11,334 |
| |
Other accrued liabilities ($2,749 and $1,656 attributable to VIEs) | | 6,087 |
| | 4,063 |
| |
Long-term debt, due within one year ($24,422 and $1,469 attributable to VIEs) | | 24,422 |
| | 1,469 |
| |
Contingent consideration for acquisition due to related party, due within one year | | 7,581 |
| | 6,768 |
| |
Liabilities held for sale | | 739 |
| | 686 |
| |
Accounts payable ($1,248 and $650 attributable to VIEs) | | | $ | 8,056 |
| | $ | 5,322 |
|
Accrued payroll and related benefits ($474 and $369 attributable to VIEs) | | | 2,538 |
| | 5,402 |
|
Other accrued liabilities ($1,437 and $1,092 attributable to VIEs) | | | 5,255 |
| | 4,960 |
|
Long-term debt, due within one year ($24,101 and $25,056 attributable to VIEs) | | | 25,066 |
| | 25,056 |
|
Operating lease liabilities, due within one year ($966 and $0 attributable to VIEs) | | | 4,787 |
| | — |
|
Total current liabilities | | 56,657 |
| | 37,389 |
| | 45,702 |
| | 40,740 |
|
Long-term debt, due after one year, net of debt issuance costs ($87,040 and $106,862 attributable to VIEs) | | 87,040 |
| | 106,862 |
| |
Contingent consideration for acquisition due to related party, due after one year | | 4,944 |
| | 4,432 |
| |
Deferred income and other long-term liabilities ($701 and $841 attributable to VIEs) | | 1,666 |
| | 2,293 |
| |
Long-term debt, due after one year, net of debt issuance costs ($16,487 and $0 attributable to VIEs) | | | 21,462 |
| | 9,114 |
|
Line of credit, due after one year | | | 10,000 |
| | 10,000 |
|
Operating lease liabilities, due after one year ($11,943 and $0 attributable to VIEs) | | | 47,152 |
| | — |
|
Deferred income and other long-term liabilities ($387 and $480 attributable to VIEs) | | | 1,837 |
| | 2,245 |
|
Deferred income taxes | | 6,132 |
| | 5,716 |
| | 870 |
| | 772 |
|
Total liabilities | | 156,439 |
| | 156,692 |
| | 127,023 |
| | 62,871 |
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| | | | | | | | |
Commitments and contingencies | |
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STOCKHOLDERS’ EQUITY | | | | | | | | |
RLH Corporation stockholders' equity: | | | | | | | | |
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding | | — |
| | — |
| | — |
| | — |
|
Common stock - 50,000,000 shares authorized; $0.01 par value; 23,611,519 and 23,434,480 shares issued and outstanding | | 236 |
| | 234 |
| |
Common stock - 50,000,000 shares authorized; $0.01 par value; 25,075,912 and 24,570,158 shares issued and outstanding | | | 251 |
| | 246 |
|
Additional paid-in capital, common stock | | 173,341 |
| | 171,089 |
| | 181,669 |
| | 182,018 |
|
Accumulated deficit | | (16,901 | ) | | (15,987 | ) | | (23,456 | ) | | (16,512 | ) |
Total RLH Corporation stockholders' equity | | 156,676 |
| | 155,336 |
| | 158,464 |
| | 165,752 |
|
Noncontrolling interest | | 30,612 |
| | 32,507 |
| | 12,673 |
| | 21,164 |
|
Total stockholders' equity | | 187,288 |
| | 187,843 |
| | 171,137 |
| | 186,916 |
|
Total liabilities and stockholders’ equity | | $ | 343,727 |
| | $ | 344,535 |
| | $ | 298,160 |
| | $ | 249,787 |
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Three and Nine Months Ended September 30, 2017 and 2016
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| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands, except per share data) |
Revenue: | | | | | | | | |
Company operated hotels | | $ | 37,244 |
| | $ | 37,157 |
| | $ | 94,214 |
| | $ | 93,515 |
|
Other revenues from managed properties | | 1,054 |
| | 1,733 |
| | 3,047 |
| | 4,498 |
|
Franchised hotels | | 12,714 |
| | 4,766 |
| | 36,045 |
| | 12,194 |
|
Other | | 12 |
| | 16 |
| | 128 |
| | 40 |
|
Total revenues | | 51,024 |
| | 43,672 |
| | 133,434 |
| | 110,247 |
|
Operating expenses: | | | | | | | | |
Company operated hotels | | 25,284 |
| | 25,363 |
| | 70,450 |
| | 71,035 |
|
Other costs from managed properties | | 1,054 |
| | 1,733 |
| | 3,047 |
| | 4,498 |
|
Franchised hotels | | 8,898 |
| | 3,214 |
| | 26,300 |
| | 10,034 |
|
Other | | (9 | ) | | 9 |
| | (2 | ) | | 30 |
|
Depreciation and amortization | | 4,660 |
| | 3,771 |
| | 13,742 |
| | 11,209 |
|
Hotel facility and land lease | | 1,201 |
| | 1,197 |
| | 3,604 |
| | 3,543 |
|
Gain on asset dispositions, net | | (113 | ) | | (100 | ) | | (334 | ) | | (729 | ) |
General and administrative expenses | | 3,640 |
| | 2,031 |
| | 11,348 |
| | 7,781 |
|
Acquisition and integration costs | | 1,235 |
| | 1,413 |
| | 1,246 |
| | 1,653 |
|
Total operating expenses | | 45,850 |
| | 38,631 |
| | 129,401 |
| | 109,054 |
|
Operating income | | 5,174 |
| | 5,041 |
| | 4,033 |
| | 1,193 |
|
Other income (expense): | | | | | | | | |
Interest expense | | (2,119 | ) | | (1,793 | ) | | (6,114 | ) | | (4,741 | ) |
Other income (loss), net | | 338 |
| | 169 |
| | 562 |
| | 290 |
|
Total other income (expense) | | (1,781 | ) | | (1,624 | ) | | (5,552 | ) | | (4,451 | ) |
Income (loss) from continuing operations before taxes | | 3,393 |
| | 3,417 |
| | (1,519 | ) | | (3,258 | ) |
Income tax expense | | 174 |
| | 166 |
| | 513 |
| | 258 |
|
Net income (loss) from continuing operations | | 3,219 |
| | 3,251 |
| | (2,032 | ) | | (3,516 | ) |
Discontinued operations: | | | | | | | | |
Income from discontinued business unit, net of income tax benefit of $0 | | 408 |
| | 262 |
| | 611 |
| | 1,831 |
|
Net income (loss) | | 3,627 |
| | 3,513 |
| | (1,421 | ) | | (1,685 | ) |
Net (income) loss attributable to noncontrolling interest | | (871 | ) | | (1,207 | ) | | 507 |
| | (645 | ) |
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation | | $ | 2,756 |
| | $ | 2,306 |
| | $ | (914 | ) | | $ | (2,330 | ) |
| | | | | | | | |
Earnings (loss) per share - basic | | | | | | | | |
Income (loss) from continuing operations attributable to RLH Corporation | | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.06 | ) | | $ | (0.21 | ) |
Income from discontinued operations | | 0.02 |
| | 0.01 |
| | 0.02 |
| | 0.09 |
|
Net income (loss) attributable to RLH Corporation | | $ | 0.12 |
| | $ | 0.11 |
| | $ | (0.04 | ) | | $ | (0.12 | ) |
| | | | | | | | |
Earnings (loss) per share - diluted | | | | | | | | |
Income (loss) from continuing operations attributable to RLH Corporation | | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.06 | ) | | $ | (0.21 | ) |
Income from discontinued operations | | 0.01 |
| | 0.01 |
| | 0.02 |
| | 0.09 |
|
Net income (loss) attributable to RLH Corporation | | $ | 0.11 |
| | $ | 0.11 |
| | $ | (0.04 | ) |
| $ | (0.12 | ) |
| | | | | | | | |
Weighted average shares - basic | | 23,609 |
| | 20,228 |
| | 23,542 |
| | 20,157 |
|
Weighted average shares - diluted | | 24,176 |
| | 20,613 |
| | 23,542 |
| | 20,157 |
|
The accompanyingthese condensed notes are an integral part of the consolidated financial statements.
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2017 and 2016
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| | | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| | (In thousands) |
Operating activities: | | | | |
Net loss | | $ | (1,421 | ) | | $ | (1,685 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 13,806 |
| | 11,354 |
|
Amortization of debt issuance costs | | 892 |
| | 880 |
|
Gain on disposition of property, equipment and other assets, net | | (328 | ) | | (730 | ) |
Deferred income taxes | | 416 |
| | 233 |
|
Equity in investments | | — |
| | (171 | ) |
Stock based compensation expense | | 2,392 |
| | 1,960 |
|
Provision for doubtful accounts | | 407 |
| | 212 |
|
Fair value adjustments to contingent consideration | | 1,325 |
| | — |
|
Change in current assets and liabilities: | | | | |
Accounts receivable | | (4,345 | ) | | (4,664 | ) |
Notes receivable | | (69 | ) | | (68 | ) |
Inventories | | (32 | ) | | 63 |
|
Prepaid expenses and other | | (1,324 | ) | | (1,959 | ) |
Accounts payable | | (780 | ) | | 3,697 |
|
Other accrued liabilities | | (1,936 | ) | | (2,046 | ) |
Net cash provided by operating activities | | 9,003 |
| | 7,076 |
|
Investing activities: | | | | |
Capital expenditures | | (8,024 | ) | | (30,266 | ) |
Acquisition of Vantage Hospitality | | — |
| | (22,694 | ) |
Proceeds from disposition of property and equipment | | 28 |
| | 434 |
|
Collection of notes receivable related to property sales | | 200 |
| | 1,781 |
|
Advance of note receivable | | (408 | ) | | (328 | ) |
Proceeds from sales of short-term investments | | — |
| | 18,060 |
|
Other, net | | — |
| | 78 |
|
Net cash used in investing activities | | (8,204 | ) | | (32,935 | ) |
Financing activities: | | | | |
Borrowings on long-term debt | | 3,237 |
| | 19,547 |
|
Repayment of long-term debt | | (959 | ) | | — |
|
Debt issuance costs | | (35 | ) | | (192 | ) |
Proceeds from sale of interests in joint ventures | | — |
| | 3,194 |
|
Distributions to noncontrolling interest | | (1,388 | ) | | (3,594 | ) |
Stock-based compensation awards cancelled to settle employee tax withholding | | (332 | ) | | (343 | ) |
Other, net | | 194 |
| | 156 |
|
Net cash provided by financing activities | | 717 |
| | 18,768 |
|
| | | | |
Change in cash, cash equivalents and restricted cash: | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 1,516 |
| | (7,091 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | 47,609 |
| | 35,202 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 49,125 |
| | $ | 28,111 |
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
For the Nine Months Ended September 30, 2017 and 2016
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| | | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
| | (In thousands) |
| | | | |
Supplemental disclosure of cash flow information: | | | | |
Cash paid during periods for: | | | | |
Income taxes | | $ | 154 |
| | $ | 22 |
|
Interest on debt | | 5,199 |
| | 4,187 |
|
Non-cash investing and financing activities: | | | | |
Reclassification of long-term debt to current | | $ | 22,953 |
| | $ | 5,912 |
|
Reclassification of current and noncurrent assets to assets held for sale | | 4,285 |
| | 3,936 |
|
Reclassification of current and noncurrent liabilities to liabilities held for sale | | 739 |
| | — |
|
Reclassification of long-term note receivable to short-term | | 339 |
| | 25 |
|
Property and equipment, purchases not yet paid | | 210 |
| | 59 |
|
Accrual of contingent consideration for Vantage acquisition | | — |
| | 11,077 |
|
Shares issued for Vantage acquisition | | — |
| | 5,755 |
|
Reclassification of current assets to noncurrent assets | | — |
| | 14 |
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands, except per share data) |
Revenue: | | | | | | | | |
Royalty | | $ | 5,867 |
| | $ | 5,770 |
| | $ | 11,607 |
| | $ | 10,045 |
|
Other franchise | | 1,214 |
| | 804 |
| | 1,756 |
| | 1,396 |
|
Company operated hotels | | 14,236 |
| | 25,005 |
| | 27,206 |
| | 47,901 |
|
Marketing, reservations and reimbursables | | 7,603 |
| | 7,027 |
| | 14,332 |
| | 12,283 |
|
Other | | 5 |
| | 6 |
| | 8 |
| | 26 |
|
Total revenues | | 28,925 |
| | 38,612 |
| | 54,909 |
| | 71,651 |
|
Operating expenses: | | | | | | | | |
Selling, general, administrative and other expenses | | 6,497 |
| | 8,268 |
| | 13,725 |
| | 15,478 |
|
Company operated hotels | | 12,532 |
| | 18,618 |
| | 24,077 |
| | 38,873 |
|
Marketing, reservations and reimbursables | | 7,847 |
| | 7,214 |
| | 15,008 |
| | 12,773 |
|
Depreciation and amortization | | 4,109 |
| | 4,701 |
| | 7,556 |
| | 9,093 |
|
Loss (gain) on asset dispositions, net | | 38 |
| | (1,855 | ) | | 44 |
| | (15,898 | ) |
Acquisition and integration costs | | 173 |
| | 1,997 |
| | 235 |
| | 2,101 |
|
Total operating expenses | | 31,196 |
| | 38,943 |
| | 60,645 |
| | 62,420 |
|
Operating income (loss) | | (2,271 | ) | | (331 | ) | | (5,736 | ) | | 9,231 |
|
Other income (expense): | | | | | | | | |
Interest expense | | (1,109 | ) | | (1,702 | ) | | (1,991 | ) | | (3,949 | ) |
Loss on early retirement of debt | | (164 | ) | | — |
| | (164 | ) | | — |
|
Other income (loss), net | | 44 |
| | 22 |
| | 77 |
| | 180 |
|
Total other income (expense) | | (1,229 | ) | | (1,680 | ) | | (2,078 | ) | | (3,769 | ) |
Income (loss) before taxes | | (3,500 | ) | | (2,011 | ) | | (7,814 | ) | | 5,462 |
|
Income tax expense (benefit) | | 108 |
| | (348 | ) | | 190 |
| | (213 | ) |
Net income (loss) | | (3,608 | ) | | (1,663 | ) | | (8,004 | ) | | 5,675 |
|
Net (income) loss attributable to noncontrolling interest | | 774 |
| | (659 | ) | | 1,060 |
| | (5,409 | ) |
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation | | $ | (2,834 | ) | | $ | (2,322 | ) | | $ | (6,944 | ) | | $ | 266 |
|
| | | | | | | | |
Earnings (loss) per share - basic | | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.28 | ) | | $ | 0.01 |
|
Earnings (loss) per share - diluted | | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.28 | ) | | $ | 0.01 |
|
| | | | | | | | |
Weighted average shares - basic | | 24,856 |
| | 24,352 |
| | 24,730 |
| | 24,227 |
|
Weighted average shares - diluted | | 24,856 |
| | 24,352 |
| | 24,730 |
| | 25,239 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Red Lion Hotels Corporation Stockholders' Equity | | | | |
| | Common Stock | | Retained Earnings (Accumulated Deficit) | | RLH Corporation Total Equity | | Equity Attributable to Noncontrolling Interest | | |
| | Shares | | Amount | | Additional Paid-In Capital | | | | | Total Equity |
| | (In thousands, except share data) |
Balances, January 1, 2018 | 23,651,212 |
| | $ | 237 |
| | $ | 178,028 |
| | $ | (18,042 | ) | | $ | 160,223 |
| | $ | 27,381 |
| | $ | 187,604 |
|
| Net income (loss) | — |
| | — |
| | — |
| | 2,588 |
| | 2,588 |
| | 4,750 |
| | 7,338 |
|
| Cumulative effect of adopting ASC Topic 606 | — |
| | — |
| | — |
| | (427 | ) | | (427 | ) | | — |
| | (427 | ) |
| Shared based payment activity | 60,388 |
| | — |
| | 294 |
| | — |
| | 294 |
| | — |
| | 294 |
|
| Vantage contingent consideration settled | 414,000 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
|
Balances, March 31, 2018 | 24,125,600 |
| | 241 |
| | 178,318 |
| | (15,881 | ) | | 162,678 |
| | 32,131 |
| | 194,809 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (2,322 | ) | | (2,322 | ) | | 659 |
| | (1,663 | ) |
| Shared based payment activity | 120,918 |
| | 1 |
| | 1,004 |
| | — |
| | 1,005 |
| | — |
| | 1,005 |
|
| Vantage contingent consideration settled | — |
| | — |
| | 2,870 |
| | — |
| | 2,870 |
| | — |
| | 2,870 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (4,081 | ) | | (4,081 | ) |
Balances, June 30, 2018 | 24,246,518 |
| | 242 |
| | 182,192 |
| | (18,203 | ) | | 164,231 |
| | 28,709 |
| | 192,940 |
|
| Net income (loss) | — |
| | — |
| | — |
| | 8,943 |
| | 8,943 |
| | 8,670 |
| | 17,613 |
|
| Shared based payment activity | 28,080 |
| | — |
| | 1,219 |
| | — |
| | 1,219 |
| | — |
| | 1,219 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (16,891 | ) | | (16,891 | ) |
Balances, September 30, 2018 | 24,274,598 |
| | 242 |
| | 183,411 |
|
| (9,260 | ) | | 174,393 |
| | 20,488 |
| | 194,881 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (7,252 | ) | | (7,252 | ) | | (950 | ) | | (8,202 | ) |
| Shared based payment activity | 19,560 |
| | — |
| | 1,018 |
| | — |
| | 1,018 |
| | — |
| | 1,018 |
|
| Vantage contingent consideration settled | 276,000 |
| | 4 |
| | 4 |
| | — |
| | 8 |
| | — |
| | 8 |
|
| Buyout of noncontrolling interest | — |
| | — |
| | (2,415 | ) | | — |
| | (2,415 | ) | | 2,111 |
| | (304 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (485 | ) | | (485 | ) |
Balances, December 31, 2018 | 24,570,158 |
| | 246 |
| | 182,018 |
| | (16,512 | ) | | 165,752 |
| | 21,164 |
| | 186,916 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (4,110 | ) | | (4,110 | ) | | (286 | ) | | (4,396 | ) |
| Shared based payment activity | 56,301 |
| | 1 |
| | 685 |
| | — |
| | 686 |
| | — |
| | 686 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (7,431 | ) | | (7,431 | ) |
Balances, March 31, 2019 | 24,626,459 |
| | 247 |
| | 182,703 |
| | (20,622 | ) | | 162,328 |
| | 13,447 |
| | 175,775 |
|
| Net income (loss) | — |
| | — |
| | — |
| | (2,834 | ) | | (2,834 | ) | | (774 | ) | | (3,608 | ) |
| Shared based payment activity | 449,453 |
| | 4 |
| | (1,034 | ) | | — |
| | (1,030 | ) | | — |
| | (1,030 | ) |
Balances, June 30, 2019 | 25,075,912 |
| | $ | 251 |
| | $ | 181,669 |
| | $ | (23,456 | ) | | $ | 158,464 |
| | $ | 12,673 |
| | $ | 171,137 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
RED LION HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| | (In thousands) |
Operating activities: | | | | |
Net income (loss) | | $ | (8,004 | ) | | $ | 5,675 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | |
Depreciation and amortization | | 7,556 |
| | 9,093 |
|
Noncash PIK interest and amortization of debt issuance costs | | 249 |
| | 781 |
|
Amortization of key money and contract costs | | 459 |
| | 353 |
|
Amortization of contract liabilities | | (534 | ) | | (337 | ) |
Loss (gain) on asset dispositions, net | | 44 |
| | (15,850 | ) |
Noncash loss on early retirement of debt | | 67 |
| | — |
|
Deferred income taxes | | 98 |
| | (560 | ) |
Stock-based compensation expense | | 1,562 |
| | 1,736 |
|
Provision for doubtful accounts | | 472 |
| | 479 |
|
Fair value adjustments to contingent consideration | | — |
| | 581 |
|
Change in operating assets and liabilities, net of business acquired: | | | | |
Accounts receivable | | (820 | ) | | (2,308 | ) |
Notes receivable | | (16 | ) | | (7 | ) |
Key money disbursements | | (535 | ) | | (5,163 | ) |
Other current assets | | 855 |
| | (1,374 | ) |
Accounts payable | | 2,827 |
| | 1,788 |
|
Other accrued liabilities | | (1,225 | ) | | 367 |
|
Net cash provided by (used in) operating activities | | 3,055 |
| | (4,746 | ) |
Investing activities: | | | | |
Capital expenditures | | (2,843 | ) | | (3,684 | ) |
Acquisition of Knights Inn | | — |
| | (27,000 | ) |
Net proceeds from disposition of property and equipment | | — |
| | 59,781 |
|
Collection of notes receivable | | 242 |
| | — |
|
Advances on notes receivable | | (90 | ) | | (537 | ) |
Net cash provided by (used in) investing activities | | (2,691 | ) | | 28,560 |
|
Financing activities: | | | | |
Borrowings on long-term debt, net of discounts | | 32,935 |
| | 30,000 |
|
Repayment of long-term debt and finance leases | | (20,283 | ) | | (49,725 | ) |
Debt issuance costs | | (542 | ) | | (1,193 | ) |
Distributions to noncontrolling interest | | (7,431 | ) | | (4,081 | ) |
Contingent consideration paid for Vantage Hospitality acquisition | | — |
| | (4,000 | ) |
Stock-based compensation awards canceled to settle employee tax withholding | | (2,131 | ) | | (576 | ) |
Stock option and stock purchase plan issuances, net and other | | 105 |
| | 139 |
|
Net cash provided by (used in) financing activities | | 2,653 |
| | (29,436 | ) |
| | | | |
Change in cash, cash equivalents and restricted cash: | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | 3,017 |
| | (5,622 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | 19,789 |
| | 44,858 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | 22,806 |
| | $ | 39,236 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
RED LION HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Red Lion Hotels Corporation ("RLH Corporation", "we", "our", "us",Corporation," "RLHC," "we," "our," "us," or "our company") is a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the management, franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.
|
| | |
| Ÿ Hotel RL
| Ÿ America's Best Inn & Suites
|
| Ÿ Red Lion Hotels
| Ÿ Signature Inn
|
| Ÿ Red Lion Inn & Suites
| Ÿ Jameson Inns
|
| Ÿ GuestHouse
| Ÿ Country Hearth Inns & Suites
|
| Ÿ Settle Inn
| Ÿ 3 Palm Hotels
|
| Ÿ Americas Best Value Inn
| Ÿ Value Inn Worldwide
|
| Ÿ Canadas Best Value Inn
| Ÿ Value Hotel Worldwide
|
| Ÿ Lexington Hotels & Inns
| |
A summary of our hotels andproperties as of June 30, 2019, including the approximate number of available rooms, as of September 30, 2017 is provided below:
|
| | | | | | | | | | | | | | | | | | |
| | Upscale Service Brand ("USB") | | Select Service Brand ("SSB") | | Total |
| | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms |
Ending quantity, June 30, 2019 | | 107 |
| | 15,400 |
| | 1,130 |
| | 64,500 |
| | 1,237 |
| | 79,900 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Company Operated | | Franchised | | Total Systemwide |
| | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms |
Total | | 20 |
| | 4,200 |
| | 1,082 |
| | 66,600 |
| | 1,102 |
| | 70,800 |
|
| | | | | | | | | | | | |
On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our Entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the Entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q. See Note 17.
We were incorporated in the state of Washington in April 1978. The Company's corporate headquarters are located in Denver, Colorado, with regional offices in Spokane, Washington, and Coral Springs, Florida.
We are authorized to issue 50 million shares of common stock, par value $0.01 per share, and five million shares of preferred stock, par value $0.01 per share. As of September 30, 2017, there were 23,611,519 shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock.
Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the shareholders with no cumulative voting rights. Holders of common stock are entitled to receive ratably the dividends, if any, which may be declared from time to time by the board of directors out of funds legally available for that purpose. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.
| |
2. | Summary of Significant Accounting Policies |
The unaudited condensed consolidated financial statements included herein have beenwere prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (SEC)("SEC") and in accordance with generally accepted accounting principles in the United States of America (GAAP)("GAAP"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted as permitted by such rules and regulations.
The Consolidated Balance Sheet as of December 31, 2016 has been2018 was derived from the audited balance sheet as of such date. We believe the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended December 31, 2016,2018, filed with the SEC in our annual report on Form 10-K on March 31, 2017.8, 2019.
In the opinion of management, these unaudited condensed consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly our Condensed Consolidated Balance Sheet at September 30, 2017,Sheets, the Condensed Consolidated Statements of Comprehensive Income (Loss) for, the threeCondensed Consolidated Statements of Stockholders' Equity, and nine months ended September 30, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016.Flows. The results of operations for the periods presented may not be indicative of that which may be expected for a full year or for any other fiscal period.
PrinciplesLeases
We determine if an arrangement is a lease or contains a lease at inception. If an arrangement is a lease or contains a lease, we then determine whether the lease meets the criteria of Consolidationa finance lease or an operating lease. Finance leases are included in Property and equipment, net, Other accrued liabilities, and Deferred income and other long-term liabilities in our Condensed Consolidated Balance Sheets. Operating leases are included in Operating lease right-of-use assets, Operating lease liabilities, due within one year, and Operating lease liabilities, due after one year, in our Condensed Consolidated Balance Sheets. We reassess if an arrangement is or contains a lease upon modification of the arrangement.
At the commencement date of a lease, we recognize a lease liability for contractual fixed lease payments and a corresponding right-of-use asset representing our right to use the underlying asset during the lease term. The financial statements encompasslease liability is measured initially as the accountspresent value of RLH Corporation and allthe contractual fixed lease payments during the lease term. The lease term additionally includes renewal periods only if it is reasonably certain that we will exercise the options. Contractual fixed leases payments are discounted at the rate implicit in the lease when readily determinable. As most of its consolidated subsidiaries, including:
Wholly-owned subsidiaries:
• Red Lion Hotels Holdings, Inc.
• Red Lion Hotels Franchising, Inc.
• Red Lion Hotels Canada Franchising, Inc.
• Red Lion Hotels Management, Inc. (RL Management)
• Red Lion Hotels Limited Partnership
• TicketsWest.com, Inc.
Joint venture entities:
• RL Venture LLC (RL Venture) in whichour leases do not provide an implicit rate, we hold a 55% member interest
• RLS Atla Venture LLC (RLS Atla Venture) in whichuse our incremental borrowing rate based on the information available at the commencement date. For the adoption of Accounting Standards Update ("ASU") 2016-02, we hold a 55% member interest
• RLS Balt Venture LLC (RLS Balt Venture) in whichmeasured our lease liabilities using our incremental borrowing rate as of January 1, 2019. Additionally, we hold a 73% member interest
• RLS DC Venture LLC (RLS DC Venture) in which we hold a 55% member interest
All inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.
Cash and Cash Equivalents
All highly liquid investments purchasedelected not to recognize leases with an original maturitylease terms of three12 months or less are considered to be cash equivalents. At times, cash balances at banks and other financial institutions may bethe commencement date in excess of federal insurance limits.our Condensed Consolidated Balance Sheets.
Restricted Cash
In accordance with our various borrowing arrangements, at September 30, 2017 and December 31, 2016 cash of $12.9 million and $9.5 million, respectively, was held primarily as reserves for debt service (interest only), property improvements, and other requirements from the lenders.
In our Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, we include restricted cash with cash and cash equivalents when reconciling the beginning and ending balances for each period. The balances included in the Consolidated Statements of Cash Flows for the periods ended are as follows (in thousands):
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash and cash equivalents | | $ | 36,179 |
| | $ | 18,930 |
|
Restricted cash | | 12,946 |
| | 9,181 |
|
Cash, cash equivalents and restricted cash | | $ | 49,125 |
| | $ | 28,111 |
|
Allowance for Doubtful Accounts
The ability to collect individual accounts receivable is reviewed on a routine basis. An allowance for doubtful accountsright-of-use asset is recognized based on specifically identified amounts believed to be uncollectible. If actual collection experience changes, revisions to the allowance may be required, and, if all attempts to collect a receivable fail, it is recorded against the allowance. The estimate of the allowance for doubtful accounts may be impacted by, among other things, national and regional economic conditions. Acquired accounts receivable from business acquisitions are recorded at fair value, based on amounts expected to be collected. Therefore no allowance for doubtful accounts related to these accounts is recorded at the acquisition date.
The following schedule summarizes the activity in the allowance account for trade accounts receivable (in thousands):
|
| | | | | | | | |
| | 2017 | | 2016 |
Allowance for doubtful accounts | | |
Balance, January 1 | | $ | 944 |
| | $ | 657 |
|
Additions to allowance | | 385 |
| | 212 |
|
Write-offs, net of recoveries | | (1 | ) | | (67 | ) |
Balance, September 30 | | $ | 1,328 |
| | $ | 802 |
|
Accounts Receivable from Related Parties
Amounts receivable from related parties relate to outstanding amounts billed to the owners of hotels we manage for reimbursement of costs of the operations of those hotels. We have a related party relationship with these owners, and there is no allowance for doubtful accounts associated with these receivables.
Notes Receivable
We carry notes receivable at their estimated collection amount, and they are classified as either current or long-term depending on the expected collection date. Interest income on notes receivable is recognized using the interest method.
Inventories
Inventories consist primarily of food and beverage products held for sale at the company operated restaurants and guest supplies. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.
Prepaid and other expenses
Prepaid and other expenses include prepaid insurance, prepaid taxes, deposits, advertising costs and prepaid costs related to our brand conferences.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. The cost of improvements that extend the life of property and equipment is capitalized. Repairs and maintenance charges are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated useful life of each asset, which ranges as follows:
|
| |
| |
Buildings | 25 to 39 years |
Equipment | 2 to 15 years |
Furniture and fixtures | 2 to 15 years |
Landscaping and improvements | 15 years |
Leasehold improvements are capitalized and depreciated over the term of the applicable lease, including renewable periods if reasonably assured, or over the useful lives, whichever is shorter.
Valuation of Long-Lived Assets
We test long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.
We base our calculations of the estimated fair value of an asset group on the income approach or the market approach. The assumptions and methodology utilized for the income approach are the same as those described in the "Goodwill and Intangible Assets" caption. For the market approach, we use analyses based primarily on market comparables, recent appraisals and assumptions about market capitalization rates, growth rates, and inflation.
Variable Interest Entities
We analyze the investments we make in joint venture entities based on the accounting guidance for variable interest entities (VIEs). These joint ventures are evaluated to determine whether (1) sufficient equity at risk exists for the legal entity to finance its activities without additional subordinated financial support or, (2) as a group, the holders of the equity investment at risk lack one of the following characteristics (a) the power, through voting or similar rights, to direct the activities of the legal entity that most significantly impact the entity’s economic performance or, (b) the obligation to absorb the expected losses of the legal entity or (c) the right to receive expected residual returns of the legal entity, or (3) the voting rights of some equity investors are not proportional to their obligations to absorb the losses or the right to receive benefits and substantially all of the activities either involve or are conducted on behalf of an investor with disproportionately few voting rights. If any one of the above three conditions are met then the joint venture entities are considered to be VIEs.
We consolidate the results of any such VIE in which we determine that we have a controlling financial interest. We would have a “controlling financial interest” (i.e., be deemed the primary beneficiary) in such an entity if we had both the power to direct the activities that most significantly affect the VIE’s economic performance and the obligation to absorb the losses of, or right to receive the benefits from, the VIE that could be potentially significant to the VIE.
Business Combinations
On the date of acquisition, the assets acquired, liabilities assumed, and any noncontrolling interests in the acquiree are recorded at their fair values. The acquiree's results of operations are also included as of the date of acquisition in our consolidated results. Intangible assets that arise from contractual/legal rights, or are capable of being separated are measured and recorded at fair value, and amortized over the estimated useful life. If practicable, assets acquired and liabilities assumed arising from contingencies are measured and recorded at fair value. If the valuation of any contingent assets or liabilities is not practicable, such assets and liabilities are measured and recorded when it is probable that a gain or loss has occurred and the amount can be reasonably estimated. The residual balance of the purchase price, after fair value allocations to all identified assets and liabilities, represents goodwill. Acquisition-related costs are expensed as incurred. Restructuring costs associated with an acquisition are generally expensed in periods subsequent to the acquisition date, and changes in deferred tax asset valuation allowances and acquired income tax uncertainties, including penalties and interest, after the measurement period are recognized as a component of the provision for income taxes. Our acquisitions may include contingent consideration, which require us to recognize the fair value of the estimated liability at the time of the acquisition. Subsequent changes in the estimate of the amount to be paid under the contingent consideration arrangement are recognized in the Consolidated Statements of Comprehensive Income (Loss). Cash payments for contingent or deferred consideration up to the amount of liability recognized on the acquisition date are classified within cash flows from financing activities within the Consolidated Statements of Cash Flows and any excess is classified as cash flows from operating activities.
Goodwill and Intangible Assets
Goodwill and intangible assets may result from our business acquisitions. Intangible assets may also result from the purchase of assets and intellectual property in a transaction that does not qualify as a business combination. We use estimates, including estimates of useful lives of intangible assets, the amount and timing of related future cash flows, and fair values of the related operations, in determining the value assigned to goodwill and intangible assets. Our finite-lived intangible assets, which include
customer contracts and certain brand names that we do not expect to maintain indefinitely, are amortized over their expected useful lives based on estimated discounted cash flows. The remaining brand name and trademark assets are considered indefinite-lived intangible assets and are not subject to amortization. Finite-lived intangible assets are tested for impairment at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are tested for impairment annually, when events or changes in circumstances indicate the asset may be impaired, or at the time when their useful lives are determined to be no longer indefinite.
Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. The reporting units are aligned with our reporting segments.
We test goodwill for impairment each year as of October 1, or more frequently should a significant impairment indicator occur. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with the two-step impairment test. The impairment test involves comparing the fair values of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure the goodwill impairment loss amount. This second step determines the current fair values of all assets and liabilities of the reporting unit and then compares the implied fair value of the reporting unit's goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.
In assessing the qualitative factors, we assess relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances, and how these may impact a reporting unit's fair value or carrying amount, involves significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, RLH Corporation-specific events, and share price trends, and making the assessment as to whether each relevant factor would impact the impairment test positively or negatively and the magnitude of any such impact.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We forecast discounted future cash flows at the reporting unit level using risk-adjusted discount rates and estimated future revenues and operating costs, which take into consideration factors, such as expectations of competitive and economic environments. We also identify similar publicly traded companies and develop a correlation, referred to as a multiple, to apply to the operating results of the reporting units. These combined fair values are then reconciled to the aggregate market value of our common stock on the date of valuation, while considering a reasonable control premium.
Other Assets
Other assets primarily consist of key money arrangementslease liability with certain of our franchiseesadjustments, if applicable. These adjustments include lease incentives, prepaid rent, and IT system implementation and license costs, for both our franchisees and our company operated hotels. We recognize key money paid in conjunction with entering into long-term franchise agreements as prepaid expenses and amortize the amount paid as a reduction of revenue over the term of the franchise agreements. IT system implementation and license costs represent costs incurred to implement and operate RevPak, our proprietary guest management system application and are amortized over the initial term of the software license arrangement or the current license period, as applicable.
Fair Value Measurements
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
Deferred Income
In 2003, we sold a hotel to an unrelated party in a sale-operating leaseback transaction. The pre-tax gain on the transaction of approximately $7.0 million was deferred and is being amortized into income over the period of the lease term, which expires in November 2018 and is renewable for three, five-year terms at our option. During the nine months ended September 30, 2017 and 2016, we recognized income of approximately $0.4 million each period for the amortization of the deferred gain. The remaining balances at September 30, 2017 and December 31, 2016 were $0.5 million and $0.9 million.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At September 30, 2017 and December 31, 2016, a valuation allowance has been recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We classify any interest expense and penalties related to underpayment of taxes and any interest income on tax overpayments as components of income tax expense.
We record uncertain tax positions in accordance with Accounting Standards Codification 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 13.
Discontinued Operations and Held For Sale
When an asset group meets the criteria to be classified as held-for-sale, and the asset group represents a component of our business or an entire reportable segment, we classify the results of operations as discontinued operations in our consolidated statements of comprehensive income for all periods presented. An asset considered a held-for-sale is reported at the lower of the asset's carrying amount or fair value. Cash flows from the Company's discontinued operations are included in the Consolidated Statements of Cash Flows. See Note 17 for further discussion of our discontinued operations.
Revenue Recognition
Revenue is generally recognized as services are provided. When payments from customers are received before services have been performed, the amount received is recorded as deferred revenue until the service has been completed. We recognize revenue from the following sources:
Company Operated Hotels - Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guest's visit to the restaurant or at the time the management services are provided. We recognize other revenue and costs from managed properties when we incur the related reimbursabledirect costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. As these costs have no added markup, the revenue and related expense have no impact on either our operating or net income.
Franchised Hotels - Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements.
Entertainment - Online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. Where we act as an agent and receive a net fee or commission, revenue is recognized in the period the services are performed. When we are the promoter of an event and are at-risk for the production, revenues and expenses are recorded in the period of the event performance. As the result of the sale of the Entertainment business on October 3, 2017, all revenues earned have been classified as discontinued operations for all periods presented.
Advertising and Promotion
Costs associated with advertising and promotional efforts are generally expensed as incurred. During the nine months ended September 30, 2017 and 2016 we incurred approximately $5.1 million and $4.3 million, respectively in advertising expense.
Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share attributable to RLH Corporation is computed by dividing income (loss) attributable to RLH Corporation by the weighted‑average number of shares outstanding during the period. Diluted earnings (loss) per share attributable to RLH Corporation gives effect to all dilutive potential shares that are outstanding during the period and include outstanding stock options, other outstanding employee equity grants, warrants and amounts contingently issuable in association with the Vantage acquisition contingent consideration, by increasing the weighted-average number of shares outstanding by their effect. See Note 12.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
Reclassifications
Effective for the year ended December 31, 2016, we early adopted Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. We have revised the Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 to reflect the adoption of this new standard. As the result, the total change in cash flows for the first nine months of 2016 was a decrease of $2.1 million of cash inflows, of which $1.1 million was an increase for operating activities, and $3.2 million was a decrease for investing activities. The change was the result of the net transfer of restricted cash to cash for completed property improvements, partially offset by the net transfer of cash to restricted cash as part of our joint venture debt arrangements.
New and Recent Accounting Pronouncements Not Yet Adopted
In May 2014,June 2016, the Financial Accounting Standards Board (FASB)("FASB") issued ASU 2014-09, Revenue from Contracts2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, as amended by multiple subsequent ASUs, which will change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU will replace the current "incurred loss" approach with Customers (Topic 606), which isan "expected loss" model for instruments measured at amortized cost. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a comprehensive new revenueforward-looking “expected loss” model that generally will result in the earlier recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchangeallowances for those goods or services.losses. The ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for usin the first quarter of 2020. We are currently evaluating the effects of this ASU on January 1, 2018. Upon adoption utilizing the modified retrospective method, we will recognize a cumulative adjustment to retained earnings as opposed to retrospectively adjusting prior periods, and our financial statements, will include expanded disclosures related to contracts with customers. We are continuing our assessment of our various revenue arrangements to ensure we account for them in accordance with this new guidance upon adoption. We doand such effects have not expect a material impact to revenue from our company operated hotels segment. Within our franchise business, we will recognize application fee revenue and the related deal commission expense over the initial contract period, rather than immediately upon the signing of the franchise agreement.yet been determined.
In February 2016,August 2018, the FASB issued ASU 2016-02, Leases2018-13, Fair Value Measurement (Topic 842).820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which provides modifications to the disclosure requirements over fair value measurements. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognitionASU is effective in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginningfirst quarter of the earliest comparative period presented in the financial statements, with certain practical expedients available. We had $81.8 million of operating lease obligations as of September 30, 2017 (see Note 9) and upon the adoption of the standard will record an ROU asset and lease liability for present value of these leases, which will have
a material impact on the Consolidated Balance Sheet. However, the Consolidated Statement of Comprehensive Income (Loss) recognition of lease expenses is not expected to change from the current methodology.
The FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments to address diversity in practice for eight specific topics: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. This guidance is effective for us beginning January 1, 2018. As this ASU is clarifying only presentation matters within the statement of cash flows, we do not expect it to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an input and a substantive process that together significantly contribute to the ability to create output. ASU 2017-01 is effective for fiscal years beginning after December 15, 20192020, with early adoption permitted. We do not expectare currently evaluating the adoptioneffects of this standard to have a material impact on our consolidated results of operations, financial position, cash flows, and related financial statement disclosures.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. ASU 2017-04 requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Upon adoption, we will follow the guidance in this standard for goodwill impairment testing.
In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The amendments clarify that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. A contract that includes the transfer of ownership interests in one or more consolidated subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it. The guidance is effective for us as of January 1, 2018 in conjunction with our adoption of ASU 2014-09. Entities may use either a full or modified approach to adopt the ASU. We are assessing the impact of the adoption of this new guidance on our financial statements.statements, and such effects have not yet been determined.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is effective on January 1, 2018 for us, and we would apply the amendments prospectively to an award modified on or after the adoption date.
We have assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us or are not anticipated to have a material impact on our consolidated financial statements.
New Accounting Pronouncements Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which we adopted on January 1, 2019. The new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification effecting the pattern of expense recognition in the income statement. Upon adoption, we applied the package of practical expedients included therein, which allows us to carry forward our historical assessments of whether contracts are leases or contain leases, the lease classification of each existing lease, and recognition of initial direct costs. The standard was adopted using the modified retrospective transition method and we did not apply the standard to the comparative periods presented in the year of adoption.
Due to the existence of certain operating lease obligations as of January 1, 2019, we recognized $51.1 million of ROU assets and corresponding lease liabilities of $52.2 million, with reductions of other accrued liabilities and deferred income and other long-term liabilities of $1.1 million. However, there was no impact to accumulated deficit and the future recognition of lease related expenses will not differ from the previous methodology in the Condensed Consolidated Statements of Comprehensive Income (Loss) for leases that existed at the adoption date.
We have two operating segments: company operatedfranchised hotels and franchisedcompany operated hotels. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income taxes and certain corporate expenses; therefore, they have not been allocated to the operating segments. We allocate direct selling, general, administrative and other expenses to our operating segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.
The results of operations of the Entertainment segment were treated as discontinued operations, due to the sale of the business completed on October 3, 2017. As a result, the revenue and operating expenses of the Entertainment segment are excluded from the segment disclosures below.
Selected financial information is provided below (in thousands):
|
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 | | Company Operated Hotels | | Franchised Hotels | | Other | | Total |
Revenue | | $ | 38,298 |
| | $ | 12,714 |
| | $ | 12 |
| | $ | 51,024 |
|
Operating expenses: | | | | | | | | |
Segment operating expenses | | 26,338 |
| | 8,898 |
| | (9 | ) | | 35,227 |
|
Depreciation and amortization | | 3,755 |
| | 594 |
| | 311 |
| | 4,660 |
|
Other operating expenses, acquisition costs and gains on asset dispositions | | 1,090 |
| | 1,235 |
| | 3,638 |
| | 5,963 |
|
Operating income (loss) | | $ | 7,115 |
| | $ | 1,987 |
|
| $ | (3,928 | ) |
| $ | 5,174 |
|
| | | | | | | | |
Capital expenditures | | $ | 1,073 |
| | $ | 188 |
| | $ | 998 |
| | $ | 2,259 |
|
Identifiable assets as of September 30, 2017 | | $ | 251,620 |
| | $ | 70,500 |
| | $ | 21,607 |
| | $ | 343,727 |
|
|
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | Franchised Hotels | | Company Operated Hotels | | Other | | Total |
Revenue | | $ | 14,684 |
| | $ | 14,236 |
| | $ | 5 |
| | $ | 28,925 |
|
Operating expenses: | | | | | | | | |
Segment and other operating expenses | | 9,921 |
| | 12,863 |
| | 4,092 |
| | 26,876 |
|
Depreciation and amortization | | 1,110 |
| | 1,917 |
| | 1,082 |
| | 4,109 |
|
Loss (gain) on asset dispositions, net | | (1 | ) | | 37 |
| | 2 |
| | 38 |
|
Acquisition and integration costs | | 34 |
| | — |
| | 139 |
| | 173 |
|
Operating income (loss) | | $ | 3,620 |
| | $ | (581 | ) | | $ | (5,310 | ) |
| $ | (2,271 | ) |
|
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | | Franchised Hotels | | Company Operated Hotels | | Other | | Total |
Revenue | | $ | 13,601 |
| | $ | 25,005 |
| | $ | 6 |
| | $ | 38,612 |
|
Operating expenses: | | | | | | | | |
Segment and other operating expenses | | 9,365 |
| | 19,024 |
| | 5,711 |
| | 34,100 |
|
Depreciation and amortization | | 1,224 |
| | 3,035 |
| | 442 |
| | 4,701 |
|
Loss (gain) on asset dispositions, net | | — |
| | (1,807 | ) | | (48 | ) | | (1,855 | ) |
Acquisition and integration costs | | 1,997 |
| | — |
| | — |
| | 1,997 |
|
Operating income (loss) | | $ | 1,015 |
| | $ | 4,753 |
| | $ | (6,099 | ) |
| $ | (331 | ) |
|
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | Company Operated Hotels | | Franchised Hotels | | Other | | Total |
Revenue | | $ | 38,890 |
| | $ | 4,766 |
| | $ | 16 |
| | $ | 43,672 |
|
Operating expenses: | | | | | | | | |
Segment operating expenses | | 27,096 |
| | 3,214 |
| | 9 |
| | 30,319 |
|
Depreciation and amortization | | 3,444 |
| | 101 |
| | 226 |
| | 3,771 |
|
Other operating expenses, acquisition costs and gains on asset dispositions | | 1,097 |
| | 1,413 |
| | 2,031 |
| | 4,541 |
|
Operating income (loss) | | $ | 7,253 |
| | $ | 38 |
|
| $ | (2,250 | ) |
| $ | 5,041 |
|
| | | | | | | | |
Capital expenditures | | $ | 9,007 |
| | $ | — |
| | $ | 787 |
| | $ | 9,794 |
|
Identifiable assets as of December 31, 2016 | | $ | 260,583 |
| | $ | 66,601 |
| | $ | 17,351 |
| | $ | 344,535 |
|
|
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | | Company Operated Hotels | | Franchised Hotels | | Other | | Total |
Revenue | | $ | 97,261 |
| | $ | 36,045 |
| | $ | 128 |
| | $ | 133,434 |
|
| | | | | | | | |
Segment operating expenses | | 73,497 |
| | 26,300 |
| | (2 | ) | | 99,795 |
|
Depreciation and amortization | | 11,096 |
| | 1,721 |
| | 925 |
| | 13,742 |
|
Other operating expenses, acquisition costs and gains on asset dispositions | | 3,258 |
| | 1,144 |
| | 11,462 |
| | 15,864 |
|
Operating income (loss) | | $ | 9,410 |
| | $ | 6,880 |
| | $ | (12,257 | ) | | $ | 4,033 |
|
| | | | | | | | |
Capital expenditures | | $ | 3,281 |
| | $ | 626 |
| | $ | 2,089 |
| | $ | 5,996 |
|
Identifiable assets as of September 30, 2017 | | $ | 251,620 |
| | $ | 70,500 |
| | $ | 21,607 |
| | $ | 343,727 |
|
|
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | Franchised Hotels | | Company Operated Hotels | | Other | | Total |
Revenue | | $ | 27,695 |
| | $ | 27,206 |
| | $ | 8 |
| | $ | 54,909 |
|
Operating expenses: | | | | | | | | |
Segment and other operating expenses | | 19,380 |
| | 25,324 |
| | 8,106 |
| | 52,810 |
|
Depreciation and amortization | | 2,024 |
| | 3,873 |
| | 1,659 |
| | 7,556 |
|
Loss (gain) on asset dispositions, net | | (1 | ) | | 43 |
| | 2 |
| | 44 |
|
Acquisition and integration costs | | 96 |
| | — |
| | 139 |
| | 235 |
|
Operating income (loss) | | $ | 6,196 |
| | $ | (2,034 | ) | | $ | (9,898 | ) | | $ | (5,736 | ) |
|
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2018 | | Franchised Hotels | | Company Operated Hotels | | Other | | Total |
Revenue | | $ | 23,724 |
| | $ | 47,901 |
| | $ | 26 |
| | $ | 71,651 |
|
Operating expenses: | | | | | | | | |
Segment and other operating expenses | | 17,266 |
| | 40,668 |
| | 9,190 |
| | 67,124 |
|
Depreciation and amortization | | 2,058 |
| | 6,158 |
| | 877 |
| | 9,093 |
|
Loss (gain) on asset dispositions, net | | — |
| | (15,851 | ) | | (47 | ) | | (15,898 | ) |
Acquisition and integration costs | | 2,101 |
| | — |
| | — |
| | 2,101 |
|
Operating income (loss) | | $ | 2,299 |
| | $ | 16,926 |
| | $ | (9,994 | ) | | $ | 9,231 |
|
|
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | Company Operated Hotels | | Franchised Hotels | | Other | | Total |
Revenue | | $ | 98,013 |
| | $ | 12,194 |
| | $ | 40 |
| | $ | 110,247 |
|
| | | | | | | | |
Segment operating expenses | | 75,533 |
| | 10,034 |
| | 30 |
| | 85,597 |
|
Depreciation and amortization | | 10,308 |
| | 115 |
| | 786 |
| | 11,209 |
|
Other operating expenses, acquisition costs and gains on asset dispositions | | 3,208 |
| | 1,654 |
| | 7,386 |
| | 12,248 |
|
Operating income (loss) | | $ | 8,964 |
| | $ | 391 |
| | $ | (8,162 | ) | | $ | 1,193 |
|
| | | | | | | | |
Capital expenditures | | $ | 28,917 |
| | $ | — |
| | $ | 1,919 |
| | $ | 30,836 |
|
Identifiable assets as of December 31, 2016 | | $ | 260,583 |
| | $ | 66,601 |
| | $ | 17,351 |
| | $ | 344,535 |
|
| |
4. | Variable Interest Entities |
Our joint venture entities have been determined to be variable interest entities (VIEs), and RLH Corporation has been determined to be the primary beneficiary of each VIE. Therefore, we consolidate the assets, liabilities, and results of operations of (1) RL Venture, (2) RLS Balt Venture, (3) RLS Atla Venture and (4) RLS DC Venture. See Note 2 for discussion of the significant judgments and assumptions made by us in determining whether an entity is a VIE and if we are the primary beneficiary and therefore must consolidate the VIE. See Note 7 for further discussion of the terms of the long-term debt at each of the joint venture entities.
RL Venture
In January 2015, we transferred 12 of our wholly-owned hotels into RL Venture, a newly created entity that was initially wholly-owned by us, and immediately sold a 45% ownership stake in RL Venture to Shelbourne Falcon RLHC Hotel Investors LLC (Shelbourne Falcon), an entity that is led by Shelbourne Capital LLC (Shelbourne). Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. We maintain a 55% interest in RL Venture, and the 11 hotels are managed by RL Management, one of our wholly-owned subsidiaries, subject to a management agreement. RL Venture is considered a variable interest entity("VIEs") because our voting rights are not proportional to our financial interest and substantially all of RL Venture'seach joint venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over two of the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 55% equity interest and management fees. As a result, we consolidate RL Venture. The equity interest owned by Shelbourne Falcon is reflected as a noncontrolling interest in the consolidated financial statements.
Cash distributions may be made periodically based on calculated distributable income. During the third quarter of 2017, RL Venture made a cash distribution totaling $1.6 million, of which RLH Corporation received $0.9 million. During the third quarter of 2016, RL Venture made distributions totaling $4.0 million, of which RLH Corporation received $2.2 million. During the nine months ended September 30, 2017 and 2016, cash distributions totaled $3.1 million and $8.0 million, of which RLH Corporation received $1.7 million and $4.4 million, respectively.
Subsequent to the third quarter of 2017, RL Venture made a cash distribution totaling $1.9 million, of which RLH Corporation received $1.0 million.
In October 2017, we listed the 11 properties in the RL Venture entity for sale through a commercial real estate broker.
RLS Balt Venture
In April 2015, we sold a 21% member interest in our wholly-owned RLS Balt Venture to Shelbourne Falcon Charm City Investors LLC (Shelbourne Falcon II), an entity led by Shelbourne. Shelbourne Falcon II had an option exercisable until December 31, 2015 to purchase up to an additional 24% member interest for $2.3 million. In December 2015, Shelbourne Falcon II elected to purchase additional member interests of 6% based on an aggregate purchase price of $560,000. With the sale of additional member interest without a corresponding change in control, $0.1 million was recognized as an increase in RLH Corporation's additional paid in capital. RL Baltimore, LLC (RL Baltimore), which is wholly-owned by RLS Balt Venture, owns the Hotel RL Baltimore Inner Harbor, which is managed by RL Management. RLS Balt Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Balt Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon II, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 73% equity interest and management fees. As a result, we consolidate RLS Balt Venture. The equity interest owned by Shelbourne Falcon II is reflected as a noncontrolling interest in the consolidated financial statements.
In October 2015, RLH Corporation provided $1.5 million to RLS Balt Venture to fund renovation costs and for operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an event, RLH Corporation will receive the $1.5 million plus a preferred return of 11%, compounded annually, prior to any liquidation proceeds being returned to the members.
In May 2017, RLH Corporation provided $2.8 million to RLS Balt Venture to fund operating losses. This funding was not treated as a loan or as a capital contribution. Rather, it is preferred capital of RLS Balt Venture and will be repaid only when the Baltimore hotel property is sold or when RLS Balt Venture is liquidated. Upon such an event, RLH Corporation will receive the $2.8 million plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to the members.
Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the nine months ended September 30, 2017 or 2016.
RLS Atla Venture
In September 2015, we formed a joint venture RLS Atla Venture, with Shelbourne Falcon Big Peach Investors LLC (Shelbourne Falcon III), an entity led by Shelbourne. We own a 55% interest in the joint venture and Shelbourne Falcon III owns a 45% interest. RLH Atlanta LLC (RLH Atlanta),partners, which is wholly-owned by RLS Atla Venture, owns a hotel adjacent to the Atlanta International Airport that opened in April 2016 as the Red Lion Hotel Atlanta International Airport. RLS Atla Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest and substantially all of RLS Atla Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon III, which does not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our 55% equity interest and management fees. As a result, we consolidate RLS Atla Venture. The equity interest owned by Shelbourne Falcon III is reflected as a noncontrolling interest in the consolidated financial statements.
Cash distributions may be made periodically based on calculated distributable income. There were no cash distributions made during the nine months ended September 30, 2017 or 2016.
RLS DC Venture
In October 2015, we formed a joint venture, RLS DC Venture, with Shelbourne Falcon DC Investors LLC (Shelbourne Falcon IV), an entity led by Shelbourne. Initially, we owned an 86% interest in the joint venture, and Shelbourne Falcon IV owned a 14% interest. On October 29, 2015, RLH DC LLC (RLH DC), which is wholly-owned by RLS DC Venture, acquired 100% of The
Quincy, an existing hotel business now operated as the Hotel RL Washington DC, in a business combination. The property is managed by RL Management.
As part of the organization of RLS DC Venture, Shelbourne Falcon IV had an option to purchase from us up to an additional 31% of the member interests. On February 3, 2016, Shelbourne Falcon IV elected to purchase from us an additional 15% of the member interests of RLS DC Venture, based on an aggregate purchase price of $1.5 million. With the sale of the additional member interest without a corresponding change in control $0.2 million was recognized as an increase in additional paid in capital in February 2016. On April 1, 2016, Shelbourne Falcon IV exercised the remaining option and purchased from us an additional 16% of the member interests of RLS DC Venture for $1.7 million, which resulted in a further increase of $0.3 million to RLH Corporation's additional paid in capital. Following the April 1, 2016 transaction, we now own 55% of RLS DC Venture, and Shelbourne Falcon IV owns 45%. RLS DC Venture is considered a variable interest entity because our voting rights are not proportional to our financial interest, and substantially all of RLS DC Venture's activities involve and are conducted on our behalf. We have determined that we are the primary beneficiary as (a) we exert power over the entity's key activities (hotel operations and property renovations) and share power over the remaining key activities with Shelbourne Falcon IV, which doesdo not have the unilateral ability to exercise kick-out rights, and (b) we have the obligation to absorb losses and right to receive benefits that could be significant to the entity through our equity interest and management fees. As a result, we consolidate the assets, liabilities, and results of operations of (1) RL Venture LLC ("RL Venture"), (2) RLS Atla Venture LLC ("RLS Atla Venture"), and (3) RLS DC Venture.Venture LLC ("RLS DC Venture"). The equity interestinterests owned by Shelbourne Falcon IV isour joint venture partners are reflected as a noncontrolling interest in the condensed consolidated financial statements.
In October 2018, we purchased the remaining 27% ownership interest in RLS Balt Venture LLC ("RLS Balt Venture") from our joint venture partner, which dissolved the joint venture relationship, thus making the entity a wholly owned subsidiary and no longer a variable interest entity.
The following table includes the ownership percentages for each of our joint ventures as of June 30, 2019 and December 31, 2018:
|
| | | | | | |
| | RLH Corporation | | Joint Venture Partner |
RL Venture | | 55 | % | | 45 | % |
RLS Atla Venture | | 55 | % | | 45 | % |
RLS DC Venture | | 55 | % | | 45 | % |
There were no cash contributions or distributions by partners to any of the joint venture entities during the three and six months ended June 30, 2019 or 2018 except as otherwise described below.
RL Venture
In February 2018, five of the RL Venture properties were sold for an aggregate sale price of $47.2 million. In April 2018, one RL Venture property sold for $5.5 million, in May 2017,2018, one RL Venture property sold for $9.3 million, and in July 2018 two additional RL Venture properties sold for $54.5 million. As of June 30, 2019, RL Venture has two remaining properties.
In March 2019, secured loans with an aggregate principal of $16.6 million were entered into for the two remaining properties. Shortly thereafter the net loan proceeds were distributed to us and our joint venture partner in accordance with our respective ownership percentages. Accordingly, during the six months ended June 30, 2019, RL Venture made cash distributions totaling $16.5 million, of which RLH Corporation provided $950,000received $9.1 million.
Cash distributions also may be made periodically based on calculated distributable income. During the second quarter of 2018, RL Venture made a cash distribution totaling $9.0 million, of which RLH Corporation received $5.0 million.
RLS Atla Venture
In March 2019, $2.8 million of cash previously contributed to RLS DCAtla Venture to fund restricted cash required by the loan agreement. This fundingRLH Corporation, was not treatedclassified as a loan or as a capital contribution. Rather, it is preferred capital of RLS DC Venture and will be repaid only when the DCAtlanta hotel property is sold or when RLS DCAtla Venture is liquidated, or the restricted cash is released per the loan agreement.liquidated. Upon such an event, RLH Corporation will receive the $950,000$2.8 million plus a preferred return of 9%, compounded annually, prior to any liquidation proceeds being returned to the members.
Cash distributions may be made periodically based on calculated distributable income.RLS DC Venture
In May 2019, a secured loan with principal and accrued exit fee of $17.4 million was executed by RLS DC Venture. The net loan proceeds were used to pay off the previous debt with a principal balance of approximately $15.9 million. There were no cash distributions made duringresulting from the nine months ended September 30, 2017 or 2016.refinancing.
Property and equipment is summarized as follows (in thousands):
|
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Buildings and equipment | | $ | 154,301 |
| | $ | 150,072 |
|
Furniture and fixtures | | 20,055 |
| | 19,746 |
|
Landscaping and land improvements | | 2,716 |
| | 2,713 |
|
| | 177,072 |
| | 172,531 |
|
Less accumulated depreciation | | (86,476 | ) | | (82,240 | ) |
| | 90,596 |
| | 90,291 |
|
Land | | 19,372 |
| | 19,372 |
|
Construction in progress | | 2,513 |
| | 5,859 |
|
Property and equipment, net | | $ | 112,481 |
| | $ | 115,522 |
|
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Buildings and equipment | | $ | 252,615 |
| | $ | 248,132 |
|
Furniture and fixtures | | 37,486 |
| | 37,743 |
|
Landscaping and land improvements | | 7,878 |
| | 7,928 |
|
| | 297,979 |
| | 293,803 |
|
Less accumulated depreciation | | (142,368 | ) | | (130,876 | ) |
| | 155,611 |
| | 162,927 |
|
Land | | 43,192 |
| | 43,193 |
|
Construction in progress | | 5,328 |
| | 4,365 |
|
Property and equipment, net | | $ | 204,131 |
| | $ | 210,485 |
|
During the three months ended June 30, 2018, we sold two hotel properties and during the six months ended June 30, 2018, we sold seven hotel properties, for a total gain of $1.7 million and $15.6 million, respectively. There were no hotels sold during the three and six months ended June 30, 2019.
| |
6. | Goodwill and Intangible Assets |
Goodwill represents the excess of the estimated fair value of the net assets acquired as a result of business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of certain franchise and entertainment businesses.
The Red Lion, GuestHouse and Settle Inn & Suites brand names are identifiable, indefinite-lived intangible assets that represent the separable legal right to trade names and associated trademarks. We acquired the Red Lion brand name in a business combination we entered into in 2001. We purchased the GuestHouse and Settle Inn & Suites brand names from GuestHouse International LLC in April 2015 and have allocated $5.5 million of the final purchase price to the brand names.
On September 30, 2016 we acquired substantially all of the assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (Vantage), including customer contracts and brand names (see Note 16). The brand names include: Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites,
Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. Based on our purchase price allocation, we allocated $30.0 million to brand names. Based on our intent with the brands acquired, we determined that certain of the brands are indefinite-lived based on our intent to hold and maintain the brands. The total of the purchase price allocated to indefinite-lived brand names was $27.2 million. We also acquired certain brand names that we intend to sunset in the future. The total of the purchase price allocated to finite-lived brand names was $2.8 million, with a weighted average remaining useful life of 7.9 years.
In the table below, the customer contracts represent the franchise license agreements acquired with the GuestHouse and Vantage acquisitions. For GuestHouse, we allocated $3.3 million of the final purchase price to the customer contracts. GuestHouse franchise license agreements are amortized over 10 years, which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements. For Vantage, we allocated $8.4 million to customer contracts and are amortizing them over 15 years, which represents the period of expected cash flows, using an accelerated amortization method that matches the economic benefit of the agreements.
Certain of our brand names and trademarks are considered to have indefinite lives. We assess goodwill and the other indefinite lived intangible assets for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill or intangible assets during the nine months ended September 30, 2017 or 2016.
In connection with the sale of the Entertainment business, $3.2 million of goodwill and $6,000 of intangible assets have been classified as held for sale. See Note 17 for further information.
The following table summarizes the balances of goodwill and other intangible assets (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Goodwill | $ | 18,595 |
| | $ | 18,595 |
|
| | | |
Intangible assets | | | |
Brand name - indefinite lived | $ | 41,278 |
| | $ | 41,278 |
|
Trademarks - indefinite lived | 128 |
| | 128 |
|
Brand name - finite lived, net | 3,932 |
| | 4,326 |
|
Customer contracts - finite lived, net | 13,786 |
| | 15,178 |
|
Total intangible assets, net | $ | 59,124 |
| | $ | 60,910 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Goodwill | $ | 9,404 |
| | $ | 9,404 |
|
| | | |
Intangible assets | | | |
Brand name - indefinite lived | $ | 39,704 |
| | $ | 39,704 |
|
Brand name - finite lived, net | 2,403 |
| | 2,664 |
|
Customer contracts, net | 9,071 |
| | 10,352 |
|
Trademarks | 128 |
| | 128 |
|
Total intangible assets | $ | 51,306 |
| | $ | 52,848 |
|
Goodwill and other intangible assets attributable to each of our business segments at September 30, 2017 and December 31, 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | Intangible | | | | Intangible |
| Goodwill | | Assets | | Goodwill | | Assets |
Company operated hotels | $ | — |
| | $ | 4,660 |
| | $ | — |
| | $ | 4,660 |
|
Franchised hotels | 9,404 |
| | 46,646 |
| | 9,404 |
| | 48,188 |
|
Total | $ | 9,404 |
| | $ | 51,306 |
| | $ | 9,404 |
| | $ | 52,848 |
|
The following table summarizes the balances of amortized customer contracts and finite-lived brand names (in thousands):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Customer contracts | $ | 20,773 |
| | $ | 20,773 |
|
Brand name - finite lived | 5,395 |
| | 5,395 |
|
Accumulated amortization | (8,450 | ) | | (6,664 | ) |
Net carrying amount | $ | 17,718 |
| | $ | 19,504 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Customer contracts | $ | 11,673 |
| | $ | 11,673 |
|
Brand name - finite lived | 2,751 |
| | 2,751 |
|
Accumulated amortization | (2,950 | ) | | (1,408 | ) |
Net carrying amount | $ | 11,474 |
| | $ | 13,016 |
|
As of September 30, 2017, estimated future amortization expenses related to our customer contracts and finite-lived brand names is as follows (in thousands):
|
| | | |
Year ending December 31, | Amount |
2017 (remainder) | $ | 511 |
|
2018 | 1,798 |
|
2019 | 1,610 |
|
2020 | 1,419 |
|
2021 | 1,261 |
|
Thereafter | 4,875 |
|
Total | $ | 11,474 |
|
| |
7. | Long-Term DebtRevenue from Contracts with Customers |
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
|
| | | | | | | | | | |
| | Financial Statement Line Item(s) | | June 30, 2019 | | December 31, 2018 |
Accounts receivable | | Accounts receivable, net | | $ | 18,923 |
| | $ | 18,575 |
|
Key money disbursed | | Other current assets and Other assets, net | | 6,667 |
| | 6,409 |
|
Capitalized contract costs | | Other current assets and Other assets, net | | 1,149 |
| | 1,172 |
|
Contract liabilities | | Other accrued liabilities and Deferred income and other long-term liabilities | | 1,701 |
| | 1,981 |
|
Significant changes in the key money disbursements, capitalized contract costs, and contract liabilities balances during the period are as follows (in thousands):
|
| | | | | | | | | | | | |
| | Key Money Disbursed | | Capitalized Contract Costs | | Contract Liabilities |
Balance as of January 1, 2019 | | $ | 6,409 |
| | $ | 1,172 |
| | $ | 1,981 |
|
Key money disbursed | | 535 |
| | — |
| | — |
|
Costs incurred to acquire contracts | | — |
| | 158 |
| | — |
|
Cash received in advance | | — |
| | — |
| | 254 |
|
Revenue or expense recognized that was included in the January 1, 2019 balance | | (255 | ) | | (171 | ) | | (501 | ) |
Revenue or expense recognized in the period for the period | | (22 | ) | | (10 | ) | | (33 | ) |
Balance as of June 30, 2019 | | $ | 6,667 |
| | $ | 1,149 |
| | $ | 1,701 |
|
Estimated revenues and expenses expected to be recognized related to performance obligations that were unsatisfied as of June 30, 2019, including revenues related to application, initiation and other fees were as follows (in thousands):
|
| | | | | | | | | | | | |
Year Ending December 31, | | Contra Revenue | | Expense | | Revenue |
2019 (remainder) | | $ | 269 |
| | $ | 151 |
| | $ | 334 |
|
2020 | | 535 |
| | 255 |
| | 503 |
|
2021 | | 487 |
| | 189 |
| | 334 |
|
2022 | | 463 |
| | 160 |
| | 246 |
|
2023 | | 437 |
| | 112 |
| | 146 |
|
Thereafter | | 4,476 |
| | 282 |
| | 138 |
|
Total | | $ | 6,667 |
| | $ | 1,149 |
| | $ | 1,701 |
|
We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, as they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts; and (ii) hotel management fees since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the management contract. Therefore, there are no amounts included in the table above related to these revenues.
| |
8. | Debt and Line of Credit |
The current and noncurrent portions of long-termour debt as of SeptemberJune 30, 20172019 and December 31, 20162018 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Current | | Noncurrent | | Current | | Noncurrent |
Line of Credit | | $ | — |
| | $ | 10,000 |
| | $ | — |
| | $ | 10,000 |
|
Senior Secured Term Loan | | — |
| | 5,189 |
| | — |
| | 9,355 |
|
RL Venture - Salt Lake City | | — |
| | 11,000 |
| | — |
| | — |
|
RL Venture - Olympia | | — |
| | 5,600 |
| | — |
| | — |
|
RLH Atla Venture | | 9,135 |
| | — |
| | 9,225 |
| | — |
|
RLH DC Venture (PWB) | | — |
| | — |
| | 15,943 |
| | — |
|
RLH DC Venture (CPBF) | | 17,393 |
| | — |
| | — |
| | — |
|
Total debt | | 26,528 |
| | 31,789 |
| | 25,168 |
| | 19,355 |
|
Unamortized debt issuance costs | | (1,462 | ) | | (327 | ) | | (112 | ) | | (241 | ) |
Debt net of debt issuance costs | | $ | 25,066 |
| | $ | 31,462 |
| | $ | 25,056 |
| | $ | 19,114 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Current | | Noncurrent | | Current | | Noncurrent |
RL Venture | | $ | 1,430 |
| | $ | 72,074 |
| | $ | 1,375 |
| | $ | 69,841 |
|
RL Baltimore | | 13,300 |
| | — |
| | — |
| | 13,300 |
|
RLH Atlanta | | 9,390 |
| | — |
| | 40 |
| | 9,360 |
|
RLH DC | | 302 |
| | 16,379 |
| | 54 |
| | 16,628 |
|
Total debt | | 24,422 |
| | 88,453 |
| | 1,469 |
| | 109,129 |
|
Unamortized debt issuance costs | | — |
| | (1,413 | ) | | — |
| | (2,267 | ) |
Long-term debt net of debt issuance costs | | $ | 24,422 |
| | $ | 87,040 |
| | $ | 1,469 |
| | $ | 106,862 |
|
The collateral for eachEach of the borrowings within the joint venture entities is the assets and proceeds of each respective entity.
RL Venture
In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank, which is secured by the hotels owned by RL Venture. Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover improvements related to the 12 hotels owned by the subsidiaries. We drew $0.4 million and $3.2 million during the three and nine months ended September 30, 2017. At September 30, 2017, there were unamortizedour debt issuance fees of $0.9 million.
The loan matures in January 2019 and has a one-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.75%. Monthly principal payments began in January 2017 in an amount that would repay the outstanding principal balance over a 25-year amortization period.
The liabilities of RL Venture, other than its long-term debt, are nonrecourse to our general credit and assets. The long-term debt is nonrecourse as to RLH Corporation, but several investors in RL Venture, including us, are guarantors regarding completion of certain improvements to the hotels, environmental covenants in the loan agreement, or losses incurred by the lender in the event of a voluntary bankruptcy filing involving RL Venture, any of its subsidiaries or the guarantors. RLH Corporation has no other obligation to provide financial support to RL Venture.
The loan requires us to comply withagreements contain customary reporting, financial and operating covenants applicable to RL Venture, including requirements relating to debt service loan coverage ratios. It also includes customary events of default.covenants. We were in compliance with theseall the financial covenants of our debt agreements at SeptemberJune 30, 2017.2019.
RL BaltimoreVenture - Salt Lake City
In April 2015,March 2019, RL Baltimore obtainedSalt Lake, LLC, a new mortgagesubsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan from PFP Holding Company IV LLC, an affiliatewith a principal balance of Prime Finance,$11.0 million. The loan is fully secured by the Hotel RL Baltimore Inner Harbor.Salt Lake City property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $54,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.
RL Venture - Olympia
In March 2019, RL Olympia, LLC, a subsidiary of RL Venture, executed a secured debt agreement with Umpqua Bank for a term loan with a principal balance of $5.6 million. The loan is fully secured by the Hotel RL Olympia property. The loan has a maturity date of March 18, 2021 and a variable interest rate of LIBOR plus 2.25%, payable monthly. The borrower has the option to exercise two six-month extensions upon maturity of the loan. There are no principal repayment requirements prior to the maturity date and the loan includes a financial covenant to be calculated semi-annually in which the property must maintain a minimum debt service coverage ratio of not less than 1.6 to 1.0. We incurred approximately $33,000 of debt discounts and debt issuance costs in connection with the issuance of the loan.
Senior Secured Term Loan
In March 2019, we transferred approximately $4.2 million, which comprises a portion of the net proceeds received from the RL Venture loans, as calculated and required by the provisions of the Senior Secured Term Loan, into a cash collateral account. The account is controlled by Deutsche Bank AG New York Branch, on behalf of the lenders, and the balance is required by the debt agreement to be applied against the outstanding principal balance of the Senior Secured Term Loan at the lender's discretion. This balance was applied against the outstanding principal balance in April 2019.
RLH DC Venture
In May 2019, RLH DC executed a new mortgage loan agreement with CP Business Finance I, LP ("RLH DC Venture - CPBF"), secured by the Hotel RL Washington DC and a $10.5 million principal guarantee by RLH Corporation. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel, which we drew during the year ended December 31, 2015. At September 30, 2017 the funds on$16.5 million. The proceeds from the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance feesimmediately used to pay off the existing mortgage loan on the property held by Pacific Western Bank ("RLH DC Venture - PWB"), which had an outstanding principal balance of $0.2 million.$15.9 million at the time of closing.
The balanceRLH DC Venture - CPBF loan had an initial maturity date of June 21, 2019, with a first extension option through May 31, 2020 that was exercised in June 2019, and a second extension option through May 31, 2021. The RLH DC Venture - CPBF loan has a cash interest rate of 7.0% in addition to PIK interest of 3.0% through May 31, 2020, which increases to 7.0% if the second extension option is payableexercised.
There was a fee of $330,000 to exercise the first extension option and there is a fee of $825,000 plus a required $2.0 million principal pay down to exercise the second extension option. The RLH DC Venture - CPBF loan may be paid off in full prior to maturity at maturityany point. The RLH DC Venture - CPBF loan contains an exit fee equal to 5.0% of the loan in May 2018. Interest under the advanced portions ofoutstanding principal balance if the loan is paid off prior to or at May 31, 2020, or an exit fee equal to 4.0% of the outstanding principal balance if the loan is paid off between June 1, 2020 and May 31, 2021. Additionally, if the loan is paid down prior to May 31, 2020, a prepayment premium must be paid. The prepayment premium is equal to the remaining cash and PIK interest that would have been payable monthlyfrom the prepayment date through May 31, 2020.
As the exit fee is payable regardless of loan repayment prior to or at LIBOR plus 6.25%.maturity, we have accrued the projected exit fee of $851,000 as part of the outstanding debt balance with an offsetting debt discount. Inclusive of the accrued exit fee, we have incurred cumulative debt discounts and debt issuance costs of $1.4 million, which will be amortized to interest expense through the first extended maturity date of May 31, 2020.
The loan agreement includescontains customary requirements for lender approval of annual operating and capital budgets, under certain conditions. ItIn also includes customary events of default. The liabilitydefault as well as financial covenants for maintaining a minimum property EBITDA, a minimum consolidated fixed coverage ratio for RLH, a maximum consolidated total net leverage ratio for RLH, and a cross default provision with our Line of RL Baltimore under the loan agreement is generally nonrecourse. However,Credit and Senior Secured Term Loan.
CP Business Finance I, LP, the lender may obtain a monetary judgment against RL Baltimore ifof the lender suffers losses under certain circumstances listed in theRLH DC - CPBF loan, agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLH Corporation has guaranteed these recourse obligations of RL Baltimore and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.
RLH Atlanta
In September 2015, RLH Atlanta obtained a mortgage loan from PFP Holding Company IV LLC,is an affiliate of Prime Finance, secured byColumbia Pacific Opportunity Fund, LP, who as of October 2018 held 500,000 shares of RLH common stock. Additionally, Alexander B. Washburn, who served as a hotel adjacentmember of our Board of Directors from May 2015 to April 2019, is one of the Atlanta International Airport,managing members of Columbia Pacific Advisor, LLC, which opened in April 2016serves as the Red Lion Hotel Atlanta International Airport. The initial principal amountinvestment manager of the loan was $6.0 million, and the lender agreed to advance an additional $3.4 million to cover expenses related to improvements to the hotel, which we drew in the three months ended March 31, 2016. At September 30, 2017 the funds on the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance fees of $0.1 million.Columbia Pacific Opportunity Fund, LP.
The loan matures in September 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. Monthly principal payments of $10,000 began in September 2017.
The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH Atlanta under the loan agreement is generally nonrecourse. However, the lender may obtain a monetary judgment against RLH Atlanta if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLH Corporation has guaranteed these recourse obligations of RLH Atlanta and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.
RLH DC
In October 2015, RLH DC obtained a new mortgage loan from Pacific Western Bank secured by the Hotel RL Washington DC. The initial principal amount of the loan was $15.2 million, and the lender agreed to advance an additional $2.3 million to cover expenses related to improvements to the hotel. We drew $1.5 million in additional funds during the year ended December 31, 2016. At September 30, 2017 the funds on the loan were fully disbursed. At September 30, 2017, there were unamortized debt issuance costs of $0.3 million.
The loan matures in October 2019 and has a one-year extension option. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.55%. Monthly principal payments begin in November 2017 in an amount that will repay the outstanding principal balance over a 25-year amortization period.
The loan agreement includes customary requirements for lender approval of annual operating and capital budgets, under certain conditions. It also includes customary events of default. The liability of RLH DC under the loan agreement is generally nonrecourse. However, the lender may obtain a monetary judgment against RLH DC if the lender suffers losses under certain circumstances listed in the loan agreement, including but not limited to fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. RLH Corporation has guaranteed these recourse obligations of RLH DC and agreed to customary reporting and operating covenants. We were in compliance with these covenants at September 30, 2017.
Contractual maturities for long-term debt outstanding at September 30, 2017, for the next five years are summarized by the year as follows (in thousands):
|
| | | | |
Year ending December 31, | | Amount |
2017 (remainder) | | $ | 434 |
|
2018 | | 24,442 |
|
2019 | | 87,999 |
|
2020 | | — |
|
2021 | | — |
|
Thereafter | | — |
|
Total | | $ | 112,875 |
|
| |
8.9. | Derivative Financial Instruments |
We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. We manage our floatingvariable rate debt using interest rate caps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest. We estimate the fair value of our interest rate caps via calculations that use as their basis readily available observable market parameters. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service, which is a Level 2 input. Changes in fair value of these instruments are recognized in interest expense on the Condensed Consolidated Statements of Comprehensive Income (Loss). At SeptemberJune 30, 20172019 and December 31, 2016,2018, the valuation of the interest rate caps resulted in the recognition of assets with minimal values both individually and in the aggregate, which are included within Other assets, net on the Condensed Consolidated Balance Sheets. We entered into cap rate transactions as described in the table below as of June 30, 2019.
|
| | | | | | | | | | | |
Subsidiary | | Institution | | Original Notional Amount | | LIBOR Reference Rate Cap | | Expiration |
| | | | (In millions) | | | | |
RLH Atla Venture | | SMBC Capital Markets, Inc. | | $ | 9.3 |
| | 3 | % | | September 2019 |
RLH DC Venture | | Commonwealth Bank of Australia | | $ | 16.0 |
| | 3 | % | | October 2019 |
|
| | | | | | | | | | | |
Subsidiary | | Institution | | Original Notional Amount | | LIBOR Reference Rate Cap | | Expiration |
| | | | (In millions) | | | | |
RL Venture | | Commonwealth Bank of Australia | | $ | 80.0 |
| | 4 | % | | January 2018 |
RL Baltimore | | Commonwealth Bank of Australia | | $ | 13.3 |
| | 3 | % | | May 2018 |
RLH Atlanta | | SMBC Capital Markets, Inc. | | $ | 9.4 |
| | 3 | % | | September 2018 |
RLH DC | | Commonwealth Bank of Australia | | $ | 17.5 |
| | 3 | % | | November 2018 |
| |
9.10. | Operating and Capital Lease CommitmentsLeases |
We have both operatinglease equipment and capital leases in the normal course of business. The operating leases relate to five of ourland and/or property at certain company operated hotel properties andas well as office space for our three administrative offices. headquarters through operating leases. We have elected the practical expedient so that leases with an initial term of 12 months or less are not recorded on the balance sheet.
We are obligated under capitalfinance leases for certain hotel equipment at our company operated hotel locations. The capitalfinance leases typically have a five-yearfive year term.
Balance sheet information related to our leases is included in the following table (in thousands):
|
| | | | |
Operating Leases | | June 30, 2019 |
Operating lease right-of-use assets | | $ | 50,830 |
|
| | |
Operating lease liabilities, due within one year | | $ | 4,787 |
|
Operating lease liabilities, due after one year | | 47,152 |
|
Total operating lease liabilities | | $ | 51,939 |
|
|
| | | | |
Finance Leases | | June 30, 2019 |
Property and equipment | | $ | 660 |
|
Less accumulated depreciation | | (367 | ) |
Property and equipment, net | | $ | 293 |
|
| | |
Other accrued liabilities | | $ | 159 |
|
Deferred income and other long-term liabilities | | 153 |
|
Total finance lease liabilities | | $ | 312 |
|
The equipment assetscomponents of lease expense during the three and six months ended June 30, 2019 are included within our property and equipment balance and are depreciated overin the lease term.following table (in thousands):
|
| | | | | | | | | | |
| | Financial Statement Line Item(s) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease expense | | Selling, general, administrative and other expenses, and Company operated hotels | | $ | 1,143 |
| | $ | 2,276 |
|
Short-term lease expense | | Selling, general, administrative and other expenses, and Company operated hotels | | 158 |
| | 405 |
|
Finance lease expense | | | | | | |
Amortization of finance right-of-use assets | | Depreciation and amortization | | 34 |
| | 69 |
|
Interest on lease liabilities | | Interest expense | | 8 |
| | 16 |
|
Total finance lease expense | | | | 42 |
| | 85 |
|
| | | | | | |
Total lease expense | | | | $ | 1,343 |
| | $ | 2,766 |
|
TotalSupplemental cash flow information for our leases is included in the following table (in thousands):
|
| | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Cash used in operating activities for operating leases | | $ | 1,182 |
| | $ | 2,351 |
|
Cash used in operating activities for finance leases | | 8 |
| | 16 |
|
Cash used in financing activities for finance leases | | 35 |
| | 69 |
|
During the three and six months ended June 30, 2019, we recognized ROU assets of $181,000 and associated operating lease liabilities of $202,000 upon commencement of leases for space in our Spokane office. There were no new finance lease assets or associated liabilities during the three and six months ended June 30, 2019.
Information related to the weighted average remaining lease terms and discount rates for our leases as of June 30, 2019 is included in the following table:
|
| | | |
| | June 30, 2019 |
Weighted average remaining lease term (in years) | | |
Operating leases | | 69 |
|
Finance leases | | 3 |
|
Weighted average discount rate | | |
Operating leases | | 7.2 | % |
Finance leases | | 9.3 | % |
The future minimum payments due under all current term operating and capital leasesmaturities of lease liabilities at SeptemberJune 30, 2017,2019, are as indicated below (in thousands):
|
| | | | | | | | |
Years Ending December 31, | | Operating Leases | | Finance Leases |
2019 (remainder) | | $ | 2,393 |
| | $ | 86 |
|
2020 | | 4,809 |
| | 149 |
|
2021 | | 4,813 |
| | 75 |
|
2022 | | 4,776 |
| | 38 |
|
2023 | | 4,739 |
| | 11 |
|
Thereafter | | 248,844 |
| | — |
|
Total lease payments | | 270,374 |
| | 359 |
|
Less: imputed interest | | 218,435 |
| | 47 |
|
| | $ | 51,939 |
| | $ | 312 |
|
|
| | | | | | | | | | | | |
Year ending December 31, | | Total Lease Obligation | | Operating Lease Obligation | | Capital Lease Obligation |
2017 (remainder) | | $ | 1,545 |
| | $ | 1,476 |
| | $ | 69 |
|
2018 | | 5,573 |
| | 5,293 |
| | 280 |
|
2019 | | 4,853 |
| | 4,571 |
| | 282 |
|
2020 | | 4,551 |
| | 4,294 |
| | 257 |
|
2021 | | 2,889 |
| | 2,752 |
| | 137 |
|
Thereafter | | 63,458 |
| | 63,453 |
| | 5 |
|
Total | | $ | 82,869 |
| | $ | 81,839 |
| | $ | 1,030 |
|
The future maturities of lease liabilities in the table above do not differ materially from future minimum rental payments under the previous leasing standard.
Total rent expense underTwo leases comprise $248.8 million of future operating lease maturities beyond 2023. One is a ground lease for our Hotel RL Washington DC property with a term through 2080 and the three and nine months ended September 30, 2017 was $1.6 million and $4.8 million, respectively, which represents the total of amounts shown within Hotel facility and landother is a ground lease expense, as well as amounts included within Franchise and General and Administrative operating expenses, and Discontinued Operations onfor our Consolidated Statements of Comprehensive Income (Loss). Total rent expense under leases for the three and nine months ended September 30, 2016 was $1.5 million and $4.2 million, respectively.Red Lion Anaheim property with a lease term through 2021 but includes renewal options through 2106 that are reasonably assured to be exercised.
| |
10.11. | Commitments and Contingencies |
At any given time, we are subject to claims and actions incidental to the operations of our business. Based on information currently available,During the three months ended June 30, 2019, we do not expectaccrued approximately $952,000 for a settlement over a wage dispute with former hotel employees related to the calculation of pay for certain rest, break, meal, and other periods that any sums we may receive or have to payare required under California laws. The related expense has been recognized in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.Company operated hotels expense in the Condensed Consolidated Statements of Comprehensive Income (Loss).
| |
11.12. | Stock Based Compensation |
Stock Incentive Plans
The 20062015 Stock Incentive Plan ("2015 Plan") authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by our shareholders and allowed awards of 2.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. No further stock option grants or other awards are permitted under the terms of the 2006 plan.
The 2015 Stock Incentive Plan (2015 Plan) authorizes the grant or issuance of various option and other awardsoptions including restricted stock units, and other stock-based compensation. The 2015 Plan was approved by our shareholders in 2015, and providedamended in 2017, and as amended provides for awards of 1.42.9 million shares, subject to adjustments for stock splits, stock dividends and similar events. In May 2017, our shareholders approved an amendment to the 2015 Plan to authorize an additional 1.5 million shares, for a total authorized of 2.9 million shares. As of SeptemberJune 30, 2017,2019, there were 1,370,596439,907 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2015 Plan.Plan, as amended.
Stock based compensation expense reflects the fair value of stock basedstock-based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. For the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 stock-based compensation expense is as follows:follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock units | | $ | 678 |
| | $ | 775 |
| | $ | 1,290 |
| | $ | 1,192 |
|
Unrestricted stock awards | | 130 |
| | 114 |
| | 259 |
| | 229 |
|
Performance stock units | | (196 | ) | | 184 |
| | (49 | ) | | 261 |
|
Stock options | | 21 |
| | 17 |
| | 43 |
| | 34 |
|
Employee stock purchase plan | | 13 |
| | 6 |
| | 19 |
| | 20 |
|
Total stock-based compensation | | $ | 646 |
| | $ | 1,096 |
| | $ | 1,562 |
| | $ | 1,736 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In thousands) |
Stock options | | $ | 17 |
| | $ | 17 |
| | $ | 51 |
| | $ | 34 |
|
Restricted stock units | | 687 |
| | 561 |
| | 1,891 |
| | 1,588 |
|
Performance stock units | | 76 |
| | — |
| | 101 |
| | — |
|
Unrestricted stock awards | | 104 |
| | 105 |
| | 319 |
| | 315 |
|
Employee Stock Purchase Plan | | 14 |
| | 11 |
| | 30 |
| | 25 |
|
Total stock-based compensation | | $ | 898 |
| | $ | 694 |
| | $ | 2,392 |
| | $ | 1,962 |
|
Stock Options
Stock options issued are valued based upon the Black-Scholes option pricing model and we recognize this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that we make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option. For the nine months ended September 30, 2017 there were no stock options granted. For the nine months ended September 30, 2016 there were 81,130 shares granted.
Stock option fair value assumptions are as follows for stock options granted during the nine months ended September 30, 2016:
|
| | | | | | | | | | |
Grant Date | | Volatility | | Forfeiture Rate | | Risk-free Interest Rate | | Dividend Yield | | Expected Life (Years) |
March 28, 2016 | | 61.12% | | 21.07% | | 1.37% | | —% | | 5 |
A summary of stock option activity for the nine months ended September 30, 2017, is as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price |
Balance, January 1, 2017 | | 132,868 |
| | $ | 8.91 |
|
Options granted | | — |
| | — |
|
Options exercised | | — |
| | — |
|
Options forfeited | | (18,890 | ) | | $ | 12.27 |
|
Balance, September 30, 2017 | | 113,978 |
| | $ | 8.36 |
|
Exercisable, September 30, 2017 | | 53,131 |
| | $ | 8.53 |
|
Additional information regarding stock options outstanding and exercisable as of September 30, 2017, is presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Exercise Price | | Number Outstanding | | Weighted Average Remaining Contractual Life (Years) | | Expiration Date | | Weighted Average Exercise Price | | Aggregate Intrinsic Value(1) | | Number Exercisable | | Weighted Average Exercise Price | | Aggregate Intrinsic Value(1) |
$8.20 | | 81,130 |
| | 8.49 | | 2026 | | $ | 8.20 |
| | $ | 37 |
| | 20,283 |
| | $ | 8.20 |
| | $ | 9 |
|
$8.74 | | 32,848 |
| | 0.64 | | 2018 | | $ | 8.74 |
| | — |
| | 32,848 |
| | $ | 8.74 |
| | — |
|
| | 113,978 |
| | 6.23 | | 2018-2026 | | $ | 8.36 |
| | $ | 37 |
| | 53,131 |
| | $ | 8.53 |
| | $ | 9 |
|
(1) The aggregate intrinsic value, in thousands, is before applicable income taxes and represents the amount option recipients would have received if all options had been exercised on the last trading day of the first nine months of 2017, or September 30, 2017, based upon our closing stock price on that date of $8.65.
Restricted Stock Units Shares Issued as Compensation
During the nine months ended September 30, 2017 and 2016, we granted 458,020 and 282,989 unvested restrictedRestricted stock units respectively,granted to executive officers and other key employees which typically vest 25% each year for four years on each anniversary of the grant date. While all of the shares are considered granted, they are not considered issued or outstanding until vested. As of September 30, 2017 and 2016, there were 1,288,752 and 1,095,719 unvested restricted stock units outstanding, respectively. Since we began issuing restricted stock units, approximately 21% of total restricted stock units granted have been forfeited.
A summary of restricted stock unit activity for the nine months ended September 30, 2017, is as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Balance, January 1, 2017 | | 1,036,680 |
| | $ | 7.27 |
|
Granted | | 458,020 |
| | $ | 6.95 |
|
Vested | | (148,674 | ) | | $ | 6.93 |
|
Forfeited | | (57,274 | ) | | $ | 7.19 |
|
Balance, September 30, 2017 | | 1,288,752 |
| | $ | 7.20 |
|
We issued 148,674 shares of common stock to employees during the first nine months of 2017 as their restricted stock units vested. Under the terms of the 2006 and 2015 plans and upon issuance, we authorizeddeliver a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee. The fair value of restricted stock that vested during the ninesix months ended SeptemberJune 30, 20172019 and 20162018 was approximately $1.0$5.8 million and $1.1$1.9 million, respectively.
During the three months ended September 30, 2017 and 2016, we recognized $0.7 million and $0.6 million, respectively in compensation expense related to these grants. During the nine months ended September 30, 2017 and 2016, we recognized $1.9 million and $1.6 million, respectively, in compensation expense related to these grants, and We expect to recognize an additional $5.8$5.6 million in compensation expense over the remaining weighted average vesting periods of 3027 months.
A summary of restricted stock unit activity for the six months ended June 30, 2019, is as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
January 1, 2019 | | 1,288,714 |
| | $ | 8.47 |
|
Granted | | 353,361 |
| | $ | 8.28 |
|
Vested | | (726,139 | ) | | $ | 7.45 |
|
Forfeited | | (142,209 | ) | | $ | 9.06 |
|
June 30, 2019 | | 773,727 |
| | $ | 9.23 |
|
Performance Stock Units, Shares Issued as Compensation
In May 2017, we grantedWe grant performance stock units (PSUs)("PSUs") to certain of our executives under the 2015 Plan.Plan, as amended. These PSUs include both performance vesting conditions and a service vesting condition. The performance vesting conditions are based on (1) an annual earnings goal tied to Adjusted EBITDA, with a 70% weighting, and (2) a goal tied to the number of signed franchise license agreements in the year, with a 30% weighting.conditions. Each performance condition has a minimum, a target and a maximum share amount based on the level of attainment of the performance condition. Compensation expense, net of estimated forfeitures, is calculated based on the estimated full year attainment of the performance conditions during the performance period and recognized on a straight-line basis over the performance and service periods. The remaining compensation expense related to PSUs vest upon achievement of approximately $1.4 million will be recognized over the performance and service conditions, provided participants are employed by RLH Corporation at the end of the service periods. For the PSUs granted in May 2017, the service period ends in March 2020.next 30 months.
A summary of performance stock unit activity for the ninesix months ended SeptemberJune 30, 2017,2019, is as follows:
|
| | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
January 1, 2019 | | 209,201 |
| | $ | 8.23 |
|
Granted | | 218,437 |
| | $ | 8.08 |
|
June 30, 2019 | | 427,638 |
| | $ | 8.15 |
|
|
| | | | | | | |
| | Number of Shares | | Weighted Average Grant Date Fair Value |
Balance, January 1, 2017 | | — |
| | — |
|
Granted | | 274,882 |
| | $ | 6.45 |
|
Vested | | — |
| | — |
|
Forfeited | | (17,906 | ) | | $ | 6.45 |
|
Balance, September 30, 2017 | | 256,976 |
| | $ | 6.45 |
|
Unrestricted Stock Awards
Unrestricted stock awards are granted to members of our boardBoard of directorsDirectors as part of their compensation. Awards are fully vested, and expensedexpense is recognized when granted. The fair value of unrestricted stock awards is the market close price of our common stock on the date of the grant.
The following table summarizes unrestricted stock award activity for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Shares of unrestricted stock granted | | 15,556 |
| | 12,062 |
| | 30,911 |
| | 23,751 |
|
Weighted average grant date fair value per share | | $ | 8.33 |
| | $ | 9.50 |
| | $ | 8.38 |
| | $ | 9.65 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Shares of unrestricted stock granted | | 14,184 |
| | 14,868 |
| | 42,432 |
| | 42,096 |
|
Weighted average grant date fair value per share | | $ | 7.40 |
| | $ | 7.06 |
| | $ | 7.54 |
| | $ | 7.48 |
|
Employee Stock Purchase Plan
In 2008, we adopted a new employee stock purchase plan (ESPP) upon expiration of our previous plan. Under the ESPP as approved in 2008, 300,000 shares of common stock were authorized for purchase by eligible employees. In May 2017, our shareholders authorized an additional 300,000 shares for a total of 600,000 shares authorized under the ESPP plan. As of September 30, 2017, 344,847 shares were available for grant. Eligible employees may purchase shares of our common stock at a 15% discount through payroll deductions. No employee may purchase more than $25,000 worth of shares, or more than 10,000 total shares, in any calendar year. As allowed under the ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. During the three months ended September 30, 2017 and 2016, there were 21,371 and 17,060 shares issued and approximately $14,000 and $11,000 was recognized in compensation expense related to the discount associated with the plan in each year, respectively. During the nine months ended September 30, 2017 and 2016, 33,925 and 29,795 shares were issued, and $30,000 and $25,000 were recognized in compensation expense related to the discount associated with the plan in each year, respectively.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Shares of stock sold to employees | | 21,371 |
| | 17,060 |
| | 33,925 |
| | 29,795 |
|
Weighted average fair value per ESPP award | | $ | 6.25 |
| | $ | 5.98 |
| | $ | 6.16 |
| | $ | 5.97 |
|
Warrants
In January 2015, in connection with Shelbourne Falcon’s purchase of equity interests in RL Venture, we issued Shelbourne warrants to purchase 442,533 shares of common stock. The warrants have a five-year term from the date of issuance and a per share exercise price of $6.78. The warrants have been classified as equity due to required share settlement upon exercise. Accordingly, the estimated fair value of the warrants was recorded in additional paid in capital upon issuance, and we do not recognize subsequent changes in fair value in our financial statements. As of September 30, 2017, all warrants were still outstanding.
| |
12.13. | Earnings (Loss) Per Share |
The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Numerator - basic and diluted: | | | | | | | | |
Net income (loss) | | $ | (3,608 | ) | | $ | (1,663 | ) | | $ | (8,004 | ) | | $ | 5,675 |
|
Net (income) loss attributable to noncontrolling interest | | 774 |
| | (659 | ) | | 1,060 |
| | (5,409 | ) |
Net income (loss) attributable to RLH Corporation | | $ | (2,834 | ) | | $ | (2,322 | ) | | $ | (6,944 | ) | | $ | 266 |
|
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average shares - basic | | 24,856 |
| | 24,352 |
| | 24,730 |
| | 24,227 |
|
Weighted average shares - diluted | | 24,856 |
| | 24,352 |
| | 24,730 |
| | 25,239 |
|
| | | | | | | | |
Earnings (loss) per share - basic | | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.28 | ) | | $ | 0.01 |
|
Earnings (loss) per share - diluted | | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.28 | ) | | $ | 0.01 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Numerator - basic and diluted: | | | | | | | | |
Net income (loss) from continuing operations | | $ | 3,219 |
| | $ | 3,251 |
| | $ | (2,032 | ) | | $ | (3,516 | ) |
Less: net (income) loss attributable to noncontrolling interests | | (871 | ) | | (1,207 | ) | | 507 |
| | (645 | ) |
Net income (loss) from continuing operations attributable to RLH Corporation | | 2,348 |
| | 2,044 |
| | (1,525 | ) | | (4,161 | ) |
Income from discontinued operations | | 408 |
| | 262 |
| | 611 |
| | 1,831 |
|
Net income (loss) attributable to RLH Corporation | | 2,756 |
| | 2,306 |
| | (914 | ) | | (2,330 | ) |
Fair value adjustment of share component of contingent consideration (1) | | 987 |
| | — |
| | 567 |
| | — |
|
Net income (loss) attributable to RLH Corporation for diluted earnings (loss) per share (1) | | $ | 3,743 |
| | $ | 2,306 |
| | $ | (347 | ) | | $ | (2,330 | ) |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average shares - basic | | 23,609 |
| | 20,228 |
| | 23,542 |
| | 20,157 |
|
Weighted average shares - diluted (1) | | 24,176 |
| | 20,613 |
| | 23,542 |
| | 20,157 |
|
| | | | | | | | |
Earnings (loss) per share - basic | | | | | | | | |
Net income (loss) from continuing operations attributable to RLH Corporation | | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.06 | ) | | $ | (0.21 | ) |
Income from discontinued operations | | 0.02 |
| | 0.01 |
| | 0.02 |
| | 0.09 |
|
Net income (loss) attributable to RLH Corporation | | $ | 0.12 |
| | $ | 0.11 |
| | $ | (0.04 | ) | | $ | (0.12 | ) |
| | | | | | | | |
Earnings (loss) per share - diluted (1) | | | | | | | | |
Net income (loss) from continuing operations attributable to RLH Corporation | | $ | 0.10 |
| | $ | 0.10 |
| | $ | (0.06 | ) | | $ | (0.21 | ) |
Income from discontinued operations | | 0.01 |
| | 0.01 |
| | 0.02 |
| | 0.09 |
|
Net income (loss) attributable to RLH Corporation | | $ | 0.11 |
| | $ | 0.11 |
| | $ | (0.04 | ) | | $ | (0.12 | ) |
(1) For the three and nine months ended September 30, 2017, the effect of the fair value adjustment of share component of contingent consideration is excluded from the calculation of diluted earnings per share as it would be antidilutive.
For the three months ended September 30, 2017, we recognized $1.0 million of expense related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $1.30 per share increase in our stock price from June 30, 2017 to September 30, 2017.
For the nine months ended September 30, 2017, we recognized $0.6 million of income related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $0.30 per share increase in our stock price from December 31, 2016 to September 30, 2017.
The following table presents options to purchase common shares, restricted stock units outstanding, performance stock units outstanding, and warrants to purchase common shares and contingently issuable shares included in the earnings per share calculation, as well as the amount excluded from the dilutive earnings per share calculation if they were considered antidilutive, for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 |
Stock Options(1) | | | | | | | | | | | | | | | | |
Dilutive awards outstanding | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,815 |
|
Antidilutive awards outstanding | | 113,978 |
| | 149,858 |
| | 113,978 |
| | 149,858 |
| | 81,130 |
| | 81,130 |
| | 81,130 |
| | 75,315 |
|
Total awards outstanding | | 113,978 |
| | 149,858 |
| | 113,978 |
| | 149,858 |
| | 81,130 |
| | 81,130 |
| | 81,130 |
| | 81,130 |
|
| | | | | | | | | | | | | | | | |
Restricted Stock Units(2) | | | | | | | | | | | | | | | | |
Dilutive awards outstanding | | 535,035 |
| | 342,321 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 752,936 |
|
Antidilutive awards outstanding | | 753,717 |
| | 753,398 |
| | 1,288,752 |
| | 1,095,719 |
| | 773,727 |
| | 1,438,723 |
| | 773,727 |
| | 685,787 |
|
Total awards outstanding | | 1,288,752 |
| | 1,095,719 |
| | 1,288,752 |
| | 1,095,719 |
| | 773,727 |
| | 1,438,723 |
| | 773,727 |
| | 1,438,723 |
|
| | | | | | | | | | | | | | | | |
Performance Stock Units(3) | | | | | | | | | | | | | | | | |
Dilutive awards outstanding | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 98,532 |
|
Antidilutive awards outstanding | | — |
| | — |
| | — |
| | — |
| | 314,684 |
| | 298,521 |
| | 314,684 |
| | 199,989 |
|
Total awards outstanding | | — |
| | — |
| | — |
| | — |
| | 314,684 |
| | 298,521 |
| | 314,684 |
| | 298,521 |
|
| | | | | | | | | | | | | | | | |
Warrants(4) | | | | | | | | | | | | | | | | |
Dilutive awards outstanding | | 31,702 |
| | 34,761 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 154,733 |
|
Antidilutive awards outstanding | | 410,831 |
|
| 407,772 |
|
| 442,533 |
|
| 442,533 |
| | 442,533 |
|
| 442,533 |
|
| 442,533 |
|
| 287,800 |
|
Total awards outstanding | | 442,533 |
| | 442,533 |
| | 442,533 |
| | 442,533 |
| | 442,533 |
| | 442,533 |
| | 442,533 |
| | 442,533 |
|
| | | | | | | | | |
Shares for Vantage Contingent Consideration(5) | | | | | | | | | |
Dilutive awards outstanding | | — |
| | 7,500 |
| | — |
| | — |
| |
Antidilutive awards outstanding | | 483,000 |
| | 682,500 |
| | 483,000 |
| | 690,000 |
| |
Total awards outstanding | | 483,000 |
| | 690,000 |
| | 483,000 |
| | 690,000 |
| |
| | | | | | | | | |
Total dilutive awards outstanding | | 566,737 |
| | 384,582 |
| | — |
| | — |
| |
(1) All stock options for the three and six months ended June 30, 2019 and the three months ended June 30, 2018 were anti-dilutive as a result of the net loss attributable to RLH Corporation for these periods. If we had reported net income for the three and six months ended June 30, 2019, no stock options would have been dilutive as a result of the RLH Corporation weighted average share price during the reporting periods. If we had reported net income for the three months ended June 30, 2018, 7,204 stock options would have been dilutive.
(2)Restricted stock units were anti-dilutive for the ninethree and six months ended SeptemberJune 30, 20172019 and 2016the three months ended June 30, 2018 due to theour net loss attributable to RLH Corporation in the reporting periods. If we had reported net income for the ninethree and six months ended SeptemberJune 30, 20172019 then 138,683 and 2016 then 444,608 and 443,668156,398 units, respectively, would have been dilutive. If we had reported net income for the three months ended June 30, 2018 then 729,145 units would have been dilutive.
(3)All performance Performance stock units are considered anti-dilutive and are not included in the weighted average diluted shares outstanding until the performance targets have beenare met. Performance targets relate to total company annual earnings and the number of new franchise agreements signed in 2017.
(4) All warrantsPSU’s were anti-dilutive for the ninethree and six months ended SeptemberJune 30, 20172019 as no performance targets had been achieved during those periods. Had performance targets been met for the three and 2016six months ended June 30, 2019 then 74,903 and 75,976 units, respectively, would have been dilutive. PSU’s were also anti-dilutive for the six months ended June 30, 2018. There would have been 105,179 units that were dilutive for the six months ended June 30, 2018 had the performance targets been achieved.
(4) All warrants for the three and six months ended June 30, 2019 and the three months ended June 30, 2018 were anti-dilutive due to the net loss attributable to RLH Corporation in theeach reporting periods.period. If we had reported net income for the ninethree and six months ended SeptemberJune 30, 20172019, 52,818 and 2016 then 24,750 and 30,453 units,72,408 warrants, respectively, would have been dilutive.
(5) As part of the Vantage acquisition, up to an additional 690,000 shares may be issued with the one-year and two-year contingent consideration earn outs (see Note 16). These shares are not included in basic shares outstanding until the period the contingency is resolved. The Year 1 contingent consideration was preliminarily determined to have been earned as of September 30, 2017, resulting in 414,000 shares included in basic shares outstanding on a weighted average basis. For purposes of calculating earnings per share, the If we had reported net income or expense recognized during the period that is related to the changes in the fair value of the share component of the contingent consideration is added back to net income/loss. Forfor the three months ended September 30, 2017, we recognized $1.0 million of expense related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $1.30 per share increase in our stock price from June 30, 2017 to September 30, 2017. For the nine months ended September 30, 2017, we recognized $0.6 million of income related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statement of Comprehensive Income (Loss)), as the result of the $0.30 per share increase in our stock price from December 31, 2016 to September 30, 2017.2018, 160,041 warrants would have been dilutive.
We recognized an income tax provision (benefit) of $174,000$108,000 and $166,000$(348,000) for the three months ended SeptemberJune 30, 20172019 and 2016.2018, respectively. For the ninesix months ended SeptemberJune 30, 20172019 and 20162018 we recognized an income tax provision (benefit) of $513,000$190,000 and $258,000.$(213,000), respectively. The income tax provision varies from the statutory rate primarily due to a fullpartial valuation allowance against our deferred tax assets, as well as for deferred tax expense associated with our acquired indefinite-lived intangible assets, which are amortized for tax purposes but not for U.S. GAAP purposes.
We have federal operating loss carryforwards, which will expire beginning in 2032, state operating loss carryforwards, which will expire beginning in 2017,2019, and both federal and state tax credit carryforwards, which will begin to expire in 2024.
Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the Level 1, Level 2 and Level 3 of the fair value hierarchy.
EstimatedCash, Restricted cash and Accounts receivable carrying values approximate fair valuesvalue due to the short-term nature of financial instruments (in thousands) are shown in the table below.these items. We estimate the fair value of our notesNotes receivable using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. We estimate the fair value of our long-termLong-term debt and capitalOperating lease obligations using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. Estimated fair values of financial instruments are shown in the table below (in thousands).
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | |
Notes receivable | | $ | 1,967 |
| | $ | 1,967 |
| | $ | 2,103 |
| | $ | 2,103 |
|
Financial liabilities: | | | | | | | | |
Debt | | $ | 58,317 |
| | $ | 57,487 |
| | $ | 44,523 |
| | $ | 43,880 |
|
Total finance lease obligations | | 312 |
| | 312 |
| | 378 |
| | 378 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Financial assets: | | | | | | | | |
Notes receivable | | $ | 1,572 |
| | $ | 1,572 |
| | $ | 1,295 |
| | $ | 1,295 |
|
Financial liabilities: | | | | | | | | |
Total debt | | $ | 112,875 |
| | $ | 112,307 |
| | $ | 110,598 |
| | $ | 107,858 |
|
Total capital lease obligations | | $ | 1,030 |
| | $ | 1,030 |
| | $ | 1,147 |
| | $ | 1,147 |
|
| |
15.16. | Related Party Transactions |
All fourthree of our current joint ventures - RL Venture, RLS Atla Venture, RLS Balt Venture and RLS DC Venture, and our former joint venture RLS Balt Venture, which was dissolved in October 2018 - have agreed to pay to Shelbourne Capital, LLC (Shelbourne Capital)("Shelbourne Capital") an investor relations fee each month equal to 0.50% of its total aggregate revenue. Shelbourne Capital is the entity that leads Shelbourne Falcon, Shelbourne Falcon II, Shelbourne Falcon III and Shelbourne Falcon IV, the noncontrolling interest holder in these joint ventures. The amount Shelbourne Capital earned from all four joint ventures during the three months ended SeptemberJune 30, 20172019 and 20162018 totaled $134,000$34,000 and $221,000,$71,000, respectively. The amount Shelbourne Capital earned from all four joint ventures during the ninesix months ended SeptemberJune 30, 20172019 and 20162018 totaled $344,000$54,000 and $423,000,$147,000, respectively. Columbia Pacific Opportunity Fund, LP ("CP"), previously one of our largest shareholders, is an investor in Shelbourne Falcon, our minorityjoint venture partner in RL Venture. During the three months ended SeptemberJune 30, 20172019 and 2016,2018, Shelbourne Capital earned $117,000$29,000 and $190,000$55,000, respectively, from RL Venture in each period.Venture. During the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, Shelbourne Capital earned $291,000$42,000 and $366,000$117,000, respectively, from RL Venture in each period.
RL Venture agreedVenture. We did not pay any investor relations fees to pay CPA Development, LLC, an affiliate of Columbia Pacific Opportunity Fund, LP, a construction management fee of $200,000Shelbourne Capital related to the renovation projects. No payment was due from RLRLS Balt Venture to CPA Development, LLC during the three and nine months ended September 30, 2017, as the obligation was fully paid by the end of 2016. RL Venture paid $11,000 and $78,000 for the construction management fee during the three and nine months ended September 30, 2016, respectively.after October 2018.
In May 2015, we entered into a management agreement with the owner (the LLC entity) of Red Lion Hotel Woodlake Conference Center Sacramento. A member of our board of directors is a 50% owner of the entity that serves as the manager member of the LLC entity. During the three and nine months ended September 30, 2016, we recognized management fee and brand marketing fee revenue from the LLC entity of $30,000 and $92,000. On December 12, 2016 the LLC permanently closed the Red Lion Hotel Woodlake.
Effective March 2016, our wholly owned subsidiary, RL Management, entered into a one-year contract to manage the Hudson Valley Resort and Spa, a hotel located in Kerhonkson, New York. Following the initial one-year term, we continuecontinued to manage the
property on a month-to-month basis.basis until October 2018. The hotel is owned by HNA Hudson Valley Resort & Training Center LLC, an affiliate of HNA RLH Investments LLC ("HNA"), previously one of our largest shareholders, and is controlled by HNA Group North America LLC, for which Enrico Marini Fichera, one of our directors, serves as the Head of Investments.shareholders. Under that contract, our subsidiary is entitled to a monthly management fee equal to $8,333 or three percent3% of the hotel’s gross operating revenues, whichever is greater. During the three and ninesix months ended SeptemberJune 30, 2017,2018, we recognized management fee revenue from HNA Hudson Valley Resort & Training Center LLC of $33,000$25,000 and $83,000.$50,000, respectively. On June 12, 2018, HNA sold their common shares in RLH to a third party, no longer making them a related party.
On September 30, 2016, we acquired the operating assets and assumed certain liabilities relating to specified hotel brands and brand extensions from Thirty-Eight Street, Inc. ("TESI") and Vantage Hospitality Group, Inc. From the date of the acquisition, our board appointed Bernard T. Moyle, as our Executive Vice President and Chief Operating Officer and Roger J. Bloss as our Executive Vice President and President of Global Development. Messrs. Moyle and Bloss are shareholders of TESI and Vantage Hospitality.
Effective May 31, 2018, Messrs. Moyle and Bloss entered into consulting agreements through December 31, 2020, ending their employment with the Company and no longer making them a related party after the effective date. On May 21, 2018, the Company entered into a letter agreement (Letter Agreement) and a First Amendment (First Amendment) to the TESI and Vantage Hospitality purchase agreement. In accordance with the Letter Agreement and First Amendment, after the first anniversary of the closing date, we issued $4.0 million in cash and 414,000 shares of the Company’s common stock to TESI in January 2018. The Company understands that Mr. Bloss and Mr. Moyle each own 50% of the outstanding shares of TESI.
Messrs. Bloss and Moyle each additionally indirectly own a 5.7% equity interest in a limited liability company that owns the Lexington Hotel and Conference Center in Jacksonville, Florida. During the three and ninesix months ended SeptemberJune 30, 2016,2018, the Company billed the property approximately $77,000 and $161,000, respectively, for franchise fees and related services, including royalty and marketing. This hotel, along with the Lexington Inn & Suites, Daytona Beach and the ABVI Las Vegas, are managed by Cal-Vegas, Ltd. ("Cal-Vegas"), of which TESI (owned by Messrs. Bloss and Moyle) is the General Partner and holds a 2% general partner interest, and Mr. Moyle serves as the Chief Operating Officer and Chief Financial Officer. The Company and Cal-Vegas are not parties to any agreement with respect to these properties, as the management contracts are between Cal-Vegas and the Company’s franchisees, who are unrelated third parties. Cal-Vegas is also the lessee of the ABVI Las Vegas hotel. Franchise fees billed by the Company to each of these properties for the three and six months ended June 30, 2018 were as follows: Lexington Inn & Suites, Daytona Beach, $18,000 and $35,000, respectively, and ABVI Las Vegas, $1,000 and $1,000, respectively.
During the fourth quarter of 2018, we recognizedtransitioned management of our company operated Hotel RL Baltimore Inner Harbor and Hotel RL Washington DC from RL Management, Inc., to HEI Hotels and Resorts, of which one of the members of our Board of Directors, Ted Darnall, is currently the Chief Executive Officer. Additionally, during the first quarter of 2019, management of our company operated hotel Red Lion Hotel Seattle Airport was also transitioned from RL Management, Inc. to HEI Hotels and Resorts. During the three and six months ended June 30, 2019, we paid $312,000 and $540,000, respectively, in management fees to HEI Hotels and Resorts for management of these properties.
On January 14, 2019, the Company announced the appointment of Julie Shiflett as Chief Financial Officer of RLH. Prior to this appointment, the Company paid consulting fees to NorthWest CFO, a consulting firm of which Ms. Shiflett is a Principal. Payments made to NorthWest CFO for consulting fees during the three months ended June 30, 2019 and 2018 totaled $0 and $224,000, respectively and during the six months ended June 30, 2019 and 2018 totaled $49,000 and $230,000, respectively. The payments made during 2019 were for services rendered by NorthWest CFO in 2018. No services have been performed by NorthWest CFO on behalf of RLH subsequent to Ms. Shiflett being appointed Chief Financial Officer.
As noted in Note 8 Debt and Line of Credit, on May 31, 2019 we executed a mortgage loan with a principal and accrued exit fee revenueof $17.4 million with CP Business Finance I, LP, an affiliate of Columbia Pacific Opportunity Fund, LP, who held 500,000 shares of RLH common stock as of October 2018. Additionally, Alexander B. Washburn, who served as a member of our Board of Directors from HNA Hudson Valley Resort & Training CenterMay 2015 to April 2019, is one of the managing members of Columbia Pacific Advisor, LLC, which serves as the investment manager of $35,000 and $65,000.Columbia Pacific Opportunity Fund, LP.
The total amounts receivable from related parties, primarily related to hotel management agreements, were $1.8 million and $1.9 million at September 30, 2017 and December 31, 2016, and are classified within Accounts receivable from related parties on our Consolidated Balance Sheets.
| |
16.17. | Business AcquisitionAcquisitions |
Knights Inn Acquisition
On September 30, 2016 (the close date)May 14, 2018, Red Lion Hotels Franchising, Inc. completed the purchase of all of the issued and outstanding shares of capital stock of Knights Franchise Systems, Inc. ("KFS"), we (i) acquired selectedand the purchase of certain operating assets from, and assumedassumption of certain liabilities relating to the business of Vantage Hospitalityfranchising Knights Inn branded hotels to hotel owners from Wyndham Hotel Group Inc. (Vantage), a subsidiaryCanada, ULC and Wyndham Hotel Group Europe Limited, pursuant to the Amended and Restated Purchase Agreement, dated May 1, 2018, for an aggregate purchase price of Thirty-Eight Street, Inc. (TESI) and (ii) acquired one brand name asset from TESI. Vantage is a hotel franchise company, and the addition of the Vantage assets substantially increases our number of franchise properties and provides us with a broader presence in the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn.$27.2 million.
The following reflects our purchase price totaled $40.2 million, including the followingallocation (in thousands):
|
| | | | |
| | Fair Value |
Current assets | | $ | 1,288 |
|
Intangible assets | | 16,800 |
|
Goodwill | | 9,191 |
|
Total assets acquired | | 27,279 |
|
| |
|
Current liabilities | | 30 |
|
Total liabilities acquired | | 30 |
|
| |
|
Total net assets acquired | | $ | 27,249 |
|
|
| | | | |
| | Purchase Price |
Cash paid to Vantage at close date | | $ | 10,300 |
|
Cash paid to TESI at close date | | 12,300 |
|
Total cash consideration at close date | | 22,600 |
|
Value of 690,000 shares to TESI at close date | | 5,800 |
|
Total consideration at close date | | 28,400 |
|
| | |
Fair value of contingent consideration | | 10,900 |
|
Assumption of Vantage obligation | | 900 |
|
Total purchase price | | $ | 40,200 |
|
The acquisition was funded at closing with $22.6Current assets are comprised of $4.6 million in contractual value of cash on hand,acquired receivables, less a fair value adjustment of which $10.3 million was paid to Vantage and $12.3 million was paid to TESI and 690,000 shares of RLH Corporation stock paid to TESI, which was valued at $5.8$3.3 million based on the closing price of RLH Corporation stock of $8.34 on the close date. The total purchase price was $40.2 million, which included the estimated fair value of $0.9 million for the assumption of an obligation related to a previous business acquisition of Vantage and the fair value of $10.9 million of primarily contingent consideration, the total of which is to be paid to TESI at the first and second anniversaries of the close date, based on the attainment of certain performance criteria. A minimum of $2 million of the additional consideration would not be contingent and would be paid in equal amounts at the first and second anniversaries of the close date. Payment of the contingent consideration is dependent on the retention of Vantage properties under franchise or membership license agreements,expected collectability.
Intangible assets acquired are as determined by the room count at the first and second-year anniversary dates when compared with the room count at the close date, as follows:follows (in thousands):
|
| | | | | |
| Fair Value | | Useful Life |
Brand names | $ | 7,700 |
| | Indefinite |
Customer contracts | 9,100 |
| | 15 years |
Total intangible assets | $ | 16,800 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year 1 Anniversary | | Year 2 Anniversary | | Total |
Threshold | | Shares | | Cash(1) | | Shares | | Cash(1) | | Shares | | Cash(1) |
90% of room count at close | | 414,000 |
| | $ | 4,000 |
| | 276,000 |
| | $ | 3,000 |
| | 690,000 |
| | $ | 7,000 |
|
80% of room count at close | | 310,500 |
| | $ | 3,000 |
| | 207,000 |
| | $ | 2,250 |
| | 517,500 |
| | $ | 5,250 |
|
Minimum | | — |
| | $ | 1,000 |
| | — |
| | $ | 1,000 |
| | — |
| | $ | 2,000 |
|
(1) in thousands
If the room counts are below the 80% thresholds at each anniversary date, but the annual franchise revenue, measured as the most recent twelve months ending on the anniversary date, of the Vantage properties is equal to or exceeds the closing date revenue benchmark, then the contingent consideration would be paid at the anniversary date based on the 90% threshold in the table above.
The contingent consideration is measured at each anniversary date independent of the other measurement period and is recorded as a liability due to the expected payment of cash and a variable number of shares. Changes in the obligation areWe recognized within acquisition and integration costs in the Consolidated Statements of Comprehensive Income (Loss). At each reporting period, we are required to assess the fair value of the liability and record any changes in fair value in our Consolidated Statement of Comprehensive Income (Loss). For the third quarter 2017, we recognized $1.2$9.2 million in expense associated with our updated assessment, including $1.0 million of expense related to the change in fair value of the share component of the contingent consideration (classified within Acquisition and integration costs on our Consolidated Statements of Comprehensive Income (Loss)),goodwill as the result of the $1.30 per share increase in our stock price from June 30, 2017 to September 30, 2017. As of September 30, 2017, we have preliminarily determined the Year 1 anniversary contingent consideration had been earned at the full amount. The value of the Year 1 anniversary consideration was $7.6 million, including $4.0 million in cash and $3.6 million in shares of RLH Corporation stock, based on the closing price of $8.65 per share on September 30, 2017. Once agreed to between the Vantage sellers and us, as specified in the asset purchase agreement, the shares of RLH Corporation stock will be issued and the cash transferred.
The Year 2 contingent consideration was $4.9 million at September 30, 2017. At December 31, 2016, the full contingent consideration was valued at $11.2 million.
Following the closing of the acquisition, Roger J. Bloss and Bernard T. Moyle were appointed to executive management positions at RLH Corporation, and Messrs. Bloss and Moyle also have ownership interests in TESI. Therefore, the contingent consideration obligations are classified as related party liabilitiesrecorded within our Consolidated Balance Sheets.franchise reporting segment. The goodwill is deductible for income tax purposes. The factors that make up the goodwill are primarily expected synergies from combining the operations of Knights Inn with our own.
The following supplemental pro forma results are based on the individual historical results of RLH Corporation and Vantage,KFS, with adjustments to give effect to the combined operations as if the acquisition had been consummated on January 1, 20162018 (in thousands, except per share data) (unaudited):
|
| | | | | |
| | | Six Months Ended June 30, 2018 |
Revenue | | | $ | 74,534 |
|
Net income (loss) | | | 7,781 |
|
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation | | | 2,372 |
|
Earnings (loss) per share attributable to RLH Corporation - basic | | | $ | 0.10 |
|
Earnings (loss) per share attributable to RLH Corporation - diluted | | | $ | 0.09 |
|
|
| | | | | | | | |
| | Three Months Ended September 30, 2016 | | Nine Months Ended September 30, 2016 |
| | (in thousands) |
Revenue | | $ | 53,692 |
| | $ | 147,463 |
|
Income (loss) before income taxes | | $ | 5,880 |
| | $ | 2,188 |
|
| |
17.18. | Discontinued Operations and Assets and Liabilities Held for SaleSubsequent Events |
Subsequent to June 30, 2019, we were notified that three franchisees related to Inner Circle Investments issued deeds to their lenders in lieu of foreclosure on their leasehold interests. The lenders subsequently initiated sale proceedings on the related leaseholds. On October 3, 2017,July 16th and July 21st, 2019, an additional two related franchisees ceased operations until further notice, and on July 22nd and 25th, 2019, two additional related franchisees filed for voluntary bankruptcy protection under Chapter 11 of the United Stated Bankruptcy Code. All seven properties continue to have active franchise license agreements with us.
As of June 30, 2019, these franchises owe us approximately $1.0 million in trade receivables, $0.5 million in collateralized loans, and $0.2 million in brand standard loans. In addition, we completedhave an asset of $3.3 million in unamortized key money related to these franchise agreements. The collateralized loans are secured by the saleproperty purchased with their proceeds. All outstanding receivables, loans, and key money assets are collateralized by an equity interest in one of certain specified liabilities and substantiallythe leaseholds as well as a personal guarantee of the owner. Given all of the assets of our Entertainment segment, previously composed of WestCoast Entertainmentfranchises continue to have active franchise license agreements with us and TicketsWest. As such,given the resultsestimated value of the Entertainment business are reported as discontinued operations, andassociated collateral, we have not recorded any additional reserves against the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q.balances described above. We will recognize an estimated gaincontinue to monitor the facts and circumstances surrounding this matter. If more information becomes available in subsequent periods, it could impact our conclusion on salethe collectability of $1.1 million inthese balances and on the fourth quarter of 2017, based on cash proceeds of $6.0 million, less estimated transaction costs of $0.7 million, and $4.2 million of net assets.Company’s future operations.
The following summarizes the results of the Entertainment business segment included in the Consolidated Statements of Comprehensive Income (Loss) as discontinued operations (in thousands).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Entertainment revenue | | $ | 2,969 |
| | $ | 1,936 |
| | $ | 9,050 |
| | $ | 13,014 |
|
Operating expenses: | | | | | | | | |
Entertainment | | 2,555 |
| | 1,605 |
| | 8,372 |
| | 11,183 |
|
Other | | — |
| | 13 |
| | — |
| | 14 |
|
Depreciation and amortization | | 7 |
| | 43 |
| | 64 |
| | 145 |
|
Gain on asset dispositions, net | | (1 | ) | | (1 | ) | | 3 |
| | (1 | ) |
Total operating expenses | | 2,561 |
| | 1,660 |
| | 8,439 |
| | 11,341 |
|
Operating income | | 408 |
| | 276 |
| | 611 |
| | 1,673 |
|
Interest expense | | — |
| | (12 | ) | | — |
| | (12 | ) |
Other income (expense), net | | — |
| | (2 | ) | | — |
| | 170 |
|
Income from discontinued operations | | $ | 408 |
| | $ | 262 |
| | $ | 611 |
| | $ | 1,831 |
|
The following table presents the assets and liabilities of the Entertainment business segment included in the Consolidated Balance Sheet as Assets held for sale and Liabilities held for sale (in thousands):
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Accounts receivable, net | | $ | 381 |
| | $ | 1,656 |
|
Inventories | | 16 |
| | 51 |
|
Prepaid expenses and other | | 266 |
| | 247 |
|
Property and equipment, net | | 228 |
| | 247 |
|
Goodwill | | 3,162 |
| | 3,162 |
|
Intangible assets | | 6 |
| | 6 |
|
Other assets, net | | 226 |
| | 216 |
|
Assets held for sale | | $ | 4,285 |
| | $ | 5,585 |
|
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Accounts payable | | $ | 318 |
| | $ | 203 |
|
Accrued payroll and related benefits | | 82 |
| | 210 |
|
Other accrued liabilities | | 15 |
| | — |
|
Deferred income and other long-term liabilities
| | 324 |
| | 273 |
|
Liabilities held for sale | | $ | 739 |
| | $ | 686 |
|
| | | | |
Other accrued entertainment liabilities held for sale | | $ | 6,757 |
| | $ | 11,334 |
|
The following table represents the cash flow items associated with discontinued operations of the Entertainment business segment for the nine months ended September 30, 2017 and 2016 (in thousands).
|
| | | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2017 | | 2016 |
Depreciation and amortization | | $ | 64 |
| | $ | 145 |
|
Capital expenditures | | $ | 101 |
| | $ | 26 |
|
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This quarterly report on Form 10-Q includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this quarterly report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of our annual report on Form 10-K for the year ended December 31, 2016,2018, which we filed with the Securities and Exchange Commission (“SEC”) on March 31, 2017,8, 2019, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements.statements, which speak only as of the date of this quarterly report.
In this report, "we", "us", "our","we," "our, company"" "us," "our company," "RLHC," and "RLH Corporation" refer to Red Lion Hotels Corporation, doing business as RLH Corporation, and as the context requires all, of its consolidated subsidiaries as follows:
Wholly-ownedWholly owned subsidiaries:
•Red Lion Hotels Holdings, Inc.
•Red Lion Hotels Franchising, Inc.
•Red Lion Hotels Canada Franchising, Inc.
•Red Lion Hotels Management, Inc. (RL Management)("RL Management")
•Red Lion Hotels Limited Partnership
•RL Baltimore LLC ("RL Baltimore")
•WestCoast Hotel Properties, Inc.
•Red Lion Anaheim, LLC
•RLabs, Inc.
Joint venture entities:
•RL Venture LLC (RL Venture)("RL Venture") in which we hold a 55% member interest
•RLS Atla Venture LLC (RLS("RLS Atla Venture)Venture") in which we hold a 55% member interest
•RLS Balt Venture LLC (RLS Balt Venture) in which we hold a 73% member interest
•RLS DC Venture LLC (RLS("RLS DC Venture)Venture") in which we hold a 55% member interest
The terms "the network",network," "systemwide hotels"hotels," "system of hotels," or "network of hotels" refer to our entire group of owned, managed and franchised hotels.
The following discussion and analysis should be read in connection with our unaudited condensed consolidated financial statements and the condensed notes thereto and other financial information included elsewhere in this quarterly report, as well as in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2016,2018, which are included in our annual report on Form 10-K for the year ended December 31, 2016.2018.
Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the management, franchising and ownership of hotels under the following proprietary brands: Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, Americas Best Value Inn, Canadas Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites.
|
| | |
| Ÿ Hotel RL
| Ÿ America's Best Inn & Suites
|
| Ÿ Red Lion Hotels
| Ÿ Signature Inn
|
| Ÿ Red Lion Inn & Suites
| Ÿ Jameson Inns
|
| Ÿ GuestHouse
| Ÿ Country Hearth Inns & Suites
|
| Ÿ Settle Inn
| Ÿ 3 Palm Hotels
|
| Ÿ Americas Best Value Inn
| Ÿ Value Inn Worldwide
|
| Ÿ Canadas Best Value Inn
| Ÿ Value Hotel Worldwide
|
| Ÿ Lexington Hotels & Inns
| |
A summary of our properties as of SeptemberJune 30, 2017,2019, including the approximate number of available rooms, is provided below:
|
| | | | | | | | | | | | | | | | | | |
| | Company Operated | | Franchised | | Total Systemwide |
| | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms |
Beginning quantity, January 1, 2017 | | 20 |
| | 4,200 |
| | 1,117 |
| | 68,900 |
| | 1,137 |
| | 73,100 |
|
Newly opened properties | | — |
| | — |
| | 48 |
| | 3,500 |
| | 48 |
| | 3,500 |
|
Terminated properties | | — |
| | — |
| | (83 | ) | | (5,800 | ) | | (83 | ) | | (5,800 | ) |
Ending quantity, September 30, 2017 | | 20 |
| | 4,200 |
| | 1,082 |
| | 66,600 |
| | 1,102 |
| | 70,800 |
|
| | | | | | | | | | | | |
Executed franchise license and management agreements, nine months ended September 30, 2017: | | | | | | | | | | | | |
New franchise / management agreements | | 1 |
| | 100 |
| | 49 |
| | 3,300 |
| | 50 |
| | 3,400 |
|
Renewals / changes of ownership | | — |
| | — |
| | 70 |
| | 5,000 |
| | 70 |
| | 5,000 |
|
Total executed franchise license agreements, nine months ended September 30, 2017 | | 1 |
| | 100 |
| | 119 |
| | 8,300 |
| | 120 |
| | 8,400 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Upscale Service Brand ("USB") | | Select Service Brand ("SSB") | | Total |
| | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms | | Hotels | | Total Available Rooms |
Beginning quantity, January 1, 2019 | | 112 |
| | 15,900 |
| | 1,215 |
| | 69,800 |
| | 1,327 |
| | 85,700 |
|
Newly opened / acquired properties | | 4 |
| | 400 |
| | 22 |
| | 1,100 |
| | 26 |
| | 1,500 |
|
Change in brand | | (1 | ) | | (100 | ) | | 1 |
| | 100 |
| | — |
| | — |
|
Terminated properties | | (8 | ) | | (800 | ) | | (108 | ) | | (6,500 | ) | | (116 | ) | | (7,300 | ) |
Ending quantity, June 30, 2019 | | 107 |
| | 15,400 |
| | 1,130 |
| | 64,500 |
| | 1,237 |
| | 79,900 |
|
A summary of our executed agreements for the six months ended June 30, 2019 is provided below:
|
| | | | | | | | | |
| | USB | | SSB | | Total |
Executed franchise license agreements, six months ended June 30, 2019: | | | | | | |
New locations | | 9 |
| | 21 |
| | 30 |
|
New contracts for existing locations | | 3 |
| | 62 |
| | 65 |
|
Change from company operated to franchised | | 1 |
| | — |
| | 1 |
|
Total executed franchise license agreements, six months ended June 30, 2019 | | 13 |
| | 83 |
| | 96 |
|
We operate in two reportable segments:
| |
• | The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from royalty, marketing, and other fees that are primarily based on a percentage of room revenue or on room count or on transaction count and are charged to hotel owners in exchange for the use of our brand and access to our marketing and central services programs. These central services and marketing programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. |
| |
• | The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated in February 2019. |
The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues are also derived from management fees and related charges for hotels with which we contract to perform management services.
The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percentage of room revenue and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.
Our remaining activities, none of which constitutes a reportable segment, have beenare aggregated into "other"."other."
On October 3, 2017,Overview
During 2018 we completedcontinued the salegrowth of certain specified liabilities and substantially allour franchise segment by acquiring approximately 350 franchise agreements through our acquisition of the assets of our Entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the Entertainment segment are reported as discontinued operations and the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q. See Note 17 of Item 1: Condensed Notes to Consolidated Financial Statements.Knights Inn franchise.
On October 5, 2017,During 2019, we announced the creation of RLabs, a travel technology-based innovator that we would be listing for sale 11 of our owned hotels while working to retain franchise agreementshouses and builds on these assets. This is consistent with the Company’s previously stated business strategy to focus on moving towards operations as primarily a franchise company. Based on a preliminary review of the market, we estimate the aggregate value of the 11 hotels is currently between $165 and $175 million. We expect that the completion of these sales would allowgroundbreaking technology platform the company to significantly reduce or eliminate long-term debthas created, including RevPak. RLabs focuses on new revenue verticals, and to increase cash reserves for future franchise agreement growth initiatives.
Overview
Total revenueon developing unique technology and system offerings for the three months ended September 30, 2017 increased $7.4 million, or 17%, compared with the same period in 2016, driven by our franchised hotels segment, partially offset by decreases in our company operated hotels segment. For nine months ended September 30, 2017, totalhospitality industry including software, robotics, and artificial intelligence. The first offering from RLabs is Canvas Integrated Systems, an all-in-one cloud-based hospitality management suite featuring a collection of seamlessly integrated tools designed to drive revenue, increased $23.2 million, or 21%, driven by our franchised hotels segment, with the company operated hotels business generating lowersecure more revenue compared with 2016. In 2017, franchise revenues were favorably impacted by the brands acquired from Vantage Hospitality Group, Inc. (Vantage) in September 2016.opportunities, automate channel management and reduce cost and friction for independent hotel owners.
Revenue per available room (RevPAR) systemwide increased 1.6% for both the three and nine months ended September 30, 2017 when compared with the same periods in 2016. The RevPAR increase for the third quarter was primarily driven by improvement
of 2.5% in Average Daily Rate (ADR) and partially offset by 60 basis points in lower occupancy. For the year-to-date period in 2017, RevPAR improved as the result of an increase in ADR of 3.3%, with an offsetting 100 basis point decrease in occupancy.
RevPAR for company operated hotels on a comparable basis increased in the third quarter and first nine months of 2017 from the same periods in 2016, driven by increased ADR on a comparable basis for both periods, and for the first nine months of 2017 was partially offset by lower average occupancy.
Results of Operations
A summary of our Condensed Consolidated Statements of Comprehensive Income (Loss) is provided below (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Total revenue | | $ | 51,024 |
| | $ | 43,672 |
| | $ | 133,434 |
| | $ | 110,247 |
|
Total operating expenses | | 45,850 |
| | 38,631 |
| | 129,401 |
| | 109,054 |
|
Operating income | | 5,174 |
| | 5,041 |
| | 4,033 |
| | 1,193 |
|
Other income (expense): | | | | | | | | |
Interest expense | | (2,119 | ) | | (1,793 | ) | | (6,114 | ) | | (4,741 | ) |
Other income (loss), net | | 338 |
| | 169 |
| | 562 |
| | 290 |
|
Income (loss) from continuing operations before taxes | | 3,393 |
| | 3,417 |
| | (1,519 | ) | | (3,258 | ) |
Income tax expense | | 174 |
| | 166 |
| | 513 |
| | 258 |
|
Net income (loss) from continuing operations | | 3,219 |
| | 3,251 |
| | (2,032 | ) | | (3,516 | ) |
Net income from discontinued operations, net of tax | | 408 |
| | 262 |
| | 611 |
| | 1,831 |
|
Net income (loss) | | 3,627 |
| | 3,513 |
| | (1,421 | ) | | (1,685 | ) |
Less net (income) loss attributable to noncontrolling interests | | (871 | ) | | (1,207 | ) | | 507 |
| | (645 | ) |
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation | | $ | 2,756 |
| | $ | 2,306 |
| | $ | (914 | ) | | $ | (2,330 | ) |
| | | | | | | | |
Non-GAAP Financial Measures (1) | | | | | | | | |
EBITDA from continuing operations | | $ | 10,580 |
| | $ | 9,243 |
| | $ | 18,948 |
| | $ | 14,523 |
|
Adjusted EBITDA from continuing operations | | $ | 11,407 |
| | $ | 10,615 |
| | $ | 19,683 |
| | $ | 14,697 |
|
Adjusted net income (loss) | | $ | 4,454 |
| | $ | 4,885 |
| | $ | (686 | ) | | $ | (1,511 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Total revenues | | $ | 28,925 |
| | $ | 38,612 |
| | $ | 54,909 |
| | $ | 71,651 |
|
Total operating expenses | | 31,196 |
| | 38,943 |
| | 60,645 |
| | 62,420 |
|
Operating income (loss) | | (2,271 | ) | | (331 | ) | | (5,736 | ) | | 9,231 |
|
Other income (expense): | | | | | | | | |
Interest expense | | (1,109 | ) | | (1,702 | ) | | (1,991 | ) | | (3,949 | ) |
Loss on early retirement of debt | | (164 | ) | | — |
| | (164 | ) | | — |
|
Other income (loss), net | | 44 |
| | 22 |
| | 77 |
| | 180 |
|
Income (loss) before taxes | | (3,500 | ) | | (2,011 | ) | | (7,814 | ) | | 5,462 |
|
Income tax expense (benefit) | | 108 |
| | (348 | ) | | 190 |
| | (213 | ) |
Net income (loss) | | (3,608 | ) | | (1,663 | ) | | (8,004 | ) | | 5,675 |
|
Net (income) loss attributable to noncontrolling interest | | 774 |
| | (659 | ) | | 1,060 |
| | (5,409 | ) |
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation | | $ | (2,834 | ) | | $ | (2,322 | ) | | $ | (6,944 | ) | | $ | 266 |
|
| | | | | | | | |
Non-GAAP Financial Measures (1) | | | | | | | | |
EBITDA | | $ | 1,718 |
| | $ | 4,392 |
| | $ | 1,733 |
| | $ | 18,504 |
|
Adjusted EBITDA | $ | 3,727 |
| | $ | 6,646 |
| | $ | 4,725 |
| | $ | 7,707 |
|
(1) The definitions of "EBITDA","EBITDA," and "Adjusted EBITDA" and "Adjusted net income (loss)" and how those measures relate to net income (loss) are discussed and reconciled under Reconciliation of Non-GAAP Financial Measures below.
For the three months ended SeptemberJune 30, 2017,2019, we reported net incomeloss of $3.6 million, which included $1.2$0.6 million of acquisition and integration costs. For the three months ended September 30, 2016, we reported net income of $3.5stock based compensation, $1.0 million which included acquisition and integration costs of $1.4 million, andrelated to a legal settlement, $0.2 million for the CFO transition and other one-time professional services costs.
For the nine months ended September 30, 2017, we reported net loss of $1.4 million, which included $1.2 million of acquisition and integration costs, and $0.1a $0.2 million loss on early retirement of CFO transition costs. debt resulting from the replacement of a mortgage loan at RLS DC Venture.
For the ninethree months ended SeptemberJune 30, 2016,2018, we reported net loss of $1.7 million, which included $1.7 million on asset dispositions related to the sale of two hotels, $2.0 million of acquisition and integration costs. $0.6costs and $0.8 million forof employee separation costs.
For the CFO transition and other one-time professional services costs, an environmental cleanup chargesix months ended June 30, 2019, we reported net loss of $0.1$8.0 million, which included $1.6 million of stock based compensation, $1.0 million related to onea legal settlement, $0.2 million of our hotel properties,acquisition and integration costs, a $0.2 million loss on early retirement of debt resulting from the replacement of a mortgage loan at RLS DC Venture.
For the six months ended June 30, 2018, we reported net income of $5.7 million, which included a $15.6 million gain on asset dispositions related to the sale of intellectual propertyseven hotels, acquisition and integration costs of $0.4 million.$2.1 million and $1.0 million of employee separation costs.
The above special items are excluded from operating results in Adjusted EBITDA and adjusted net income (loss).EBITDA. For the three months ended SeptemberJune 30, 2017,2019, Adjusted EBITDA was $11.4$3.7 million compared with $10.6$6.6 million in 2016.2018. For the ninesix months ended SeptemberJune 30, 2017,2019, Adjusted EBITDA was $19.7$4.7 million compared with $14.7$7.7 million in 2016.2018. The decrease is primarily due to the sale of nine hotels throughout 2018.
Non-GAAP Financial Measures
EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.
Adjusted EBITDA and Adjusted net income (loss) areis an additional measuresmeasure of financial performance. We believe that the inclusion or exclusion of certain special items, such as gains and losses on asset dispositions and impairments and discontinued operations, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results.
During the fourth quarter of 2018, we modified the definition of Adjusted EBITDA Adjusted as used in prior periods to exclude the effect of stock compensation expense. We believe that the exclusion of this item is consistent with the purposes of the measure described below and we have applied this modification to all prior periods presented.
EBITDA and Adjusted net income (loss)EBITDA are commonly used measures of performance in our industry. We utilize these measures because management finds them a useful tool to calculate more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. Our board of directors and executive management team consider Adjusted EBITDA to be a key performance metric and compensation measure. We believe they are a complement to reported operating results. EBITDA Adjusted EBITDA and Adjusted net income (loss)EBITDA are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States (GAAP)of America ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and, in particular, Adjusted EBITDA and Adjusted net income (loss) differently than we do or may not calculate them at all, limiting the usefulness of EBITDA Adjusted EBITDA and Adjusted net income (loss)EBITDA as comparative measures.
Comparable hotels are defined as properties that were operated by our company for at least one full calendar year as of the beginning of the current year other than hotels for which comparable results were not available. Comparable results excludes two hotels, one of which was sold in the fourth quarter of 2016, and one property that opened during the second quarter of 2016, as these properties had not been open at least one year as of the beginning of the current year. In addition, we exclude revenue earned and expenses incurred related to our hotel management agreements.
We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by GAAP, and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.
The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | | $ | 3,627 |
| | $ | 3,513 |
| | $ | (1,421 | ) | | $ | (1,685 | ) |
Depreciation and amortization | | 4,660 |
| | 3,771 |
| | 13,742 |
| | 11,209 |
|
Interest expense | | 2,119 |
| | 1,793 |
| | 6,114 |
| | 4,741 |
|
Income tax expense (benefit) | | 174 |
| | 166 |
| | 513 |
| | 258 |
|
EBITDA from continuing operations | | 10,580 |
| | 9,243 |
| | 18,948 |
| | 14,523 |
|
Acquisition and integration costs (1) | | 1,235 |
| | 1,413 |
| | 1,246 |
| | 1,653 |
|
Employee separation and transition costs (2) | | — |
| | 221 |
| | 100 |
| | 617 |
|
Reserve for environmental cleanup (3) | | — |
| | — |
| | — |
| | 128 |
|
Gain on asset dispositions (4) | | — |
| | — |
| | — |
| | (393 | ) |
Income from discontinued business unit (5) | | (408 | ) | | (262 | ) | | (611 | ) | | (1,831 | ) |
Adjusted EBITDA from continuing operations | | 11,407 |
| | 10,615 |
| | 19,683 |
| | 14,697 |
|
Income from discontinued business unit (5) | | 408 |
| | 262 |
| | 611 |
| | 1,831 |
|
Depreciation and amortization of discontinued business unit | | 7 |
| | 43 |
| | 64 |
| | 145 |
|
Interest expense from discontinued business unit | | — |
| | 12 |
| | — |
| | 12 |
|
Adjusted EBITDA from discontinued operations | | 415 |
| | 317 |
| | 675 |
| | 1,988 |
|
Adjusted EBITDA from continuing & discontinued operations | | 11,822 |
| | 10,932 |
| | 20,358 |
| | 16,685 |
|
Adjusted EBITDA attributable to noncontrolling interests | | (3,142 | ) | | (3,155 | ) | | (6,110 | ) | | (6,137 | ) |
Adjusted EBITDA attributable to RLH Corporation | | $ | 8,680 |
| | $ | 7,777 |
| | $ | 14,248 |
| | $ | 10,548 |
|
| | | | | | | | |
(1) On September 30, 2016 RLH Corporation acquired Vantage. Net expenses associated with the acquisition and changes in the fair value of contingent consideration are included within Acquisition and integration costs on the Consolidated Statements of Comprehensive Income (Loss). |
(2) During the third quarter of 2016, RLH Corporation recorded separation costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. The costs recorded for the nine months ended September 30, 2017 consisted of legal and consulting services associated with the CFO transition. |
(3) In the first quarter of 2016, a reserve was recorded for environmental cleanup at one of the hotel properties. |
(4) In the second quarter of 2016, RLH Corporation recorded a gain on sale of intellectual property, net of brokerage fees, of $0.4 million, included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss). |
(5) On October 3, 2017, the Company completed the sale of its Entertainment business. Based on this sale, the results of operations of the Entertainment business are reported as discontinued operations for all periods presented. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | | $ | (3,608 | ) | | $ | (1,663 | ) | | $ | (8,004 | ) | | $ | 5,675 |
|
Depreciation and amortization | | 4,109 |
| | 4,701 |
| | 7,556 |
| | 9,093 |
|
Interest expense | | 1,109 |
| | 1,702 |
| | 1,991 |
| | 3,949 |
|
Income tax expense (benefit) | | 108 |
| | (348 | ) | | 190 |
| | (213 | ) |
EBITDA | | 1,718 |
| | 4,392 |
| | 1,733 |
| | 18,504 |
|
Stock-based compensation (1) | | 646 |
| | 1,096 |
| | 1,562 |
| | 1,736 |
|
Acquisition and integration costs (2) | | 173 |
| | 1,997 |
| | 235 |
| | 2,101 |
|
Employee separation and transition costs (3) | | 35 |
| | 844 |
| | 35 |
| | 975 |
|
Loss on early retirement of debt (4) | | 164 |
| | — |
| | 164 |
| | — |
|
Loss (gain) on asset dispositions (5) | | 39 |
| | (1,683 | ) | | 44 |
| | (15,609 | ) |
Legal settlement expense (6) | | 952 |
| | — |
| | 952 |
| | — |
|
Adjusted EBITDA | | 3,727 |
| | 6,646 |
| | 4,725 |
| | 7,707 |
|
Adjusted EBITDA attributable to noncontrolling interests | | (458 | ) | | (1,409 | ) | | (1,005 | ) | | (1,862 | ) |
Adjusted EBITDA attributable to RLH Corporation | $ | 3,269 |
| | $ | 5,237 |
| | $ | 3,720 |
| | $ | 5,845 |
|
| | | | | | | | |
(1) Costs represent total stock-based compensation for each period. These costs are included within Selling, general, administrative and other expenses, Company operated hotels and Marketing, reservations and reimbursables on the Condensed Consolidated Statements of Comprehensive Income (Loss). |
(2) Costs for 2019 are associated with the continued integration of the Knights Inn acquisition as well as costs incurred for potential acquisitions in the current period. Costs are associated with the acquisition of Knights Inn in May 2018 and continued integration costs from the Vantage acquisition made in 2017. These costs are included within Acquisition and integration costs on the Condensed Consolidated Statements of Comprehensive Income (Loss). |
(3) The costs recognized in 2019 relate to a reduction in force that was implemented in the second quarter of 2019. The costs recognized in 2018 relate to employee separation, primarily for severance agreements with our Chief Operating Officer, and President of Global Development in May 2018. These costs are included within Selling, general, administrative and other expenses on the Condensed Consolidated Statements of Comprehensive Income (Loss). |
(4) The loss on early retirement of debt relates to unamortized deferred debt issuance costs and prepayment fees incurred related to the payoff of a mortgage loan at RLS DC Venture, which was replaced through a new mortgage loan with a different lender. |
(5) The gains relate to the sale of seven properties during the six months ended June 30, 2018, two of which were sold during the three months ended June 30, 2018. There is no comparable activity during the six months ended June 30, 2019. |
(6) Legal settlement expense relates to a settlement agreement with former hotel workers regarding a wage dispute. This expense is included in Company operated hotels expense on the Condensed Consolidated Statements of Comprehensive Income (Loss). |
The following is a reconciliation of Adjusted net income (loss) to net income (loss) for the periods presented (in thousands):Franchise and Marketing, Reservations and Reimbursables Revenues
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income (loss) | | $ | 3,627 |
| | $ | 3,513 |
| | $ | (1,421 | ) | | $ | (1,685 | ) |
Acquisition and integration costs (1) | | 1,235 |
| | 1,413 |
| | 1,246 |
| | 1,653 |
|
Employee separation and transition costs (2) | | — |
| | 221 |
| | 100 |
| | 617 |
|
Reserve for environmental cleanup (3) | | — |
| | — |
| | — |
| | 128 |
|
Gain on asset dispositions (4) | | — |
| | — |
| | — |
| | (393 | ) |
Income from discontinued business unit (5) | | (408 | ) | | (262 | ) | | (611 | ) | | (1,831 | ) |
Adjusted net income (loss) | | $ | 4,454 |
| | $ | 4,885 |
| | $ | (686 | ) | | $ | (1,511 | ) |
| | | | | | | | |
(1) On September 30, 2016 RLH Corporation acquired Vantage. Net expenses associated with the acquisition and changes in the fair value of contingent consideration are included within Acquisition and integration costs on the Consolidated Statements of Comprehensive Income (Loss). |
(2) During the third quarter of 2016, RLH Corporation recorded separation costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. The costs recorded for the nine months ended September 30, 2017 consisted of legal and consulting services associated with the CFO transition. |
(3) In the first quarter of 2016, a reserve was recorded for environmental cleanup at one of the hotel properties. |
(4) In the second quarter of 2016, RLH Corporation recorded a gain on sale of intellectual property, net of brokerage fees, of $0.4 million, included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss). |
(5) On October 3, 2017, the Company completed the sale of its Entertainment business. Based on this sale, the results of operations of the Entertainment business are reported as discontinued operations for all periods presented. |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (in thousands) |
Royalty | | $ | 5,867 |
| | $ | 5,770 |
| | $ | 11,607 |
| | $ | 10,045 |
|
Other franchise | | 1,214 |
| | 804 |
| | 1,756 |
| | 1,396 |
|
Marketing, reservations and reimbursables | | 7,603 |
| | 7,027 |
| | 14,332 |
| | 12,283 |
|
The following is a reconciliation of comparable company operated hotelThree months ended June 30, 2019 and 2018
Royalty revenue expensesincreased $0.1 million or 2%, revenues from Marketing, reservations, and operating profit (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (in thousands) |
Company operated hotel revenue | | $ | 37,244 |
| | $ | 37,157 |
| | $ | 94,214 |
| | $ | 93,515 |
|
less: revenue from sold and closed hotels | | — |
| | (1,338 | ) | | — |
| | (2,791 | ) |
less: revenue from hotels without comparable results | | (1,307 | ) | | (1,223 | ) | | (3,528 | ) | | (1,830 | ) |
less: revenue from managed properties | | (380 | ) | | (235 | ) | | (855 | ) | | (982 | ) |
Comparable company operated hotel revenue | | $ | 35,557 |
| | $ | 34,361 |
| | $ | 89,831 |
| | $ | 87,912 |
|
| | | | | | | | |
Company operated hotel operating expenses | | $ | 25,284 |
| | $ | 25,363 |
| | $ | 70,450 |
| | $ | 71,035 |
|
less: operating expenses from sold and closed hotels | | — |
| | (761 | ) | | — |
| | (1,949 | ) |
less: operating expenses from hotels without comparable results | | (1,108 | ) | | (1,151 | ) | | (3,096 | ) | | (2,311 | ) |
less: operating expenses from managed properties | | (188 | ) | | (237 | ) | | (520 | ) | | (866 | ) |
Comparable company operated hotel operating expenses | | $ | 23,988 |
| | $ | 23,214 |
| | $ | 66,834 |
| | $ | 65,909 |
|
| | | | | | | | |
Company operated hotel direct operating profit | | $ | 11,960 |
| | $ | 11,794 |
| | $ | 23,764 |
| | $ | 22,480 |
|
less: operating profit from sold and closed hotels | | — |
| | (577 | ) | | — |
| | (842 | ) |
less: operating profit from hotels without comparable results | | (199 | ) | | (72 | ) | | (432 | ) | | 481 |
|
less: operating profit from managed properties | | (192 | ) | | 2 |
| | (335 | ) | | (116 | ) |
Comparable company operated hotel direct profit | | $ | 11,569 |
| | $ | 11,147 |
| | $ | 22,997 |
| | $ | 22,003 |
|
Comparable company operated hotel direct margin % | | 32.5 | % | | 32.4 | % | | 25.6 | % | | 25.0 | % |
Revenues
A detail of ourreimbursables revenue increased by $0.6 million or 8%, and Other franchise revenues increased $0.4 million or 51% for the three and nine months ended SeptemberJune 30, 2017 and 2016 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Company operated hotels | | $ | 37,244 |
| | $ | 37,157 |
| | $ | 94,214 |
| | $ | 93,515 |
|
Other revenues from managed properties | | 1,054 |
| | 1,733 |
| | 3,047 |
| | 4,498 |
|
Franchised hotels | | 12,714 |
| | 4,766 |
| | 36,045 |
| | 12,194 |
|
Other | | 12 |
| | 16 |
| | 128 |
| | 40 |
|
Total revenues | | $ | 51,024 |
| | $ | 43,672 |
| | $ | 133,434 |
| | $ | 110,247 |
|
Three months ended September 30, 2017 and 2016
During the third quarter of 2017, revenue from our company operated hotel segment was flat compared with the third quarter of 2016. This business benefited from increased ADR in 2017, which was almost entirely offset by the reduction of revenue from the sale of one owned property and the closure of one managed property in the fourth quarter of 2016.
On a comparable hotel basis, excluding the results of sold and closed properties and hotels for which comparable results were not available, revenue from our company operated hotel segment was higher ($1.2 million or 3%) in the third quarter of 2017 compared with the third quarter of 2016 primarily due to the 3.0% increase in ADR and a slight increase in average occupancy.
Revenue from our franchised hotels segment increased $7.9 million to $12.7 million in the third quarter of 20172019 compared with the same period in 2016. This increase was2018. These increases are primarily due to an additional $7.8 millionrevenues from the recently acquired Vantage brands, as well asacquisition of Knights Inn franchised hotels in May 2018 plus additional organic growth, in the number of franchises in the system.partially offset by a reduction from terminated agreements.
Nine months endedSeptember 30, 2017 and 2016
During nineSix months ended SeptemberJune 30, 2017,2019 and 2018
Royalty revenue from our company operated hotel segment increased $0.7$1.6 million or 1%16%, revenues from Marketing, reservations and reimbursables increased $2.0 million or 17%, and Other franchise revenues increased $0.4 million or 26% for the six months ended June 30, 2019 compared with the same period in 2016. The increase was driven2018. These increases are primarily by new company operated locations that were openeddue to additional revenues from the acquisition of Knights Inn franchised hotels in the second quarter of 2016,May 2018 plus additional organic growth, partially offset by two hotel properties sold or closed ina reduction from terminated agreements.
Company Operated Hotels Revenues
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | (in thousands) |
| | 2019 | | 2018 | | 2019 | | 2018 |
Company operated hotels | | $ | 14,236 |
| | $ | 25,005 |
| | $ | 27,206 |
| | $ | 47,901 |
|
Three months ended June 30, 2019 and 2018
During the fourth quarter of 2016.
On a comparable hotel basis, excluding the results of sold and closed properties and hotels for which comparable results were not available,three months ended June 30, 2019, revenue from our companyCompany operated hotelhotels segment was higher ($1.9decreased $10.8 million or 2%) for the nine months ended September 30, 201743% compared with the same period in 20162018. The decrease was driven primarily due toby the 3% increase in ADRdisposal of nine hotel properties during 2018. There were no hotel properties sold during the three months ended June 30, 2019.
Six months ended June 30, 2019 and partially offset by a slightly lower average occupancy.2018
RevenueDuring the six months ended June 30, 2019, revenue from our franchisedCompany operated hotels segment increased $23.9decreased $20.7 million to $36.0 million in the nine months ended September 30, 2017or 43% compared with the same period in 2016. This increase2018. The decrease was driven primarily due to an additional $22.9 million fromby the recently acquired Vantage brands, as well as growth in the numberdisposal of upscale and midscale franchises in the system.
Comparable Hotel Revenue (Non-GAAP Data)
Comparable hotels are defined asnine hotel properties thatduring 2018. There were operated by our company for at least one full calendar year as of the beginning of the current year other than hotels for which comparable results were not available. Comparable results excludes two hotels, one of which wasno hotel properties sold in thev fourth quarter of 2016, and one property that opened during the second quarter of 2016, as these properties had not been open at least one year as of the beginning of the current year. In addition, we exclude revenue earned and expenses incurred related to our hotel management agreements.six months ended June 30, 2019.
We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by GAAP, and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.
Average occupancy, ADR and RevPAR statistics are provided below on a comparable basis.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Comparable Hotel Statistics (1) | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Occupancy(2) | | | ADR(3) | | RevPAR(4) | | Average Occupancy(2) | | ADR(3) | | RevPAR(4) |
Systemwide | | 69.9 | % | | | $ | 99.40 |
| | $ | 69.46 |
| | 70.5 | % | | $ | 96.95 |
| | $ | 68.38 |
|
| | | | | | | | | | | | | |
Change from prior comparative period: | | Average Occupancy(2) | | | ADR(3) | | RevPAR(4) | | | | | | |
Systemwide | | (60.0 | ) | bps | | 2.5 | % | | 1.6 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Comparable Hotel Statistics (1) | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | Average Occupancy(2) | | | ADR(3) | | RevPAR(4) | | Average Occupancy(2) | | ADR(3) | | RevPAR(4) |
Systemwide | | 63.1 | % | | | $ | 92.74 |
| | $ | 58.54 |
| | 64.1 | % | | $ | 89.81 |
| | $ | 57.59 |
|
| | | | | | | | | | | | | |
Change from prior comparative period: | | Average Occupancy(2) | | | ADR(3) | | RevPAR(4) | | | | | | |
Systemwide | | (100.0 | ) | bps | | 3.3 | % | | 1.6 | % | | | | | | |
|
|
(1)Certain operating results for the periods included in this report are shown on a comparable hotel basis. Comparable hotels are defined as hotels that were in the system for at least one full calendar year as of the beginning of the current year under materially similar operations.
|
(2)Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation.
|
(3)Average daily rate (ADR) represents total room revenues divided by the total number of paid rooms occupied by hotel guests.
|
(4)Revenue per available room (RevPAR) represents total room and related revenues divided by total available rooms.
|
Average occupancy, RevPAR, and ADR as defined below, are non-GAAP measures and are widely used in the hospitality industry and appear throughout this document as important measures to the discussion of our operating performance.
Average occupancy represents total paid rooms occupied divided by total available rooms. We use average occupancy as a measure of the utilization of capacity in our network of hotels.
RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our network of hotels.
ADR represents total room revenues divided by the total number of paid rooms occupied by hotel guests. We use ADR as a measure of room pricing in our network of hotels.
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. We use total available rooms as a measure of capacity in our network of hotels and do not adjust total available rooms for rooms temporarily out of service for remodel or other short-term periods.
Comparable hotels are hotels that have been owned, leased, or franchised by us and were in operation for at least one full calendar year as of the beginning the current period other than hotels for which comparable results were not available.
Throughout this document and unless otherwise stated, RevPAR, ADR and average occupancy statistics are calculated using statistics for comparable hotels. Some of the terms used in our industry such as "upscale", "midscale" and "economy" are consistent with those used by Smith Travel Research (STR), an independent statistical research service that specializes in the lodging industry. These terms as used in our disclosures are consistent with the STR definitions.
Operating Expenses
Operating expenses generally include direct operating expenses for each of the operating segments, selling, general, administrative and expenses, depreciation and amortization, hotel facility and land lease expense,asset impairment, gain or loss on asset dispositions general and administrative expenses and acquisition and integration costs.
The detail of ourOur operating expenses by major expense category as reported for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016 is2018 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Company operated hotels | | $ | 25,284 |
| | $ | 25,363 |
| | $ | 70,450 |
| | $ | 71,035 |
|
Other costs from managed properties | | 1,054 |
| | 1,733 |
| | 3,047 |
| | 4,498 |
|
Franchised hotels | | 8,898 |
| | 3,214 |
| | 26,300 |
| | 10,034 |
|
Other | | (9 | ) | | 9 |
| | (2 | ) | | 30 |
|
Depreciation and amortization | | 4,660 |
| | 3,771 |
| | 13,742 |
| | 11,209 |
|
Hotel facility and land lease | | 1,201 |
| | 1,197 |
| | 3,604 |
| | 3,543 |
|
Gain on asset dispositions, net | | (113 | ) | | (100 | ) | | (334 | ) | | (729 | ) |
General and administrative expenses | | 3,640 |
| | 2,031 |
| | 11,348 |
| | 7,781 |
|
Acquisition and integration costs | | 1,235 |
| | 1,413 |
| | 1,246 |
| | 1,653 |
|
Total operating expenses | | $ | 45,850 |
| | $ | 38,631 |
| | $ | 129,401 |
| | $ | 109,054 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Marketing, reservations and reimbursables | | $ | 7,847 |
| | $ | 7,214 |
| | $ | 15,008 |
| | $ | 12,773 |
|
Company operated hotels | | 12,532 |
| | 18,618 |
| | 24,077 |
| | 38,873 |
|
Selling, general, administrative and other expenses | | 6,497 |
| | 8,268 |
| | 13,725 |
| | 15,478 |
|
Depreciation and amortization | | 4,109 |
| | 4,701 |
| | 7,556 |
| | 9,093 |
|
Loss (gain) on asset dispositions, net | | 38 |
| | (1,855 | ) | | 44 |
| | (15,898 | ) |
Acquisition and integration costs | | 173 |
| | 1,997 |
| | 235 |
| | 2,101 |
|
Total operating expenses | | $ | 31,196 |
| | $ | 38,943 |
| | $ | 60,645 |
| | $ | 62,420 |
|
Three months ended June 30, 2019 and 2018
Marketing, reservations and reimbursables expenses increased by $0.6 million or 9%. This increase was primarily due to supporting the growth in our mid-scale hotels as well as additional expenses related to our Knights Inn acquisition. The summaryexpense increase is consistent with the increase in Marketing, reservations and reimbursables revenues.
Company operated hotels expenses decreased by $6.1 million or 33% and Depreciation and amortization expense decreased $0.6 million or 13%. The decreases were driven primarily by the disposal of our comparablenine properties during the year ended December 31, 2018, two of which were disposed of during the three months ended June 30, 2018. There were no hotel operatingproperties sold during the three months ended June 30, 2019. The decrease in Depreciation and amortization was partially offset by additional amortization recognized from finite-lived intangible assets acquired as part of the Knights Inn acquisition in 2018 and other fixed assets placed in service during the remainder of 2018 and the first six months of 2019.
Selling, general, administrative and other expenses decreased by $1.8 million or 21% for the three and nine months ended SeptemberJune 30, 20172019 compared with three months ended June 30, 2018. The decrease was driven by a reduction in franchise development and 2016 isoperation expenses, as follows (in thousands):well a reduction in overall compensation expense including stock compensation.
Comparable Hotel Expenses (Non-GAAP Data) |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Company operated hotel operating expenses | | $ | 25,284 |
| | $ | 25,363 |
| | $ | 70,450 |
| | $ | 71,035 |
|
less: operating expenses from sold and closed hotels | | — |
| | (761 | ) | | — |
| | (1,949 | ) |
less: operating expenses from hotels without comparable results | | (1,108 | ) | | (1,151 | ) | | (3,096 | ) | | (2,311 | ) |
less: operating expenses from managed properties | | (188 | ) | | (237 | ) | | (520 | ) | | (866 | ) |
Comparable company operated hotel operating expenses | | $ | 23,988 |
| | $ | 23,214 |
| | $ | 66,834 |
| | $ | 65,909 |
|
Comparable hotels are defined asWe recognized a net Gain on asset dispositions of $1.9 million from the disposal of two hotel properties that were operated by our company for at least one full calendar year as of the beginning of the current year other than hotels for which comparable results were not available. Comparable results excludes two hotels, one of which was sold in the fourth quarter of 2016, and one property that opened during the second quarter of 2016,2018 with no comparable activity in 2019.
Acquisition and integration costs decreased by $1.8 million for the second quarter of 2019 compared with 2018. There were no completed acquisitions during the second quarter of 2019 while Knights Inn was acquired during the second quarter of 2018. Integration activities for the Knights Inn acquisition continued during the second quarter of 2019 in addition to due diligence costs for potential acquisitions.
Six months ended June 30, 2019 and 2018
Marketing, reservations and reimbursables expenses increased by $2.2 million or 17% during the six months ended June 30, 2019. This increase was primarily due to supporting the growth in our mid-scale hotels as these properties had not been open at least one yearwell as of the beginning of the current year. In addition, we exclude revenue earned andadditional expenses incurred related to our hotel management agreements.Knights Inn acquisition. The expense increase is consistent with the increase in Marketing, reservations and reimbursables revenues.
We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisonsCompany operated hotels expenses decreased by $14.8 million or 38% and Depreciation and amortization expense decreased $1.5 million or 17%. The decreases were driven primarily by the disposal of past, present and future operating results and as a means to evaluatenine properties during the resultsyear ended December 31, 2018, seven of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by GAAP, and such information should not be considered as an alternative to reported information or any other measurewhich were disposed of performance prescribed by GAAP.
Threeduring the six months ended SeptemberJune 30, 20172018. There were no hotel properties sold during the six months ended June 30, 2019. The decrease in Depreciation and 2016
Direct company operated hotel expenses were flat at $25.3 million and $25.4 million in the third quarters of 2017 and 2016. On a comparable basis, direct company operated hotel expenses were $24.0 million in the third quarter of 2017 compared with $23.2 million in the third quarter of 2016, driven by additional costs associated with higher revenue and a minimum wage increase in Washington,amortization was partially offset by cost control measuresadditional amortization recognized from finite-lived intangible assets acquired as part of the Knights Inn acquisition in 2018 and other fixed assets placed in service during the current period.remainder of 2018 and the first six months of 2019.
DirectSelling, general, administrative and other expenses decreased by $1.8 million or 11% for the franchised hotelssix months ended June 30, 2019 compared with six months ended June 30, 2018. The decrease was driven by a reduction in franchise development and operation expenses, as well a reduction in overall compensation expense including stock compensation.
We recognized a net Gain on asset dispositions of $15.9 million from primarily, the thirddisposal of seven hotel properties during the six months ended June 30, 2018 with no comparable activity in 2019.
Acquisition and integration costs decreased by $1.9 million for the six months ended June 30, 2019 compared with 2018. There were no completed acquisitions during the second quarter of 2017 increased $5.7 million compared with2019 while Knights Inn was acquired during the thirdsecond quarter of 2016, primarily driven by costs associated with2018. Integration activities for the economy brand operations acquired from Vantage as of September 30, 2016.
Depreciation and amortization expenses increased $0.9 million inKnights Inn acquisition continued during the thirdsecond quarter of 2017 compared with the third quarter of 2016, primarily2019 in addition to due to the completion of the renovations at the RL Venture and Washington, D.C. properties and the addition of the definite-lived intangibles from the Vantage acquisition.
Hotel facility and land lease costs were flat for the third quarter of 2017 compared with 2016.
General and administrative expenses increased by $1.6 million in the third quarter of 2017 compared with 2016, primarily due to the addition of costs from the Vantage acquisition and higher variable compensation expense in conjunction with our financial performance in 2017 compared with 2016.
Acquisition and integrations costs were lower by $0.2 million in the third quarter of 2017 compared with 2016. In 2017, we recognized $1.2 million in expense related to the increase in fair value of the contingent consideration for the Vantage acquisition. In 2016, we incurreddiligence costs for professional services related to the negotiations of the Vantage acquisition.potential acquisitions.
Nine months ended September 30, 2017 and 2016
Interest Expense
Direct company operated hotel expenses were $70.5
Interest expense decreased $0.6 million and $71.0 million in the first nine months of 2017 and 2016, lower primarily due to the closure and sale of two properties in the fourth quarter of 2016, partially offset by the opening of two locations in the second quarter of 2016. On a comparable basis, direct company operated hotel expenses were $66.82019 and $2.0 million induring the nine month periodsix months ended SeptemberJune 30, 2017 compared with $65.9 million in the same period in 2016, driven by higher variable costs associated with higher revenue and a minimum wage increase in Washington, partially offset by cost control measures in the current period.
Direct expenses for the franchised hotels in the first nine months of 2017 increased $16.3 million2019 compared with the same period of 2016, primarily driven by costs associated with the economy brand operations acquired from Vantage as of September 30, 2016.
Depreciation and amortization expenses increased $2.5 millionperiods in the first nine months of 2017 compared with 2016,2018. The decreases were primarily due to the completion of the renovations at the RL Venture and Washington, D.C. properties, along with the opening of the Atlanta Airport hotel in the second quarter of 2016,sales and the addition of the definite-lived intangiblesrelated reduction in debt outstanding from the Vantage acquisition.period to period.
Hotel facility and land lease costs were flat for the first nine months of 2017 compared with 2016.
General and administrative expenses increased by $3.6 million in the nine months ended September 30, 2017 compared with 2016, primarily due to the addition of costs from the Vantage acquisition and higher variable compensation expense in conjunction with our financial performance in the first nine months of 2017 compared with 2016.
Acquisition and integrations costs were lower by $0.4 million in the first nine months of 2017 compared with 2016. In 2017, we recognized expense for the increase in fair value of the contingent consideration for the Vantage acquisition. In 2016, we incurred costs for professional services related to the negotiations of the Vantage acquisition.
Interest Expense
Interest expense increased $0.3 million in the third quarter of 2017 compared with the third quarter of 2016. Interest expense increased $1.4 million during the nine months ended September 30, 2017 compared with the same period in 2016. The increase was primarily driven by the greater outstanding principal balance of debt at the joint ventures.
Other Income (Expense), net
Other income (expense), net increased $0.2 million in the third quarter of 2017 compared with the third quarter of 2016, and increased $0.3 million in the first nine months of 2017 compared with the same period in 2016. The additional income was driven by a litigation settlement for hotel equipment.
Income Taxes
For the three and ninesix months ended SeptemberJune 30, 2017,2019, we reported income tax expense of $174,000$108,000 and $513,000$190,000 compared with income tax expensebenefit of $166,000$(348,000) and $258,000$(213,000) for the same periods in 2016.2018. The income tax provisions vary from the statutory rate primarily due to a fullpartial valuation allowance against our deferred tax assets, as well as for deferred tax expense associated with our acquired indefinite-lived intangible assets, which are amortized for tax purposes but not for U.S. GAAP purposes.
Discontinued Operations
On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our Entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the Entertainment segment are reported as discontinued operations and the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q.assets. See Note 17 of14 Income Taxes within Item 1: Condensed Notes to Consolidated 1. Financial Statements.Statements.
Liquidity and Capital Resources
Our principal source of liquidity is cash flowsflow from operations. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was $20.4$2.7 million and $33.0$5.9 million at Septemberas of June 30, 20172019 and December 31, 2016.2018, respectively. We believe that we have sufficient liquidity to fund our operations at least through November 2018.August 2020.
We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business.
We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. This requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation. As a result, we included property improvement expenditures in the borrowing arrangementsrenovation for our RL Venture Holding LLC properties, as well as the Baltimore, Atlanta,owned properties.
Sources and Washington, DC locations. Those renovations have been completed as of September 30, 2017.
In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover property improvements related to the original 12 hotels owned by the subsidiaries. Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. At September 30, 2017, draws on the loan were substantially complete, with a remaining amount of $0.3 million available for draw. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 4.75%. Monthly principal payments began in January 2017 in an amount that will repay the outstanding principal balance over a 25-year amortization period. Our joint venture partner owns 45% of RL Venture at September 30, 2017.
In April 2015, RL Baltimore, a wholly-owned subsidiary of RLS Balt Venture LLC, obtained a new mortgage loan from PFP Holding Company IV LLC, an affiliate of Prime Finance, secured by the Hotel RL Baltimore Inner Harbor. The initial principal amount of the loan was $10.1 million, and the lender agreed to advance an additional $3.2 million to cover expenses related to improvements to the hotel, all of which has been drawn. The loan matures in May 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.25%. Principal payments of $16,000 per month are required beginning in May 2018. Our joint venture partner owns 27% of RLS Balt Venture at September 30, 2017.
In September 2015, RLH Atlanta obtained a new mortgage loan from PFP Holding Company IV LLC, which was used to acquire, and is secured by, a hotel adjacent to the Atlanta International Airport, which opened in April 2016 as the Red Lion Hotel Atlanta International Airport. The principal amount of the loan is $9.4 million, all of which has been drawn at September 30, 2017. The loan matures in September 2018 and has two one-year extension options. Interest under the advanced portions of the loan is payable monthly at LIBOR plus 6.35%. Monthly principal payments of $10,000 began in September 2017. Our joint venture partner owns 45% of RLS Atla Venture at September 30, 2017.
In October 2015, RLH DC obtained a new mortgage loan from Pacific Western Bank, which was used, along with cash on hand, to acquire, and is secured by, the Hotel RL Washington, DC. The principal amount of the loan is $16.7 million and has been fully
drawn as of September 30, 2017. The loan matures in October 2019 and has a one-year extension option. Interest under the advanced portions of the loan will be calculated at LIBOR plus 4.55%. Interest only payments are due monthly and commenced November 2015. Monthly principal payments are required beginning in November 2017 in an amount that will repay the outstanding principal balance over an amortization period of 25-years. Our joint venture partner owns 45% of RLS DC Venture as of September 30, 2017.
At September 30, 2017 total outstanding debt was $111.5 million, net of discount, all of which is at variable interest rates. Our average pre-tax interest rate on debt was 6.3% at September 30, 2017. Refer to Note 7 in Item 1. Financial Information for further information on the specific termsUses of our debt.Cash, Cash Equivalents, and Restricted Cash
The following table summarizes our net cash flows for operating, investing, and financing activities (in thousands):
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
Net cash provided by (used in) operating activities | | $ | 3,055 |
| | $ | (4,746 | ) |
Net cash provided by (used in) investing activities | | (2,691 | ) | | 28,560 |
|
Net cash provided by (used in) financing activities | | 2,653 |
| | (29,436 | ) |
Operating Activities
Net cash provided by operating activities totaled $9.0$3.1 million during the first ninesix months of 20172019 compared with $7.1cash used in operating activities of $4.7 million during the same period in 2016.2018. The primary drivers of the change in cash flows were higheran improvement in net income,loss excluding gain on asset dispositions net of non-cash items, partially offset byapproximately $2.2 million and a decline$4.6 million reduction in working capital accountskey money disbursed for the ninesix months ended SeptemberJune 30, 2017.2019 compared to the prior period.
Investing Activities
Net cash used in investing activities totaled $8.2$2.7 million during the first ninesix months of 20172019 compared with $32.9cash provided by investing activities of $28.6 million during the first nine months of 2016. The primary drivers of the change were a decreasesame period in 2018. Cash spent for capital expenditures from $30.3 million for the nine months ended September 30, 2016 down to $8.0 million for the nine months ended September 30, 2017, and the acquisition of Vantage Hospitality in the third quarter of 2016 partially offsetwas reduced by proceeds from sales of short-term investments of $18.1$0.8 million during the ninesix months ended SeptemberJune 30, 2016.2019 compared with the same period in 2018. During the six months ended June 30, 2018 we acquired Knights Inn and disposed of seven hotels from our company operated hotels portfolio.
Financing Activities
Net cash provided by financing activities was $0.7$2.7 million during the first ninesix months of 20172019 compared with $18.8cash used in financing activities of $29.4 million in the first ninesix months of 2016. The primary driver2018. During the six months ended June 30, 2019 we executed new mortgage loans for three company operated hotel properties while paying off one. Some of the change was higher borrowingsloan proceeds were distributed to joint venture partners and used to pay down a portion of the outstanding principal on long-term debt forour Senior Secured Term Loan. During the ninesix months ended SeptemberJune 30, 20162018 we executed the Senior Secured Term Loan to finance our acquisition of $19.5 million downKnights Inn and we repaid outstanding debt on mortgage loans related to $3.2 million for the nineseven hotel properties disposed of during the period.
Debt
As of June 30, 2019, we had outstanding total debt, excluding unamortized deferred financing costs and discounts, of $56.5 million.
During the six months ended SeptemberJune 30, 2017.2019 we executed term loans at each of the two properties held by RL Venture for a total principal amount of $16.6 million. Proceeds from the loans were distributed to the Partners of RL Venture in accordance with ownership interest percentage. We transferred $4.2 million of the proceeds received into a cash collateral account, which is included in Restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2019. In April 2019, the $4.2 million in the cash collateral account was applied against the outstanding principal balance of the Senior Secured Term Loan.
We also executed a new mortgage loan agreement at the RLH DC Venture property for a total principal and accrued exit fee of $17.4 million. The proceeds from the loan were immediately used to pay off the existing mortgage loan on the property, which had an outstanding principal balance of $15.9 million at the time of closing.
See Note 8 Debt and Line of Credit within Item 1. Financial Statements of this quarterly report on Form 10-Q, for further additional information about our debt obligations.
Contractual Obligations
The following table summarizesOther than the issuance of two term loans for the remaining properties in RL Venture and the replacement of a mortgage loan by RLS DC Venture as described in Note 8 Debt and Line of Credit within Item 1. Financial Statements of this quarterly report on Form 10-Q, there were no material changes to our significant contractual obligations including principal and estimated interestfrom what we previously disclosed in our annual report on debt and capital leases, as of September 30, 2017 (in thousands):Form 10-K for the fiscal year ended December 31, 2018.
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
Debt(1) | | $ | 122,397 |
| | $ | 31,430 |
| | $ | 90,967 |
| | $ | — |
| | $ | — |
|
Capital leases(1) | | 1,144 |
| | 329 |
| | 602 |
| | 213 |
| | — |
|
Operating leases | | 81,839 |
| | 5,555 |
| | 9,024 |
| | 5,121 |
| | 62,139 |
|
Total contractual obligations (2) | | $ | 205,380 |
| | $ | 37,314 |
| | $ | 100,593 |
| | $ | 5,334 |
| | $ | 62,139 |
|
(1)Includes estimated interest payments and commitment fees over the life of the debt agreement or capital lease.
(2)With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable or legally binding as to fixed or minimum quantities to be purchased or stated price terms.
We have leasehold interests at various hotel properties, as well as our offices located in Spokane, Washington, Denver, Colorado and Coral Springs, Florida. These leases require us to pay fixed monthly rent and have expiration dates of 2018 and beyond, which are reflected in the table above.
Off-Balance Sheet Arrangements
As of SeptemberJune 30, 2017,2019, we had no off-balance sheet arrangements as defined by SEC regulations, which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect:effect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2Since the date of the condensed notes to consolidated financial statements included in this quarterly report on Form 10-Q.
Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented on our annual report on Form 10-K for the fiscal year ended December 31, 2016. Since the date of our 2016 annual report on Form 10-K, there2018, we have beenmade no material changes to our critical accounting policies nor have there been any changes to our methodology andor the methodologies or assumptions applied to these policies.that we apply under them, other than those described in Note 2 Summary of Significant Accounting Policies within Item 1. Financial Statements of this quarterly report on Form 10-Q.
New and Recent Accounting Pronouncements
Please refer toSee Note 2: 2 Summary of Significant Accounting Policieswithin Item 1. Financial Statements of this quarterly report on Form 10-Q for information on new and recent U.S. GAAP accounting pronouncements.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Our earnings and cash flows are subject to fluctuations due to changes in interest rates, primarily from outstanding debt. As of SeptemberJune 30, 2017,2019, our outstanding line of credit and debt, including current maturities and excluding unamortized origination fees, was $112.9$58.3 million. Of this total debt, $40.9 million which is under term loans subject to variables rates, butof the debt is subject to interestvariable rate caps.based on the LIBOR index.
We enter into derivative transactions to hedge our exposure to interest rate fluctuations, and not for trading purposes. We manageAt June 30, 2019, $9.1 million of our floating rateoutstanding debt usingwas subject to interest rate caps, in order to reducewhich effectively cap the associated LIBOR reference rates and reduces our exposure to the impact of changing interest rates and future cash outflows for interest. For additional information, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of our annual report on Form 10-K for the year ended December 31, 2016.2018, and Note 9 Derivative Financial Instruments within Item 1. Financial Statements. Our exposures to market risk have not changed materially since December 31, 2016.2018.
A 100 basis point change in the underlying interest rates on our $40.9 million of variable rate debt not subject to interest rate caps would result in approximately a $0.4 million increase or decrease in annual long-term debt interest expense.
We do not foresee any changes of significance in our exposure to fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.
The below table summarizes the principal payment requirements on our debt obligations at SeptemberJune 30, 20172019 on our Condensed Consolidated Balance SheetSheets (in thousands):
| | | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | | Total | | Fair Value | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Fair Value |
Debt | | $ | 434 |
| | $ | 24,442 |
| | $ | 87,999 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 112,875 |
| | $ | 112,307 |
| |
Total Debt | | | $ | 26,528 |
| | $ | — |
| | $ | 16,600 |
| | $ | — |
| | $ | 15,189 |
| | $ | — |
| | $ | 58,317 |
| | $ | 57,487 |
|
Average interest rate | | | | | | | | | | | | | | 6.3 | % | | | | | | | | | | | | | | | | 6.4 | % | | |
| |
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2017,2019, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”("CEO") and our Chief Financial Officer (“CFO”("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in SEC rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in the company’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the threesix months ended SeptemberJune 30, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
PART II – OTHER INFORMATION
On September 26, 2018, Radisson Hotels International, Inc. filed a complaint against RLH Corporation and our subsidiary Red Lion Hotels Franchising, Inc. in the United States District Court for the Eastern District of Washington. The complaint alleges tortious interference with agreements between Radisson and several franchisees controlled by Inner Circle Investments and seeks damages in an undetermined amount. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.
On October 31, 2018, the Company's lease for the Red Lion River Inn expired. The landlord filed a lawsuit against the Company on January 24, 2019 in Spokane Superior Court, alleging breach of the lease agreement and tort claims relating to the condition of the hotel. The Company filed its Answer on January 25, 2019, denying all allegations and asserting various affirmative defenses. RLH Corporation believes this complaint is without merit and we intend to defend it vigorously.
During the three months ended June 30, 2019, we accrued approximately $952,000 for a settlement over a wage dispute with former hotel employees related to the calculation of pay for certain rest, break, meal, and other periods that are required under California laws.
At any given time, we are subject to additional claims and actions incidental to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations. See Note 10 of11 Commitments and Contingencies within Item 1: Condensed Notes to Consolidated 1. Financial Statements.Statements.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2016,2018, which could materially affect our business, financial condition or future results. The risks described in our annual report may not be the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In connection with our acquisition of the operating assets and assumption of certain liabilities of Vantage Hospitality Group, Inc., we agreed to issue up to 414,000 shares of common stock as contingent consideration if certain performance measures were achieved as of September 30, 2017, the one year anniversary of the closing date. As of September 30, 2017, we have preliminarily determined that the year 1 contingent consideration has been earned, and the 414,000 shares of the Company’s common stock should be issued.None.
The issuance of the Company’s common shares is exempt from registration under Section 4(a)(2) of the Securities Act because the transaction did not involve a public offering. The purchaser is an accredited investor, and the shares of the Company’s common stock are restricted securities for purposes of Rule 144 and subject to certain requirements before sale, including holding period requirements. The Company has not engaged in general solicitation or advertising with regard to the issuance and sale of the Company’s common stock issued pursuant to the Purchase Agreement.
| |
Item 3. | Defaults Upon Senior Securities |
None.
| |
Item 4. | Mine Safety Disclosures |
Not applicable.
None.
Index to Exhibits
|
| | |
Exhibit Number | | Description |
| | |
| | Asset PurchaseForm of Performance-Based Restricted Stock Unit Agreement between Red Lion Hotels Corporation, TicketsWest.com, Inc. and Paciolan, LLC dated August 11, 2017- Notice of Grant (incorporated by reference to Exhibit 10.1 in the current report of Form 8-K (Commission File No. 001-13957) filed on May 28, 2019) |
| | |
| | Statement of Computation of Ratios2019 RLHC Executive Officers Bonus Plan (incorporated by reference to Exhibit 10.2 in the current report on Form 8-K (Commission File No. 001-13957) filed on September 7, 2018) |
| | |
| | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
| | |
| | Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
| | |
| | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b) |
| | |
| | Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(b) |
| | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Red Lion Hotels Corporation
Registrant
|
| | | | | | |
Signature | | Title | | Date |
| | | | | | |
By: | | /s/ Gregory T. Mount | | President and Chief Executive Officer (Principal Executive Officer) | | November 3, 2017August 6, 2019 |
| | Gregory T. Mount | | | |
| | | | | | |
By: | | /s/ Douglas L. LudwigJulie Shiflett | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | November 3, 2017August 6, 2019 |
| | Douglas L. LudwigJulie Shiflett | | | |