RLH Corporation is taking steps to become asset-light with plans to sell 11 of its 18 owned hotels. EVP, CFO and Treasurer Douglas Ludwig* offers some insight into the company’s strategy.
DENVER—RLH Corporation is moving forward with an asset-light strategy, which EVP, CFO and Treasurer Douglas Ludwig said will help boost more franchise business for the company. The next step will be the sale of 11 of the company’s 18 owned hotel properties, which the company’s Board of Directors approved on 5 October.
Ludwig said the company looked at lodging companies like Marriott International as models for a successful asset-light strategy.
For RLHC, the model is attractive because it results in higher profit margins, he said.
“To take the franchise fee incomes from, in our case, (1,100) properties (compared to less than 100 in 2014), that is very profitable. Our profit margins were just about 30% in the second quarter this year—that’s the highest level we’ve obtained,” he said.
The 11 hotels listed for sale include five in Washington, two each in Idaho and California, one in Utah and one in Oregon. Seven are in the Red Lion Hotel brand, one is a Red Lion Inn & Suites, and three are Hotel RL properties.
When the strategy was born
“Our brand made a conscious decision about three to four years ago that it endorsed this asset-light model, and that’s what we’ve been working to in terms of how we grow our business and how we intend to grow the business,” Ludwig said.
Ludwig looked back to about two years ago when RLHC had about 50 properties in 10 states. Now the company has approximately 1,100 properties—in almost every state, as well as Canada, South Korea and India, he said.
Many of those properties were added to the RLHC portfolio with the 2016 acquisition of Vantage Hospitality Group.
“All of a sudden the company has visibility that it didn’t have before,” Ludwig said.
Why sell now?
The real estate markets are “good to very good right now,” Ludwig said, and the 11 assets have been established and renovated, placing them at stabilized levels of profitability, he said.
The company is also at a point where it has become better known to potential owners, who are starting to understand the competitive advantage to be under the RLHC umbrella, he said.
The assets, which Ludwig described as diverse and ranging from economy to upscale, are appealing to new owners, he said.
He added that the timing of the decision to shed assets is not due to any fear of a downturn in the cycle.
“I think if anything, that might have been the case if we did this the first quarter of this year when there was a little bit of skittishness. But the lodging analysts, they’re feeling more positive about the outlook,” he said. “So we’re very deep into this recovery, but there’s no one that I’ve seen that is taking the view that we’re at the end of this recovery.”
It also helps that there’s a lot of new supply growth in the market today, like was seen in later stages of prior cycles, he said.
The company has set a goal estimate of 100 to 120 new franchise agreements this year, which represents roughly 10% to 12% of its contract base, Ludwig said.
Last year, the company added about 30 franchise agreements, and to be within that goal range of 100 to 120 already this year shows healthy growth, he said.
“Many of our 100 to 120 new contracts this year don’t require any capital from us, so to have an asset-light, low-capital requirement model is very powerful, and it typically gets valued in the stock market, anywhere from a 20% to 30% premium to owning companies,” he said.
Over time, he said the company wants to be a franchise company and wants a vast majority of its earnings before interest, tax, depreciation and amortization to be from the franchise business.
Who to sell to
All of the listed hotels are owned through partnerships with outside investors, and Ludwig said he is confident the assets will attract both regional and foreign investors. CBRE is marketing the properties.
And even though the properties will be listed to sell, the team wants to consciously maintain its franchise rights related to the 11 assets, he said.
“They’re important markets to us; we want to stay involved. (But) we just want to divest some of the ownership positions, so if that’s a deep-pocketed owner, we’re happy with whoever,” he said, adding that “the more experience in the assets they have in the hotel real estate sector the better.”
Working with the owner, he said, has benefits for both the owner and the company.
As for selling-price expectations of the assets, Ludwig said CBRE provided low, medium and high estimates, and RLHC is comfortable with those estimates.
“I think as long as we end up within that range, we would look to transact,” he said. “There are good values there. They should lead to gains on the asset sales themselves (and) should lead to cash generated from the sales being in excess of the property debt.”
Ludwig said beyond debt repayment, the cash reserves could go toward acquisition of another franchise company.
The rest of the assets
There’s still seven owned properties that will be left under RLHC once the 11 immediately enter the market. Ludwig said that’s because several properties need another year to 18 months to achieve higher levels of profitability.
Once those three or four assets reach that level, he said, that’s likely when they will enter the market.
The remainder of the owned assets are under leasehold interests, and there are no immediate plans to sell them, he said.
“Although, if the right circumstances are there and someone approaches us about it, we would consider selling it, but it’s not a high priority as the first 14 assets are,” he said.
* Correction, 6 October 2017: An earlier version of this story included an incorrect title for Douglas Ludwig.