On the company’s third-quarter earnings call, RLH Corporation announced its President and CEO Greg Mount has resigned from his role, which he held since 2014, effective immediately.
DENVER—Citing the declining performance of owned hotels and frustration from shareholders, Bob Wolfe, chairman of the RLH Corporation Board of Directors, announced on the company’s third-quarter earnings calls with analysts Friday that President and CEO Greg Mount had resigned.
The board accepted Mount’s resignation on Thursday to end his role as president and CEO—which he assumed in 2014—and his position on the board of directors effective immediately. Mount was not present on Friday’s call.
“Acknowledging and sharing our shareholders’ frustration regarding the lack of progress growing the core franchise business along with elevated franchise terminations and weak performance of owned hotels, the board understands the need for action to be taken,” Wolfe said on the call. “That starts with a change in the company’s leadership.”
Wolfe cited the first step toward progress was making changes to the board over the last six months. The board has appointed a search committee for a new CEO, which will be led by Jake Brace, an independent director on the company’s board. Until a new CEO is appointed, Wolfe said RLHC’s management committee will oversee day-to-day operations. Members of that committee include EVP and COO Gary Sims, EVP and CFO Julie Shiflett and EVP and General Counsel Thomas McKeirnan.
When asked if the search for a new CEO was urgent, Wolfe said it is more about finding the right fit.
“We are focused on getting the right person. There’s no fire drill, and we’ll take our time, and we’ll do it right, and we are going to get a leader that can help us meet our objectives,” Wolfe said. “We have a lot of confidence in (our committee), we’re well-covered.”
Wolfe said those objectives include a CEO who will build around a strong business proposition for RLHC’s franchisees and deliver value to shareholders.
Adjusted earnings before interest, depreciation and amortization margins of its core franchise business was about 34% compared to 40% in the year prior, Shiflett said on the call. This was primarily due to money owed from one of RLHC’s franchisees who operates a portfolio of 20 hotels, 10 of which carry the RLHC brand flag.
“We have accounts and notes receivable balances of approximately $7.2 million with this customer and have recognized a $750,000 bad debt charge in the quarter, which has reflected in our SG&A expense,” she said.
Shiflett said five of those hotels are still operating under RLHC flags, two have ceased operations and the remaining three are continuing to operate under their franchise agreements.
“This situation is fluid, and we are working closely with the customer and our attorneys to pursue and protect our financial interest,” she said. “We anticipate that there will be further legal costs associated with this situation as it progresses.”
SG&A expense in Q3 increased about 1% year over year to $8.2 million, primarily due to the bad debt expense and legal costs related to that midscale franchise customer, she said.
Shiflett said RLHC has re-evaluated its adjusted EBITDA guidance for 2019, reducing it to between $11.5 million and $13.5 million compared to the previous range of between $20.5 million and $22.5 million.
During the quarter, RLHC experienced 58 franchise contract terminations. Of those terminations, 51 were in the economy segment, and all terminations totaling annualized royalty contributions of about $1.1 million, Shiflett said. Year-to-date terminations total to 176 agreements, with 159 in economy.
“We expect the level of terminations we are experiencing may persist through the first half of 2020. Over time, we anticipate we will settle into a more industry standard termination of around 10% on our economy brand hotels, offset by similar levels of new contract additions,” she said.
RLHC also reported a net loss of $3.5 million compared to net income of $8.9 million the year prior. Shiflett said that change is primarily due to prior-year gains on asset sales that did not recur this year.
She also cited a deceleration in the travel industry as negatively impacting Q3 results. RLHC saw declines in demand in both its business and leisure segments. Its midscale and economy hotels experienced shorter booking windows compared to higher-scale hotels, she said.
“In our owned hotels, we responded to these industry headwinds by reducing our operating costs,” she said.
As of press time, RLHC’s stocks were trading at $2.92 a share, down 54.6% since Thursday. Year to date, the company's stock is down 64.4%. The Baird/STR Hotel Stock Index was up 12.3% year to date.
Despite some headwinds, RLHC completed 47 franchise agreements for the quarter, an increase of 57% year over year, according to a company release. The agreements include 10 midscale hotels and 37 select-service hotels. Year to date, the company has executed 143 agreements, up 43% from 2018.
Shiflett said RLHC will maintain its guidance range of 175 to 210 new franchise license agreements. During the quarter, franchise revenues grew 7% compared to this time last year to $16.2 million, according to the release.