Sonesta to add more than 900 hotels with $90m RLHC buy
 
Sonesta to add more than 900 hotels with $90m RLHC buy
31 DECEMBER 2020 11:06 AM

Sonesta International Hotels Corporation entered a definitive agreement to acquire RLH Corporation in an all-cash transaction valued at approximately $90 million.

Editor's note: This article was updated on 31 December 2020 with addtional comments from Sonesta President and CEO Carlos Flores.

REPORT FROM THE U.S.—In the latest big play to rapidly expand its portfolio, Sonesta International Hotels Corporation has announced an agreement to acquire RLH Corporation and its more than 900 franchised hotels across eight brands.

The announcement follows moves by Sonesta to rebrand, under its own flag, 103 InterContinental Hotels Group hotels and 122 Marriott International hotels after owner Service Properties Trust terminated agreements with IHG.

In a news release announcing the RLHC agreement, Sonesta officials said the acquisition is an all-cash transaction aimed to create a diverse portfolio of brands across market segments.

The deal, with a transaction value of approximately $90 million, is expected to be finalized in the first quarter of 2021, growing Sonesta’s portfolio to approximately 1,200 hotels under 13 brands, after starting the year with just 58 properties.

RLHC’s board of directors unanimously approved the agreement.

“We are excited about unlocking shareholder value through this all-cash transaction with Sonesta,” R. Carter Pate, chairman of RLHC, said in a release. “After conducting a thorough review of strategic alternatives, the board believes (Wednesday’s) announcement is in the best interest of all of Red Lion’s shareholders.”

The acquisition of RLHC would “significantly accelerate” Sonesta’s hotel franchising capabilities by adding RLHC’s more than 900 hotels, said Sonesta President and CEO Carlos Flores in his company’s release.

In an interview with Hotel News Now after announcing the deal with RLHC, Flores said it makes sense because Sonesta has planned to move into franchising for “quite some time,” and even more so in recent years.

He said RLHC has been on Sonesta’s radar not only for its franchise business but also because of other attributes, “mainly the underlying real estate, which they’ve really pivoted from over the last couple of years in favor of … (an) asset-light strategy.”

Today, RLHC has only three owned hotels, which Flores said “made (RLHC) almost a perfect fit” for Sonesta.

“I don’t think that the board at Red Lion has made any secret to the fact that they have been exploring strategic alternatives,” he said.

He said the deal didn’t come out of the blue, but the timing of it is “measured best in weeks, maybe months.” There are still conversations to be had around integration, marketing and positioning.

Speaking on RLHC’s franchise community, Flores said it’s very active, vibrant and engaged. And the company more recently has been working harder to strengthen those ties with its franchisees to deliver value, which was attractive to Sonesta.

Flores said Sonesta will have more impressive scale the moment the deal closes, and the Sonesta team will pick up and carry forward the work that RLHC’s existing management team has done or is in the process of executing to “build a much stronger, developed foundation.”

Not only will this develop a stronger foundation for RLHC’s portfolio of brands, it will also create a platform that will leverage other Sonesta brands as well paving the way for potential new ones, he said.

Flores said the forthcoming combined portfolio of hotels domestically is complementary, with very little overlap in terms of product type and segment. RLHC’s GuestHouse brand, for example, is one Flores said still requires some figuring out.

“It could make perfect sense as it relates to the overall stack of brands that we have within the portfolio that would be part of the larger combined organization,” he said. “That is something that we should discuss but I don’t think at this point we’re in a position essentially to make a binary decision. Primarily, we’re focusing on the marriage now.”

However, he said the intent isn’t to migrate RLHC’s ecosystem onto Sonesta’s existing brands; they are complementary to the point where they can coexist.

Michael Bellisario, senior hotel research analyst and director at Baird, said that “Sonesta’s growth this year has been about gaining scale and becoming a more relevant hotel company in the eyes of both consumers and owners.”

“Almost all of the growth, however, has been inorganic—assuming the brand and management contracts of many of SVC’s properties and now acquiring Red Lion,” he said. “The next stage of growth for Sonesta, especially in order to become a more formidable hotel competitor, will need to be growing the third-party development pipeline and overall system size in an organic and capital-light manner, which we view as key elements of a powerful hotel brand platform.

RLHC’s franchise-light model
In 2017, RLHC began moving forward with an asset-light strategy to become entirely a franchise company, shedding its owned assets.

The company’s EVP, CFO and Treasurer Douglas Ludwig said in 2017 the asset-light strategy was a conscious decision made about three to four years prior.

“That’s what we’ve been working to in terms of how we grow our business and how we intend to grow the business,” he added.

A majority of RLHC’s properties were added to the portfolio with the 2016 acquisition of Vantage Hospitality Group. That deal, for $23 million and 690,000 shares of common stock, resulted in the combined company operating or franchising more than 73,000 rooms.

In December 2016, RLHC’s then President and CEO Greg Mount said the goal was to be the “franchisor of choice for hotel owners.” 

But those plans didn’t come to fruition with Mount at the helm, and in 2019 Bob Wolfe, chairman of the RLHC board of directors, announced on the company’s third-quarter earnings call that Mount had resigned as president and CEO. Wolfe cited declining performance of owned hotels and frustration from shareholders.

“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.”

In December 2019, RLHC named John Russell interim CEO. He was officially appointed CEO in June 2020.

Russell told Hotel News Now in February 2020 that his focus for the company was recruiting new franchisees and selling to existing ones to support RLHC’s franchise model. RLHC had also restructured its franchisee operations department.

He added the company needed to overcome some growing pains after acquiring Vantage’s eight brands in 2016 and Knights Inn in 2018.

RLHC’s brand portfolio includes Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, Signature Inn, GuestHouse, Knights Inn, Americas Best Value Inn and Canadas Best Value Inn.

Sonesta’s expansion
While RLHC’s focus has been to become asset light, Sonesta’s has been portfolio growth.

The company’s connection with Service Properties Trust (which holds a partial ownership stake in Sonesta, in addition to both being managed by The RMR Group) opened the door for it to grow its portfolio in August after the hotel and retail focused real estate investment trust terminated its agreements with IHG on 103 hotels because of a dispute over rent payments and did the same a month later for 122 Marriott hotels.

Flores told Hotel News Now in September 2020 that Sonesta was internally focused on building its platform.

“I’m feeling good about what we have established in terms of our core systems, plans and vendor relationships. We’ve been preparing for a like event. (103 hotels) might be a little bit more than we expected at once, but the team has been working night and day to come up to scale,” he added.

The company, founded in 1937, has a portfolio of full-service and extended-stay hotels across eight countries. Its flags include Royal Sonesta, Sonesta Hotels & Resorts, Sonesta ES Suites, Sonesta Posada del Inca, Sonesta Simply Suites and Sonesta Cruise Collection, all under the broad Sonesta banner.

Flores said since he stepped in as CEO in 2015, his objective has been to create a platform of growth. The coronavirus pandemic has underlined the appeal of extended-stay properties. Sonesta’s most recent brand launch in December was Sonesta Simply Suites, focused on extended stay. And a few months earlier, RLHC relaunched its extended-stay brand GuestHouse.

Market cap
As of press time, RLHC’s market capitalization is $87.4 million, with stocks trading at $3.44, down 5.3% year to date.

Sonesta is not publicly traded, but its parent companies RMR Group and Service Properties are trading at $38.85, down 13.7% and $11.63, down 51.4 %, year to date, respectively.

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