Red Lion Hotels Corporation
Aug 4, 2010
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Red Lion Hotels Reports Second Quarter 2010 Results

Market Rate Pressures and Regional Group Demand Impact RevPAR

Red Lion Hotels Reports Second Quarter 2010 Results Market Rate Pressures and Regional Group Demand Impact RevPAR

SPOKANE, WA, August 4, 2010 - Red Lion Hotels Corporation (NYSE: RLH), a western U.S.-based owner and franchisor of midscale hotels, today announced its results for the second quarter ended June 30, 2010.
Highlights:

Total revenue during the second quarter was $42.5 million with revenue from hotels of $38.6 million, compared to $45.5 million and $41.0 million, respectively, in the prior year period. EBITDA for the second quarter of 2010 was $7.4 million, compared to $9.7 million for the second quarter of 2009. Net loss was $0.1 million in the quarter, or zero cents per diluted share, compared to net income of $1.5 million, or $0.08 per diluted share, for the prior year period.

President and Chief Executive Officer Jon Eliassen commented, "The Pacific Northwest and West Coast are currently lagging most other U.S. markets. Group demand in particular softened during the second quarter and pricing remains highly competitive in this occupancy-led recovery. This, combined with higher-end chain scales aggressively reducing rate, placed pressure on our segment. As a result, we saw some margin and profit erosion during the quarter due to the revenue challenges coupled with the previously announced investments we made in sales, marketing and franchising. While these investments impacted our results in the near term, we are confident that they are laying the foundation for long-term profitability."

Eliassen continued, "We are pleased with our competitive rate performance in this difficult environment. Our achievements are a direct result of our pricing strategy launched earlier this year. We drove rate growth in the transient segment, partially offsetting the revenue impact from both reduced group bookings and our intentional shift away from relying on online travel agencies. While the recovery in our markets is trailing the broader industry, we continue to position Red Lion for the long-term to increase profitability and growth for shareholders."

Summary results for the second quarter and six-months ended June 30, 2010 and June 30, 2009 follow:

In addition, key hotel operating metrics on a comparable basis, and reported hotel revenues and operating margin for the second quarter and six-months ended June 30, 2010 and June 30, 2009, are highlighted below for owned and leased hotels:

Second Quarter 2010 Results
Comparing the second quarter of 2010 to the second quarter of 2009, ADR increased 0.2% to $84.58 for owned and leased hotels. Occupancy declined 120 basis points to 59.3% resulting in a 1.8% decrease in RevPAR. Including franchised hotels, system-wide RevPAR on a comparable basis for the quarter declined 2.7% due to a 140 basis point decrease in occupancy and a 0.5% decline in ADR.

Revenue from hotels of $38.6 million declined $2.3 million, or 5.7%, from the prior year period. Rooms revenue declined approximately $1.0 million, or 3.3%, due to a decline in occupancy from fewer group bookings and reduced reliance on online travel agencies. Results also reflect a $0.4 million revenue impact from the closure of the Company's hotel in Astoria, Oregon which is a leased property.

Food and beverage revenue declined $1.6 million compared to the prior year period primarily due to the previously announced change to food and beverage operations designed to increase long term profitability.

Hotel direct operating margin declined to 25.6% during the quarter from 29.3% in the same period in 2009. This is primarily due to a reduction in group rooms resulting in lower occupancy, coupled with investments in sales and technology expenses.

Franchise revenue declined $0.4 million due to a one-time settlement received in the second quarter of 2009. Profitability in the segment was impacted by development expenditures associated with the Company's franchise growth strategy.

Profitability in the entertainment segment increased due to strong ticketing activity for early summer events.

Six Months Ended June 30, 2010 Results
Total revenue for the six months ended June 30, 2010 was $76.8 million compared to $80.1 million in the prior year period. Revenue from hotels of $69.3 million was down $2.5 million, or 3.5%. Hotel direct operating margin declined to 19.9% from 22.5% in the prior year period.

RevPAR for comparable owned and leased hotels increased 1.0% driven by a 50 basis point increase in occupancy and a 0.1% increase in ADR. Including franchised hotels, system-wide RevPAR on a comparable basis for the quarter declined 0.7% due to a 0.7% decrease in ADR and level occupancy.

Liquidity and Balance Sheet
Capital expenditures during the quarter ended June 30, 2010 totaled $2.3 million. Capital expenditures during 2010 are expected to total $12.7 million for core investments in maintenance, technology and necessary hotel improvement projects, which reflects the Company's continued focus on investing as appropriate to maintain competitive guest services. All capital needs are expected to be funded with operating cash flow. As of June 30, 2010, the Company had approximately $3.1 million in cash and cash equivalents, and outstanding debt of $130.6 million.

Subsequent Events
On July 21, 2010, the Company announced the appointment of Melvin L. Keating to the Board of Directors. Mr. Keating has been a director for numerous publicly traded and private companies. He has also served in executive management positions for various organizations, including real estate development companies. He was involved in the development of the World Trade Center in New York and Canary Wharf in London among other projects. With Mr. Keating's appointment, the Company's board expands to eight directors.

The Company entered into an agreement with the Port of Astoria on July 21, 2010 to evaluate the potential re-development of the Company's hotel in Astoria, Oregon. The Company had previously closed the property after an engineering study indicated that the hotel building had reached the end of its useful life. Discussions are ongoing with the Port of Astoria regarding the re-development and a decision is expected by November 2010.

Outlook for 2010
Based on current visibility on the second half of 2010 and second quarter results, the Company is updating its guidance for 2010 as follows:

Chief Operating Officer George Schweitzer noted, "Although the challenges we experienced in the second quarter impacted our guidance for the year, our outlook for the balance of the summer season is positive. We are confident in our rate strategy and expect continued performance in our transient segments. Group demand appears to be strengthening; accordingly we are cautiously optimistic about performance in this segment for the remainder of the year."

Conference Call Information
The Company will conduct a conference call on August 5, 2010 at 11:00 a.m. Pacific Time (2:00 p.m. Eastern Time), to discuss the results for interested investors, analysts and portfolio managers. Hosting the call will be President and Chief Executive Officer Jon Eliassen and Senior Vice President and Chief Financial Officer Anthony Dombrowik.

To participate in the conference call, please dial the following number ten minutes prior to the scheduled time: (800) 288-8968. International callers should dial (612) 288-0337.

This conference call will also be webcast live at http://www.redlion.com in the Investor Relations section of the website. To listen to the live call, please go to the Red Lion website at least fifteen minutes prior to the start of the call to register, download and install any necessary audio software. For those unable to participate during the live broadcast, a replay will be available at 1:30 p.m. PDT on August 5, 2010 through September 5, 2010 at (800) 475-6701 or (320) 365-3844 (International) access code - 165955. The replay will also be available shortly after the call on the Red Lion website.

About Red Lion Hotels Corporation:
Red Lion Hotels Corporation is a hospitality and leisure Company primarily engaged in the ownership, operation and franchising of midscale full, select and limited service hotels under its Red Lion® brand. As of June 30, 2010, the RLH hotel network was comprised of 43 hotels located in eight states and one Canadian province, with 8,383 rooms and 419,987 square feet of meeting space. The Company also owns and operates an entertainment and event ticket distribution business. For more information, please visit the Company's website at www.redlion.com.

This press release contains forward-looking statements within the meaning of federal securities law, including statements concerning plans, objectives, goals, strategies, projections of future events or performance and underlying assumptions (many of which are based, in turn, upon further assumptions). The forward-looking statements in this press release are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those expressed. Such risks and uncertainties include, among others, economic cycles; international conflicts; changes in future demand and supply for hotel rooms; competitive conditions in the lodging industry; relationships with franchisees and properties; impact of government regulations; ability to obtain financing; changes in energy, healthcare, insurance and other operating expenses; ability to sell non-core assets; ability to locate lessees for rental property; dependency upon the ability and experience of executive officers and ability to retain or replace such officers as well as other matters discussed in the Company's annual report on Form 10-K for the year ended December 31, 2009 and in other documents filed by the Company with the Securities and Exchange Commission.

Red Lion Hotels Corporation
Impact of Change in Accounting Principle on Consolidated Financial Statements
(unaudited)

In June 2009, the FASB issued changes to the consolidation guidance applicable to variable interest entities ("VIE") that became effective for us on January 1, 2010. Under the new guidance, we have determined that our cooperative marketing fund, referred to as the Central Program Fund ("CPF"), now meets the definition of a VIE and should be included in our consolidated financial statements. For additional information on the CPF, see Note 2 of Notes to Consolidated Financial Statements for the year ended December 31, 2009, previously filed with the SEC on Form 10-K.

The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was created to provide services to all member hotels including certain advertising services, frequent guest program administration, reservation services, national sales promotions and brand and revenue management services intended to increase sales and enhance the reputation of the Red Lion brand. The activities of the CPF benefit our owned and leased hotels as well as our franchise properties, however, historically only the proportionate share of CPF expenses for our owned and leased hotels were recognized in our consolidated financial statements. Based on the new guidance, we will now include all of the expenses and other balances of the CPF in our consolidated financial statements, including revenue received from franchisees to support CPF activities. There have been no changes to the organization, structure or operating activities of the CPF since its inception in 2002.

The adoption of these changes were applied retrospectively, including the recording of the $1.0 million net of tax impact of cumulative effect of change in accounting principle as of the earliest period presented in this release. The consolidated financial statements included in this release have been adjusted to conform to the new treatment. The table below represents the impact on consolidation of the CPF for the three and six months ended June 30, 2010 and 2009, which added additional expense before impact of income tax of $606 thousand and $450 thousand, respectively, during the second quarter periods, and $951 thousand and $1.1 million, respectively, during the first six months of 2010 and 2009.

NON-GAAP FINANCIAL MEASURES

EBITDA is defined as net income (loss) attributable to Red Lion Hotels Corporation, before interest, taxes, depreciation and amortization. EBITDA is considered a non-GAAP financial measurement. We believe it is a useful financial performance measure for us and for our shareholders and is a complement to net income (loss) attributable to Red Lion Hotels Corporation and other financial performance measures provided in accordance with generally accepted accounting principles in the United States ("GAAP").

We use EBITDA to measure the financial performance of our owned and leased hotels because it excludes interest, taxes, depreciation and amortization, which bear little or no relationship to operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to our company in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels and other operations cannot control. Byexcluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe that EBITDA provides us and investors with information that is relevantand useful in evaluating our business.

However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our long-lived assets. In addition, because EBITDA does not reflect interest expense, it does not take into account thetotal amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile all EBITDA measures to net income (loss) attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income (loss) or net income (loss) attributable to Red Lion Hotels Corporation determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.