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Edited Transcript of RLH earnings conference call or presentation 8-May-20 1:00pm GMT

Q1 2020 Red Lion Hotels Corp Earnings Call

Spokane May 26, 2020 (Thomson StreetEvents) -- Edited Transcript of Red Lion Hotels Corp earnings conference call or presentation Friday, May 8, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan Redmond

Red Lion Hotels Corporation - VP of Financial Planning & Analysis

* John J. Russell

Red Lion Hotels Corporation - Interim President & CEO

* Nathan M. Troup

Red Lion Hotels Corporation - Executive Officer

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Brian H. Dobson

Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs

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Presentation

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Operator [1]

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Greetings, and welcome to the RLHC First Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dan Redmond, Vice President of Financial Planning and Analysis. Please go ahead.

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Dan Redmond, Red Lion Hotels Corporation - VP of Financial Planning & Analysis [2]

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Thank you. Welcome to RLH Corporation's First Quarter Earnings call. With us today are John Russell, Interim CEO; and Nate Troup, EVP and Chief Financial Officer.

Before we get started, I want to remind you that the company's remarks today contain forward-looking information that is subject to a number of risk factors that may cause actual results to differ materially from those expressed or implied. For a discussion of important risk factors, please see our most recent Form 10-K filed with the SEC as well as subsequent filings, including our Form 10-Q to be filed after today's call. Our Form 10-K and other filings are available on our website, rlhco.com in the Investor Relations section or through the SEC website at sec.gov.

These forward-looking statements speak as of today, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances. The company will also be referring to a number of non-GAAP measures. A reconciliation of these measures to their comparable GAAP measure is provided in the tables of our press release. That release is also available on the Investor Relations section of our website.

I will now turn the call over to John Russell, Interim Chief Executive Officer.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [3]

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Thank you, Dan. Good morning all. Thank you for joining us today to review our results for the first quarter of 2020. We find ourselves in a very different global situation as compared to our last earnings report. We at RLHC sincerely hope that you and those important to you are healthy, safe and finding ways to shelter in place happily and productively.

The COVID-19 pandemic has introduced a myriad of challenges across our professional and personal lives requiring each of us to assess our situations, adapt our behavior and embrace what we believe will help us get through. The pandemic has influenced the traffic like no other event. It has forced us to seriously consider and revise our ways of living, working and traveling. While the duration of the pandemic is unclear, we do know that the hospitality industry has a history of resilience. And the actions RLHC has decisively taken in the last 2 months will support the resilience of our brands as the impact of the pandemic subsides.

We started the year and the quarter executing our back-to-basic strategy with a renewed focus on our franchise business. The strategy emphasize improving our core service offering to our franchisees while aligning RLHC's cost structure to our current size and profitability. As the impact of the pandemic on our business escalated, we took decisive action to sustain our company and accelerate our cost-cutting initiatives. These initiatives included a large reduction in workforce, company-wide compensation reductions, consolidation of operations in Denver with the closing of the Spokane office and a meaningful reduction in capital spend. All of these challenging initiatives were undertaken as the team was sheltering in place and working from home.

Managing and navigating managerial decisions is never easy and is less so when we have to communicate difficult news remotely. Despite our focus on defensive moves towards the end of the quarter, our franchise development team delivered 70 franchise agreements, exceeding the number achieved in the first quarter of 2019 by 25%. These agreements included 6 midscale hotels and 64 economy hotels, of which 16 were for new locations. Offsetting the new franchise agreements were 44 terminations, representing a 21% improvement from last year and a 55% drop from the fourth quarter. The terminations were comprised of 1 mid-scale hotel and 43 economy hotels.

With respect to franchise signings, our pre-COVID-19 progress was encouraging. Our franchise development team continues to cultivate relationships with future franchisees. So when the environment normalizes, we can return to the expansion of our franchise network. In fact, we are still sending out franchise disclosure documents to prospects and seen franchise leads coming through conversions to sign contracts have slowed considerably due to the ongoing uncertainty around COVID-19.

Due to the lack of visibility caused by the pandemic, the slowing of contract signings and the expectation that this trend will continue for the foreseeable future, we are withdrawing our guidance on new location signings for 2020.

On a positive note, we completed the sale of 2 properties, Hotel RL in Washington, D.C. and the Red Lion Anaheim Hotel, which provided us with over $9 million in net proceeds after closing costs and the repayment of property level and corporate level debt. From a balance sheet perspective, we now have approximately $38 million of cash and cash equivalents. No corporate debt and $5.6 million in property-level debt on the Red Lion Hotel Olympia, which is currently being marketed.

From an operations perspective, we have seen a significant shift from the beginning of the year. While the RevPAR in our economy and mid-scale hotels showed promising improvement in January and February of 2020 relative to the same months in the prior year, we experienced a precipitous decline beginning in March once the impact of COVID-19 took effect.

Our franchisees have certainly felt the impact of the pandemic. However, as of today, nearly all of our 1,000-plus hotels across the country are open for business. Our franchisees, small business owners remain committed to supporting essential workers who are forced to be on the road, providing them with a safe, clean and welcoming place to stay during this time of uncertainty. Owners of properties off the interstate highways and secondary and tertiary cities and urban locations across the country and are currently providing the combinations for essential workers who keep our country moving forward during this crisis: our truck drivers, postal workers, FEMA personnel, health care providers, food service providers and the like.

However, due to nonessential travel restrictions, all of our franchisees have seen a significant drop in business. Our corporate staff is working closely with our franchisees to guide them through the uncertainties of these tumultuous times, and we are working with our vendors to improve and expand service and information they provide to our franchise network.

We have begun a Royalty and Marketing Fee deferral program to help our franchisees with cash flow and have implemented other fee reductions and delayed implementation of capital-intensive brand standards and extended deadlines for completions. We know that eventually, the pandemic went and reopening successful will be an important factor in our collective success. Our franchise support team is working diligently on developing plans that can be implemented and easily modified as the reopening of the nation evolves. We are cautiously optimistic that when travel resumes, RLHC will be a net beneficiary as our hotels are economically priced and predominantly located in secondary and tertiary drive to markets, away from urban centers that have been hotspots of COVID-19.

We believe that our price point, locations and our geographic dispersion could contribute to RLHC's resilience as the economy and mid-scale chain typically outperform in a recovering economic backdrop.

I'd like to thank our team for their tireless efforts during this challenging time and our franchisees for their focus and dedication in providing shelter to all our essential workers.

With that, I'd like to turn the call over to Nate to discuss our results and COVID-19 related actions in more detail.

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Nathan M. Troup, Red Lion Hotels Corporation - Executive Officer [4]

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Thanks, John. As John described, COVID-19 has had a pervasive impact on our industry, and RLH Corporation's first quarter results were not immune to the economic impact.

In the first quarter of 2020, RLH reported a net loss of $8.1 million or $0.32 per share as compared to a net loss of $4.3 million or $0.17 per share in the prior year period. The year-over-year change was deeply impacted by COVID-19, which specifically influenced $9.7 million of bad debt expense, primarily associated with Inner Circle and other former franchisees, a $1.8 million asset impairment on the Red Lion Hotel Seattle Airport and $500,000 of employee separation costs. Separate from COVID-19 as part of our deleveraging initiative, we also incurred a $1.3 million loss associated with the retirement of debt. Partially offsetting the loss in the quarter was a $7.9 million gain from the disposal of our hotels in Washington, D.C. and Anaheim, California.

In the first quarter, adjusted EBITDA was negative $10.3 million as compared to a positive $1 million in the prior year. The year-over-year decline reflects the lower contribution from the sale of owned hotels, lower royalty revenues due to terminations, along with the impact of COVID-19 and a $9.7 million in bad debt expense recognized in the first quarter of 2020.

Core adjusted EBITDA, which excludes the results of our company-operated hotels, was negative $10 million in the first quarter of 2020 as compared to negative $428,000 in the first quarter of 2019. Selling, general and administrative expense in the quarter was $16.3 million as compared to $7.4 million a year ago. The $8.9 million increase in 2020 was driven primarily by the $9.7 million in bad debt expense referenced earlier. This expense was largely due to the write-off of the $6.3 million remainder of the Inner Circle receivable, which we discussed on our COVID-19 update call on April 6.

As we discussed on that call, COVID-19 had a detrimental impact on the expected value of the collateral supporting the remaining receivables from the Inner Circle default, which we had originally disclosed in Q3 of 2019.

In response to these circumstances, the first lien holder for the collateral indicated its desire to exercise its right to foreclose on or take control of the collateral on an accelerated basis. Due to the timing of this action, in conjunction with the decline in fair value of the collateral property due to the economic impacts of the COVID-19 pandemic we have concluded the value of the collateral no longer supports the remaining balances, and as such, we've recognized bad debt expense of $6.3 million on the previously unreserved Inner Circle balances.

Aside from Inner Circle, we recognize that current and former franchisees with outstanding receivable balances are facing significant cash flow constraints as a result of the pandemic. Facing difficult working capital constraints, these franchisees will focus first on sustaining their business then on rebuilding it. This may leave little cash to address certain aged receivables. Accordingly, we also took a hard look at other older dated accounts receivable, and certain notes receivable and updated our estimate of collectibility based on the new information available in the first quarter and considering the current COVID-19 impacted environment. This resulted in the recognition of an additional $3.4 million in bad debt this quarter.

We believe that our recognition to bad debt in the quarter reflects the current health of our franchise network. And while the duration and extent of COVID-19 remains uncertain, we do not anticipate bad debt recognition of this magnitude in future quarters.

As John discussed earlier, we signed 70 new contracts in the first quarter, a 25% improvement over the first quarter of 2019. These contracts were comprised of 6 midscale hotels and 64 economy hotels. Of the 70 new contracts signed in the quarter, 16 were for new locations, 2 were for our midscale brands and 14 were for our economy brands. This was offset by 44 terminations comprised of 1 midscale hotel and 43 economy hotels. Terminations were substantially less, down 21% compared to the first quarter of 2019 and down from 98 terminations in the fourth quarter of 2019, a sequential improvement of 55%. In fact, the first quarter of 2020 represented the lowest quarterly termination rate since 2018. We believe this decline in terminations, coupled with executing 25% more contracts in the first quarter compared to the same quarter in the prior year, points to the improvement in our franchise relations and demonstrates the longer-term potential of our back to the basics project drawer, which we introduced late last year.

Turning now to hotel sales and liquidity. We completed 2 hotel sales in the quarter, Hotel RL Washington, D.C. and the Red Lion Hotel Anaheim for gross proceeds of approximately $38 million. After closing costs, repayment of property-level debt at DC and repayment of 100% of our remaining corporate level debt, we netted over $9 million in cash.

Two additional hotels are being currently marketed, Hotel RL Baltimore, which we own outright and which carries no debt; and Hotel RL Olympia, which is in a joint venture and which secures a $5.6 million mortgage, the only remaining debt on our consolidated balance sheet.

Given the disruptive impact that COVID-19 has had on the real estate transaction market, we cannot provide an estimate on our expected timing of completion.

With respect to our liquidity, RLHC finished the quarter with cash and cash equivalents of $37.8 million. The company has no corporate debt outstanding. And with only the $5.6 million of property-level debt remaining, cash needed for interest payments over the last 9 months of 2020 is expected to be less than $200,000. This compares to $4.9 million of cash paid for interest in the full 12 months of 2019.

That largely concludes our presentation on quarterly results. However, in light of the COVID-19 pandemic, we'd like to provide the following commentary on liquidity based on what we are seeing develop so far in the second quarter.

First, we announced in our 8-K on April 23 that we successfully received $4.2 million in proceeds from a loan and the U.S. government's Paycheck Protection Program. Subsequent to our receipt of those funds, the government issued new guidance effective retroactively that we feel introduced significant ambiguity to certain eligibility requirements, particularly for publicly traded companies. While we believe that we met the eligibility requirements in place at the time that we applied for the loan, it does not appear that we meet the new eligibility requirements. Accordingly, and consistent with the conclusion of many other similarly situated public companies, we made the decision to return the proceeds of our PPP loan in May. As to our cash flows for the month of April, we are still in the process of closing our books, so we don't have final figures and haven't fully completed our analysis.

However, we expect to close the month of April between $35 million and $36 million in cash after adjusting for the return of the PPP loan, which occurred in May. The ongoing impact of COVID-19 on our cash receipts is very uncertain. In April, as we expected, our cash receipts were slowed by the impacts of the pandemic, reflecting in part, participation by our franchisees in our previously announced key deferral program, which offers delayed billing of royalty and marketing fees for all brands. Amounts deferred under this program are expected to be recouped within a 12-month period.

As for cash outflows. As we announced on our COVID-19 update call on April 6, the company should see lower cash needs for G&A in the coming months, reflecting our previously announced reduction in force and compensation cuts. Our reduction in force and company-wide reductions in compensation costs led to lower cash used for payroll in the second half of April. However, this was offset by separation costs, delaying the cash flow improvements at the reduction of force and compensation reductions.

We have also consolidated our real estate footprint, which should reduce cost by $300,000 over the remainder of 2020 and suspended nonessential CapEx, which should decrease cash consumption in the coming months and quarters. Also, as previously mentioned, our deleveraging has left us with minimal cash needs for debt service.

Finally, we continue to work with our vendors on cost reductions and payment deferrals, which we expect will further slow our spend levels throughout the near future.

In summary, the pandemic has introduced significant uncertainty to our cash flows and results of operations. However, we feel the cost-cutting initiatives that we have executed on as well as our significant deleveraging, puts us in a good liquidity position as we face this uncertainty.

That concludes our prepared remarks, and we'll now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from Brian Dobson from Nomura Instinet.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [2]

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Do you think that you could give us an update on how you envision occupancy returning starting, call it, this summer and heading over the next 12 months? Which segments of your occupancy are most likely to come back first and which segments should take a longer time to build? And then I have a follow-up question as well.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [3]

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Yes, a great question. Since we've got a lot of our properties in secondary tertiary cities and in some warm weather locations, we feel that the drive business will pick up substantially, people in their cars and RVs kind of visit families and friends, national parks that have been pent up for the last couple of months, starting in, say, late May going into June, July and August. So we feel very strong about the leisure transient business and family reunion type things throughout the country. As a matter of fact, what we've seen just recently Smith Travel Research had a -- sent some information out that the last weekend of April versus the first weekend of May that occupancies in the cities that you can travel in, the travel restrictions were lifted, doubled, doubled. And so we feel very strong that the leisure markets will come back substantially and pick up June, July, August into September. And that's great for economy hotel brands like Americas Best Value Inn and Knights Inn. On the other side, the business travel will be slowly coming back. Group business, corporate business slowly coming back. I think you'll see that pick up in October, November. Going into next year, that will be a slower build. And that will affect more of our upscale type brands like Red Lion and Red Lion Inns and RL.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [4]

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Great. That's very helpful. So as we're -- I guess, as we're exiting the teeth of this lockdown, but demand is still greatly diminished. I guess, what opportunities do you see within your business to take this time to improve best practices, operating practices so that you can head into 2021 a stronger company? Is there anything that you've undertaken over the past few weeks that would be in line with that?

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [5]

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Well, we've been focused very heavily on cleanliness and sanitation. We put best practices out in -- with -- to our franchisees. We've held some webinars already. And that's going to -- the way we operate the hotels is going to be quite different than we did before. With social distancing, the way you check-in, mobile check-ins, credit card swipes as opposed to giving your credit card to the front desk attendance, the way we clean the rooms, spacing of guests of every other room, maybe also our practices in houses procedures, SOPs for how we clean the room is different. We have given guidance out on breakfast. No more buffets, mostly packaged counter breakfast, amenities. Those properties that have room service will be -- room service will look a lot different. Those that have restaurants, the way it's seeded and the way you pick up or where you get your food -- order your food and get your food will be different.

That said, I think what this does -- and we've had our franchise operations department working very closely with all the brands, the branch advisory committees -- boards rather as well as we've had several calls with franchise groups, virtual town hall meetings. It now is a time to really focus on how you operate your hotel from cost-saving measures. I think it's kind of like we do in this whole concept of back to the basics. That's what our properties are doing the same thing back to the basics of timeliness. Everything works, friendliness, and ensuring that it's a safe and healthy place to stay.

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Nathan M. Troup, Red Lion Hotels Corporation - Executive Officer [6]

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Yes. And I think, Brian, I'd like to add to that. From a corporate perspective, we obviously accelerated a lot of our cost-cutting initiatives that we had already put in place as a result of COVID. And that's going to stick, right? I think we're really focused on automation anywhere we can automate. We're focused on process efficiency. We're focused on watching where every single nickel is spent. We cut very judiciously, and we want to stay at that level and think very hard about any dollar spent. And so I think from a cost side, a lot of the efficiencies that we've accelerated and latched on to through this process, we expect to maintain. It's very important that we think about it that way.

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Brian H. Dobson, Nomura Securities Co. Ltd., Research Division - VP of Lodging REITs [7]

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Excellent. So then I guess, finally, turning to your franchise owners, have you heard any feedback from them regarding their access to SBA loans or other forms of governmental support during this period?

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [8]

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Yes. We keep pretty close tabs on that, Brian. They have been getting access to the PPP loans. I don't know a number. They've used that. They've used the EIDL loans as well. But a lot of them, quite frankly, are getting forbearance from their local community regional banks. That's probably the #1 thing they've got. So they get a 3-month forbearance on that. And the vast majority that we've talked to have applied for the loan. And I don't know the exact percentage of what's gotten the loan, but they are utilizing those opportunities.

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Operator [9]

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And our next question is from Alex Fuhrman from Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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I hope you're all well. I wanted to ask about the Keep Our Country Moving program that you announced back in April. Curious what response you've had to that and how that may have provided some kind of a base for your business in April and starting here in May. And just curious from a little bit of a bigger picture perspective as you look over the next couple of months and demand for leisure travel slowly returning. Are there any opportunities to perhaps have a small base of business for essential workers who don't want to return home and risk infecting their families? Has that emerged as an opportunity coming out of this Keep Our Country Moving program?

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [11]

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Yes. Let me -- thanks for the question, Alex. So far to date, we launched that just in kind of late April. We've got about 500 room nights so far have been totally consumed. We'll continue to monitor the results of the promotion, of course, over the next -- it ends in June. But if necessary, we will extend it. But what it has stimulated and, in fact, it's a good promotion for those workers. But what has stimulated as a lot of demand or, I should say, public relations, given a lot of demand for some of our hotels are actually providing housing for female workers now, for supplying housing for, of course, the health care providers, non-COVID patients that are next -- our hotels are next to those hospitals, so that promotion actually from a -- it's good in its own right, but it also stimulated other business into our hotels that looks like the company that -- we have a company that does care and I see that continuing on. The one thing that we're starting to see, too, the people that are working from home, that some of them got -- has families with lots of children, dogs and cats, working out of their kitchens. Some of our hotels have a program where it's kind of like work in the hotel. It's work remotely from a hotel room to give a reasonable rate, $39 to $60 or something like that. You get free coffee. You get access to a printer and it's a way to getaway. In other words, you get away from your home and have a place that's quiet, a little more spacious and a little bit of amenities. So we see those things happening.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

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Great. That's really helpful. And then as you think about -- it sounds like you're starting to see an increase in demand, at least off of low levels, but starting to see things pick up in June, July, heading into the summer month. Can you talk about where you're seeing the biggest pickup in terms of bookings, either geographically or in terms of size of city? It certainly strikes me that the name tag Red Lion brand has a lot of properties out west that are in proximity of national parks. Just curious where you think Americans will start to be returning to as we head into the summer.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [13]

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Yes. I think the warm weather locations, the Floridas, the Californias, for sure, definitely the national parks. I was just telling Nate the other day, I just saw where -- in other words, all the drive business. I did see where RV sales were up 21% for RVs. So that's an indicator that there's going to be an awful lot of road traffic over the summer. And we're so positioned -- we've got a lot of hotels, particularly some exterior corridor hotels that are off the interstate highways on your way from point A to point B that should relish a lot of that business. And so you can drive in, drive right up, check in mobile-ly if you want to and get right to your room. So we see the secondary tertiary cities, but the warm weather locations, the resort locations and the national parks, I think will be the early winners -- winter winners in this, as we get back to business.

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Operator [14]

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And we have reached the end of the question-and-answer session. And I will now turn the call over to John Russell for closing remarks.

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John J. Russell, Red Lion Hotels Corporation - Interim President & CEO [15]

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Yes. Thank you very much. I want to thank everybody that participated on behalf of Red Lion Hotel Corporation. Thank you for your time, and thank you for your questions. If you have anything that you'd like to talk to Nate or I directly, please feel free to reach out. I want you to stay safe and healthy, and God bless. Thank you.

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Operator [16]

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And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.