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Edited Transcript of RLH earnings conference call or presentation 8-Mar-19 5:00pm GMT

Q4 2018 Red Lion Hotels Corp Earnings Call

Spokane Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Red Lion Hotels Corp earnings conference call or presentation Friday, March 8, 2019 at 5:00:00pm 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

* Gregory T. Mount

Red Lion Hotels Corporation - President, CEO & Director

* Julie A. Shiflett

Red Lion Hotels Corporation - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Alex Joseph Fuhrman

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

* Eric Christian Wold

B. Riley FBR, Inc., Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the RLH Corporation's Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to introduce your host, Dan Redmond, Vice President, Financial Planning and Analysis.

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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 fourth quarter earnings call. With us today are President and Chief Executive Officer, Greg Mount; and EVP and Chief Financial Officer, Julie Shiflett.

Before we get started, I want to remind you that the company's remarks today contain forward-looking information that are 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 and subsequent reports filed with the SEC. 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. The reconciliation of these measures to their comparable GAAP measure is provided in the tables of the press release today. That release is also available on the Investor Relations section of our website.

I will now turn the call over to Greg Mount.

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [3]

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Hello, everyone. Thank you for joining today's call. 2018 was a key transition year in the execution of the strategy we laid out in 2014 in positioning the company to an asset-light franchising and branding company. The year was a big step to achieving our stated goals as we delivered progress on a number of key initiatives. We further expanded our geographic footprint and marketing resources with the acquisition of Knights Inn. We made substantial progress to becoming capital light as we sold 9 company-owned hotels for over $116 million, which contributed $14.5 million of 2017 EBITDA, while executing 167 franchise license agreements and achieved 23% in unit growth, taking us to 86,000 rooms.

On the human capital front, we made significant investments and additions to the leadership of our franchise business. We streamlined our corporate infrastructure operations by reducing and redeploying our human capital, bringing our website management and development in-house, closing our office in Florida and strengthened our accounting, finance and internal audit groups.

The execution of the stated 2014 goals are accumulation of steps that position us as an asset-light franchise and brand company along with the platform and margins to continue to build an investment to our core business. Our development strategy in 2019 and beyond will increasingly focus on adding to our mid-scale and upscale brands. As we stand today, nearly 67% of our revenues derive from our economy brand, providing a stable baseline with a company that is not susceptible to [road park] attraction. We look forward to the opening of the 2 hotel RL's by the end of the first half of 2019 in Miami Beach and St. Louis. Our franchise license agreement pipeline is robust, with a number of executions. In addition, we continue to evaluate potential mid-scale and upscale acquisitions where we believe we can leverage our technology and owner-friendly franchise structure to attract complementary brands, remaining confident that there are viable opportunities for further acquisitions.

Over time, our goal is to grow the royalties from mid- and upscale brands at a faster rate than the royalties of our select service brands reaching an ultimate target royalty revenue contribution of roughly 55% from the current 33%. Given the compelling value proposition we offer, cutting edge technology, low-cost guest rewards, reasonable property improvement requirements as well as low franchise fees, we are confident that we can achieve our long-term objectives.

On the technology front, we further innovated and improved our Hello Rewards program with the introduction of Hello Bucks, which has been well received by both our franchisees and guests. Hello Bucks is an RLH Rewards currency that allows guests to earn rewards with every stay and spend the accumulated points on their next visit. Our rewards program is differentiated by the expediency of the use as opposed to other platforms, which require guests to accumulate a large number of night stays to be rewarded for their loyalty. Remembering that the largest majority of travelers only stay 6 to 7 nights and never reach a status level with the other antiquated loyalty systems. This innovation in loyalty not only reaches the largest segment of consumers of hotel rooms, it reduces cost to owners from 4% to 5% of gross room revenues to less than 1%.

Earlier this week, we announced the launch of RLabs, our RLH subsidiary that is a travel technology-based innovator. RLabs will focus on the new revenue verticals for the hospitality industry, including end-to-end software, robotics, and artificial intelligence. RLabs is now the future innovator of RevPak and will continue to support RLH. However, this structure allows us to leverage and monetize what we have created for RLH by primarily targeting upscale independent hotels through our debut of Canvas Integrated Systems.

We believe that this initiative has a great deal of potential allowing RLH the ability to offer third-party management companies the capability to bring brand-level resources, pricing and technology under a white label, to independent hotels around the world. We are off to a strong start with the development of Canvas Integrated Systems to 7 independent upper upscale hotels and resorts, such as the recently converted Tides Hotel in Monterey, California.

Looking ahead, our assessment of 2019 is generally consistent with industry forecasters and research analysts, which anticipate lower expectation for RevPar growth and for EBITDA margins in 2019. However, as we have discussed, our flat fee model, which constitutes about 2/3 of our franchise revenue is not as reliant upon RevPar growth. Rather, we see the slight contraction and growth as an opportunity for RLH as owners assess their current brand fees, brand requirements and performance.

Labor availability in a sub-4% unemployment environment, combined with wage and benefit increases, will also begin to impact owners. This cost pressure combined with the slower RevPar growth will encourage owners to look for competitively-priced alternatives. This is where our lower-cost basis, that translates into lower fees for owners, while maintaining a competitive demand will create more opportunity. Lastly, the sale of the majority of the owned assets will further insulate RLH from the impacts of lower RevPar growth and increasing costs.

Overall, 2018, while noisy, as we sold the majority of our owned assets has positioned us to take greater advantage of the high margin franchising business and new opportunities in travel verticals. Given our focused efforts and hard work, we have laid a solid foundation to build on in 2019.

Julie Shiflett, our CFO, will now discuss the financial results in more detail and will provide our outlook for 2019.

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [4]

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Thank you, Greg. Before diving into the numbers, I wanted to share that we spent a considerable amount of time working on how best to present a dramatically changed RLH Corporation.

With over 50% of our fourth quarter revenues being derived from franchise-related revenue streams, we felt it was appropriate to recast our financial presentation in order to improve transparency and provide disclosure more aligned with our asset-like peers.

Franchise income is now separated into 3 buckets: royalty revenues; marketing, reservation and reimbursables; and finally, other franchise fees, which are primarily services offered to hotel owners, such as revenue management. Operating expenses have also been recast with selling, general and administrative costs reflecting franchise development, franchise operations, franchise sales and corporate administration, including the cost of being publicly held.

Marketing reservations and reimbursables expense, over time, should be equivalent to its related revenue line. To that end, our income statement and our supplemental tables in our earnings release and our 10-K provide a revised view of our financial disclosures. To facilitate year-over-year comparisons, we have provided financial results in this new format for 2016, '17, and '18 as well as quarterly results for 2017 and '18. We feel strongly the recast financials provide a better view of the strong growth of our franchise business as well as the associated costs with supporting this growth.

With that, let me turn to our 2018 fourth quarter and year-end results. RLH Corporation reported a net loss for the fourth quarter of $7.3 million or $0.30 per share as compared to net income of $1.5 million or $0.06 per diluted share in the prior-year period. For the 12 months of 2018, net income was $2 million or $0.08 per diluted share compared to net income of $0.6 million or $0.02 per diluted share in the prior-year period. The quarter-over-quarter change in net income was primarily due to the lost contribution from the sales of our 9 company-owned hotels, a $3.5 million noncash impairment charge in the fourth quarter of 2018 on the GuestHouse brand and a $3.8 million nonrecurring, noncash benefit related to the Tax Cut and Jobs Act of 2017, that was recognized in the 2017 Quarter 4.

Adjusted EBITDA from continuing operations for the fourth quarter of 2018 was $2.3 million versus $3.6 million in the year-ago period. Adjusted EBITDA from continuing operations for 2018 was $16 million as compared to $26 million for 2017. The change in quarter-over-quarter and year-over-year net income and adjusted EBITDA is primarily due to the sale of 9 company-owned hotels for $116 million in proceeds.

These hotels had contributed roughly $14.5 million in EBITDA during 2017. The impact of the lost EBITDA from sales was partially offset by the 36% growth of franchise royalty fees. This double-digit improvement arose from our organic growth and the contribution of the Knights Inn acquisition. Total revenue for the quarter and the year declined by 27% and 21% respectively, reflecting the impact of these sold hotels. If you exclude the company-operated hotels revenue, and look at just franchise-related, RLH achieved a 19.3% franchise-related revenue growth for the quarter and 10.8% franchise related revenue growth for the year. The improvement in franchise revenues reflects the impact of the 167 franchise agreements signed in the year as well as the Knights Inn acquisition.

Our franchise operations achieved a 35% margin, a 600 basis point expansion for the year. Also, during the year, as Greg mentioned, we internalized the management of our website, made significant improvements to our Guest rewards program, Hello Rewards, and completed a number of smaller technology projects. Continued investment in our technology platform ensures we remain at the forefront of providing both our hotel owners and our guests with efficient tools to run their business or book travel.

In 2018, we invested roughly $5 million of CapEx on these and other IT-related projects. Additional CapEx was made up of cost to expand our offices in Denver, as well as standard maintenance and improvements to owned hotel and costs necessary to prepare those properties for sale. For 2019, we have several tech and corporate initiatives that we are undertaking and anticipate investment in the range of $8 million to $9 million, continuing to support our franchise infrastructure and expand our offerings to hotel owners and guests through our website, mobile applications, direct marketing capabilities and reservation support systems. In addition, we'll continue to support our remaining hotel assets through maintenance and property improvement CapEx.

We made significant progress in disposition of our hotels in 2018. We now have 8 owned or leasehold hotels remaining, and with that said, we're committed to reducing our hotel ownership and the sales process will be focused primarily on maximizing the value of our ownership for our shareholders and less so on timing. We will provide details on transaction pricing, use of proceeds and historical EBITDA contribution as hotel properties are sold.

We continue to move the management and operations of our owned hotels and leasehold interest to third-party managers, allowing us to focus our company resources on growing our core franchise business.

With respect to SG&A, the change from our prior presentation reflects the reclassification of franchise development, sales and operations into this line item as well as corporate overhead amounts, which were previously allocated to the hotel division expense line item.

So said differently, today's SG&A line item represents the administrative costs of running our business in one line. Under this new presentation, for the fourth quarter, SG&A decreased by 4% to $8.5 million, primarily due to a reduction in compensation expense. For the year-over-year comparison, 2018 SG&A includes EBITDA add back expenses totaling $1.5 million related to employee severance and the closure of our Florida office, and $4 million in stock compensation expense.

Excluding these amounts, the 2018 SG&A is approximately $26.8 million versus a prior year comparable number of $26.4 million. We anticipate 2019 SG&A to be in the range of $25 million to $27 million net of stock compensation. Based on the Q4 stock compensation expense of $1.1 million in 2018, the anticipated annualized amount for 2019 would be approximately $4.5 million.

We have continued to reduce our mortgage debt through our hotel sales. At December 31, 2018, the company had approximately $44 million of indebtedness, with a weighted average interest rate of 6.8% and a weighted average maturity of 2.4 years. We had cash on hand totaling $19.8 million and a net debt to EBITDA of 1.5x.

Given my recent appointment to the role as CFO, I thought it would be helpful to share my views on long-term capital structure. While we have a comparatively low net debt-to-EBITDA ratio now, we do expect that for the appropriate reasons, and from time to time, our net debt-to-EBITDA ratio could flex up to a range of 3x to 4x in support of our long-term goal of achieving a 20% to 25% CAGR on EBITDA as highlighted in our current Investor Relations deck available on our website.

Responsible stewardship of capital will always take priority, but there may be times that justify the increase of leverage in the short term to achieve our strategic objectives. We've also been asked a great deal about the initiation of a share buyback program. And while we agree that's an attractive way to manage the share count expansion or return capital to shareholders, the board and management strongly believe the best use of our capital at this stage of our growth is redeployment of capital into our business.

Total share count has increased by almost 23% or 4.5 million shares over the last 3 years, while our franchise revenues or asset-light revenues have grown by 118%. The majority of the increase in our shares outstanding was related to growth initiatives including our follow-on offering, where we issued 2.5 million shares and 1.4 million shares, which were both issued with respect to the Vantage acquisition. As our platform grows and achieves better economies and free cash flow generation, we will revisit a share expansion mitigation program with our board.

Let me now turn to our outlook for 2019. As shared on our third quarter call last year, the company discontinued guidance on RevPar as 67% of the company's revenue is derived from the economy segment, which is primarily fixed fee revenue. This provides a stable revenue stream throughout all economic cycles, making RevPar less important for our current business model.

With that said, over time, as our upscale and mid-scale portfolio grows, we do expect to reintroduce this metric. As previously communicated, we anticipate signing franchise agreements in the range of 160 to 200 for the year. We anticipate adjusted EBITDA to be in the range of $20.5 million to $22.5 million. It's important to note that adjusted EBITDA includes the add back of stock-based compensation.

Also, to provide transparency, to our expectations, we anticipate that our SG&A will be in the range of $29.5 million to $31.5 million, including stock compensation. Another important point to note is that our guidance does not include or contemplate the impact of additional hotel sales. For simplicities sake, as has been our practice in the past, we will file an 8-K in the event of a sale or acquisition and will update our guidance for the inter-quarter activities during the subsequent quarter's earnings call.

That concludes our prepared remarks, and we'd now like to 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) Our first question comes from the line of Eric Wold with B. Riley FBR.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [2]

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So a few questions. I guess, one, and I apologize if you mentioned some of this in the beginning, but maybe Greg, just give us an update overview on the remaining company-operated and leasehold property in terms of what's currently in sale negotiation? What's still on the block? What's kind of been pulled off the block that you're kind of holding on to? And then, are you still on track for the 4 sales in first half of this year with $70 million in proceeds?

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [3]

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Yes. Eric, we have continued to market a number of the hotels as we look at pricing and work with our joint venture partners to kind of determine the outcome of those. We've also taken the step of going back in and refinancing on some of the other assets where we're able to get fairly significant proceeds at this time and look to restabilize those. So at this point, we're in that process of evaluation. As we look at offers that are coming in, we're also in the process of refinancing some of the assets currently. And we'll continue to do that throughout 2019. We don't want to be in a situation where we're -- disposition of an asset too early or too low of a price. And we're also going to start to reach in to season here. So it may make more sense in some cases to keep those assets as we go through season. So all of those things are kind of on interplay, but for us, we have sold the majority of them. We have moved the majority into third-party operations. So it's not a defocus for us in the sense of how to spend time on them on an operations bases. So it really kind of affords us the ability to be patient and get the right price, which is really what we and our partners are focused on.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [4]

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Okay. And then, just moving on to the franchising side. So looking, last year, kind of excluding the 9 agreements from the hotels that you sold. You had 72 new locations. Assuming kind of same ratio this year on your mid-point, your guidance is about 81. So low double-digit kind of growth in kind of new locations, I guess. With Knights in kind of now fully in the mix, what's keeping that, maybe, from moving meaningfully higher from these levels?

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [5]

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Based on the number of hotels? Is that what the question is to [direct that]...

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [6]

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Yes. It looks like -- the same ratio will be about 81 this year versus 72 last year in terms of new. So it's -- I mean, it's good increase, but what kind of keeps that from accelerating from these levels?

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [7]

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Yes. I think that as we talked about for last year and we've talked about a couple of times in our call, we have begun to be much more disciplined in making sure that the franchisees are in our systems. Really reflect the brand and what needs to happen from a quality standpoint going forward. And so we've definitely had, as we've talked about, a little higher ratio of terminations, which in many cases, have been kind of, from our perspective, terminations that needed to occur. At the same time, we've been going back and renegotiating these 1-year agreements to 3- and 5-year agreements, but really shows up in the total revenue, which is what we've talked about is really where the primary focus should be and where we're focused on our 20% growth. At the same time, I think that you'll start to see us as we shift our forecast -- as we shift our focus on to our mid-scale and upscale, you'll see a much greater acceleration and longer-term agreements that have a much stronger MPV for us and overall revenue. So it's hard to look at the number of hotels and really get a benchmark, but what I can tell you is, is that we're being very disciplined in making sure that the hotels in our systems reflect the segment and the quality that we want to see and we're also looking to make sure that the owners that are in our system are not only participating in them as they should, but also that we're looking at longer-term agreements, which is a key focus. So in the areas of a Vantage transaction, Knights Inn, some of the others, and you've seen us push out some of those what we would call bad actors that really had a number of challenges and were unwilling to address them. We'll continue to do that, maybe not at the same pace, but I think you'll continue to see that. And it's not anything unlike we had talked about in the Vantage transaction, where they were at about a 10% termination rate on average for many, many years. That tends to be kind of part of that segment. So hopefully that answered your question.

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Eric Christian Wold, B. Riley FBR, Inc., Research Division - Senior Equity Analyst [8]

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No, it's good. And final question. So looking at the SG&A guidance kind of on the -- Julie, kind of on the apples to apples, excluding kind of nonrecurring things. You're kind of looking at the $25 million to $27 million versus $26.8 million last year. So a little bit lower. Where are you kind of on the expense reduction plans? How much else can come out? Or is this kind of a good base level, this $25 million to $27 million, kind of going forward?

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [9]

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This is a really good base level going forward. It is truly the run rate that we expect, and so it turns up a quarterly level. It's really that number divided by 4. It's not -- there's not a lot of seasonality in that line item with the recast that we've done. It's a very stable amount, and we do expect to see those cost reductions from the initiatives that were taken in 2018. Those will realize themselves in that guidance that we have given at a lower run rate than 2018 and '17.

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Operator [10]

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(Operator Instructions) Our next question comes from the line of Alex Fuhrman with Craig-Hallum.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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I wanted to ask about this RLabs that you launched recently. It sounds like, definitely, an extension of the digital services that you offer to hotel brands. Just trying to get a sense of how this will be positioned going forward, and what other services might be included in it. Is this, basically, a way to provide all of the technology that you provide to your existing franchisees on a no-name basis for independents? Just trying to get a sense of where this will fit into your existing offerings for hotel operators and how it will leverage the technology that you're already deploying for your franchisees?

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [12]

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Yes. We're really excited about this. We have built a platform that's been highly successful for us and our franchisees and have been recognized in the industry for that platform. And we really felt that there was a great opportunity to monetize what we've already built and to leverage it into a segment as a business that we think is greatly underserved, both from a technology standpoint as well as just sheer capabilities, and then, on top of that just cost. And so we spent time, really, looking at this and analyzing these independent hotels, who really, for the most part, want to keep their independence and kind of looked at what their costs were versus what we're providing as well as all of the additional things that we provide from mobile check-in, to websites, to revenue management, et cetera. And their costs have been ranging anywhere from 30% to 50% higher than what we're actually able to provide. So there's really a great margin there for us. We think that there's very long tail particularly in the upper upscale luxury and resort market. There's approximately about 80,000 independent hotels throughout the world that fit into this opportunity, so we see it as one that we can continue to grow and leverage. And the great part about it is, as I said earlier, is we're just monetizing what we've already built. There's not a lot of additional expense here for us. So baby steps at this point, but we are getting a tremendous amount of interest in this. There's a number of independent hotels that have been forced to select soft branding, and what they're finding from the brands in their soft branding is that their costs are almost the same as being a branded hotel, and now they're starting to be forced to follow the same standards and expend a tremendous amount of dollars from the PIP standpoint or the renovation standpoint. And we think that this allows them to avoid that, yet at the same time, get the advantage of our scale, get the advantage of our platform and remain independent. And most of these hotels are in high barrier to entry markets. They're iconic. They carry a cache with them. They're just unable to get the same kind of technology, innovation, pricing, et cetera. And then, lastly, we think that there are a number of associations out there that have been providing kind of a platform per se to the independent hotels around the world. And really, they're very underserved from a technology standpoint and their pricing is really not competitive, and then, for the most part, they're very reliant on larger CRS, or reservation systems that are out there. So from our perspective, being able to white label this will not be tied back to our brands or Red Lion. We'll allow management companies, independent hotels, and others, to really access this technology. And for us, to get paid on a transaction basis, which as we've discussed before, we really think there's an opportunity to move more towards a transaction orientation of things, and this is a great example of it. So sorry for the long-winded answer, but hopefully that covers it.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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No. That's great. I really appreciate that, Greg. And then, one other thing I just wanted to ask about, now that we're seeing the franchise revenue broken down into more of the components, just trying to get a sense of royalty revenue, obviously, was up tremendously in 2018. It looks like the marketing reservations and the other line item that was about flat for the year. So just trying to understand, is this kind of a shift in more royalty relationships. Should we expect that trend to continue for the foreseeable future?

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [14]

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Yes. If I'm understanding the question correctly, I think that's really going to be a point of emphasis for us. And we were talking earlier today, I mean, if you kind of look at how we currently break -- how we currently break it down, about 8.5% of our hotels, in our overall franchise revenues, are mid-scale and upscale. And they provide about 22% as it relates to our overall new generation and revenue. And then, as Julie spoke about, it's about 33% of the revenue. So I think it really gives you a great formulation to kind of see where our emphasis is and why we're focused on that, and again, for us, the royalty fees are really the best opportunity, best optic for everyone to look at as it relates to the growth of the company and our ability to continue to escalate our higher-margin business and franchising.

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Julie A. Shiflett, Red Lion Hotels Corporation - Executive VP, CFO & Treasurer [15]

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And one other thing to add, Alex, is that marketing reservations and reimbursables revenue, over time, is offset by marketing reservations and reimbursables. So our real margin and growth, as Greg alluded to, is in that product and line item.

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Operator [16]

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We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

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Gregory T. Mount, Red Lion Hotels Corporation - President, CEO & Director [17]

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Great. Thank you, operator. We'd like to thank everyone for joining us today, and we look forward to an exciting 2019.

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Operator [18]

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This concludes today's teleconference. A replay of today's conference may be accessed by dialing (877) 660-6853 or (201) 612-7415 and entering the code 13687348. This replay is available until March 22, 2019.

You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.