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Red Lion Offloads Non-Core Assets

Zacks Equity Research

Red Lion Hotels Corporation (RLH) has recently struck a deal to sell its 478-room hotel in Southeast Denver, Colorado for $13.0 million. The deal is expected to be sealed on or before October 31.

Last month, the hotelier sold another property, a 149-room Red Lion Colonial Hotel in Helena, for $5.6 million.  In this deal, the hived-off property will continue to operate under the Red Lion name and the company will likely enjoy a franchisee fee, unlike the latest one.

Washington-based Red Lion, which owns, operates and franchises mid-scale full, select and limited service hotels, has been considering the divesture option for quite sometime. In June 2011, Red Lion also closed the sale of its hotel in Seattle for $71.0 million. During the fourth quarter of 2011, the hotelier also listed its Medford and Missoula properties for sale.

The basic idea of asset disposition was to unlock real estate value by giving away ownership of selective assets. Management intends to use the sale proceeds to invest in brand positioning as well as restructure the company’s balance sheet that includes paying down debt.

The asset sale is part of Red Lion’s long-term strategy to strengthen financial flexibility, which in turn will maximize shareholder value. A higher concentration of franchise fees reduces earnings volatility and provides a more stable growth profile.

Since late 2010, transition to an “asset light” business model has gained momentum in the hotels and the REIT industry. Many of Red Lion’s close competitors including Starwood Hotels & Resorts Worldwide Inc. (HOT) and Morgans Hotel Group Co. (MHGC) have embarked on this strategy.

Another long-term initiative of Red Lion is to increase its franchise activities. The company believes that refinancing in its namesake brand will position it well for expansion through franchising, once the market fully recovers. The company expects to add at least 30 to 40 franchised hotels within 2014. Red Lion currently carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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