As the hospitality industry gets more consolidated than ever, RLH Corp. is pursuing a crucial strategy to enable it to get bigger.

The board of directors of the Denver-based chain, which is the parent company of several hotel brands, including Red Lion, said October 5 it approved the sale of 11 of the company’s remaining 18 owned-hotel properties.

The decision to sell those properties marks yet one more step in the company’s pursuit of an asset-light strategy, which RLH began about four years ago, said chief financial officer Doug Ludwig.

It’s a strategy the company is pursuing not only because it makes good business sense, but because it can help the company get event bigger by helping RLH “acquire franchise businesses similar to Vantage [Hospitality],” which Red Lion bought last year.

So, who would might RLH buy? Ludwig wouldn’t name names, but he did give some hints.

“I think the difference, for our next few acquisitions, would be to go after upscale and midscale properties,” he said. “Whereas Vantage was more dominated by economy properties, the benefit of going upscale is that the fee income is more significant — the royalty and marketing fees are based as a percentage of rooms revenue. And the contracts are typically longer-term contracts, too. Instead of a five- to 10-year contract, those are usually 20 to 30 years.”

He said that potential acquisition targets would most likely be private companies that aren’t “big enough to attract the attention of the Marriotts, Hyatts, or Hiltons in the world.”

Ludwig added, “We’re in the top 10 in the franchise space, and in many ways, we’re a logical and capable accumulator of these kinds of [hotel] groups. They tend to be regional, they tend to be smaller. They can be anything from 30 to 40 properties to something similar to Vantage. I think it will be, again, similar to Vantage — I don’t think anyone had heard of them until we bought them. There are other opportunities across the U.S. I’d put Canada in the same category. There are interesting opportunities out there that we would like to accumulate.”

While RLH  isn’t necessarily known for its upscale business, Ludwig said the company is gaining buzz for its upscale Hotel RL brand, and that’s all a part of the company’s plan to better “refine” its brand portfolio and attract new franchise owners.

“We’re refining our approach to property owners, and trying to convince them to come to one of the Red Lion brands,” Ludwig noted. “For instance, our Hotel RL hotels — our upscale product — has had very good market reaction.”

He also said there are “some updates” with regard to RLH’s lawsuit against Hard Rock Hotels for intellectual-property infringement related to Hard Rock’s new Reverb hotel brand, but details wouldn’t be announced until next week or later.

Ludwig said that with the addition of Vantage, RLH now has nine brands — three in the economy space, three midscale, and three upscale — and the company is working hard to ensure the “brands are better understood, promoted, and marketed. It makes us better known faster than has been historically the case because we’re just doing a better job on the awareness side of things. We’re making sure customers and intermediaries understand who we are and what each of the brands mean. We’re now in 50 states, and we have 40 properties in Canada, with some properties in South Korea and in India, too.”

RLH’s relationship to distributors like Expedia is also much different than its hotel peers. In 2016, the company announced it would allow Expedia.com and Hotels.com to sell its members-only rates in exchange for the ability to automatically enroll any guests who book through those channels into the Red Lion Hello Rewards loyalty program. Should RLH continues to grow and become even bigger, however, it’ll be interesting to see if the company retains this online travel agency-friendly approach to distribution.

Why Everyone Goes Asset Light

Pursuing an asset-light strategy is not a new hospitality trend. Just look at the recent spin-off that Hilton completed earlier this year, or Marriott, which has pursued an asset-light strategy for many years. And that process continues for Marriott at it looks to sell off Starwood-owned hotels inherited after purchasing the chain for $13.3 billion last year.

“The shift to an asset-light strategy continues to accelerate across the industry, especially as shares of Marriott and Hilton now trade at premium valuation multiples,” Michael Bellisario, senior research analyst for Baird Equity Research wrote in an investors’ note.  “Hyatt is one of the remaining global brands with an owned real estate strategy; however, even Hyatt’s tone appeared to subtly shift recently with management noting that the company’s future growth was expected to be driven primarily by its management and franchise business.”

For a smaller company like RLH, it’s extremely important in helping it compete with the larger hotel companies and to continue to grow.

Four years ago, the company began disposing of other owned assets and it created multiple joint ventures that helped the company transition from a 100 percent owner hotel company to 55 percent owned, Ludwig said.

With the addition of Vantage, RLH added approximately 1,000 new properties — all of them with franchise agreements — to its portfolio. “We acquire those franchise rights at a very favorable valuation to us, so it meant the purchase price was very manageable, and we are seeing very good returns on that investment in the first year of operation,” said Ludwig.

He added, “We’ll recover our investment in Vantage over a two- to three-year period. It’s a benefit of being asset light. Rather than an ownership position that takes on a lot more debt and usually takes three or five years or more to recover the investment, the franchise business turns over faster. We didn’t need any debt to complete that acquisition. We did that out of our cash reserves. That worked well.”

Another benefit of going asset light, Ludwig noted, is that it makes business “more stable and less susceptible to economic changes and it’s also a much higher profit margin business.”

“On the ownership side, you’re operating margins that are 18 to 20 percent, maybe a high of 22 percent. On the franchise side, we completed the second quarter at almost 30 percent and we see that increasing further,” Ludwig noted.

“That’s the secret of why the industry is going toward this asset-light model: You don’t need a lot of capital to add franchise agreements and they are immediately profitable; there are no startup losses. You’re not exposed to capital requirements of real estate assets themselves. It’s a low capital, stable, high-margin business — the investment community is willing to pay a higher valuation or higher multiple because of those characteristics.”

Ludwig believes that within two to three years, RLH’s profit margins may rise to the 40s and mid-50s percentages. “It’s a very scalable growth model.”

The hotels that RLH is currently listing for sale are as follows:

Hotel RL Salt Lake City, Utah
Hotel RL Spokane at the Park, Washington
Hotel RL Olympia, Washington
Red Lion Hotel Pasco, Washington
Red Lion Hotel Richland Hanford House, Washington
Red Lion Hotel Port Angeles, Washington
Red Lion Hotel Redding, California
Red Lion Hotel Eureka, California
Red Lion Hotel Boise Downtowner, Idaho
Red Lion Hotel Templin’s on the River, Post Falls, Idaho
Red Lion Inn & Suites Bend, Oregon

Photo Credit: The lobby of the Hotel RL Spokane at the Park in Spokane, Washington. Parent company RLH Corp. is looking to sell the property along with 10 others in pursuit of an asset-light hotel strategy. RLH Corp.