RED LION HOTELS CORPORATION The following discussion and analysis should be read in conjunction with Item 8. Financial Statements and Supplementary Data.
Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business asRLH Corporation and primarily engaged in the franchising, management and ownership of hotels under the following proprietary brands:Hotel RL ,Red Lion Hotels ,Red Lion Inn & Suites , GuestHouse,Settle Inn ,Americas Best Value Inn ,Canadas Best Value Inn , Signature andSignature Inn ,Knights Inn , andCountry Hearth Inns & Suites . A summary of our open franchise and company operated hotels as ofDecember 31, 2019 , including the approximate number of available rooms, is provided below: Midscale Brand Economy Brand Total Total Available Total Available Total Available Hotels Rooms Hotels Rooms Hotels Rooms Beginning quantity, January 1, 2019 112 15,900 1,215 69,800 1,327 85,700 Newly opened 8 700 32 1,600 40 2,300 Change in brand / adjustments (1) (1) 100 (30) (1,800) (31) (1,700) Terminated properties (23) (3,200) (251) (15,400) (274) (18,600) Ending quantity, December 31, 2019 96 13,500 966 54,200 1,062 67,700 (1) During the fourth quarter of 2019 we identified a number of errors in our contract tracking system, primarily related to the status of acquired contracts from acquisitions. The impact of these adjustments is reflected on this line. A summary of activity relating to our open midscale franchise and company operated hotels by brand fromJanuary 1, 2019 throughDecember 31, 2019 is provided below: Red Lion Inns Midscale Brand Hotels Hotel RL Red Lion Hotel and Suites Signature Other Total Beginning quantity, January 1, 2019 8 46 43 2 13 112 Newly opened 1 - 5 2 - 8 Change in brand / adjustments - 1 1 - (3) (1) Terminated properties - (8) (9) - (6) (23) Ending quantity, December 31, 2019 9 39 40 4 4
96
Ending rooms, December 31, 2019 1,400 8,000 3,300 300 500 13,500
A summary of activity relating to our open economy franchise hotels by brand
from
Country
Economy Brand Hotels ABVI and CBVI Knights Inn Hearth Guest House Signature Inn Other Total
Beginning quantity, January
1, 2019 777 332 53 27 2 24 1,215
Newly opened 28 2 1 1 - - 32
Change in brand / adjustments
(1) (7) (20) - - - (3) (30)
Terminated properties (141) (82) (7) (9) (2) (10) (251)
Ending quantity, December 31,
2019 657 232 47 19 - 11 966
Ending rooms, December 31,
2019 34,900 14,100 2,300 1,300 - 1,600 54,200
(1) During the fourth quarter of 2019 we identified a number of errors in our
contract tracking system, primarily related to the status of acquired contracts
from acquisitions. The impact of these adjustments is reflected on this line.
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A summary of our executed franchise agreements for the year ended
Midscale Brand Economy Brand Total
Executed franchise license agreements, year ended
16 27 43
New contracts for existing locations 11 115 126
Total executed franchise license agreements, year ended
December 31, 2019 27 142 169
We operate in two reportable segments:
•The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from royalty, marketing and other fees that are primarily based on a percentage of room revenue or on room count or on transaction count and are charged to hotel owners in exchange for the use of our brand and access to our marketing and central services programs. These central services and marketing programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. Additionally, this segment includes our initial contracts for Canvas Integrated Systems. •The company operated hotel segment derives revenues primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues have also been derived from management fees and related charges for hotels with which we contract to perform management services, however our last management agreement terminated inFebruary 2019 .
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".
Major Transactions During Reporting Periods Presented
InMay 2018 ,Red Lion Hotels Franchising, Inc. , a wholly-owned subsidiary ofRLH Corporation (RLH Franchising) completed the purchase of all of the issued and outstanding shares of capital stock ofKnights Franchise Systems, Inc. (KFS), and the purchase of certain operating assets including franchise agreements for approximately 330 hotels from, and assumption of certain liabilities relating to the business of franchisingKnights Inn branded hotels to hotel owners fromWyndham Hotel Group Canada ,ULC andWyndham Hotel Group Europe Limited , pursuant to an Amended and Restated Purchase Agreement, for an aggregate purchase price of$27.2 million . See Note 16 Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data. Consistent with the Company's previously stated business strategy to move towards operating as primarily a franchise company, in 2017, we announced that we would be marketing for sale 11 of our owned hotels held by our consolidated joint venture,RL Venture . In 2018, nine of theRL Venture properties were sold for$116.5 million . InDecember 2019 , we sold an additionalRL Venture property for$33.0 million . InNovember 2019 , we sold the only hotel in our consolidated joint venture, RLS Atla Venture for$12.3 million . Most of the buyers entered into franchise license agreements to retain the Red Lion brand. It is our intention, subject to market conditions, to sell all of our hotel ownership positions in the next few years so that we can focus on our hotel franchise business, which is less capital intensive and generates higher profit margins than the hotel ownership business. We anticipate that the completion of these sales will allow the Company to continue to significantly reduce or eliminate long-term debt and to increase cash reserves for future franchise agreement growth initiatives.
For further discussion on these transactions, see Note 16, Acquisitions and Dispositions within Item 8. Financial Statements and Supplementary Data.
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--------------------------------------------------------------------------------Results of Operations
A summary of our Consolidated Statements of Comprehensive Income (Loss) is provided below (in thousands):
Years Ended
2019 2018
Total revenues $ 114,288 $ 135,849
Total operating expenses 129,584 114,715
Operating income (loss) (15,296) 21,134
Other income (expense):
Interest expense (5,157) (6,209)
Loss on early retirement of debt (428) (794)
Other income, net 161 265
Total other income (expense) (5,424) (6,738)
Income (loss) before taxes (20,720) 14,396
Income tax expense (benefit) 253 (71)
Net income (loss) (20,973) 14,467
Net (income) loss attributable to noncontrolling interest 1,944 (13,129)
Net income (loss) and comprehensive income (loss) attributable to
Non-GAAP Financial Measures: (1) EBITDA$ (996) $ 37,608 Adjusted EBITDA$ 11,592 $ 15,766 _________
(1) The definitions of "EBITDA," and "Adjusted EBITDA" and how those measures relate to net income (loss) are discussed and reconciled under Non-GAAP Financial Measures below.
For the year endedDecember 31, 2019 , we reported a net loss attributable toRLH Corporation of$19.0 million or$(0.76) per weighted average basic share, which includes$14.1 million in impairment losses related to ourWashington DC joint venture property as well as ourAmericas Best Value Inn and Knights Inn brand name intangible assets,$7.1 million in gains primarily from the disposal of two hotel properties,$0.6 million of expense related to a non-income tax expense assessment,$1.8 million of stock based compensation,$1.0 million of expense related to a legal settlement,$1.1 million in employee separation costs,$0.8 million of bad debt expense and associated legal fees related to a reserve recognized in the second half of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large customer in bankruptcy,$0.6 million in transaction and integration costs, and a$0.4 million loss on early retirement of debt. For the year endedDecember 31, 2018 , we reported net income attributable toRLH Corporation of$1.3 million or$0.05 per weighted average share, which included$41.5 million in gains from the disposal of nine hotel properties,$10.6 million in impairment losses related to ourBaltimore joint venture property and GuestHouse brand name intangible asset,$4.0 million of stock based compensation,$2.2 million in transaction and integration related costs,$1.5 million in employee separation costs,$0.6 million of expense related to a non-income tax expense assessment, and a$0.8 million loss on early retirement of debt resulting from an early repayment on our Senior Secured Term Loan using proceeds from anRL Venture distribution following two hotel sales.
For the year ended
Non-GAAP Financial Measures
EBITDA is defined as net income (loss), before interest, taxes, depreciation and
amortization. We believe it is a useful financial performance measure due to the
significance of our long-lived assets and level of indebtedness.
Adjusted EBITDA is an additional measure of financial performance. We believe
that the inclusion or exclusion of certain special items, such as gains and
losses on asset dispositions and impairments, is necessary to provide the most
accurate measure of core operating results and as a means to evaluate
comparative results. Adjusted EBTIDA also excludes the effect of non-cash
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--------------------------------------------------------------------------------stock compensation expense. We believe that the exclusion of this item is consistent with the purposes of the measure described below.
EBITDA and Adjusted EBITDA are commonly used measures of performance in our industry. We utilize these measures because management finds them a useful tool to calculate more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. Our board of directors and executive management team consider Adjusted EBITDA to be a key performance metric and compensation measure. We believe they are a complement to reported operating results. EBITDA and Adjusted EBITDA are not intended to represent net income (loss) defined by generally accepted accounting principles inthe United States of America (GAAP), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and, in particular, Adjusted EBITDA differently than we do or may not calculate them at all, limiting the usefulness of EBITDA and Adjusted EBITDA as comparative measures.
The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
Years Ended December 31,
2019 2018
(In thousands)
Net income (loss) $ (20,973) $ 14,467
Depreciation and amortization 14,567 17,003
Interest expense 5,157 6,209
Income tax expense (benefit) 253 (71)
EBITDA (996) 37,608
Stock-based compensation (1) 1,780 3,955
Asset impairment (2) 14,128 10,582
Transaction and integration costs (3) 632 2,219
Employee separation and transition costs (4) 1,101 1,509
Loss on early retirement of debt 428 794
Gain on asset dispositions (5) (7,067) (41,520)
Legal settlement expense (6) 952 -
Non-income tax expense assessment (7) 634 619
Adjusted EBITDA 11,592 15,766
Adjusted EBITDA attributable to noncontrolling interests (1,457) (1,806)
Adjusted EBITDA attributable to RLH Corporation $ 10,135 $ 13,960
(1) Costs represent total stock-based compensation for each period. These costs are included within Selling, general,
administrative and other expenses, Company operated hotels and Marketing, reservations and reimbursables on the
Consolidated Statements of Comprehensive Income (Loss).
(2) During 2019, we recognized impairments on our Hotel RL Washington DC joint venture property, and on our Americas
Best Value Inn and Knights Inn brand name intangible assets. During 2018, we recognized impairments on our Hotel RL
Baltimore Inner Harbor joint venture property and on our Guesthouse brand name intangible asset. All are included
within Asset impairment on the Consolidated Statements of Comprehensive Income (Loss).
(3) Transaction and integration costs include incremental expenses incurred for potential and executed acquisitions
and dispositions of assets.
(4) The costs recognized relate to employee separation. In 2019, the costs primarily relate to severance agreements
with our Chief Executive Officer and other executives in November 2019 . The costs recognized in 2018 primarily relate
to severance agreements with our Chief Operating Officer, and President of Global Development in May 2018 and our
Chief Marketing Officer in December 2018 . These costs are included within Selling, general, administrative and other
expenses and Marketing, reservations and reimbursables expense on the Consolidated Statements of Comprehensive Income
(Loss).
(5) Gains relate primarily to the sale of two properties in the fourth quarter of 2019 and nine properties during
2018, which are included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive
Income (Loss).
(6) Legal settlement expense relates to a settlement agreement with former hotel workers regarding a wage dispute in
California . This expense is included in Company operated hotels expense on the Consolidated Statements of
Comprehensive Income (Loss).
(7) During the fourth quarter of 2019, we concluded that we are probable of being assessed non-income taxes in
additional states of $0.6 million for each of the years ended December 31, 2019 and 2018. We accrued these estimated
taxes in Selling, general, administrative and other expenses on the Consolidated Statements of Comprehensive Income
(Loss), with a revision to our 2018 Consolidated Statement of Comprehensive Income (Loss) to reflect the prior period
adjustment. For further discussion, see Note 2, Summary of Significant Accounting Policies within Item 8. Financial
Statements and Supplementary Data.
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--------------------------------------------------------------------------------Revenues
Franchise and Marketing, Reservations and Reimbursables Revenues
Years Ended December 31,
2019 2018
(In thousands)
Royalty $ 22,121 $ 22,309
Marketing, reservations and reimbursables 31,375 28,239
Other franchise 5,749 3,246
2019 Compared to 2018
Revenues from royalties decreased slightly by $0.2 million or 1%. This decrease
is primarily due to terminated agreements in our economy brand hotels, partially
offset by a full year of royalties in 2019 from our acquired Knights Inn
agreements compared to the partial year in 2018. Marketing, reservations, and
reimbursables revenue increased $3.1 million or 11% and Other franchise revenues
increased by $2.5 million or 77%. These increases are primarily due to the
additional revenue provided by the acquisition of the Knights Inn franchised
hotels in May 2018 plus an increase in reservation and other miscellaneous fees,
partially offset by the impact of terminated agreements.
Company Operated Hotels Revenues
Years Ended December 31,
2019 2018
(In thousands)
Company operated hotel revenues $ 55,029 $ 82,021 2019 Compared to 2018
Company operated hotels revenue decreased by$27.0 million or 33%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during 2018 and an additional two hotel disposals in the fourth quarter of 2019, along with the expiration of a company operated hotel property lease in the fourth quarter of 2018. Revenues for the six company operated hotels held during the entirety of both periods increased by$0.2 million , to$41.4 million in 2019 compared to$41.2 million in 2018. 31
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Operating Expenses
Selling, General, Administrative and Other Expenses
Years Ended December 31,
2019 2018
(In thousands)
Franchise development and operations, including labor $ 8,618 $ 9,908
General and administrative labor and labor-related costs 7,260 9,036
Stock-based compensation 651 2,169
Non-income tax expense assessment 634 619
Bad debt expense 3,221 872
Legal fees 2,023 1,697
Professional fees and outside services 1,099 1,560
Facility lease 941 844
Information technology costs 814 967
Other 4,159 4,009
Total Selling, general, administrative and other expenses $ 29,420 $ 31,681
2019 Compared to 2018
Total Selling, general, administrative and other expenses decreased by
Franchise development and operations expenses decreased primarily due to lower overall compensation expense in 2019 as compared to 2018. This decrease in compensation expense was driven by a reduction in variable compensation due to lower than expected growth in the current year, along with a decrease in average headcount. Labor and labor-related costs decreased primarily due to a reduction in variable compensation due to lower than expected growth in the current year, along with decreased headcount and overall benefit costs. Stock-based compensation decreased primarily due to the reversal of previously recognized expense resulting from forfeitures due to several executive terminations in the fourth quarter of 2019, along with the determination that the achievement of performance vesting conditions associated with certain outstanding performance stock units was no longer probable. Due to a non-income tax audit that was initiated in 2019, during the fourth quarter of 2019 we engaged a third party expert to assist management in a study that concluded we are probable of being assessed non-income taxes in additional states related to billings from 2016 through 2019. The total estimated non-income tax liability for all periods was estimated at$2.0 million , which includes penalties and interest of$0.3 million . There is significant subjectivity as to whether non-income taxes can be assessed on certain of our franchise billings. In order to mitigate our potential exposure, the company has requested acceptance into voluntary disclosure agreements with multiple states that comprise the majority of our exposure. We have the ability and right to bill and collect a reimbursement of the incremental non-income tax, excluding penalties and interest, from our franchisees. However, as the amounts included significant judgment, cover multiple periods, and as we lack a history of collecting these types of non-income taxes, we have concluded we will not recognize an asset for potential reimbursement and therefore we have recognized the 2016 and 2017 impact of$0.7 million as a decrease in Accumulated deficit and an increase to Other accrued liabilities as ofJanuary 1, 2018 , as well as recognizing$0.6 million in Selling, general, administrative and other expenses in 2019 and 2018, respectively. For further discussion on this item and the associated immaterial revisions of prior period financial information, see Note 2, Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data. Bad debt expense increased due to increased terminations reducing the likelihood of collection of outstanding amounts as well as a reserve established in the second half of 2019 for certain amounts of accounts receivable, key money, and notes receivable outstanding for a large customer in bankruptcy. 32 --------------------------------------------------------------------------------
Professional fees and outside services decreased primarily due to various efficiencies and cost cutting initiatives implemented by management.
Company Operated Hotels Expenses
Years Ended December 31,
2019 2018
(In thousands)
Company operated hotel expenses $ 48,612 $ 67,314 2019 Compared to 2018
Company operated hotels expenses decreased by
Operating expenses for the six company operated hotels held during the entirety of both periods increased by$2.1 million , to$36.7 million in 2019 compared to$34.6 million in 2018, primarily due to a$0.9 million increase in third party management fees as most of our hotels were transitioned from internal management to external management during late 2018 and early 2019 as we continue to focus resources on our franchising segment.
Marketing, Reservations and Reimbursables Expenses
Years Ended December 31,
2019 2018
(In thousands)
Marketing, reservations and reimbursable expenses $ 29,292 $ 27,937
2019 Compared to 2018
Marketing, reservations and reimbursables expenses increased by $1.4 million or
5%. This increase was primarily due to supporting growth in our midscale hotels
as well as a full year of expenses related to Knights Inn , which was acquired in
May 2018 . This increase is consistent with the increase in Marketing,
reservations and reimbursables revenues.
Depreciation and Amortization
Years Ended December 31,
2019 2018
(In thousands)
Depreciation and amortization $ 14,567 $ 17,003 2019 Compared to 2018
Depreciation and amortization expense decreased$2.4 million or 14%. This decrease was primarily due to the disposal of nine hotel properties from our company operated hotels segment during the year endedDecember 31, 2018 . The decrease in depreciation and amortization from hotel sales was partially offset by additional amortization from acquired intangible assets that were part of theKnights Inn acquisition inMay 2018 and other fixed assets placed in service during the remainder of 2018 and 2019. 33 --------------------------------------------------------------------------------
Asset Impairment
Years Ended December 31,
2019 2018
(In thousands)
Asset impairment $ 14,128 $ 10,582
2019 Compared to 2018
We recognized an impairment loss of $5.4 million on our Hotel RL Washington DC
joint venture property in the third quarter of 2019 and an impairment loss of
$7.1 million on our Hotel RL Baltimore Inner Harbor joint venture property in
the third quarter of 2018. See Note 5. Property and Equipment within Item 8.
Financial Statements for additional detail. Additionally, we recognized an
impairment loss of $7.4 million on our Americas Best Value Inn brand name
intangible asset and an impairment loss of $1.3 million on our Knights Inn brand
name intangible asset in the fourth quarter of 2019. We recognized an impairment
loss of $3.5 million on our GuestHouse brand name intangible asset in the fourth
quarter of 2018. See Note 6 Goodwill and Intangible Assets within Item 8.
Financial Statements for additional detail.
Gain on Asset Dispositions, net
Years Ended December 31,
2019 2018
(In thousands)
Gain on asset dispositions, net $ (7,067) $ (42,021) 2019 Compared to 2018
For the year ended
Transaction and Integration Costs
Years Ended December 31,
2019 2018
(In thousands)
Transaction and integration costs $ 632 $ 2,219 2019 Compared to 2018
Transaction and integration costs decreased by$1.6 million or 72% There were no acquisitions completed in 2019, whileKnights Inn was acquired in the second quarter of 2018. Costs incurred in 2019 relate to integration activities for theKnights Inn acquisition that continued into the current year, in addition to due diligence costs incurred for other potential sales and acquisitions.
Interest Expense
Interest expense decreased$1.1 million or 17% in 2019 compared with 2018. This decrease is primarily due to hotel sales and the related reduction in our average corporate and hotel-specific debt outstanding during 2019 as compared to 2018. 34
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Loss on Early Retirement of Debt
In the second quarter of 2019, we recognized a Loss on early retirement of debt of$0.2 million for unamortized deferred debt issuance costs and prepayment fees incurred related to the payoff of a mortgage loan at RLS DC Venture, which was replaced through a new mortgage loan with a different lender. In the fourth quarter of 2019, we recognized an additional Loss on early retirement of debt of$0.3 million related to the early payoff of our Senior Secured Term Loan and a secured debt agreement atRL Venture -Salt Lake City . These loans were paid off using proceeds from the sales of theHotel RL Salt Lake City andRed Lion Hotel Atlanta Airport . In 2018, the Loss on early retirement of debt arose primarily from a$20.6 million early payment of our Senior Secured Term Loan. The debt was repaid using proceeds from a distribution fromRL Venture after the sales of ourRed Lion Hotel Port Angeles andHotel RL Spokane .
See Note 8, Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data for additional information.
Income Taxes
We reported income tax expense of$0.3 million in 2019, compared with an income tax benefit of$0.1 million in 2018. The income tax provisions vary from the statutory rate primarily due to a partial valuation allowance against our gross deferred tax assets. See Note 13, Income Taxes within Item 8. Financial Statements and Supplementary Data.
Liquidity and Capital Resources
Overview
Our principal source of liquidity is cash flows from operations. Cash flows may fluctuate and are sensitive to many factors including changes in working capital and the timing and magnitude of capital expenditures and payments on debt. Working capital, which represents current assets less current liabilities, was$23.0 million and$4.6 million atDecember 31, 2019 and 2018. We believe that we have sufficient liquidity to fund our operations at least throughFebruary 2021 . We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business. We are committed to maintaining our infrastructure for systems and services we provide to our franchisees. This requires ongoing access to capital investments in technology and related assets. Years Ended December 31, 2019 2018 (In thousands) Net cash provided by (used in) operating activities$ 5,382 $ (3,514) Net cash provided by (used in) investing activities 39,391 76,898 Net cash provided by (used in) financing activities (32,754) (98,453) Operating Activities Net cash provided by operating activities totaled$5.4 million in 2019 compared with net cash used in operating activities of$3.5 million during 2018. This increase of$8.9 million from 2018 was primarily due to an increase of$7.2 million in cash flows from working capital accounts, driven by the disbursement of significant amounts of key money in 2018.
Investing Activities
Net cash provided by investing activities totaled$39.4 million and$76.9 million for the years endedDecember 31, 2019 and 2018, respectively. Cash flows decreased$37.5 million in 2019 compared to 2018 primarily due to lower proceeds from hotel sales in the current year, partially offset by the acquisition of the Knights Inn brand and related franchise agreements in 2018. 35 --------------------------------------------------------------------------------
Financing Activities
Net cash flows used by financing activities were$32.8 million during 2019, compared with$98.5 million in 2018. In 2019, we had borrowings on long-term debt of$32.9 million , made repayments of$45.9 million on long-term debt, and paid$17.6 million in distributions to noncontrolling interest. In 2018, we had borrowings on long-term debt of$30.0 million , drew$10.0 million on our line of credit, made repayments of$108.0 million on long-term debt, paid$7.0 million in contingent consideration from theVantage Hospitality, Inc. acquisition that occurred in 2016 and paid$21.5 million in distributions to noncontrolling interest.
Debt
As of
During 2019, we executed term loans at theOlympia andSalt Lake City properties held byRL Venture for a total principal amount of$16.6 million . Proceeds from the loans were distributed to the partners ofRL Venture in accordance with ownership interest percentage. We transferred$4.2 million of the proceeds received into a cash collateral account, and inApril 2019 , the$4.2 million in the cash collateral account was applied against the outstanding principal balance of the Senior Secured Term Loan.
In the fourth quarter of 2019, using the net proceeds from the sales of our
InDecember 2019 , using proceeds from the sale of theHotel RL Salt Lake City ,RL Venture repaid the$11.0 million outstanding principal balance under the term loan executed at theSalt Lake City property. The remaining outstanding debt balance for the term loan executed at theOlympia property was$5.6 million ofDecember 31, 2019 . InMay 2019 , we executed a new mortgage loan agreement at the RLH DC Venture property for a total principal and accrued exit fee of$17.4 million . The proceeds from the loan were immediately used to pay off the existing mortgage loan on the property, which had an outstanding principal balance of$15.9 million at the time of closing. InSeptember 2019 , RLH Atlanta executed several amendments to the existing mortgage loan withPFP Holding Company IV, LLC ("PFP"), an affiliate of Prime Finance, extending the maturity date fromSeptember 9, 2019 toJanuary 9, 2020 . InNovember 2019 , using proceeds from the sale of theRed Lion Hotel Atlanta International Airport joint venture property, RLH Atlanta repaid the$8.2 million outstanding principal balance under the loan agreement with PFP.
See Note 8, Debt and Line of Credit within Item 8. Financial Statements and Supplementary Data of this annual report on Form 10-K, for additional information about our debt obligations.
Off-Balance Sheet Arrangements
As of
Seasonality
Our business has historically been subject to seasonal fluctuations, with more
revenues and profits realized from May through October than during the rest of
the year. Due to the large amount of acquisitions and dispositions undertaken by
the Company during the periods presented, this seasonality is not as apparent as
it would be in a steady state.
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--------------------------------------------------------------------------------Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 , Summary of Significant Accounting Policies within Item 8. Financial Statements and Supplementary Data; however, we have also identified our most critical accounting policies and estimates below. Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented below.
Revenue Recognition and Receivables
Revenue is generally recognized as our performance obligations are satisfied. We recognize revenue from the following sources:
•Franchised Hotels - royalty, marketing and other fees are received in connection with licensing our brands to franchisees. See Note 2, Summary of Significant Accounting Policies for further discussion, within Item 8. Financial Statements and Supplementary Data.
•Company-Operated Hotels - Room rental and food and beverage sales from majority owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guests visit to the restaurant and at the time the management services are provided. We also recognize other revenue and costs from managed properties when we incur the related reimbursable costs. These costs primarily consist of payroll and related expenses at managed properties where we are the employer. We review the ability to collect individual accounts receivable on a routine basis. We recognize an allowance for doubtful accounts based on a combination of reserves calculated based on underlying characteristics of receivables (such as the age of the related receivable) as well as specifically identified amounts believed to be uncollectible. A receivable is written off against the allowance for doubtful accounts if collection attempts fail.
Goodwill is assigned to our reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics. The reporting units are aligned with our reporting segments.Goodwill is not amortized, but we test goodwill for impairment each year as ofOctober 1 , or more frequently should facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit, including goodwill, is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of each reporting unit based on projected future cash flows, and comparing the estimated fair values of the reporting units to their carrying amounts, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, including goodwill, no impairment is recognized. However, if the carrying amount of a reporting unit, including goodwill, exceeds its fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total goodwill balance of the reporting unit.
We have not recognized any impairment on goodwill during the years ended
37
--------------------------------------------------------------------------------Indefinite-Lived Intangible Assets
Through prior business combinations we have obtained intangible assets related to ourAmericas Best Value Inn ,Canadas Best Value Inn , Guesthouse,Knights Inn , and Red Lion brands. At the time of each acquisition, the brands were assigned a fair value based on the relief from royalty method. As there are no limitations on the useful lives of these assets, we have determined they are indefinite-lived intangible assets that will not be amortized. Annually, onOctober 1 , we reassess the useful lives of each asset to determine if they should continue to be classified as indefinite and we additionally test the assets for impairment. Impairment may also be tested at any point in which facts and circumstances indicate that it is more likely than not that the fair value of the asset is less than the carrying amount. As part of the impairment test, we may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the asset is less than its carrying amount, or if we elect to bypass the qualitative assessment, we would then proceed with a quantitative assessment. The quantitative assessment involves calculating an estimated fair value of the asset using the relief from royalty method, and comparing the estimated fair value of the asset to its carrying amount. If the estimated fair value of the asset exceeds its carrying value, no impairment is recognized. However, if the carrying amount of the asset exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. OnOctober 1, 2019 , we recognized impairment losses on theAmericas Best Value Inn and Knights Inn brand name indefinite-lived intangible assets of$7.4 million and$1.3 million , respectively. OnOctober 1, 2018 , we recognized an impairment loss on the Guesthouse brand name indefinite-lived intangible asset of$3.5 million and reclassified the$2.1 million remaining fair value from an indefinite-lived intangible asset to a finite-lived intangible asset. The impairment losses are included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairments and reclassification at Note 6,Goodwill and Intangible Assets within Item 8. Financial Statements and Supplementary Data.
Valuation of Long-Lived Assets Including Finite-Lived Intangible Assets
We test long-lived asset groups, including finite-lived intangible assets, for recoverability when changes in circumstances indicate the carrying value may not be recoverable. For example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life. During the year endedDecember 31, 2019 , we recognized an impairment loss on ourHotel RL Washington DC joint venture property of$5.4 million . During the year endedDecember 31, 2018 , we recognized an impairment loss on ourBaltimore joint venture property of$7.1 million . These impairment losses are included in Asset impairment in the Consolidated Statements of Comprehensive Income (Loss). See further discussion of the impairment at Note 5, Property and Equipment within Item 8. Financial Statements and Supplementary Data.
Variable Interest Entities
We analyze the investments we make in joint venture entities based on the
accounting guidance for variable interest entities (VIEs). These joint ventures
are evaluated to determine whether (1) sufficient equity at risk exists for the
legal entity to finance its activities without additional subordinated financial
support or, (2) as a group, the holders of the equity investment at risk lack
one of the following characteristics (a) the power, through voting or similar
rights, to direct the activities of the legal entity that most significantly
impact the entity's economic performance or, (b) the obligation to absorb the
expected losses of the legal entity or (c) the right to receive expected
residual returns of the legal entity, or (3) the voting rights of some equity
investors are not proportional to their obligations to absorb the losses or the
right to receive benefits and substantially all of the activities either involve
or are conducted on behalf of an investor with disproportionately few voting
rights. If any one of the above three conditions are met then the joint venture
entities are considered to be VIEs.
We consolidate the results of any such VIE in which we determine that we are the
primary beneficiary, having both the power to direct the activities that most
significantly affect the VIE's economic performance and the obligation to absorb
the losses of, or right to receive the benefits from, the VIE that could be
potentially significant to the VIE.
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When acquiring other businesses or participating in mergers or joint ventures in which we are deemed to be the acquirer, we generally recognize identifiable assets acquired, liabilities assumed and any noncontrolling interests at their acquisition date fair values, and separately from any goodwill that may be required to be recognized.Goodwill , when recognizable, would be measured as the excess amount of any consideration transferred, which is generally measured at fair value, over the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Accounting for such transactions requires us to make significant assumptions and estimates. These include, among others, any estimates or assumptions that may be made for the amounts of future cash flows that will result from any identified intangible assets, the useful lives of such intangible assets, the amount of any contingent liabilities, including contingent consideration, to record at the time of the acquisition and the fair values of any tangible assets acquired and liabilities assumed. Although we believe any estimates and assumptions we make to be reasonable and appropriate at the time they are made, unanticipated events and circumstances may arise that affect their accuracy, causing actual results to differ from those estimated by us.
New and Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies for information on new
and recent
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