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Inner Circle Investments Signs 20-Year Franchise Contract with RLH Corporation

Red Lion Hotels Corporation [NYSE:RLH] announced Thursday that Inner Circle Investments has signed 20-year franchise contracts for one Hotel RL and nine Red Lion Hotels. The properties will be managed by Inner Circle Management.

CEO Joe Gillespie of franchisee Inner Circle Investments was quoted in a RLH Corporation press release as saying, “We were drawn to RLH Corporation’s innovative and unique approach to revenue management and generation through their RevPak offering, as well as RLH Corporation’s overall hands-on approach to franchise support.” RevPak is a software and application suite that helps franchisees manage hotel bookings and guest expectations, as well as attempting to retain former guests through loyalty programs. “We are looking forward to a rewarding relationship with RLH Corporation as we grow our business,” added Gillespie.

Twenty years is a long time for a hotel property owner with no exit window

Inner Circle signed a twenty-year agreement. Franchisors prefer it that way. But hotel franchisees often prefer a short-term accord that they can easily exit. That can be seen in some of RLH's other brands. For example, RLH Corporation acquired Vantage Hospitality hotels of America's Best Value Inn, Lexington Suites, Country Hearth and other chains in 2016, each with their easy-to-leave franchise agreements. 

“Franchisees prefer shorter contracts for two reasons,” says Amanda Belmonte, executive vice president and chief operating officer of Vimana Franchise Systems. “To keep their options open and to keep the franchisor’s ‘feet to the fire,’” she says. Belmonte oversees a small group of some 30 franchises in Vimana’s Centerstone and Keywest hotel brands. Portraying itself as franchisee friendly, Vimana offers franchise owners short-term franchise contracts and low fees.

If they don’t have a short- to medium-term contract, major hotel franchisors are known to offer exit windows in, say, the 12th, 36th or 60th month of the contract that allow the franchisee to vacate the agreement without costly penalties.

“Unfortunately, for a lot of franchisees out there, they commit to 20 years without an option to leave," Belmonte says. She adds that in such a case they forfeit the means with that particular brand to leave without costly termination fees and liquidated damages.

Belmonte has a point.

Leaving Red Lion can be costly. Red Lion's standard franchise contract that it discloses to buyers and state regulators does indeed have a fee for franchisees who want to sell their franchise. “Submit to us a nonrefundable processing fee of Twenty Thousand Dollars ($20,000),” states Red Lion’s contract. There are other fees. If the franchisee leaves, he will still need to compensate the franchisor with future royalties in one lump sum, the penalty calculated as if the hotel would still be in the system for years to come and paying its royalties.

“Exit windows, like shorter contracts, gives the franchisee options should a brand not be performing,” says Belmonte, chief operating officer of Vimana. “It also keeps the franchisor accountable for performing. Knowing a property can leave a franchise system every 36-, 24-, or 12-month period of time means a franchisor has to ensure the marriage is working. Meaning, is the franchisee happy, are they getting reservation contribution from the brand, are they remaining competitive in their market and getting support from their franchisor. If they are, they stay—if they’re not, they leave. This makes entering a 20-year marriage, a 20-year agreement, easier to swallow.”

RLHC hotel-level performance expectations for 2018

RLHC said in its November earnings report that it expects system-wide RevPAR to grow between 1 to 3 percent for its hotels in 2018, a soft-to-average number. Compare the top end of 3 percent with the RevPAR growth projection of 2.5 percent in 2018 of the average hotel in the industry, according to CBRE Hotels’ Americas Research. That would be a mediocre performance from RLHC.

There’s more negative news. RLH Corporation is down in hotel count. It terminated 83 franchised hotels from January until the end of September, but opened only 48, which dropped its hotel count of 1,117 down to 1,082 franchised hotel properties. In November the company announced it expected to exceed 140 new executed contracts by the end of 2017. Since then RLH announced one hotel opening in New York, five hotel purchases, a San Francisco opening and the sale of two more hotels. That does not look promising. Having said that, in just a few days RLH will release its last quarter and annual earnings report for 2017, containing an updated hotel count.

Some Wall Street investors think there are hints that the franchisor may beat expectations. Shareholders may like what happens to their share price if the franchisor’s earnings beat expectations for the quarter and year. Even so, unless those soft franchise numbers come up, franchisees are likely to have flat to deflated resale value when they try to sell their Red Lion branded hotel properties.

For franchisee Inner Circle Investments, reselling its new franchised properties is an issue that is probably way in the future. Meanwhile, its franchisor is upbeat about the ten-property franchise sale that will grow its chain and in the franchisee's focus on following the brand's operating standards.

“These 10 hotels in conjunction with Inner Circle will play a significant role as we grow our mid and upscale brands across North America,” said RLH Corporation Chief Development Officer Paul Sacco. “Inner Circle is keenly focused on implementing the right design elements and operational initiatives in each hotel, which will make for a great relationship between our two companies.”

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