Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
            
Commission File Number: 001-13957 
 RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
Washington
 
91-1032187
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
201 W. North River Drive, Suite 100
Spokane Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (509) 459-6100 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o     No ý 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
ý
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  ý
The aggregate market value of the registrant's common stock as of June 30, 2016 was $168.5 million, of which 81.59% or $137.5 million was held by non-affiliates as of that date. As of March 27, 2017, there were 23,495,908 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2017 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the registrant's 2016 fiscal year, are incorporated by reference herein in Part III.




TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
PART II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
PART III
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
PART IV
 
Item 15
Item 16
 
 
 
 
 
 
 






PART I
This annual report on Form 10-K includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as "anticipate", "believe", "estimate", "expect", "intend", "may", "plan", "seek", "should", "will" and similar expressions or their negatives are used in this annual report, these are forward-looking statements. Many possible events or factors, including those discussed in "Risk Factors" under Item 1A of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

In this report, "we", "us", "our", "our company" and "RLHC" refer to Red Lion Hotels Corporation and, as the context requires, all of its consolidated subsidiaries, including:
Wholly-owned subsidiaries:
Red Lion Hotels Holdings, Inc.
Red Lion Hotels Franchising, Inc.
Red Lion Hotels Canada Franchising, Inc.
Red Lion Hotels Management, Inc. ("RL Management")
Red Lion Hotels Limited Partnership
TicketsWest.com, Inc.
Joint venture entities:
RL Venture LLC ("RL Venture") in which we hold a 55% member interest
RLS Atla Venture LLC ("RLS Atla Venture") in which we hold a 55% member interest
RLS Balt Venture LLC ("RLS Balt Venture") in which we hold a 73% member interest
RLS DC Venture LLC ("RLS DC Venture") in which we hold a 55% member interest

The terms "the network", "systemwide hotels" or "network of hotels" refer to our entire group of owned, managed and franchised hotels.

Item 1.
Business

Available Information

Through our website (www.redlion.com), we make available our annual report on Form 10-K, quarterly reports on Form 10‑Q, current reports on Form 8-K, proxy statements, amendments to these filings and all other reports and documents that we file with the U.S. Securities and Exchange Commission ("SEC") pursuant to Section 13(a) of the Securities Exchange Act of 1934. The public may read and copy the materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

Our internet website also contains our Code of Business Conduct and Ethics, our Corporate Governance Guidelines; charters for our Audit, Compensation, and Nominating and Corporate Governance Committees, Accounting and Audit Complaints and Concerns Procedures, our Statement of Policy with Respect to Related Party Transactions, Stock Ownership Guidelines for Directors and Executive Officers and information regarding shareholder communications with our board of directors.

General

We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) primarily engaged in the franchising, management and ownership of hotels under our proprietary brands, which include Hotel RL, Red Lion Hotel, Red Lion Inn & Suites, GuestHouse and Settle Inn & Suites. On September 30, 2016, we acquired certain assets from Vantage Hospitality Group, Inc. and a number of its affiliates ("Vantage"), including the brands of Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. All our brands are referred to collectively as the RLHC brands, and our hotels operate in the upscale, midscale or economy hotel segments.

All our properties strive to highlight friendly service and reflect the local flair of their markets. The upscale and midscale RLHC brands of Hotel RL, Red Lion Hotel and Red Lion Inn & Suites offer a unique local spin on the expected travel experience

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in an environment that allows customers to feel welcome and at home. Our focus is to anticipate guest needs and pleasantly surprise them with our distinctive Pacific Northwest-inspired customer service. Warm and authentic, our commitment to customer service includes a focus on delivering the guest locally inspired, friendly and personalized signature moments. This is intended to position each RLHC brand hotel as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

In October 2014, we launched a new brand, Hotel RL. This upscale lifestyle brand is a full-service, conversion brand that is targeted for the top 80 U.S. urban markets inspired by the spirit of the Pacific Northwest and designed for consumers with a millennial mindset. The first additions to Hotel RL were the Hotel RL Baltimore Inner Harbor and the Hotel RL Washington DC, which opened in August 2015 and October 2015, respectively. During 2016, we converted three of our existing hotels located in Olympia and Spokane, Washington and Salt Lake City, Utah to the Hotel RL brand. These five properties are owned through our joint ventures and operated by RLHC. In addition, the Hotel RL brand currently has 6 signed franchise agreements. In January 2017, two of the franchise Hotel RLs in Brooklyn, New York and Omaha, Nebraska opened. The remaining four are expected to open in the second half of 2017 or early 2018.

Our economy brands are focused on delivering our guests a consistent experience with exceptional comfort, quality and service at an affordable rate, with over 1,000 locations in 47 states and four countries outside the United States.

A summary of our properties as of December 31, 2016 is provided below:
 
 
Hotels
 
Total
Available
Rooms
Company operated hotels
 
 
 
 
Majority owned and consolidated
 
14

 
2,900

Leased
 
4

 
900

Managed
 
2

 
500

Franchised hotels
 
1,117

 
68,900

Total systemwide
 
1,137

 
73,200


We are also engaged in entertainment operations, which derive revenue from promotion and presentation of entertainment productions under the WestCoast Entertainment tradename and from ticketing services under the TicketsWest tradename. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.

Our company was incorporated in the State of Washington in April 1978.

Operations

We operate in three reportable segments:

The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees, which are typically based on a percentage of room revenue or on a flat fee per month, and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.

The company operated hotel segment derives revenue primarily from guest room rentals and food and beverage offerings at owned and leased hotels for which we consolidate results. Revenues are also derived from management fees and related charges for hotels with which we contract to perform management services.

The entertainment segment is composed of our WestCoast Entertainment and TicketsWest operations.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

We have two measures of segment performance under U.S. generally accepted accounting principles (GAAP): revenue and operating income. In addition, we measure performance of our company operated hotel segment using the following non-GAAP measures:

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Revenue per available room (RevPAR)
Average daily rate (ADR)
Occupancy
Comparable hotel revenue
Comparable hotel direct operating income (margin)

Intersegment revenues are minimal. Certain operating expenses are allocated to the operating segments based upon internally established allocation methodologies. Income tax provision (benefit) and certain corporate operating expenses are neither allocated to the segments nor included in the measures of segment performance. See Item 6. Selected Financial Data for information about our non-GAAP measures and reconciliations to the most comparable GAAP measures.

Overview
A summary of our reporting segment revenues is provided below (in thousands, except for percentages). For further information regarding our reportable segments, see Note 3 of Notes to Consolidated Financial Statements.
 
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Company operated hotels
 
$
123,589

 
75.3
%
 
$
119,773

 
83.9
%
 
$
118,616

 
81.6
 %
Franchised hotels
 
24,634

 
15.0
%
 
12,039

 
8.4
%
 
9,618

 
6.6
 %
Entertainment
 
15,719

 
9.6
%
 
11,057

 
7.7
%
 
17,115

 
11.8
 %
Other
 
128

 
0.1
%
 
51

 
%
 
77

 
 %
Total revenues
 
$
164,070

 
100.0
%
 
$
142,920

 
100.0
%
 
$
145,426

 
100.0
 %
 



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Average occupancy, ADR and RevPAR statistics are provided below on a comparable basis:
Comparable Hotel Statistics (1)(2)(3)
 
 
 
 
 
 
 
 
 
For the year ended December 31,
 
 
2016
 
2015
 
 
Average Occupancy
 
 
ADR
 
RevPAR 
 
Average Occupancy
 
ADR 
 
RevPAR 
Systemwide
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
64.5
%
 
 
$93.85
 
$60.58
 
64.6
%
 
$91.78
 
$59.31
Economy (pro forma) (2)
 
56.4
%
 
 
$67.73
 
$38.22
 
53.1
%
 
$67.16
 
$35.65
Total systemwide
 
62.3
%
 
 
$87.18
 
$54.28
 
61.4
%
 
$85.89
 
$52.75
Franchised hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
60.5
%
 
 
$90.54
 
$54.78
 
59.4
%
 
$87.31
 
$51.85
Economy (pro forma) (2)
 
56.4
%
 
 
$67.73
 
$38.22
 
53.1
%
 
$67.16
 
$35.65
Company operated hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
68.7
%
 
 
$96.88
 
$66.60
 
70.1
%
 
$95.71
 
$67.06
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change from prior comparative period:
 
Average Occupancy
 
 
ADR
 
RevPAR
 
 
 
 
 
 
Systemwide
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
(10
)
bps
 
2.3%
 
2.1%
 
 
 
 
 
 
Economy (pro forma) (2)
 
330

bps
 
0.8%
 
7.2%
 
 
 
 
 
 
Total systemwide
 
90

bps
 
1.5%
 
2.9%
 
 
 
 
 
 
Franchised hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
110

bps
 
3.7%
 
5.7%
 
 
 
 
 
 
Economy (pro forma) (2)
 
330

bps
 
0.8%
 
7.2%
 
 
 
 
 
 
Company operated hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
Midscale
 
(140
)
bps
 
1.2%
 
(0.7)%
 
 
 
 
 
 
(1
)
Certain operating results for the periods included in this report are shown on a comparable hotel basis. With the exception of pro forma economy hotels, comparable hotels are defined as hotels that were in the system for at least one full calendar year as of the beginning of the current reporting year under materially similar operations.
(2
)
We acquired the franchise license agreements of GuestHouse and Settle Inn & Suites properties on April 30, 2015. Results presented for periods prior to that date are attributable to and provided by the prior owner. These results do not include any franchises acquired from Vantage, as comparable pro forma data is not available.
(3
)
The results for our three Hotel RLs converted in 2016 are included in midscale company operated hotels, as these properties were previously Red Lion Hotels, which we classify as midscale.

Average occupancy, ADR and RevPAR, as defined below, are widely used in the hospitality industry and appear throughout this document as important measures to the discussion of our operating performance.

Average occupancy represents total paid rooms occupied divided by total available rooms. We use average occupancy as a measure of the utilization of capacity in our network of hotels.
RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our network of hotels.
ADR represents total room revenues divided by the total number of paid rooms occupied by hotel guests. We use ADR as a measure of room pricing in our network of hotels.
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. We use total available rooms as a measure of capacity in our network of hotels and do not adjust total available rooms for rooms temporarily out of service for remodel or other short-term periods.
Comparable hotels are hotels that have been owned, leased, managed, or franchised by us and were in operation for at least one full calendar year as of the beginning of the reporting year and properties for which comparable results were available.


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Throughout this document and unless otherwise stated, RevPAR, ADR and average occupancy statistics are calculated using statistics for comparable hotels. Some of the terms used in this report, such as "upscale", "midscale" and "economy" are consistent with those used by Smith Travel Research, an independent statistical research service that specializes in the lodging industry.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K for specific segment results.
 
 

Company Strategy

Our strategy is to grow our brands and profitability by expanding our hotel network with additional franchised hotels, managing the operations of hotels leased or partially owned by us through joint venture or minority equity participation, managing operations of hotels for hotel owners who have contracted with us to perform management services, and increasing RevPAR by offering superior hotel management technology to hotel operators.

We believe franchising and management represents a profitable, non-capital intensive growth opportunity. By segmenting our upscale, midscale and economy brands with clear distinctions between each offering, we are uniquely positioned to provide an appealing alternative for a variety of owners. Our strategy for our upscale and midscale hotel brands is to identify larger urban metropolitan statistical areas (MSAs) that are saturated by larger brands in order to become the conversion brand of choice for owners of established hotels looking for alternatives in those markets. We believe our strong brand name recognition in the Western U.S. markets provides us with an opportunity to expand our hotel network within our existing footprint. The Midwest, South and East Coast markets also provide us with opportunity to expand our hotel network into markets across North America as our brands will be a unique and new value proposition for current and potential hotel owners in markets saturated by competitor brands. To assist in our ability to grow our hotel network in larger metropolitan cities, we may consider special incentives, management contracting services, minority equity, joint venture opportunities with hotel owners and investors or adding additional brand options. In addition to conversion from other brands, independently branded hotel operations may also benefit from the RLHC central services programs. Our economy hotel brands have strong national brand name recognition and provide hotel owners an affordable alternative to traditional franchise programs with primarily flat fees, sensible property improvement plans and a wealth of resources and programs to support owners. For all of our properties, we strive to provide hotel owners leading distribution technology and sales support as part of our brand support programs.

We believe that additional growth in our hotel network in larger metropolitan areas will also come from hotel acquisitions where we contribute partial equity or participate in equity ownership opportunities in joint ventures with hotel owners and investors. Equity investment in hotels new to our system is an opportunity for us to redeploy cash on hand or cash generated from sales of joint venture hotels into improvement and expansion of our hotel network in major cities. Further growth opportunities may come from the expansion of our brand offerings. With Hotel RL we have a hotel product that is intended to be flexible enough to allow adaptive reuse projects, conversions and new builds while giving owners a more free-form approach to adapt the hotel to their unique markets and locations. The new flat fee structure is a true differentiator in this segment, which provides a predictable cost structure for our franchisees with the opportunity to leverage a greater proportion of their top-line growth to superior hotel performance.

All of our owned properties are held in joint venture (JV) entities, in each of which we have a majority ownership interest. Eleven of our hotels are held in RL Venture, LLC, which was formed in January 2015 in which we hold a 55% interest. Immediately after transferring the properties into the JV entity, we sold a 45% member interest to a third party and concurrently refinanced all of our secured debt. During 2016, we completed extensive renovations to these properties, and converted three of them to Hotel RLs. All 11 hotels will continue to be managed by RLHC's wholly-owned subsidiary, RL Management, each with an initial five-year management contract, with three five-year extensions.

Our Baltimore Hotel RL is held in its own JV entity, RLS Balt Venture, LLC, of which we own 73%.

Our Red Lion Hotel Atlanta Airport is held in its own JV entity, RLS Atla Venture, of which we own 55%.

Our Washington DC Hotel RL is held in its own JV entity, of which we own 55%. Prior to 2016, we owned 86% of this entity. During the first and second quarters of 2016, we sold 31% of our interest, in two transactions, to our joint venture partner.

The obligation for all of our debt under the JV loan agreements is generally non-recourse to RLHC, except for instances of fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations. 


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In 2015, we completed the acquisition of the intellectual property assets and all hotel franchise license agreements of GuestHouse International, LLC. The acquisition expanded our presence across the country by adding two recognized hotel brands GuestHouse and Settle Inn & Suites, to the RLHC brands, and their franchise license agreements.

On September 30, 2016 (the close date), we (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (“Vantage”), a subsidiary of Thirty-Eight Street, Inc. (“TESI”) and (ii) acquired one brand name asset from TESI. Vantage is a hotel franchise company, and the addition of the Vantage assets substantially increases our number of franchise properties and provides us with a broader presence across the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. The acquisition was funded at closing with $22.6 million of cash on hand, of which $10.3 million was paid to Vantage and $12.3 million was paid to TESI and 690,000 shares of RLHC stock paid to TESI, which was valued at $5.8 million, based on the closing price of RLHC stock of $8.34 on the close date. The total purchase price was $40.2 million, which included the estimated fair value of $0.9 million for the assumption of an obligation related to a previous business acquisition of Vantage and the estimated fair value of $10.9 million of primarily contingent consideration, the total of which will be payable to TESI at the first and second anniversaries of the close date, based on the attainment of certain performance criteria. A minimum of $2 million of the additional consideration is not contingent and will be paid in equal amounts at the first and second anniversaries of the close date. Payment of the contingent consideration is dependent on the retention of Vantage properties under franchise or membership license agreements, as determined by the room count at the first and second year anniversary dates when compared with the room count at the close date

In December 2016, we completed an underwritten public offering of 2.5 million shares of our common stock with net proceeds to the company of $18.5 million. Proceeds from this offering will be used for general corporate purposes which may include, but are not limited to, pursing acquisitions and supporting our working capital needs.

We are also investing in sales and marketing talent and technology to improve our ability to manage the various channels that drive occupancy and average daily rate at our hotels, including transient, group and preferred corporate business. We continue to improve and implement our guest management ecosystem, RevPak, which includes a number of industry revenue generation systems fully integrated to provide comprehensive information by integrating information on customer acquisition, customer management and customer retention. This suite of products is flexible and dynamic and can be tailored to the needs of individual hotel brands. It also delivers dynamic and personalized communications and promotions tailored to individual guest travel needs and habits.

Our focus on improving e-commerce revenue generation includes ongoing updates and improvements to our RedLion.com website and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

Employees

At December 31, 2016, we employed 1,752 people on a full-time or part-time basis, with 1,593 directly related to hotel operations, 98 employees in other operating segments, primarily within our entertainment segment, and 61 employees in our corporate office. Our total number of employees fluctuates seasonally, and we employ many part-time employees.

At December 31, 2016, approximately 8% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Item 1A.
Risk Factors

We are subject to various risks, including those set forth below, that could have a negative effect on our financial condition and could cause results to differ materially from those expressed in forward-looking statements contained in this report or other RLHC communications.

Our operating results are subject to conditions affecting the lodging industry.

Our revenues and operating results may be impacted by and fluctuate due to a number of factors, including the following:


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Changes in demand for business, convention, group and leisure traveler rooms and related lodging services, including reductions in business and federal, state and local government travel may result due to budgetary constraints, increase in the use of video conferencing services, or general economic conditions;
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
Changes in the desirability of the geographic regions in which our hotels are located, or adverse changes in local economies where our hotels are concentrated;
The attractiveness of our hotels to consumers and competition from other hotels and lodging alternatives such as Airbnb;
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
The quality and performance of the employees of the hotels in our network;
Transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
Existing and potential new regulations relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;
Recent travel bans and other federal regulations that restrict entry into the United States could reduce overall tourist and business travel;
Travelers' fears of exposure to contagious diseases or foodborne illness;
The impact of internet intermediaries and competitor pricing;
New supply or oversupply of hotel rooms in markets in which we operate;
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations;
Recently enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements;
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under management and franchise agreements;
Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet; and
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain.

Any of these factors could adversely impact hotel room demand and pricing and thereby reduce occupancy, ADR and RevPAR or give rise to government imposed fines or private litigants winning damage awards against us. Reductions in occupancy, ADR and/or RevPAR could have a significant negative impact on the portion of our franchise revenues, which is derived from hotel rooms revenues. These items could adversely affect our results of operations and financial condition.

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hospitality and leisure companies.

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major categories of travelers: business travelers, convention and group business travelers and leisure travelers. All three categories are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.

Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete against national limited and full-service hotel brands and companies, as well as various regional and local hotels in the upscale, midscale and economy hotel segments of the industry. Many of our competitors have greater name recognition, a larger network of locations and greater marketing and financial resources than we do. Competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels. New hotels are being built in a number of the markets

7



where we operate, which could adversely affect our business. In order to remain competitive and to attract and retain customers, we and the owners of our franchised and managed hotels must be able to differentiate and enhance the quality, value and efficiency of our product and customer service, and we must make additional capital investment to modernize and update our hotels.

We also compete with other hotel brands and management companies for hotels to add to our network, including through franchise and management agreements. Our competitors include management companies as well as large hotel chains that own and operate their hotels and franchise their brands. As a result, the terms of prospective franchise and management agreements may not be as favorable as our current agreements. In addition, we may be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties in connection with future franchise or management agreements.

If we are unable to compete successfully in these areas, our market share and operating results could be diminished, resulting in a decrease in occupancy, ADR and RevPAR for our hotels. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations, thereby reducing occupancy, ADR and RevPAR and otherwise adversely impacting our results of operations and financial condition.

The results of some of our hotels are significantly impacted by group contract business and other large customers, and the loss of such customers for any reason could harm our operating results.

Group contract business and other large customers, or large events, can significantly impact the results of operations of some of the hotels in our network. These contracts and customers vary from hotel to hotel and change from time to time. Contracts with large customers such as airlines and railroads are typically for a limited period of time after which they may be eligible for competitive bidding. The impact and timing of group business and large events are not always predictable and are often episodic in nature. The operating results for hotels in our network can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can harm our overall operating results.

Our new programs and new brands may not be successful.

We have made a significant investment in RevPak, a guest management system that allows hotel operators to increase their bookings by integrating customer relationship management software, sales force automation processes, translation services, a central guest reservation system, and digital and field marketing capabilities onto a single platform. Additionally, RevPak allows operators to measure results with reputation management, business intelligence, and web analytics capabilities. We believe this technology provides a measureable benefit to our company and our franchisees by helping increase hotel patronage and generate strong RevPAR growth. However, we cannot be certain that this technology will provide all the benefits we anticipated, that it will be well received by all of our franchisees and hotel owners, or that we will be able to recover the costs we incurred in developing this system. We also cannot assure you that other recently announced programs and brands, such as Hotel RL, or any other new programs or brands we may launch in the future will be accepted by hotel owners, potential franchisees, or the traveling public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring these programs or brands, or that the brands or any new programs will be successful.

We may be unsuccessful in identifying and completing acquisitions of new franchised and managed hotels and expanding our brands, which could limit our ability to implement our growth strategy and result in significant expense.

We are continuing to pursue the expansion of our franchise operations in markets where we currently operate and in selected new markets. We are also pursuing expansion of our RLHC brands into targeted segments. Both owned and franchised hotels will be able to carry one of the RLHC brands, and we may consider adding additional brand options in the future.

As of December 31, 2016, we managed hotels in our system that were owned by third parties under a RLHC brand or other brands. Going forward we plan to seek to increase the number of hotels that we manage for third parties in order to expand our hotel network. Management of non-owned hotels also allows us to take advantage of economies of scale with our infrastructure.

The growth of our franchise business and the management of non-owned hotels will both require considerable management time, as well as expenses for market development before any significant revenues and earnings are generated. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised and managed hotels in our system or that we will be able to attract qualified franchisees or hotel owners wanting to delegate responsibility for hotel management.

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The growth in the number of franchised and managed hotels is subject to numerous risks, many of which are beyond our control and that of the owners of our franchised or managed hotels. Among other risks, the following factors affect our ability to achieve growth in the number of franchised and managed hotels:

Competition with other hotel companies, many of which have more franchised and managed hotels in their systems and more resources to assist owners of new franchised and managed hotels with capital expenditures needed to satisfy brand standards;
Our ability to attract and retain qualified franchisees and hotel owners who want us to operate their hotels under one or more of our brands;
The recognition in the market and the reputation of the RLHC brands;
Access to financial resources necessary to open or rebrand hotels;
The ability of the owners of franchised and managed hotels to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to RLHC brands, include among others:
The availability of hotel management, staff and other personnel;
The cost and availability of suitable hotel locations;
The availability and cost of capital to allow hotel owners and developers to fund investments;
Cost effective and timely construction and renovation of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
Securing required governmental permits.
Our ability to continue to maintain and enhance our central reservation system to support additional franchised and managed hotels in a timely, cost-effective manner; and
The effectiveness and efficiency of our development organization.

Our failure to compete successfully for properties to franchise or manage, or to attract and maintain relationships with hotel owners and hotel investors, could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

The use of common stock to fund new acquisitions will dilute existing shareholders.

In connection with our acquisition of Vantage, we may be required to pay additional consideration in September 2017 in an aggregate amount of up to (i) $4 million in cash and (ii) 414,000 shares of the Company’s common stock, and up to (i) $3 million in cash and (ii) 276,000 shares of the Company’s common stock in September 2018. Future acquisitions of other hotels or brands may also involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired. These future issuances of our equity securities will dilute existing shareholders’ ownership interests.

Joint venture and other acquisition arrangements may not prove successful and could result in operating difficulties and failure to realize anticipated benefits.

In January 2015, we transferred 12 of our owned hotels to RL Venture, a joint venture in which we now hold a 55% interest. During the remainder of 2015, we participated in joint ventures that acquired three hotels that are now managed by us. We may in the future acquire interests in other properties through joint venture arrangements with other entities. In addition, we may enter into other non-property investment joint ventures through other divisions such as our entertainment division or for marketing or other services. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party, or parties, than to us. Although we will actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject our investment to risks not present with a wholly owned property, including, among others, the following:

The other owner(s) of the investment might become bankrupt;
The other owner(s) may have economic or business interests or goals that are inconsistent with ours;
The other owner(s) may be unable to make required payments or meet guarantor obligations on loans under which we are jointly and severally liable;
The other owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling the property at a time when to do so would have adverse consequences to us;

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Actions by the other owner(s) might subject the property to liabilities in excess of those otherwise contemplated by us; and
It may be difficult for us to sell our interest in the property at the time we deem a sale to be in our best interests.

If any hotel acquisitions fail to perform in accordance with our expectations or if we are unable to effectively integrate new hotels into our operations, our results of operations and financial condition may suffer.

Based on our experience, newly acquired, developed or converted hotels typically begin with lower occupancy and room rates, thereby resulting in lower revenue. Any future expansion within our existing markets could adversely affect the financial performance of our hotels in those markets and, as a result, negatively impact our overall results of operations. Expansion into new markets may also present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our inability to anticipate all of the changing demands that expanding operations will impose on our management and management information and reservation systems, or our failure to quickly adapt our systems and procedures to new markets, could result in lost revenue and increased expenses and otherwise have an adverse effect on our results of operations and financial condition.

If our franchise or management contracts terminate or are not renewed, if new franchisees are unable to effectively integrate their hotels into our system, or if franchisees or owners are unprofitable or go out of business, our franchise or management fee revenue will decline.

As of December 31, 2016, there were 1,117 hotels in our system that were owned by others and operated under franchise agreements. Our revenues and operating results are dependent upon the ability of our franchisees to generate revenue at their franchised properties. If the revenues of our franchisees decrease, or our franchisees close their hotels, our operating results will be negatively affected.

Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms. In addition, there can be no assurance that we will be able to replace expired or terminated franchise agreements, or that the provisions of renegotiated or new agreements will be as favorable to us as the expired or terminated agreements. As a result, our revenues could be negatively impacted.

Since January 2015, we have entered into management contracts for each of the hotels in our joint venture portfolio, RL Venture, Baltimore, Washington, D.C. and Atlanta, as well as our previously owned hotel in Bellevue, WA, and previously franchised hotel in Sacramento, CA. These agreements generally specify a fixed term as well as management responsibilities defined by certain terms and conditions. Our failure to meet the obligations within these agreements could trigger early termination. Additionally, there is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms for other reasons.

We may have difficulty integrating the Vantage Brands into our own operations.

The integration of the recently acquired Vantage Brands into our own operations will be time consuming and presents financial, managerial and operational challenges. Issues that arise during this process may divert management’s attention away from our day-to-day operations, and any difficulties encountered in the integration process could cause internal disruption in general, which could impact our relationships with employees, hotel owners, hotel franchisees, or guests. Combining our different reservations and other systems and business practices could be more difficult and time consuming than we anticipated, and could result in additional unanticipated expenses. Our combined results of operations could also be adversely affected by any issues we discover that were attributable to Vantage’s operations that arose before the acquisition. Failure to successfully integrate Vantage in a timely and cost-efficient manner could impair our ability to realize any or all of the other anticipated benefits of the acquisition, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

If owners of hotels that we manage or franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be harmed.

The owners of many of our managed and franchised properties have pledged their hotels as collateral for mortgage loans they entered into when those properties were purchased or refinanced. If an owner cannot repay or refinance maturing indebtedness on favorable terms or at all, the lender could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our management or franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.

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Failure of the joint venture or joint venture owners to comply with debt covenants could adversely affect our financial results or condition.

In January 2015, we transferred 12 of our owned hotels to RL Venture, a joint venture in which we hold a 55% equity interest. In October 2016, we sold one of these hotels, leaving 11 properties in RL Venture. Additionally, during 2015 we entered into joint ventures related to our Baltimore, Washington, D.C. and Atlanta properties, in which we own equity interests of 73%, 55% and 55%, respectively. We manage these hotels under management agreements with five-year terms and three five-year extension options. In connection with these transactions, the joint ventures borrowed a combined total of $110.6 million, which is secured by the hotel properties within the joint venture entities. The credit agreements for these loans contain customary affirmative and negative covenants. There is no assurance that the joint ventures will be able to comply with these covenants in the future. Any failure to do so could result in a demand for immediate repayment of the loans, which could result in one or more of these hotels being foreclosed upon and otherwise adversely affect our results of operation and financial condition, and limit our ability to obtain financing. For additional information, see Note 7 of Notes to Consolidated Financial Statements.

The market price for our common stock may be volatile.

The stock market has experienced and may in the future experience extreme volatility, oftentimes unrelated to the operating performance of particular companies. Many factors could cause the market price of our common stock to rise or fall, including but not limited to:

Changes in general economic conditions, such as the 2007-2009 recession, and subsequent fluctuations in stock market prices and volumes;
Changes in financial estimates, expectations of future financial performance or recommendations by analysts;
Changes in market valuations of companies in the hospitality industry;
Actual or anticipated variations in our quarterly results of operations;
Issuances of additional common stock or other securities;
Announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company;
Low daily trading volume of our stock; and
Announcements by us or our competitors of, or speculation with respect to, acquisitions, investments or strategic alliances.

We are not currently paying dividends and will likely not pay dividends for the foreseeable future.

We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, contractual restrictions and other factors that our board of directors deems relevant.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.

Real estate investments are relatively illiquid, and therefore we and the joint ventures in which we participate have a limited ability to promptly sell one or more hotels in response to changing economic, financial or investment conditions. The real estate market, including the market for hotels, is affected by general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. In addition, it may be difficult or impossible to convert hotels to alternative uses if they become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to an alternative use would also generally require substantial capital expenditures. This inability to respond promptly to changes in the performance of our hotels could adversely affect our financial condition and results of operations as well as our ability to service debt. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

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General economic conditions may negatively impact our results and liquidity.

Many businesses, including RLHC, were adversely affected by the state of the economy. During the recent economic downturn, discretionary travel decreased because of economic pressures, and this in turn hurt the hospitality industry and our company. High unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have the effect of reducing the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. Although the economy did improve in 2016, a slowdown in the economic recovery or a worsening of economic conditions in 2017 could result in weak hospitality occupancy and rates and adversely affect our revenues and operating results. Negative economic conditions could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.

Risks associated with real estate ownership may adversely affect revenue or increase expenses.

We are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue and cash flow from our hotels and other real estate may be adversely affected by, and costs may increase as a result of, changes beyond our control, including but not limited to:

Changes in national, regional and local economic conditions;
Changes in local real estate market conditions;
Increases in interest rates and other changes in the availability, cost and terms of financing and capital leases;
Increases in property and other taxes;
The impact of present or future environmental legislation;
Adverse changes in other governmental regulations, insurance and zoning laws; and
Condemnation or taking of properties by governments or related entities.

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

Our expenses may remain constant or increase even if revenues decline.

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we have recently been investing in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce the returns we anticipate or the returns may take longer to achieve than expected.

We reported net losses from continuing operations from 2008 through 2013 and 2016, and, although we had a net profit in 2014 and 2015, there is no assurance that we will remain profitable in the future.

During the years 2008 through 2013 and in 2016, we reported net losses from continuing operations. Not only did these losses have a direct adverse effect on our financial condition, they also increased our costs of borrowing. Although we have shown a net profit during two of the last three fiscal years, the long prior history of net losses could impair our ability to raise capital needed for hotel maintenance and other corporate purposes. There is no assurance that we will be able to continue to achieve profitability in the future.

Our business requires capital for ongoing hotel maintenance, modernization and renovation, as well as for any acquisitions or development projects we may want to undertake. If needed capital is not available, our ability to successfully compete with hotels in our scale categories may be adversely impacted.

We are committed to keeping our properties well-maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We are also focused on working with our franchise hotel owners so that they maintain their properties to the same standards. This requires ongoing access to capital for both us and our franchisees for replacement of outdated furnishings as well as for facility repair, modernization and renovation. To the extent we or our franchisees cannot fund these expenditures from cash generated from operations, funds must

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be borrowed or otherwise obtained. If these funds cannot be obtained, the expenditures have to be deferred to a later period. Without needed investments, we may need to cancel the agreement with the franchisee or move the hotel to a lower classification, both of which would likely have a negative impact on our franchise revenue stream.

For most of the past seven to eight years, our levels of capital expenditures for these purposes have been lower than normal due to the general economic conditions impacting our industry. As a result, in order to support the room rates that we have historically charged, we made investments of over $27 million in our company operated hotels in 2016. Customers may not view these investments and improvements as significant enough to allow us to charge higher room rates, and this could negatively impact our hotel revenues and operating results. There are likely to be similar adverse effects if our franchisees are unable to make comparable investments in their properties. Without needed investments, we may have to cancel the agreement with the franchisee or move the hotel to a lower classification, both of which would likely have a negative impact on our franchise revenue stream.

Hotel maintenance, hotel acquisitions and new project development are subject to a number of risks, including:

Availability of capital;
Construction delays and cost overruns;
Unavailability of rooms or meeting space for revenue generating activities during modernization and renovation projects;
Numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements and other required governmental permits and authorizations;
Uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
Potential environmental problems.

Whether capital for new investments and maintenance of existing hotels will be available to us and our franchisees depends on a number of factors, including our cash reserves, profitability, degree of leverage, the value of assets, borrowing restrictions that may be imposed by lenders and conditions in the capital markets. The condition of the capital markets and liquidity factors are outside our control, so there is no assurance that we or our franchisees will be able to obtain financing as needed.

If we need to raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, there is no assurance that we could raise money through equity issuances.

If we seek to raise additional capital through financing, our leverage may increase. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates.

Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation, hotel acquisitions and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.

We may incur indebtedness in connection with capital expenditures, other corporate purposes or growth of our system of hotels.

Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise.

We rely on our central reservation system and other technologies for occupancy at hotels in our network and a lack of investment in upgrades or new technologies or any failures in the system could negatively affect our revenues and cash flows.

The hospitality industry requires the use of technology and systems for property management, procurement, reservations, operation of customer loyalty programs, distribution and other purposes. These technologies can be expected to change guests' expectations, and there is the risk that advanced new technologies will be introduced requiring further investment capital. We

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maintain a hotel reservation system that allows us to manage our hotel network's rooms inventory through various distribution channels, including our website, and execute rate management strategies. As part of our marketing strategy, we encourage guests to book on our website, which guarantees the lowest rate available compared to third-party travel websites.

The development and maintenance of our central reservation system and other technologies may require significant capital. There can be no assurances that, as various systems and technologies become outdated or new technology is required, we will be able to replace or introduce them as quickly as our competition or within budgeted costs and time frames. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system. If our systems fail, whether as a result of a deliberate cyber-attack or an unintentional event that causes interruptions or delays in our ability to process reservations, our ability to conduct business and generate revenue will be negatively impacted. If our systems fail to achieve anticipated benefits, or if we fail to keep up with technological or competitive advances, our revenues and cash flows could suffer.
 
Our central reservation system includes a third-party operated call center that enables guests to make reservations on a 24/7 basis. Poor performance by the third party provider, disputes with the third party provider, increased costs of the call center or our inability to renew or extend our agreement with the third party on favorable terms could adversely impact the hotel operations and our expenses as well as those of our franchised and managed hotels.

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

Some of our hotel rooms may be booked through third-party travel websites operated by companies like Priceline, Travelocity or Expedia. As internet bookings now represent the majority of hotel reservations in the industry, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as "three-star downtown hotel") at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, our profitability may be adversely affected.

Our international operations are subject to political and monetary risks.

We currently have franchised hotels operating outside of the United States, including in Canada, Mexico, India and South Korea. We may also in the future enter into new joint venture or franchise agreements with foreign hotel operators. International operations generally are subject to greater economic, geopolitical and other risks that are not present in U.S. operations. These risks include not only administrative and logistical difficulties in managing worldwide operations, but also risks of war, terrorism or civil unrest, political instability, exposure to local economic conditions, and adverse changes in the diplomatic relations between foreign countries and the United States.

Sales in international jurisdictions typically are made in local currencies, which exposes us to risks associated with currency fluctuations. Fluctuations in currency exchange rates may significantly increase the amount of translated U.S. dollars required for expenses outside the U.S., or significantly decrease the U.S. dollars received from foreign currency revenues. We also face exposure to currency translation risk because we report the results of our business outside of the U.S. in local currency, and then translate those results to U.S. dollars for inclusion in our consolidated financial statements. As a result, changes between the foreign exchange rates and the U.S. dollar will affect the recorded amounts of our foreign assets, liabilities, revenues and expenses, and could have a negative impact on our financial results. To date we have not entered into foreign exchange hedging agreements to reduce our exposure to fluctuations in currency exchange rates, but even if we enter into these hedging agreements in the future, they may not eliminate foreign currency risk entirely, and will involve risks of their own in the form of transaction costs and counterparty risk.

In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. As a result, the steps we have taken to protect our trademarks and brands in foreign countries may not be sufficient to prevent the authorized use or imitation of our trademarks by others, which could reduce the value of our brand and its goodwill, which could adversely affect our business. As we continue to expand internationally, the risks related to our international operations will become more significant.

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Failure to maintain the security of internal or customer data could adversely affect us.

Our operations require us to collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, which are entered into, processed by, summarized by and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. Our franchise hotel owners also maintain similar personally identifiable information, on systems that we do not control. The security of this data may potentially be breached due to a number of risks, including cyber-attack, system failure, computer virus, or unauthorized or fraudulent use by customers, company employees, franchisees or employees of third party vendors. Although we employ systems to protect data, no system is impenetrable. A theft, loss or fraudulent use of customer, employee or company data by us or our franchise hotel owners could adversely impact our reputation and could result in significant remedial and other costs, fines and litigation.

We also rely on a variety of direct marketing techniques to reach guests and potential guests, including email marketing, telemarketing and postal mailings. Changes in laws and regulations regarding direct marketing and solicitation could adversely affect the effectiveness these marketing techniques and could force us to make changes to our marketing strategies. Our failure to comply with laws and regulations regarding direct marketing could result in fines or place restrictions on our business.

If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business.

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S., as well as by various contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may have inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could result in fines or restrictions on our use or transfer of data.

Any failure to protect our trademarks could have a negative impact on the value of our brand names.

The success of our business depends in part upon our continued ability to use our trademarks, increase brand awareness and further develop our brands. We have registrations with the U.S. Patent and Trademark Office of various formulations of certain trademarks, including but not limited to the following: Red Lion, Hotel RL, Red Lion Inn & Suites, GuestHouse, Settle Inn & Suites, WestCoast, Cavanaughs, TicketsWest and Cascadia Soapery, Hello Rewards, MAKE IT#WORTHIT, MIWI, PROJECT WAKE UP CALL, RLHC and RLH. We also acquired several additional registered trademarks in our transaction with Vantage, including Americas Best Value Inn, ABVI, Best Value Inn, Value Inn Worldwide, Vantage, 3 Palms Hotels & Resorts, America’s Best Inns & Suites, Country Hearth Inn & Suites, Jameson Inn, Lexington, Canadas Best Value Inn, and CBVI.

We have also registered various formulations of the Red Lion trademark in Canada, Mexico, China, India, Australia, the European Union and a number of other countries in Asia. We cannot be assured that the measures we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

We are exposed to impairment risk of goodwill, intangibles and other long-lived assets.

Financial and credit market volatility directly impacts fair value measurement through our company's estimated weighted average cost of capital used to determine discount rate, and through our common stock price that is used to determine market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend.

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At the end of 2016, our recorded goodwill amount was $12.6 million, and other intangible assets totaled $52.9 million. Market conditions in the future could adversely impact the fair value of one or more of our franchise, hotel and entertainment reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

The assessment for possible impairment requires us to make judgments, including:

Estimated future cash flows from the respective properties or business units, which are dependent upon internal forecasts;
Estimation of the long-term rate of growth for our business;
The useful life over which our cash flows will occur;
The determination of real estate and prevailing market values;
Asset appraisals; and
Current estimated net sales proceeds from pending offers or net sales proceeds from previous, comparable transactions, if available and appropriate.

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. There were no impairment charges in 2014, 2015 or 2016. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

Our two largest shareholders own more than 23% of our stock. These shareholders may seek to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. In addition, given the amount of stock held by them, we would likely need their approval in order to undertake any sale or other disposition of all or substantially all of our assets. If any of our larger shareholders or any group of shareholders decided to sell their shares, this would likely result in a significant decline in the trading price of our common stock.

As of March 24, 2017, Columbia Pacific Opportunity Fund, L.P. ("Columbia Pacific") and HNA Investment Management LLC ("HNA") held more than 23% in aggregate of our outstanding shares of common stock. Columbia Pacific, HNA or one or more other shareholders may take actions designed to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. Such actions could include, among other things, attempting to obtain control of our board of directors or initiating or substantially assisting an unsolicited takeover attempt.

Under our Articles of Incorporation and the laws of the State of Washington, we can undertake a merger or sale of all or substantially all of our assets only if the transaction is approved by holders of at least two-thirds of our outstanding shares of common stock. This in turn means that any person or group of persons holding at least one-third of our outstanding shares of common stock would be able to block any such transaction if they chose to do so. Because Columbia Pacific and HNA hold a significant percentage of our shares, we believe that as a practical matter they would be able, if they were to act together or with other shareholders, to prevent any such transaction believed not to be in their best interests.

This state of affairs adds a level of uncertainty to our business and operations, including in employee hiring and retention, in franchise acquisitions, and in generally developing corporate policy and strategy. In addition, because our common stock is relatively thinly traded, if Columbia Pacific, HNA or any other significant shareholders decided to sell their holdings of our common stock, this would likely result in a significant decline in its trading price. Our stock price may also fluctuate materially based on announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company.

Failure to attract, retain and incentivize the performance of senior executives or other key employees could adversely affect our business.

In 2014 we hired new Chief Executive and Chief Marketing Officers. In 2016 we hired a new Chief Franchise Officer and a new Chief Operating Officer. In 2017 we hired a new Chief Financial Officer, who is expected to start at the beginning of April 2017. We may in the future hire additional officers and key employees. To be properly integrated into our company, new executives and employees must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. As a result, the integration of new personnel may result in some disruption to our ongoing operations. If we fail to successfully complete this integration, our business and financial results may suffer.


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We place substantial reliance on the lodging industry experience and the institutional knowledge of members of our senior management team. We compete for qualified personnel against companies with greater financial resources than ours, and the loss of the services of one or more of these individuals, or delay in replacing a key employee, could hinder our ability to effectively manage our business. Finding suitable replacements for senior management and other key employees can be difficult, and there can be no assurance we will continue to be successful in retaining or attracting qualified personnel in the future. Competition for qualified personnel in this position is significant. We generally do not carry key person insurance on members of our senior management team. Any loss of a senior team member could have a material adverse impact on our financial condition or results of operations.

Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

Our business is seasonal in nature, with the period from May through October generally accounting for the greatest portion of our annual company operated hotel revenues. In addition, our upscale and midscale franchise agreements contain fees paid to us primarily based on a percentage of hotel revenue. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks during this period, including labor force shortages, cash flow problems, economic downturns and poor weather conditions. The adverse impact to our revenues would likely be greater as a result of our seasonal business.

The performance of our entertainment division is particularly subject to fluctuations in economic conditions.

Our entertainment division, which comprised 10% of our revenues from continuing operations in 2016, engages in event ticketing and the presentation of various entertainment productions. Our entertainment division is vulnerable to risks associated with general regional and economic conditions, significant competition and changing consumer trends, among others. The overall economy in the markets we serve has impacted the ticketing division through lower demand for concerts, events and sporting activities. Also, we face the risk that entertainment productions will not tour the regions in which we operate or that the productions will not choose us as a presenter or promoter.

We may have disputes with the owners of the hotels that we manage or franchise.

The nature of our responsibilities under our franchise and management agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential franchisees, hotel owners and joint venture partners. However, we may not always be able to do so. Failure to resolve such disagreements may result in franchisees or other hotel owners leaving our system of hotels, or in litigation, arbitration or other legal actions.

Government regulation could impact our franchise business.

The Federal Trade Commission (the "FTC"), various states and certain foreign jurisdictions, where we market franchises, regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales. In addition, several states in which our franchisees operate have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect.

We are subject to various obligations and restrictions under the leases governing our leased properties. In addition, we may not be able to renew these leases on favorable terms or at all.

Five of our hotels and our corporate offices are subject to leases. In addition to the requirement to pay rent, the leases for these properties generally impose various maintenance and other obligations on us and may also require us to obtain the consent of the landlord before taking certain actions such as modifications to the properties. These lease provisions may limit our flexibility with the leased properties, delay modifications or other actions we may wish to take, or result in disputes with the landlords. In addition, the terms of the leases for three of our leased properties will expire in the period from 2018 to 2024. The lease on our corporate office space expires at the end of 2017. There can be no assurance that any of our landlords will be willing to extend these leases and, even if they are willing to extend, it is possible that the lease costs will increase, which would adversely impact the hotel operations and our expenses. If the lease at our corporate office is not renewed for any reason, we will incur additional costs and expenses associated with negotiating a new lease agreement and moving our offices to a new location.

17




Our hotels may be faced with labor disputes that could harm the operation of our hotels.

We rely heavily on our employees to provide high-quality personal service at our hotels. At certain of our owned and leased hotels, employees are covered by collective bargaining agreements, and attempts could be made in the future to unionize our employees at other locations. Any labor dispute or stoppage at an owned hotel or a franchised hotel could harm our ability to provide high-quality personal services, which could reduce occupancy and room revenue, tarnish our reputation and harm our results of operations.

Our properties are subject to risks relating to natural disasters, terrorist activity and war, and any such event could materially adversely affect our operating results without adequate insurance coverage or preparedness.

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where our properties are located. Our properties are generally covered by comprehensive liability, public area liability, fire, boiler and machinery, extended coverage and rental loss insurance. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, flood, terrorism and environmental hazards, may exceed or not be covered by the insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Similarly, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brands or the reputation of our business.

Disruption or malfunction in our information systems could adversely affect our business.

Our information technology systems are vulnerable to damage or interruption from:

Earthquakes, fires, floods and other natural disasters;
Power losses, computer system failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events; 
Third party provider disruptions in service; and
Computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information, and other breaches of security.

We rely on our systems to perform functions critical to our ability to operate, including our central reservation system. Accordingly, an extended interruption in the systems' function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, prevent fraud, or maintain investor confidence. Failure to maintain effective internal controls over financial reporting resulted in a material weakness in our Entertainment division during 2016.

Effective internal controls are necessary for us to provide reliable and accurate financial reports and effectively prevent fraud. We have devoted significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act. In addition, Section 404 under the Sarbanes-Oxley Act requires that our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our compliance with the annual internal control report requirement for each fiscal year will depend on the effectiveness of our financial reporting, data systems, and controls across our operating subsidiaries. Furthermore, one part of our growth strategy has been, and may continue to be, the acquisition of complementary businesses, and we expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. Likewise, the complexity of our transactions, systems, and controls may become more difficult to manage. We cannot be certain that these measures will ensure that we design, implement, and maintain adequate controls over our financial processes and reporting in the future, especially for acquisition targets that may not have been required to be in compliance with Section 404 of the Sarbanes-Oxley Act at the date of acquisition.

Failure to implement new controls or enhancements to controls, failure to remediate the material weakness, difficulties encountered in control implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could result in additional errors, material misstatements, or delays in our financial reporting obligations. Inadequate internal controls could also lead to SEC sanctions or investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock and our access to capital.

18




We recently identified a material weakness over financial reporting related to our Entertainment division and more specifically our event ticketing liability, as disclosed in Item 9A. Remediating our material weakness and ensuring that we maintain effective internal control over financial reporting will require management time and attention. If our remediation efforts are insufficient, or additional material weaknesses in our internal control over financial reporting are discovered or identified in the future, we may be required to restate our consolidated financial statements, which could cause us to fail to meet our reporting obligations, lead to a loss of investor confidence and have a negative impact on the trading price of our common stock.

We are subject to environmental regulations.

Our results of operations may be affected by the costs of complying with existing and future environmental laws, ordinances and regulations. Under federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in the property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate a contaminated property properly, may prevent the owner from selling a property or using it as collateral for a loan. Environmental laws may also restrict the use or transfer of a property as well as the operation of businesses at the property, and they may also impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition.

When we acquire a hotel, a Phase I environmental site assessment (“ESA”) is usually conducted by a qualified independent environmental engineer. A Phase I ESA involves an on-site inspection and research of historical usages of a property, databases of underground storage tanks and other matters to determine whether an environmental issue with respect to the property needs to be addressed. If the results of a Phase I ESA reveal potential issues warranting further investigation, a Phase II ESA, which may include soil testing, ground water monitoring or borings to locate underground storage tanks, will be recommended. It is possible that Phase I and Phase II ESAs will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns that we do not discover. Phase I ESAs have been performed on all properties owned and leased by us.

A Phase II ESA conducted at the Port Angeles hotel property revealed that fill material from an unknown source was placed at the property prior to construction of the existing buildings. Diesel and lube oil-range petroleum hydrocarbons and benzene were detected in one sample collected at concentrations greater than MTCA Method A cleanup levels. If the fill material was from a contaminated site, it could be a potential source of subsurface contamination, so additional testing was conducted at the Port Angeles site in August 2013. These tests identified petroleum hydrocarbons and PAHs at concentrations greater than applicable cleanup levels near a former auto repair area that were likely related to impacted fill material identified in the area. Fill material appears to include burned wood, paper, glass debris, metal material and bricks.  The contamination exceeds clean-up standards but does not appear to be a threat to human health or the environment. Groundwater appears to be contaminated but is likely associated with the contaminated fill.  Groundwater in this area is also likely influenced by tides and is not currently utilized as drinking water. The contaminated soil is capped with asphalt or structures, so that exposure to petroleum vapors or direct contact with contaminated soil is limited. We plan to continue to monitor the affected area and ensure that the asphalt cap is maintained. Depending on the results of further analysis we may have some requirement to perform clean-up of the affected area.

Other than as disclosed above, we have not been notified by any governmental authority and we have no other knowledge of any continuing material noncompliance, material liability or material claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties. Nevertheless, there is no assurance that these properties do not have any environmental concerns associated with them. In addition, there is no assurance that we will not discover problems we are unaware of that currently exist, that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties, such as the presence of leaking underground storage tanks, or by third parties unrelated to us.

We face risks relating to litigation.

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money, and we may not be insured for such a loss. If this were to occur, it could have an adverse effect on our financial condition and results of operations.


19



In addition, our financial condition may be adversely impacted by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, accessibility and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits in the future may be instituted against us, and we may incur material damages and expenses which could have an adverse effect on our results of operations and financial condition.

In addition, in recent years there has been increasing activity by patent holding companies (so-called patent "trolls") that do not use technology but whose sole business is to enforce patents for monetary gain against companies in a wide variety of businesses and industries. These efforts typically involve proposing licenses in exchange for a substantial sum of money and may also include the threat or actual initiation of litigation for that purpose. Any such litigation can be quite costly to defend, even if infringement is unsubstantiated or speculative. We have been threatened with one such claim and two claims have actually been filed against us. Each claim is related to separate technology, but we believe that each such technology is non-proprietary. Both filed claims have been resolved. If we are ultimately found to have violated a patent, our operations could be negatively impacted and/or we might be subject to substantial financial penalties, licensing fees and attorneys' fees. It is not possible to predict the potential impact on our business and operations of any future claims of this type that may be asserted against us.

Washington law contains provisions that could deter takeover attempts.

Our company is incorporated in the State of Washington and subject to Washington state law. The Washington State Anti­takeover Act could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one statutory provision prohibits us, except under specified circumstances, from engaging in any significant business transaction, such as a merger, with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an "acquiring person") for a period of five years following the time that such shareholder becomes an acquiring person.



20



Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Company Operated Properties

Company operated properties are those properties which we operate and manage through ownership, lease, or management contract.

The table below reflects our company operated hotel properties and locations, as well as total available rooms per hotel, as of December 31, 2016.
 
  
 
  
Total
 
 
 
 
Available
Property
 
Location
 
Rooms
Company operated properties
 
 
 
 
Red Lion Anaheim(1)
  
Anaheim, California
  
308

Red Lion Hotel Kalispell(1)
  
Kalispell, Montana
  
170

Red Lion Hotel Seattle Airport(1)
  
Seattle, Washington
  
144

Red Lion River Inn(1)
  
Spokane, Washington
  
245

Hotel RL Spokane at the Park(2)
  
Spokane, Washington
  
401

Red Lion Hotel Atlanta (5)
 
Atlanta, Georgia
 
246

Red Lion Inn & Suites Bend (2)
  
Bend, Oregon
  
75

Red Lion Hotel Boise Downtowner(2)
  
Boise, Idaho
  
182

Red Lion Hotel Eureka(2)
  
Eureka, California
  
175

Hotel RL Olympia(2)
  
Olympia, Washington
  
192

Red Lion Hotel Pasco(2)
  
Pasco, Washington
  
279

Red Lion Hotel Port Angeles(2)
  
Port Angeles, Washington
  
187

Red Lion Hotel Redding(2)
  
Redding, California
  
192

Red Lion Hotel Richland Hanford House(2)
  
Richland, Washington
  
149

Hotel RL Salt Lake City(2)
  
Salt Lake City, Utah
  
394

Red Lion Templin’s Hotel on the River(2)
  
Post Falls, Idaho
  
163

Hotel RL Baltimore Inner Harbor(3)
 
Baltimore, Maryland
 
130

Hotel RL Washington DC(4)
 
Washington, D.C
 
99

Red Lion Hotel Bellevue(6)
  
Bellevue, Washington
  
181

Hudson Valley Resort & Spa(7)
 
Hudson Valley, New York
 
323

Company operated properties (20 properties)
 
 
 
4,235

__________ 
(1) Leased
(2) Owned by RL Venture; managed by RL Management, Inc.
(3) Owned by RLS Balt Venture, LLC; managed by RL Management, Inc.
(4) Owned by RLS DC Venture, LLC; managed by RL Management, Inc.
(5) Owned by RLS Atla Venture, LLC; managed by RL Management, Inc.
(6) No ownership; managed by RL Management, Inc.
(7)
No ownership or franchise agreement; managed by RL Management, Inc.

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the RLHC brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network.


21



At December 31, 2016, our franchised operations consisted of 1,117 hotels with a room count of 68,900.
Discontinued Operations
 
Discontinued operations includes a hotel in Eugene, Oregon that ceased operations in the first quarter of 2014.

The discontinued operations presentation, as required under generally accepted accounting principles ("GAAP"), separately reports the revenue and expenses including any related asset impairment charges, net of income taxes as "Income (loss) from discontinued operations" on our Consolidated Statements of Comprehensive Income (Loss) for all periods presented.

Item 3.
Legal Proceedings

At any given time, we are subject to claims and actions incidental to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations.

Item 4.
Mine Safety Disclosures

Not applicable.

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "RLH". The following table sets forth for the periods indicated the high and low sale prices for our common stock on the NYSE:

 
High
 
Low
2016
 
 
 
     Fourth Quarter (ended December 31, 2016)
$
9.40

 
$
7.90

     Third Quarter (ended September 30, 2016)
$
8.46

 
$
6.25

     Second Quarter (ended June 30, 2016)
$
8.80

 
$
6.23

     First Quarter (ended March 31, 2016)
$
8.50

 
$
5.45

2015
 
 
 
     Fourth Quarter (ended December 31, 2015)
$
9.55

 
$
6.71

     Third Quarter (ended September 30, 2015)
$
9.00

 
$
7.54

     Second Quarter (ended June 30, 2015)
$
7.75

 
$
6.43

     First Quarter (ended March 31, 2015)
$
7.14

 
$
6.18

Holders
At March 27, 2017, there were 118 shareholders of record of our common stock.
Dividends
We did not pay any cash dividends on our common stock during the last two fiscal years. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2016 on plans under which equity securities may be issued to employees, directors or consultants. All of our equity compensation plans have been approved by our shareholders.

22



 
 
  
(a)
 
(b)
 
(c)
 
 
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
  
 
  
 
 
 
 
2006 Stock Incentive Plan(1)
  
51,738

  
$
10.03

 

 
2015 Stock Incentive Plan(2) 
  
81,130

 
$
8.20

 
572,104

 
Total
  
132,868

  
$
8.91

 
572,104


__________
(1) Excludes 375,891 restricted stock units granted under the 2006 Stock Incentive Plan.
(2) Excludes 660,789 restricted stock units granted under the 2015 Stock Incentive Plan.


Performance Graph

The following graph compares the five-year cumulative total return to shareholders of our common stock with the five-year cumulative total return of the Russell 2000 Index and the S&P Hotels, Resorts & Cruise Lines Index.

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11501328&doc=15
The above presentation assumes an investment of $100 in our common stock, the Russell 2000 Index and the S&P Hotels, Resorts & Cruise Lines Index and depicts RLHC's price performance relative to the performance of the Russell 2000 Index and the Standard & Poor's Hotels, Resorts & Cruise Lines Index, assuming a reinvestment of all dividends. The price performance on the graph is historical and not necessarily indicative of future stock price performance.

Item 6.
Selected Financial Data

The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012. The selected consolidated statements of comprehensive income (loss) and balance sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC.

23



 
 
 
 
Year ended December 31,
 
 
 
2016 (1)
 
2015
 
2014
 
2013
 
2012
 
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
164,070

 
$
142,920

 
$
145,426

 
$
137,307

 
$
145,896

 
Asset impairment
 

 

 

 
7,785

 
9,440

 
Gain on asset dispositions
 
(2,437
)
 
(17,692
)
 
(4,006
)
 
(112
)
 
(160
)
 
Loss on early retirement of debt
 

 
(2,847
)
 

 

 

 
Operating expenses
 
162,317

 
129,819

 
138,667

 
148,152

 
156,265

 
Operating income (loss)
 
1,753

 
13,101

 
6,759

 
(10,845
)
 
(10,369
)
 
Income (loss) from continuing operations
 
(4,840
)
 
4,016

 
2,492

 
(15,070
)
 
(11,164
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued business units, net of income tax expense (benefit)
 

 

 
(187
)
 
(1,204
)
 
1,009

 
Loss on disposal of the assets of the discontinued business units, net of income tax
 

 

 
(2
)
 
(773
)
 
(4,526
)
 
Net income (loss)
 
$
(4,840
)
 
$
4,016

 
$
2,303

 
$
(17,047
)
 
$
(14,681
)
 
Net income (loss) attributable to noncontrolling interests (2)
 
163

 
(1,297
)
 

 

 

Net Income (Loss) attributable to RLHC
 
$
(4,677
)
 
$
2,719

 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
Earnings (Loss) per share - basic
 
 
 
 
 
 
 
 
 
 
 
Loss from discontinued business units, net of income tax
 
$
(0.23
)
 
$
0.14

 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
Loss on disposal of the assets of the discontinued business units, net of income tax
 

 

 
(0.01
)
 
(0.10
)
 
(0.18
)
 
Net income (loss) attributable to RLHC
 
$
(0.23
)
 
$
0.14

 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
Earnings (Loss) per share - diluted
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLHC
 
$
(0.23
)
 
$
0.13

 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
Loss from discontinued operations
 

 

 
(0.01
)
 
(0.10
)
 
(0.18
)
 
Net income (loss) attributable to RLHC
 
$
(0.23
)
 
$
0.13

 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
20,427

 
19,983

 
19,785

 
19,575

 
19,327

 
Diluted
 
20,427

 
20,200

 
19,891

 
19,575

 
19,327

(1)At September 30, 2016, we acquired substantially all of the assets of Vantage Hospitality Group, Inc., which include 10 hotel brands and 1,042 franchise license agreements at the date of acquisition. Refer to Item 8. Note 16 for further information on this transaction.
(2)Represents noncontrolling interests in consolidated joint ventures. In 2015 we entered into four joint venture transactions. Refer to Item 1. Business for further information on these transactions.


24



 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
(See Note 18)(1)
 
(See Note 18)(1)
 
(See Note 18)(1)
 
(See Note 18)(1)
 
 
(In thousands, except per share data)
Non-GAAP Data
 
 
 
 
 
 
 
 
 
 
EBITDA
$
18,517

 
$
24,395

 
$
19,671

 
$
1,612

 
$
1,508

 
Adjusted EBITDA
19,472

 
12,463

 
13,350

 
11,956

 
14,275

 
Adjusted net loss
(3,885
)
 
(7,916
)
 
(4,018
)
 
(6,703
)
 
(1,907
)
Consolidated Statement of Cash Flow Data (2)
 
 
 
 
 
 
Net cash provided by operating activities
$
5,562

 
$
14,084

 
$
10,958

 
$
9,504

 
$
14,411

 
Net cash provided by (used in) investing activities
(30,688
)
 
(30,080
)
 
(5,600
)
 
6,441

 
12,347

 
Net cash provided by (used in) financing activities
37,533

 
45,847

 
(13,065
)
 
(6,947
)
 
(21,321
)
Consolidated Balance Sheet Data
 
 
 
 
 
 
Cash
$
38,072

 
$
23,898

 
$
5,126

 
$
13,058

 
$
6,477

 
Assets held for sale

 

 
21,173

 
18,346

 
18,288

 
Property and equipment, net
210,732

 
195,390

 
160,410

 
166,356

 
195,012

 
Total assets
344,535

 
287,218

 
221,310

 
232,850

 
259,107

 
Total debt, net of debt issuance costs
108,331

 
87,557

 
29,873

 
43,058

 
49,178

 
Debentures due Red Lion Hotels Capital Trust

 

 
29,108

 
29,049

 
28,990

 
Total liabilities
156,692

 
120,817

 
81,673

 
96,841

 
107,399

 
Total RLHC stockholders' equity
155,336

 
132,792

 
139,637

 
136,009

 
151,708

 
Noncontrolling interest(3)
32,507

 
33,609

 

 

 

 
Total stockholders' equity
187,843

 
166,401

 
139,637

 
136,009

 
151,708

(1)We revised other accrued entertainment liabilities and accumulated deficit for each of the years ended December 31, 2015, 2014, 2013 and 2012 as presented here. For further information regarding the revision, see Item 8, "Financial Statements and Supplementary Data" - Note 18, "Revision of the Previously Issued Financial Statements for Correction of an Immaterial Error". There was no impact on our consolidated revenues, operating expenses, operating income, earnings per share or cash flows as a result of the revision.
(2)Cash flow data has been revised to reflect the adoption of ASU 2016-18 for 2012-2015
(3)Represents noncontrolling interests in consolidated joint ventures. In 2015 we entered into four joint venture transactions.

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 and Adjusted net income (loss) are additional measures 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.
EBITDA, Adjusted EBITDA and Adjusted net income (loss) are commonly used measures of performance in the industry. We utilize these measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. EBITDA, Adjusted EBITDA and Adjusted net income (loss) are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States ("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 and Adjusted net income (loss) differently than we do or may not calculate them at all, limiting the usefulness of EBITDA, Adjusted EBITDA and Adjusted net income (loss) as comparative measures.


25



The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(In thousands, except per share data)
 Net income (loss)
$
(4,840
)
 
$
4,016

 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
Depreciation and amortization
16,281

 
13,315

 
12,762

 
13,960

 
14,968

 
Interest expense
6,764

 
6,979

 
4,575

 
5,516

 
7,553

 
Income tax (benefit) expense
312

 
85

 
31

 
(817
)
 
(6,339
)
 EBITDA
18,517

 
24,395

 
19,671

 
1,612

 
1,508

 
Loss on discontinued operations (1)

 

 
189

 
1,977

 
3,327

 
Gain on asset dispositions (2)
(1,912
)
 
(17,808
)
 
(3,996
)
 

 

 
Loss on early retirement of debt (3)

 
2,847

 

 

 

 
Lease termination costs (4)

 
2,250

 
750

 

 

 
Franchise termination fees (5)

 

 
(2,095
)
 

 

 
Termination of loyalty program (6)

 

 
(1,525
)
 

 

 
Acquisition and integration costs (7)
2,112

 
779

 

 

 

 
Separation costs (8)
627

 

 
356

 
582

 

 
Asset impairment (9)

 

 

 
7,785

 
9,440

 
Reserve for environmental cleanup (10)
128

 

 

 

 

Adjusted EBITDA
$
19,472

 
$
12,463

 
$
13,350

 
$
11,956

 
$
14,275

 
 
 
 
 
 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2016, we recorded a gain on sale of intellectual property, net of brokerage fees, of $0.4 million and a $1.5 million gain on sale of the Coos Bay property. During 2015, we recorded $16.4 million in gain on the sales of the Bellevue and Wenatchee properties, and a $1.3 million gain on sale of our equity method investment in a 19.9% owned real estate venture. During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties.
(3
)
In 2015, we recorded $2.8 million in loss on the early retirement of our corporate debt and the debentures associated with our Trust Preferred Securities.
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded additional lease termination fees of $2.2 million and $0.8 million in 2015 and 2014, respectively.
(5
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(6
)
In 2014, we recognized a non-cash benefit related to the termination of our loyalty program.
(7
)
During 2016, RLHC acquired Vantage, with related acquisition expenses totaling $2.1 million. During 2015, we acquired a hotel in Washington, DC that was accounted for as a business combination. We recorded $0.8 million in transaction costs.
(8
)
During 2016, we recorded $0.6 million of separations costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. During 2014, we recorded a $0.4 million separation cost associated with the separation of another former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer. These amounts are included in the line item "General and administrative expenses" on the accompanying statements of comprehensive income (loss).
(9
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties.
(10
)
During 2016, a reserve account was recorded for environmental cleanup at one of our hotel properties.

26



The following is a reconciliation of adjusted net income (loss) to net income (loss) for the periods presented:
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(In thousands, except per share data)
 Net income (loss)
$
(4,840
)
 
$
4,016

 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
Loss on discontinued operations (1)

 

 
189

 
1,977

 
3,327

 
Gain on asset dispositions (2)
(1,912
)
 
(17,808
)
 
(3,996
)
 

 

 
Loss on early retirement of debt (3)

 
2,847

 

 

 

 
Lease termination costs (4)

 
2,250

 
750

 

 

 
Franchise termination fees (5)

 

 
(2,095
)
 

 

 
Termination of loyalty program (6)

 

 
(1,525
)
 

 

 
Acquisition and integration costs (7)
2,112

 
779

 

 

 

 
Separation costs (8)
627

 

 
356

 
582

 

 
Asset impairment (9)

 

 

 
7,785

 
9,440

 
Reserve for environmental cleanup (10)
128

 

 

 

 

Adjusted net loss
$
(3,885
)
 
$
(7,916
)
 
$
(4,018
)
 
$
(6,703
)
 
$
(1,907
)
 
 
 
 


 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2016, we recorded a gain on sale of intellectual property, net of brokerage fees, of $0.4 million and a $1.5 million gain on sale of the Coos Bay property. During 2015, we recorded $16.4 million in gain on the sales of the Bellevue and Wenatchee properties, and a $1.3 million gain on sale of our equity method investment in a 19.9% owned real estate venture. During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties.
(3
)
In 2015, we recorded $2.8 million in loss on the early retirement of our corporate debt and the debentures associated with our Trust Preferred Securities.
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded additional lease termination fees of $2.2 million and $0.8 million in 2015 and 2014, respectively.
(5
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(6
)
In 2014, we recognized a non-cash benefit related to the termination of our loyalty program.
(7
)
During 2016, RLHC acquired Vantage, with related acquisition expenses totaling $2.1 million. During 2015, we acquired a hotel in Washington, DC that was accounted for as a business combination. We recorded $0.8 million in transaction costs.
(8
)
During 2016, we recorded $0.6 million of separations costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. During 2014, we recorded a $0.4 million separation cost associated with the separation of another former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer. These amounts are included in the line item "General and administrative expenses" on the accompanying statements of comprehensive income (loss).
(9
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties.
(10
)
During 2016, a reserve account was recorded for environmental cleanup at one of our hotel properties.


27



Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

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) primarily engaged in the franchising, management and ownership of hotels under our proprietary brands, which include Hotel RL, Red Lion Hotel, Red Lion Inn & Suites, GuestHouse and Settle Inn & Suites. On September 30, 2016, we acquired certain assets from Vantage Hospitality Group, Inc. and a number of its affiliates ("Vantage"), including the brands of Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. All our brands are referred to collectively as the RLHC brands, and our hotels operate in the upscale, midscale or economy hotel segments.

A summary of our properties as of December 31, 2016 is provided below:

 
 
Hotels
 
Total
Available
Rooms
Company operated hotels
 
 
 
 
Majority owned and consolidated
 
14

 
2,900

Leased
 
4

 
900

Managed
 
2

 
500

Franchised hotels
 
1,117

 
68,900

Total systemwide
 
1,137

 
73,200


We operate in three reportable segments:

The franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees, which are typically based on a percentage of room revenue or on a flat fee per month, and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.

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 are also derived from management fees and related charges for hotels with which we contract to perform management services.

The entertainment segment is composed of our WestCoast Entertainment and TicketsWest operations.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

Overview

On September 30, 2016 (the close date), we (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (“Vantage”), a subsidiary of Thirty-Eight Street, Inc. (“TESI”) and (ii) acquired one brand name asset from TESI. Vantage is a hotel franchise company, and the addition of the Vantage assets substantially increases our number of franchise properties and provides us with a broader presence in the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. The acquisition was funded at closing with $22.6 million of cash on hand, of which $10.3 million was paid to Vantage and $12.3 million was paid to TESI and 690,000 shares of RLHC stock paid to TESI, which was valued at $5.8 million, based on the closing price of RLHC stock of $8.34 on the close date. The acquisition remains subject to a working capital adjustment, which is not expected to be significant. The total purchase price was $40.2 million, which included the estimated fair value of $0.9 million for the assumption of an obligation related to a previous business acquisition of Vantage and the estimated fair value of $10.9 million of primarily contingent consideration, payable upon the attainment of certain performance criteria. The contingent consideration will be payable to TESI at the first

28



and second anniversaries of the close date, with a payment of $4 million in cash and 414,000 shares of common stock on the first anniversary and $3 million in cash and 276,000 shares of common stock on the second anniversary. A minimum of $2 million of the additional consideration is not contingent and will be paid in equal amounts at the first and second anniversaries of the close date. Payment of the contingent consideration in full is dependent on the retention of Vantage properties under franchise or membership license agreements, as determined by the room count at the first and second year anniversary dates when compared with the room count at the close date. The contingent consideration may also be paid if membership fee revenue as of the first and second anniversary dates is not less than 90% of the closing date membership fee revenue.

On October 6, 2016, the sale of the Red Lion Hotel Coos Bay property (the Coos Bay property), in Coos Bay, Oregon, was completed for $5.7 million in net proceeds and a gain on sale of $1.5 million. The Coos Bay property was previously included in our company operated hotels segment and was one of the original 12 properties included in the RL Venture, LLC ("RL Venture") joint venture entity. The hotel is now under a franchise license agreement with RL Franchising as a Red Lion Hotel. As required by the RL Venture debt agreement, at the time of the sale we were required by our applicable debt agreement to use $4.9 million in proceeds to paydown the outstanding balance of the RL Venture debt.

In 2016, we completed $26 million in renovations to the 11 remaining properties held by RL Venture. In conjunction with these renovations, we converted three Red Lion Hotels (Spokane, Washington; Olympia, Washington; and Salt Lake City, Utah) to Hotel RLs. These properties are currently operating under the Hotel RL brand.

In December 2016, we completed an underwritten public offering of 2.5 million shares of our common stock with net proceeds to the company of $18.5 million. Proceeds from this offering will be used for general corporate purposes which may include, but are not limited to, pursing acquisitions and supporting our working capital needs.

Subsequent to December 31, 2016, we identified a material weakness in internal controls over financial reporting within our entertainment segment. We evaluated the "Other accrued entertainment liabilities" and determined it was understated by $1.2 million for all periods presented. We recorded a correction to increase "Other accrued entertainment liabilities" with a corresponding increase to accumulated deficit of $1.2 million. As a result of the correction, we have revised certain amounts in our consolidated balance sheet as of December 31, 2015 and our consolidated statements of changes in stockholders' equity for the years ended December 31, 2015 and 2014. Adjustments have been recognized as a cumulative correction to the beginning accumulated deficit as of the earliest period presented. There was no impact on our consolidated revenues, operating expenses, operating income, earnings per share or cash flows as a result of the revision. See Item 8, "Financial Statements and Supplementary Data" - Note 18, "Revision of the Previously Issued Financial Statements for Correction of an Immaterial Error."


29



Results of Operations

A summary of our consolidated statements of comprehensive income (loss) is provided below (in thousands):
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Total revenue
 
$
164,070

 
$
142,920

 
$
145,426

Total operating expenses
 
162,317

 
129,819

 
138,667

Operating income (loss)
 
1,753

 
13,101

 
6,759

Other income (expense):
 
 
 
 
 
 
Interest expense
 
(6,764
)
 
(6,979
)
 
(4,575
)
Loss on early retirement of debt
 

 
(2,847
)
 

Other income, net
 
483

 
826

 
339

Other expense
 
(6,281
)
 
(9,000
)
 
(4,236
)
Income (loss) before taxes
 
(4,528
)
 
4,101

 
2,523

Income tax expense
 
312

 
85

 
31

Net income (loss) from continuing operations
 
(4,840
)
 
4,016

 
2,492

Net loss from discontinued operations
 

 

 
(189
)
Net income (loss)
 
(4,840
)
 
4,016

 
2,303

Less net income attributable to noncontrolling interest
 
163

 
(1,297
)
 

Net income (loss) attributable to RLHC
 
(4,677
)
 
2,719

 
2,303

Comprehensive income (loss)
 
 
 
 
 
 
Unrealized loss on cash flow hedges, net of tax
 

 

 
(44
)
Comprehensive income (loss)
 
$
(4,677
)
 
$
2,719

 
$
2,259

 
 
 
 
 
 
 
Non-GAAP data: (1)
 
 
 
 
 
 
EBITDA
 
$
18,517

 
$
24,395

 
$
19,671

Adjusted EBITDA
 
$
19,472

 
$
12,463

 
$
13,350

Adjusted net income (loss)
 
$
(3,885
)
 
$
(7,916
)
 
$
(4,018
)
_________
 
 
 
 
 
 
(1)  See Item 6. Selected Financial Data for a reconciliation of non-GAAP measures to net income (loss) for the periods presented

For the year ended December 31, 2016, we reported net loss attributable to RLHC of $4.7 million or $0.23 per basic share, which includes (i) $2.1 million in acquisition related costs, (ii) a $1.9 million gain on sale of assets, (iii) $0.6 million in employee separation costs, and (4) $0.1 million in costs for environmental cleanup at one of our hotel properties.

For the year ended December 31, 2015, we reported net income attributable to RLHC of $2.7 million or $0.14 per share, which includes (i) $16.4 million in gains on the sales of the Bellevue and Wenatchee properties, (ii) $1.2 million in loss on early termination of the Wells Fargo credit facility, (iii) $1.7 million in loss on the redemption of the debentures held by the Red Lion Hotels Capital Trust, and (iv) $2.3 million in amortized lease termination fees related to the amended lease for the Red Lion Hotel Vancouver at the Quay.

For the year ended December 31, 2014, we reported net income attributable to RLHC of $2.3 million or $0.12 per share, which includes (i) $4.0 million in gains on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties. (ii) $2.1 million in early termination fee received related to the Seattle Fifth Avenue Hotel terminating its franchise agreement, (iii) $0.8 million in amortized lease termination fees related to the amended lease for the Red Lion Hotel Vancouver at the Quay, and (iv) $0.4 million in costs associated with the separation of a former Executive Vice President and Chief Financial Officer.

The above special items are excluded from operating results in Adjusted EBITDA. For the year ended December 31, 2016, Adjusted EBITDA was $19.5 million, compared to $12.5 million for the year ended December 31, 2015 and $13.4 million for the year ended December 31, 2014.

Revenues


30



Our revenues from continuing operations were as follows (in thousands):
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Company operated hotels
 
$
117,641

 
$
116,187

 
$
118,616

Other revenues from managed properties
 
5,948

 
3,586

 

Franchised hotels
 
24,634

 
12,039

 
9,618

Entertainment
 
15,719

 
11,057

 
17,115

Other
 
128

 
51

 
77

Total revenue
 
$
164,070

 
$
142,920

 
$
145,426


Total revenue for 2016 increased by $21.1 million or 15%, compared with 2015. The increase was driven by $12.6 million in revenue growth from our franchise business, $4.7 million in higher revenue from our entertainment segment, and $3.8 million in higher revenue from our hotels segment. Franchise revenue increased by $8.9 million due to the Vantage acquisition, along with growth in our brand portfolio. Entertainment segment revenues increased primarily from successful runs of Broadway shows in Spokane and Honolulu. Revenues from our hotels segment increased by $9.4 million from new hotels opened in late 2015 and early 2016, partially offset by $6.2 million in revenue from hotel properties sold in 2015 and 2016. Other revenues from managed properties increased by $2.4 million in 2016, resulting from the addition of a new managed property in April 2016, as well as full year results for a property added in May 2015.

Total revenue for 2015 decreased by $2.5 million or 2%, compared with 2014. The decrease was driven by $15.5 million in revenue recorded in 2014 for hotel properties that we sold in 2014 and in early 2015, as well as $6.1 million in lower revenue from our entertainment segment. These decreases were partially offset by $9.7 million in higher revenue driven by 10.4% in RevPAR growth in comparable hotels, $3.4 million in revenue from new hotel growth, and $2.4 million higher revenue from our franchise segment.
 
Comparable Hotel Revenue (Non-GAAP Data)

Our comparable hotel revenues were as follows (in thousands):
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Company operated hotel revenue from continuing operations(1)
 
$
117,641

 
$
116,187

 
$
118,616

less: revenue from sold and closed hotels
 
(2,822
)
 
(8,999
)
 
(24,067
)
less: revenue from hotels without comparable results
 
(12,827
)
 
(3,441
)
 

Comparable company operated hotel revenue
 
$
101,992

 
$
103,747

 
$
94,549

 
 
 
 
 
 
 
Company operated hotel operating expenses from continuing operations(1)
 
91,572

 
92,057

 
94,241

less: operating expenses from sold and closed hotels
 
(1,785
)
 
(6,863
)
 
(18,791
)
less: operating expenses from hotels without comparable results
 
(10,266
)
 
(3,330
)
 

Comparable company operated hotel operating expenses
 
$
79,521

 
$
81,864

 
$
75,450

 
 
 
 
 
 
 
Company operated hotel direct operating income from continuing operations(1)
 
$
26,069

 
$
24,130

 
$
24,375

less: operating margin from sold and closed hotels
 
$
(1,037
)
 
$
(2,136
)
 
$
(5,276
)
less: operating margin from hotels without comparable results
 
$
(2,561
)
 
$
(111
)
 
$

Comparable company operated hotel income margin
 
$
22,471

 
$
21,883

 
$
19,099

Comparable company operated hotel direct margin %
 
22.0
%
 
21.1
%
 
20.2
%
(1)Excludes other revenues and costs from managed properties
 
 
 
 
 
 

Comparable hotels are defined as properties that were operated by our company for at least one full calendar year as of the beginning of the reporting year and for which comparable results were available.

31



We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by GAAP, and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2016 Compared to 2015

During 2016, revenue from the company operated hotel segment increased $1.5 million or 1% from 2015. The increase was driven by $9.4 million in higher revenue from new hotel growth, partially offset by $6.2 million in reduced revenue for hotel properties sold in 2015 and 2016. On a comparable basis, excluding the results of the sold and closed properties and the hotels for which comparable results were not available, revenue from the company operated hotel segment decreased $1.8 million or 2% in 2016 compared to 2015. Occupancy decreased 140 basis points compared to 2015, primarily driven by decreases in group nights and disruption from our renovations, partially offset by an increase of 1.2% in ADR, as the result of higher rates in the transient segment.

Revenue from our franchised hotels segment increased $12.6 million to $24.6 million in 2016 compared to 2015. This was primarily due $8.9 million from the Vantage acquisition and a full year of revenue from GuestHouse and Settle Inn properties in 2016, as well as other additions to our franchise hotel portfolio. In addition, the comparable RevPAR for franchised midscale hotels increased 5.7% and increased 7.2% for franchised economy hotels when comparing 2016 with 2015.

Revenue in the entertainment segment increased $4.7 million to $15.7 million in 2016. This was primarily due to a successful run of high demand Broadway style productions in Spokane and Honolulu.

2015 Compared to 2014

During 2015, revenue from the company operated hotel segment decreased $2.4 million or 2% from 2014. The decrease was driven by $15.5 million in revenue recorded in 2014 for hotel properties that we sold at the end of 2014 or in January 2015, partially offset by $9.7 million in higher revenue from 10.4% RevPAR growth in comparable hotels and $2.4 million in revenue from new hotel growth. On a comparable basis, excluding the results of the sold and closed properties and the hotels for which comparable results were not available, revenue from the company operated hotel segment increased $9.7 million or 10% in 2015 compared to 2014. This comparable increase was primarily driven by a 5.1% increase in ADR, as the result of higher rates in the transient segment. Occupancy increased 340 basis points compared to 2014, primarily driven by increases in group and transient room nights.

Revenue from our franchise segment increased $2.4 million to $12.0 million in 2015 compared to 2014. This was primarily due to an increase in the number of franchised properties from 36 at the end of 2014 to 104 franchised properties at the end of 2015. In addition, the comparable RevPar for franchised midscale hotels increased 14.1% in 2015 from 2014.

Revenue in the entertainment segment decreased $6.1 million to $11.1 million in 2015 compared to 2014. This was primarily due to a successful 2014 run of high demand Broadway style productions, as well as a significant reduction in the number of show nights in 2015.

Operating Expenses

Operating expenses generally include direct operating expenses for each of the operating segments, depreciation and amortization, hotel facility and land lease expense, gain or loss on asset dispositions and general and administrative expenses.

Our operating expenses from continuing operations were as follows (in thousands):

32



 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Company operated hotels
 
$
91,572

 
$
92,057

 
$
94,241

Other costs from managed properties
 
5,948

 
3,586

 

Franchised hotels
 
19,315

 
11,233

 
7,004

Entertainment
 
13,635

 
10,118

 
14,785

Other
 
42

 
35

 
318

Depreciation and amortization
 
16,281

 
13,315

 
12,762

Hotel facility and land lease
 
4,740

 
6,569

 
5,210

Gain on asset dispositions, net
 
(2,437
)
 
(17,692
)
 
(4,006
)
General and administrative expenses
 
11,109

 
9,819

 
8,353

Acquisition and integration costs
 
2,112

 
779

 

Total operating expenses
 
$
162,317

 
$
129,819

 
$
138,667


Comparable Hotel Expense (Non-GAAP Data)

Our comparable hotel expenses were as follows (in thousands):
 
 
Year ended December 31,
 
 
2016
 
2015
 
2014
Company operated hotel operating expenses
 
$
91,572

 
$
92,057

 
$
94,241

less: operating expenses from sold and closed hotels
 
(1,785
)
 
(6,863
)
 
(18,791
)
less: operating expenses from hotels without comparable results
 
(10,266
)
 
(3,330
)
 

Comparable company operated hotel operating expenses
 
$
79,521

 
$
81,864

 
$
75,450


Comparable hotels are defined as properties that were operated by our company for at least one full calendar year as of the beginning of the reporting year and properties for which comparable results were available.
We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by GAAP, and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2016 Compared to 2015

Direct company operated hotel expenses were $91.6 million in 2016 compared to $92.1 million in 2015. The primary reason for the decrease is lower costs associated with lower revenues in 2016. On a comparable basis, direct company operated hotel expenses were $79.5 million in 2016 compared to $81.9 million in 2015. The decrease was driven primarily by decreased occupancy related costs.

Direct expenses for the franchise segment in 2016 increased by $8.1 million compared to 2015, primarily driven the addition of Vantage operations, as well as increased marketing costs primarily due to the growth in the franchise portfolio of hotels.

Direct expenses for the entertainment segment in 2016 increased $3.5 million as compared to 2015, primarily due to higher costs associated with the successful run of high demand Broadway stage productions in 2016.

Depreciation and amortization expenses increased $3.0 million in 2016 compared to 2015, primarily driven by the addition of new capital expenditures associated with our renovations and new hotel properties.

Hotel facility and land lease costs decreased $1.8 million to $4.7 million in 2016 compared to 2015, primarily due to amortized lease termination fees for the Red Lion Hotel Vancouver at the Quay in 2015 that did not recur in 2016.


33



During 2016, we recorded a $1.5 million gain on the sale of the Coos Bay property and a $0.4 million gain on sale of intellectual property, net of brokerage fees. During 2015, we recorded $16.4 million in gains on the sales of the Bellevue and Wenatchee properties; we also recorded a $1.3 million gain on sale of RLHC's portion of the RLH building, our administrative office in Spokane.

General and administrative expenses increased by $1.3 million in 2016 compared to 2015, primarily due to the addition of operations from the Vantage acquisition, partially offset by lower variable compensation expense.

2015 Compared to 2014

Direct hotel expenses as reported were $92.1 million in 2015 compared to $94.2 million in 2014. The primary reason for the decrease is lower direct costs driven by lower revenues, partially offset by higher general and administrative expenses as we invest in infrastructure to build the company operated hotel business. On a comparable basis, direct company operated hotel expenses were $82.0 million in 2015 compared to $77.5 million in 2014. The increase was driven primarily by increased occupancy related costs and a prior year $1.3 million non-cash benefit in our loyalty program.

Direct expenses for the franchise segment in 2015 increased by $4.2 million compared to 2014, primarily driven by a higher number of franchises in the system as well as investment costs of the expanded franchise development team.

Direct expenses for the entertainment segment in 2015 decreased $4.7 million as compared to 2014, primarily due to a successful 2014 run of high demand Broadway stage productions in addition to a significant reduction during 2015 in the number of show nights versus the prior year.

Depreciation and amortization expenses increased $0.6 million in 2015 compared to 2014, primarily driven by the addition of new capital expenditures and hotel properties, partially offset by the sale of properties in late 2014 and early 2015.

Hotel facility and land lease costs increased $1.4 million in 2015 compared to 2014, primarily due to amortized lease termination fees for the Red Lion Hotel Vancouver at the Quay.

During 2015, we recorded $16.4 million in gain on the sales of the Bellevue and Wenatchee properties; we also recorded a $1.3 million gain on sale of RLHC's portion of the RLH building, our administrative office in Spokane. During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kennewick, Kelso, Pocatello and Canyon Springs properties.

General and administrative expenses increased by $1.5 million in 2015 compared to 2014, primarily due to additional stock compensation and variable compensation expenses.

Interest Expense

Interest expense decreased $0.2 million in 2016 compared with 2015. The decrease is primarily due to the repayment of the 9.5% Junior Subordinated Debentures, partially offset by a higher principal amount of debt outstanding during 2016, as the result of additional draws to fund our hotel renovations. Interest expense increased $2.4 million in 2015 compared with 2014. The increase is primarily due to increased principal balance of debt outstanding in 2015. The average outstanding debt balances for 2016, 2015 and 2014 were $100.7 million, $76.1 million and $67.8 million, respectively.

Loss on Early Retirement of Debt

In 2015, we recorded a loss of $2.8 million for the early retirement of debt when we repaid the outstanding balance of our Wells Fargo term loan and redeemed of all of our 9.5% Junior Subordinated Debentures due 2044. The overall loss was driven primarily by the write off of unamortized prepaid debt costs.

Income Taxes

We reported income tax expense of $0.3 million, $0.1 million and $31,000 in 2016, 2015 and 2014, respectively. The income tax provision varies from the statutory rate primarily due to a full valuation allowance against our net deferred tax assets.

Discontinued Operations

During 2014, we ceased the operation of the Red Lion Hotel Eugene in Eugene, Oregon when we assigned our lease to a third party.


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Liquidity and Capital Resources

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 $29.4 million and $36.2 million at December 31, 2016 and 2015. We believe that we have sufficient liquidity to fund our operations at least through March 2018.

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.

In December 2016, we completed an underwritten public offering of 2.5 million shares with net proceeds to the company of $18.5 million. Proceeds from this offering will be used for general corporate purposes which may include, but are not limited to, pursing acquisitions and supporting our working capital needs.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. This requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation. We included property improvement expenditures in the borrowing arrangements for our RL Venture Holding LLC properties, as well as the Baltimore, Atlanta, and Washington, DC locations. These amounts have been substantially all drawn for use in our renovations in 2016.

At December 31, 2016 total outstanding debt was $108.3 million, net of discount. The obligation for all of our debt under the loan agreements is generally non-recourse to RLHC, except for instances of fraud, criminal activity, waste, misappropriation of revenues, and breach of environmental representations.  Our average pre-tax interest rate on debt was 5.7% at December 31, 2016, all of which is at a variable rate. Refer to Note 7 in Item 8. Financial Information and Supplementary Data for further information on the specific terms of our debt.

On September 30, 2016 (the close date), we (i) acquired selected assets and assumed certain liabilities of Vantage Hospitality Group, Inc. (“Vantage”), a subsidiary of Thirty-Eight Street, Inc. (“TESI”) and (ii) acquired one brand name asset from TESI. Vantage is a hotel franchise company, and the addition of the Vantage assets substantially increases our number of franchise properties and provides us with a broader presence in the United States and Canada. We acquired over 1,000 hotel franchise and membership license agreements, as well as multiple brand names, including Americas Best Value Inn, Canadas Best Value Inn, Lexington Hotels & Inns, America's Best Inns & Suites, Jameson Inns, Country Hearth Inns & Suites, Vantage Hotels, Value Inn Worldwide, Value Hotel Worldwide, 3 Palms Hotels and Resorts and Signature Inn. The acquisition was funded at closing with $22.6 million of cash on hand, of which $10.3 million was paid to Vantage and $12.3 million was paid to TESI and 690,000 shares of RLHC stock paid to TESI, which was valued at $5.8 million, based on the closing price of RLHC stock of $8.34 on the close date. The acquisition remains subject to a working capital adjustment, which is not expected to be significant. The total purchase price was $40.2 million, which included the estimated fair value of $0.9 million for the assumption of an obligation related to a previous business acquisition of Vantage and the estimated fair value of $10.9 million of primarily contingent consideration, the total of which will be payable to TESI at the first and second anniversaries of the close date, based on the attainment of certain performance criteria. A minimum of $2 million of the additional consideration is not contingent and will be paid in equal amounts at the first and second anniversaries of the close date. Payment of the contingent consideration is dependent on the retention of Vantage properties under franchise or membership license agreements, as determined by the room count at the first and second year anniversary dates when compared with the room count at the close date, as follows:

 
 
Year 1 Anniversary
 
Year 2 Anniversary
 
Total
Threshold
 
Shares
Cash(1)
 
Shares
Cash(1)
 
Shares
Cash(1)
90% of room count at close
 
414,000

$
4,000

 
276,000

$
3,000

 
690,000

$
7,000

80% of room count at close
 
310,500

3,000

 
207,000

2,250