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, 2017
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.)
 
 
 
1550 Market St. #350
Denver Colorado
 
80202
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" 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
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 2017 was $173.2 million, of which 69.6% or $120.6 million was held by non-affiliates as of that date.
As of March 16, 2018, there were 24,125,600 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2018 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 2017 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", "our", "us", "our company" "RLHC" and "RLH Corporation" refer to Red Lion Hotels Corporation, doing business as RLH Corporation, and as the context requires, all of its consolidated subsidiaries as follows:

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
Sleeping Lion, 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" "system of 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.rlhco.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. The contents of our website are not incorporated into this filing.

1




General

We are a NYSE-listed hospitality and leisure company (ticker symbol: RLH) doing business as RLH Corporation and primarily engaged in the franchising, management and ownership of hotels under the following proprietary brands:
 
Active Brands
 
Supported Brands
 
International Brands
 
Ÿ Hotel RL
 
Ÿ America's Best Inn & Suites
 
Ÿ Value Inn Worldwide
 
Ÿ Red Lion Hotels
 
Ÿ Jameson Inns
 
Ÿ Value Hotel Worldwide
 
Ÿ Red Lion Inn & Suites
 
Ÿ Lexington Hotels & Inns
 
 
 
Ÿ GuestHouse
 
Ÿ 3 Palm Hotels
 
 
 
Ÿ Settle Inn
 
 
 
 
 
Ÿ Americas Best Value Inn
 
 
 
 
 
Ÿ Canadas Best Value Inn
 
 
 
 
 
Ÿ Signature and Signature Inn
 
 
 
 
 
Ÿ Country Hearth Inns & Suites
 
 
 
 

All our properties strive to highlight friendly service and reflect the local flair of their markets. The upscale and midscale RLH Corporation brands of Hotel RL, Red Lion Hotel and Red Lion Inn & Suites offer a unique local spin on the expected travel experience 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 RLH Corporation brand hotel as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

Hotel RL, our upscale lifestyle brand launched in October 2014, 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. There are seven hotels currently open in the Hotel RL brand and five more expected to open in 2018 and 2019. The currently open hotels are located in Baltimore Inner Harbor, Maryland; Washington DC; Olympia and Spokane, Washington; Salt Lake City, Utah; Brooklyn, New York and New Orleans, Louisiana.

Our economy brands are focused on delivering our guests a consistent experience with exceptional comfort, quality and service at an affordable rate, with approximately 1,000 locations in 46 states and three countries outside the United States.

A summary of our properties as of December 31, 2017, including the approximate number of available rooms, is provided below:
 
 
Company Operated
 
Franchised
 
Total Systemwide
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2017
 
20

 
4,200

 
1,117

 
68,900

 
1,137

 
73,100

Newly opened properties
 
1

 
100

 
64

 
5,100

 
65

 
5,200

Terminated properties(1)
 

 

 
(120
)
 
(8,800
)
 
(120
)
 
(8,800
)
Total
 
21

 
4,300

 
1,061

 
65,200

 
1,082

 
69,500

 
 
 
 
 
 
 
 
 
 
 
 
 
Executed franchise license and management agreements, year ended December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
New franchise / management agreements
 
1

 
100

 
63

 
4,600

 
64

 
4,700

Renewals / changes of ownership
 

 

 
81

 
5,900

 
81

 
5,900

Total executed franchise license and management agreements, year ended December 31, 2017
 
1

 
100

 
144

 
10,500

 
145

 
10,600

(1) Terminated properties include locations at which we ended our franchise relationship because the hotels did not meet RLH Corporation's hotel standards. We are focused on maintaining a set of brand standards at all of our locations.


2



On October 5, 2017 our Board of Directors approved a process to market and sell 11 of our 14 hotel ownership positions maintained in joint venture arrangements. It is our intention, subject to market conditions to sell all of our hotel ownership positions in the next few years so that we can focus on our hotel franchise business which is less capital intensive and generates higher profit margins than the hotel ownership business.

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale as of December 31, 2016 in this annual report on Form 10-K. The loss on sale of the entertainment segment included in the 2017 financial statements was $0.2 million, net of tax. See Item 8, Notes 17 and 18 for discussion of Discontinued Operations and Assets and Liabilities Held for Sale associated with the transaction.

Operations

We operate in two reportable segments:

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 franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees that are based on a percentage of room revenue or room count 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.

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

We have two measures of segment performance under generally accepted accounting principles in the United States of America (GAAP): revenue and operating income. In addition, the following non-GAAP measurements are used to evaluate the performance of our franchise and company operated hotel segments:

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

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

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 represents a profitable, less 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. In 2017 we executed 144 franchise agreements. Also during 2017, 120 franchise agreements in our network terminated, partially due to our focus on eliminating hotels that did not meet RLH Corporation's hotel standards. Our strategy for our upscale and midscale hotel brands is to identify larger urban metropolitan statistical areas (MSAs) that are saturated by larger

3



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 upscale and midscale 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 RLH Corporation 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 demand 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 may 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, to a lesser extent, 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 to establish the Hotel RL brand, 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.

Owned Hotels

All of our owned properties are held in joint venture (JV) entities, in each of which we have a majority ownership interest. As of December 31, 2017 eleven of our hotels are held in RL Venture, LLC, of which we own a 55% interest. During 2016, we completed extensive renovations to these properties, and converted three of them to Hotel RLs. All 11 hotels continue to be managed by RLH Corporation'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, LLC, of which we own 55%.

Our Washington DC Hotel RL is held in its own JV entity, RLS DC Venture, LLC, of which we own 55%.

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

We also operate four hotels under land and/or building leases.

With the objective of accelerating the Company's asset-light strategy in October 2017 the Company listed with CBRE the majority of its owned assets for sale. The hotels being marketed for sale are the following:
1.
Hotel RL Salt Lake City, Utah
2.
Hotel RL Spokane at the Park, Washington
3.
Hotel RL Olympia, Washington
4.
Red Lion Hotel Pasco, Washington (sold in February 2018, entered into franchise agreement)
5.
Red Lion Hotel Richland Hanford House, Washington (sold in February 2018, entered into franchise agreement)
6.
Red Lion Hotel Port Angeles, Washington
7.
Red Lion Hotel Redding, California (sold in February 2018, entered into franchise agreement)
8.
Red Lion Hotel Eureka, California (sold in February 2018, entered into franchise agreement)
9.
Red Lion Hotel Boise Downtowner, Idaho (sold in February 2018, entered into franchise agreement)
10.
Red Lion Templin’s Hotel on the River, Post Falls, Idaho
11.
Red Lion Inn & Suites Bend, Oregon
See Item 8, Note 20 for additional information regarding the sale of hotels in February 2018.


4



Franchised Hotels

As of December 31, 2017 our network of hotels included 1,061 hotels under franchise agreements, representing a total of 65,200 rooms.

As part of our focus on expanding our franchising division, in 2015 we completed the acquisition of the intellectual property assets and all hotel franchise license agreements of GuestHouse International, LLC, an economy scale brand. The acquisition expanded our presence across the country by adding two recognized hotel brands, GuestHouse and Settle Inn & Suites, to the RLH Corporation brands, and their franchise license agreements.

In September 2016, 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 was a hotel franchise company, and the addition of the Vantage assets substantially increased our number of franchise properties and provided 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.

In December 2017, we announced the launch of franchiseasysm, a re-imagined franchise process to appeal to owners of independent hotels or hotels that don't fit a traditional franchise. The process provides a straightforward and flexible website application process for hoteliers looking to operate as independent or under the nationwide Country Hearth brand. Applications can be completed from a mobile device, and agreements offer an associated simplified fee structure.

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 rlhco.com website and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

Reporting Segment Revenues

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.
 
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Company operated hotels
 
$
123,100

 
71.6
%
 
$
123,589

 
83.3
%
 
$
119,773

 
90.8
%
Franchised hotels
 
48,559

 
28.2
%
 
24,634

 
16.6
%
 
12,039

 
9.1
%
Other
 
267

 
0.2
%
 
128

 
0.1
%
 
51

 
0.1
%
Total revenues
 
$
171,926

 
100.0
%
 
$
148,351

 
100.0
%
 
$
131,863

 
100.0
%
 

Comparable Hotel Measures and Room Count (Non-GAAP Data)

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results as these measures influence and affect franchise revenues. 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. We exclude total revenue earned and expenses incurred related to our hotel management agreements in the comparable hotel statistics.


5



The primary non-GAAP measure for the franchise revenue from economy hotels is room counts due to the prevalence of fixed fee arrangements in this portion of the franchise segment.
Average occupancy, ADR and RevPAR statistics are provided below on a comparable basis:
Comparable Hotel Statistics
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
 
2017
 
2016
 
 
Average Occupancy(1)
 
 
ADR(2)
 
RevPAR(3)
 
Average Occupancy(1)
 
ADR(2)
 
RevPAR(3)
Systemwide - Midscale
 
62.2
%
 
 
$96.19
 
$59.80
 
62.3
%
 
$93.61
 
$58.33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change from prior comparative period:
 
Average Occupancy(1)
 
 
ADR(2)
 
RevPAR(3)
 
 
 
 
 
 
Systemwide - Midscale
 
(10
)
bps
 
2.8%
 
2.5%
 
 
 
 
 
 
(1)  Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation.
(2)  Average daily rate (ADR) represents total room revenues divided by the total number of paid rooms occupied by hotel guests.
(3)  Revenue per available room (RevPAR) represents total room and related revenues divided by total available rooms.

Average occupancy, ADR and RevPAR, as defined below, are non-GAAP measures and 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 period other than hotels for which comparable results were not available.

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 our industry, such as "upscale", "midscale" and "economy" are consistent with those used by Smith Travel Research (STR), an independent statistical research service that specializes in the lodging industry. These terms as used in our disclosures are consistent with the STR definitions.

Future midscale franchise segment revenues will generate revenue from franchise fees that are based on a percentage of room revenue, as has been the historical revenue model for the company. Future economy franchise segment revenues will derive primarily from fixed fee arrangements based on hotel room counts. Our franchised economy room count decreased from approximately 59,300 rooms at December 31, 2016 to approximately 54,900 rooms at December 31, 2017, as we focused on eliminating hotels that did not meet RLH Corporation's hotel standards.

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.
 
 

Employees

At December 31, 2017, we employed approximately 1,580 people on a full-time or part-time basis. Our total number of employees fluctuates seasonally. At December 31, 2017, 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. As we dispose of our hotel ownership assets designated for sale the number of employees' subject to collective bargaining agreements will decline. We believe our employee relations are satisfactory.

6




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 RLH Corporation 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:

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;
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
New supply or oversupply of hotel rooms in markets in which we operate;
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;
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;
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;
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;
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.

7




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 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.

General economic conditions may negatively impact our results and liquidity.

Many businesses, including RLH Corporation, were adversely affected by the state of the economy. During the economic downturn, which began in 2007, 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 improved in 2016 and 2017, a slowdown in the economic recovery or a worsening of economic conditions in 2018 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.

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.


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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, 2017, there were 1,061 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.

We are party to management contracts for each of the hotels in our joint venture portfolio, RL Venture, Baltimore, Washington, D.C. and Atlanta, as well as Bellevue, Deschutes and Hudson Valley hotel properties, which are owned by third parties. 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.

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.

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 continue to invest 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 through 2017, and, although we had a net profit in 2014 and 2015, there is no assurance that we will be profitable in the future.

During the years 2008 through 2013 and in 2016 and 2017, 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 four fiscal years, the long prior history of net losses could impair our ability to raise capital needed for franchise expansion, hotel investments and other corporate purposes. There is no assurance that we will be able to achieve profitability in the future.

The planned sale of joint venture and company owned hotels may not occur in the timeline expected and the company may not be able to replace the Revenue and Adjusted EBITDA from this business in future periods.

On October 5, 2017 the company’s Board of Directors approved a process to market and sell 11 of its 14 hotel ownership positions maintained in joint venture arrangements. This is consistent with the Company’s previously stated business strategy to focus on moving towards operations as primarily a franchise company. Based on a preliminary review of the market, if all 11 hotels are sold we estimate the aggregate sale value currently between $160 and $175 million. We expect that the completion of these sales would allow the company to significantly reduce or eliminate long-term debt and to increase cash reserves for future franchise agreement growth initiatives.


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It is our intention, subject to market conditions to sell all of our hotel ownership positions in the next few years. Despite favorable market conditions at the time of the plan, we cannot be certain that the hotel sales will occur according to the timing or market prices anticipated. The revenue provided by the 11 hotels was $73.1 million, $70.4 million, and $71.6 million in 2017, 2016 and 2015, respectively. The Adjusted EBITDA provided by the hotels was $16.8 million, $15.5 million, and $14.4 million in 2017, 2016 and 2015, respectively. We cannot be certain that we will be able to replace the revenue and Adjusted EBITDA results with franchise business growth in future periods, or that the profit margins of our franchise business will be as we expected.

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 RLH Corporation brands into targeted segments. Both owned and franchised hotels will be able to carry one of the RLH Corporation brands, and we may consider adding additional brand options in the future.

As of December 31, 2017, we managed three hotels in our system that were owned by third parties under a RLH Corporation brand or other brands.

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.

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 RLH Corporation 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 RLH Corporation 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.

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

In connection with our acquisition of Vantage, we issued 690,000 shares of common stock, and we settled the first portion of contingent consideration due in January 2018 in the amount of (i) $4.0 million cash and (ii) 414,000 shares of the Company's common stock. We may be required to pay additional consideration following September 2018 for the second and final portion of the Vantage contingent consideration in an aggregate amount of up to (i) $3.0 million in cash and (ii) 276,000 shares of the Company’s common stock. 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.

We have hotel ownership interests, varying from 55% to 73% in joint ventures. 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 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;
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 franchise or hotel acquisitions fail to perform in accordance with our expectations or if we are unable to effectively integrate new franchisees or 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 owners of hotels that we franchise or manage 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 franchised and managed 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, of which we own 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, of 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 $112.5 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 operations and financial condition, and limit our ability to obtain financing. For additional information, see Note 7 of Notes to Consolidated Financial Statements.

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.

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 company owned 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 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.

In the recent past, our levels of capital expenditures for these purposes had been lower than normal due to the general economic conditions impacting our industry. As a result, in 2016, we completed a substantial renovation project of over $27 million in our company operated hotels in order to support an increase in room rates. 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 move the hotel to a lower classification, which would likely have a negative impact on our hotel 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

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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 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.

Four of our hotels and all of 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 through 2024. 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 some of our leases are not renewed for any reason, we could incur additional costs and expenses associated with negotiating a new lease agreement and moving our offices to a new location.

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.

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, Expedia or Travelocity. 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.

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 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.

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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.

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 of 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 United States, 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.

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.


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We have identified material weaknesses in our internal controls over financial reporting. 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.

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, a 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.

During our evaluation of the effectiveness of the internal controls over financial reporting as of December 31, 2017, we identified material weaknesses in each of the following areas: Control Environment, Risk Assessment, Monitoring and Financial Closing and Reporting.

In particular, controls related to the following were not designed to operate effectively:

Control Environment
·
We did not maintain a sufficient complement of personnel with the appropriate knowledge, experience and/or training in application of GAAP commensurate with our financial reporting requirements.
· 
We did not maintain adequate qualified personnel with regard to certain significant complex transactions and technical accounting matters.
 
Risk Assessment
·
We did not design and maintain internal controls that were effective in identifying, assessing and addressing risks that significantly impact the financial statements or the effectiveness of the internal controls over financial reporting. We did not modify our controls to sufficiently address changes in risks of material misstatement as a result of changes in our operations, organizational structure and operating environment, specifically the expansion of activities related to recent acquisitions.
 
Monitoring
·
We did not design and maintain effective monitoring of compliance with established accounting policies, procedures and controls. This weakness included the failure to design and operate effective procedures and controls whose purpose is to evaluate and monitor effectiveness of the individual control activities.
 
Financial Closing and Reporting
·
We did not design and maintain effective controls over the financial closing and reporting process with sufficient precision to mitigate a potential material misstatement.
 
These deficiencies are pervasive in nature and create a reasonable possibility that a material misstatement of the annual or interim financial statements would not have been prevented or detected on a timely basis.

We are currently in the process of implementing our remediation plans, including engaging a third-party provider to help us assess and improve our internal controls for complying with the Sarbanes-Oxley Act, hiring a Chief Accounting Officer with appropriate experience applying GAAP technical accounting guidance, hiring additional accounting personnel and designing additional controls around identification, documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business. As we continue to evaluate and take actions to improve our internal control over financial reporting and the monitoring of those internal controls, we may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measures described above.

Any failure to remediate the material weaknesses identified above, implement required new or improved controls, or if we were to encounter difficulties in their implementation or operation, or difficulties in the assimilation of acquired businesses into our control system could cause harm to our operating results or cause us to fail to meet our financial reporting obligations. Inadequate internal controls could also cause 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.

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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, Signature, Signature Inn, WestCoast, Cavanaughs and Cascadia Soapery, Hello Rewards, MAKE IT#WORTHIT, MIWI, PROJECT WAKE UP CALL, RLH Corporation 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.

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, and in 2017 we hired a new Chief Financial Officer. 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.

We place substantial reliance on the lodging industry experience and the institutional knowledge of the 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. We currently 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.

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

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.

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, leased 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.

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 2017, our goodwill amount was $9.4 million, and other intangible assets totaled $50.7 million. Market conditions in the future could adversely impact the fair value of one or both of our franchise or hotel 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 2015, 2016 or 2017. 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.

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.

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.

Sales of our common stock by our major shareholders, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares.


17



On February 21, 2018, HNA Investment Management LLC (HNA), which controls 3,738,401 shares, or 15.5% of our common stock, informed us of their decision to proceed with a sale of their shares of common stock, and delivered to us a demand notice for the registration of these shares with the U.S. Securities and Exchange Commission. HNA will control the manner and timing of their sale of our common stock. We will bear one-half of the fees, costs and expenses related to the registration, other than underwriting discounts, if any, and commissions attributable to the sale of shares by HNA. Because our common stock is relatively thinly traded, a sale by HNA of our common stock in the public market will likely result in a significant decline in our stock price. Our stock price may also fluctuate materially based on announcements by HNA or other large 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.

Our two largest shareholders own 22% 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.

As of March 16, 2018, Columbia Pacific Opportunity Fund, L.P. (Columbia Pacific) and HNA Investment Management LLC (HNA) held 22% in aggregate of our outstanding shares of common stock. Columbia Pacific, HNA or one or more other large 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 currently 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.

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, 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.


18



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.

Our international operations are subject to political and monetary risks.

We currently have franchised hotels operating outside of the United States, including in Canada, 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 United States 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 United States, 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 United States 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 unauthorized use or the 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.

Government regulation could impact our franchise business.

The Federal Trade Commission (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 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

19



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.

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.

20




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.


21



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 21 company operated hotel properties and locations, as well as total available rooms per hotel, as of December 31, 2017.
 
  
 
  
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 Olympia (2)
  
Olympia, Washington
  
193

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

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

Red Lion Hotel Boise Downtowner (2)(8)
  
Boise, Idaho
  
182

Red Lion Hotel Eureka (2)(8)
  
Eureka, California
  
175

Red Lion Hotel Pasco (2)(8)
  
Pasco, Washington
  
279

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

Red Lion Hotel Redding (2)(8)
  
Redding, California
  
192

Red Lion Hotel Richland Hanford House (2)(8)
  
Richland, Washington
  
149

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

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 Atlanta (5)
 
Atlanta, Georgia
 
246

Red Lion Hotel Bellevue (6)
  
Bellevue, Washington
  
181

Red Lion Inn and Suites Deschutes River (6)
 
Bend, Oregon
 
99

Hudson Valley Resort & Spa (7)
 
Hudson Valley, New York
 
270

Company operated properties (21 properties)
 
 
 
4,282

__________ 
(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.
(8) Sale completed in February 2018. Hotels will continue as franchised hotels under new ownership.


22



Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the RLH Corporation 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. At December 31, 2017, our franchised operations consisted of 1,061 hotels with an approximate room count of 65,200.

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.


23



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
2017
 
 
 
     Fourth Quarter (ended December 31, 2017)
$
10.10

 
$
7.95

     Third Quarter (ended September 30, 2017)
$
8.75

 
$
6.15

     Second Quarter (ended June 30, 2017)
$
7.40

 
$
6.15

     First Quarter (ended March 31, 2017)
$
8.80

 
$
6.60

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

Holders
At March 16, 2018, there were 111 shareholders of record of our common stock.
Dividends
Historically, we have not paid any cash dividends on our common stock. 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, 2017 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.
 
 
  
(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)
  
9,697

  
$
8.74

 

 
2015 Stock Incentive Plan(2) 
  
81,130

 
$
8.20

 
1,379,117

 
2008 Employee Stock Purchase Plan(3)
  

  
$

 
344,847

 
Total
  
90,827

  
$
8.26

 
1,723,964


__________
(1) Excludes 242,180 of unvested restricted stock units granted under the 2006 Stock Incentive Plan.
(2) Excludes 1,261,762 of unvested restricted stock units granted under the 2015 Stock Incentive Plan.
(3) As of December 31, 2017, 344,847 shares remained available for issuance under our 2008 Employee Stock Purchase Plan.



24



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=12164569&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 RLH Corporation'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, 2017, 2016, 2015, 2014 and 2013. 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.

25



 
 
 
Years Ended December 31,
 
 
2017 (1)
 
2016 (1)(2)
 
2015 (1)
 
2014 (1)
 
2013 (1)
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
Total revenues
$
171,926

 
$
148,351

 
$
131,863

 
$
128,311

 
$
127,868

 
Gain on asset dispositions, net
(449
)
 
(2,436
)
 
(17,692
)
 
(4,006
)
 
(112
)
 
Asset impairment

 

 

 

 
7,785

 
Operating expenses
170,823

 
148,497

 
119,446

 
123,532

 
138,604

 
Operating income (loss)
1,103

 
(146
)
 
12,417

 
4,779

 
(10,736
)
 
Loss on early retirement of debt

 

 
(2,847
)
 

 

 
Net income (loss) from continuing operations
(1,669
)
 
(6,094
)
 
3,563

 
1,192

 
(14,978
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of income tax expense (benefit)
425

 
1,254

 
453

 
1,113

 
(1,296
)
 
Gain (loss) on sale or disposal of the assets of the discontinued operations, net of income tax
(244
)
 

 

 
(2
)
 
(773
)
 
Net income (loss)
(1,488
)
 
(4,840
)
 
4,016

 
2,303

 
(17,047
)
 
Net income (loss) attributable to noncontrolling interests (3)
2,069

 
163

 
(1,297
)
 

 

Net Income (Loss) attributable to RLH Corporation
$
581

 
$
(4,677
)
 
$
2,719

 
$
2,303

 
$
(17,047
)
 
 
 
 
 
 
 
 
 
 
Earnings (Loss) per share - basic
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
$
0.01

 
$
(0.29
)
 
$
0.12

 
$
0.06

 
$
(0.76
)
 
Gain (loss) on sale or disposal of the assets of the discontinued operations, net of income tax
0.01

 
0.06

 
0.02

 
0.06

 
(0.11
)
 
Net income (loss) attributable to RLH Corporation
$
0.02

 
$
(0.23
)
 
$
0.14

 
$
0.12

 
$
(0.87
)
Earnings (Loss) per share - diluted
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to RLH Corporation
$
0.01

 
$
(0.29
)
 
$
0.11

 
$
0.06

 
$
(0.76
)
 
Gain (loss) on sale or disposal of the assets of the discontinued operations, net of income tax
0.01

 
0.06

 
0.02

 
0.06

 
(0.11
)
 
Net income (loss) attributable to RLH Corporation
$
0.02

 
$
(0.23
)
 
$
0.13

 
$
0.12

 
$
(0.87
)
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
23,669

 
20,427

 
19,983

 
19,785

 
19,575

 
Diluted
24,253

 
20,427

 
20,200

 
19,891

 
19,575

(1)  On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations for all periods presented in this annual report on Form 10-K. See Item 8, Notes 17 and 18 for further information on this transaction.
(2) At September 30, 2016, we acquired substantially all of the assets of Vantage Hospitality Group, Inc., which included 10 hotel brands and over 1,000 franchise license agreements at the date of acquisition. See Item 8, Note 16 for further information on this transaction.
(3)  Represents noncontrolling interests in consolidated joint ventures. In 2015 we entered into four joint venture transactions. See Item 8, Note 4 for further information.


26



 
 
 
Years Ended December 31,
 
 
 
2017 (1)
 
2016 (1)(2)
 
2015 (1)
 
2014 (1)
 
2013 (1)
 
 
 
(In thousands, except per share data)
Consolidated Balance Sheet Data
 
 
 
 
 
 
 
Cash
 
$
32,429

 
$
38,072

 
$
23,898

 
$
5,126

 
$
13,058

 
Assets held for sale
 
34,359

 
5,585

 
5,256

 
27,334

 
25,105

 
Property and equipment, net
 
167,938

 
210,485

 
195,061

 
159,847

 
165,688

 
Total assets
 
330,350

 
344,535

 
287,218

 
221,310

 
232,850

 
Total debt, net of debt issuance costs
 
111,397

 
108,331

 
87,557

 
29,873

 
43,058

 
Debentures due Red Lion Hotels Capital Trust
 

 

 

 
29,108

 
29,049

 
Liabilities held for sale
 

 
12,020

 
11,171

 
7,303

 
5,836

 
Total liabilities
 
140,110

 
156,692

 
120,817

 
81,673

 
96,841

 
Total RLH Corporation stockholders' equity
 
162,859

 
155,336

 
132,792

 
139,637

 
136,009

 
Noncontrolling interest (3)
 
27,381

 
32,507

 
33,609

 

 

 
Total stockholders' equity
 
$
190,240

 
$
187,843

 
$
166,401

 
$
139,637

 
$
136,009

 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statement of Cash Flow Data (4)
 
 
 
 
 
 
 
Net cash provided by operating activities
 
$
14,516

 
$
5,562

 
$
14,084

 
$
10,958

 
$
9,504

 
Net cash provided by (used in) investing activities
 
(16,145
)
 
(30,688
)
 
(30,080
)
 
(5,600
)
 
6,441

 
Net cash provided by (used in) financing activities
 
(1,122
)
 
37,533

 
45,847

 
(13,065
)
 
(6,947
)
(1)  On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations for all periods presented in this annual report on Form 10-K. See Item 8, Notes 17 and 18 for further information on this transaction.
(2) At September 30, 2016, we acquired substantially all of the assets of Vantage Hospitality Group, Inc., which included 10 hotel brands and over 1,000 franchise license agreements at the date of acquisition. See Item 8, Note 16 for further information on this transaction.
(3)  Represents noncontrolling interests in consolidated joint ventures. In 2015 we entered into four joint venture transactions. See Item 8, Note 4 for further information.
(4) Cash flow data has been revised to reflect the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-18 for 2013-2015.

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) doing business as RLH Corporation and primarily engaged in the franchising, management and ownership of hotels under the following proprietary brands:

 
Active Brands
 
Supported Brands
 
International Brands
 
Ÿ Hotel RL
 
Ÿ America's Best Inn & Suites
 
Ÿ Value Inn Worldwide
 
Ÿ Red Lion Hotels
 
Ÿ Jameson Inns
 
Ÿ Value Hotel Worldwide
 
Ÿ Red Lion Inn & Suites
 
Ÿ Lexington Hotels & Inns
 
 
 
Ÿ GuestHouse
 
Ÿ 3 Palm Hotels
 
 
 
Ÿ Settle Inn
 
 
 
 
 
Ÿ Americas Best Value Inn
 
 
 
 
 
Ÿ Canadas Best Value Inn
 
 
 
 
 
Ÿ Signature and Signature Inn
 
 
 
 
 
Ÿ Country Hearth Inns & Suites
 
 
 
 

A summary of our properties as of December 31, 2017, including the approximate number of available rooms, is provided below:
 
 
Company Operated
 
Franchised
 
Total Systemwide
 
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
 
Hotels
 
Total Available Rooms
Beginning quantity, January 1, 2017
 
20

 
4,200

 
1,117

 
68,900

 
1,137

 
73,100

Newly opened properties
 
1

 
100

 
64

 
5,100

 
65

 
5,200

Terminated properties(1)
 

 

 
(120
)
 
(8,800
)
 
(120
)
 
(8,800
)
Total
 
21

 
4,300

 
1,061

 
65,200

 
1,082

 
69,500

 
 
 
 
 
 
 
 
 
 
 
 
 
Executed franchise license and management agreements, year ended December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
New franchise / management agreements
 
1

 
100

 
63

 
4,600

 
64

 
4,700

Renewals / changes of ownership
 

 

 
81

 
5,900

 
81

 
5,900

Total executed franchise license and management agreements, year ended December 31, 2017
 
1

 
100

 
144

 
10,500

 
145

 
10,600

(1) Terminated properties include locations at which we ended our franchise relationship because the hotels did not meet RLH Corporation's hotel standards. We are focused on maintaining a set of brand standards at all of our locations.

We operate in two reportable segments:

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 franchised hotels segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees that are that are based on a percentage of room revenue or room count 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.

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

28




Major Transactions During Reporting Periods Presented

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations and the assets and liabilities are classified as held for sale for all periods presented in this quarterly report on Form 10-Q. See Item 8, Notes 17 and 18 for discussion of Discontinued Operations and Assets and Liabilities Held for Sale associated with the transaction.

On October 5, 2017, we announced that we would be marketing for sale 11 of our owned hotels while working to retain franchise agreements on these assets. This is consistent with the Company’s previously stated business strategy to focus on moving towards operations as primarily a franchise company. Based on a preliminary review of the market, if all 11 hotels are sold we estimate the aggregate sale value currently between $160 and $175 million. We expect that the completion of these sales would allow the company to significantly reduce or eliminate long-term debt and to increase cash reserves for future franchise agreement growth initiatives. In February 2018, five of the RL Venture properties were sold for $47.2 million. All of the buyers entered into franchise license agreements to retain the Red Lion brand. Immediately following the sales of the five hotels, our consolidated subsidiary RL Venture, LLC repaid $38.2 million in principal balance outstanding under its loan agreement with Pacific Western Bank, as required by the terms of the agreement. See Item 8, Notes 18 and 20 for discussion of Assets Held for Sale and Subsequent Events.

In September 2016, 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 was a hotel franchise company, and the addition of the Vantage assets substantially increased our number of franchise properties and provided 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 RLH Corporation stock paid to TESI, which was valued at $5.8 million, based on the closing price of RLH Corporation 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 fair value of $10.9 million of primarily contingent consideration, the total of which will be paid to TESI at the first and second anniversaries of the close date, based on the attainment of certain performance criteria. In connection with our acquisition of Vantage, we settled the first portion of contingent consideration due in January 2018 in the amount of (i) $4.0 million cash and (ii) 414,000 shares of the Company's common stock. We may be required to pay additional consideration following September 2018 for the second and final portion of the Vantage contingent consideration in an aggregate amount of up to (i) $3.0 million in cash and (ii) 276,000 shares of the Company’s common stock.

In April 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.


29



Results of Operations

A summary of our consolidated statements of comprehensive income (loss) is provided below (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Total revenues
 
$
171,926

 
$
148,351

 
$
131,863

Total operating expenses
 
170,823

 
148,497

 
119,446

Operating income (loss)
 
1,103

 
(146
)
 
12,417

Other income (expense):
 
 
 
 
 
 
Interest expense
 
(8,252
)
 
(6,752
)
 
(6,979
)
Loss on early retirement of debt
 

 

 
(2,847
)
Other income (loss), net
 
818

 
326

 
779

Total other income (expense)
 
(7,434
)
 
(6,426
)
 
(9,047
)
Income (loss) from continuing operations before taxes
 
(6,331
)
 
(6,572
)
 
3,370

Income tax expense (benefit)
 
(4,662
)
 
(478
)
 
(193
)
Net income (loss) from continuing operations
 
(1,669
)
 
(6,094
)
 
3,563

Net income from discontinued operations
 
181

 
1,254

 
453

Net income (loss)
 
(1,488
)
 
(4,840
)
 
4,016

Net (income) loss attributable to noncontrolling interest
 
2,069

 
163

 
(1,297
)
Net income (loss) and comprehensive income (loss) attributable to RLH Corporation
 
$
581

 
$
(4,677
)
 
$
2,719

 
 
 
 
 
 
 
Non-GAAP data: (1)
 
 
 
 
 
 
 EBITDA
 
$
22,274

 
$
18,319

 
$
24,140

Adjusted EBITDA from continuing operations
 
$
22,374

 
$
17,230

 
$
11,477

Adjusted net income (loss)
 
$
(40
)
 
$
(5,139
)
 
$
(8,369
)
_________
 
 
 
 
 
 
(1)  See Item 7. Selected Financial Data for a reconciliation of non-GAAP measures to net income (loss) for the periods presented

For the year ended December 31, 2017, we reported net income attributable to RLH Corporation of $0.6 million or $0.02 per basic share, which includes (i) $1.5 million in acquisition and integration related costs, (ii) $0.1 million in employee separation and transition costs, (iii) $3.8 million of income tax benefit primarily due to changes from the H.R. 1 known as the 2017 Tax Cuts and Jobs Act (the 2017 Tax Act) and (iv) $1.5 million in net income from discontinued operations of our entertainment segment.

For the year ended December 31, 2016, we reported net loss attributable to RLH Corporation of $4.7 million or $0.23 per share, which includes (i) $2.1 million in acquisition and integration related costs, (ii) a $1.9 million gain on sale of assets, (iii) $0.6 million in employee separation costs, (iv) $0.1 million in costs for environmental cleanup at one of our hotel properties, and (v) $2.0 million in income from discontinued operations of our entertainment segment.

For the year ended December 31, 2015, we reported net income attributable to RLH Corporation 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, (iv) $2.3 million in amortized lease termination fees related to the amended lease for the Red Lion Hotel Vancouver at the Quay, (v) $0.8 million in acquisition and integration related costs, and (vi) $0.7 million in income from discontinued operations of our entertainment segment.

The above special items are excluded from operating results in Adjusted EBITDA. For the year ended December 31, 2017, Adjusted EBITDA was $22.4 million, compared to $17.2 million for the year ended December 31, 2016 and $11.5 million for the year ended December 31, 2015.


30



Non-GAAP Financial Measures

EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.

Adjusted EBITDA 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 our industry. We utilize these measures because management finds them a useful tool to calculate more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. 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, 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.

Comparable hotels are defined as properties that were operated by our company for at least two full calendar years as of the beginning of the current year other than hotels for which comparable results were not available. Comparable results excludes seven hotels: one hotel was converted from owned to managed in 2015, one hotel was converted from owned to franchised in 2015, one hotel was closed in 2015 and one hotel was sold in the fourth quarter of 2016. In addition, three properties, Hotel RL Baltimore, Hotel RL Washington DC, and Red Lion Hotel Atlanta International Airport are excluded as each opened during 2015 or 2016, therefore these properties had not been open at least two years as of the beginning of the current year. In addition, we exclude revenue earned and expenses incurred related to our hotel management agreements.

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.


31



The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Net income (loss)
$
(1,488
)
 
$
(4,840
)
 
$
4,016

 
Depreciation and amortization
18,824

 
16,095

 
13,060

 
Interest expense
8,252

 
6,752

 
6,979

 
Income tax expense (benefit)
(3,314
)
 
312

 
85

 EBITDA
22,274

 
18,319

 
24,140

 
Acquisition and integration costs (1)
1,529

 
2,112

 
779

 
Employee separation and transition costs (2)
100

 
627

 

 
Reserve for environmental cleanup (3)

 
128

 

 
Gain on asset dispositions (4)

 
(1,912
)
 
(17,808
)
 
Discontinued operations (5)
(1,529
)
 
(2,044
)
 
(731
)
 
Loss on early retirement of debt (6)

 

 
2,847

 
Lease termination costs (7)

 

 
2,250

Adjusted EBITDA from continuing operations
22,374

 
17,230

 
11,477

 
Net income from discontinued operations (5)
181

 
1,254

 
453

 
Depreciation and amortization of discontinued operations
64

 
186

 
255

 
Interest expense from discontinued operations

 
12

 

 
Gain on sale of business unit
(883
)
 

 

 
Income tax expense (benefit) from discontinued operations
1,348

 
790

 
278

 
Adjusted EBITDA from discontinued operations
710

 
2,242

 
986

Adjusted EBITDA from continuing & discontinued operations
23,084

 
19,472

 
12,463

 
Adjusted EBITDA attributable to noncontrolling interests
(6,863
)
 
(6,840
)
 
(6,040
)
Adjusted EBITDA attributable to RLH Corporation
$
16,221

 
$
12,632

 
$
6,423

 
 
 
 
 
 
 
 
(1)  During 2016 RLH Corporation acquired Vantage. For 2016 and 2017 net expenses of $1.5 million and $2.1 million represent costs associated with the acquisition and changes in the fair value of contingent consideration for 2016 and 2017. During 2015, we acquired a hotel in Washington, DC that was accounted for as a business combination. We recognized $0.8 million in transaction costs. All are included within Acquisition and integration costs on the Consolidated Statements of Comprehensive Income (Loss).
 
(2)  During 2016, RLH Corporation recognized $0.6 million of separation costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. The $0.1 million costs recognized during 2017 consisted of legal and consulting services associated with the CFO transition. These costs are included within General and administrative expenses on the Consolidated Statements of Comprehensive Income (Loss).
 
(3)  In the first quarter of 2016, a reserve was recorded for environmental cleanup at one of our hotel properties.
 
(4)  During 2016, RLH Corporation recognized 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 recognized $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. All are included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss).
 
(5)  On October 3, 2017, the Company completed the sale of its entertainment business. Based on this sale, the results of operations of the entertainment business are reported as discontinued operations for all periods presented.
 
(6)  In 2015, we recognized $2.8 million in loss on the early retirement of our corporate debt and the debentures associated with our Trust Preferred Securities.
 
(7)  In 2015, we recognized an additional $2.2 million related to an amended lease for the Red Lion Hotel Vancouver at the Quay.



32



The following is a reconciliation of adjusted net income (loss) to net income (loss) for the periods presented:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands, except per share data)
Net income (loss)
$
(1,488
)
 
$
(4,840
)
 
$
4,016

 
Acquisition and integration costs (1)
1,529

 
2,112

 
779

 
Employee separation and transition costs (2)
100

 
627

 

 
Reserve for environmental cleanup (3)

 
128

 

 
Gain on asset dispositions (4)

 
(1,912
)
 
(17,808
)
 
Net income from discontinued operations (5)
(181
)
 
(1,254
)
 
(453
)
 
Loss on early retirement of debt (6)

 

 
2,847

 
Lease termination costs (7)

 

 
2,250

Adjusted net income (loss)
$
(40
)
 
$
(5,139
)
 
$
(8,369
)
 
 
 
 
 
 
 
 
(1)  During 2016 RLH Corporation acquired Vantage. For 2016 and 2017 net expenses of $1.5 million and $2.1 million represent costs associated with the acquisition and changes in the fair value of contingent consideration for 2016 and 2017. During 2015, we acquired a hotel in Washington, DC that was accounted for as a business combination. We recognized $0.8 million in transaction costs. All are included within Acquisition and integration costs on the Consolidated Statements of Comprehensive Income (Loss).
 
(2)  During 2016, RLH Corporation recognized $0.6 million of separation costs of a former Executive Vice President and Chief Financial Officer and other legal and consulting services associated with the CFO transition. The $0.1 million costs recognized during 2017 consisted of legal and consulting services associated with the CFO transition. These costs are included within General and administrative expenses on the Consolidated Statements of Comprehensive Income (Loss).
 
(3)  In the first quarter of 2016, a reserve was recorded for environmental cleanup at one of our hotel properties.
 
(4)  During 2016, RLH Corporation recognized 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 recognized $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. All are included within Gain on asset dispositions, net on the Consolidated Statements of Comprehensive Income (Loss).
 
(5)  On October 3, 2017, the Company completed the sale of its entertainment business. Based on this sale, the results of operations of the entertainment business are reported as discontinued operations for all periods presented.
 
(6)  In 2015, we recognized $2.8 million in loss on the early retirement of our corporate debt and the debentures associated with our Trust Preferred Securities.
 
(7)  In 2015, we recognized an additional $2.2 million related to an amended lease for the Red Lion Hotel Vancouver at the Quay.


33



The following is a reconciliation of comparable company operated hotel revenue, expenses and operating profit (in thousands):

 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Company operated hotel revenue
 
$
119,186

 
$
117,641

 
$
116,187

less: revenue from sold and closed hotels
 

 
(2,822
)
 
(8,999
)
less: revenue from hotels without comparable results
 
(13,955
)
 
(11,434
)
 
(2,394
)
less: revenue from managed properties
 
(991
)
 
(1,393
)
 
(1,047
)
Comparable company operated hotel revenue
 
$
104,240

 
$
101,992

 
$
103,747

 
 
 
 
 
 
 
Company operated hotel operating expenses
 
$
91,622

 
$
91,572

 
$
92,057

less: operating expenses from sold and closed hotels
 

 
(2,021
)
 
(7,522
)
less: operating expenses from hotels without comparable results
 
(11,930
)
 
(10,869
)
 
(3,507
)
less: operating expenses from managed properties
 
(671
)
 
(1,056
)
 
(278
)
Comparable company operated hotel operating expenses
 
$
79,021

 
$
77,626

 
$
80,750

 
 
 
 
 
 
 
Company operated hotel direct operating profit
 
$
27,564

 
$
26,069

 
$
24,130

less: operating profit from sold and closed hotels
 

 
(801
)
 
(1,477
)
less: operating profit from hotels without comparable results
 
(2,025
)
 
(565
)
 
1,113

less: operating profit from managed properties
 
(320
)
 
(337
)
 
(769
)
Comparable company operated hotel direct profit
 
$
25,219

 
$
24,366

 
$
22,997

Comparable company operated hotel direct margin %
 
24.2
%
 
23.9
%
 
22.2
%

Revenues

Our revenues from continuing operations were as follows (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Company operated hotels
 
$
119,186

 
$
117,641

 
$
116,187

Other revenues from managed properties
 
3,914

 
5,948

 
3,586

Franchised hotels
 
48,559

 
24,634

 
12,039

Other
 
267

 
128

 
51

Total revenue
 
$
171,926

 
$
148,351

 
$
131,863


Total revenue for 2017 increased by $23.6 million or 16%, compared with 2016. The increase was driven by $23.9 million in revenue growth from our franchise business and an increase of $1.5 million from our company operated hotels. Franchise revenue growth reflects a full year of revenue from the Vantage properties in 2017. Revenues from our hotels segment decreased by $0.5 million primarily due to the closure of one managed property in the fourth quarter of 2016, partially offset by the addition of one management property in the second quarter of 2016 and one in the fourth quarter of 2017.

Total revenue for 2016 increased by $16.5 million or 13%, compared with 2015. The increase was driven by $12.6 million in revenue growth from our franchise business 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. 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.
 

34



2017 and 2016

During 2017, revenue from the company operated hotel segment increased $1.5 million or 1% from 2016. The increase was driven by new company operated locations that were opened in the second quarter of 2016 and the fourth quarter of 2017, partially offset by two hotel properties sold or closed in the fourth quarter of 2016. During the second quarter of 2016, we opened our Atlanta location and began managing the Hudson Valley location. During the fourth quarter of 2017, we began managing the Deschutes River property. During the fourth quarter of 2016, we sold the Coos Bay property and closed the managed Woodlake property. On a comparable basis, excluding the results of the sold and closed properties and the hotels for which comparable results were not available as well as managed properties, revenue from the company operated hotel segment increased $2.2 million or 2% in 2017 compared to 2016.

Revenue from our franchised hotels segment increased $23.9 million to $48.6 million in 2017 compared to 2016. The revenue growth reflects a full year of revenue from the Vantage properties in 2017. In addition, the comparable RevPAR for franchised midscale hotels increased 2.8% when comparing 2017 with 2016. These increases were partially offset by a decrease in room counts in the economy franchise segment from 2016 to 2017.

2016 and 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 to $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.

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, general and administrative expenses and acquisition and integration costs.

Our operating expenses from continuing operations were as follows (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Company operated hotels
 
$
91,622

 
$
91,572

 
$
92,057

Other costs from managed properties
 
3,914

 
5,948

 
3,586

Franchised hotels
 
34,794

 
19,315

 
11,233

Other
 
(9
)
 
42

 
35

Depreciation and amortization
 
18,824

 
16,095

 
13,060

Hotel facility and land lease
 
4,806

 
4,740

 
6,569

Gain on asset dispositions, net
 
(449
)
 
(2,436
)
 
(17,692
)
General and administrative expenses
 
15,792

 
11,109

 
9,819

Acquisition and integration costs
 
1,529

 
2,112

 
779

Total operating expenses
 
$
170,823

 
$
148,497

 
$
119,446


35




Comparable Hotel Expense (Non-GAAP Data)

Our comparable hotel expenses were as follows (in thousands):
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
Company operated hotel operating expenses
 
$
91,622

 
$
91,572

 
$
92,057

less: operating expenses from sold and closed hotels
 

 
(2,021
)
 
(7,522
)
less: operating expenses from hotels without comparable results
 
(11,930
)
 
(10,869
)
 
(3,507
)
less: operating expenses from managed properties
 
(671
)
 
(1,056
)
 
(278
)
Comparable company operated hotel operating expenses
 
$
79,021

 
$
77,626

 
$
80,750


Comparable hotels are defined as properties that were operated by our company for at least two full calendar years as of the beginning of the current year other than hotels for which comparable results were not available. Comparable results excludes seven hotels: one hotel was converted from owned to managed in 2015, one hotel was converted from owned to franchised in 2015, one hotel was closed in 2015 and one hotel was sold in the fourth quarter of 2016. In addition, three properties, Hotel RL Baltimore, Hotel RL Washington DC, and Red Lion Hotel Atlanta International Airport are excluded as each opened during 2015 or 2016, therefore these properties had not been open at least two years as of the beginning of the current year. In addition, we exclude revenue earned and expenses incurred related to our hotel management agreements.

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results as these measures influence and affect hotel financial results. 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.

2017 and 2016

Direct company operated hotel expenses were flat at $91.6 million in 2017 and 2016. On a comparable basis, direct company operated hotel expenses were $79.0 million in 2017 compared to $77.6 million in 2016. The increase was driven primarily by the increase in comparable hotel revenues.

Direct expenses for the franchise segment in 2017 increased by $15.5 million compared to 2016, primarily driven by the addition of Vantage operations for the full year in 2017, as well as increased marketing costs primarily due to the growth in the franchise portfolio of hotels.

Depreciation and amortization expenses increased $2.7 million in 2017 compared to 2016, primarily driven by the addition of new capital expenditures associated with our 2016 renovations, new hotel properties and the addition of the definite-lived intangibles from the Vantage acquisition.

Hotel facility and land lease were flat at $4.8 million and $4.7 million in 2017 and 2016, respectively.

During 2016, we recognized 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.

General and administrative expenses increased by $4.7 million in 2017 compared to 2016, primarily due to the addition of costs from the Vantage acquisition and higher variable compensation expense in conjunction with our financial performance in 2017.

2016 and 2015

Direct hotel expenses as reported were $91.6 million in 2016 compared to $92.1 million in 2015. The primary reason for the decrease is lower average occupancy. On a comparable basis, direct company operated hotel expenses were $77.6 million in 2016 compared to $80.8 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 by the addition of Vantage operations, as well as increased marketing costs primarily due to the growth in the franchise portfolio of hotels.


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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 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.

During 2016, we recognized 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 recognized $16.4 million in gains on the sales of the Bellevue and Wenatchee properties; we also recognized a $1.3 million gain on sale of RLH Corporation's portion of the RLH building, an 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.

Interest Expense

Interest expense increased $1.5 million in 2017 compared with 2016. The increase is primarily due to the higher principal amount of debt outstanding during 2017, as the result of draws to complete the hotel renovations. 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. The average outstanding debt balances for 2017, 2016 and 2015 were $111.6 million, $100.7 million, and $76.1 million, respectively.

Loss on Early Retirement of Debt

In 2015, we recognized 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.

Other Income (Expense), net

Other income (expense), net increased $0.5 million in 2017 compared with 2016, due to litigation settlements for hotel equipment and an antitrust settlement. Other income (expense), net decreased $0.5 million in 2016 compared with 2015, due to a class action settlement received in 2015.

Income Taxes

We reported an income tax benefit on continuing operations of $4.7 million in 2017. We reported income tax expense on continuing operations of $0.5 million and $0.2 million in 2016 and 2015, respectively. We reported income tax expense on discontinued operations of $1.3 million, $0.8 million and $0.3 million in 2017, 2016 and 2015, respectively. The income tax provision varies from the statutory rate primarily due to a valuation allowance against our net deferred tax assets. Due to changes in the tax laws associated with the enactment of the 2017 Tax Cuts and Jobs Act, RLH Corporation has determined that a full valuation allowance is no longer required. See Item 8, Note 13 for additional discussion of the impact of the 2017 Tax Cuts and Jobs Act.

Discontinued Operations

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale as of December 31, 2016 in this annual report on Form 10-K. See Item 8, Notes 17 and 18 for discussion of Discontinued Operations and Assets and Liabilities Held for Sale associated with the transaction.

Assets Held for Sale

On October 5, 2017, RLH Corporation announced the marketing for sale of 11 hotel properties. As of that date, RLH operated 20 hotels, with an additional managed property added during October for a total of 21 hotels in its company operated hotels operating segment. The 11 properties are within the RL Venture LLC joint venture. These 11 properties are being marketed for sale to see if they have been stabilized following the renovations and if the current market conditions are favorable for sale.


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Based on RLH Corporation and RL Venture LLC joint venture approval of non-binding letters of intent (LOIs) or approval to negotiate LOIs under proposed terms, we classified the following six properties as held for sale at December 31, 2017 include:
1.
Red Lion Inn & Suites Bend, Oregon
2.
Red Lion Hotel Richland Hanford House, Washington
3.
Red Lion Hotel Redding, California
4.
Red Lion Hotel Eureka, California
5.
Red Lion Hotel Boise Downtowner, Idaho
6.
Red Lion Templin’s Hotel on the River, Post Falls, Idaho

The results of operations of these six properties at December 31, 2017 are not considered to be discontinued operations as the prospective sales are not considered a strategic shift due to the significance of the remaining hotel operations. See Item 8, Notes 18 and 20 for discussion of Assets Held for Sale and the sales and associated debt repayments subsequent to December 31, 2017.

On October 3, 2017, we completed the sale of certain specified liabilities and substantially all of the assets of our entertainment segment, previously composed of WestCoast Entertainment and TicketsWest, including ticketing agreements and engagement agreements with various entertainment venues, teams and artists located throughout the Western United States. As such, the results of the entertainment segment are reported as discontinued operations, and the assets and liabilities are classified as held for sale as of December 31, 2016 in this annual report on Form 10-K. See Item 8, Notes 17 and 18 for discussion of Discontinued Operations and Assets and Liabilities Held for Sale associated with the transaction.

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 $12.4 million and $33.0 million at December 31, 2017 and 2016. We believe that we have sufficient liquidity to fund our operations at least through March 2019.

We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business.

We are committed to 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 and 2017.

In January 2015, RL Venture Holding LLC, a wholly-owned subsidiary of RL Venture LLC, and each of its 12 wholly-owned subsidiaries entered into a loan agreement with Pacific Western Bank, which is secured by the hotels owned by RL Venture. Subsequently we disposed of one hotel, leaving 11 properties owned by RL Venture. We own 55% of RL Venture and our partner owns 45% of RL Venture at December 31, 2017. The original principal amount of the loan was $53.8 million with an additional $26.2 million to be drawn over a two-year period to cover improvements related to the original 12 hotels owned by the subsidiaries. We drew $3.3 million during the