Royal Host Inc. Announces Fourth Quarter and Annual Results

HALIFAX, March 18, 2014 /CNW/ - Royal Host Inc. ("Royal Host" or the "Company") today announced results for the three months (the "Fourth Quarter") and year ended December 31, 2013.

OVERVIEW OF 2013 AND OUTLOOK FOR 2014
(All dollar amounts are shown in thousands of Canadian dollars unless otherwise indicated)

Two thousand thirteen was a year of transition for the Company. For the last few years, the Company has not generated meaningful cash flow (excluding hotel sales) when considering capital reinvested in the hotel properties and has sold a number of hotel properties with the proceeds used to improve the Company's cash flow profile and to reduce debt.  This strategy has helped deal with some of the Company's challenges, but it cannot be a long-term solution if a company has fundamental issues going unaddressed. Royal Host had such fundamental issues; its cost structure was too high, it had not made changes to its employment practices and operational processes, it was paying too much in interest expense and it wasn't investing sufficient sums in its core properties. These are all issues that can be fixed and the Company has started to do exactly that with results that are only starting to appear in the financial statements. The following are select examples of how the Company is changing its culture and fixing the operational issues that have existed for too long:

• Replaced several members of its executive team, bringing in a new Vice President of Operations, a new General Counsel and creating the position of Vice President of Development;
  
  
• Internalized the management and accounting of its ten select service hotels. The Company has added basic hotel management functions such as revenue management, which the former manager did not provide;
  
  
• Successfully negotiated new collective bargaining agreements with two of the Company's unions, achieving important concessions that allow the Company to align its cost structure with the competitive environment in which the Company operates;
• Extended the maturity of two series of convertible debentures for five additional years and at reasonable interest rates, allowing the Company to continue improving its business rather than constantly focusing on financing matters;
• Reduced the Company's cost structure at both the hotel and corporate levels. Every cost and every operating practice is being challenged so that the Company is operating in the most efficient and profitable way. In that regard, the Company has implemented a number of initiatives that the Company estimates will reduce hotel-level costs by more than $2 million annually and the reduction of corporate-level expenses can already be seen in the Company's financial results;
  
  
• Expanded the franchise sales team at the Company's Travelodge® franchising business with a view to growing the Travelodge® brand in Eastern Canada beyond the six properties currently located in Quebec and Atlantic Canada.
• Repurchased $8.6 million principal amount of convertible debentures at a discount resulting in a gain of $0.6 million.
  

• Sold four select service hotel properties for gross proceeds of $11.5 million yielding a pre-tax gain on disposition of properties of $2.7 million.

The results of the changes described above are starting to be seen in the Company's financial results. In 2013, the Company's revenue declined compared to the prior year primarily due to the sale of six hotels since March 2012 which contributed $4.7 million more hotel revenue in 2012.  Also contributing to the decline was a 3.8% drop in Comparable Hotel¹ revenue attributable to both the full service and select service portfolios primarily due to lower food and beverage revenue at the full service properties.  Despite the decline in revenue, the Company realized improved margins, an improved net loss and, most importantly, improved cash flow. Particular operating highlights include a 1.6 percentage point increase in gross margin percentage from 19.6% to 21.2% year over year, an 8.5% decrease in interest costs and a 26.7% decrease in corporate administration costs.

In previous reports, the Company indicated that its main focus in 2013 was to create a corporate and operational structure that is sustainably cash flow positive. The Company has made good progress on this goal during the year from a cost perspective and it will continue to focus on improving our cost structure in 2014. In addition, the Company will focus on generating additional revenue throughout the portfolio, particularly with the addition of new revenue management personnel. As the Company's cost structure continues to decline, each dollar of revenue that is generated results in greater profit and cash flow.

With the addition of the Vice President of Development, the Company intends to focus considerable efforts on upgrading certain of its hotels as well as redeveloping certain properties for other uses. One of the Company's full service properties in Ontario will be upgraded, including improvements to guestrooms, common areas, food and beverage operations and potentially the inclusion of an internationally recognized food and beverage outlet. The Company will also start investigating redevelopment possibilities for its Ottawa, Ontario hotels, which sit on sites of 6.5 acres and 4.7 acres each, and for the parking facility that currently services the London, Ontario hotel and which can accommodate a large downtown tower development. The Company can't promise anything on the development, but management is confident that these properties can be redeveloped over time with significant financial benefits to the Company and its shareholders.

In February 2014, the Company sold two select service hotels. These properties generated negative cash flow and the proceeds from the sales were used to further reduce its debt. The Company does not anticipate any additional hotel sales in 2014. The Company intends to further reduce its debt and repurchase its debentures opportunistically.

In February 2014, the Company made the decision to internalize hotel management and accounting at its nine full service properties, effective May 31, 2014. With its new management team in place, the Company believes it can drive better results at its full service hotels and do so at a lower cost than under the current management agreement. Once this internalization occurs, the Company will be internally managing all of its properties and the Company is very excited by that prospect.

SELECTED FINANCIAL INFORMATION - ANNUAL

The following table provides key financial information for the years ended December 31, 2013, 2012 and 2011:

($000's, except as otherwise noted)		Year ended December 31
		2013	2012	2011
Hospitality Revenue		69,853	76,214	88,867
Hospitality Expenses excluding Depreciation^(1)		55,070	61,313	70,623
Gross Margin ^(1) (2)		14,783	14,901	18,244
Gross Margin % ^(2)		21.2%	19.6%	20.5%
Other Income (Expense)
	Investment Income	579	681	4,542
	Finance Costs	(9,715)	(10,620)	(13,637)
	Impairment of Property and Equipment	(603)	(2,356)	(2,748)
	Gain on Sale of Property and Equipment ^(1)	2,740	42	6,327
	Depreciation and Amortization	(8,204)	(8,934)	(13,060)
	Corporate Administration	(2,369)	(3,230)	(3,533)
	Insurance Proceeds, Net of Remediation Costs	94	1,373	725
	Income Tax Recovery (Expense)	1,231	(121)	3,111
Net Loss ^(1)		(1,464)	(8,264)	(29)
Total Assets		133,335	150,568	160,074
Total Non-current Financial Liabilities		118,690	143,283	148,339
Basic and Diluted Loss per Share ($)		(0.09)	(0.47)	0.00
FFO ^(2)		4,603	3,178	7,625
Basic FFO per Share  ($)		0.28	0.18	0.43
AFFO ^(2)		1,896	211	4,141
Basic AFFO per Share ($)		0.12	0.01	0.24
Number of Shares Outstanding  (000's)		16,380	17,551	17,582
Weighted Average Shares Outstanding  (000's)		16,697	17,584	17,538

As at March 17, 2014, the Company had 16,379,675 shares outstanding.
⁽¹⁾ Hospitality expenses, gain on sale of property and equipment, gross margin and net loss have been adjusted throughout this MD&A from those previously reported in 2012 as the result of a change in accounting policy with respect to inventory.  For further details see section titled "Changes in Accounting Policies and Critical Accounting Estimates".
⁽²⁾ Items represent non-GAAP financial measures.

SELECTED FINANCIAL INFORMATION - FOURTH QUARTER

Selected Fourth Quarter Data ($000's, except as otherwise noted)		Three months ended December 31
		2013	2012	Change
Hospitality Revenue		16,658	18,501	(1,843)
Hospitality Expenses excluding Depreciation ^(1)		13,153	14,785	1,632
Hospitality Gross Margin ^(1) (2)		3,505	3,716	(211)
Hospitality Gross Margin % ^(2)		21.0%	20.1%	0.9%
Other Income (Expense)
	Investment Income	232	3	229
	Finance Costs	(2,300)	(2,475)	175
	Gain (Loss) on Sale of Property and Equipment ^(1)	3	(6)	9
	Depreciation and Amortization	(1,963)	(2,232)	269
	Impairment of Property and Equipment	(438)	(453)	15
	Corporate Administration	(707)	(750)	43
	Insurance Proceeds, Net of Remediation Costs	1	(129)	130
	Income Tax Recovery (Expense)	1,231	(1,794)	3,025
Net Loss		(436)	(4,120)	3,684
Basic Loss Per Share		(0.03)	(0.23)	0.20
Diluted Loss Per Share		(0.03)	(0.23)	0.20

⁽¹⁾ Hospitality expenses, gain on sale of property and equipment, gross margin and net loss have been adjusted throughout this MD&A from those previously reported in 2012 as the result of a change in accounting policy with respect to inventory.  For further details see section titled "Changes in Accounting Policies and Critical Accounting Estimates".
⁽²⁾ Items represent non-GAAP financial measures.

ROYAL HOST INC.
Royal Host is a diversified hospitality company. Royal Host currently owns 17 hotels with 2,382 rooms across Canada. Royal Host also owns and operates the Travelodge Canada franchise business which is currently comprised of over 90 hotels across Canada. Royal Host's common shares and convertible debentures are traded on the Toronto Stock Exchange under the trading symbols "RYL", "RYL.DB.B", "RYL.DB.C" and "RYL.DB.D" respectively.

This press release may contain certain forward-looking statements relating, but not limited to, Royal Host's operations, anticipated financial performance, business prospects, and strategies. Forward-looking information typically contains statements with words such as "anticipate", "does not anticipate", "believe", "estimate", "forecast", "intend", "expect", "does not expect", "could", "may", "would", "will", "should", "budgeted", "plan" or other similar terms and expressions suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by such forward-looking statements. Readers are therefore cautioned that Royal Host's expectations, estimates and assumptions, although considered reasonable, may prove to be incorrect and readers should not place undue reliance on forward-looking statements.

Forward-looking statements contained herein are not guarantees of future performance and involve certain risks, uncertainties, and other factors that are difficult to predict, and could result in the outcome of such events being materially different from those intended, planned, anticipated, believed, estimated, or expected in this news release. Such factors and assumptions include, but are not limited to, general economic conditions, levels of travel in Royal Host's key market areas, political conditions and events, competitive pressures, changes in government policy or regulations, and lodging industry conditions. Royal Host does not undertake any obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances, unanticipated events or circumstances, or should its estimates or assumptions change, after the date hereof, except as expressly required by law.

This press release contains registered trademarks that are the exclusive property of their respective owners. None of the owners of these trademarks has any responsibility or liability for any information contained in this press release.

____________________________
¹ Comparable Hotels are hotels which were owned by the Company for the entire current period as well as the comparable period from the prior year whose operations and available rooms are materially consistent for both periods. The hotels sold by the Company in 2012 and 2013 are not included in Comparable Hotel information throughout this MD&A (both financial information and operational Key Performance Indicators).  Additionally, the Company's select service hotel in Thunder Bay, Ontario which suffered a fire in October 2011 and a flood in May 2012 and had the majority of its rooms out of service from October 2011 through 2012 has been excluded from Comparable Hotels.

 

SOURCE: Royal Host Inc.

Michael McFeters
Chief Financial Officer
902.470.4515