NEW YORK, May 14, 2019 /PRNewswire/ -- Vindico Capital LLC announced that it has sent the following letter to the Board of Directors of Red Lion Hotels Corporation, outlining Vindico's intention to vote at its upcoming 2019 Annual Meeting on May 21, 2019 AGAINST four of the company's legacy directors (Robert Wolfe, Michael Vernon, James Evans, and Bonny Simi) and FOR the election of new nominee R. Carter Pate in Proposal 1.
Vindico also intends to vote AGAINST both Proposals 2 and 4 regarding executive compensation until a refreshed Board can implement a better plan in the context of a broader capital allocation strategy that best incentivizes management to maximize shareholder value.
Here is the full text of the letter, submitted by Vindico managing partner Scott R. Grossman:
May 14, 2019
c/o Board of Directors
1550 Market Street, Suite 350
Denver, CO 80202
Dear Board of Directors:
As you know, Vindico Capital LLC ("Vindico", or "We") is the advisor to entities that own approximately 2% of Red Lion Hotels Corporation ("RLH"). Vindico—which means to support, champion, or defend—invests alongside management driving significant transformations, and frequently collaborates with companies to advocate and catalyze change. We take great pride in being a value-add partner, and believe our proactive efforts to help RLH last June is indicative of our partnership approach.
Importantly, this is Vindico's first letter that we decided to release publicly as we prefer to work constructively in private. I tell you this simply to emphasize the gravity of the current situation, and our strong belief that we should be heard for the benefit of all shareholders that likely share our frustration. To help accelerate imperative change, Vindico will be voting at its upcoming Annual Meeting AGAINST four legacy Directors—Robert Wolfe, Michael Vernon, James Evans, and Bonny Simi—and FOR the new nominee R. Carter Pate in Proposal 1. In addition, we will be voting AGAINST Proposals 2 and 4 regarding compensation. Management should be fairly compensated, but we believe a refreshed Board can implement a better plan in the context of a broader capital allocation strategy that best incentivizes management to maximize shareholder value.
To be short, we have waited patiently for decisive action by the Board to fulfill its obligation to act in the best interest of shareholders—and we have concluded it as currently constructed is incapable to do so. While the recent proposal to add a new seasoned executive is clearly a step forward, these Directors have overseen as chairmen of their committees a persistent share price underperformance over the past 3+ years relative to peers and the market. As you know, RLH shares are flat over 3 years, which is hard to fathom in one of the strongest markets in generations. Again in 2019, RLH has materially underperformed; the median of its hotel peers is up ~15% YTD vs. RLH -12% and we believe its core franchising business is now valued at a significant (40%+) discount to peers. Plus, RLH's trading volume is down ~30% year-over-year which in our experience reflects a "buyer's strike."1 This is despite continued momentum in its core franchising business where royalties have increased 2.6x since 2016, EBITDA has increased 5.3x, and margins inflected by ~2000 basis points.2 The Board must recognize investors have clearly lost confidence in you, and it's simply time for change.
We vehemently believe the i) resignation of your prior CFO; ii) a surprising "step-function" increase in corporate G&A; and iii) a potential pause in monetizing RLH owned properties—all effectively catalyzed in Q4 2018—set in motion a litany of missteps which have significantly damaged credibility. Moreover, this Board has overseen management literally fail on multiple occasions to restore it. Shockingly, we believe many to all of these missteps were in your control.
We believe the Board has consistently demonstrated it lacks the engagement and expertise to oversee RLH's transformation. Of course we appreciate the M&A strategy, but doing so in a vacuum is assuredly the wrong approach and we think it demonstrates how ineffective the Board is at capital allocation and shareholder value creation. Additionally, RLH needs to objectively assess if it has the right cost structure without additional deals, and if it has the expertise to acquire assets. We also believe the Board should evaluate other strategies after finally monetizing legacy assets that have burdened RLH for years. Despite the Board's and management's continued confidence in RLH's performance, it is quite telling that no one has tried to restore investor confidence by personally buying stock or putting in place a modest buyback despite our feedback. We firmly believe the Board's lack of "skin in the game" has led to inaction, which we've seen so many times before. No one on the Board (or management for that matter) has bought shares over the past 5+ years with one exception, which is unacceptable for a company that has woefully underperformed.
To be clear, we are confident this situation can be fixed. When the Board is reconstructed, RLH should focus on 4 key areas: First, RLH needs to fully commit to monetize its remaining properties immediately. Second, RLH needs to highly scrutinize the 2x increase in corporate G&A over the past 2 years. This defies logic given the current size of our franchise business, and we can show empirically how RLH's cost structure compares to peers, and at a similar point in their development. We are highly supportive of investing for growth, but without isolating normalized vs. growth G&A we can't keep management accountable and assess if this is the best use of capital. Third, RLH needs to formulate a rigorous capital allocation plan and immediately install a buyback program. And fourth, all M&A above a certain size needs to be halted. RLH has not earned the right to make a large acquisition when it seems increasingly likely you haven't optimized what you currently own.
We are available to discuss these concerns at your convenience. But in the meantime, they constitute the reasons on how we will be voting on the proposals indicated.
Scott R. Grossman
Managing Partner, Vindico Capital LLC
Vindico Capital LLC ("Vindico") is not engaged in a proxy solicitation, is not and does not intend to solicit proxies relating to RLH Corporation ("RLH") special meeting and does not have, and is not seeking, the authority to vote your proxy at either meeting. No agreement, commitment, understanding or other legal relationship exists or may be deemed to exist between or among Vindico or any other person by virtue of Vindico issuing this letter.
This material set forth in this letter is solely intended to announce our voting decisions and rationale for general informational purposes only and is not intended to be relied upon as investment advice. The views and opinions expressed are those of Vindico as of the date hereof and are subject to change at any time due to changes in market or economic conditions. Vindico makes no undertaking (and is under no obligation) to update any such views or opinions.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements. All statements that are not clearly historical in nature or that necessarily depend on future events are forward-looking, and the words "anticipate," "believe," "expect," "estimate," "plan," and similar expressions are generally intended to identify forward-looking statements. These statements are based on current expectations of Vindico currently available information. They are not guarantees of future performance, involve certain risks and uncertainties that are difficult to predict, and are based upon assumptions as to future events that may not prove to be accurate. Accordingly, readers should not place undue reliance on forward looking information. Vindico does not assume any obligation to update any forward-looking statements contained in this press release, except as required by applicable law.
1 Hotel peers include Choice Hotels, Wyndham Hotels & Resorts, Hyatt, Hilton, Marriott, IHG. Price changes and YTD trading volume vs. FY 2018 comparisons compiled per Sentieo as of May 13, 2019. Valuation analysis as per Vindico.
2 As per RLH public filings and Vindico analyses.
SOURCE Vindico Capital LLC