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Red Lion Hotels Corporation reported third-quarter 2012 earnings from continuing operations of 2 cents per share, missing the Zacks Consensus Estimate of 6 cents. However, this was ahead of the approximately breakeven result in the year ago quarter.

Total revenue came in at $45.4 million, ahead of the Zacks Consensus Estimate of $44.0 million and year-ago revenue of $44.5 million. The increase was attributable to a 1.6% increase in hotel revenue and 27.7% surge in franchise revenues, partially offset by 25.4% dip in other revenues and 2.9% decline in entertainment revenue.

Quarter Highlights

Comparable hotel revenue increased 3.6% year over year to $42.0 million. Revenue per Available Room (RevPAR) for comparable owned and leased hotel increased 4.6% year over year to $65.99, while RevPAR for franchised hotels upped 3.1% to $72.64.

Occupancy in owned and leased hotels increased 270 basis points (bps) to 74.6%, but decreased 110 bps to 76.7% in franchised hotels. Average daily rate (ADR) increased 0.9% to $88.49 for owned and leased hotels and 4.6% to $94.76 for franchised hotels.

The company reported operating income of $2.7 million, which increased substantially from the year-ago income of $1.8 million.

Hotel Update

The company is focused on a long-term strategy of expanding its franchise network. In connection with this, the company signed three new franchise agreements for three hotels - Red Lion Hotel Woodlake Conference Center Sacramento, Red Lion Inn & Suites Cathedral City and Red Lion Inn & Suites Denver Airport.

In the reported quarter, Red Lion sold two previously owned hotels ??? Red Lion Colonial Hotel in Helena, Montana and Red Lion Hotel Denver Southeast ??? for $5.6 million and 13.0 million respectively to the franchise. Along with these, the company also sold California-based Red Lion Hotel Sacramento at Arden Village hotel for $9.0 million in the quarter.

As of September 30, 2012, Red Lion’s system wide portfolio consisted of 47 hotels, comprising 8,872 rooms and around 443,587 square feet of meeting space.

Liquidity

Red Lion ended the third quarter with cash and cash equivalents of $14.1 million and total outstanding debt of $89.3 million. It had $10.0 million available under revolving credit facility.

2012 Outlook

The company increased its RevPAR for owned and leased hotels guidance and now expects it to increase in the range of 3% - 5%, up from the previous range of 2% - 4%. Red Lion affirmed its investment for capital improvement expense guidance and continues to expect it be around $10.0 million.

Our Viewpoint

We remain bullish on the stock, given the company’s significant portfolio restructuring activity, expansions in core markets as well as system wide RevPAR and occupancy growth. Based on these positives, we expect analysts to increase their estimates in the coming days. Currently the Zacks Consensus Estimate for 2012 and 2013 is pegged at loss of 27 cents and loss of 15 cents, respectively.

Red Lion competes with the likes of Starwood Hotels & Resorts Worldwide Inc. (HOT - Analyst Report), which reported its third quarter 2012 adjusted earnings of 58 cents per share, surpassing the Zacks Consensus Estimate by 5 cents.

Red Lion currently carries a Zacks #3 Rank, implying a short-term Hold rating. We also reiterate our long-term Neutral recommendation on the stock.

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