In the midst of a transition that involves selling hotels, paying off debt, and a subtle rebranding, Red Lion Hotels Corp. expects franchising to emerge as a primary vehicle for its growth.

The Spokane-based hotelier has announced hotel sales in each of the last three months, and company President and CEO Jon Eliassen says additional transactions likely will be announced in coming weeks. In the process, Red Lion is converting some buyers of its properties into franchisees, and by the end of the year, it expects to have as many franchise hotels in its network as it has corporation-owned properties.

"We're getting it pared down so the core hotels we own are in markets we want to invest in," Eliassen says.

Red Lion currently has a total of 50 hotels in nine western U.S. states and British Columbia. Those include 30 that are corporate owned, 16 owned by franchisees, and three that are in the process of becoming franchisee owned. By the end of the year, Eliassen says, the company expects to own 24 or 25 hotels and to have about the same number of franchised hotels.

The company, which has been under well-publicized scrutiny from select investors in recent months, recently suspended what it called a review of strategic alternatives, through which it enlisted BofA Merrill Lynch to help it identify potential buyers, merger opportunities, or other alternatives that would increase the company's value. Seventy-five potential suitors or partners were identified, but none extended offers to purchase or partner with the company. Eliassen says the company remains open to such talks, but the company is moving forward as though it will remain a relatively small, publicly-traded hotel chain.

Harry Sladich, Red Lion's executive vice president of sales, marketing, and distribution, says he expects the number of franchised Red Lion hotels to increase substantially, going as far as to assert, "Through franchising, we're going to see the Red Lion rising."

As is typical in franchising relationships, Red Lion, as the franchisor, receives an up-front fee and ongoing royalties for providing its brand, expertise, and access to internal operations and systems, which in this case includes its reservation system. The franchisee owns its hotel property and is responsible for its operations, including any upgrades or improvements mandated by the franchisor.

In Red Lion's current third quarter, which ends Sept. 30, the company has sold three properties for a total of $27.6 million and has added four franchise hotels.

Earlier this month, Red Lion announced that Tower Hospitality, of Denver, signed a franchise agreement, and in November, an 87-guest room hotel that company owns near Denver International Airport will become a Red Lion Inns & Suites Denver Airport.

Days earlier, the company announced that Shri Vinayaka Inc., of Sacramento, Calif., has agreed to convert a 306-guest room full-service hotel into the Red Lion Hotel Woodlake Conference Center Sacramento.

In both Denver and Sacramento, Red Lion had sold separate, corporate-owned properties to operators that didn't elect to franchise. The company announced the $9 million sale of its Red Lion Hotel Sacramento at Arden Village when it disclosed its new franchise agreement. The company disclosed the $13 million sale of its Red Lion Hotel Denver Southeast property in early August.

In July, the company sold a 149-room hotel in Helena, Mont., for $5.6 million, and added that property as a franchise operation. Earlier that month, WR Management Co., of Cathedral City, Calif., agreed to convert its 97-room hotel there into Red Lion Hotel Cathedral City.

In coming months, Eliassen says he expects Red Lion will announce the sale of a hotel in Medford, Ore., and a retail property in Kalispell, Mont. The company also continues to market a hotel in Missoula, Mont., for sale.

The shedding of properties is part of a process that started at the beginning of 2011 through which the company is working to reduce the amount of debt on its balance sheet. At that time, Eliassen says, the company had about $170 million tied up—$130 million in debt and $40 million in hotel-property leases.

The company sold the Red Lion Hotel on Fifth Avenue, in downtown Seattle, for $71 million and converted it into a franchise operation. Income from that transaction took a chunk out of the company's debt and allowed the company to buy 10 hotel properties it previously leased.

As of the end of the second quarter, Eliassen says, the company had $100 million in debt. A portion of the $27.6 million in sales during the third quarter will go toward reducing that debt further.

The company posted losses for both the first and second quarters of this year. Through the first six months of this year, the company posted a $10.1 million loss, or 23 cents a diluted share, compared with net income of $13.9 million, or 80 cents a share, in the year-earlier period.

Second-quarter 2011 results, however, received a $33.5 million boost from the sale of the Seattle property, which is the primary reason for the profitability during that period.

When looking at revenue per available room, known as RevPAR and regarded in the hospitality industry as a yardstick for performance, Red Lion performed better; its RevPAR was 5.4 percent higher in the first six months of this year than in the year-earlier period.

While Eliassen is unsure when the company will return to profitability and is dubious about its ability to maintain that rate of growth in RevPAR, he says the increase has come in markets in which room rates haven't increased. Consequently, the numbers, he says, suggest the company has taken market share this year.

Sladich attributes the increase in RevPAR to a change in the way the company prices its rooms. Conventionally, the company used what Sladich refers to as market-based pricing, which in simplest terms involves looking at what the hotel across the street is charging for a room and charging the same or slightly less.

Instead of doing that, he says, the company looked at the price range in which it sold the most hotel rooms and started charging that price, regardless of what the competitors are charging. There are exceptions to that philosophy and rates are reviewed weekly, but the new process has proven to be effective, Sladich says.

Brand update

Red Lion Hotels is nearing the end of a rebranding process through which it will update its logo, website, and recast some of its hotels, Sladich says.

Working with Seattle-based branding company Methodologie, Red Lion is modernizing its logo. It will continue to incorporate the lion into the logo, but Sladich says, "The lion went in for a little shave and make up."

While the logo changes might be subtle, Sladich says the company's website will change dramatically. With an anticipated launch later this year, the website is expected to feature what the company is calling a "hyper local" feel, with information about restaurants, bars, and other venues that are favored by locals in a given area.

For example, he says, if the site were to give breakfast recommendations for Spokane, it might have photos and information about Frank's Diner, Dolly's Cafe, and the Satellite Diner.

The goal, he says, is to intrigue potential customers and keep them on the site so that they book there, rather than going to a travel site, such as Expedia.com or hotels.com. Sladich says a customer gets the same rate at a travel site as it would get at Red Lion's site, but the company pays a fee to the travel site for each booking, so the company makes less money on that room night.

"This is different from what other hotels are doing," he says. "We're either going to stand out as an unbelievable winner or have something that didn't work so well."

The hotels themselves will be labeled either as Red Lion Hotels or Red Lion Inns & Suites, depending on their size and amenities.

Red Lion Hotels, Sladich says, will be full-service hotels that include full-service restaurants and bars, whereas Inns & Suites likely will have smaller or no dining options.

He says the recasting is similar in concept to a Holiday Inn and Holiday Inn Express.

"We're not rewriting the book on this one," he says.