LuxUrban Hotels Inc (LUXH) 2023 Q2 法說會逐字稿

Greetings, and welcome to the LuxUrban Hotels's Incorporated second-quarter 2023 financial results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Devin Sullivan, Managing Director of The Equity Group. Thank you, Devin, you may begin.

Thank you, John. Good morning, everyone. Thank you for joining us today for LuxUrban Hotels's 2023 second-quarter financial results conference call. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer; and Shanoop Kothari, the company's President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during this call, we will be discussing forward-looking statements, including with respect to financial and operational guidance, the success of the company's collaboration with Wyndham Hotels & Resorts, scheduled property openings, expected closing of note of lease transactions, the company's ability to continue closing on additional leases for properties in the company's pipeline, as well as the company's anticipated ability to commercialize efficiently and profitably the properties it leases and will lease in the future.

These forward-looking statements are based on current expectations and beliefs concerning future developments and their potential effect on the company. There can be no assurance that future developments will be those that have been anticipated. These forward-looking statements are subject to a number of risks, uncertainties, some of which are beyond our control or other assumptions that may cause actual results or performance to be materially different from those expressed in or implied by these forward-looking statements, including those set forth under the caption of Risk Factors in our public filings with the SEC, including in Item 1A for our 10-K for the year ended December 31, 2022, and in Item 1A of our Form 10-Q for the three months ended June 30, 2023.

The forward-looking information and forward-looking statements are made as of today's date and the company does not undertake to update any forward-looking information and/or forward-looking statements that are contained to reference herein, except in accordance with applicable securities law. Management will also be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the company's press release.

With that said, I'll now turn the call over to Brian Ferdinand, Chairman and Chief Executive Officer of LuxUrban Hotels. Brian, please go ahead.

Thank you, Devin. Good morning, and thank you for joining us today. Almost one year to the day after completing our initial public offering, I am proud of what we've been able to accomplish operationally, financially, and culturally. These last several quarters have been a transformative period for LuxUrban. And I am happy to say that we have entered the second half of 2023 in the strongest position in our history to drive future growth, enhance cash flow, capture the benefits of scale, and deliver long-term value to our shareholders.

In the second quarter of 2023, we generated record net rental revenue, EBITDA, and cash net income. On an adjusted basis, we reported our eighth consecutive quarter of cash-based net income, and seventh consecutive quarter of positive EBITDA. We transformed our financial profile by eliminating the entirety of the approximately $9.8 million of senior secured debt held by our pre-IPO lenders and an estimated $87.5 million in future revenue share payments, all while pursuing a focused, high-conviction commitment to growth and profitability.

When compared to December 31, 2022 year end, our quarter-end cash position more than tripled, total debt, net debt each declined significantly, and shareholders' equity improved by nearly $17 million. We continue to pursue a significant pipeline opportunity that's accelerating, as hotel owner's facing upcoming debt maturities.

Deal flow remains incredibly strong, which allows us to pursue only the most favorable properties in deal structures to advance our growth. We continue to adhere to strict operating controls and we believe that we currently have the lowest per night property level breakeven costs in the markets we serve. We also transform the arc of our anticipated growth by announcing a partnership with Wyndham Hotels & Resorts, the world's largest hotel franchise company.

Highlights of the deal include: LuxUrban Hotels initially being added to the Wyndham portfolio are expected to be integrated into the trademark brand, and in turn, Wyndham's booking channels by the end of the year, likely sooner. By using Wyndham's platform, we expect to see a significant reduction in commissions and online booking fees compared to our prior operations. As a reminder, the Wyndham Rewards Program serves more than 100 million members. We have already begun the integration and it's underway.

Wyndham will provide LuxUrban with significant upfront initial non-dilutive working capital and growth capital based primarily on LuxUrban's existing property portfolio, with ongoing non-dilutive acquisition and working capital to be provided by Wyndham to fund future MLAs. LuxUrban's properties covered under this agreement will operate on Wyndham's world-class operational and customer service support systems, which are expected to enhance LuxUrban's cash flow by optimizing enterprise large-wide operating efficiencies. And LuxUrban will remain operating control of its hotels, while being jointly branded and marketed in partnership with Wyndham.

We're incredibly enthusiastic about our alignment with Wyndham and believe that the financial brand and operating advantages will make LuxUrban even more attractive solution for property owners looking to employ our asset-light triple net lease alternatives, while maintaining ownerships of their asset.

With that, I'll turn it over to Shanoop Kothari, our President and Chief Financial Officer, for a review of our financials.

Thank you, Brian. We reported another strong quarter and continued to validate the growth and earnings power inherent in our model.

Net rental revenue tripled to $31.9 million from last year's second quarter, driven primarily by an increase in average units available to rent from 565 in Q2 '22 to 1,086 in Q2 '23, as well as improved revenue per available room, or RevPAR. Year-to-date RevPAR rose to $291 from $183 in Q2 '22, and from $247 at December 31, 2022. 2Q 2023 total cash rent expense was $4.8 million, or 15.2% of net rental revenue, compared to $2.1 million, or 20.9% of net rental revenue in the same period last year. Non-cash rent expense amortization was $2.6 million, up from $1.1 million in Q2 '22.

Gross profit rose to $10.2 million, or 31.8% (sic - see press release, "31.9%") of net rental revenue from $2.9 million, or 28% of net rental revenue in Q2 '22. G&A expenses increased to $4.4 million, or 13.9% of net rental revenue, compared to $900,000, or 8.7% in Q2 '22. Our net loss for the second quarter was $26.8 million, or $0.78 per share, as compared to net income of $762,000, or $0.04 per share in the second quarter of last year. The primary driver of the net loss was a $28.5 million one-time, non-cash financing charge associated with the revenue share agreement that eliminated an estimated $87.5 million in future revenue share payments that we would have been contracted to pay.

We also incurred a [$1.2 million] one-time cash interest and financing costs associated with the retirement of debt and related premiums associated with those. While these charges did impact our results, they should not mask the positive impact of the elimination of these revenue share payment obligations we would have had on our business over the long term, primarily by removing the drag on our primary financial results, increasing our access to growth capital, and providing financial flexibility.

Exclusive of these items, adjusted cash net income improved to $7.2 million, up from just under $1.9 million in last year's second quarter, and EBITDA improved to $8.4 million. Going forward, we will not have charges related to financing, but we'll continue to have regular stock compensation expense associated with equity grants, and non-cash rent expense amortization associated with ASC 842.

For the quarter ended June 30, 2023, our EBITDA margin increased to 26.5%. As we've discussed last quarter, our goals are to achieve 20%-plus EBITDA margins in the short term, and 25%-plus EBITDA margins over the long term. We reiterate this guidance. During the June 2023 quarter, our units hosting guests rose to 1,086 from 988 in the prior quarter, and 479 in 2Q '22.

Moving to the balance sheet. At June 30, cash and cash equivalents totaled $3.8 million, a $2.7 million improvement from December 31, 2022. Restricted cash was unchanged at $1.1 million. Total debt at quarter end declined to $4.6 million from $14 million at December 31, 2022. And net debt in the quarter end was about $800,000, down from $10.3 million at year-end 2022.

We continue to work on our payables and working capital and made strides during the quarter. Our working capital position narrowed to a negative $2.4 million at June 30, 2023, from a negative $13.5 million at December 31, 2022. However, removing short-term lease liabilities, our working capital for June 30, 2023, was positive $3.7 million versus a negative $9.6 million at December 31, 2022. That said, we'll continue to work towards improving our liquidity and working capital throughout the balance of the year.

During the quarter, we deployed $4 million in security deposits, and for the six months over $8 million. As we have stated previously, we continue to make efforts in improving free cash flow and liquidity, and look to improve these metrics while continuing to reduce our debt over the coming quarters.

Looking at our portfolio at June 30, 2023, and today. As of June 30, we operated 12 properties, 1,086 units in five cities. As of today, we operate 15 properties with 1,411 units hosting guests in New York, Los Angeles, Miami, Washington, and New Orleans. We currently have under MLA 17 properties totaling 1,625 short-term rental units.

As of June 30, 2023, across our portfolio, our investment in security deposits were $13,554 per unit with the high being in New York at 17,307; and the low end in New Orleans and DC at $5,000 and $6,329, respectively, per unit. We expect these amounts to set to remain relatively consistent in the near future.

Regarding guidance. We have maintained our net rental revenue and EBITDA guidance for 2023 and 2024. We expect that all-in RevPAR for 2023 will be between $250 and $280, and we expect gross margins of 30% to 40%. G&A, excluding non-cash items, will approximate 10% to 12% during the year. We believe that this will result in EBITDA margins of 20% to 25%-plus.

We continue to expect year-end operating units to be between 2,500 and 3,000 short-term hotel units under MLA, up from 844 at December 31, 2022, and 1,625 as of today. The timing to reach a goal of between 2,500 and 3,000 units may positively impact our revenue guidance.

A few additional comments about the Wyndham partnership. We estimate key money reduced by required CapEx provides us over $15 million of synthetic financing over the course of the initial stages of the agreement. We believe this could increase over time subject to, one, how we perform under the agreement; two, the quality of the pipeline; and three, continued dialogue with our partner.

The transaction provides us significant benefits, reducing operating expenses when we drive booking traffic to Wyndham's booking channels. Based on our expected case, we believe we will improve RevPAR, which will impact us starting 2024, and reduce OTA costs by about one-third based on our current booking fees. The net impact, once we're fully operational, will be after year end. Finally, we have yet to quantify the secondary benefits of staffing and resources at LuxUrban, as we continue to become more dependent on Wyndham for items who are currently had earnings on an operational basis.

With that, I'll turn the conversation back over to Brian.

Thank you, Shanoop. I believe we're going to open this up for questions now. Just want to thank everyone for participating, and I'll turn it over to Devin to open up for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)

Allen Klee, Maxim Group.

Good morning. Congrats on a very strong quarter. When I look at one area where there was a strong positive variance compared to our model was your revenue per available room. Could you just give some color on what -- there's a lot of things that go into RevPAR or what drove the jump there? Thank you.

Yeah, sure. I'll take that. So Allen, so the jump -- so we did $257 last quarter. The jump to the $291 for the six months is related to timing of certain higher-quality properties that came on primarily early part of the second quarter, as well as pickup for the summer season, coupled with the downside of the January side. So a little bit better than we expected. But I think it's just related to the higher-quality average properties that were put on at the early part of the quarter.

Thank you. In terms of Wyndham, I was looking through your 10-Q. In it, you say that you'll pay them around a 6% franchising fee on gross booking units in the beginning, which will rise to 6.5%. But the cost savings you're going to get from the booking orders, and using their system, and then that your net expenses will decline as a result of that.

I heard you say something declined by one-third. I didn't quite catch that. Could you talk a little about the factors and some sense of the decline in expenses that can come from Wyndham?

Yeah, sure. So franchise fees, along with booking fees on their platform, is about one-third less than what we currently -- are OTA agreements. So to the extent that we're driving traffic through Wyndham's platform, it's about a one-third reduction, basically call it OTA and other fees. And if we go -- if we continue to use OTAs, they have a better negotiated rate than we do.

So that, plus the franchise fees, is more expensive. But we fully expect in all the guidance we've gotten from the Wyndham team is that a significant part of our future bookings over time will go through their platform and through their Rewards members and such. And the way we've modeled it is about a little less than half is the breakeven for it, but we fully expect to be much higher than that as we fully ramp up.

Thank you. And I thought I also heard you say that this would improve your RevPAR. Could you explain how the Wyndham transaction could improve the RevPAR? Thank you.

Yeah. I'll take that. Just from a marketing perspective -- hey, Allen, it's Brian. So Wyndham has over 100 million Rewards members worldwide and the largest Rewards program in the world. So they have members that utilize both through internally, so through the Wyndham Rewards, where, in particular, New York City, Wyndham has limited supply of hotel rooms. You have an oversupply of people looking, and certainly, in the other cities as well.

So we look at being able to increase RevPAR in particular, in New York, very handsomely through Wyndham's marketing programs, as well as the Rewards program. So we think we'll see increased demand through those channels, which we don't have access to today, very, very substantial.

That's great. My last question, and I'll jump back in the queue, is just, you also said it could provide around $50 million of synthetic capital. So they'll be providing you working capital and basically paying some of the security deposit, which had been maybe one of the higher costs that maybe constrain some of your growth that that could get eased up.

Is there anything you could add some color on how you're going to think about the benefit from that over the next year or two? Thank you. Like, maybe in terms of the amount of rooms you can add? Thank you.

Allen -- absolutely. So just as a point of fact, if you go to the balance sheet from this Q, we have invested [$19.6 million] into security deposits, with $3.5 million of letter of credits. So call it about $23 million total invested into portfolio in terms of deposits which was our largest outlay of capital for those hotels. And that portfolio generated $8.4 million of EBITDA.

So when you're looking at ROI or investment, you've got $23 million invested into the hotel properties, you're generating $8.4 million of EBITDA a quarter, annualized about $33 million of EBITDA on $23 million invested. So we had talked about $1 of investment into security previously for $1 of EBITDA. We're seeing a greater return than that currently.

And then, in particular, Wyndham provides us, as part of the franchise agreement, capital for enhancements to the property, as well as working capital for the operations of the property and a portion of the security.

Thanks very much. Congratulations for a nice quarter.

And Allen, the -- I missed it. But it's $15 million the way we've modeled it, not $50 million.

Sorry. Okay, thank you. Thank you so much.

Bryan Maher, B. Riley Securities.

Thank you, and good morning. We're starting to see a little bit of an acceleration in hand backs of hotels from some of our coverage companies to the banks in lieu of refinancing difficulties. Are you subsequently seeing a pickup in inbound calls and opportunities for you? And as a second part to that question, are you seeing any changes in the terms that owners are looking for today relative to what you saw up through the first quarter?

So, yeah. We are definitely seeing a several day. We're getting shown every distress deal throughout that's in need of a refinancing or that is over levered. So we're very carefully selecting, in a very disciplined approach, only the properties that really are turnkey from a CapEx perspective, and then also meet our underwriting criteria, which hasn't moved since the start of the business.

So we're still seeing significant pipeline opportunities, significant opportunities in the same rents or underwriting bands that we have done historically. So we have not moved up our underwriting criteria. We're seeing things come in at the same or lower.

Okay. And has there been any change in your target market outside of what you've talked about in the past? Are there any markets within the US or outside the US, I think, maybe you talked about London before, where you're focusing your attention?

Yeah. So it's the five cities we're in today, and then it's Boston and London that we're actively pursuing opportunities. We've continued to scale rapidly in New York. Represents for largest opportunity will be concentrated in New York City. It represents the largest part of our pipeline as well, but Boston and London are two other cities that meet both our underwriting criteria, and also have the attributes that we look for in terms of volume of travelers and RevPARs that are sustainable that meet our risk profile.

So, really, it's seven-city footprint. It's possible that we will look at other cities in partnership with Wyndham around specific opportunities in the future. But right now, as far as LuxUrban is concerned, it's the seven-city footprint that we're focused on.

Okay. And maybe last for me in New York City, since you brought that up, you can't open a newspaper or turn on the TV without seeing inbound staying at the Roosevelt Hotel and what a disaster that is outside the Roosevelt Hotel. I don't know what New York City is paying Roosevelt for their rooms.

But as it relates to the closed hotels in New York City that you might be able to strike a deal with, what's going on there with immigration and people showing up in New York impacting your ability or cost to take down any of those hotels? Just curious what you're seeing.

Yeah. I mean what it provides is a short-term alternative for hotel owners that are distressed, but it doesn't allow them to refinance on a city contract. So an owner, who you look at, in particular, like New York City, the owners went into foreclosure, took the city money, and now we're trying to restructure their debt. It hasn't allowed them to restructure. So it's really a Band-Aid on a larger problem, and some owners that are opting for short-term cash.

I do believe that it will create a secondary pipeline about, I think, close to 100 hotels in that program. So as they clear out in the programs, I think it will give us a secondary pipeline beyond that to clean up those hotels, bringing back online these hotels. We've talked to several owners around that as well that are in city programs that are looking for ways to take care of their debt obligations and restructure on long-term triple net leases.

We've even done two deals with the city program hotels that the owner is going to turn back, refurbish some, and then turn it over to a city program. So it's really just a secondary pipeline opportunity for us.

Okay. Thank you. That's helpful.

Alex Fuhrman, Craig-Hallum Capital Group.

Hi, guys. Just to follow up on the Wyndham deal there. Can you walk us through how you expect to get that level of booking from the Wyndham channel? Is that just a natural function of being exposed to that many members? Do you plan on removing your properties for many existing OTAs, or raising rates, or anything like that, or any other channel to help direct things in that way?

Alex, could you repeat that? I'm sorry. I lost the last part of it. It broke up a little.

Just a question of how do you envision Wyndham getting to that level of your bookings? Are you going to be removing your hotels for any other OTAs or channel partners, or raising rates through any other channels? Or is that just going to -- do you think it happened organically as a function of being exposed to that many Wyndham members?

Yeah. I mean, I think we ran internally our model with them. We're 91% OTA-driven today. So paying close to 15%. I think our cost this quarter was $3.7 million in third-party OTA commissions, was the number, plus about $1.5 million in additional processing fees.

So all in, about $5.2 million went out the door this quarter in expense. They typically provide an urban core under their properties, 85% direct booking. So we're talking about -- Shanoop's been modeling our cost savings at a third.

So substantial leverage in -- to answer your question specifically, we would not remove them, but I think that they will pick up a large portion of our bookings both through rewards. Also, they have pretty sophisticated sales and distribution as well. And they also have group sales, B2B sales, specific departments around that, and they have 9,000-plus hotels globally, largest franchise company in the world.

So their sales and distribution is very powerful, almost as powerful, if not, as an OTA itself. So we're looking at redistributing cost savings there. So yeah, it's pretty powerful and we did pretty extensive work on it.

Okay. Thanks very much.

Matthew Erdner, JonesTrading.

Hey, guys. Thanks for taking the question. Sticking on the expenses side, what are you guys seeing in terms of property-related costs, such as utilities, labor, Wi-Fi, TV, stuff like that? I mean, the expectation going forward, are we going to see increases there similar to the rent expense?

So the way we look -- yeah. So the way we look at it -- so we got to about 26.9% EBITDA margins this quarter. We were in the low-20s last quarter. Part of that is the impact of new property additions, is less of a drag. As we continue to grow the portfolio when we enter into new property, we hire on the staffing, we're ramping up the revenues associated to it. It becomes less of an impact.

As we continue to grow, we historically were very scrappy, start-up bootstrap company. We continue to run in that mindset. So consolidation of operations, cross staffing, different properties, with personnel, GMs, and maintenance crews, and so forth. We're meeting with utility companies actually, as we speak now, to leverage the economies that we're developing.

So I would say, overall, look. I think, there's still plenty of areas we can improve. So I'd actually look at it from a different perspective. As we continue to grow and we become a more -- better capitalized, larger player, I think we can get some savings to offset pricing increases. So net-net, I would be looking at the same level of costs.

Okay. That's helpful there. And in terms of occupancy. You guys, I believe, had your best quarter ever there at 80%. How is it tracking this quarter, if you have any insight into that for the remainder of the summer? And then what does the expectation once the fall starts and school's back in session?

Yeah. So I think we're going to improve occupancy as we continue through the balance of the year. It's tough in Miami right now with the weather, but that should pick up in the fall. New York continues to say very robust. I mean, anecdotally, I tell people that every time I come to New York, it's difficult for me to find a room in one of our properties. So it continues to be that way.

We're also pretty focused on perishable, selling the perishable inventory we have. So, look, we're getting better at optimizing. You've picked it up in terms of occupancy. I think we still have some room to increase that.

We run a business where every night that goes by, we have a vacant room, it's a lost revenue. We have to balance that with some with the brand, and our partner, and so forth. But we will continue to try to increase that. So I would say that for the balance of the year, we would like to improve that with baseline of where we're at right now.

Awesome. Thanks for taking the questions.

Tom Kerr, Zacks Investment Research.

Good morning, guys. One more follow-up on the Wyndham deal. Do they have any operational input? I was confused on that. Or do you still operate the hotels as you see fit and this is just a reservation pricing-type deal?

So it's --

No. We maintain our operating control and then we collaborate on revenue management, sales and distribution, as well as standards and customer service. And also, the standards internally on the property as well.

Does that mean you don't use your pricing algorithms that you have developed over the years or you collaborate on that?

No, we still -- we collaborate. We still run sales and distribution in connection with their team.

Okay, got it. A couple of quick financial questions. Yes. So the share count increased because of the revenue share agreement. So the average shares, so the ending shares for the third quarter will be 44.2 million?

Well, that's only the ending. Not --

Yeah. So if you look at the cover of the Q, the shares issued are slightly under 36 million. The way the rev share agreements are structured, the debt holder can call on additional chairs. So that's the 44 million. That's an all-in number of what's been committed on the rev share agreement. So --

But we don't know if those have been issued until they execute --

Yeah. They asked for those to be issued. We issued them. So that's the delta between the two numbers. When they asked, we issue. So eventually, it will get to that 44 million.

Okay. But it could be a long way away or several quarters out?

Correct.

Yeah. There's an extended lockup on those through 2025.

Okay. That's just -- yeah. And then any guidance or color on the tax rates in the second half of the year? The second-quarter tax rate seemed a little confusing.

Yeah. So majority of the non-cash expenses are non-deductible for tax purposes, and also there's a limitation on interest expense, what you can do. So our interest expense based on our financing is moving around. So the way I'd calculate taxes is on a cash basis, to take out the non-cash, we're roughly 28% to 30%. That's combined federal and state.

Got it. All right. Well, last one. So the units, operating units, the 1,625 number, would that be the rough estimate of units at the end of the third quarter, meaning the average units for the third quarter would be in the 1,300s or something like that?

So we've laid it out. If you look at the MD&A section of Q, I've laid it out. I think it's page 19. So we have 1,411 operating currently with the balance. There's two properties that are not quite operating right now. Those three that are operating this quarter were at the beginning of the quarter.

So it would be 1,400-plus what we what we are open and operate between now and the end of the quarter. So probably somewhere higher than that.

Great. Appreciate it. That's all the questions I have for today.

Allen Klee, Maxim Group.

Oh, hi. My follow-up question was answered. Thank you.

Okay. At this time, there are no further questions. And I'd like to pass it back over to Brian Ferdinand for any closing comments.

Thank you again, everyone, for your participation and continued interest in LuxUrban Hotels. We are very pleased with our progress, and look forward to updating you throughout the year. Have a great day, and thank you, everyone.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.