Q1 2020 Earnings Call

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In 2020 call point lodging conference call.

This time, all participants on the listen only mode. After the speaker presentation, there will be a question and answer session.

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I like the hand, the conference over to your Speaker today, Becky Rosemary Senior Vice President of Finance and Investor Relations. Thank you. Please go ahead.

Thank you good afternoon, and welcome to corporate lodgings first quarter 2020, <unk> earnings conference call in a moment, we will have remarks from Keith Cline, our CEO and dance watch from our CFO, Rob song, our SVP of investment and Howard Garfield or C O.

Our also on the line with us.

Before we start I would like to remind everyone that our remarks today will include forward looking statements.

Actual results could differ materially from those indicated in the forward looking statements and forward looking statements made today speak only to our expectations as of today, we do not undertake any duty to update forward looking statements. These statements are subject to risks factors that may cause our.

Actual results to differ materially from those expressed or implied for more details on some of these risks. Please refer to the risk factor section of the company's most recent annual report on form 10-K supplemented by the company's current report on form 8-K filed.

On May 11, 2020, and any subsequent reports filed with the Securities and Exchange Commission.

In today's remarks, we'll also refer to certain non-GAAP financial measures.

On a GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release.

Which is available on our website at core point Dot com.

Finally for those listening to a replay of this call. After may 20th 2020, we remind you that this presentation will not be updated and it is possible that the information discussed will no longer be correct.

With that I'll now turn the call over to keep.

Thank you backing good afternoon, everyone and welcome. We're pleased you can join us.

Last 10 weeks have been an incredibly challenging time for all of us and we offer our sincere thanks to those who are on the frontline fighting this pandemic every day.

As it relates to our business I will focus my time today and how we have been managing through this crisis today.

Our key priorities and our action plan going forward.

I'll turn it over to Dan later to update you on our operating results liquidity profile balance sheet and encore disposition program.

Entering the year, our top 2020 initiatives where to focus on ensuring the revenue and other platform improvements with Wyndham were completed on time and addressed our needs and to execute in the next phase of our real estate strategy.

The current operating reality, we've entered into including record year over year declines in revenue due to the impact of Cobot 19 pandemic has driven a rapid reprioritization and collective change your focus for our team.

While we will obviously continue to focus on the platform improvements and real estate strategy. Our most important priorities right now are to continue.

Continue to implement cost containment strategies at the hotel in corporate levels to preserve cash and liquidity.

Maintain balance sheet resiliency and flexibility.

Exert strong asset management oversight.

And prepare for the full reopening of the economy.

Our most aggressive efforts to date have reflected strong asset management oversight to significantly cut costs at the property level and to preserve as much liquidity as possible.

We provided some details on our initial efforts last month and I'll briefly give an update on these initiatives.

As of April nine to date, we reported our initial efforts 26 of our hotels were temporarily not accepting transient guests.

At peak, we had 30 such hotels.

With improving demand, we're reducing that number as more hotels begin accepting transient guests and reservations.

To date 10 of the 30 hotels are reopens to transient guests and we're currently expecting the remaining 20 hotels to resume accepting all reservations over the next several weeks.

We continue to assess all of our hotels regularly to determine the best course of action taking into consideration the safety of our guests local circumstances and the impact of hotel room demand on our operations.

Last month, we outlined a number of cost containment efforts at the property level that we're underway.

We have intensified those in all cases with reduced staffing levels elimination of all non essential amenities and the freezing of all spending at the hotels to only what is essential to run the hotel safely.

We're standards reflect a significant reduction in housekeeping hours, driven by lower occupancy as well as reductions in areas such as breakfast maintenance van drivers in guest service associates to better match, our cost structure with the number of rooms sold.

In the end the goal of cost containment is to reduce our monthly cash burn rate for perspective during the month of April which reflected historically low performance across our industry and as it relates to CPLG in occupancy level of approximately 21% and a revpar of approximately $13.50 are.

Preliminary property level cash burn was in the range of $9 million to $10 million.

Based on our run rate from the last four weeks, which includes both the recent pickup in occupancy and the full impact of the cost containment items. We've discussed our current estimated monthly cash burn rate would be reduced by approximately $2 million to $3 million.

We have not limited our aggressive focus only to costs. We've taken the same assertive asset management approach with sales and revenue management together with our third party manager, we're actively pursuing opportunities such as extended stay medical and first responders construction government as well as other local and regional relationships.

We're actively working through a number of revenue management strategies that have been successful for us in the past with these assets.

In the very early read on these efforts is encouraging with gains in market share and increased revenue.

At the corporate level. We've also taken a number of steps to reduce costs related to corporate gionee and capital spending and Dan I'll walk through those details in a moment.

And last let me briefly touch on the other major initiatives underway for 2020.

Wyndham is generally on schedule to meet the 2020 deliverables under our settlement.

Enhanced direct billing system for corporate and grew clients was finalized late in the first quarter with other deployments of certain legacy booking tools on schedule to be completed by June Thirtyth 2020.

And the implementation of the enhanced dynamic best available rate setting tool scheduled to go live by December 30 Onest.

Recall that we had always expected the benefit from these tools to begin in late 2020 with the majority of the benefit in 2021, but their progress is encouraging nonetheless.

Our real estate strategy is a proven value creator for us and continues to be highly accretive.

Since inception, we have completed the sale of 70 assets totaling gross priests proceeds of $290 million at how the accretive hotel EBITDA multiples.

The proceeds have primarily reduced our debt and enhanced our liquidity.

Ultimately, we believe the sale of the 140 remaining noncore hotels over the next two years or so could generate substantial proceeds to further delever the balance sheet and create value.

Today, we have 26 hotels under contract for gross proceeds of approximately $115 million.

As I mentioned last quarter, we were monitoring and evaluating any impact from cobot 19 as it relates to these asset sales.

We said it was reasonable to anticipate a disruption or a slowdown in the pace of asset sales in the near term and we did in fact experienced some delays and disruption related related to deals under contract.

We have observed the financing process is slowing down.

Including on ESPN loans, compared with prior periods and some buyers waiting until they have more forward visibility.

The good news is that we sold 23 hotels during the first quarter six of those since the Q4 call on March 12, raising approximately $100 million in gross proceeds for the quarter and approximately $26 million since our last call.

As you might expect we did not have any activity in April, but we've seen a restart to the process with three deals closing so far in may for approximately $13 million in gross proceeds.

Dan I'll provide some additional details on closed transactions in a few moments.

We've said all along that this was a multiyear process and the recent pace during April Doesnt change the ultimate goal or diminished the significant value creation. This program has and will continue to generate.

In closing I would like to reiterate that this is a new operating reality for core point and for that matter all of lodging.

We believe the decisive actions we've taken over the last several weeks have made a significant difference in our ability to create long term value for our shareholders I'm proud of the collective response, our team and look forward to updating you on our future progress that I'll turn the call over to our CFO, Dan Swanstrom Dan.

Thank you Keith and good afternoon, everyone I'll start today by providing a brief review of the first quarter operating results recent trends and our actions to preserve liquidity I'll also provide updates on our balance sheet and our noncore disposition strategy.

The first quarter operating results were generally consistent with industry Revpar performance and the deteriorating trends that we highlighted in our operations update on April nine.

The comparable Revpar decline of approximately 23% during the first quarter was driven by 5.5% decrease in SDR and a 1200 10 basis point decline in occupancy for the month of March comparable Revpar declined approximately 52% year over year.

The decrease in revenues due to significant reduction in room demand, resulting from the impact of cobot 19.

Which is clearly evident in the occupancy steps as well as the year over year disruption from the transition and integration of our hotels onto the Wyndham platform in April 2019, and the impact of sold hotels.

This contributed to the decline in adjusted EBITDA Ari to $10 million for the first quarter.

Looking at our occupancy trends from mid March through mid April our total portfolio experienced a rapid decline with occupancy reaching a low point of approximately 16% for the second week of April.

Since that time, we've been encouraged by early signs of some recovery in demand with occupancy levels for the second half of April around 25% and for the first half of may around 35% with the hotels accepting transient reservations, achieving higher occupancy level of approximately 38%.

We believe our portfolio of select service hotels predominantly focused on the Midscale segments is well positioned to capture incremental room committed group demand coming back online.

In particular as it relates to leisure travel and the associated demand for many of our drive to destinations hotels.

From a liquidity perspective, our cash balance today is approximately 190 million. This includes the $110 million draw that we made from our revolving credit facility and excludes lender escrows of approximately 24 million.

We continue to be highly focused on controlling costs and preserving capital.

In addition to the numerous cost containment initiatives at the property level that Keith walked through earlier, we've also taking a number of steps of the corporate level to implement capital preservation measures.

These actions include.

One suspending the common stock dividend, resulting in the preservation of approximately $11 million of cash per quarter or approximately 45 million on an annualized basis.

Two deferring all non essential capital investments and expenditures with the exception of life safety or critical operational needs, resulting in an estimated reduction of total capital spending of at least 60% as compared to the initial capital plans for 2020.

Therefore, we currently estimate our highly scaled back level of Capex to be about 15 million to 20 million in total on an annual run rate basis.

And three implementing various cost containment measures with respect to corporate cash DNA, resulting in an estimated savings of approximately 10%.

Following the implementation of these various liquidity and capital preservation initiatives. We currently expect our corporate cash outlays to be approximately 4 million to $5 million per month, which includes approximately 3 million per month for total interest expense as well as our current estimate for corporate cash DNA.

In combination with the estimated hotel operations cash burn range of 9 million to $10 million for the month of April's preliminary results that Keith highlighted this results in an overall estimated at monthly cash burn range of approximately 13 million to 15 million per month.

Given the recent positive trends in room demand in occupancy for the month of made to date. We are optimistic that April could represent a low point in terms of the monthly negative contribution from hotel operations.

In fact to reiterate keeps comments, if we assume more of a second half of April 1st half of May operational approach to the estimated hotel operations cash burn range that could reduce the overall monthly cash burn on a go forward basis by 2 million to 3 million per month as compared to the preliminary full month of April results.

Turning to our balance sheet and debt outstanding at the time of our last earnings call on March 12, we had paid our CMBS debt down from 921 million at year end to 880 million through the use of asset sale proceeds.

As of today, we've paid down our CMBS debt, even further to 865 million using a portion of our most recent asset sale proceeds while our revolver balance drawn as $110 million.

Our current weighted average interest rate is approximately 3.3%.

As of March 30, Onest, we were in compliance with both total net leverage and interest coverage financial covenants under our revolving credit facility.

Subsequent to quarter end, we were pleased to execute alone Amendment with our bank group that extends the maturity of the role of the revolver to May 30, Onest 2021, and eliminates these two financial covenant requirements going forward through the extended maturity.

With respect to the CMBS facility. The initial maturity date is approaching in the coming weeks, we have borrower options to extend the initial maturity date of June 2020 for five successive terms of one year, each and we have provided notice to the lender to exercise our first such option to extend the facility for one year through June two.

21.

At this point, we expect the extension will be effective on the existing maturity date in June 2020.

Both the CMBS and revolver extensions as well as the revolver Amendment provides us additional and enhanced flexibility with respect to our balance sheet.

To expand on keeps comments regarding the continued success of our ongoing noncore disposition program. During the first quarter of 2020, we closed on the sale of 23 hotels for total gross proceeds of approximately 100 million.

Which included six hotel sales for total gross proceeds of approximately 26 million following our last quarter release on March 12.

These total first quarter transactions were completed at attractive valuations and average revenue multiple of approximately 2.7 times and a hotel adjusted EBITDA Ari multiple of approximately 34 times.

Month to date, thus far in May we have closed on the sale of an additional three hotels located in Midwest markets total gross proceeds of $13 million, representing an average revenue multiple of approximately 2.8 times and a hotel adjusted EBITDA Ari multiple of approximately 16 times.

As we outlined last quarter, we believe there is compelling strategic rationale for our noncore disposition program and narrowing our focus to a go forward core portfolio of 105 hotels focused on our higher quality and growth potential assets that are primarily located in top 50 MSS.

In light of the recent disruption caused by coated 19 over the past 10 weeks, we have been and we'll continue to be patient and thoughtful in our execution of this disposition strategy to realize value for these noncore hotels.

We continue to believe there are numerous long term strategic benefits to our ongoing portfolio transformation and our timeframe to execute on this effort was always over a period of two years.

In closing, while we are encouraged by the continued demand for our noncore hotels.

The ability to complete additional sales recently, albeit at a slower paced than expected pre covert 19, and the early signs of recovery and occupancy over the last silver weeks. The fact remains that we're operating in a very challenging lodging environment with critical public health milestones ahead.

We believe we have taken the right steps to best position for point to continued to manage through this pandemic.

And our near term priorities remain focused on cost containment and capital preservation initiatives.

With that we'll open the line for your questions operator.

Thank you Sir.

As a reminder to ask a question you would need to press star one on your telephone.

Your your question press the pound cake.

I show our first question comes from Chris Woronka from Deutsche Bank. Please go ahead.

Hey, good afternoon, guys and thanks, rather thanks for all the color they.

So could you maybe talk a little bit about the overall kind of buyer pool for the assets pretty pretty impressive that you were able to close I think you said three hotels so far in may.

Do you know fees or owner new owners are planning to.

Keep them as hotels or is there some kind of alternative use.

Well the these deals that a closed were deals that we had struck kind of pre cobot 19 and.

Generally the vast vast majority of that people that they are buying these hotels, our existing hotel owners that may or may either own ala came to flag or potentially even other flags.

So I would tell you from the onset. These deals were closed for the purpose of continuing to operate a hotel now that may change over time.

But but the deals that we struck are the vast majority of those are for continuing hotel operations.

Okay, Great appreciate that and then.

As you guys think about I guess, you could go street corner by Street corridor, but you probably focus a little bit more on the core 105 hotels for now I mean do you think there is possibility that that.

Some of the competitors in those markets, maybe they're older product in sub standard and maybe even on unbranded. You are you seeing any signs that there is going to be.

More hotel closures in your competitive set.

Well you know it's interesting right obviously.

The the markets performing very differently by price point in terms of aggregate number of rooms that are closed.

And that and you've seen the data with with the economy segment really outperforming from an occupancy perspective, and and number of rooms open now in terms of our hotels we've seen.

Certainly a nice bounce back from the low points that we talked about and Dan mentioned, specifically in his comments and as as you mentioned in our press release as well, we're seeing occupancy numbers that are in the mid mid thirtys and approaching 40% or higher at times. So as they think about the positioning of our hotels a relative to the competitors on our street corners.

It's pretty clear that in a challenging environment given the market share gains that were seeing and the accelerate re acceleration of occupancy that the looking to brand and the location of these hotels is resonating now with that said I can't speak to additional closures from a competitive perspective.

Like all hotel owners, we are evaluating on a constant basis. The number of rooms that are being sold in every single market, where we own and operate and if they hotel has the ability given the level of demand that exists to operate and cover fixed costs on a contribution margin basis, we'll work hard to keep those rooms available for trends.

Guests in the end the very few number of locations that can't support it will suspended for a period of time until demand comes back and we've been pretty pretty systematic and methodical about reviewing that.

Okay very helpful and just.

One last one for me you mentioned, you've gotten up to I think 35% occupancy.

Lately and 38% for the hotels that are taking transient.

Is that roughly kind of a breakeven occupancy level at that at the property level or is there still more to go.

You know breakeven right, it's a nuance to concept because there's a lot of variables that.

Significantly affect how sensitive breakeven can be and these hotels right guilt given that we're in the select service part of the industry Labor is a very large percentage of our cost and given the 80 ours.

That we typically charge.

Our can make it very highly sensitive.

So so as you think about it in broad strokes.

If if we're running lets say 80 ours in the mid Sixty's.

And.

Labor as a percentage of revenue is let's call it 25%.

Our theoretical breakevens, probably close to 50% occupancy now to show you how sensitive that is if if the labor costs only dropped by a few hundred basis points. The theoretical breakeven occupancy at the same HDR can drop 10 full points.

I mean, it's very sensitive so we're focused on on on kind of optimizing rate and revpar in these properties.

And growing occupancy at a level that puts us in the best positioned to drive a solid economic return.

So it does vary so I would say, it's kind of in that probably 40% to 50% occupancy range, depending on the architecture of how the revenue comes in.

Okay, Yeah understood.

Very helpful. Thanks, guys.

Thanks, Chris.

Thank you Sean next question comes from.

JP Morgan. Please go ahead.

Hey, everyone. Thanks for taking my questions I Hope you.

There and your families are well unhealthy.

Same to you.

Thank you so first off on the proceeds from asset sales how is your thinking on on the use of proceeds change I guess the portion of proceeds to pay down debt, maybe I'm reading too much into it portion of proceeds used to pay down debt.

Assets sold in the one Q in Twoq unit day, when a bit lower than than 2019, I guess with industry. It with industry industry pressures excuse me does the amount that you can deploy versus what you're required to hold come down given the CMBS agreement.

Yes. Good afternoon Omar this is Dan I think big picture the way we've been approaching it as you know the CMBS agreements require that.

The allocated loan proceeds plus a 5% to 10% premium our first.

Net proceeds sales gross proceeds from sales are first allocated to paying down that to the CMBS and so as we managed it over time, we've paid down.

To at least the extent required on under the CMBS and more recently over the last six months when we have open windows to pull out cash we've been doing that.

As Keith mentioned in his remarks to enhance our liquidity as we move forward, we would expect given the.

Deteriorating demand and the resulting drop in EBITDA that we would be below the threshold levels in the CMBS and.

And therefore, all the proceeds from asset sales will be required to pay down CMBS debt.

Yes.

Okay. That's helpful. Thank you and then it will just one follow up.

I guess on on one of the earlier or the earlier comments on the as you can elaborate on the state of the financing markets when you're looking at these asset sales.

How much of that it sticking point versus investors are buyers really just looking to see how things.

I think it's kind of come together for the next couple of weeks.

As we as you mentioned in kind of our prepared remarks during the month of April just given the the rapid steep contraction.

On the worst month in the history of our industry.

The financing markets pause.

On.

The deals that we had in the pipeline and the buyers of those assets had this wait and see.

Obviously since then we've seen some rebound in occupancy some recovery in the assets that we own and operate as well as the ones that are.

That are in the non core portfolio and you've seen deals now start to close.

So as I mentioned in my comments, it's a combination of both I think in April is really the lending markets.

Paused to see where the bottom of this potentially could be and see if theres any recovery and since then we've seen the financing markets Reengage, but you still do that you still do have some buyers that are also trying to gain additional visibility by pausing and we continue to work.

With those buyers.

On the deals that they have paired with us.

Great. Thank you.

Thank you.

Sure no further questions in the queue at this time I would like to turn the call back over to Mr., Keith Cline, President and CEO for closing remarks. Please go ahead.

Well I want to thank all of you for your interest in core point lodging and listening in today and we wish all your families a lot of safety and health as we all work through the thank you.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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