Q2 2023 LuxUrban Hotels Inc Earnings Call
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Greetings and welcome to the Luxe urban hotels incorporated second quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded and 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 and good morning, everyone. Thank you for joining us today for <unk> Luxe Urban hotels 2023 second quarter financial results Conference call. Our speakers for today will be Brian Ferdinand is chairman and Chief Executive Officer, and she knew Qatari 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 and resorts scheduled property openings expected closing of noted 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 at the properties at leases and we'll 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.
Will be those that had 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 risk factors in our public filing.
As with the SEC, including in item one a for our 10-K for the year ended December 31 2022.
And then item one a of our Form 10-Q for the three months ended June 32023.
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 are forward looking statements that are contained a referenced 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.
That said I'll now turn the call over to Brian Ferdinand Chairman and Chief Executive Officer of Luxor, but 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 transfer me to transport formative charity it locks urban and I'm happy to say that we have entered the second half of 2023 in the strongest position in our history to drive future growth enhanced cash flow captured the benefits of scale and deliver long term value to our shareholders in the second quarter.
Of 2023, the 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 that'd be appreciated.
<unk> $9 8 million of senior secured debt held by our re IPO lenders and an estimated 87 and a half million in future revenue share payments, all while pursuing a focused high conviction commitment to growth and profitability when compared to December 31st 2022 year end our quarter end.
Cash position more than tripled total debt net debt each declined significantly in share holders equity improved by nearly $17 million. We continue to pursue a significant pipeline opportunity that's accelerating as hotel owners facing upcoming debt maturities.
Deal flow remains incredibly strong which allows us to pursue only the most favorable properties and deal structures to advance our growth. We continue to adhere to strict operating controls and we believe that we currently have the lowest for a nice property level breakeven costs and the markets we serve.
We also transformed the arc of our anticipated growth by announcing a partnership with Wyndham hotels and resorts the world's largest hotel franchise company.
I liked the deal include.
E locks urban hotels initially being added to the Wyndham portfolio are expected to be integrated into the trademark brand and in turn Wyndham spooking channels by the end of the year.
Likely sooner by using Windows 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 lux urban with significant upfront initial non dilutive working capital and growth capital based primarily on luck serving existing property portfolio with ongoing non dilutive acquisition and working capital to be provided by Wyndham to fund future MLA.
Walks urban's properties covered under this agreement will operate on Wyndham is world class operational.
And customer service support systems, which are expected to enhance long service cash flow by optimizing enterprise wide wide operate operating efficiencies and Luxor will remain operating control of its hotels, while being jointly branded and marketed in partnership with Windows.
We're incredibly enthusiastic about our alignment with Wyndham and believe that the financial brand and operating advantages will make lots of an even more attractive solution for property owners looking to employ our asset light triple net lease alternatives, while maintaining ownership of their assets with that I'll turn it over to its unique authority, 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 in earnings power inherent in our model net rental revenue tripled to $31 9 million from last years second quarter, driven primarily by an increase in average units available to rent from 565 in Q2 22 to 1080.
In Q2, 'twenty three as well as improved revenue per available room or revpar year to date Revpar Rose to 291 from 183 in Q2 22 and 247 at December 31 2022.
Two Q 'twenty two 'twenty three total cash rent expense was $4 8 million or 15, 2% of net rental revenue compared to $2 1 million or 29% of net rent up wherever in the same period last year.
Noncash rent expense amortization was $2 6 million up from $1 1 million in Q2 'twenty two.
Gross profit rose to 10.2 million or 31, 8% of net rental revenue from $2 9 million or 28% of net rental revenue in Q2 'twenty two.
G&A expenses increased to $4 4 million or 13, 9% of net rental revenue compared to 900000 or eight seven in Q2 'twenty two our net loss for the second quarter was $26 8 million or <unk> 78 per share as compared to net income of 762000.
Or four cents per share in the second quarter of last year.
The primary driver of the net loss was a 28.5 million onetime noncash 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 cat, one time cash interest and financing costs associated with the retirement of debt and related premiums associated with it while these charges did impact our results.
Could not match the positive impact of the elimination of these revenue sharing payment obligations.
We would have had on your business over the long term primarily by removing the drag on our 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 1.1, $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.
<unk> expense associated with equity grants and noncash rent expense amortization associated with ASC 842.
For the quarter ended June 30th 2023, our EBITA margin increased to 26, 5%.
As we've discussed last quarter, our goals are to achieve 20 plus percent EBITDA margins in the short term and 25 plus percent EBITDA margins over the long term, we reiterate this guidance.
During the June 2023 quarter, our units hosting gas rose to 1086 from 988 in the prior quarter and 479 in two Q 'twenty two.
Moving to the balance sheet.
At June 30th cash and cash equivalents totaled $3 8 million.
A one 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 and was about 800000 down from $10 3 million at year end 2022.
We continue to work on our payables in working capital and made strides during the quarter.
Yeah.
Our working capital position narrowed to negative $2 4 million at June 30th 2023 from a negative $13 5 million at December 31, 2022, However, removing short term lease liabilities are working capital for June 30th 2023 was positive $3 7 million versus a net.
Net of $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 30th 2023 and today.
As of June 30, we operated 12 properties 1086 units in five cities as of today, we operate 15 properties.
With 1400 11 units hosting guests in New York, Los Angeles, Miami, Washington in New Orleans.
We have under we currently have under MLA.
17 properties totaling 1600, and twenty-five short term rental.
Yeah.
As of June 32023 across our portfolio our investment in security deposits were 13554 per unit with the high being in New York at 17307, and the low end in New Orleans in D. C. At 5000, and 6329, respectively per unit. We expect these amounts to two <unk>.
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.
Can we expect gross margins of 30% to 40%.
G&A, excluding noncash items will approximate 10% to 12% during the year. We believe that this will result in EBITDA margins of 20 to 25 plus percent.
We continue to expect.
Year end operating units to be between 20, 503000 short term hotel units under Emma like up from 844 at December 31, 2022, and 1000 and 625 as of today.
The timing to reach the goal of between 20 503000 units may positively impact our revenue guidance for the year.
A few additional comments about the Wyndham partnership we estimate.
Key money reduced by required Capex provides us over $50 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 to 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 windows booking channels.
Based on our expected case.
We believe we will improve revpar, which will impact us.
Starting 2024.
And reduce O T a cost.
By about one third based on our current.
Our booking fees the net impact once we're fully operational will be after yearend. Finally, we have yet to quantify the secondary benefits of staffing and resources at Luxor, but as we continue to become more dependent on Wyndham for items, where it currently headroom on an operational basis with that I'll turn the conversation back over to Brad.
Yeah.
Thank you Shannon.
I believe.
We're going to.
Open this up for questions now just want to thank everyone for participating.
I'll turn it over to Gavin to open up for questions.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two to remove your question from the queue for participants.
Using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And the first question comes from the line of Allen Klee with Maxim Group. Please proceed with your question.
Good morning, Congrats on a very strong quarter.
When I look at it.
One area, where there was a strong positive variance compared to our motto was your revenue per available room could you just give some color on what there's a lot of things that go into revpar.
What what drove the jump there. Thank you.
Yeah sure I'll take that so.
Alan So so the jumps so we did 257 last quarter the jump to the $2 91 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 sort of tick up for the summer season, coupled with sort of a down you know 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 they were put on at the early part of the quarter.
Yeah.
Thank you in terms of window My I was looking through your 10-Q.
Dirt in it you say that you'll pay them.
Around a 6% franchising figure on gross booking units in the beginning which will rise to six 5%, but the cost savings you're going to get from from the order booking orders and I'm using their system and then that your net expenses will decline as a result of that.
I heard you say something where climbed by one third I didn't quite catch that could you talk a little about the the factors in and there's some sense of the decline in expenses that can come from Wyndham.
Yes, sure. So so franchisees along with with booking fees on their platform.
<unk> is about one third less than what we currently R. R. O T air agreements. So so to the extent that we're driving traffic through Wyndham spot for them. It's a it's a it's about a one third reduction basically call. It O T a and other fees.
If we go if we continue to use otas.
Better negotiated rate them, we do so that plus the franchise fees is more expensive.
But we fully expect and all the guidance we've gotten from the wind team is that a significant part of our future bookings you know over time will go through their platform and through their through their rewards members and such the way we've modeled it is.
About a little less than half is sort of the breakeven.
For it but we fully expect to be.
Much higher than that as.
As we fully ramp up.
Thank you and I had thought I also heard you say that this would improve your revpar could you explain how the how the Wyndham transaction, which could improve the revpar. Thank you.
Yeah, I'll take that just from a marketing perspective.
Hey, Alan it's Ryan.
So.
So Wyndham has over 100 million rewards members worldwide.
And.
<unk> rewards program in the world. So they have members that.
Utilize both through their you know.
And internally show through the women's Ward's Ware.
In particular in New York City, Wyndham has limited supply, but its all rooms do 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 handsome way through.
Wyndham is 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 that it's very very substantial.
That's great and then 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 and so there'll be providing your working capital and are basically paying somebody a security deposit which had been a part and then maybe one of the higher cost.
That may be constrained some of your growth that that could get eased up is is there anything you could add some color on how you're how you're trying to think about the benefit from that over the next year or two thank you like maybe in terms of like the amount of rooms, you can add.
Absolutely. So just just as a point of fact, if you. If you go to the balance sheet from this Q1, we have invested $19 $6 million in two security deposits.
With a three and a half million of letter of credits so call. It about 23 million totally totally invested into the portfolio in terms of deposits, which was our largest outlay of capital for those hotels.
And you know that portfolio generated $8 4 million of EBITDA.
When you're looking at a ROI or investment you know you've got $23 million invested into.
All properties, and you're generating $4 million EBITDA quarter annualized yeah about 33 million of EBITDA on 23 million invested. So you know we had talked about a dollar of our investment.
Investment into security previously for a dollar of EBITDA, we're seeing it a greater return than that currently.
And then in particular Wyndham provides us as part of <unk>.
The franchise agreement capital.
Hmm.
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 congratulate Oklahoma.
And now on the <unk>.
I missed it.
It's 15 million the way we've modeled it about 50.
Oh, sorry, okay. Thanks, Thank you.
Thank you so much.
And the next question comes from the line of Bryan Maher with B Riley Securities. Please proceed with your question.
Thank you and good morning.
We're starting to see a little bit of an acceleration in hand backs of hotels from our coverage companies.
<unk> to the banks you know in lieu of refinancing difficulties are you subsequently seeing a pick up in inbound calls and opportunities for you and kind of as a second part to that question are you seeing any changes in the terms that owners are looking for a two.
Day relative to kind of what you saw up through the first quarter.
So yeah, we are definitely seeing a.
Several a day were getting show in every distressed Neil you know throughout that's in need of a refinancing or that is over levered. So you know, we're we're very carefully selecting and a very disciplined approach.
Only that.
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 you know outside of what you've talked about in the past or are there any markets within the U S or outside the U S. I think maybe you talked about in London before.
Where you're focusing your attention.
Yeah. So you know it's the five cities. We're in today and then its Boston and London that we're actively pursuing opportunities.
We've continued to scale rapidly in New York represents the largest opportunity will be concentrated in New York City.
<unk> represents the largest part of our pipeline as well, but Boston and London or to other cities that need both our underwriting criteria and also have.
The attributes that we look for in terms of volume travelers and reservoirs that are sustainable.
Our risk profile, so really a seventh city footprint I'm.
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 luck serving as concern.
The seventh city footprint that we're focused on.
Okay, and maybe last for me in New York City. Since you brought that up you know you can't open a newspaper turn on the T without seeing.
You know inbound staying at the Roosevelt Hotel and you know what kind of a disaster that is you know outside there is a hotel I don't know, what New York City as Pang rose about four their rooms, but as it relates to the closed hotels in New York City that you might be able to.
You know strike a deal with.
You know, 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 saying.
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 the Sydney contract.
So and owner, who if you look at it.
Particular, like ROE, New York City. The owners went into foreclosure took the city money and now were trying to restructure their debt. It hasnt allowed them to restructure so it's really a band aid on the larger problem.
And some owners are opting for short term cash I do believe that it'll create a secondary pipeline. It's about I think close to 100 hotels in that program.
So as they clear out in the programs I think it'll give us a secondary pipeline beyond that too.
You know clean up those hotels bring them back online and so it tells me 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 with even.
So in two deals with the city put your hotels that the owner is going to turn it back refurbish them and then turn it over to Russ one sneak program. So it's really just a secondary pipeline opportunity for us.
Okay. Thank you that's helpful.
And the next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.
Hey, guys just a follow up on the wind.
Deal there.
Walk us through kind of how how you expect to get that level of kind of booking.
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 channels to kind of help direct thing 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 how are you how do you envision a wyndham getting to you know.
That level of your bookings or are you going to be removing your hotels for many other otas are channel partners, who are raising rates or any other channel our or is that just going to you think happen organically as a function of being exposed to that many wyndham members.
Yeah, I mean, I think you know we ran internally our model with them you know, we're 91% O T. H turbine today, so paying close to 15% I think our cost was this quarter was $3 $7 million in third party O T a commissions.
What's the number.
Plus about $1 5 million in additional processing fees. So you know all in about $5 2 million went out the door this quarter in expense.
They typically provide an urban core on there their properties you know 85% direct booking. So we you know we were talking about snips and modeling are our cost savings at a third so substantial leverage in we would not to answer.
Your question, specifically would not remove them, but I think that they will pick up a large portion of our our bookings on both through rewards also they have a pretty sophisticated.
Sales and distribution as well.
And they also have group sales <unk> sales specific departments around that and you know they have you know 9000, plus hotels globally largest franchise company in the world. So their sales and distribution, it's very powerful almost as powerful if not as it as an O T a itself.
So we're looking at redistributing cost savings there so yeah, it's pretty powerful and we did a pretty extensive work on it.
Okay. Thanks very much.
And the next question comes from the line of Matthew <unk> with Jones trading. Please proceed with your question.
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.
Why five T V stuff like that I mean, the expectation going forward are we going to see increases there kind of similar to that.
Rent expense.
So the way we want.
Yeah. So the way we look at it. So we got we got to about $26, 9% EBITDA margins. This quarter, we were in the low twenties last quarter part of that is is the impact.
Pact of new property additions.
Is less of a drag you know as we continue to grow the portfolio.
When we enter into a new property with higher on the staffing we were ramping up the revenues associated to it becomes less of an impact as we continue to grow you know we.
Historically, we're very scrappy startup bootstrap company.
We continue to sort of run in that sort of mindset. So consolidation of operations you know cross staffing different properties with you know with personnel Gms and maintenance crews and so forth, we're meeting with utility companies actually as we speak now.
To leverage you know.
The economies that we're developing so I would say overall look I think there's still plenty of areas, where we can improve so I would actually look at it from a different perspective, as we grow and we become a more you know a better capitalize a larger player I think we can get some savings to offset.
Pricing increases so net net I would.
We'd be looking at sort of the same level of cost.
Okay. That's helpful.
And in terms of occupancy you guys I believe had your best quarter ever there, 80% how is it tracking this quarter. If you have any insight into that for the remainder of the summer and then what is the expectation once the false starts and school is back in session.
Okay.
Yeah. So so I think I think we're going to we're going to improve occupancy.
As we continue through the balance of the year, you know its tough and in Miami right now with the weather, but that should pick up.
Fall New York continues to stay very robust I mean, you know anecdotally I'd tell.
All 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 you know were also.
Pretty focused on perishable settling the perishable inventory we have so look what I would I would you know where we're getting better at optimizing.
You picked it up in terms of you know occupancy I think we still have some some room to increase that you know we run a business where you know every night that those by way of a makeup room. It's lost revenue we have to balance that you know with.
With the brand and and you know 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 with sort of the baseline of where we're at right now.
Awesome, Thanks for taking the questions.
And the next question comes from the line of Tom Curran with Zacks investment Research. Please proceed with your question.
Hey, good morning, guys, one more follow up on the Wyndham deal.
Do they have any operational and put it 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.
Yeah.
Sure.
We maintain our operating control and then we collaborate on revenue management sales and distribution.
Well as standards and customer service and also standards in internally on the property as well.
Does that mean, you don't use your pricing algorithm and since you have developed over the years.
Or do you collaborate them, though we still we can collaborate we still runs sales and distribution in connection with their team.
Oh, Okay got it a couple of quick financial questions.
Yep.
The share count increase because of the revenue share agreement.
So the average share so the ending shares for the third quarter will be $44 2 million.
So that shouldn't be the ending.
Yeah. So so if you look at the cover of the Q D.
Shares issued are the slightly under $36 million the way the Rev share agreements are structured.
Hum.
The the the debt holder can call on additional chairs. So that's the 44, that's an all in number of what's been committed on the Rev share.
Agreement so.
But we don't know if it was then issued until they.
E execute yeah, yeah. They they they may ask for those to be issued we issued them. So that's sort of the delta between the two numbers when when they ask weird true. So eventually they'll get turned out $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 yeah, alright, and then any guidance or color on the tax rates in the second half of.
The year, the second quarter tax rates seemed a little confusing.
Yes, so so the non majority of the noncash expenses our 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 kind of moving around but if you. So the way I calculate taxes is on a cash basis and take out the noncash where roughly 28% to 30%.
That's combined federal and state.
Got it.
Alright last one so the units are.
Operating units the 16 25 number.
Would that be the rough estimate of units at the end of the third quarter.
Meaning average units for the third quarter would be in the 13, hundreds or something like that.
So we've laid it out if.
If you look at the MD&A section of the Q I've laid it out I think it's page 19. So we have 14 11 operating currently with the balance Theres two properties that are there they're not quite operating right now those those three that are out there that are operating this quarter. We're at the beginning of the quarter. So it would be for.
<unk> hundred plus what we what we are open and operate between now and the end of the quarter, so probably somewhere higher than that.
Okay.
Yeah.
I appreciate it that's all the questions I have for today.
Yeah.
And the next question comes from the line of Allen Klee with Maxim Group. Please proceed with your question.
Okay.
Oh hi.
And my question was answered thank you.
At this time there are no further questions and I will pass it back over to Brian for NAND for any closing comments.
Thank you again, everyone for your participation and continued interest in locks urban hotels, and we're 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.
Yeah.
Okay.
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