CorePoint Lodging Inc.
Q4 2018 Earnings Call Transcript

Published: 22 Mar 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to CorePoint Lodging’s Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s conference maybe recorded. I’d now like to introduce your host for today’s conference Ms. Kristin Hays. Ma’am please go ahead.

[Kristin Hays:]

Thank you, Liz. Good afternoon, and welcome to CorePoint Lodging’s fourth quarter and full-year 2018 earnings conference call. This presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflects the company's current view of future events and financial performance. Words such as outlook, expect, will, plan, anticipate, intend, believe, and other similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties, such that the company's future or actual results could differ materially from historical results or current expectations or from that which is expressed or implied by any such forward-looking statements. For more details on these risks, please refer to the company's information statement included as Exhibit 99.1 to the company's registration statement on Form 10 or our annual report on Form 10-K once it has been filed with the Securities and Exchange Commission. In addition, in today's remarks, we will refer to adjusted EBITDAre, which is a non-GAAP financial measure. You may find a reconciliation of this information to the most comparable measure calculated and presented in accordance with GAAP in our earnings press release, which is also included as an exhibit to the Form 8-K we filed with the SEC, which may be found on our website at www.corepoint.com. Also, it is important to note that certain financial results, including adjusted EBITDAre, will be discussed on a pro forma basis giving effect to adjustments relating to our spin-off from La Quinta Holdings and other matters. Please refer to our earnings press release for additional detail. Please note that no portion of this presentation may be rebroadcast or rewritten in any form without the prior written consent of CorePoint Lodging. For those listening after March 21, 2019, we remind you that this presentation will not be updated, and it is possible that the information discussed will no longer be current. This afternoon, Keith Cline, our President and Chief Executive Officer, will provide an overview of CorePoint's fourth quarter and full-year performance and a review of our strategic priorities for the coming year, including an update on the Wyndham integration. Dan Swanstrom, CorePoint's Chief Financial Officer, will then provide more details on our quarterly performance, review our balance sheet and liquidity position, and discuss our outlook for 2019. Keith will then make a few closing comments before we open the line for your questions. Also, in the room with us today is John Cantele, CorePoint's Chief Operating Officer; Howard Garfield, our Chief Accounting Officer; Rob Song, SVP of Investments; and Becky Roseberry, our SVP of Finance. With that, I will now turn the call over to our President and CEO, Keith Cline.

[Keith Cline:]

Thank you, Kristin. Good afternoon, everyone, and welcome to CorePoint Lodging’s fourth quarter and full-year 2018 earnings call. We are pleased you could join us today. I’ll begin with a recap of our 2018 performance. As many of you know, CorePoint Lodging became a standalone public held company at the end of May as a part of the transaction where La Quinta spun-off its own real estate into a portfolio of 315 geographically diverse hotels that is primarily focused on the mid-scale and upper mid-scale select service segments. Since that time, the CorePoint team has been building the foundation to unlock the potential of our portfolio and maximize results. As a reminder, our key priorities for the second half of 2018 were to drive RevPAR and market share growth, reopened our hurricane affected properties, complete the repositioning of 54 hotels in key markets, begin executing a proactive asset management strategy to drive results, while also enhancing profit margins through Wyndham’s business model and scale of operations, and monitor the transition to an integration of the La Quinta brand and the management of our hotels with Wyndham Hotels and Resorts. I am pleased to report that we accomplished much of what we set out to do in the second half of the year. This afternoon, we reported comparable RevPAR growth in the fourth quarter of 9.9%, driven by healthy increases in both rate and occupancy. Our RevPAR performance in the fourth quarter benefited from having rooms back in service in Florida and we successfully reopened the remaining properties impacted by hurricane Irma, which was ahead of schedule. The fourth quarter also benefited from a continued RevPAR growth tailwind, driven by our repositioned properties. During the quarter, we completed four additional repositioning projects bringing the total to 53 as of the end of the fiscal year. This leaves us with one repositioning project to be completed at our [indiscernible] location, which we expect to be complete in the first half of 2019. For the full-year, we delivered comparable RevPAR growth of 4.7%, which exceeded the high end of our guidance range of 4.25% growth and comparable RevPAR index for the full-year grew by 360 basis points. Growth in both RevPAR and market share in 2018 was primarily driven by the list generated by our repositioned hotels and by the performance in our West Texas hotels. In addition, today we reported adjusted EBITDAre of $180 million for the full-year at the high-end of our most recent guidance range. Adjusted EBITDAre however continues to be pressured by expenses, especially in the areas of payroll and benefits, supplies, property insurance, and third-party OTA fees. Dan will go into more detail on our adjusted EBITDAre performance in just a moment. While we’re pleased with our RevPAR and market share growth last year. We are evaluating our entire portfolio to identify opportunities to expand profit margins and improve overall performance. Moving forward, into 2019, our team will be focused on two strategic initiatives to unlock the potential of our diverse portfolio and maximize results. First, we are executing an aggressive asset management strategy that includes working closely with our manager to improve the operational performance of CorePoint's portfolio, especially in our underperforming hotels and working to leverage their broad distribution network and infrastructure. And second, we are engaged in ongoing strategic review of our real estate portfolio to identify hotels that no longer fit within CorePoint strategic plans and may be candidates for possible disposition. With regard to the first initiative, we continue to believe there are opportunities create value by leveraging Wyndham's broad distribution network and infrastructure to drive revenue and improve margins. The property management and revenue generating systems of La Quinta will be transitioning in early April, which is designed to give the brand the benefit of Wyndham's broader distribution network. We believe there will be opportunities to drive traffic through direct channels, by cross-selling in their call centers, and via their website. Wyndham also offers an industry-leading travel rewards program with over 60 million members who will be exposed to La Quinta by Wyndham and upper midscale offering that has not previously been available within its family of brands. We remain focused on our mix of revenue that’s been generated through direct channels, as well as the overall cost of customer acquisition. For our portfolio, the channel mix of third-party booking was 30% for the fourth quarter and the full-year of 2018 as compared to 27% for the same period last year. We believe that by the second half of this year, once the La Quinta brand is fully integrated, we will begin to see the benefits of Wyndham's network distribution and scale. In addition, we believe that opportunities exist to improve CorePoint’s EBITDA margins as we execute an aggressive asset management strategy and continue to focus on cost control, especially at our lowest performing hotels. There are several areas we can partner with our manager to lower expenses, better control labor costs, and leverage their scale to improve results. We believe the largest areas of opportunity continue to be payroll, employee benefits, insurance, third-party travel agency commissions, and savings available by leveraging Wyndham's procurement programs at the hotel level. To date, Wyndham has identified approximately $5 million of expense savings, related to field employee costs for healthcare, benefits, and insurance that is included within our 2019 outlook. However, any revenue or channel benefits to be realized from Wyndham's broad distribution network is not included in our current outlook. We’ll provide an update on that progress on our Q1 earnings call. Next, under our second initiative, we are engaged in an ongoing strategic review of our real estate portfolio to identify hotels that no longer fit within CorePoint strategic plans and may be candidates for possible disposition. As you know, our existing portfolio of hotels is the outcome of a transaction. As such, we have certain assets that may not fit within our strategic focus. To that end, in the fourth quarter of 2018, we began a strategic review for portfolio with the goal of improving operating performance and results. Our initial focus is on our lowest performing hotels where we are evaluating opportunities to increase gross margin, net cash flow, and return on investment. Concurrently, we are evaluating what are the disposition of certain hotels could result in a superior value creation outcome. As you will see in our updated investor deck there is a subset of 237 hotels tells that we identify as our core portfolio that delivers approximately $723 million of revenue annually and approximately 26% hotel level adjusted EBITDAre margins. We’ve also identified a set of non-core hotels that significantly underperforms our core portfolio. This non-core portfolio consists of 76 hotels, which represents approximately $138 million of revenue and on average delivers approximately 8% hotel level adjusted EBITDAre margins. We considered many factors when characterizing an asset as non-core, including market conditions, the age of the asset, capital requirements, and revenue and margin performance. In our earnings release, we disclosed the sale of two of those non-core assets. Dan will provide more details on the pricing of those transactions in his remarks. I should also mention, that in connection with the strategic review and segmentation of our real estate, we shortened the assumed holding periods for many of our hotels and recorded a non-cash impairment charge of $154 million. As I said previously, we are engaged in ongoing strategic review of our assets to identify opportunities to expand profit margins and improve the overall performance of the CorePoint portfolio. We look forward to updating you on the progress as we move throughout the year. With that, I will turn the call over to our CFO, Dan Swanstrom. Dan?

[Dan Swanstrom:]

Thank you, Keith, and good afternoon everyone. Today, I will discuss CorePoint's operating results for the fourth quarter, provide an update on our balance sheet and liquidity position, review our outlook for 2019, and provide additional details on our recent disposition activity. Adjusted EBITDAre for the fourth quarter of 2018 was 30 million, resulting in full-year adjusted EBITDAre of 180 million on a pro forma basis, which as Keith mentioned, came in at the high-end of our most recent guidance range of 174 million to 180 million. The outperformance in the fourth quarter relevant to the mid-point of our prior guidance was primarily driven by the reopening of our remaining hurricane Irma impacted properties in Florida ahead of schedule, revenue outperformance broadly across our portfolio of hotels in the Phoenix market and the benefits of one-time spikes in room demand experienced at our hotels in the Boston and El Paso markets. Turning to our balance sheet, at the end of the fourth quarter of 2018, the company had total debt outstanding of 1.035 billion, which consists entirely of our CMBS debt facility. As of today, our 150 million revolving credit facility is undrawn. In terms of liquidity, between the undrawn revolver and our 60 million of cash and cash equivalents at December 31, we have 218 million of total availability. With respect to our total estimated business interruption insurance claims of approximately 26 million through December 2018 the company has received approximately 12 million in total business interruption insurance proceeds, which includes approximately 9 million received during the fourth quarter of 2018 that is excluded from adjusted EBITDAre. Subsequent to year-end, we have received an additional 1 million in business interruption insurance proceeds. We continue to expect to recover the majority of these business interruption claims in the future. We will keep you posted on the amounts and timing of incremental proceeds received, but I would highlight that business interruption insurance proceeds will continue to be excluded from our 2019 guidance. Today, we introduced our 2019 guidance outlook. We expect comparable RevPAR growth of 0% to 2% for the full-year 2019 and we anticipate adjusted EBITDAre to be in the 173 million to 184 million range. Included in our updated investor deck is an EBITDA bridge for the full-year 2018 on a pro forma basis to the mid-point of our 2019 outlook. We currently estimate incremental hotel EBITDA contributions of 10 million and 7 million in 2019 over 2018 from our hurricane impacted hotels and our repositioned hotels, respectively. Hotels with significant exposure to oil industry-related demand, in particular our West Texas hotels are expected to experience headwinds in 2019, primarily due to increased alternative supply in those markets. We currently estimate hotel EBITDA from this bucket of our portfolio to decline 8 million in 2019, as compared to 2018. For the remainder of our portfolio, we currently estimate hotel EBITDA to decline 10 million in 2019, as compared to 2018, as we expect to continue to experience hotel operating expense pressures. For the first quarter of 2019, although our comparable RevPAR growth is tracking above 2,5% growth as compared to the first quarter of 2018, our portfolio has experienced some revenue softness in both rate and occupancy relative to our expectations coming into the year, particularly as it relates to the Florida markets, including our hurricane impacted hotels, the Northeast region and Houston. Our outlook for 2019 takes into account these revenue performance trends. From an expense perspective for the portfolio in totality, year-over-year we expect continued expense growth overall with increases in payroll, property taxes, third-party travel agent commissions, and property insurance to more than offset the 5 million of Wyndham-related expense savings that Keith previously mentioned. The increases in property insurance are most impacting our hurricane disruption hotels. As we continue to experience ongoing cost pressures, our asset management team is working diligently to identify additional opportunities to reduce controllable expenses. In terms of capital investments, we are pleased that our 54-hotel strategic repositioning program is nearing completion, with more than 230 million or over 30,000 per key, invested to reposition these hotels upward within their local markets, the CorePoint portfolio will continue to benefit from this significant capital investment program initiated in 2016. As it relates to capital spend expectations for 2019, we anticipate total capital expenditures for the portfolio to be in the 8% to 9% of revenue range. Based on 2018 actual revenues, this equates to approximately 70 million to 75 million of expected 2019 capital spend with up to 5% of revenues allocated to maintenance CapEx and the remaining capital allocated to smaller scale hotel improvement projects. Turning to asset sales, as Keith mentioned, today we announced the sale of two non-core hotels. One located in Chattanooga, Tennessee, which was our only Baymont hotel in the portfolio and one located in Tuscaloosa, Alabama for a combined total gross sales price of approximately 4.5 million. We used all of the net proceeds from these transactions to paydown CMBS debt outstanding. In 2018, these two assets combined, produced approximately 2.7 million of revenue and approximately 200,000 of hotel level adjusted EBITDA on a pro forma basis. We were pleased to achieve over a 20-times multiple on 2018 EBITDA on the disposition of these two lower-performing non-core assets. We plan to continue to evaluate additional opportunities to create value for our shareholders through the potential disposition of further non-core assets. I will now turn the call back over to Keith.

[Keith Cline:]

Thanks, Dan. In closing, we believe CorePoint represents a compelling investment opportunity. Our goal continues to be the creation of premium long-term total returns for our stockholders. Long-term, our team is executing a multifaceted approach to value creation based on three key strategies, two of which we have begun executing against in 2019. One, we are focused on the transformation of our portfolio by cultivating high-growth and highly profitable assets. Two, we are executing against key asset management initiatives by working with our property manager to continuously improve property-level operating performance through aggressive proactive asset management. We're also partnering with our brand to realize revenue and cost synergies by leveraging Wyndham's distribution scale. And three, longer-term, we continue to believe there is a consolidation opportunity in this space. Through disciplined capital allocation strategies and a focus on continuing to strengthen our balance sheet, there is an opportunity longer-term for CorePoint to consolidate a diversified portfolio of select service hotels. We believe this three-pronged and multifaceted approach to value creation is what makes CorePoint lodging a unique investment. Our differentiated strategic focus and unique market position creates what we believe is an attractive value creation opportunity in the midscale and upper-midscale lodging segments over time. With that, we'll open the line for your questions. Operator?

[Operator:]

[Operator Instructions] We have a question from the line of Omer Sander with JPMorgan. Your line is now open.

[Omer Sander:]

Hi, guys, congrats on the quarter and thanks for taking the question. Obviously, with a number of moving pieces…

[Keith Cline:]

Hi, Omer.

[Omer Sander:]

Hi, number of moving pieces with the ramp of hurricane-interrupted hotels, the recent renovation, obviously getting on in the Wyndham platform, as well as the review of 17 non-core assets. How do you think about some margin profile of the business, maybe the absolute RevPAR index of your portfolio in the future? And then I don't know if you have – how renovated hotel has been tracking? Longer-term, do you think you could be buyers of assets, as well as when you look at these seven to eight hotels?

[Keith Cline:]

Yes. So, Omer, let me kind of break that down a little bit. So, when we think about on a good resource for some of this information to at least look at the bucketing, not necessarily the margins of the RevPAR, but I'll talk a little bit to the RevPAR expectations. Page 22 of our updated investor deck provides a waterfall from our 2018 actual EBITDAre to the midpoint of our 2019 guidance. And it breaks down the different EBITDA contributions from the various buckets, hurricane reposition, oil impacted, and then the remaining portfolio, which is about 192 hotels. So, as we look at the kind of RevPAR performance that underly some of these contributions, although the renovated hotels haven't reached full stabilization, we still have hotels that opened during 2018 that have not had a full 12 months of performance behind them. So, think about 2020 as kind of the full-year of stabilization for that bucket. But if you look at that Page 22, I would think about hurricane and reposition impact hotels kind of being in the mid-to-high single-digit RevPAR growth ranges, with hurricane RevPAR growth outpacing reposition hotel growth in 2019. Now, the oil-impacted hotels as we discussed coming into 2019, we did expect some downward pressure in those hotels. And think about those hotels in kind of the high teens range, kind of near 20 percentage down to RevPAR. And really as Dan mentioned on the call, the driver there is kind of alternative supply for housing in those markets, where we're primarily located. And then you have the remaining portfolio, which in that waterfall and as Dan mentioned on the call, was down about $10 million year-over-year. Think about that RevPAR growth as kind of slightly negative, kind of rounding to something close to down one at the midpoint of our range. Now, in terms of the go-forward kind of margin profile of the business, in the investor deck, there is a break-out of core versus non-core where you would be able to see within the core portfolio, there are two different buckets included within that. One, that has margins over 30% and then a core portfolio with margins below 30%. So, if you look at the overall aggregate portfolio of 313, which is absent of the two that were sold recently, about 64 hotels make up that core bucket, where margins are over 30%, so a healthy percentage of our portfolio, about 173 hotels make up the bucket is less than 30. And you can do the math on the page on a blended basis, you can calculate the EBITDA contribution from those buckets. In the non-core, there’s really where the underperforming hotels are existing from a margin composition. So, you can use that page to do, at least, some back of the envelope break-outs on what we think the different margin buckets in the business could be. And certainly, as we think about the strategy of growing our business, right? As we mentioned on the call, we’re using the kind of this three-pronged approach to growing our business, where in the near-term, we're focusing quite a bit on the items that we discussed on the call around asset management and around evaluating our portfolio in terms of improving the overall quality. We still believe longer-term, there is very much an opportunity here to be an acquirer of hotels and consolidate in a very attractive segment of our industry.

[Omer Sander:]

Great. And then maybe just – can you discuss the cadence of RevPAR and EBITDA growth by quarter and there's a lot of moving pieces in there? And then you gave AFFO guidance, does that have any share repurchases built in there?

[Keith Cline:]

Okay. Yes.

[Daniel Swanstrom:]

Omer, this is Dan. In terms of the cadence of RevPAR growth, I think, as Keith mentioned, our first quarter is expected to be the strongest. So, again, we gave a range of 0% to 2%. And in my remarks, I did comment that the first quarter was tracking to be above 2.5%. So, from a growth perspective, the first quarter is expected to be the strongest during the year. On your second question as it relates to AFFO, the guidance that we provided today is for the portfolio as is and it does not take into consideration any dispositions or capital markets or share repurchase activity. Obviously, as we move forward throughout the year, we'll keep you posted and update the guidance as needed.

[Omer Sander:]

Awesome. Thanks so much.

[Operator:]

And that concludes today's question-and-answer session. I'd like to turn the call back to Keith Cline for closing remarks.

[Keith Cline:]

Great, thank you. I want to thank, everyone, for joining the call today and certainly, thank you for your continued interest in CorePoint Lodging. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.