CorePoint Lodging Inc.
Q1 2020 Earnings Call Transcript

Published: 21 May 2020

[Operator:]

Thank you for standing by and welcome to the Q1 2020 CorePoint Lodging Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference to your speaker today, Becky Roseberry, Senior Vice President of Finance and Investor Relations. Thank you. Please go ahead, ma’am.

[Becky Roseberry:]

Thank you. Good afternoon and welcome to CorePoint Lodging’s first quarter 2020 earnings conference call. In a moment, we will have remarks from Keith Cline, our CEO and Dan Swanstrom, our CFO. Rob Song, our SVP of Investment and Howard Garfield, our CAO are also in 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 risk 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 Factors section of the company’s most recent Annual Report on Form 10-K as supplemented by the company’s current report on Form 8-K filed on May 11, 2020 and in the subsequent reports filed with the Securities and Exchange Commission. In today’s remarks, we will also refer to certain non-GAAP financial measures. Corresponding 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 corepoint.com.Finally, for those listening to a replay of this call after May 20, 2020 we remind you that this presentation will not be updated and it is possible that the information discussed will no longer be current.With that, I will now turn the call over to Keith.

[Keith Cline:]

Thank you, Becky. Good afternoon, everyone and welcome. We are pleased you can join us. The 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 frontlines fighting this pandemic everyday. As it relates to our business, I will focus my time today on how we have been managing through this crisis today, our key priorities and our action plan going forward. I will turn it over to Dan later to update you on our operating results, liquidity profile, balance sheet and non-core disposition program.Entering the year, our top 2020 initiatives were a focus on ensuring the revenue and other platform improvements with Wyndham were completed on time and addressed our needs and to execute on the next phase of our real estate strategy. The current operating reality we have entered into, including record year-over-year declines in revenue due to the impact of COVID-19 pandemic, has driven a rapid reprioritization and collective change in 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 to implement cost containment strategies at the hotel and 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 have provided some details on our initial efforts last month and I will briefly give an update on these initiatives. As of April 9, the date we reported our initial efforts, 26 of our hotels were temporarily not accepting transient guests. At peak, we have 30 such hotels. With improving demand we are reducing that number as more hotels begin accepting transient guests and reservations. To-date, 10 of the 30 hotels, are reopened to transient guests and we are 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 were underway. We have intensified those in all cases with reduced staffing levels, elimination of all nonessential amenities and the freezing of all spending at the hotels to only what is essential to run the hotel safely. To give you some context of what actions we have taken, we have cut costs significantly across the property level P&L by over 50% today compared to our original 2020 expectations. Labor has been the biggest driver of the cost savings and our revised labor standards reflect a significant reduction in housekeeping hours driven by lower occupancy as well as reductions in areas such as breakfast, maintenance, van drivers and 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 an occupancy level of approximately 21% and a RevPAR of approximately $13.50, our preliminary property level cash burn was in the range of $9 million to $10 million. Based on our run-rate from the last 4 weeks which includes both the recent pickup in occupancy and the full impact of the cost containment items we have 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 have taken the same assertive asset management approach with sales and revenue management. Together with our third-party manager, we are actively pursuing opportunities such as extended stays, medical and first responders, construction, government as well as other local and regional relationships. We are actively working through a number of revenue management strategies that have been successful for us in the past with these assets and the very early read on these efforts is encouraging with gains in market share and increased revenue. At the corporate level, we have also taken a number of steps to reduce costs related to corporate G&A and capital spending and Dan will 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. The enhanced direct billing system for corporate and group clients was finalized late in the first quarter with other deployments of certain legacy booking tools on schedule to be completed by June 30, 2020 and the implementation of the enhanced dynamic best available rate setting tool scheduled to go live by December 31. 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 the 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 proceeds of $290 million at highly accretive hotel EBITDA multiples. The proceeds have primarily reduced our debt and enhanced our liquidity. Ultimately, we believe the sale of the 140 remaining non-core hotels over the next 2 years or so could generate substantial proceeds to further de-lever 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 COVID-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 to deals under contract. We have observed the financing process is slowing down, including on SBA 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, 6 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 have seen a restart to the process with 3 deals closing so far in May for approximately $13 million in gross proceeds. Dan will provide some additional details on closed transactions in a few moments. We have said all along that this was a multiyear process and the recent pace during April doesn’t change the ultimate goal or diminish 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 matter for CorePoint and for that matter, all of lodging. We believe the decisive actions we have taken over the last several weeks have made a significant difference in our ability to create long-term value for our shareholders. I am proud of the collective response of our team and look forward to updating you on our future progress.With that, I will turn the call over to our CFO, Dan Swanstrom. Dan?

[Dan Swanstrom:]

Thank you, Keith and good afternoon everyone. I will start today by providing a brief review of the first quarter operating results, recent trends and our actions to preserve liquidity. I will also provide updates on our balance sheet and our non-core 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 9. The compatible RevPAR decline of approximately 23% during the first quarter was driven by a 5.5% decrease in ADR and a 1210 basis point decline in occupancy. For the month of March, comparable RevPAR declined approximately 52% year-over-year. The decrease in revenue was due to the significant reduction in room demand resulting from the impact of COVID-19, which is clearly evident in the occupancy stats as well as the year-over-year disruption from the transition and integration of our hotels on to the Wyndham platform in April 2019 and the impact of sold hotels. This contributed to the decline in adjusted EBITDAre 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 have 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 mid-scale segments, is well-positioned to capture incremental room 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 have also taken a number of steps at the corporate level to implement the capital preservation measures. These actions include

[Operator:]

Thank you, sir. [Operator Instructions] I show our first question comes from Chris Woronka from Deutsche Bank. Please go ahead.

[Chris Woronka:]

Hey, good afternoon, guys and thanks for all the color. So could you maybe talk a little bit about the overall kind of buyer pool for the assets? Pretty impressive that you are able to close, I think you said 3 hotels so far in May. I mean, do you know if these are – new owners are planning to keep them as hotels or is there some kind of alternative use?

[Keith Cline:]

Well, these deals that it closed were deals that we had struck to kind of pre-COVID-19. And generally, the vast, vast majority of the people that they are buying these hotels are existing hotel owners that may either own a La Quinta flag or potentially even other flags. So I will 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 the deals that we’ve struck – the vast majority of those are for continuing hotel operations.

[Chris Woronka:]

Okay, great. Appreciate that. And then, as you guys think about I guess you could go street corner by street corner, but you probably focus a little bit more on the core 105 hotels for now. I mean do you think there is a possibility that some of the competitors in those markets maybe they’re older product and substandard and maybe even on branded, do you – are you seeing any signs that there is going to be more hotel closures and your competitive set.

[Keith Cline:]

Well, it’s interesting, right. Obviously, the market’s performing very differently by price point in terms of aggregate number of rooms that are closed. And I think you’ve seen the data with the economy segment really outperforming from an occupancy perspective 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 have talked about and Dan mentioned specifically in his comments. And as we mentioned in our press release as well, we’re seeing occupancy numbers that are in the mid-30s and approaching 40% or higher at times. So as I think about the positioning of our hotels, relative to the competitors on our street corners. It’s pretty clear that in a challenging environment, given the market share gains that we’re seeing and the accelerate – reacceleration 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 a hotel has the ability, given the level of demand that exists to operate and cover fixed cost on a contribution margin basis, we’ll work hard to keep those rooms available for transient guests in the very few number of locations that can’t support it we will suspend them for a period of time until demand comes back. And we’ve been pretty, pretty systematic and methodical about reviewing them

[Chris Woronka:]

Okay, very helpful. And just one last one for me, you mentioned you have gotten up I think 35% occupancy lately 38% for the hotels that are taking transient. Is that roughly kind of a breakeven occupancy level at the property level or is there still more to go?

[Keith Cline:]

Breakeven right, it’s a nuance concept, because there’s a lot of variables that significantly affect how sensitive breakeven can be and in these hotels right. Given that we’re in the select service part of the industry, Labor is a very large percentage of our cost and given the ADRs that we typically charge. ADR can make it very highly sensitive. So as you think about it in broad strokes, if we are running let’s say ADRs in the mid-60s and labor as a percentage of revenue is, let’s call it 25%. Our kind of theoretical breakeven is probably close to 50% occupancy. Now to show you how sensitive that is if the labor cost is only dropped by a few hundred basis points, the theoretical breakeven occupancy at the same ADR can drop 10-full points. I mean it’s very sensitive. So we’re focused on kind of optimizing rate and RevPAR in these properties and growing occupancy at a level that puts us in the best position 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.

[Chris Woronka:]

Okay. Yes, understood. Very helpful. Thanks guys.

[Keith Cline:]

Thanks, Chris.

[Operator:]

Thank you. Our next question comes from Omer Sander from JPMorgan. Please go ahead.

[Omer Sander:]

Hey, everyone. Thanks for taking my questions. I hope you guys are and your families are well and healthy.

[Keith Cline:]

Same to you.

[Omer Sander:]

Thank you. So first, on the proceeds from asset sales, how was your thinking on the use of proceeds changed? I guess the portion of proceeds used to pay down debt, made them reading too much into it, the portion of proceeds used to pay down debt for assets sold in the 1Q and 2Q today was a bit lower than 2019. I guess the industry pressures does the amount that you can deploy versus what you required to hold come down given the CMBS agreement?

[Dan Swanstrom:]

Yes, good afternoon, Omer, 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 have managed it over time, we’ve paid down to at least the extent required 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 therefore all of the proceeds from asset sales will be required to pay down CMBS debt.

[Omer Sander:]

Okay, that’s helpful. Thank you. And then just one follow-up, I guess, on one of the earlier comments on the – I was hoping you could elaborate on the state of the financing markets when you’re looking at these asset sales. How much is that a sticking point versus investors or buyers really just looking to see how things kind of come together for the next couple of weeks?

[Keith Cline:]

As you mentioned in kind of our prepared remarks during the month of April, just given the rapid steep contraction in the worst month in the history of our industry, the financing markets paused on the deals that we had in the pipeline and the buyers of those assets had to just 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 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, really the lending markets paused to see where the bottom of this potentially could be and see if there’s 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 spent with us

[Omer Sander:]

Great. Thank you.

[Operator:]

Thank you. I show 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.

[Keith Cline:]

I want to thank all of you for your interest in CorePoint Lodging and listening in today. And we wish all your families a lot of safety and health as we all work through this. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.