CorePoint Lodging Inc.
Q1 2019 Earnings Call Transcript

Published: 15 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 CorePoint Lodging Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I’d now like to introduce your host for today’s conference, Ms. Becky Roseberry, Senior Vice President of Finance. You may begin.

[Becky Roseberry:]

Good afternoon, and welcome to CorePoint Lodging’s first quarter 2019 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In addition, in today’s remarks, we will refer to adjusted EBITDAre and adjusted FFO, which are non-GAAP financial measures. 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 related to our spin-off from La Quinta Holdings Inc and other matters. Please refer to our earnings press release for additional detail. Finally, for those listening to a replay of this call, after May 14, 2019, we remind you that this presentation will not be updated and it is possible that the information discussed will no longer be correct. This afternoon, Keith Cline, our President and Chief Executive Officer, will discuss CorePoint’s first quarter performance and provide an update on our 2019 strategic priorities, including an update on the Wyndham integration and execution of our real estate strategy. Dan Swanstrom, CorePoint’s Chief Financial Officer, will then provide more details on our quarterly performance, review our balance sheet, highlight our recent share repurchase activity and provide an update on the continued execution of our non-core asset sales. Keith will then make a few closing comments before we open the line for your questions. Also, in the room with us today is Howard Garfield, our Chief Accounting Officer; and Rob Song, SVP of Investments. With that, I will now turn the call over to our President and CEO, Keith Cline.

[Keith Cline:]

Thank you, Becky. Good afternoon, everyone, and welcome to CorePoint Lodging’s first quarter 2019 earnings conference call. We’re pleased you could join us. I’ll begin today with a recap of our first quarter performance. This afternoon, we reported comparable RevPAR growth in the first quarter of 3%, driven by increases in occupancy with roughly flat ADR when compared to the first quarter of last year. We also realized comparable RevPAR index growth of 530 basis points. Our RevPAR performance in the first quarter was driven by double-digit growth in both the hurricane-impacted hotels and in our repositioned properties. Hurricane hotels benefited from cycling over the room closures from the first quarter of last year and repositioned properties benefited from growth in ADR and occupancy as they continue to ramp. This growth was partially offset by the significant headwinds we’re facing in our oil markets, especially West Texas. It’s important to note that our total portfolio RevPAR was up 4.6%, driven by 10 non-comp hotels that were primarily impacted by the hurricanes in Q1 2018, In addition, today, we reported adjusted EBITDAre of $43 million for the first quarter, up $6 million, or approximately 16% over the same period last year on a pro forma basis, with comparable hotel margins increasing 80 basis points. We are generally pleased with our first quarter operating performance. As we have said previously, we expected RevPAR growth for the rest of the year benefiting from the lapping of hurricane displacement in the first quarter of last year and continued tailwinds from the repositioned properties. As we move through the balance of the year with more moderate top line growth forecasted, our asset management team will continue to focus on cost control measures to combat continued expense pressures expected across our portfolio, including as we have previously highlighted, the areas of labor, third-party OTA fees, property insurance and real estate taxes. From a RevPAR cadence perspective, we expect the second quarter to be our weakest quarter in comparison to the prior year. Now turning to our 2019 priorities. As we announced on CorePoint’s fourth quarter 2018 call, we continue to engage in an ongoing evaluation of our entire portfolio to identify opportunities to expand profit margins and improve overall performance. This year, we’re focused on executing two strategic initiatives to unlock the potential of CorePoint’s diverse portfolio and to 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 Wyndham’s broad distribution network and infrastructure. And second, we are engaged in ongoing strategic review of our real estate portfolio to identify hotels that may no longer fit within CorePoint strategic plans and are candidates for possible disposition. With regard to the first initiative. The property management and revenue-generating systems of La Quinta transitioned to the Wyndham distribution network in early April. The month of April was softer than Q1 with several contributing factors

[Daniel Swanstrom:]

Thank you, Keith, and good afternoon, everyone. Today, I will discuss CorePoint’s operating results for the first quarter, review our balance sheet, summarize our recent share repurchase activity, provide additional details with respect to our non-core asset sales and highlight our guidance for 2019. Adjusted EBITDAre for the first quarter of 2019 was $43 million, which compares to $37 million on a pro forma basis for the first quarter of 2018. Year-over-year, adjusted EBITDAre increases in both the hurricane-impacted hotels and repositioned hotels within our portfolio totaling approximately $9 million, more than offset adjusted EBITDAre decreases from our group of hotels with exposure to oil-related demand, including our West Texas hotels and from the remainder of our portfolio. Turning to our balance sheet. At the end of the first quarter of 2019, the company had total gross debt outstanding of $1.031 billion, which consisted entirely of our CMBS debt facility. As of today, incorporating the recent paydowns of CMBS debt from asset sale proceeds, we have total gross debt outstanding of $1.016 billion. We also currently have no outstanding borrowings on our $150 million revolving credit facility. From a capital allocation perspective, in addition to paying down debt with proceeds from asset sales, the company began repurchasing shares of its common stock in March. To date, we have utilized cash on our balance sheet to repurchase approximately 1.8 million shares of common stock at an average price of $11.58, or approximately $21 million in total. With respect to our total estimated business interruption insurance claims of approximately $26 million through March 2019, the company received approximately $13 million in total business interruption insurance proceeds, which does include approximately $1 million received during the first quarter of 2019 that is excluded from adjusted EBITDAre. Subsequent to quarter-end, we have received an additional $4 million in business interruption insurance proceeds. We expect to recover the majority of the remaining $9 million of outstanding business interruption claims in the future. We will keep you posted on the amounts and timing of incremental proceeds received. As a reminder, business interruption insurance proceeds are excluded from our 2019 guidance. Turning to asset sales. During the first quarter, as previously announced, we sold two non-core hotels for a combined total gross sales price of approximately $4.5 million and used the net proceeds from those transactions to paydown CMBS debt outstanding. The gross sales price represented over a 20 times multiple on hotel level adjusted EBITDAre on a pro forma basis or an approximately 1.7 times revenue multiple. And then, as Keith mentioned, today, we announced the sale of an additional three non-core hotels totaling 395 guest rooms. Two hotels located in Savannah, Georgia and one hotel located in Aurora, Colorado for a combined gross sales price of approximately $16 million, or just over $40,000 per key. The gross sales price represents a 15 times multiple on the trailing 12 months hotel level adjusted EBITDAre on a pro forma basis, or an approximately 2.5 times revenue multiple. We allocated the net proceeds from these sales to paydown CMBS debt outstanding. We are pleased to execute on the disposition of these lower-performing non-core assets to maximize their value. For the three hotels, the average hotel RevPAR was more than 25% lower than our portfolio average and the average hotel level EBITDAre margin was approximately 700 basis points lower than our portfolio average. Buyer interest in our non-core assets remain strong and we continue to evaluate additional opportunities to create value for our shareholders through the sale of further non-core assets. Towards that end, we have a number of our non-core assets that are currently in various stages of the marketing and sale process, and we will continue to keep you posted on our strategic disposition activity as the year progresses. Lastly, we reaffirmed our 2019 guidance for comparable RevPAR growth and adjusted EBITDAre. We continue to expect comparable RevPAR growth of 0% to 2% and we continue to expect adjusted EBITDAre to be in the $173 million to $184 million range for the full-year 2019. Our outlook includes all disposition and share repurchase activity to date. The reduction in adjusted EBITDAre for the balance of 2019 from the hotels recently sold, is expected to be offset by a slightly higher level of estimated cash corporate G&A savings for the remainder of 2019. As a result of the headcount reductions in our corporate staff, we expect to incur one-time cash severance expense of approximately $3.5 million in the second quarter, which will be excluded from adjusted EBITDAre and adjusted FFO. With respect to adjusted FFO per diluted share, we updated our 2019 guidance to be in the $1.89 per share to $2.04 per share range, an increase of $0.03 to the low-end of our prior range. As a reminder, our 2019 outlook does not consider any unannounced hotel dispositions, acquisitions or capital markets activity, including share repurchases. We’ll continue to keep you posted and provide updates on such activity as we move throughout the balance of the year. 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 team is executing on a multifaceted approach to value creation, which includes two key 2019 strategic initiatives. One, we’re executing against key asset management initiatives by working with our property manager to continuously improve property-level operating performance through aggressive proactive asset management, and we’re also partnering with our brand to realize revenue and cost synergies by leveraging Wyndham’s distribution and scale; and two, we’re focused on the transformation of our portfolio by cultivating high-growth and highly profitable assets and realizing value through non-core asset sales. With that, we’ll open the line for your questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Omer Sander with JPMorgan. Your line is open.

[Omer Sander:]

Hey, guys, thanks for taking the question.

[Keith Cline:]

Hi, Omer.

[Omer Sander:]

Can you just talk about your capital deployment priorities in regard to the portfolio review? To what extent can you continue share repurchases versus repaying debt?

[Daniel Swanstrom:]

Sure. Hey, Omer, this is Dan. Our priority has been on paying down debt and opportunistically repurchasing our shares accretively at a discount to NAV. As you mentioned upon sale, our CMBS facility does require us to paydown the allocated property loan amount, plus our release sales premium of about 5% to 10% above the actual loan amount. And then further until we hit a stated debt release yield on sales, we are required to paydown additional debt upon sales. So we do expect as we continue to move forward for debt paydowns to be a priority, and then when we reach that level to then have full discretion with the cash proceeds after the allocated loan amounts to then use for other capital allocation priorities, including share repurchases.

[Omer Sander:]

Okay. And then shifting gears, RevPAR in the first quarter was driven by – had a nice benefit from the hurricane-impacted hotels, as well as the renovated hotel. The 3% same-store excludes those hotels, is that correct? And how many, I guess, are included in that renovated bucket?

[Daniel Swanstrom:]

No, the 3% comp RevPAR includes the hurricane hotels. There’s only a handful of hotels that we actually took out of comp, about seven hotels that actually are not in the comp base. Our comp base is 303 hotels, which includes all of the renovated properties and all of our hurricane properties.

[Omer Sander:]

Got it. And then…

[Daniel Swanstrom:]

And as we mentioned, hurricane in the renovated properties generated kind of double-digit RevPAR growth in the quarter and obviously, we saw a pretty significant headwind in the oil markets.

[Omer Sander:]

Okay. And now there’s only one hotel, one renovated hotel that’s not yet opened?

[Keith Cline:]

Yes, it’s not yet opened. It is in our comp base, but our property at LAX continues to go through some last investments.

[Omer Sander:]

Got it. And then with regard to the index gain, I think you were north of 500 bps of index gain. I think, in the 4Q, there was also pretty solid gains. Are you now above index of 100?

[Keith Cline:]

Well, so as we think about the index gains that we’re realizing, in Q4, as well as in the first quarter, we saw pretty heavy benefits to index as it relates to hurricane properties, because as you recall in Q4 of 2017 and Q1 of 2018, we saw disruption in those markets and overlapping against that disruption. Now, obviously, we’ve got our renovated properties that are out there ramping and continuing to ramp. I don’t have the specific breakdown of overall index number sitting in front of me, but certainly we’ve seen some pretty healthy increases over the past couple of quarters.

[Omer Sander:]

Okay. And that maybe you haven’t, maybe you don’t. But do you know RevPAR ex-renos and ex the hurricane hotels? Just trying to get a comp overall?

[Keith Cline:]

In our Q, we actually disclosed the RevPAR of the hotels that we consider kind of the non-impact hotels. I believe it’s in the MD&A section of the Q. And that would be – these would be the hotels that are non-oil, non-reno, non-hurricane. And those on a comp basis were down about 1% in the first quarter.

[Omer Sander:]

Got it. Awesome. Thank you.

[Keith Cline:]

Thanks, Omer.

[Operator:]

Thank you. And our next question comes from Anthony Powell with Barclays. Your line is open.

[Anthony Powell:]

Hi, good afternoon, everyone.

[Keith Cline:]

Hey, Anthony.

[Anthony Powell:]

Hey, just a question on the asset sales here in the second quarter. For multiples, it did higher than your March sales? Can you also walk those – maybe how those hotels are different than what you sold in March? It looks to me as a better market than the other markets you sold in previously? Were they higher-margin? And were they higher RevPAR?

[Daniel Swanstrom:]

Yes. Hey, Anthony, this is Dan. One of the two hotels that we sold in the first two was in Chattanooga, Tennessee, and that was actually our only Baymont-branded hotel. And Chattanooga and Tuscaloosa are both very lower-performing markets certainly compared to Denver and Aurora. So as you look at the RevPAR created by the most recent sales in Savannah and Denver, they were about $45 of RevPAR, which was stronger than the two that we previously sold. And the Aurora asset in particular did have a pretty strong margin profile from an EBITDA perspective. As a whole of the three, we’re about 16% margins, which again we’re kind of stronger and a higher level than the first two sales that we executed in March.

[Anthony Powell:]

Got it. Does it mean that you may sell more of those hotels in that below 30% margin bucket rather than the non-core hotels in order to generate some higher proceeds?

[Daniel Swanstrom:]

Yes. As we think about it and again just to recap kind of following the initial strategic review of our portfolio in our first quarter call – sorry, fourth quarter call, we identified about 75 of our hotels as non-core. Those are large in terms of number of hotels, but small in terms of EBITDA contribution, and many of them have margin sub-10% and, in fact, the average is about 8%. So what we’re executing on is what we think is a very compelling value creation opportunity to maximize value on these assets by transacting on more of a revenue multiple basis, which may ascribe more value to these assets, demonstrate EBITDA multiple implied by our share price across the portfolio. So we’re really looking to sell these lower-performing low EBITDA contribution and margin assets and maximize their value on a revenue multiple basis. And we think the five sales that we closed year-to-date are representative of this opportunity with EBITDA multiples north of 15 times.

[Anthony Powell:]

Got it. Thanks. I know it’s early, but how was the integration performed here in April and May? I know you said RevPAR is down slightly, but did you expect that? Were there any surprises relative to what you were hoping for some more detail on the post-integration performance would be great?

[Keith Cline:]

Yes, that’s great. And then, Anthony, I want to clarify a comment that you made. Did you comment that you thought those last two sales were from the core portfolio?

[Anthony Powell:]

No. I was asking whether you would consider selling more of the core below 30% margin hotels that theoretically could get a higher multiple rather than the non-core assets and if that were…?

[Keith Cline:]

Exactly. I mean, obviously, if the math would work and the underwriting would work, we would certainly consider it. I just want to make sure we answered your question fully. So as you think about the integration, right, so Q2, as we talked about on the call, was planned to be a weaker quarter for a number of reasons, as we discussed, right? We know that there was a negative impact from the Easter reversal. We certainly had planned on softness in Texas and oil. We did see incremental softness throughout the month, however. We saw small impact from our temporary outage in our call center provider. But in terms of disruption related to the systems conversion, what we did experience was a decline in ADR post-migration. But at this point, given the lack of visibility we have today into the source data and the information, it’s very challenging for us to isolate the specific impact. So, our disclosure is really acknowledging that we did see something disruptive and it manifested in terms of ADR. But I will reiterate that it is very soon in this transition and will certainly learn a lot more as these systems stabilize and mature throughout the second quarter. So as we have more insights and better quantify, what we think the impact of this transition is, we’ll certainly communicate that on our Q2 call.

[Anthony Powell:]

All right. That’s it for me. Thank you.

[Keith Cline:]

Great. Thanks, Anthony.

[Operator:]

Thank you. And I’m showing no further questions in the queue. I’d like to turn the call back to Mr. Keith Cline for closing remarks.

[Keith Cline:]

Great, thank you. As always, thank you for dialing in today, and thank you for your continued support of CorePoint. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.