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Edited Transcript of CPLG.N earnings conference call or presentation 6-Nov-18 3:00pm GMT

Q3 2018 CorePoint Lodging Inc Earnings Call

Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of CorePoint Lodging Inc earnings conference call or presentation Tuesday, November 6, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kristin Hays

CorePoint Lodging Inc. - IR & Media

* Keith Cline

CorePoint Lodging Inc. - President and CEO

* Dan Swanstrom

CorePoint Lodging Inc. - CFO

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Conference Call Participants

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* Omer Sander

JP Morgan - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CorePoint Lodging Third Quarter 2018 Earnings Conference. (Operator Instructions) Now it's my pleasure to turn the call to Kristin Hays.

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Kristin Hays, CorePoint Lodging Inc. - IR & Media [2]

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Thank you, Carmen. Good morning, and welcome to CorePoint Lodging Third Quarter 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, and 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 as well as the company's periodic filings 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 the adjusted EBITDAre information for historical periods discussed in today's call 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 and give effect to adjustments relating to the spin-off 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 November 6, 2018, we remind you that this presentation will not be updated, and it is possible that the information discussed is no longer current.

This morning, Keith Cline, our President and Chief Executive Officer, will provide an overview of CorePoint's third quarter results, a review of our near-term strategic priorities, and an update on the Wyndham integration. Dan Swanstrom, CorePoint's Chief Financial Officer, will then provide more details on our third quarter performance, review our balance sheet and liquidity position as well as our capital investments activity during the quarter, and discuss our updated outlook for the remainder of 2018. Keith will then make a few closing comments before we open the line for questions. Also in the room with us today is John Cantele, CorePoint's Chief Operating Officer; Howard Garfield, our Chief Accounting Officer; and Becky Roseberry, our SVP of Finance.

With that, I will now turn the call over to our President and CEO, Keith Cline.

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Keith Cline, CorePoint Lodging Inc. - President and CEO [3]

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Thank you, Kristin. Good morning, everyone, and welcome to CorePoint Lodging's third quarter 2018 earnings call. We're pleased that you could join us today for our discussion of CorePoint's performance and our first full quarter as a standalone lodging REIT. While CorePoint is a new entity, many of you know that our initial portfolio of La Quinta branded hotels has been executing on a multiyear strategy that began under our former parent, La Quinta Holdings Inc.

La Quinta put a strategic plan in place two years ago to drive consistency in its hotel product, drive consistency in the delivery of an outstanding guest experience, and to drive customer engagement with the brand. The plan was specifically designed to grow RevPAR, improve guest satisfaction scores, and to take back market share. It resulted in a reorganization and enhancement of the hotel operations team, investments in guest experiences through better quality service and improved amenities, and a strategic capital investment in the 54 owned hotels. This strategy successfully delivered significant increases in RevPAR Index share and higher Net Promoter Scores, driven by both service quality and product quality.

Despite those successes, we still believe that in order to fully unlock the potential of La Quinta's owned hotel portfolio, there needed to be a transaction that would give the La Quinta brand scale, distribution, and cost efficiencies in order to drive long-term sustainable growth at the 316 owned hotels that formed the initial CorePoint portfolio. That transaction, which involved the spin-off of La Quinta's real estate business as CorePoint, followed by the merger of La Quinta's Franchise and Management businesses within Wyndham, closed at the end of May, and since that time the CorePoint team has been building the foundation to unlock the potential of our portfolio and maximizing results.

As a reminder, our key strategic priorities for 2018 continue to be: driving growth in RevPAR and market share; reopening our hurricane-affected properties; completing our hotel repositioning projects; executing a proactive asset management strategy to drive hotel revenue growth and direct bookings, while also enhancing profit margin through Wyndham's business model and scale of operations; and closely monitoring the transition and integration of the La Quinta brand and the management of our hotels to Wyndham hotels and resorts.

To that end, let's review our third quarter. For the quarter, we are extremely pleased with the revenue and market share growth experienced for our portfolio. This morning, we reported comparable RevPAR growth of 3.6%, primarily driven by a 3.5% increase in comparable ADR and a 10 basis point increase in occupancy. We continue to experience revenue strengths in our repositioned hotels that have completed our strategic renovations as well as in the energy markets, realizing RevPAR growth of 15.6% and 24.2%, respectively, year-over-year. Regionally, our top-performing markets during the quarter included Boston, New Orleans, Phoenix, San Francisco, and West Texas.

Comparable RevPAR Index for the third quarter grew 390 basis points over the same period last year. Once again, our hotels located in the oil markets, especially three of our West Texas hotels and our repositioned hotels, display the largest year-over-year index growth. We achieved these strong results despite the negative impact hurricane-affected hotels continue to have on our performance. As rooms remained offline this quarter, and we are cycling over hurricane-induced demand from last year. At the start of the third quarter, we still had five hotels closed in Florida due to Hurricane Irma. We're pleased to report that two of these hotels opened at the end of September, two more hotels closed after Hurricane Irma are expected to be reopened by the end of the year, leaving our Fort Myers hotel with a projected reopening date in early 2019.

We also experienced weaker performance in certain Texas market this quarter as we cycled against top comparisons from the lift we experienced after Hurricane Harvey last year. While we are pleased with our RevPAR performance again this quarter, we have yet to realize corresponding improvements in hotel profit margins in these early months of our transition to Wyndham as our manager.

On an EBITDA basis, CorePoint reported adjusted EBITDAre for the third quarter of $55 million, which compares with $58 million for the same period last year on a pro forma basis. As a result, we thought it was prudent to lower the midpoint of our EBITDA guidance for 2018 from $182 million to $177 million. I'll discuss our plans to address margin improvement in a moment.

I know many of you are seeking some insights into our 2019 EBITDA expectations. We are in the early stages of 2019 budget planning with Wyndham to complete our 2019 budgets, and we'll provide full year 2019 guidance on our fourth quarter earnings call in February. However, based on a very preliminary review, I can provide some direction on two key items for 2019. First, the properties impacted by hurricanes. All properties impacted by Hurricane Irma will be opened by the end of 2018, except our Fort Myers location, which we expect to open in early 2019. We currently expect the incremental EBITDA contribution from properties impacted by Hurricane Harvey and Irma will be in a range of $13 million to $17 million in 2019 over 2018, reflective of an expectation of increased operating costs and insurance premiums next year.

Second, the repositioned properties. As of the end of 2018, 27 of the repositioned hotels will have a full 12 months of ramp and the remaining 26 properties under repositioning will be in various phases of stabilization. As such, next year, we'll only realize a portion of the benefit of this initiative. Consistent with our performance in 2018, our preliminary expectations for the performance of these repositioned hotels in 2019 is exceeding our original revenue expectations. But as we continue the transition of these hotels, higher expenses are impacting their overall profitability versus our original expectations, at least in the near term. Taking this into account, we currently expect the incremental EBITDA generated by repositioned properties will be in a range of $7 million to $9 million in 2019 over 2018.

As we look ahead to 2019, we believe that significant opportunities exist to improve CorePoint's EBITDA and EBITDA margins as we continue to focus on expense control and to realize the potential benefits and synergies from leveraging the Wyndham platform. Our asset management team under John Cantele's leadership is proactively working with our manager to assess and adjust the operating model on a hotel by hotel basis and identify opportunities to improve margins. We believe there are several areas we can lower expenses, better control labor costs and leverage our partnership with Wyndham to improve results.

The largest areas of opportunity continue to be payroll, benefits, insurance, third-party travel agency commissions and savings associated with leveraging Wyndham's procurement programs at the hotel level. We remain focused on our mix of revenue that's being 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 third quarter of 2018 compared to 28% for the same period last year.

We're hopeful that next year, once the La Quinta brand and our portfolio of 315 hotels are fully integrated into the Wyndham platform, we'll begin to see the benefit of its network distribution and scale, driving more business through direct channels, which should lower our customer acquisition costs. Our asset management team is executing a proactive asset management strategy to continue to drive RevPAR growth, with a focus on our repositioned and hurricane-impacted hotels and optimizing EBITDA margins.

Next I'd like to provide a brief update on our Wyndham transition and integration. Overall, the transition is progressing. I would describe the working relationship with our partners at Wyndham as productive. Both parties certainly have a vested interest in ensuring a successful integration. We believe that once the La Quinta brand is fully integrated into the Wyndham platform next year, it should improve the scale, distribution and reach of La Quinta, which includes our existing portfolio of 315 hotels.

In the first half of 2019, Wyndham expects to conduct its technology migration to move over all of La Quinta property management reservation systems, its revenue management platform, and all digital channels including lq.com. Our internal and external technology advisers are actively engaged with Wyndham on this planned IT platform conversion to mitigate any potential risks associated with it. With the migration likely complete during the first half of 2019, any benefit or lift to our business from the Wyndham distribution network would not incur until the second half of next year. We'll keep you apprised on the progress related to this technology migration

And with that, I'll turn the call over to our CFO, Dan Swanstrom.

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Dan Swanstrom, CorePoint Lodging Inc. - CFO [4]

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Thank you, Keith, and good morning, everyone. Today, I'll discuss CorePoint's operating results for the third quarter, provide an update on our balance sheet and liquidity position as well as our capital investments activity during the quarter, and review our updated outlook for the remainder of 2018.

Adjusted EBITDAre for the third quarter 2018 was $55 million as compared to $58 million on a pro forma basis for the same period in '17. Increases in room revenues during the quarter were offset by increases in hotel operating expenses, in particular, rooms expense, which includes payroll-related items, benefits, supplies, and third-party travel agent commissions. With respect to payroll expenses, we continue to experience the competitive wage pressures that are impacting our industry and an increased need for contract labor in some hotels due to a tight labor market. In addition, as we mentioned last quarter, a portion of the payroll expense increase relates to labor investments made to grow the sales team to drive revenue growth, in particular, at the repositioned hotels. As Keith mentioned, we're working closely with our manager to contain further expense growth and to identify potential cost efficiency opportunities.

Taking into consideration the hurricanes impact, third quarter 2018 adjusted EBITDAre on a normalized basis is estimated to be approximately $57 million as compared to $57 million for the third quarter 2017 on a pro forma basis. This includes a $2 million increase in the third quarter of 2018 to adjust for the disruption from several hotels that remained closed or affected during the third quarter of 2018 as well as a $1 million positive benefit in the third quarter of 2017 following Hurricane Harvey.

Turning to our balance sheet. At the end of the third quarter of 2018, the company had total debt outstanding of $1.035 billion, which consist entirely of our CMBS debt facility. As of today, our line of credit is currently undrawn. In terms of liquidity, between the undrawn revolver and our $64 million of cash and cash equivalents at September 30, we have over $210 million of total availability.

With respect to our total business interruption insurance claims of approximately $26 million through September 2018, CorePoint has received approximately $3 million in proceeds, which includes approximately $2 million received during the third quarter of 2018, which is excluded from our adjusted EBITDAre numbers. Subsequent to quarter end, we have received an additional $4 million in proceeds. We continue to expect to recover the majority of these business interruption claims in the future. We'll keep you posted on the amounts and timing of incremental proceeds received.

In terms of capital investments, we've invested approximately $40 million during the third quarter, of which $13 million was part of our ongoing hotel strategic repositioning program. During the quarter, we completed construction phase of one additional total renovation as part of the renovation program. As a result, 49 of our total 54 hotel repositioning projects are now complete as of September 30, with all but one remaining hotel under construction, anticipated to be completed by the end of 2018. CorePoint continues to benefit from the significant capital investment program initiated in 2016, as these hotels have been repositioned upward within their local markets. Our outlay of capital for this program is substantially complete with approximately $7 million of remaining capital investment to be funded.

Lastly, today we updated our 2018 guidance outlook. We are narrowing our comparable RevPAR growth guidance by increasing the lower end of our prior range from 3% to 3.25%. As a result, we now expect RevPAR growth to be 3.25% to 4.25% for the full year 2018. During the fourth quarter, we expect continued strength from our repositioned hotels as well as a tailwind from hurricane-impacted hotels on a year-over-year basis.

We now anticipate pro forma adjusted EBITDAre for 2018 to be in the $174 million to $180 million range. This downward revision is primarily due to continued increases in direct hotel operating expenses, including payroll-related items and higher-than-anticipated repairs and maintenance expenses. The updated range also captures approximately $1 million of unanticipated operating losses for two temporary hotel closures that were not factored into our original guidance -- one hotel closure due to Hurricane Michael and one repositioned hotel closure due to water damage.

Our 2018 outlook continues to incorporate the disruption caused by Hurricanes Harvey and Irma on our operating results. As mentioned earlier, the majority of these business interruption claims are expected to be recovered in the future due to the company's business interruption insurance coverage, and at the same total claims level as expected last quarter. Factoring in the current expense growth trends as Keith mentioned earlier, we currently estimate our hurricane disruption hotels on a run-rate basis to provide incremental hotel EBITDA contribution of $13 million to $17 million in 2019 over 2018, and repositioned hotels to provide an incremental EBITDA contribution of $7 million to $9 million in 2019 over 2018.

I'll now turn the call back over to Keith.

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Keith Cline, CorePoint Lodging Inc. - President and CEO [5]

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Thanks, Dan. In closing, our goal continues to be the creation of premium long-term total returns for our stockholders through disciplined capital allocation, maintaining a strong balance sheet, proactive asset management and value-enhancing investments. We believe CorePoint represents a compelling investment opportunity; and we believe the reopening of hurricane-impacted properties, the completion of our repositioning efforts, and our 2019 integration into the Wyndham distribution network will drive incremental value.

In addition, we're not only focused on continuing to drive revenue growth but also laying out a path for margin expansion. Our team is continuing to partner with the brand and our property manager to optimize the performance of the CorePoint portfolio, and work to realize the benefits of increased scale, distribution, loyalty, and reach that we believe the Wyndham network will drive. Also, our differentiated strategic focus and unique market position creates what, we believe, is an attractive growth and consolidation opportunity in the midscale and upper midscale lodging segments over time.

With that, we'll open the line for your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Omer Sander with JP Morgan.

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Omer Sander, JP Morgan - Analyst [2]

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I just wanted to dig in a little bit more on 2018 guidance and what that implies for 2019. I know you don't give quarterly guidance and haven't formally talked about 2019. But do you have any commentary based on what you're seeing now? How is 4Q tracked about a month into the quarter? Are there any markets that are stronger?

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Keith Cline, CorePoint Lodging Inc. - President and CEO [3]

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Obviously, as you mentioned, we don't guide quarterly results. As you think about our RevPAR range of 3.25% to 4.25% for the year, obviously, on a year-to-date basis, as you'll see in our disclosures, we're tracking at approximately 3.2%. So our expectation is that Q4, our RevPAR performance is going to be very strong as we lap kind of the initial rooms out of service from Hurricanes Irma that occurred last year.

So, obviously, our expectations for Q4, our RevPAR growth that would outpace our performance on a year-to-date basis. And as we talked about on the call, although we're not providing any guidance for the year for 2019, we thought it important to at least segment two very important topics that come up amongst the investment community, which are, what's the 2019 anticipated contribution from hurricane-affected hotels that have come back online and what's the 2019 anticipated EBITDA contribution from repositioned properties. And we discussed that quite a bit on the call, and the numbers that we -- the ranges that we discussed certainly reflect the anticipation that many of the expense pressures in the lines that Dan mentioned would continue to occur as we move into 2019.

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Omer Sander, JP Morgan - Analyst [4]

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Got it. And I guess, one more maybe on the renovations and post hurricane impact, I guess, qualitatively, how are those hotels ramping up? And then I guess, what are the -- what's the pace? And what do you expect to see through 2019?

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Keith Cline, CorePoint Lodging Inc. - President and CEO [5]

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Well, in terms of hurricane-affected hotels, as you mentioned, all hotels, except for Fort Myers property, will be opened by the end of the year. Obviously, as you move into the first quarter of 2019, the ramp or the business performance in those hotels would outpace their performance year-to-date because you're entering the peak season in the State of Florida. So that is reflective of the range of incremental EBITDA contribution that Dan and I both discussed on the call.

And as you think about the repositioned properties, certainly one size doesn't fit all in terms of how these hotels ramp. As many of you are aware, we have 27 hotels as of the beginning of 2019 that would have been opened for a full 12 months. So those hotels will be in a more stabilized position than the remaining group of hotels that have opened throughout 2018 that will be in some various form of stabilization in 2019, which is why I mentioned on the call, 2019 certainly is kind of the beginning of this journey of having these hotels reopened. It certainly isn't the full benefit of repositioning program. The first year that will get the full 12-month benefit of all hotels being opened is actually 2020.

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Operator [6]

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And ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to Keith Cline for his final remarks.

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Keith Cline, CorePoint Lodging Inc. - President and CEO [7]

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Just want to thank everyone for the time today, and certainly thank you for your continued interest in CorePoint Lodging. Have a good day.

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Operator [8]

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And ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day.