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Edited Transcript of CPLG.N earnings conference call or presentation 13-Aug-19 9:00pm GMT

Q2 2019 CorePoint Lodging Inc Earnings Call

Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of CorePoint Lodging Inc earnings conference call or presentation Tuesday, August 13, 2019 at 9:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Becky Roseberry

CorePoint Lodging Inc. - SVP of Finance

* Daniel E. Swanstrom

CorePoint Lodging Inc. - Executive VP & CFO

* Keith A. Cline

CorePoint Lodging Inc. - President, CEO & Director


Conference Call Participants


* Anthony Franklin Powell

Barclays Bank PLC, Research Division - Research Analyst

* Omer Nathan Sander

JP Morgan Chase & Co, Research Division - Analyst




Operator [1]


Good day, ladies and gentlemen, and welcome to the CorePoint Lodging's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

At this time, I would like to turn the call over to your host, Becky Roseberry. Please go ahead.


Becky Roseberry, CorePoint Lodging Inc. - SVP of Finance [2]


Good afternoon, and welcome to CorePoint Lodging's Second Quarter 2019 Earnings Conference Call. Everyone should have received a copy of our earnings release issued earlier this afternoon. This release, along with our 10-Q and a transcript of this call, when available, can be found on our Investor Relations page.

In a moment, we will have some prepared remarks from Keith Cline, our President and Chief Executive Officer, and Dan Swanstrom, our Chief Financial Officer. Also in the room with us today are Howard Garfield, our Chief Accounting Officer; and Rob Song, our SVP of Investments.

Before we start, I would like to remind everyone that 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 spinoff 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 August 13, 2019, we will 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 our President and CEO, Keith Cline.


Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [3]


Thank you, Becky. Good afternoon, everyone, and welcome. We're pleased you could join us. We have several objectives for today's call. First, we want to describe with as much of detail as we can what we believe are the factors behind the results we're reporting today, including how they deviated materially from our expectations and from industry chain scale data.

Second, we want to discuss what actions we're taking to remedy this performance and recent trends as quickly as we can and discuss the impact on our 2019 outlook.

Lastly, we want to provide an update on our strategic initiatives, in particular, our noncore disposition activity, and our current thoughts on capital allocation priorities.

Let's begin with the second quarter performance. Recall that on our first quarter call, we indicated that as we move through the balance of 2019, we expected more moderate top line growth on our forecast.

We further stated that from a RevPAR cadence perspective, that the second quarter would be our weakest quarter. Based on our prior full year guidance, our second quarter comparable RevPAR would have implied a range of flat to down 1% taking into consideration that we expected a tailwind from the repositioned properties as they ramped up and continued headwinds from oil impacted markets for most of the year.

That was our baseline heading into the second quarter.

With that said, for the second quarter, our comparable RevPAR decreased 6.1%. To provide a bit more color, let's evaluate our results by isolating various buckets within our portfolio and their impact to total comparable RevPAR.

Repositioned properties, as we expected, were a tailwind for the second quarter. To illustrate this, our comparable RevPAR, excluding repositioned properties, would have been down 8%. On the other hand, oil-impacted markets, as we expected, were a headwind for the second quarter. Comparable RevPAR, excluding oil-impacted properties, would have been down 4.6%.

So when netted together, the benefit of repositioned properties more than offset the decline in oil-impacted markets. The impact from our comparable hurricane impacted hotels was negligible, as our total comparable RevPAR would still be down 6.1% if you exclude this group of hotels from our comparable RevPAR for the quarter. As you'll recall, we did have over 1,000 rooms out of service in the second quarter last year, including at 7 properties that were partially or fully closed. It's important to note that if you include these 7 hotels that are not currently in our comparable hotel portfolio, total revenues for all of our hurricane-impacted properties increased in the second quarter on a year-over-year basis.

The non-impacted portion of our portfolio, which are the 186 comparable hotels that exclude repositioned properties, oil-impacted markets and hurricane-impacted properties, had a RevPAR decline of 6.1% for the second quarter.

Our total comparable RevPAR decline for the second quarter was driven by a decrease in occupancy of 120 basis points and a decrease in ADR of 4.5%.

For perspective, if we look at our RevPAR performance compared to the performance of the industry, which includes the impact of variables such as market level economic conditions as well as growth in supply and softness in demand, it's clear to us that our portfolio has been performing differently in the second quarter and through July.

For the second quarter, total U.S. industry RevPAR grew 1.1%, and RevPAR performance in the upper midscale, midscale and economy chain scales in the quarter was 0%, down 0.7% and up 1.7%, respectively.

As a result of our 6.1% decline in comparable RevPAR for the second quarter, our comparable RevPAR Index declined 455 basis points.

We believe this underperformance is well outside normal expectations and reflects the impact of an adverse disruption to our business.

As a part of our transition to the Wyndham platform, the property manager for all of our wholly owned hotels, LQ Management, among other things, made modifications to the revenue management systems and tools, the call center interface technology and the administration of corporate and group bookings.

We believe these modifications and other problems related to implementation of the transition of our hotels contributed to our lower occupancy and average daily rate as well as the loss in market share.

On our first quarter call, we noted we were seeing early indications of disruption, in particular, a decline in ADR from the transition and integration of our hotels to the Wyndham platform in April.

Unfortunately, that has not yet abated, and July's RevPAR on a comparable basis was down 5.2% with continued market share loss.

The end result is that we are reporting second quarter adjusted EBITDAre of $46 million, down 21% from the same period last year on a pro forma basis and significantly reducing our full year guidance.

Dan will walk through our revised guidance in a few moments. As we framed our expectations for Q3 and Q4 and the revised outlook, we included the impact of the disruption we experienced in the second quarter and assumed that a similar trend that we've experienced thus far in the third quarter will continue through the end of the year. We do not believe our revised 2019 expectations are indicative of the performance we would expect from this portfolio absent this disruption.

As I discussed a few moments ago, we believe these modifications adversely affected our business. On July 30, 2019, we gave notice to LQ Management that we believe there are several events of default under the management agreements relating to all of our wholly owned properties.

Our manager has denied they're in default under these agreements, and we are currently in discussion with them to resolve these matters. When we have more to report and discuss on this matter, we will do so.

In the interim, we are working alongside our management company as mitigation efforts are deployed, and we are closely evaluating and monitoring the impact on our business, while we pursue all options available to us.

I'd now like to spend some time on our strategic priorities for 2019, much of which relates to a continued strategic review of our real estate portfolio, including the disposition of noncore hotels.

After selling 2 noncore hotels in the first quarter, during the second quarter and to date in the third quarter, we've completed the sale of 11 additional hotels. Dan will walk through the details on pricing and proceeds, but I would add that we've seen strong interest from potential buyers for these properties and others that are being actively marketed.

We have 27 hotels under contract with qualified buyers, expected to generate over $100 million of gross proceeds at pricing in line with our initial expectations, which we expect to close by the end of the year.

Improving operating performance of our business and executing on our real estate strategy and the disposition of noncore hotels continues to be our key priorities. As I mentioned earlier, we are pursuing all options at our disposal to bring the performance of our hotels back in line with what we believe they are capable of producing. And given the early success we've seen in our noncore asset sales, we will continue to evaluate the composition of our portfolio in order to drive long-term shareholder value.

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


Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [4]


Thank you, Keith, and good afternoon, everyone. Following on the objectives we outlined for today's call, I'll provide more color on the operating results, summarize our updated guidance for 2019, highlight our capital allocation priorities and provide an update on our noncore disposition strategy.

The $12 million year-over-year decline in adjusted EBITDAre for the second quarter of 2019 reflects much of the commentary that Keith provided in his remarks. From a performance by category perspective, the non-impacted hotels or our remaining portfolio decreased $6 million, and our group of hotels with exposure to oil-related demand, including our West Texas hotels, decreased $3 million. I would also like to highlight that approximately $2 million of the decrease is attributable to 3 hotels that experienced unanticipated and one-off property displacement during the second quarter of 2019 as compared to the same period in 2018.

We expect to ultimately recover virtually all of these operating losses through business interruption insurance proceeds. These 3 hotels are excluded from our comparable hotel portfolio.

Lastly, approximately $1 million of decrease is attributable to hotels sold through June 30, 2019.

During the quarter, we received $6 million in business interruption (technical difficulty) to a total of $19 million received to date out of the total estimated business interruption insurance claims of approx $26 million in relation to our 2017 and 2018 hurricane-impacted properties. These amounts are excluded from adjusted EBITDAre and from our 2019 guidance.

We still expect to recover the majority of the remaining $7 million of outstanding business interruption claims in the future, and we will keep you updated on the amounts and timing of the incremental proceeds received.

With respect to our updated guidance, I will refer you to many of the details we included in our earnings release for the reduction in comparable RevPAR, adjusted EBITDAre and AFFO per share.

The RevPAR outlook reflects the trends Keith and I have both discussed so far. Our prior RevPAR guidance was flat to up 2%, and we are now revising this to be down between 2.5% and 4.5%.

Adjusted EBITDAre has moved from a range of $173 million to $184 million to a range of $150 million to $160 million. You will note that we added a new chart on Page 4 of our earnings release that bridges our previous adjusted EBITDAre guidance on May 14 at the midpoint to the new outlook at the midpoint. We are expecting $1 million less in adjusted EBITDAre from the asset sales completed subsequent to our prior outlook and $4 million less from property displacements in 2019 that were not contemplated in our prior outlook.

We expect to ultimately recover $3 million of operating losses through business interruption insurance proceeds. The remaining $19 million revision to adjusted EBITDAre includes the impact of revenue disruption that we believe occurred following the transition and integration of our hotels in April.

Of this amount, the hurricane-impacted and repositioning-impacted hotels account for $4 million each, the oil-impacted hotels account for $2 million, and the balance of the remaining portfolio accounts for $9 million of the adjustment.

Our outlook includes all disposition and share repurchase activity to date. As a reminder, our 2019 outlook does not consider any unannounced closed hotel dispositions, acquisitions or capital markets activity, including share repurchases.

Turning to our balance sheet. As of June 30, we had total gross debt outstanding of $1.016 billion, which consisted entirely of our CMBS debt facility. After factoring in the paydowns of CMBS debt from asset sales completed subsequent to quarter end, we have total gross debt outstanding of $1.005 billion. We also currently have no outstanding borrowings on our $150 million revolving credit facility.

Disciplined capital allocation is of paramount importance for us. Our priorities have been paying down debt, repurchasing shares and capital investments in the portfolio.

During the quarter and to date in the third quarter, we have paid down approximately $26 million in debt. For the same time period, we have repurchased approximately 1.5 million shares of common stock. As a result, to date in 2019, the company has repurchased 2.2 million shares of its common stock at an average price of $11.70 per share for an aggregate purchase price of approximately $26 million. That leaves us with about $24 million of remaining authorized capacity under our existing share repurchase program.

During the quarter, we also invested approximately $25 million in capital improvements and are pleased to report that we expect renovations to be completed soon at our final repositioning hotel in Los Angeles, California.

In terms of prioritizing our future deployment of capital, we will continue to use disposition proceeds to pay down CMBS debt to at least to the extent we are required to do so under the covenants, and we will also continue to be opportunistic with accretive share repurchases.

From a capital investments perspective, we expect to reduce our second half of 2019 planned total CapEx spend, a portion previously earmarked for potential smaller scale hotel improvement-type projects, by approximately $10 million as we focus on these other capital allocation priorities.

The positive momentum on our noncore asset sales is not only providing a source of capital for these priorities I just mentioned, but is also providing validation for how to think about the valuation of our remaining noncore portfolio and the potential proceeds we can generate.

In addition to the 3 hotels we sold in May that we discussed on the last call for gross proceeds of $16 million, in June, we sold a hotel in Oakbrook Terrace, Illinois, that had been nonoperational since 2016, for gross proceeds of $3 million.

In July and August, we've sold 7 more noncore hotels totaling 796 guest rooms, for gross proceeds of approximately $29 million.

These hotels were located in 6 different markets in Alabama, Illinois, Tennessee, and Texas. The gross sales price on these sales to date in the third quarter represents an approximate 25x multiple on the trailing 12 months hotel-level adjusted EBITDAre on a pro forma basis, or an approximate 2.5x revenue multiple. A portion of the net proceeds, totaling $10 million, was used to pay down CMBS debt.

We are, again, pleased to execute on the disposition of these lower-performing and CapEx-intensive noncore assets to maximize their value. For the 7 assets we've sold in July and August, the average hotel RevPAR was more than 30% lower than our portfolio average, and the average hotel-level EBITDAre margin was approximately 1,200 basis points lower than our portfolio average.

When we last provided an overview of our portfolio between those hotels operating above and below a 30% margin and the noncore hotels in our May 2019 investor presentation, we had 73 of the initial 78 noncore hotels remaining, representing total revenue of $131 million and only $10 million of hotel-level adjusted EBITDAre.

Since then, we have sold these additional 8 hotels for gross proceeds of $32 million and brought down the room count by 946, revenue down by $11 million and only trimmed EBITDA by $1 million.

To us, that clearly demonstrates how much capital we can unlock out of these noncore hotels to redeploy in other initiatives with far superior returns. These hotels typically trade on revenue, and we've targeted a range of generally 1.5x to 2.5x revenue. To date, we have been well within that range, which could translate to potential gross proceeds of at least $250 million, if we are successful in disposing of the noncore portfolio in its entirety. This pricing, which based on our total dispositions to date in 2019, represents a multiple of approximately 22x hotel-level adjusted EBITDAre, also demonstrates the significant disconnect between public and private market valuations for our real estate.

We now have more of our remaining noncore hotels on the market, under contract or in active negotiations than we've had at any point since our initial portfolio review.

We have 27 hotels under contract with qualified buyers that we expect to generate over $100 million of gross proceeds at pricing in line with our initial expectations, which we expect to close by the end of the year.

We expect to remain active throughout the second half of the year, and we'll continue to keep you posted on any additional activity.

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


Questions and Answers


Operator [1]


(Operator Instructions) Our first question comes from Omer Sander from JPMorgan.


Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [2]


Could you guys just give a little more color on the Wyndham disruption? Maybe give a sense of exactly what's going on and maybe if you can quantify or at least [qualify] trends into July? And at least sequentially, has it eased since April?


Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [3]


Well, so as we -- this is Keith. As we look at our second quarter, the RevPAR trends throughout the second quarter were fairly consistent in April and May, eroded a bit more in June, as we mentioned in our prepared remarks, July was down 5.2%. And we had no mention yet of August in our comments. But as I would dimension this, it's important to note that the kind of indications of disruption that we mentioned in the first quarter call certainly did not abate as we moved throughout the quarter. And our priorities today are really on addressing this disruption, which has impacted our hotels and try to as quickly as possible bring them back in line with expectations. And certainly, we'll take any action, we believe, necessary to help with that.


Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [4]


Got it. And then just one more. For the noncore portfolio, how should we think about the pace of those asset sales going forward? Obviously, pretty impressive the strong multiples on those, but do you have a target date to hit the total 76? (sic) [78]?


Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [5]


Thanks, Omer. This is Dan. As I mentioned, we've sold 13 year-to-date, and we expect to close on the 27 under contract by the end of 2019. So we're very pleased with that progress. That would represent a little over half of the number of hotels that we hope to have closed by the end of the year. As I mentioned, we are active in the market, marketing the remaining noncore hotels and in active negotiations on others. So we hopeful -- we would hope to continue to make progress in the second half of the year and set up the first half of the year of 2020 with the remaining closings. But certainly, on -- well above pace in terms of how we thought about it when we first announced in March of this year the 78 noncore disposition program.


Operator [6]


Our next question comes from Anthony Powell from Barclays.


Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [7]


Just another question on the disruption. You mentioned there were changes in group sales and corporate sales and other channels. Maybe you could -- could you give more detail on where the most disruption was? Was it in group, was it in direct business from the website, call center, kind of split it out between segments, that would be great?


Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [8]


Well, I mean, certainly given the fact that we're in discussions with Wyndham on these topics, we're limited to much of what we can say aside from our prepared remarks, but what I can say is that we believe that, among other things, the modifications that were made to revenue management tools, customer interfaces and the administration of corporate and group bookings has had an adverse effect on our business. And as we move forward, we'll certainly keep the markets apprised of any new information or additional insights that we can disclose.


Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [9]


Got it. And I missed this, but what date did you notify that Wyndham was in default of the contract?


Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [10]


July 30.


Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [11]


July 30, okay. And just one more on capital allocation. It's -- given the moving parts with the EBITDA, and the leverage has gone up a bit, why wouldn't buying back -- why wouldn't rather paying down debt be the -- really the only priority relative to share buybacks? And how do you look at your dividend going forward, given coverage is dropping here and taxable income is pretty low, does a dividend make sense at the current level?


Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [12]


Anthony, I'll take your second question first with respect to the dividend policy, which is obviously regularly reviewed at the Board level. We believe our dividend is well covered. Our annual $0.80 dividend represents about 50% of AFFO from a payout perspective, based on our revised AFFO midpoint. If you further incorporate our estimated annual maintenance CapEx, which we conservatively assume to be about 5% of total revenues, our dividend and net maintenance CapEx level is also covered at about 90% of AFFO. And then I would further add a few other things. The noncore dispositions, we expect to reduce maintenance CapEx going forward as well, as we sell these older, higher CapEx assets. And given the low EBITDA contribution, even lower or marginal AFFO contribution, we would expect to reduce the go-forward maintenance CapEx without really losing much AFFO.

And then lastly, I'd just reiterate Keith's comment that we do not think that our revised fiscal year '19 outlook is reflective of the potential capability of this portfolio. And then circling back to your first question on capital allocation, our priority has been on paying down debt to strengthen the balance sheet and opportunistically repurchasing our shares accretively. So as we go forward, as we look at this, given the profile, again, of the low EBITDA contribution, we're confident that we can actually pay down debt and still have proceeds left over to repurchase shares and our debt-to-EBITDA leverage ratios actually come down, again, given that we're selling on a revenue multiple basis, so we're unlocking a lot of value in proceeds relative to the little EBITDA that they're contributing. So overall, we think we can accomplish both of our capital allocation priorities, paying down debt and accretively repurchasing shares.


Anthony Franklin Powell, Barclays Bank PLC, Research Division - Research Analyst [13]


Got it. And what's your target leverage ratio, again?


Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [14]


Our target leverage ratio over the medium to longer term is 4x to 5x.


Operator [15]


There appears to be no further questions. Mr. Cline, I will turn the call back to you for any closing remarks.


Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [16]


Well, thank you, again, for joining us today. And thank you for your continued interest in CorePoint Lodging. Have a great day.


Operator [17]


Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.