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Edited Transcript of CPLG.N earnings conference call or presentation 12-Mar-20 9:00pm GMT

Q4 2019 CorePoint Lodging Inc Earnings Call

Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of CorePoint Lodging Inc earnings conference call or presentation Thursday, March 12, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Omer Nathan Sander

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the CorePoint Lodging Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference to your speaker today, Becky Roseberry, SVP of Finance and Investor Relations. Please go ahead, ma'am.

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

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Sure. Good afternoon, and welcome to CorePoint Lodging's Fourth Quarter Earnings 2019 Conference Call. In a moment, we will have some prepared comments from Keith Cline, our CEO, and Dan Swanstrom, our CFO. Also in the room with us today are Rob Song, our SVP of Investments; and Howard Garfield, our CAO.

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 and in subsequent reports filed 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 March 12, 2020, 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 Keith.

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

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Thank you, Becky. Good afternoon, everyone, and welcome. We're pleased you could join us. As we've all seen over the last few weeks, there's been a sudden and rapid deterioration in the macro lodging environment due to the actual and anticipated impact of the COVID-19 virus. We are in unprecedented times for the lodging industry. We're working closely with Wyndham to respond to the circumstances. And as always, the health and safety of our guests and employees is a priority. At the asset level, we're working diligently to implement cost containment initiatives in response to declining demand.

With respect to our business, we have experienced approximately $5 million in lost revenue from actual disruptions in the business incurred to date, and we've seen a slowdown in our transient business, as evidenced by a slowing of our forward booking pace. Although group travel does not constitute a material part of our overall business mix, we've also experienced group and conference cancellations. With these recent trends in mind, we believe the prudent course is to withhold formal guidance at this time due to the uncertainty and limited visibility on forward bookings and operating trends. While we're obviously cognizant of the macro environment, it goes without saying that addressing its impact on our business, guests and employees is our most immediate priority. However, Dan and I did want to take some time on today's call to provide an update on the company's key initiatives and performance.

Before I hand it off to Dan, I'll briefly review our fourth quarter and full year results and discuss the strategic review of our real estate that led us to the decision to expand our noncore asset disposition program and why we believe this strategy will provide meaningful shareholder value over time.

Now to the results. Fourth quarter 2019 comparable RevPAR declined 8.7% as compared to the same period in 2018, which brought us to a decline of 4.5% for the year as compared to 2018. Adjusted EBITDAre for the fourth quarter of 2019 was $19 million bringing us to $146 million for the year. The fourth quarter was consistent with our revised 2019 outlook, which included continued declines in ADR, occupancy and market share.

As we've discussed for the last few quarters, 2019 was certainly a challenging year from an operational perspective. We experienced revenue disruptions following the systems migration to the Wyndham platform that occurred in early 2019 as well as a general softening of the macro lodging environment in the back half of the year, most significantly in our mid-scale and economy segments.

With respect to the Wyndham settlement, which we were pleased to have reached during the fourth quarter, we are working closely with Wyndham to support their reestablishment of the agreed-upon revenue management and other key booking functionalities that are at least reasonably equivalent to the legacy systems, and we're on schedule at this point to meet the 2020 deliverables. Given the implementation time line, I would like to remind everyone that we're not expecting to see any material benefits from these changes until late 2020 or early 2021.

During the fourth quarter of 2019, CorePoint received cash payments totaling approximately $28 million from Wyndham in accordance with the economic terms of the settlement. We expect to receive the remaining approximate $9 million of settlement payments by no later than June 2021. The settlement was important not only for resolving the operational dispute with Wyndham but also for reaching an agreement on franchise transfer approval criteria, which has assisted us in achieving a more efficient and timely asset sales closing process.

Our disposition program was highly accretive and one of our top initiatives for 2019. Last March, we outlined a plan to sell 78 noncore hotels and targeted gross proceeds of approximately $250 million to $260 million. To date for these Phase 1 noncore hotel sales, we've sold 57 hotels for gross proceeds of approximately $235 million and have an additional 15 hotels under contract for gross proceeds of approximately $57 million. This would bring total gross proceeds for 72 of the 78 Phase 1 assets well above our initial total range and at an average revenue multiple of 2.5x and a hotel adjusted EBITDAre multiple of approximately 36x - valuations, which have been highly accretive to our trading multiple.

Now turning to our top 2020 initiatives. In addition to remaining vigilant and aggressively responding to any disruption to our business from this rapidly evolving environment, we are also focused on ensuring that the revenue and other platform improvements pursuant to the Wyndham settlement are completed on time and properly address our needs as well as improving upon our asset management capabilities and processes, which we believe will drive improved operational results. Additionally, we're focused on executing on the next phase of our real estate strategy, which should drive meaningful value creation once again through asset dispositions. At full execution, this strategy will result in a core portfolio of 105 hotels that are focused on our higher-quality and growth potential assets that are primarily located in top 50 MSAs.

Dan will walk through more of the details, but as I mentioned at the outset, based on the success of asset sales to date and the strategic review of our portfolio, we are expanding the size of our noncore disposition program to include an additional Phase 2 group of 132 hotels. This expansion of the disposition program led to a reduction of the applicable holding periods for these noncore hotels, necessitating a fourth quarter noncash GAAP impairment charge of $141 million. To date, we are pleased to have sold 4 of these Phase 2 hotels for a combined gross sales price of approximately $16 million, with an additional 27 Phase 2 hotels under contract with qualified buyers, expected to generate approximately $163 million in gross proceeds.

As of today, we have a total of 149 remaining noncore hotels in our disposition program that we intend to sell generally over the next 2 years and have targeted gross sales proceeds of approximately $800 million based on revenue multiples of generally 2x to 3x.

As I just highlighted in reviewing both our Phase 1 and Phase 2 sales progress, in total, we have 42 of these remaining 149 noncore hotels already under contract with qualified buyers, which are expected to generate approximately $220 million in gross proceeds, representing an average revenue multiple of approximately 2.6x and a hotel adjusted EBITDAre multiple of approximately 17x.

We will continue to monitor and evaluate any potential impact of COVID-19 as it relates to these asset sales. Although we haven't seen a meaningful impact to closing for assets under contract to date, it is reasonable to anticipate a disruption or a slowdown in the pace of asset sales in the near term, given the current environment. Executing on this multi-year next phase of asset sales will enable us to unlock embedded value and additional capital while supporting our near-term focus to strengthen the balance sheet.

2020 is a transitional year for CorePoint, and we continue to monitor and evaluate the financial impacts of the current business environment on our portfolio. We're also working with our management company to ensure appropriate measures are in place to maintain the safety of our guests and our operators, employees. Despite the current environment, we are excited to be getting critical revenue management tools online by the end of the year and executing on our portfolio transformation. Both initiatives should better position CorePoint for long-term success and value creation.

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

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

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Thank you, Keith, and good afternoon, everyone. I'll start today by providing a brief review of the fourth quarter operating results and then provide the balance sheet update. I'll also review our recent capital allocation activities, provide additional details on our strategic review of the portfolio that led to the expansion of our noncore disposition strategy and discuss 2020 observations.

Fourth quarter operating results were generally in line with our expectations and as a result, we achieved the midpoint of our revised full year 2019 outlook for comparable RevPAR growth and came in just above the midpoint for adjusted EBITDAre. The comparable RevPAR decline during the fourth quarter of 8.7% was due to a 3.3% decrease in ADR and a 360 basis point decrease in occupancy. The $11 million year-over-year decline in adjusted EBITDAre for the fourth quarter of 2019 is primarily due to decreases in revenue, which reflect continued declines in comparable RevPAR including headwinds following the transition of our portfolio to the Wyndham platforms earlier this year, the impact of sold hotels and weakness in the oil and gas markets.

Turning to our balance sheet. As of December 31, we had total gross debt outstanding of $921 million, which is down from $973 million a quarter ago. After factoring in the pay downs of debt completed subsequent to quarter end using asset sale proceeds, we now have total gross debt outstanding of approximately $880 million and cash of approximately $100 million. We also currently have no outstanding borrowings on our $150 million revolving credit facility. For the portfolio we own today and based on our current net debt balance, our net debt to adjusted EBITDAre is approximately 5.4x on a trailing basis.

We remain highly focused on disciplined capital allocation to increase shareholder value over time. Since March 2019, we have generated $251 million in gross proceeds from our noncore disposition program. Our capital allocation priority with sales proceeds has been the repayment of debt, and we have made substantial progress on that front to date, with approximately $155 million of CMBS debt being repaid.

During 2019, we repurchased 2.6 million shares of common stock for an aggregate investment of approximately $29 million, paid out approximately $46 million in common dividends and made capital investments in the portfolio totaling approximately $54 million, which excludes hurricane restoration costs that are predominantly funded by property insurance proceeds.

We also meaningfully increased our cash position in the second half of 2019, which as mentioned, currently stands at about $100 million. Our priority for the future deployment of the capital we are raising through asset sales will continue to be primarily concentrated on paying down our CMBS debt and continuing to maintain balance sheet capacity and flexibility.

As discussed, we are expanding our noncore disposition program. Our go-forward core portfolio will now be comprised of 105 hotels focused on our higher-quality and growth potential assets that are primarily located in top 50 MSAs. In fact, approximately 85% of the core portfolio resides in top 50 MSAs. Pro forma for the completion of the noncore disposition program, we are narrowing our geographic footprint from 41 states and 116 MSAs to 22 states and 50 MSAs. We are increasing our concentrations in higher growth West Coast market locations such as in California and Washington while reducing our footprint in low growth, Midwest and Southeast markets as well as in the generally more volatile energy markets. We are also disposing of all remaining economy chain scale hotels. Compared to our sold hotels that had average RevPAR of about $37 and hotel adjusted EBITDAre margins less than 10% and our remaining noncore hotels that in 2019, had average RevPAR of about $50 and hotel adjusted EBITDAre margins of approximately 17%, this core portfolio of 105 hotels in 2019 achieved significantly higher RevPAR of $73 and hotel adjusted EBITDAre margins of 26%. The benefits of this portfolio transformation strategy are substantial as we will be more focused in key markets with better-performing hotels, a lower average age and a meaningfully reduced level of capital needs with the sale of older hotels.

As Keith noted earlier, we are not providing formal guidance for 2020. Given the extraordinary events in the macro lodging environment over the past few weeks, we believe it is prudent to hold off on guidance at this time. To provide some perspective on what we thought the core and noncore portfolios were capable of producing this year, obviously, in a stable environment, unlike what we are currently experiencing, I wanted to briefly walk through how we thought 2020 might otherwise have unfolded.

Using 2019 actual results for the portfolio we own today as a starting point, hotel adjusted EBITDAre was $165 million for the total portfolio and $108 million for the core portfolio of 105 assets. For 2020 as compared to 2019, we were expecting comparable RevPAR to be down 2% to down 1% for the total portfolio and down 1% to flat for the core portfolio. Similar to others in the industry, we'd expect the continued headwinds from operating expense growth, including labor and wages, real estate property taxes and property insurance. We would have expected this to translate to a year-over-year decline in hotel adjusted EBITDAre of slightly below 10% for the total portfolio and about 5% for the core portfolio.

Clearly, the current environment is creating uncertainty, significantly affecting these prior expectations given the current lack of visibility into future operations. We are now focused on working closely with our third-party manager and the appropriate cost containment and mitigation initiatives to respond to this environment as well as deferring nonessential capital expenditures.

The success of our asset sales to date demonstrates the value we believe we can create over time with an expansion of this disposition program. To expand on Keith's comments with respect to the remaining 149 noncore hotels to be sold, we are targeting gross sales proceeds of approximately $800 million based on the midpoint of revenue multiple valuations generally in the 2x to 3x range or approximately $730 million of net proceeds after factoring in estimated management, termination fees and transaction costs. We envision that at least $500 million of the net proceeds would be used to pay down CMBS debt from its current balance of approximately $880 million and that the balance of net proceeds would provide investment capacity for other accretive capital allocation opportunities, which could include additional debt paydown to further increase or grow the core portfolio's earnings profile over time.

Our objective is to strengthen the balance sheet and reduce net debt to adjusted EBITDAre for the core portfolio to our longer-term target range of 4x to 5x. From a capital investments perspective, we anticipate maintenance CapEx for the pro forma core portfolio to be about $15 million on an annual basis or just under 4% of total revenues, which is generally consistent with 2019 levels.

In closing, while we are focused on responding to the sudden and rapid change in the macro lodging environment and the resulting disruption to our business, we believe there are numerous long-term strategic benefits to this next phase of our ongoing portfolio transformation, which include realizing significant embedded value, unlocking capital for higher priority uses, strengthening the balance sheet, creating investment capacity to better position CorePoint for future accretive capital allocation opportunities and optimizing the portfolio to be focused on a core portfolio of 105 of our higher quality, better-located hotels with enhanced growth profiles.

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 comes from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [2]

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I appreciate all the detail you gave us on the call. Can you maybe give us a sense for the hotels that are under contract right now, but not sold. Can you give us some general sense as to the buyer pool, what kind of buyers they are? Are they mostly one-offs? Are these small portfolios? Or is there a bigger group of hotels?

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

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So the buyer pool in the hotels under contract continues to be kind of the same group, a general type of investors. It's small, 1 or 2 asset purchases, maybe you can have a buyer that could acquire 3 to 5 over a period of time. But typically, the transactions are in small groups. And as of today, as we think about the hotels that are under contract, we certainly would expect all those to close by the end of the third quarter of this year. But we're also realistic as we think about the current environment, that is constantly changing in terms of access to capital, et cetera. So we're going to continue to monitor it, but our expectation as of right now is that these hotels should close by the third quarter of this year.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [4]

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Okay. That's very helpful. And then you mentioned, you're in the process of starting cost containment initiatives at properties with Wyndham. Is there any sense for how they are kind of underwriting in terms of -- can you take step functions on these costs? Or how are they underwriting? How much occupancy might fall? It's obviously really challenging that in the current environments, it's kind of uncharted territory. But is there any kind of guideline they're following for costs that they want to take out?

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Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [5]

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Well, as I mentioned on the call, and you mentioned it yourself, we're in a little bit of uncharted territory at this point. Obviously, given how steep and quickly demand has declined. There are a lot of things you can focus on inside the box, everything from the hours you're allocating, overtime, rightsizing the number of rooms available on a hotel based on the occupancy. So you can shrink the footprint that you're having to continuously clean and maintain. There's a lot of other variable costs in the hotel that you can address. I mean one that certainly comes to mind as a consumer and I guess to myself out there at hotels is there is a growing level of potential concern of open food and buffet-type food servings where you can try to tweak some things to not only make it safer for guests but also help the hotel contain some costs. So I would say, there's a litany of things that we can address in response to changing demand. The thing that we continue to monitor is how quickly and aggressively can we move, given how quickly the demand environment is changing.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [6]

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Okay. Very helpful. Appreciate all the color, Keith.

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Operator [7]

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Our next question comes from Omer Sander with JPMorgan.

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Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [8]

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Appreciate the color. Can you talk about any -- maybe about liquidity and maybe your ability to defer any CapEx or maybe cap with other sources of capital if needed?

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Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [9]

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Sure, Omer, this is Dan. So as I mentioned in the call, from a liquidity perspective, we currently have about $100 million of cash on balance sheet. And we currently have no outstanding borrowings on our $150 million revolving credit facility. Clearly, in this environment, we're very focused, as Keith mentioned, on cost containment initiatives at the property level. And as I mentioned in the call, we're also deferring all kinds of nonessential maintenance CapEx across the portfolio. So those are a couple of levers that we can pull in terms of scaling back capital spend and just making sure that, out of an abundance in caution, we're being very prudent and maintaining balance sheet flexibility and capacity.

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Omer Nathan Sander, JP Morgan Chase & Co, Research Division - Analyst [10]

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Got it. And then maybe just one follow-up on one of the earlier questions. So on the asset sales, can you maybe talk what EBITDA multiples, these are -- these assets are garnering, as you -- presumably as you go up, kind of the so-called quality scale in your portfolio? Does that kind of improve? And does that get higher? And then in regard to the net leverage target of 4 to 5x, is there some sort of time line you should think about reaching that? Or is that kind of in tune or in lockstep with the asset sales there as you step towards that 105 core portfolio?

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Daniel E. Swanstrom, CorePoint Lodging Inc. - Executive VP & CFO [11]

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Sure. Let me start with your question on the multiples. As Keith mentioned in the script, obviously, on the Phase 1 assets, we've been very successful. We've achieved the high end of our revenue multiple range that we had put out about a year ago of 2.5x. And as we've communicated with respect to these hotels. They're lower contribution in terms of EBITDA, less than 10% margins. So we're able to achieve an EBITDA multiple of 36x. As we move forward, the remaining noncore hotels do have a slightly higher -- or actually double EBITDA margins of about 17%. And so as we mentioned, the target from a revenue multiple valuation on this noncore remaining hotels is 2 to 3x. But given the higher EBITDA margins, that translates to about a 14 to 15x EBITDA multiple on a gross basis.

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Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [12]

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Yes. And Omer, as I mentioned in the script, as we look at the aggregate Phase 1 and Phase 2 remaining noncore, which is about 149 hotels. Of that group, 42 of those are under contract, and those are under contract at 2.6x revenue multiples and 17x hotel adjusted EBITDAre multiples kind of consistent with the range that Dan was talking about.

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Operator [13]

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Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Keith Cline for any closing remarks.

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Keith A. Cline, CorePoint Lodging Inc. - President, CEO & Director [14]

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I just want to thank everyone for joining us today on the call and certainly thank you for your continued interest in CorePoint Lodging. Thank you.

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Operator [15]

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