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Edited Transcript of CPLG.N earnings conference call or presentation 13-Aug-18 9:00pm GMT

Q2 2018 CorePoint Lodging Inc Earnings Call

Aug 23, 2018 (Thomson StreetEvents) -- Edited Transcript of CorePoint Lodging Inc earnings conference call or presentation Monday, August 13, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel E. Swanstrom

CorePoint Lodging Inc. - Executive VP & CFO

* John W. Cantele

CorePoint Lodging Inc. - Executive VP & COO

* Keith A. Cline

CorePoint Lodging Inc. - President & CEO

* Kristin Hays

CorePoint Lodging Inc. - SVP, IR & Corporate Communications

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for your patience. You've joined the CorePoint Lodging Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Ms. Kristin Hays, with Investor Relations. Ma'am, you may begin.

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Kristin Hays, CorePoint Lodging Inc. - SVP, IR & Corporate Communications [2]

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Thank you, operator. Good afternoon, and welcome to CorePoint Lodging Second Quarter 2018 Earnings Conference Call. As noted in the company's earnings release announcement, today's presentation will include prepared remarks from company management. There will not be a question-and-answer session at the end of today's 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 results of operations could differ materially from historical results or current expectations.

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 pro forma adjusted EBITDAre, which is a non-GAAP financial measure. You may find a reconciliation of the pro forma 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 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, such as pro forma 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 August 13, 2018, we remind you that this presentation will not be updated, and it is possible that the information discussed will no longer be current.

This afternoon, Keith Cline, our President and Chief Executive Officer, will provide an overview of CorePoint's second quarter results, and update on the Wyndham integration and an overview of CorePoint's key strategic priorities for the near and longer term. John Cantele, our Chief Operating Officer, will give a status update on our strategic repositioning efforts and our hurricane recovery efforts in Texas and in Florida, as well as discuss our key asset management initiatives.

Dan Swanstrom, CorePoint's Chief Financial Officer, will then provide more details on our second quarter performance and update on our financing activities during the quarter, our dividend policy and CorePoint's outlook for the remainder of 2018.

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

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

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Thank you, Kristin. Good afternoon, and welcome to CorePoint Lodging's Second Quarter 2018 Earnings Call. We are pleased to be here today for our inaugural call as CorePoint Lodging, the first since our successful spin-off from La Quinta and closing of the sales transaction on May 30.

On May 31, CorePoint began trading at CPLG on the New York Stock Exchange, becoming the only U.S. publicly traded lodging REIT strategically focused on the ownership of mid-scale and upper mid-scale select service hotels.

Concurrent with the spin-off, we also completed the financing for CorePoint Lodging and Dan will share more details on that in a moment. Before discussing our financial results for the second quarter and providing an update on our portfolio's integration into the Wyndham network, I want to quickly revisit the thesis for the creation of CorePoint Lodging.

As most of you are aware, our predecessor entity, La Quinta Holdings Inc. has been aggressively pursuing a three-pronged strategy of driving consistency in product, driving consistency in the delivery of an outstanding guest experience and driving customer engagement with the La Quinta brand.

The first 2 components of this strategy drove the intended outcome, as illustrated by: one, significant increases in RevPAR Index share; and two, higher Net Promoter Scores driven by both service quality and product quality.

We believed that in order to unlock the full potential of our 316 hotel initial portfolio, with approximately 40,500 rooms in locations in 41 states as well as the value of the La Quinta system brings to those hotels, there needed to be a consolidation transaction that would give the La Quinta brand scale, distribution, loyalty and reach so it could drive improved results for our hotels.

And since the spin-off just over 2 months ago, our team has been hard at work at building the foundation to do that very thing, unlock the potential of this portfolio and drive results. We've been focused on operating CorePoint as an independent public entity and transitioning our business and systems from that of a C corporation to a stand-alone REIT as Wyndham's largest franchisee. We're also building out the CorePoint team and we've attended our first La Quinta franchise advisory council meeting. And we've held the first of many joint business reviews with our property manager.

Together, Wyndham and CorePoint are executing integration plans and creating new lines of communication between the 2 organizations to ensure we minimize the risks that could be associated with the transition and integration of this complexity, size and scale.

These are very early days, but we believe that over the next 12 to 18 months our teams will implement as smooth an integration as possible, and we look forward to keeping you updated on our progress along the way.

Turning to CorePoint's second quarter performance. We are extremely pleased with the revenue and market share growth we're experiencing across our portfolio. Today, we reported comparable RevPAR of $63.29, which represents of 5.6% RevPAR growth over the same period last year, as we continue to reap the benefits of the key strategic initiatives that La Quinta put into place almost 2 years ago, and in spite of the negative impact the hurricane-affected hotels had on performance.

Our impressive RevPAR growth in the quarter was driven by a 4.7% increase in comparable ADR and 60 basis points of improvement in comparable occupancy. Our top-performing markets during the quarter included Atlanta, Dallas-Fort Worth, West Texas and New Orleans, where our newly repositioned downtown location is about to celebrate its grand reopening and begin to ramp.

As John will share in a moment, our results not only benefited from our investments into repositioned hotels, but also from growth in the energy market. In addition, hurricane-impacted rooms in Florida generally came back online faster than we expected throughout the quarter. Comparable RevPAR Index in the second quarter grew 230 basis points over the same period last year. Repositioned hotels and hotels located in the energy markets despite the largest year-over-year index growth offsetting the negative impact that the hurricane-affected hotels had on RevPAR Index, primarily due to lower occupancy in those hotels.

Before moving on, I want to provide an update on the estimated tax associated with the CorePoint Lodging spin-off from La Quinta. As you know, CorePoint spin-off was a taxable transaction. In connection with the spin, the parties agreed to set aside $240 million as a reserve amount to pay the taxes that will be due as a result of the spin-off and related transactions.

If the tax amount due is less than the $240 million reserve, any remaining amount will come back to CorePoint in the form of cash. As of the spin-off date, we and our tax advisers estimated that CorePoint would receive approximately $56 million based on estimated tax gain valuations. These valuations involve complex analysis and assumptions, including the estimate for an adjusted tax basis of CorePoint's assets and liabilities.

Due to the complex nature of the analysis, CorePoint recently engaged a second tax adviser to review the calculation and perform its own independent analysis. As a result of this ongoing work, while CorePoint expects the $240 million reserve to be more than sufficient to cover the tax payment, it now believes that the tax due may be substantially higher than the original estimate, which could significantly reduce the cash payment to CorePoint.

We will keep you updated on the amount and timing of any payment to be made to CorePoint. Before talking about CorePoint's near and longer-term strategies, I would like to turn the call over to CorePoint's COO, John Cantele, who will provide a more detailed update on the asset management strategies for CorePoint and our strategic repositioning effort as well as the hurricane recovery efforts in Texas and Florida. John?

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John W. Cantele, CorePoint Lodging Inc. - Executive VP & COO [4]

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Thank you, Keith. Good afternoon, everyone. I am pleased to update you on the operations of CorePoint Lodging. I will begin by taking a moment to highlight a few unique aspects of CorePoint that structurally and strategically benefit us, including a continuity of leadership and being well positioned for revenue growth.

CorePoint will continue to work with the team that almost entirely remains intact from La Quinta. Wyndham has integrated the majority of La Quinta's revenue management and sales organizations, regional vice presidents and general managers. The institutional knowledge that transferred to Wyndham and the fact that we're initially working with one management company, allows us to focus our asset management resources more strategically and work closely with them to ensure CorePoint is reaping the full benefits of the Wyndham platform.

Prior to the spin, La Quinta put in place an initiative to add approximately 25 people to its sales force to increase the focus on local markets, especially at the 54 hotels being renovated and repositioned upward. These repositioned hotels are seeing a significant improvement in market share, driven in part by the additional sales resources. This is an exciting trend and one we expect to continue as repositioned hotels continue to ramp.

Turning to an update on the substantial progress of our repositioning effort and the build back of the hurricane-impacted hotels.

I've good news to report that our repositioning effort is nearing completion. At the close of the second quarter, 48 hotels had completed their construction phase and are now in the process of being reintroduced within their markets. By the end of this year, we expect 5 more hotels to come out of renovation, leaving just one, Los Angeles Airport, which is scheduled to be completed in 2019.

We continue to be pleased with the initial performance of the repositioned hotels. While it is still early in the process, with the 27 hotels that completed renovation by year-end 2017, if we compare the year-to-date RevPAR performance in 2018 to the same period in 2016, RevPAR is up approximately 20% for those hotels, driven by double-digit growth in average daily rate.

We also drove significant market share gains and improvement in guest satisfaction scores. In addition to our successful repositionings, we are making progress in hurricane recovery efforts in Texas and Florida. The overall impact of the hurricanes on our second quarter performance ended up being less than originally anticipated as rooms came online faster than projected toward the end of the quarter.

In addition, we are pleased to report that the 5 closed hotels in Florida, which are not in our comparable pool, are scheduled to reopen by early Q1 2019. Two hotels in Naples, along with Fort Lauderdale, Tamarac and West Palm Beach are expected to reopen by the end of 2018, with Fort Myers projected to reopen in early 2019.

I'd now like to expand a bit on our asset management team priorities, which are twofold: First, integration across the Wyndham platform to realize incremental revenue opportunities and cost efficiencies; and second, the strategic allocation of capital to improve and refresh our hotels. While it is early in the process, our asset management team is working closely with our brand partner to best position CorePoint to realize the potential benefits resulting from the transaction, including access to Wyndham's broader distribution platform, cross-selling through their direct channels, participation in an industry-leading loyalty program and alignment of revenue-generating resources within our global sales and revenue management team.

From an expense perspective, we are working with Wyndham to identify opportunities to lower cost related to technology, distribution and marketing, and to leverage supplier relationships to reduce CorePoint's operating costs. Our asset management team is laser-focused on margin growth, and unlocking embedded value in this portfolio. At the same time, we continue to monitor revenue management and cost control at the property level.

With respect to the strategic allocation of capital, as we near the completion of the repositioning of 54 hotels, we are evaluating additional opportunities to improve and reposition select assets in order to drive attractive, risk-adjusted returns, in addition to our ongoing maintenance capital spending.

We are also working to identify potential assets to be rebranded within the Wyndham family of brands to generate a stronger ROI. In summary, we are extremely pleased with CorePoint's revenue growth in the second quarter. With the repositionings nearing completion and the hurricane-affected rooms coming back online and the potential benefits to be realized from the integration, we believe CorePoint is well positioned for the remainder of the year and heading into 2019.

With that, I will turn the call over to our CFO, Dan Swanstrom. Dan?

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

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Thanks, John. First, I'd like to start by saying that I'm thrilled to have recently joined CorePoint Lodging. I'm excited to partner with Keith, John and our team on this exciting new journey for CorePoint, which I believe is well positioned to capture embedded growth opportunities and value creation in the near- to medium-term and to grow and diversify its portfolio over time.

We have assembled a highly experienced team to execute on our strategic priorities. In addition to our recent asset management hires, we are pleased that the our new Chief Accounting Officer, who will head up our accounting and tax functions, will join CorePoint later this month to complete the formation of our senior management team.

Today, I will discuss our operating results for the quarter, give a brief update on our ongoing hotel strategic repositioning program, provide an overview of our balance sheet and liquidity position, review our dividend policy and introduce our 2018 outlook.

As Kristin noted in her opening comments, the operating results and the outlook I will discuss today are on a pro forma basis. Pro forma adjusted EBITDAre for the second quarter 2018 was $58 million as compared to $68 million on a pro forma basis for the same period in 2017.

Increases in room revenue during the quarter were offset by increases in rooms expense, including payroll and third-party travel agent commissions. With respect to rooms’ expense, we continue to experience the competitive wage pressures that are impacting our industry and an increased need for contract labor. I would also note that a portion of the payroll expense increase relates to continued labor investments being made to grow the sales force across the portfolio, which as John outlined, is contributing positively to revenue growth.

The year-over-year variance in total pro forma adjusted EBITDAre is primarily due to 2 nonrecurring factors: first, the prior year results included a positive insurance expense adjustment of approximately $9 million recognized in the second quarter of 2017.

Second, our 2018 results continue to be impacted by hurricane disruption, which we estimate to result in a reduction of approximately $3 million, net of approximately $750,000 of business interruption proceeds received compared to 2Q '17.

Taking into consideration these 2 nonrecurring items, second quarter 2018 pro forma adjusted EBITDAre on a normalized basis is estimated to be approximately $61 million as compared to $59 million for the second quarter of 2017 on a similar basis.

In terms of capital investment, we invested $45 million during the second quarter, of which $18 million was part of our ongoing hotels strategic repositioning program. During the quarter, we completed the construction phase of 9 significant hotel renovations as part of the repositioning program.

As a result, as John mentioned, 48 of our total 54 hotel repositioning projects are now complete as of June 30, with all but one of the remaining 6 hotels under construction anticipated to be completed by the end of 2018.

This program is an exciting tailwind going forward for the CorePoint portfolio as it continues to benefit from the significant capital investment program initiated in 2016. With more than $200 million invested to date, these hotels have been repositioned upward within their local markets with enhanced guest rooms, expanded public areas and upgraded exterior elements.

We expect to invest a substantial majority of the remaining approximately $20 million of capital spend associated with this program in the second half of 2018.

Turning to our balance sheet, in connection with the spin-off, CorePoint entered into a new $1.035 billion CMBS debt facility. The facility has an initial term of 2 years with 5 1-year borrower extension options and bears interest at LIBOR plus 275 basis points.

Under the terms of the loan agreement, CorePoint is permitted to prepay up to 20% of the principal balance without the payment of any spread maintenance premium. During the quarter, we also closed on a new $150 million revolving credit facility. As of June 30, 2018, we had $25 million outstanding on the revolver, but this amount was repaid subsequent to quarter end with cash on hand.

As a result, our line of credit is currently undrawn. In terms of liquidity, between the underground revolver and our cash and cash equivalents at June 30, pro forma for the revolver pay down, we have over $200 million of total availability. More broadly, one of CorePoint's strategic priorities is to build and maintain a strong balance sheet.

We are focused on having a conservative capital structure, preserving sufficient liquidity with minimal short-dated debt maturities and reducing leverage over time. Our net debt to pro forma adjusted EBITDAre on a trailing 12-month basis is approximately 5.3x.

We expect to organically reduce this ratio to below 5x through the anticipated realization of our targeted EBITDA growth drivers embedded in the portfolio, including the reopening of hurricane-impacted hotels as well as the completion and full ramp-up of our repositioned hotels, both of which should provide CorePoint's operating results strong momentum heading into 2019.

With respect to our dividend policy, CorePoint put out a release last week announcing that our Board of Directors declared a cash dividend of $0.067 per share of common stock with respect to the second quarter of 2018. Prorated for the period of the completion of CorePoint spin-off from La Quinta, through the last day of the second quarter, which represents an anticipated regular quarterly dividend of $0.20 per share of common stock.

Our objective is to maintain a sustainable and well-covered dividend. And we sized our initial dividend based on the current cash flow being generated by the business, which as we have mentioned, continues to be impacted by disruption from hurricanes and our strategic repositioning program.

The board will continue to evaluate our dividend level as we progress through the year and as we gain better insights into 2019 and the anticipated realization of EBITDA growth embedded in the portfolio. Lastly, today we introduced our 2018 guidance outlook.

We are establishing comparable RevPAR growth guidance of 3.0% to 4.25% for the full year 2018, and we anticipate pro forma adjusted EBITDAre to be in the range of $177 million to $187 million.

The company currently estimates the impact of the ongoing disruption caused by the hurricanes to result in a reduction of approximately $18 million to $22 million of pro forma adjusted EBITDAre for the full year of 2018, which is captured in the $177 million to $187 million outlook range.

As a reminder, the majority of these losses are expected to be recovered in the future through the company's business interruption insurance coverage.

I will now turn the call back over to Keith, who will walk through our strategic priorities and provide additional color on CorePoint's compelling value proposition.

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Keith A. Cline, CorePoint Lodging Inc. - President & CEO [6]

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Thanks, Dan. As you can see in our press release issued today and as heard on this call, this quarter reflects noncomparable and somewhat complex financial disclosures with 2 months of results from our predecessor La Quinta on a discontinued operations basis and 1 month of CorePoint Lodging, and includes substantial costs associated with the spin and sale transactions.

We look forward to the third quarter, where our financials should be a much cleaner representation of CorePoint Lodging. This is a busy and exciting time for our business. Our teams are focused on both the impact of the Wyndham transition and integration into their system as well as driving results at our hotels.

We are extremely pleased with the revenue and market share growth we experienced in the first half of the year. In the second half of this year, we believe CorePoint will continue to benefit from the strategic initiatives we put in place at La Quinta as well as the near-term embedded growth opportunities that exist for our portfolio.

For example, our strategic repositioning effort across 54 hotels is nearing completion, and the initial performance in those hotels is exceeding our expectations. Those hotels are being repositioned into higher competitive sets within their respective markets and have additional sales efforts in place to drive long-term revenue growth.

We also have over 500 hurricane-affected rooms coming back online as we move through the second half of 2018, which we believe should also help drive revenue towards the end of this year and into 2019.

Finally, while it is very early in the transition, we believe CorePoint will benefit once we fully integrate our hotels into the Wyndham network. As we've said before, this is a key element of unlocking the potential of this portfolio, and we look forward to keeping you updated on our progress.

We're not only focused on continuing to drive revenue growth, but also laying out a path for margin expansion. Our team will 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.

In closing, our goal is to generate premium long-term total returns for our stockholders through proactive asset management, value-enhancing investments, disciplined capital allocation and maintaining a strong balance sheet.

CorePoint offers a geographically diverse portfolio located primarily in markets with strong underlying economic and lodging fundamentals, with our largest concentrations in the Sunbelt states and higher growth markets like Texas, Florida and California.

We believe CorePoint presents a compelling investment opportunity, not only because of the near-term embedded growth opportunities that I just discussed, but also because of our differentiated strategic focus and unique market position creates what we believe is an attractive growth and consolidation opportunity in the mid-scale and upper mid-scale lodging segments.

We look forward to seeing many of you on the road over the course of the next several months and sharing updates on our progress.

Thank you for your time and your interest in CorePoint Lodging. This concludes our call. Operator?

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Operator [7]

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Thank you, sir. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may disconnect at this time.