Corphousing Group Inc.

Greetings. Welcome to Corp Housing Group's second quarter 2022 financial results conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Devin Sullivan with the Equity Group. Devin, you may begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us for Corp Housing Group's 2022 Second Quarter Financial Results Conference Call. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer, and Shanoop Kothari, the company's Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, we will be discussing forward-looking statements, including with respect to the expected closing of noted lease transactions and continued closing on additional leases for properties in the company's pipeline, as well as the company's anticipated ability to commercialize efficiently and profitably the properties it leases and will lease in the future. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those set forth under the caption risk factors in the prospectus forming part of the company's effective registration statement on Form S-1, file number 333-262114. Generally, such forward-looking information or forward-looking statements can be identified by the use of forward-looking terminology, such as plans, expects, or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates, or does not anticipate, or believes, or variations of such words and phrases that may contain statements that certain actions, events, or results may, could, would, might, or will be taken, will continue, will occur, or will be achieved. Forward-looking information may relate to anticipated events or results, including but not limited to business strategy, leasing terms, high-level occupancy rates, and sales and growth plans. The financial projections provided herein are based on certain assumptions and existing and anticipated market, travel, and public health conditions, all of which may change. The forward-looking information and forward-looking statements contained in this call and the press release we issued last night are made as of the date of this call and the company does not undertake to update any forward-looking information and or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities laws. Management will also be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the company's second quarter press release. With that said, I'd now like to turn the call over to Brian Ferdinand, Chairman and Chief Executive Officer.

Brian, please go ahead. Thank you, Devin, and thanks to each of you for making time to join us this morning on our first quarterly conference call. We began our journey in 2017 focused on building a portfolio of short-term rental and multifamily properties in destination cities across the United States. However, in 2021, we identified unique opportunities born out of the COVID-19 crisis as hotels in the United States and abroad were shuttered with no apparent timetable to reopen. In response, we quickly pivoted to focus almost entirely on the hotel industry. We now utilize a master lease agreement structure, some for as long as 25 years, to acquire hotels that have been dislocated due to the global pandemic's impact on the travel and accommodations industry. Once we acquire a hotel, we leverage technology to cost effectively manage and market the rooms to business and vacation travelers under our customer-facing brands, including Lux Urban. Customers around the world can find our properties listed on dozens of third-party travel and booking sites, including Marriott Homes and Villas, Booking.com, Expedia, VRBO, Airbnb, and directly through our own portals. Over time, we intend to supplement our marketing and sales engagements, by having our guests book repeat stays directly through our proprietary platforms to reduce commissions and increase our profit margins with additional revenue streams. At present, there are 10 hotels in CHD's portfolio consisting of 1,037 total units under long-term lease in seven cities. We are laser focused on executing our post IPO scaling strategy and are currently assessing a robust property pipeline, which includes thousands of high quality hotels, units located in our current markets and new destination cities. We look forward to announcing the consummation of several additional acquisitions in the coming weeks. As mentioned above, CHG enhances operational efficiencies by employing and leveraging technology across the business to increase occupancy rates, ADRs, and RevPar with our asset-light, lease-not-owned model. Combined, this supports predictable revenue streams and expanding operating margins, which we believe will improve over time as more efficiencies are realized. During the month of August, we hosted approximately 12,338 guests across our portfolio of seven active hotels. Based upon recently announced acquisitions and our expected timeframes, for getting these properties operational. We anticipate hosting in excess of 50,000 guests per month in 20 hotels beginning in 2023. While we certainly have a lot of work to do to make these projections a reality, our operations team led by Marine Lieutenant Colonel David Gerfine continues to ensure effective new property launches while enhancing operational efficiencies across our portfolio. We are extremely confident in our scaling strategy that will position us well to generate higher revenues and improve margins beginning in the fourth quarter and continuing throughout 2023 and beyond. Although CHD is currently a relatively small player in a significant global market, we believe the combination of our access to quality properties available with favorable terms our existing operational and revenue management expertise, and the reemergence of global travel provides us with a unique opportunity to accelerate our growth and capture a disproportionately large amount of the business and vacation travel market. Thank you again for your attention. And I'd now like to turn it over to Shanoop Kothari to provide an overview of our second quarter financial results.

Thank you, Brian. Good morning, everyone. As you know, we closed our IPO in August, generating gross proceeds of $13.5 million. Our results for Q2 do not reflect the impact of the IPO, specifically as it relates to our balance sheet. We do expect to present a more representative view of the IPO impact in our third quarter financial results, which we'll report in November. We did file our 10Q last night, and we certainly encourage you to review that document to help answer any questions. We are very pleased with our results for the second quarter of 2020. Here are a couple of highlights. Net rental revenue in the 2022 second quarter increased by 144% to $10.2 million from $4.2 million in last year's second quarter, driven primarily by an increase in average units available to rent from 376 in Q2 2021 to 565 at Q2 2022, as well as better occupancy rates and average daily rates over this period. For the current quarter, we are generating about 18,000 per average unit, or slightly below $200 a night, all in, including occupancy and additional fees and taxes. Cost of revenue. which includes rental expenses, rose to $7.3 million in Q2 2022 from $4.0 million in Q2 2021 due primarily to the increase in the size of a rental unit portfolio as well as related increases in furniture rentals, cleaning costs, cable Wi-Fi costs, and credit card processing fees. Gross profit improved to $2.9 million, or 28% of net rental revenue, from 148,000 or 3.5% of net rental revenue. Higher gross profit and gross margin was primarily attributed to a reduction in the impact of COVID-19 on our operations, higher unit counts, and better occupancy rates and ADRs. Total G&A expenses in the 2022 second quarter increased to 886,000 or 9% of net rental revenue from 738,000 or 18% of net rental revenue in Q2 2021. This was attributable to an increase in number of units in operation. It is important to note that despite a 144% increase in net rental revenue, G&A only rose just 28% quarter over quarter, providing a glimpse into the benefits derived from scale. Income before the provision of income taxes improved to 1.5 million, from a loss of 1.1 million due to better margins and operating efficiencies. Net income improved to just under 800,000 or 4 cents per diluted share compared to a net loss of 1.1 million in the last year's second quarter. Our average diluted share count at the quarter end was 21.7 million. EBITDA rose to 2.1 million or 21% of net rental revenue in Q2 2022 compared to an EBITDA loss of $590,000. As we look beyond this quarter to the balance of the year, we expect that all-in revenue per available room night to expand to beyond $200 with a related gross margin between 26 and 30%. G&A should remain below 10% of revenue with an EBITDA margin of greater than 20%. I'll now turn the conversation back over to Brian.

Thank you, Shanup, and thank you to each of you for making the time to join us today. I'll now ask the operator to open the call to any questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, that's star one.

Thank you.

Thank you. Our first question is from the line of Alan Klee with Maxim Group. Please proceed with your questions.

Good morning, and congratulations on a profitable quarter. My first question is, I think in your 10Q, you said you expect to have 1,200 units operational by the fourth quarter. And then I think I heard you on the call just say expect 2,000 plus at the beginning of 23. Could you help me understand that a little better?

Sure, Alan. It's Brian. Thanks for joining. So the view is obviously there's a scale up as we're acquiring leases. So the idea is to have a blended average of through the fourth quarter of approximately 1,200 units with the view to have 2,100 units starting for January 1st. So as we build into the end of the year, our scaling strategy as we sign leases, we're getting them online through the end of the year. And that's kind of a blended average view. of when the leases will go live over the course of the fourth quarter. So it's really a blended unit count across the fourth quarter with the view to have 2,100 starting January 1st.

That's great. Thank you. And for occupancy rates, is that impacted when you take on a new master lease that it kind of has a negative impact and then you kind of ramp it up? Or how How do you think about kind of the direction of occupancy rate as we go through this year and next?

Sure. So currently, I could give you indication across the entire portfolio. I believe I'll let you answer that in terms of the overall portfolio. But I know on our two main New York properties, we're running in the mid to high 90s. approximately 280 yard Blakely and Herald Square properties. And we launched Herald Square in the end of June. So we really took about 60 days to ramp that property up and we were running in the mid to high 90s.

Yeah, to further that, like in the entire portfolio, it's low to mid 80s. And Alan, the Units that are unavailable to rent are included in that. So if we have damage in a unit, we penalize ourselves for that, to be intellectually honest. So what Brian's thinking about is internally what available rooms are to rent that don't include stuff that's offline based on repairs and such.

Thank you. And when you're signing new master leases, could you explain why the party you're signing with is willing to do this, and are these rooms that are kind of mothballed, or is it that you can give them more confidence, or maybe describe that a little bit more? Thank you.

Sure. There's two main components. One is we're reopening shuttered hotels in New York alone. Out of the 700 hotels, there was 200 that were shuttered during COVID. So there's massive opportunity to reopen what you described as multiple. And then the second piece is debt markets on the owner-operated hotel or hospitality assets has completely dried up. So the interest in the owner is a triple net lease. They're willing to take far less of the upside for some level of stability and the ability to restructure debt or refinance the property.

Thank you. And as you scale up the number of units that you have, how do you think about how you can leverage your operating costs? I think I heard you say that GNA was like 10 percent or at around 10 percent. It sounds pretty good if you're going to be able to grow the top line as fast as you can.

Yeah, I'll answer that, Brian. So we were at 8.7 for the quarter and for the six months, a little over that amount. And first quarter, we were roughly, call it slightly below 11%. And so as we continue to scale, that number will grow, but, you know, we believe it'll stay below that 10% level and, you know, potentially even, you know, even get lower than that. But, you know, out of the gates, I think our view is, you know, with the scale we have coming online, you know, we don't need to add, you know, top-heavy folks. We do need to add some more bench strength, but we should be able to manage to that below 10% guidance.

That's fantastic. My last question and then I'll get back in the queue is how do you think about, as you sign master lease with new units and you have to put up a security deposit, which eventually you get back assuming everything goes okay, In the beginning, that costs you capital, but as you generate cash flow, you can kind of offset that. So do you feel that that will at some point become a constraining factor on your ability to continue to add new units, or do you think that it will get offset by, as you said, 20% type EBITDA margins and the cash flow from that?

It becomes self-fulfilling, I think, as we go into next year, probably in the third quarter. And, you know, I think the initial ramp requires capital, which is the purpose of the IPO. But as we get to scale, it becomes self-fulfilling. The cash flow leverage is significant. And with the EBITDA margins, you can self-invest.

That's great. Thank you so much. Thanks, Alan.

Thank you. Our next question is from the line of Brian Maher with B Reilly Securities. Please proceed with your questions.

Good morning. Just a couple of questions for me. When it comes to the leases, I think you noted in your comments that some are as long as 25 years. What would be the shortest viable lease period that you would consider relative to your cost structure and operations?

Great question. We have... some with five years and a five-year option, in particular in South Beach. Our target is 15 years really is what we're looking for in terms of base lease plus extensions. The average lease life across our hotel portfolio currently with extensions is 19 and a half years. So for us, the longer and locking in pricing today around dislocation in hospitality assets with you know two to three percent escalators annualized given the dislocation in these markets is really what we're doing and looking to lock in pricing today have predictability both in our inventory and pricing as we go out um so for us it's really a 10 year with a five-year option 15 years is really our target at this point um

Got it. And then in your comments, you also noted, you said a pipeline in the thousands. I'm sure that was that hotels or was that rooms?

That's rooms. So hotel units is what I said. And so our view, we have currently under LOI or in our pipeline upwards towards 5,000 hotel rooms. So, you know, probably 42, 43 properties all across the U.S. and internationally. And we're continually building that pipeline, assessing that pipeline. Obviously, we have models that we run based on all sorts of analytics and then obviously negotiating pricing around those for final lease terms. So it's hotel units when we refer to thousands to clarify.

Okay. And just Two more for me. As it relates to, you know, the pipeline and owners' willingness to enter into these agreements, are you seeing that that pipeline is getting, you know, bigger or smaller? And relative to what we're seeing in lodging, you know, particularly lodging equities coming in here, is their appetite, you know, kind of growing or getting smaller? Thanks.

Sure. It's accelerating in our favor, right? So when we initially were really looking at the dislocation, you know, we were slightly concerned about the length of time, the duration we would have to acquire. But it's accelerating in our favor with higher interest rates on the border of a recession. Obviously, owners of these hospitality assets are becoming somewhat more distressed around the debt covenants and the general debt loads on these properties. And in order to refinance or restructure the debt on these properties, they really need a credit AAA tenant. And they're willing to give up a lot of the upside in the economics of the building in favor of having a steady triple net tenant at less favorable upside or economics than they could in a traditional owner operated hotel situation because of the debt load. So we're seeing the pipeline accelerate. And we're really capturing the opportunity. It's accelerating in our favor.

Thank you. That's very helpful.

Thank you. At this time, I'll turn the floor back to Brian Ferdinand for closing remarks.

Thank you. It has been an eventful and productive several months for CHD, and I want to thank you for your support. We are very excited about the emerging opportunities that we believe we can capture through our platform. We are focused on delivering a long-term value to our stakeholders and look forward to keeping you apprised of our progress. Thank you again for your participation and have a great day.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.