LuxUrban Hotels Inc.

Greetings and welcome to Lux Urban Hotels Incorporated third quarter 2022 financial results conference call. At this time, all participants are on a 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 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Devin Sullivan, Senior Vice President of the Equity Group. Thank you. You may begin.

Thank you, Rob. Good morning, everyone, and thanks for joining us for Lux Urban Hotels' 2022 Third Quarter Financial Results Conference Call. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer, and Shanubh Katari, 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 the 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 333-262-114. 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, or 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 rate, 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 press release and made during this presentation are made as of the date of the press release, 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 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 thank you everyone for joining us this morning. In the third quarter, we continue to deliver on our commitment to creating a growing, sustainable, and profitable company. We delivered record net revenue of $11.6 million and $14.4 million of gross revenue with significant increases in gross profit, rev far, and occupancy rates. As our IPO occurred in this quarter, we had several non-cash warrant and stock expenses we had not seen before as a private company, mostly non-cash in one time. On a cash basis, the business has been net income positive for the last four quarters and the last five quarters EBITDA positive. Excluding these charges, we reported adjusted net income of $600,000 in the third quarter and adjusted EBITDA of $2.4 million. At quarter end, we operated 10 hotels under long-term lease in five cities, Denver, New York, Miami, Los Angeles, and Washington DC. During November, we added over 300 new units and established the presence in New Orleans, Louisiana. This past Friday, we secured the rights to the former Ritz Carlton and Battery Park City in New York, a 298 key five-star hotel. as well are consummating several other high-profile transactions this quarter. We plan to open the former W downtown in New York City on schedule located at 123 Washington Street in New York City this week. We are focused on a capital plan that brings the business to scale while providing shareholders significant value. To that end, we are currently restructuring our pre-IPO private equity investors and debt holders to align their interests directly with their shareholders and create significant long-term shareholder value while providing substantial additional runway into the business over the next year. As we are seeing in real time, our asset light acquisition model is producing a ratio of approximately one to one of every dollar invested into unit growth, which equates to approximately $1 in incremental EBITDA. We now operate approximately 1,200 short-term rental hotel units, all which have been fully funded. As we look to the future, we expect to operate a total of approximately 1,500 short-term rental hotel units by or around December 31st, 2022. The approximately 300 new units we expect to have online by 2023 will be funded by a combination of anticipated operating cash flows and our existing non-dilutive debt facility, 2.5 million of which is currently available. I also want to point out that the net revenue and EBITDA guidance we have provided for 2022 and 2023 assumes no additional unit growth beyond the 1,500 units we expect to have in operation by year end. During the quarter, we hosted approximately 20,000 guests across our portfolio of 10 hotel properties. Based on recently announced acquisitions and our expected timeframes for getting these new properties operational, we continue to believe that we are on pace to exceed 50,000 guests per month across 20 hotel properties to begin 2023. We remain focused on securing the benefits of scale to expand margins, generate positive cash flows, and drive profitability. From a property perspective, we will leverage unit density in cities like New York and Miami It also includes our agreement with Rebel Hotel Company, a premier hospitality management firm. We expect that our partnership with Rebel will deliver margin enhancements that we would not have been able to realize until at least 2024, as well overall direct cost savings into our operations. Finally, I am very excited about the rollout of our corporate rebranding initiative to Lux Urban Hotels. Our name change reflects the culmination of a long planned exit from our legacy apartment rental business, which started in the fourth quarter of 2021. Lux Urban Hotels more accurately reflects who we are today as a provider of short-term rental hotel properties in destination cities for business and leisure travelers. With that, I'll turn it over to Chanute Kothari, our CFO, for financial update.

Thanks, Brian. We filed our 10-Q yesterday. and we certainly encourage you to review that document to help answer any questions. Although we were only public for about half the quarter, our third quarter results reflect the impact of our August 2022 IPO, and in that sense, they do offer more representative view of our financial condition than did our second quarter results. The current quarter will be the first quarter as a public company, straddling half the quarter as private and half public post IPO. Key financial and accounting impacts to this quarter in addition to the IPO were the issuance of options to employees and the related stock compensation expense, the issuance of warrants to investors into the company and the related warrant expense or debt discount, the repayment of certain debt as outlined in the IPO prospectus, the exit of SoBNY and the related costs, And as Brian mentioned, the acquisition of additional units later in the quarter that did not provide material revenues for the third quarter. Net rental revenue in the third quarter rose 74.2% to 11.6 million from 6.6 million in last year's third quarter, driven primarily by the increase in average units available to rent from 4.46 in 3Q 2021 to 5.71 in 3Q 2022. All in REVPAR, which includes room rates, taxes, and other fees, for the third quarter rose 11% from the second quarter to 220 compared to 198 in the prior quarter. All in REVPAR grew 32% for the nine months ended 2022 versus 2021, while occupancy rates improved to 87% from 71%. These increases are due to better quality units, as well as an improving environment for the hospitality industry. Cost of revenue, which includes rental expenses for available units to rent, rose to $6.9 million in the third quarter from $5.9 in last year's third quarter, due primarily to the increase in the company's size of the rental unit portfolio and other associated costs. Gross profit improved to 4.9 million or 42.2% of net rental revenue from about 800,000 or 11.9% of net rental revenue in the third quarter of 2021. This was driven primarily by reduction in the impact of COVID-19 on our operations, higher unit counts, and better occupancy rates and ADRs. As we get further down the P&L, the charges and costs we incurred will become apparent. As Brian referenced, during the quarter, we incurred approximately 4.6 million in total charges and expenses, 2.7 of which are non-cash charges, and 1.8 in cash expenses. Of the 4.6 million, approximately 4.2 are one time in nature, which only includes stock company expense being recurring. Total G&A expenses increased to 5.3 million from about 260,000 in last year's third quarter. This increase included approximately $1.8 million in one-time related costs to the planned exit from a legacy apartment rental business and non-cash stock compensation expense of $360,000 and an increase in the size of the business as compared to last year, as well as costs associated with being a public company. Operating costs also included contracted services, selling administrative expenses, professional fees, software fees, all of which increased over these periods primarily attributable to the operation of additional units as compared to last year's third quarter. Total other expenses rose to $3.5 million from just under $600,000 in last year's third quarter and primarily reflected a one-time non-cash charge of $2.4 million associated to the issuance of warrants to debt investors. As a result of the above, the net loss for 2022 third quarter was 3.2 million or 13 cents or negative 13 cents as compared to a net loss of less than 0.1 million in 3Q 2021. Adjusted net income improved to 615,000 or 3 cents per share compared to a net loss of less than 0.1 million in 3Q 2021. Adjusted EBITDA rose to 2.4 million or 20.6% of net rental revenue in 3Q22 compared to adjusted EBITDA of half a million or 8% of net rental revenue in 3Q2021. Our average diluted share count at the quarter end was 24.1 million. We have, as Brian mentioned, we have reiterated our guidance for full year 2022 and 2023. For 2022, based on our current operating portfolio of approximately 1200 short-term rental hotel units, we expect net rental revenue of between 42 and 46 million and EBITDA of between 7 to 9 million. For 2023, based on expectations that we'll operate approximately 1,500 short-term rental units by year-end, we expect net rental revenue of approximately 100 to 110 million and EBITDA of 16 to 20 million. We continue to expect that all-in revenue, I'm sorry, all-in REVPAR will remain consistent with levels this quarter, slowly increasing next year. On a normalized basis, we expect related gross margins of 30-plus percent with G&A without one-time items and non-cash stock compensation expense to be around or slightly above 10%, as net rental revenue will grow to absorb the cost of being a public company. At September 30, 2022, total cash, including restricted cash, was $2.3 million, and total debt was slightly under $7 million. Looking at debt to LTM EBITDA and debt to LTM adjusted EBITDA, we were at 1.4 times or 1.1 times, respectively, at the end of Q3 2022. I'll now turn the conversation back over to Brian.

Thank you, everyone. Devin, I'll turn it back to you, and we can move to Q&A.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. 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 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. Our first question comes from Alan Klee with Maxim Group. Please proceed with your question.

Good morning. This is Derek Greenberg on for Alan. My first question is just if you could possibly provide some color on the timing of adding units in 4Q to get to 1500 and maybe what the total count was at the end of 3Q just so we can get a sense of what average units might be in the quarter.

Sure, I'll turn that back to Chanute.

Yeah, so the quarter end unit count was 576 for Q3. And then I would assume that the addition of units is more back end loaded for the 1500. Because even if we enter into an agreement There's usually a make-ready period that can be a few weeks to longer than that.

Okay. And then outside of the 1,500 book capacity, you guys have to add more units from existing 9W to finance and cash flows?

Sure. So like I mentioned on the call, we're in process of restructuring with the pre-IP equity holders. So that could provide additional runway of upwards towards 18 million, depending on several factors, which we're currently working on. So, you know, that could provide substantial runway to add on a non-diluted basis going over the next 12 to 14 months.

Great. And then just a little bit about the due process agreement. I was wondering how this might affect either cost of goods sold or, you know, expenses should we expect perhaps a four percent bump in gross margins or just how to think about that yeah it's a it's a straight cost savings on pro on a processing case okay yeah and potential and that okay you know i i referenced about 30 and i would say you know know that can be bumpy you know up and down based on you know the cost of the properties and so forth so it's included in that 30 percent okay and the um the new partnership you guys have with rebel hotels um maybe just some color on the potential expansion gross markets from that as well sure so that allows us to focus um

you know, heavily on our acquisitions, which we're extremely good at our asset like model. It allows us to bring properties online much quicker. And then in addition, you're going to see and we will see margin expansion around that relationship where we're leveraging their scale to get reductions across commissions on third party OTAs, supplies, leverage in economies of scale across employees. negotiations with the labor unions. So we estimate additional margin expansion across the processor and the rebel opportunity, somewhere around 10% in aggregate of cost savings entering into that relationship between the two components.

Okay, got it. Thank you. Then I guess I just have One more question that's related to the impact of new finance on cash and share count.

Yeah, so with regard to that impact, we're not prepared to go through that yet, but we will as soon as, you know, we'll follow the related documents as soon as, you know, all that's sort of taken care of.

I think the one thing to focus on is the model and our business is performing, right? And it continues to perform. And when you look at any sort of financing with respects to the current business and trajectory of the business, as I mentioned, we're seeing as we deploy capital into new units, and again, those are going in the form of security deposits or letter of credit, so they sit on the balance sheet. So it's not even spend, right, it's a refundable security deposit or a letter of credit to secure the asset, we're seeing approximately a dollar of incremental EBITDA. So if we put out 10 million of lease deposits, the current economics we're seeing, right, we're seeing a return of 10 million annualized in EBITDA approximately, right? So for us to deploy capital in the window we have to execute around the distressed opportunity into hotel assets, right, you know, that portfolio extends out 15 to 25 years based on the lease duration. So when we're looking at the opportunity, you know, 10, 20 million equates to 10, 20 million of annualized EBITDA for the next 15 to 25 years, right, under the model, right? So that's what we're looking at, and that's the scope of the opportunity we're seeing, and we're proving it out in our numbers, right? If you look at our numbers, you know, I think it was the adjusted either there was 26% this quarter, you know, we're looking at 30, 35% margins with the optimization we're doing between Rebel, credit card processors, and other initiatives we're taking on, also reducing headcount internally as we move into the Rebel agreement. So when you look at that, the opportunity set is one that as we deploy capital, obviously in the most efficient way we can from a cap structure perspective, you know, you're getting such tremendous leverage on the incremental EBITDA that, you know, our view is investing now where the opportunity set is, you know, really a once-in-a-lifetime opportunity, right? So then we continue to do that, and we want to continue to do that because the opportunity set is in front of us around the distressed hospitality assets, the debt loads on these properties, the current environment. So on the acquisition side, we're really focused on the immediate opportunity in front of us over the next 12 months. to grab as much real estate as we can.

Yeah. So, so Derek, so as Brian pointed out, um, you know, EBITDA, um, and adjusted EBITDA depending on the quarter, um, roughly, you know, 20 plus percent. So 21 to 22% this all year. Um, what that, you know, that's, that's, there's a couple of things to think about from that, right. You brought up the processor agreement, brought up rebel, you know, economies of scale associated to, you know, growing the business, right? We're not expanding the management team. And then, you know, we had to absorb a number of costs associated being a public company, which we'll leverage as we continue to grow. So there's room to expand the EBITDA margin, you know, as we move forward, right? And so, you know, we've kind of held to what we've said at the IPO in terms of overall, you know, overall, you know, gross margin and G&A. And, you know, at this point, you know, it's really leveraging the platform.

Great. That's very helpful. Thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Andrew Cedar with B Reilly. Please proceed with your question.

Hi, good morning. This is Andrew Seder. I'm on for Brian Maher this morning. I just have a couple questions for you. The first being is within your hotel and rental business, are you seeing an increase or decrease in property opportunities over these past couple months? And I guess a follow-up to that is have there been any changes in owner or seller expectations in either pricing or the duration of the lease?

Thank you, Andrew. This is Brian Ferdinand. So we've seen... An acceleration of pipeline around the current environment, in particular around debt loads and debt restructuring on the hotel property side, owner side. So we're seeing an acceleration of deal flow. So it continues. And no material or changes to deal structure. We're seeing 15 to 25 year leases. rent bans or lease costs are within and at the lower end of our underwriting guidelines. So we're seeing those tick up in economics. And then on balance, the properties that we do have fully operating, we're seeing acceleration on the upside, right, in ADR and occupancy. But these properties are in more distressed situations given the need to restructure on the debt side. and they're unopened, right, a lot of them. So it becomes very challenging for the owner operator or owner to restructure without a commercial triple net lease.

Okay, thank you. My second question is, are there any markets you are currently in that you would like to go deeper into? And are there any markets that you are not currently in that are a high priority?

Great question. We look at the high density, major urban core markets. So New York is probably the largest opportunity. It was the hardest hit, the pandemic. And there's the largest amount of closed hotels or distressed hotels in the country that's still in New York. Still a number of thousands of workers out of work in the hotel union. So there's still a major opportunity in New York. And obviously, if you look at our portfolio, we're heavily focused in New York. and we've done a great job getting some more key assets, and we continue to work on that. Boston is a city where we're heavily focused on opportunities there, and we're very focused on Boston in terms of scale. All right. Thank you. All right.

And my final question relates to some housekeeping in the income statement. Is the increase in the G&A expense expected to remain at or around the new elevated level? Or like what is a good run rate going forward for that?

Yeah, so the increase in G&A, a big portion of the G&A increase is the exit from the apartment rental business, so BNY, which if you look at the 10Q, there's, you know, in the MD&A section we've kind of outlined that specifically. Also, you know, with regard to the straddle quarter, so we have, you know, a number of expenses that immediately hit for the IPO, you know, such as director compensation and, you know, some IPO costs that are not, you know, classified in the proceeds, as well as the deployment of capital post-IPO for units that, you know, didn't come online in the quarter. So all in Compass, you know, we've strived to stay prudent on the G&A side, you know, at around 10%. I think this is, you know, the next quarter will be, you know, at around 10%. And overall, as we continue to grow the business, we expect it to be below 10%. All right.

Thank you. That was all for me. Thank you.

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Great. Thank you everyone for joining our call. We're very excited about our future and appreciate you guys joining the call. I'll turn it back to Devin.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.