LuxUrban Hotels Inc.

Greetings and welcome to the Lux Urban Hotels 2022 Financial Results Conference Call. At this time, all participants are in 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 call over to Devin Sullivan, Managing Director of the Equity Group. Thank you. You may begin.

Thank you, Daryl. Good morning, everyone, and thank you for joining us today. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer, and Chanute Katari, the company's President and Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, we will be discussing forward-looking statements with respect to financial and operational guidance, scheduled property openings, expected closing of noted lease transactions, 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 our public filings with the SEC, including an item 1A of our 10-K for the year ended December 31, 2022. 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. The 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 the company's press release and during this call are made as of the date of this event 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'll now 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 joining us this morning. We are excited to report record full-year financial results, continued success in executing against our growth plans, and an outlook for continuing growth and profitability in 2023. We completed our IPO in August, 2022, which in our view adds important context to all that we accomplished in 2022 and during the early part of 2023. We more than doubled net rental revenue in 2022 to 43.8 million from 21.4 million in 2021, as well tripled our operational unit count as of Q1, 2023. On an adjusted basis, we reported our sixth consecutive quarter of cash basis net income and fifth consecutive quarter of positive EBITDA. We completed a successful corporate rebranding, significantly increased our property portfolio on a fully funded basis, established our presence in new cities, and added scale in two of the country's premier destination cities, New York and Miami. Utilizing our asset-light business model, we increased the number of short-term stay hotels under master lease agreements and expanded total units for rent and operation. At year-end, we operated properties in New York, Miami, Los Angeles, New Orleans, and Washington, D.C. We continued this growth in the first quarter of 2023, both in terms of properties under MLA and units available for rent. We exited our legacy apartment rental business, SoBNY, as part of our plan to focus exclusively on the short-term stay hotel rental business. Although this shift resulted in non-recurring cash exit costs of $4.1 million in 2022, these expenses were confined to 2022, and we believe that we are now well-positioned to capitalize on the ongoing recovery in global travel. We are seeing robust consumer demand as well, very high quality assets in our pipeline that we are continuing to pursue and close. We are proud of our success to date. However, we believe that the opportunities that lie ahead of us are historic in nature. Approximately $31 billion of CMBS loans backed by hotels are set to mature by the end of 2024. reflecting the ongoing distress in hotel assets created by the pandemic and now exacerbated by rapidly rising interest rates. This confluence of factors has resulted in new and challenging financial requirements for hotel owners, which fully aligns with our supply growth strategy in acquiring turnkey hotel properties on long-term master lease agreements at pricing that is at historic cycle lows. We are now accessing a sustained and elongated pipeline of hotel opportunities we think will continue through 2025. As the business continues to scale and mature, we are well positioned to expand margins by applying our advanced revenue management capabilities, as well as pursuing previously untapped high margin revenue streams at each of our lease properties beginning in the second quarter of 2023. We have also completed significant steps to fortify our financial position, simplify our capital structure, generate cash, and accelerate debt repayment of pre-IPO high-interest notes with non-cash expense components. The effect of these initiatives will begin to manifest in our first quarter of 2023 results, specifically with respect to reducing our total legacy debt. We are really excited to continue to see the business performance scale in 2023. This past year has allowed us to showcase the viability of our hotel operating model, and we remain focused on expanding our industry presence in 2023. We anticipate a higher deal flow environment this fiscal year, allowing us to select only the most favorable properties and deal structures to advance our growth. With that, I'll turn it over to Shanukh Kothari, our President and Chief Financial Officer for review of our financials.

Thanks, Brian. We intend to file our 10K by March 30th. For those of you who may be new to our story, we completed our IPO in August of 2022, making the fourth quarter of 2022 our first full quarter as a public company. As Brian noted, we have accomplished quite a bit for a company our size and a newly public status in terms of growth, profitability, and realignment of our operational priorities. The costs and charges associated with these activities are reflected in our results, and therefore, you will need to peel back the onion a bit to appreciate the strength of our business and its embedded potential. In many respects, this is the most representative quarter since our IPO. We believe that the true growth and earnings power inherent in our model will more fully manifest beginning in the first quarter of 2023 as the actions we have taken since our IPO, along with those in process, have set the stage for what we believe to be a strong 2023 and beyond. I will first provide a brief overview of our financial results, share our guidance for the year, and then we'll open the call to questions. Net rental revenue rose 105% to $43.8 million from $21.4 million in 2021, driven primarily by an increase in REVPAR from $124 for 2021 to $247 for 2022. As a reminder, we define REVPAR as revenue per available room or simply net revenues divided by average available units for the period. Gross profit rose 12.4 million or 28% of net rental revenue from 2.1 million or 10% of net rental revenue in 2021. 14% of the increases due to greater operating costs associated with hotel properties versus apartment units that are more than offset by greater rev par as well as 4% associated to the non-cash impact of lease accounting. General and administrative expenses increased to 6.8 million or 16% of revenue from 2.8 million or 13% of revenue in 2021, with the increase reflecting our ramp up and change in infrastructure for one, the shift to hotel units, two, the preparation for the IPO, and three, post-IPO public company expenses. Also included in operating expenses were 2.5 million of non-cash stock compensation expense, 2.4 million of non-cash of non-cash for lease expenses for the exit apartment units and 4.1 million of cash expenses also for the exit of apartment rental business. Our net loss for the year was 9.4 million or 40 cents per share compared to a net loss of 2.2 million in 2021. Net loss in 2022 included approximately 9 million of non-cash charges consisting of previously mentioned 1.9 million of non-cash rent amortization, 2.5 million non-cash stock compensation expense, 2.4 million of non-cash lease expenses for the exit apartment units, as well as 2.0 million of non-cash financing costs. We also incurred cash costs of 4.1 million associated with the exit from legacy apartment rental business and 5.5 million of cash interest and financing costs. These costs and expenses were partially offset by $1.6 million of other income. Exclusive of these items, adjusted cash net income improved to $3.8 million from an adjusted cash net loss of $2.2 million in 2021. EBITDA and adjusted EBITDA increased to $8.3 million and $12.4 million in 2022, respectively, from a $600,000 loss for both EBITDA and We hosted approximately 220,000 guests in 2022, which is about 600 guests a day, double the approximately 110,000 guests we hosted in 2021. To put our growth in perspective, we are currently hosting about 1,500 guests per day. Moving to the balance sheet, at December 31st, 2022, cash and cash equivalents and treasury bills totaled 3.7%. Restricted cash was $1.1 million and total debt was $16.5 million and consisted of $9.1 million of senior secured notes, $2 million of short-term business financing, and other debt of $5.4 million. As announced in February, we entered into an amended revenue share agreement with our institutional partners that allow us to convert $5 million in cash payments to just under $2.5 million shares of our common stock that will be issued at various times during the year. This resulted in immediate increase in growth capital while simplifying a capital structure and aligning the interest of our institutional partners with that of all shareholders. We estimate that total debt has been reduced by $6 million subsequent to year end. This was via the equity conversion initiatives and debt pay down from cash generated from operations resulting in a pro forma debt of approximately $10 million or less than one times adjusted trailing EBITDA. Free cash flow will be a primary measure of our financial performance as we move through 2023. The trajectory of our business is expected to produce significant free cash that we will use to reduce or potentially eliminate debt in 2023 while still meeting our projected growth targets. We have maintained our guidance for 2023 of net rental revenue of 115 to 120 million and EBITDA of 21 to 25 million. We expect that all in REVPAR for 2023 will be 220 to 240. We continue to target gross margins of 30 plus percent, with G&A excluding any items to be approximately 10 to 12 percent, which would result in EBITDA margins of 20 to 25 plus percent after we achieve adequate economies of scale. With respect to guidance, We are in various stages of negotiation with multiple property owners to acquire the long-term operating rights for hotels in the United States and Europe. We expect to end the year operating between 2,500 and 3,000 short-term units up from 844 units at December 31, 2022. The timing of reaching our goal of between 2,500 and 3,000 units may positively impact our revenue guidance for the year. I'll now turn the conversation back to Brian.

Thanks, Chanuk, and thanks to each of you for joining us today. I'll now ask the operator to open up the call to questions from analysts that are in the question queue.

Thank you. We will now be conducting a question and answer session. If you would 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 two if you would 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 your questions. Our first questions come from the line of Alan Klee with Maxim Group. Please proceed with your questions.

Good morning and congrats on strong growth. Can you tell us right now how many units you have that are active? And with your pipeline, how many units can you add without raising additional capital? Thank you.

Sure. So just as of this week, so April 1st, we will have just approximately 1,500 units fully operational. generating through GAAP revenue as of the start of the second quarter. And we can add with free cash flow, as we have been, approximately 200 units per month, keeping the business in a strong working capital position and leveraging our free cash flow, about 200 units per month, 600 per quarter.

Thank you. In your comments, you said that you plan to pursue previously untapped high margin revenue streams at each of the leased properties beginning in the second quarter. Could you give us a sense of what this is?

Sure. So twofold. One is utilizing the real estate that exists in some of the larger scale properties, such as conference rooms, ballrooms, event spaces. So the actual real estate that came with the properties that we haven't utilized yet, we're only utilizing it for room revenue currently. So there's some beautiful spaces in many of the hotels or most of the hotels we operate in. So we have been working on leasing and partnering on those spaces to generate significant add-on revenue. to some of our larger properties, such as 123 Washington, Tuscany, the Marriott and Herald Square, and some of our Miami properties, as well as our new Los Angeles property. And then in addition, typical to the larger flags that exist, i.e. Marriott, Hilton, Hyatt, they have on-property add-on revenues, so property enhancements, as well as guest enhancement revenues, such as elevated Wi-Fi. You know, we're partnering on food and beverage components, so upsell opportunities there. vending ATM machines, typical add-on revenues in hotels that we have never tapped. So we're looking to generate, you know, somewhere around $20 per stay. So, you know, just in terms of, you know, just the high level, the amount of guests we track, i.e. 200,000 last year. Shanute mentioned about 1,500 per day currently. If you're able to get you know, $20 more out of every stay, you're talking about millions of dollars in add-on revenue that we have not tapped. So we have a very strong initiative internally on generating add-on revenue across both the property level as well as the guest experience.

And Alan, just to go back, the $1,500 plus, you know, current, you know, or as of April with $200 per month gets to that, you know, reconciles to that $3,000. You know, it's a little bit higher than $3,000, but, you know, assuming for timing differences and so forth of getting properties online. So that's kind of how we get there on an organic basis.

That's great. One other question. I'll jump back in the queue. I'm trying to figure out your fourth quarter EBITDA and adjusted EBITDA. Now, you provide full-year numbers. And you've added some new items for full year. So the question I have, are these new items all essentially showing up in the fourth quarter? Are they redefinitions of things that you've had in the past? Basically, I'm trying to figure out what the fourth quarter actual EBITDA is. So if you could help with that. Thank you.

Yeah, so the fourth quarter adjusted EBITDA is slightly under $3 million, breaking out some of these items throughout the quarter. So, for example, the change in lease accounting and the non-cash amortization of the long-term nature of the leases, breaking out by quarter and so on and so forth with some of the other expenses. So it's slightly under $3 million of adjusted EBITDA for the quarter.

Thank you very much.

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

Great. Good morning, Brian and Chinope. A couple of questions for me. I was curious on your commentary in the release last night on the international moves, London and possibly more. Can you give us a little bit more color on that You know, kind of how hard is it to implement that and who would manage those properties?

Sure. So our focus on international expansion is London. It has a very similar operating environment to New York City, both in terms of international and pan-European travel to, you know, central London. So very high travel volume and heavy dislocation on the asset side. So very similar to New York City. So our primary focus is really on London. We have secured our first property in London, a 207 key hotel, and we expect to launch operations. We will be operating that hotel on the ground as we do, you know, the 20 hotels currently that we operate.

Okay. And is there any change in the past couple of few months on what owners of properties or what's their ask relative to striking a deal with you? Has that changed at all?

We're seeing the best economics we have seen in the cycle. The distress around refinancings and the debt loads on these properties are ever stressing these owners. So our pipeline in terms of higher quality assets, Um, and the rents that they're asking, um, you know, are weakening from their perspective. There's there's strengthening from our perspective. Um, and we're seeing higher quality opportunities at better pricing, um, and longer lease times. Um, that's, that's where we are, um, focused on.

Do you anticipate any headwind or change in that regard as we go through 2023 and these owners are faced with higher interest expense to refinance their properties, granted that might motivate them to then lease them to you, but potentially their ask might be higher as they're faced with higher carrying costs, or do you suspect that they might just have to eat that?

Yeah, I think it's twofold. The first is they will certainly have to eat that. Some assets come in under debt servicing currently. So your point, they're eating the spread to preserve the assets. And then we're also seeing a number of properties that are going to be going into foreclosure that we're sitting and waiting on that will change hands at much lower asset values. So if you have an asset that has $110 million debt load and they're asking a rent know to cover that debt servicing at the 110 million but the assets only worth 65 million today which is the case in many of these um they're going to go into foreclosure um they're going to change hands the bank's going to under write down the delta the owner's going to give back the asset lose the asset they're going to change hands and then come back to us at a lower asset value so we're seeing a number of deals um that are actually trading or about to trade at much lower asset values, which in return resets the asset value, resets the cap rate, and is very favorable to Lux Urban on those types of transactions. And we anticipate over the next 24 to 36 months, there will be a lot of opportunity in our pipeline that we're tracking and negotiating on that's going to go in the foreclosure, reset the asset value, in return, come back to us at a much lower rank then.

That's helpful. And then just last for me, are you seeing any slowdown in the rate of increase when it comes to, you know, wage costs and sourcing labor?

We are not. We work closely with the IWA in New York City, the hotel union. which is our largest footprint, about half our business currently. And they still have a number of hotel closures and union workers that are still out of work from the pandemic. So, you know, we're able to work very closely with them on favorable headcount reductions when we reopen a hotel as well as wage. So there's still a large supply in particular in New York and the unionized hotels of labor that is willing and able to come back to work. So we're not seeing that on the bulk of our portfolio.

Okay, thank you.

Thank you. Our next questions come from the line of Alan Klee with Maxim Group. Please proceed with your questions.

Yes, hi. Just two follow-ups. Can you comment if you believe there'll be any seasonality in the business? And then second, how do you expect REVPAR to trend over the year? Thank you.

Shanub, I'll let you take that one.

Yeah, so seasonality, Alan, you know, first quarter is the worst quarter, right? And then it picks up, you know, all things equal, right? And we're a moving target with our unit growth. But seasonality starts off, right, the January, February period is the slowest of the year, picking up for spring break in March and then going through summer and then, you know, the holiday season. So it tiers. What we've seen is that, again, all things equal, tiers starting Q1, incrementally improving Q2, Q3, Q4. Along with that is REVPAR. So the 220 to 240, I would say that on the lighter side on the front end and the heavier side on the back end, also just based on supply-demand dynamics. Again, moving target, we're also adding some higher-quality properties But all things equal, that's the way it should flow through.

Thank you.

Thank you. We have reached the end of our question and answer queue. I would now like to turn the call back over to Brian Ferdinand for any closing remarks.

Thank you again for your participation and continued interest in Lux Urban Hotels. We remain optimistic about our future and our ability to capitalize on the opportunities in front of us. We still have a lot of work to do, but we are committed to building the business, serving our valued guests, and delivering long-term value to our stakeholders. Thank you again for your participation and have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.