LuxUrban Hotels Inc.

Good morning, everyone, and thank you for joining us for Lux Urban's 2023 First Quarter Financial Results Conference Call. At this time, all participants are on a listen-only mode. A brief 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. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer, and 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 closings of noted lease transactions, continued closings 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 caption risk factors in our public filings with the SEC, including in 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, or may contain statements that contain 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, the 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 press release are made as of the date of this 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 like to turn the call over to Brian Ferdinand, Chairman and Chief Executive Officer Thank you, Brian. Please go ahead.

Good morning and thank you for joining us today. After a strong full year 2022, we started off 2023 in a promising fashion. Net rental revenue increased more than 150% to $22.8 million. On an adjusted basis, we reported our seventh consecutive quarter of cash-based net income and sixth consecutive quarter of positive EBITDA. We also improved our financial profile from year end 2022 by reducing our legacy debt substantially. Subsequent to quarter end, we began hosting guests at 101 Bogart Street in Brooklyn on May 1st. The Condor Hotel, our second property in Brooklyn, and the Trinity Hotel in LA, our second property in Los Angeles, are expected to begin hosting guests on or about July 1st. As of May 9th, We had 20 hotel properties under master lease agreement consisting of 1,673 rooms that will be hosting guests from early in the current second quarter to early in the third quarter. We expect to have approximately 2,000 short-term rental hotel rooms operational at the start of the third quarter of 2023 located in five cities, Denver, New York, Miami, Los Angeles, and Washington, DC, and New Orleans. As a high growth company operating in a generational opportunity environment, we are cognizant that our expansion must be managed appropriately. The days of growth at all costs are over. Right now, we are balancing two dynamic forces. The first is addressing a growing historic pipeline of opportunities driven by the lingering effects of the pandemic and exacerbated by rapidly rising interest rates. Many hotel property owners are facing the challenge of meeting their daily operational costs in the face of lingering effects of the COVID shutdowns and looming maturing debt liabilities. Approximately 31 billion of CMBS loans backed by hotels are set to mature by the end of 2024. These factors form the foundation of our growth strategy to acquire the long-term operating rights under master lease agreements for turnkey hotel properties at pricing that is at historic cyclical lows. We offer these owners, operators the opportunity to avoid default, generate stable cash flow, improve ROI on the property, drive occupancy, and restructure their debt. We believe that this opportunity will continue through at least 2025. Second, as the business continues to scale and mature, we must remain focused on creating a predictable, sustainable, and profitable operating model. The first step towards that goal is adhering to a discipline asset light strategy by focusing on select high quality properties in destination locations. Our portfolio is presently concentrated in New York City, which is expected to welcome more than 60 million visitors this year and approach pre pandemic levels of tourism. We plan to add further density in New York City, New Orleans, Los Angeles, and Miami. We are also beginning to realize the benefits of a maturing and increasingly efficient operating structure, which includes strong union relationships and an elevated industry profile of being able to bring properties online quickly. This is driving higher deal flow and attracting a more select group of properties for us to consider. We have combined the benefits of acquiring the operating rights to our properties and what we view as a generational low point with a focus on optimizing operational efficiencies across our organization. This is reflected, for example, in the fact that we believe that we currently have the lowest per night property level breakeven costs in our markets. Finally, we are ever mindful of maintaining a strong financial position. To that end, as previously announced, we have entered into debt extension and conversion agreements with our pre-IPO investors, in addition to decreasing our legacy debt by approximately $5 million from December 31, 2022 to March 31, 2023. These agreements have also carved the pathway for improved cash flow and access to growth capital subject to certain conditions. Deal flow remains incredibly strong, which we believe will allow us to select only the most favorable properties and deal structures to advance our growth. With that, I'll turn it over to Sunil Kothari, our President and Chief Financial Officer, for a review of our financials.

Thanks, Brian. As I stated last quarter, we believe that the true growth and earnings power inherent in our model would be more fully manifest beginning with the first half of 2023. Stripping away the non-cash charges we incurred, we reported a strong quarter and continue to believe that 2023 will be a period of significant growth. I will first provide a brief overview of our financial results, share our guidance for the year, and then we will open the call up for questions. Net rental revenue rose 151% to $22.8 million from $9.1 million in last year's first quarter driven primarily by an increase in average units available to rent from 479 in Q1 2022 to 988 in Q1 2023, as well as improved revenue per available room or rev par during the period. More impressively, quarter-to-quarter growth from December 31, 2022 to March 31, 2023 was 76%. Q1 2023 total rent expense was $7.1 million, consisting of 5.4 million of cash expenses and 1.7 million of non-cash rent amortization. This compared to total rent expense of 2.5 million in Q1 2022 consisting of cash rent expense of 2.3 million and non-cash rent expense of about 255,000. On a percentage basis, total rent expense rose to 31% of net rental revenue from 28% in last year's first quarter despite a 150% increase in net rental revenue and doubling of average units available for rent. Rent expense as a percentage of revenue increased due to property additions in the quarter, adding expenses without the full benefit of the ramp-up of revenues. Gross profit rose to $5.4 million, or 23.5% of net rental revenue from $2.5 million or 27.6% of net rental revenue in last year's first quarter. As we continue to gain economies of scale and become less impacted by property additions during the quarter, we believe gross profit will normalize at or above 30% of net rental revenue. General administrative expenses increased to $3.6 million or 15.9% of revenue from $1.0 million or 10.9% of revenue in Q1, 2022. Our net loss for the first quarter was 2.8 million or 10 cents per share compared to net income of 1.4 million or 7 cents per share in the first quarter of 2021. We recorded a few non-cash, non-recurring items in the quarter, which included 1.7 million in non-cash rent expense amortization, as compared to $255,000 in Q1 2022. Approximately $900,000 of non-cash related expenses for the issuance of shares for operating expenses as compared to no such expenses in Q1 2022. Approximately $400,000 of non-cash stock compensation expense as compared to no such expense in Q1 2022. Approximately $200,000 in non-cash option compensation expense as compared to no such expense in Q1 2022. Approximately $1.7 million of non-cash financing costs associated with shares issued for revenue share agreements. There was no such expense occurred in 2022. And approximately $600,000 of SOBNY exit costs, which we do not expect any more such costs with regards to the exit of our legacy apartment rental business going forward. Exclusive to these items, adjusted cash net income improved to 2.2 million, up from 1.4 million last year, and first quarter EBITDA improved to 4.0 million from just under 2 million last year. For the March 31st, 2023 quarter, our EBITDA margin was 18%. I'll address this more specifically later. During the March 2023 quarter, we hosted slightly under 70,000 room nights versus approximately 35,000 room nights in last year's first quarter. Moving to the balance sheet, at March 31st, 2023, cash and cash equivalents totaled $2.9 million. Restricted cash was $1.1 million. The previously announced amendments with our pre-IPO lenders has had the desired effect on our financial position during the quarter, as total debt declined to $9 million from $14 million at December 31, 2022. Net debt at the quarter end was $6.1 million, down from $10.3 million at the end of 2022, resulting in a debt and net debt to LTM EBITDA ratios at March 31, 2023, of 0.07 and 0.05, respectively, as compared to 1.1 and 0.8 at December 31st, 2022, respectively. This effectively is a reduction of about a quarter turn from quarter to quarter. Continuing on the balance sheet, our days payable outstanding on a cash payable basis was 35 days as of March 31st, 2023, down five days versus 40 days as of December 31st, 2022. As we have limited property level CapEx with our current portfolio and pipeline, our operating cash flow plus security deposits placed in the quarter mirrors our EBITDA at $4.0 million. As we have stated previously, we continue to make efforts to improve free cash flow and liquidity and look to improve these metrics while continuing to reduce our higher cost debt over the coming quarters. Finally, looking at our portfolio portfolio, At March 31st, 2023 and today, as of March 31st, 2023, we operated 12 properties and 1,034 units in four cities. We currently have under master lease 20 properties and 1,673 units in five cities. As of March 31st, across our portfolio, our investment or security deposits were 13,554 per unit with the high being in New York of 16,348 and the low being in New Orleans and D.C. at 5,000 and 5,789, respectively, per unit. We expect these amounts to remain relatively consistent in the future. We continue to go responsibly, leverage the dislocation in the market, and execute. As good as we believe our results are, we can try and will do better. Couple areas for improvement. As we continue to gain economies of scale, continue to better leverage our size and optimize our human capital, we believe we can achieve 20 plus percent EBITDA margins in the short term and 25 plus percent EBITDA margins in the longer term. We have developed scale and operations and experience and as a result better, maybe not yet best practices for properties in New York. We're looking to leverage our experience and results in New York to better optimize our properties in Miami and DC. We plan to do this throughout the balance of 2023. We have started the process to look at ancillary revenue opportunities. To start putting this in perspective, if we are able to generate $10 per additional room over the March 31st, 2023 quarter, we would have increased revenue by approximately $1 million with majority of it would drop to EBITDA net income. With regard to guidance, we have maintained our guidance for 2023 of net rental revenue of $115 to $120 million and EBITDA of $21 to $25 million. We continue to expect that all in REVPAR for 2023 will be $220 to $240 to $250 per night. While achieving over the year a target quarterly gross margin of 30 plus percent, we expect G&A excluding non-cash related items will be approximately 10 to 12 percent during the year which we would believe would result in EBITDA margins of between 20% to 25%, as I mentioned earlier. To continue in various stages, we continue in various stages of negotiation with multiple property owners to acquire long-term operating rights for hotels in the United States and Europe, and we expect by the end of the year to operate between 2,500 and 3,000 short-term stay hotels under MLA up from 844 at December 31st and 1,034 as of March 31, 2023. The timing of reaching our goal between 2,500 to 3,000 units may positively impact our revenue guidance for the year. I'll now turn the conversation back to Brian.

Thank you, Chanuk. And thanks to each of you for joining today. I'll now ask the operator to open up the call to questions.

Thank you. The floor is now open for questions. If you would like the opportunity to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Again, that's star 1 to register a question at this time. Today's first question is coming from Alan Klee of Maxim Group. Please go ahead.

Hi, congratulations on the strong results. Question on when you sign up a new MLA on a unit, how should we think about the timing to get that unit operational and then the timing to maybe get it at full potential? Thank you.

Thanks, Alan. So thanks for joining on. We, when we signed an MLA and actually signed the lease and fund it, which is, it represents the 1,673 units, you know, in the, in the Delta between the operational unit account. Typically it takes approximately 30 days to take over possession of the property. And then from there, really from. Going operational, it's an additional 60 to 90 days to fully ramp up the property, of which we typically have a rent abatement period to do that. So when we look at bringing a new property online, it's from lease signing to possession. It's typically 30 days when we announce it and fund it. And then it's about 90 days to bring it to maturity, which typically is done during the rent abatement or free rent period.

That's great. And so you said that you currently have 1,673 rooms operational. And did I also hear you say that you think that the beginning of next quarter, you'll be at around 2,000. So that 2,000 number, that means fully operational?

Yes, and funded. So yes, that's correct. 1,673 currently that we will have. Some are coming online this month. It's signed and funded. So we're in that kind of 30-day period where we have under MLA signed and funded 1,673 keys. And then now we're kind of starting that 30-day period on some of them. Some of them are already operational, the new units. And we will have 2,000 keys operational. So between the difference would be going on in May and June, and the view is we will have 2,000 operational units that are live selling, hosting, under GAAP revenue for the start of the third quarter.

That's great. One more question and then I'll jump back in queue. In terms of the, sorry, I lost my thought there. Oh, in terms of your revenue par, very strong during the quarter, 257 up from the quarter before. You're guiding for the year to 220 to 240, but you also said that starting in the second quarter, you have actions that could increase that number $20 from over the year. So are you just being conservative or is this factoring in maybe that there might be a slowdown in the rest of the year? How do you think about the $20 kicking in and then also just how this plays out? Thank you.

I'll let Chinook take that question.

There's two factors to this. One is being conservative for sure. The second is that we got the benefit in Q1 of two really fabulous properties in our portfolio. So really kind of skewed the numbers a little bit. As we look forward, our plan is economically focused, not quality focused, right? So we're looking at overall property economics first and foremost. And so as I look forward to the pipeline, we're going to continue to add good quality properties, but we're also going to add, you know, three-star, three-and-a-half-star properties. So we want to balance that and not set expectations on the higher end of that, you know, just based on the Q1 skew associated to some better quality properties. So I would expect it to be at the higher end of the range, but, you know, I don't think we, you know, if we hit on all cylinders, yeah, we can exceed that, but, you know, we want to be a little conservative in laying out our guidances.

Sorry, maybe just to follow up on that, the $20 that you could potentially add, how do you think about how that could layer in through the rest of the year of when it materializes?

So the example was $10, but it could be $20. So we just embarked on incremental revenue opportunities. You know, it could be zero for, you know, 60%, 70% of the properties, and $30 or $40 for a few of the properties. So we haven't got enough data to lay that out yet, but I would think that we'd start seeing a bigger impact of that. We just kicked off the initiative in the summer of this year, so we could probably get some more guidance on it at the end of next quarter.

Thank you so much.

Thank you. The next question is coming from Brian Maher of B. Reilly Securities. Please go ahead.

Thank you. Good morning, Brian and Chinook. Just a couple of quick questions for me today. Kind of logistically, if you take over a union hotel, let's say in New York City, can you transition that to be non-union or do you reduce FTEs? I mean, how do you control costs in that type of a scenario when you take over an asset in a market like New York?

sure thanks brian so um we we typically focus um exclusively on union hotels in new york city um we work very closely we've developed a very good relationship with the hotel union um so when we reopen um a closed hotel which we've reopened uh three in new york city um to this point um those employees had been severanced out um And the previous owner had paid severance and done some pension withdrawal payments and basically settled out the liabilities for their previous hotel. So when we come in and open up a new hotel or reopen a closed hotel, we then, under our IWA agreement with the union, are able to control costs through reduced headcount because we have to do a recall and limited amount of workers come back. Um, so we reduced the headcount and then since those employees were severance, um, and you know, furloughed or severance out from the previous employee, which is not our expense. Um, when they restart with us at the hotel, whether it's the engineer on fire safety, inspector Bellman lobby, they're starting at a lower range of wage rate. So there's both a headcount reduction and also a labor wage reduction. Um, and so that that's occurs. within a closed hotel that is now being reopened by Lux Urban, which the Blakely was, Tuscany was, and the Marriott, former Marriott in Herald Square was. And then a situation where we're taking over an already operating hotel, which we're in process of a couple right now in New York City. It's obviously underwriting those costs relative to the rent and looking for ways to, whether it's the F&B, whether it's the minibar component, is third-party those out and then reduce our operational footprint within the hotel. And that's, you know, part of what Chanute's talking about with ancillary revenue is partnering with F&B operators, leasing restaurant spaces and event spaces to reduce not only our costs but also increase revenue on a revenue share with partners and operators in those hotels. So those are really the two ways we look at that.

Okay, and two more for me kind of related. First of all, have you come across anybody out in the marketplace trying to do what you're doing?

We have not. We have very limited competition. What's occurring is typically these opportunities are coming to us on refinance opportunities for the owners that have debt maturing. at very high interest rates and need to restructure. So they're looking for, um, you know, triple net lease, um, giving up a lot of the upside, um, on the performance of the hotel over the life of the lease, but really just to restructure the debt and get the property stable from a debt load and the interest rate perspective, um, and get a longer maturity. So, um, we're not seeing that, you know, the alternative for the owners is to maybe sell it, um, which obviously the depressed value, which isn't really a realistic option. Um, and then obviously, uh, third party management was just in process of doing a deal, um, where we're displacing a large management company, um, that is not financeable, um, on a third party management contract. So they're opting for a trip in that lease. So we're seeing very limited, um, competition, if any at all, um, in what we're doing currently.

Okay. And then just lastly for me, When you look at this opportunity, it really seems like, you know, kind of the sweet spot of the opportunity for you guys is kind of the next 12 to 18, maybe 24 months, but really kind of the next year, year and a half. What would you say is your biggest limiter of growth? Is it capital? Is it personnel? You know, what is it that keeps you from going from, you know, 2000 keys to eight or 10,000 keys? Yeah, I think it's,

Currently, you know, we're executing, right? So, you know, if you look at our unit growth from the IPO, right, in August to where it was at Q1 to 2,000 keys at the end of Q2, right? You know, my belief is nothing's going to stop us from doing that. Could we accelerate it with more capital, right? You know, potentially, as, you know, the equity starts to perform, I think people really start to understand the story and the opportunities. you know, perhaps down the road. But, you know, right now we're, you know, as Chinook mentioned, you know, we generated $4 million of positive cash flow through the Q, through Q1, right? And a lot of those units that we put on were not fully mature through that period, right? So we expect that to accelerate. We've done a lot of work with our debt lenders to both convert out debt as well as pay down debt. through that period. So, you know, we put $3 million of free cash flow into security deposits in Q1, which, you know, got us additional scale. And we expect that to continue. And, you know, that's our current view is adding, you know, 600 units per Q organically. There are opportunities to accelerate the growth. If we were to do it, we would do it in a non-diluted fashion. We're not looking to utilize the equity at these levels and at this valuation. So that's our current view. But in terms of being at 5,000, 6,000 keys at the end of 24, we could do that organically. And to your point, we watch the window very closely and we watch the CMBS refinance markets and maturity markets very closely. And that's kind of our key as well as interest rates. Um, so, you know, as we see that opportunity, I mean, we believe, I believe it's, it's, it's more like 24 to 36 months, um, given the maturities, um, out through 25. Um, but you know, our, our view is that we will get to 10, 12,000 units. We could accelerate that, um, you know, into a two year window versus a three or four year window. Um, and that'll really depend on a variety of factors. as we watch that. Thank you very much.

So, Brian, just to add to that, just laying out what the history has been, from the IPO to this quarter, we went from roughly 500 units to 1,000. That's not exactly correct because the 500 had apartment rentals in there, too, so actually the growth was higher. We have 1,637 under contract. And the 2,000 is a real number. I mean, you know, if you think about sort of the last minute changes of what was going on, you know, it's going to get there pretty quick. So from Q1 to Q3, call it six-ish months, we go from 1,000 to 2,000. And then, you know, our goal, we say 25 to 300. Our goal is always at the higher end of the range. And so, you know, can we get from $2,000 to $3,000? You know, maybe it's not exactly year-end. Maybe it's right after. But then that spitting distance of $4,000 is pretty close. So we can get, you know, with the momentum we have and reinvesting cash flow to $4,000, I think it gets a little bit harder from $4,000 to $8,000, as you allude to. But, you know, could we get there by the end of 24? Yeah, we could, right? And so that's the way we think about the growth is sort of the three or four doublings. And then your earlier point about, you know, why isn't anyone doing this? You know, we've laid this out in our financials and we get the question all the time. You know, there's really three aspects to the business that I think are collectively unique, individually not. is we are actively negotiating multiple units at the same time to get the best deal. So Brian and his team leads that to get the best deal at this point, what we consider to be a cyclical low, maybe more than that. The second is we distribute wide, and we've got distinct tools to do that to maximize revenue and bring that forward too to help fund the growth. So we're booking right now through the balance of the year. Some of that money comes to us immediately, and that gets reinvested at the ground level. And then the blocking and tackling of the hotel business, which it's dealing with people and it's, you know, as you can imagine, anytime you're dealing with people, you're, you know, there's challenges to it. But you snap that together, I just don't think there's anyone out there that has the savvy at our size and scale.

Okay, thank you.

Thank you. The next question is coming from Ashok Kumar of Think Equity. Please go ahead. Ashok, please make sure your line's not on mute.

Yes, thank you, Brian and Chinook. Just a long-term economics question, right? EBITDA guided to 20% to 25%, right, versus 18% right now. And what would it take it to get to about the upper end of that range, right? In the past, you've talked about, you know, I think economies of scale, potentially a relationship with Rebelle. and being able to outsource, you know, some of the internal costs in terms of optimization. Then, of course, the credit card processing and other initiatives and also reducing headcount internally, right? So what would it take to step function increase, you know, that EBITDA to the 30, 35 percent which has been in the conversation in the past?

yeah so let me i'll let you answer that from the financial perspective but i just want to give you a practical um example um so tuscany hotel we opened on february 1st um of this year right so um you know we took on costs right to open that hotel and when we when alan clee asked about you know the ramp up period so we took possession of that hotel on around february 1st um you know it took us about 65 days to get that hotel filled up, right? But in Q1, right, you have that hotel that, you know, has staffing, has costs, some startup costs, which degrades the overall EBITDA margins. But, you know, as we move into Q2, that hotel is 95% occupied at a very, very healthy ADR rep bar. So, you know, you have just this gap where you put a hotel on and because we're growing so quickly, right, And we're adding hotels every quarter. Some of the hotels that are coming on, you know, are running sub the optimized EBITDA, but the hotels that are mature, like 123 Washington, Blakely, Marriott, Herald Square, now the Tuscany, right, and Q2, they're at those optimized EBITDA margins, right? So that's a big part of how we grow. And, you know, I'll let Chinook take it over, but I just want to make that distinction, you know, as we're in rapid growth, right? you're going to have a little bit of choppiness depending on when we start a hotel. But as that hotel matures, we're seeing those levels at the property level for the more mature properties. But Shanup, I'll let you answer.

Yeah. So, you know, we get greater impacts now with our size in opening a, you know, 100 to 200 room property mid-quarter based on the ramp up. So that's, you know, that's part of what Brian's referring to. But overall, How do we drag it up? One is occupancy. With any portfolio now, we have the benefit of the portfolio, but we also have our least favorite children. So we've got to get them to work better. So we've started that process internally of benchmarking our different properties and jurisdictions amongst each other. and working, you know, putting the effort into where it moves the needle the greatest. You know, for example, the Blakely and the Washington, you know, they've been with us for a while and they've been doing very well. So it's that one piece is, you know, improve occupancy, improve rev par per unit as well, or ADR really, you know, the occupancy piece will follow through. So that's one piece. The second is incremental revenue. You know, we really haven't focused in on that. We really haven't, you know, our model is simple. We don't try to, you know, provide ancillary services like food service and such. But there are still opportunities for late checkout, early check-in, you know, bag storage, et cetera, that is, you know, fairly easy to do. but requires discipline in the operational side and some benchmarking. So that's a piece of it. And just overall, we have grown so quickly and we have pivoted the business also very quickly. So we just need to optimize our expense structure. You know, when I say optimize, you know, it's really looking at legacy expenses associated department rental unit business. Do we still need the staffing associated to it? You know, really sort of looking at overall human capital, et cetera. And so, you know, the combination of all that, you know, I think gets us, you know, well within the range of what we're talking about.

Great. Then in terms of unit economics, right, your revenue par has expanded almost in $100 2018 through first quarter, right, from $160 to $257. And where do you see the leverage? And then, of course, your break-even is, You know, property-level break-even rate for revenue per available room, that's about 140 to 150. Do you see more leverage on the cost side as opposed to the revenue side, right? In other words, are you asymptotically approaching your sweet spot on the revenue part, and you'll get better leverage on the cost side to improve gross margins?

So from my perspective, the expense side at the property level, there's some economies. But, you know, you are still going to have to have a general manager. We're still going to have to have front desk folks. You know, we're still going to have utilities associated to the property. The property is an independent, you know, effectively segment business unit. There are some ways to optimize. So, for example – In New York, you know, we have, you know, some of the qualified staff at one property, you know, helping the engineering at other properties. So there's a little bit of overlap, but, you know, you got to remember, you know, when a guest shows up and something isn't working, they're not waiting for someone to drive across town to fix it. They're looking for someone to show up, you know, in the next five or ten minutes, right? So less... synergies at the property level, more synergies at the portfolio level with regard to revenue, you know, driving revenue, being more methodical in terms of how we price things, and so forth.

Got it. And then just in terms of, you know, apples to apples, right, I think some of the cash, I mean, expenses are on the non-cash side in terms of SBC, you know, you don't have professional fees, you know, I think called out in your P&L and so on. So I assume On an apples-to-apples, you know, the 24% gross margins reported and then the 19% expense ratio will normalize, you know, through the rest of the year, right? So we're still looking at about 30% gross margins and maybe 12% expense ratio. So you'll still get the operating leverage in your P&L.

Yeah, I mean, exactly. So the bigger factor there is, you know, I think the G&A side stays relatively consistent, right? So we'll get the expansion as revenues expand. It's really optimizing on the revenue side.

Got it. And one last question on the below the line, right, in terms of interest expense, as you indicated there, that's industry headwind, you know, the $2 million. In Q1, right, I mean, do you see it normalized at this $8 million annualized level, or do you see a better, I think, more leverage to reduce the pain points on the financing side, right, to get a better flow through in your business model?

Yeah, so we had $1.7 million of expenses associated to the shares issued for revenue share agreements that were part of some of the original financing. The accounting for that is based on when the shares are issued, the stock price. We've already publicly announced the amount of shares, so it's in an AK probably a few months ago. So that's a variable piece of it, that it falls under interest expense. The fixed side of it is the balance, so roughly a million-ish. And as we further reduce debt, obviously that goes to zero.

Thank you, Brian, and congratulations. Thank you. Thank you very much.

Thank you. At this time, I'd like to turn the floor back over to Mr. Ferdinand for closing comments.

Thank you again for your participation and continued interest in Lux Urban Hotels. We remain very 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 values to our shareholders. Thank you again for your participation and have a wonderful day.

Ladies and gentlemen, thank you for your participation. This concludes today's event.

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