LuxUrban Hotels Inc.

Greetings and welcome to Lux Urban Hotel's third quarter 2023 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 conference over to your host, Devin Sullivan, Managing Director of the Equity Group. Please go ahead.

Thank you for joining us for Lux Urban Hotels 2023 Third Quarter Financial Results Conference Call. Our speakers for today will be Brian Ferdinand, Chairman and Co-CEO, and Shanup Katari, the company's Co-CEO and Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, set forth in Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. Statements that are not purely historical are forward-looking statements. Forward-looking statements include but are not limited to statements regarding expectations, hopes, beliefs, intentions, or strategies regarding the future, In addition, any statements that refer to projections, forecasts, or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Generally, the words anticipates, believes, continues, could, estimates, expects, intends, may, might, plans, possible, potential, predicts, projects, should, would, and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements may include statements with respect to financial and operational guidance, the success of the company's collaboration with Wyndham Hotels and Resorts, scheduled property openings, expected closings of noted lease transactions, the company's ability to continue closing on additional leases for properties in the pipeline, as well as its anticipated ability to commercialize efficiently and profitably the properties it leases and will lease in the future. forward-looking statements are based on current expectations and beliefs concerning future developments and their potential effect on the company, and there could be no assurances of these future developments will have been anticipated. These forward-looking statements are subject to a number of risks and uncertainties, some of which are beyond the company's control, or other assumptions that may cause actual results of performance to be materially different from those expressed or implied by these forward-looking statements. including those set forth under the caption risk factors in our public filings with the SEC, including in item 1A of our 10-K for the year end of December 31, 2022, and any updates to those factors set forth in subsequent quarterly reports on Form 10-Q or other public filings. Forward-looking information and forward-looking statements are made as of the date of this presentation, and the company does not undertake 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 and a reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the company's press release, which we issued yesterday afternoon. With that said, I'd now like to turn the call over to Brian Ferdinand. Brian, please go ahead.

Thank you, Devin. Good morning and thank you for joining us today, everyone. We continue to be very pleased with the trajectory of our growth the consistency of our execution, and the depth and breadth of the opportunities that we are pursuing. We continue to evolve as a company and management team. As validated by our results, we are successfully leveraging our first mover status, asset-light approach, and focus on turnkey properties to identify and lease dislocated hotel properties in destination locations across the U.S. In the third quarter of 2023, we generated record net rental revenue, EBITDA, our first GAAP net income quarter since coming public. In prior quarters, we had incurred a variety of costs and charges associated with our now-retired long-term debt that served to mask our inherent profitability. These expenses are now behind us, which we believe will result in a cleaner, less complicated P&L in future quarters. We remain true to our commitment to grow the business via non-dilutive funding. To that end, we closed our Series A preferred stock offering in late October and generated gross proceeds of $7 million, which we will deploy to further expand our portfolio. The results of the offering reflect our focus on raising capital that can be immediately utilized to expand our footprint and enhance our operations. We want to avoid raising expensive capital in the future that we cannot deploy in a quick and efficient manner to the benefit of our stakeholders in a non-diluted fashion. Our relationship with Wyndham Hotels and Resorts continues to transform our business and help drive our growth. We have successfully onboarded the 17 initial properties under the Wyndham Agreement and are in the process of integrating additional hotels to the Wyndham brand family and operating platform. We remain very optimistic about our future. Our pipeline of opportunities continues to expand, and our asset-light triple net lease alternative is becoming an increasingly attractive solution for property owners against the backdrop of rapidly rising interest rates and its related impact to upcoming asset refinances. With that, I'll turn it over to Shanukh Kothari, our co-CEO and Chief Financial Officer for review of our financials.

Thank you, Brian, and thank you for joining us today. As Brian noted, we are very proud of our third quarter results and have put us in an excellent condition to finish the year strong. Our balance sheet is much improved and our business model is expected to allow us to realize the continuing growth throughout 2024. I would like to also remind everyone that our press release issued yesterday afternoon and our Form 10-Q filed with the SEC both contain a good amount of detail on our operating results. With that in mind, I'll focus my remarks on selected highlights and key items. Net rental revenue nearly tripled to $31.2 million from last year's third quarter, driven primarily by an increase in average units available to rent to 1,423 from 571, as well as improved revenue per available room or REVPAR during the period. Year-to-date REVPAR rose to 274 from 191 in the same period in 2022 and from 247 at December 31st, 2022. Occupancy for the first nine months of 2023 was 81%. Q3 2023 total cash rent expense was $7.8 million or 25% of net rental revenue compared to $2.8 million or 24% of net rental revenue in the same period last year. Non-cash rent expense amortization was $2 million in Q3 2022. Gross profit rose to $7.8 million or 25% of net rental revenue from $4.9 million or 42% of net rental revenue in Q3 2022. Gross profit in 2023 third quarter included other expenses totaling $13.6 million as compared to $3.9 million in last year's third quarter. Last year's expense numbers are not comparable based on the accounting for certain expenses below gross margin under the apartment rental business model, which we exited in 2022. General and administrative expenses declined to 0 million from 6.4 or 6.4% of net rental revenue from 5.0 million or 42.8% of net rental revenue. The decline as with gross profit was driven primarily by one-time charges incurred in 2022 related to our exit from our apartment rental business. Income from operations improved to 5.1 million from an operating loss of 400,000. Income before the provision of income taxes improved to 2.9 million from a loss of 4 million. Net income improved to 4.9 million or 11 cents per share from a net loss of 3.2 million or negative 13 cents per share. Adjusted net income, adjusted cash net income rose to 5.7 million compared to 900,000 in Q3 2022. For the quarter ended September 30th, 2023, our EBITDA and EBITDA margin increased to 8.4 million or 27% respectively, up from 2.4 million or 20% in Q3 2022. Q3 2023 margin results were slightly ahead of our goals of 20 plus percent EBITDA margins in the short term and 25 plus percent EBITDA margins in the long term. Moving to the balance sheet. At September 30, 2023, cash and cash equivalents totaled $4.8 million, a $3.7 million improvement from December 31, 2022. Restricted cash was unchanged at $1.1 million. Our balance sheet at quarter end did not include proceeds from our October closing of an underwritten public offering of the company's 13% Series A cumulative redeemable preferred stock that generated gross proceeds of $7 million. The offering was non-dilutive, and we believe our ability to go to market with this new security reflects the growing strength of our financial position and promising outlook. I'd like to also add that senior management participated in this offering. Total debt at the quarter end declined to $5.2 million from $14 million at December 31, 2022, and net debt in the quarter was around $400,000, down from 12.9 million at the end of 2022. Staying with the balance sheet, we continue to work on our payables and working capital and made strides in the quarter. Our working capital position improved to 6.6 million from a negative 2.4 million at June 30th, 2023, and from a negative 13.9 million in December 31st, 2022. As we have stated previously, we continue to make efforts to improve free cash flow, liquidity, and working capital and look to improve these metrics in the coming quarters. During the quarter, we added four properties, a total of 360 units, all in New York City. Looking at our portfolio, as of September 30, 2023, the company leased 16 properties with 1,446 units available for rent. As of November 8, 2023, the company leased 18 properties with 1,599 units available for rent. Um, and, and as of November 9th or November 8th, 2023, we leased 21 properties with 2,032 units. And these includes properties under lease, but not yet available for rent. Regarding guidance, we have increased our net rental revenue and EBITDA guidance for 2023 and 2024, reflecting the expected addition of new rooms to our portfolio and the associated operating synergies we expect to realize from our Wyndham relationship. We expect that all in rev par for 2023 will be between $250 and $280 per room, while achieving over the year a target of quarterly gross margins of 30% both in 2023 and 2024. We expect G&A, excluding non-cash items, will approximate 10% to 12% during the year. And we believe that that would result in EBITDA margins of 20% in the short term and 25% plus in the long term.

We expect to end the year operating approximately higher quality properties than we did previously.

Although this has elongated our closed cycle to 45 to 90 days, our pipeline of opportunities has never been larger. regarding a couple operational initiatives and accomplishments over the quarter. As Brian mentioned, we completed the onboarding process with Wyndham. All the initial properties are now co-branded under the By Lux Urban trademark collection by Wyndham Brand. Second, we reduced corporate staffing by more than 10% without sacrificing client service or organizational health. This included adding Matt Ullman to our senior executive team as general counsel, effective the end of this month. We promoted two general managers to oversee operations in New York and Miami with the goal to improve operations and share best practices in areas we have meaningful unit density. And as we continue to grow and evolve as a company, we expect to focus on two new initiatives over the next few quarters. One, improve occupancy in seasonal markets, which we believe will result in much higher revenues. as with the business well over 100 million run rate, formally focused on ancillary revenue and co-branding opportunities. We believe that over the next two to four quarters, we can add five plus percent top line revenues and three to five percent margin improvement pursuing these new revenue streams. I'll now turn the conversation back over to Brian.

Thanks, Chanute, and thanks to each of you for joining us today. I'll now ask the operator to open the call to questions.

Thank you. At this time, we'll 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 2 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 pull for questions. Our first question today comes from Alan Klee of Maxim Group. Please proceed with your question.

Good morning. Congratulations on the strong results. First question is on rev par. You don't report it, but it looks like it did drop. It's a very strong RBR, but I think third quarter was down a little from second quarter. My question now is, is that mix related or is it Anything to do with apples to apples? And to what extent does the fact that you rebranded so many properties to one, not as a temporary time period where they're not operational when you're changing them and that could improve once that's fixed? Thank you.

Thanks, Alan. So I'll take that and then turn it over to Chinook for additional follow-up. So really a combination of three things. First is some seasonality in the portfolio. The second piece is we did transition the entire portfolio, all 17 hotels, and there were periods of time where sales and distribution dropped during the quarter as we made that transition. So there was a little bit of degradation there in terms of sales pickup for the quarter. Obviously, that's come back online and seeing a pickup there. And then a slight softening. given the overall economic environment. And one thing I will say is, you know, a lot of questions around our business is, you know, could we withstand the softening in REVPAR? And, you know, as you can see, the leverage in the business, we did see a softening of REVPAR through those combination of factors, and the business still performed very well, really well. So, you know, I think, you know, that should, you know, answer some questions in terms of the ability for a REVPAR to create, higher REVPARs to create additional market expansion. And then if you do get a softening REVPAR for a variety of reasons, including a softer economy, you know, the business really still performs.

Yeah, so, Alan, the front part of Brian's response, you know, a lot of the second quarter bookings that drove REVPAR were made in the early part of the year, right? We don't recognize that revenue until the stay occurs. So that's just the nature of, you know, coming still out of COVID, summer travel pent up. And, you know, so that was part of the Q2 increase versus Q3. So the softening is light. You know, we're not seeing the softening in the New York market. You know, personally experienced, you know, we're full occupancy. We're actually – in some cases overbooked and operationally we're figuring out how not to turn away guests because it's a bad experience. But really it's based on the front end of the block of reservations booked at a frothy time and then a little bit of the transition to Wyndham where we were down a little bit transitioning over.

Thank you. I had two more questions. One was, you have guidance of 2,500 to 3,000 rooms under MLAs by the end of this year. I'm not sure if that actually means that many that are operational. Is there a way to think, I don't know if you can provide this, of a framework of maybe how many might be operational by the end of the year?

Go ahead, Brian. I'll let you take that.

Okay. So, I mean, we have 2,032 units under MLA, you know, of which 1,600 are operating. The bulk of that, you know, will be operating, I would say, you know, 1,800 plus units shortly, you know, maybe in the next week or two, actively, you know, discussing that on an operational level. So, you know, my thought on this is, you know, the cycles, you know, in some cases, you know, are longer just based on, you know, the process that we're going through. But I would say between $2,000 to $2,500 would be what is operational, so maybe somewhere in the you know, 2024, you know, you know, somewhere in between 25 to 3000, maybe on the higher end, you know, one, one single property can get us well over the range, right? There's, there's a number of assets in the pipeline that are, you know, two, 300 keys that could easily get us over that. So it just depends on when the chips drop, but from a revenue guidance perspective, you know, we're very comfortable as we've always been with your guidance.

That's great. My last question has, this is more just so I can understand your deal with Wyndham, where they've put up roughly half of your upfront costs for a property that you're, or for the master leases that you're putting on the units. Related to that, How does it work in terms of you have to put up the cash up front and then they reimburse you? Can I understand kind of the timing of that? And I'm really asking that just to understand, like, your working capital to be able to fund the future projects. Thank you.

Sure. So our strategy – so the way the Wyndham – financing works is they provide key money or Dan money development and enhancement notes or incentive notes for each property that we bring on to the platform so they provide key money in the form of a development enhancement note which amortizes over the life of the franchise agreement so that capital as it gets redeployed to us for the initial portfolio, right, which was, you know, substantial capital into the business, can then get redeployed into the business for new acquisitions, working capital at the property level, et cetera. So we do put out the capital, and then we get reimbursed on opening for the property that's going live. So when you're doing this in large scale, which was the purpose of the preferred offering, was to get a larger scale cycle going of about 1,000 keys per quarter. And then we get reimbursed that capital and then redeploy capital into additional units.

That's great. Thank you so much and congrats again.

Thanks, Alan.

The next question is from Matthew Erdner of Jones Trading. Please proceed with your question.

Hey guys, good morning. Congrats on the good quarter. So can you just talk about the opportunities that you guys have right now? And then on top of that, the seven new properties that you brought on, the three and four star, and then I guess how Wyndham has played into the role of the developmental, of just the pipeline itself.

Thanks. Sure. So currently we have approximately 5,000 high quality keys. with the heavy concentration in New York, New Orleans, Boston, and London. Under binding LOI or LOI that we're moving into our MLA cycle, larger scale, higher quality properties, some are even five-star properties. So very, very robust. Wyndham has been very helpful both in sourcing of properties under MLA as well as each property that we bring on to the LuxUrban platform that will be branded through a trademark or one of their variety of brands goes through underwriting through Wyndham. We work very closely with their business development teams, and we obviously, when we onboard the property, both operationally and from a sales and distribution perspective, it's done in a joint process.

Yeah, that's helpful. And then as a follow-up, you know, you talked about occupancy and seasonal markets. Is there any insight that you can kind of give into 4Q occupancy numbers? And then if you could, could you expand on, I guess, what you're going to be doing to try and increase the occupancy in some of those markets? Sure. I'll let you take that.

Yeah. So, occupancy... So again, New York continues to stay very robust. So it's a combination of overall dynamics of the city as well as the way we approach perishable inventory. The other markets, New Orleans does very well. LA is improving just based on us getting more traction and understanding of that market as well as I believe we opened, not we, but there was a restaurant opened within the property at the ground floor that will help help there. Miami continues to stay seasonal. As we enter into the colder months in the Northeast, we should see a pickup there. Initiatives-wise, we're looking to do a bunch of things at the property level, improve overall offerings in terms of grab-and-go breakfast, focus on one of our really, I would say, higher quality properties is slightly lower than our expected with regard to occupancy. So I think that's a function of not as many reviews on that property. You think about reviews, typically they're negatively slanted. People don't give attaboys when they have great stays. They usually put a review down when they're unhappy. So we got to focus on getting the high quality reviews in there to improve occupancy. So there's a number of factors. As a management team, we're talking about it now weekly on certain markets as to how to improve, especially where it's seasonal, where we have to work much harder to get the occupancy up. But look, just as a management team, as the underlying comment, You know, we've collapsed some of the team, you know, as a function of really sort of getting, you know, our hands more deeper involved in the business and focusing on the operations, which, you know, is occupancy. And then I mentioned as well ancillary revenues. So these are two things that are extremely low-hanging fruit. You know, we can't guarantee that it will happen next quarter, but, you know, we can definitely say that we're going to put full effort into it in the next couple quarters. We're going to see a material impact.

Awesome. Thank you, guys. Thank you, Matt.

The next question is from Chris Tuttle of Caterpillar Investments. Please proceed with your question.

All right. Thanks very much. And congratulations, Sanuk, for a well-earned promotion there. I think I can speak for everyone when you might want to just point us to a link to understand the safe harbor rules in future calls.

But I've got a few questions.

I wanted to know behind your 2024 guide, what's sort of your REVPAR assumption of looking at next year?

Yeah, so REVPAR next year, we haven't adjusted that, and we're being conservative based on a couple factors, right? So one is You know, economic, you know, overhang, which, you know, I think from the hospitality perspective has been overdone. I mean, you know, if you followed other companies that have reported, they haven't really seen much of an impact yet. I think it's sort of one of the bright spots, you know, where there's overhang with economic uncertainty. The second is, you know, REVPAR is heavily weighted on what type of properties Um, um, you know, we acquire, so four stars is going to be on the higher end, three stars is going to be a lower end. Markets also matter. New Orleans is much lower than New York, equal star comparison. So, you know, we don't have a crystal ball on which are the best opportunities that we're going to be putting online in March, April, May, June, right? We have strong visibility into what we think is coming online over the next three to four months. But after that sort of depends. So for example, in Brian's world, you know, he'll reject a property. and then they'll come back, right, you know, because they're not quite at the refinancing deadline. You know, they'll try to, you know, garner a better alternative, but they'll come back to the table, you know, potentially in three or four months. And so even though we may have passed on a property that's a four-star and may come back into the pipeline. So there's a number of factors. I think we're being conservative. We've always been conservative. You know, we have initiatives here. Obviously, answer your revenue and occupancy will drive REVPAR up. But, you know, we want to make sure that we provide guidance that's achievable and, you know, we'll manage through that.

Okay. I think I can read into that. Can you talk a little bit about, a little more about your, you talked about your two initiatives, and one of them was the employer revenue partnership example. Could you just provide a little color on what types of things that involves, before I ask a follow-up question on that?

Yeah, so early check-in, late check-out, you know, providing at the higher-end properties more of a, you know, I wouldn't call it resort fee because that's, you know, not well-received at this point, but, you know, more of a bundled service offering. Sundry Bar, you know, we've got something, you know, that we're talking to, which is a large sort of a, you know, digital assistant, you know, platform. So there's a number of things that, you know, we get approached on as we continue to grow the portfolio. We become much more of a, you know, sought after candidate to continue, you know, to enhance, you know, the guest experience through, you know, third party co-branding. And, you know, obviously adds revenue to us. So a variety of aspects. We've been so focused on really coming out of the gates of the IPO, executing on the business model, proving the business model, which I think in some cases there's some skepticism associated to, you know, are the economics really that good? And now that we have an adequate portfolio and, you know, good operational team, we're going to start focusing on that.

One additional thought. One additional item there is we've recently signed an agreement with Amazon Hospitality, a pilot program in a number of our hotels, and that will be rolling out. There will be more details on that coming soon. That sounds interesting. Just a couple more. So as you – acquire and bring these properties online, you know, they're one-offs, each of them with their individual contracts for the Wi-Fi, credit card processing, whatever. My question is, as you guys get more scale, are you able to go to, you know, a payment processor like a Shift4 or a national communications company like an AT&T or something to get a better and more manageable deal on things like communication services and payment processing? How important is that in terms of being part of the model and part of the opportunity you have in the near to medium term, I guess? Chris, could you just repeat that? I want to make sure I fully understood the question. Yeah, I'm sorry. I'm trying to simplify it. As you get more scale and have more properties, can you negotiate a more comprehensive deal with someone like Shift4 for payment processing or AT&T for all the Wi-Fi and hotel communications that gives you better price performance, basically? Yeah, absolutely. So there's, as we get scale, there's, there's leverage across multiple pieces of the business. Um, you know, obviously, um, driving commissions down, right. Payment processing, which is a large cost, uh, inherent in the business. 98% of the transactions are 99 or credit card processing. Lower rates there have, you know, pure incremental, um, margin expansion, um, supply ordering, right. Wyndham, we're leveraging Wyndham system for a number of things in terms of public health supplies. And then in addition, we're working on a number of partnerships. When Snoop talks about ancillary revenue, it's not just property-level ancillary revenue. It's potential partnerships, which we're working on with large-scale soap and beauty companies, product placement companies. Again, I mentioned the Amazon hospitality. Details will be coming on that. That's something similar where you're not only creating a better guest experience, the ability to upcharge for services, but also creating A lot of the product comes for free, so it's pure incremental margin, and they're looking to place product even down to certain pillows, mattresses. As you get scale, there's a lot of incremental ability to generate revenue across the portfolio. Okay. All right. Thanks. I can appreciate that. And let's see, I had one last question, then I'll get off, is where are we in the transition or the uptake of you guys talk about the, you know, you pay the CTA fees or the OTA fees, I should say rather, and then as you're on the Wyndham platform, you'll have the opportunity to enjoy more bookings through that platform, which is a lower percentage. Where are we on that? What inning are we in in terms of that transition? Are you able to do that yet? How long will that take? Currently, 100% of the hotels that were from the prior portfolio versus previous community signings are on the Wyndham platform. We're working through that process now with them. So we are live on Wyndham Rewards under OTA commission rates currently, and we're working on technology requirements as we scale the portfolio and optimizing that. Okay. All right. Thanks, guys. I'll let the next person jump in.

Thanks, Chris.

The next question is from Tom Kerr of Zacks Investment Research. Please proceed with your question.

Good morning, guys. I think all my questions have been covered. Just one quick one on the taxes, that $2 million benefit tax, is that just a timing issue? And then how do we look at tax rates for the fourth quarter and maybe even into 2024? Thanks. Yeah, so the tax benefit...

was related to, you know, upon further inspection. You think about, you know, the way tax provisions are done. You make an estimate at each quarter for what you think the year is going to be. The estimate is based on where you think the year is going to be as well as the deductibility of certain expenses. So in the preparation of our 2022, I'm probably going a little too complex, but in the preparation of our 2022 tax return, You got to remember, 2022 is the first year we were a C Corp. The ability to deduct the large charge from last year was determined, which we thought there was a limitation to that. That's hence the big benefit. We have a large benefit associated to the rev share agreement that we entered into. So going forward, next few quarters, I'd expect a very low tax rate with the benefit of that deductibility. And then as we probably, you know, approach sort of maybe second quarter onwards next year, you know, about 30% would be, you know, it's kind of where we've penciled in all in, you know, with state and federal taxes.

Okay. So there will be normalized tax rate at some point in 2024 and beyond, right?

Yeah, if you think about 2024 with the first half being low and the back half being sort of normalized, so maybe in the teens or 20s, but then normalized from that point forward. Again, it's based on the large deductible nature of the rev share accounting we did last quarter.

Yeah. I think that's all I have. Everything else has been covered. Thanks. Appreciate it.

The next question is, from Leo Carpio of Joseph Gunner. Please proceed with your question.

Good morning, gentlemen. Most of my questions have been answered, but I actually have two follow-up questions. First, on the Wyndham relationship, can you provide some more insights in terms of how they help you with improving your rev par and especially on the occupancy in the slow seasons? And then secondly, can you comment on the pipeline of deals that you're having right now in terms of Are distressed property vendors coming to, hotel properties coming to you in increasing volumes or the same volume as you're gaining more recognition in the market? Thanks. Great. Thanks, Leo.

So first question, Wyndham has the largest rewards program in the world, approximately 110 million members worldwide, 9,000 hotel footprint, 5,000, 600,000 keys, et cetera. So very, very large footprint, high volume. through Wyndham's both rewards and direct booking channels. So leveraging that as a main point of distribution across the LuxArgan portfolio drives additional volume, should result in increased rev bar. We're seeing some good traction there in early days. Been on for maybe 30, 45 days and seeing good velocity of bookings there. So that's a main point of distribution. And then in addition to that, Wyndham gives us the ability to leverage lower commission rates across the OTAs to drive bottom line margin expansion, so lowers our costs versus us doing it independently. So those two points in terms of sales and distribution, as well as Wyndham is a globally recognized hospitality brand Luxurban as a you know new entrant into hospitality you know a couple years old leveraging co-branding by Luxurban trademark collection by Wyndham enhances the property value it also helps in terms of pipeline acquisition owners are obviously more comfortable with Wyndham's name attached to the hotel they ensure a higher standard of both operating, employee training at the property level, property inspections, and just a higher brand standard than a typical boutique hotel. So good quality control around employee interaction, customer service functions, and also property level upkeep. So helping there. And then in terms of the pipeline, we're seeing Just about every deal come through in the market currently. Very, very difficult refinancing and financing market for hotel owners. Probably historically the most challenging ever. And we're seeing higher quality assets, higher velocity of hotels in terms of amount of deals coming to us. It's very, very, very robust.

All right. Thank you.

The next question is from Matt Scullin of Ancora. Please proceed with your question.

Hi, gentlemen. I want to follow up on the funding arrangement between you and Wyndham. You mentioned that after reimbursement, it amortizes over the life of the franchise agreement. Does that mean that you're actually repaying the reimbursement that Wyndham provides to you and over what time period?

Yeah, so the way we account for it, the spirit of the agreement is it's roughly, they're done asset by asset, but roughly 20-year agreements. If we perform on the agreement, there's no repayment, so it's amortized from our financials, so it's a liability amortized to a reduction of expenses over the 20-year course. If we don't perform on the agreement, there's a liquidated damages provision that's about 18 months of fees that they would receive for that key money on the front end. So again, the spirit of it is it's not really a liability. It's booked as a liability because you kind of put it somewhere in the balance sheet, and then it's brought down off the balance sheet over the term of the agreement.

Okay, that brings me to my next question, which I've made an assumption, but I haven't actually seen it spelled out. How is Wyndham getting paid for all of these benefits that they're providing to Lux Urban? What is that going to look like on the income statement?

Yeah, so it's going to be in cost of revenues. There's a slew of fees, but on a very, very high level basis, the combination of the fees booked with booking fee included, right? So if it's booked off of their platform, so if a guest directly books off of their platform, it's a reduction of overall operating expenses by the magnitude of, you know, call it 3%, 4%, 5% than what we had previously. If we book, if the guest books off of a third-party platform, You know, they have negotiated rates off the third-party platform that were better than what we had before the agreement, but it is an incremental cost increase. So, look, I mean, initially day zero and day one, you know, as traffic goes, you know, towards their site, we would incur greater expenses. And then over time, we'd expect, you know, to achieve, you know, 70%, 80%, you know, which is an overall margin savings for us, right? So in the magnitude of a few percent, which is thinking about, you know, a run rate business beyond $100 million going to $200, you know, meaningful dollars.

Okay, so despite the fact that you're paying them some kind of fee or royalty off the top, you actually expect this to be accretive to maybe the margin profile that you've put out in the past? Is that accurate to say?

Yeah, we'll see 3% to 4% minimum margin improvement net of penguin to ball inclusive.

Okay, great. And then OTA receivables are a growing light item on your balance sheet. What do you expect kind of the collection period or DSOs to be on that?

Sure. So those receivables are made up of, we took over, so the OTA receivables are pretty consistent with last queue. We took over two properties that had receivables due from New York City that we turned over. So that is the bulk of the increase this queue. So they're sitting in New York receivables for programs really one time. As we took over possession of two properties, there was receivables through the quarter OTA receivables were about 5 or 6 million, consistent with last queue, should stay static around there. That was really a one-time turnover on the two particular hotels that we took over this queue.

Okay, so as you continue to grow, that would not be a normal, it would not normally be as large as that or might go away entirely? That's correct.

Okay. I would say 10 to 15% of the queue revenue.

Okay, that's helpful. And then kind of last one for me, I think you mentioned 5,000 properties under LOI with the new Wyndham partnership, and you've kind of put out some numbers of 6,000 MLAs by June and up to 12,000 by year end. You know, I guess what gives you the confidence to put out kind of some big numbers like that and, you know, how – How confident are you in those conversions of those LOIs, and over what time frame will they occur?

Yes, sure. Highly confident, but we wouldn't have put it out. Historically, we have met or exceeded guidance, both in earnings and in unit count. High conviction, deep in the process on both lease negotiations and or signing of leases on those. deep process with Wyndham underwriting on those in terms of key money, brand standards, PIP reports on a lot of those assets have been run. So they're very far along in the process, and they're highly achievable.

Okay, great. Thanks. That's all from me, guys.

The next question is from Adam Waldo of Lismore Partners. Please proceed with your question.

Yes, good day, gentlemen. Thank you very much for taking my question. One more on the balance sheet following the prior questioner's inquiry about the OTA and channel retained funds are suitable. The processor retained funds, I think, relates obviously to the payment processor. And I think if I recall, you all put out a press release late in 22, early in 23 around the switch in payment processor resulting in freeing up that working capital to be able to reinvest in growth. Am I right in my recollection there? And if so, how should we think about the process of retained funds balance developing as we go forward at the rate of growth you're seeing? Yeah, great.

So if you see, it's no longer increasing. If you see, I think it went down about 1.1 million Q over Q, right? So we did get some release there. I think it went from six and change down into the fives. So we got a release of about, over a million dollars that came into working capital over the queue, which was deployed into the business. So I think over the next two or three queues, you should see that come down to a negligible number. It certainly will not increase, and it will come down to the balance of the next few quarters as we get those funds released working with those processors.

So why does that become – oh, I'm sorry. But thinking about it from, you know, when that balance peaked – you know, at the end of last year, you know, the revenues are almost, you know, not quite, but two and a half times. So the percentage of revenues has gone down considerably, right? And so it's really meant for, you know, protection of holdbacks and so forth. But so as a percentage, it's plummeted and they've also started releasing capital.

No, absolutely. But I guess where I was going with this is now that you're, you know, obviously payment processing almost entirely through the Wyndham platform, Does that go down to just a few million dollars over the next few quarters? Brian's comments seem to suggest maybe that does and becomes a source of growth capital and no follow-up after that. Thank you.

It does. It should eventually go to zero, right, because there's no more holdbacks given the strength of the business on current payment processing. It's historic payment processors that we're working with that we're holding back given the you know, the balance sheet of the company historically. And as it's improved, we don't have a requirement for holdbacks any longer on any payment processing. So as, you know, we work over the time periods of those contracts, the money gets released. So it will provide working capital. And it should get to zero over the next three to four quarters.

Tremendously helpful. Thanks very much, and good luck on continued strong performance.

Thank you very much.

There are no additional questions at this time. I would like to turn the call back to Brian Ferdinand for closing remarks.

Great. I appreciate everyone joining, and thank you very much.

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