LuxUrban Hotels Inc. (NASDAQ:LUXH) Q4 2023 Earnings Call Transcript April 16, 2024
LuxUrban Hotels Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Kath, and I will be your conference operator today. At this time, I would like to welcome everyone to the LuxUrban Hotels Incorporated 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Devin Sullivan, Managing Director at the Equity Group. Please go ahead.
Devin Sullivan : Thank you, Kath, and good morning, everyone. Thank you for joining us today for LuxUrban Hotels’ 2023 financial results conference call. Our speakers for today will be Brian Ferdinand, Chairman and Shanoop Kothari, the company’s Co-CEO and Chief Financial Officer. Before we begin, I’d like to remind everyone that this call may contain certain 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. These statements may 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, should, would and similar expressions may identify forward-looking statements but the absence of these words does not mean that a statement is forward-looking. Forward-looking statements may include, for example, statements with respect to the success of the company’s collaboration with Wyndham Hotels & Resorts, scheduled property opening, expected closing of noted lease transactions, the company’s ability to continue closing on property in the pipeline as well as the company’s anticipated ability to commercialize and efficiently and profitably operate these properties.
These statements are based on current expectations and beliefs concerning future developments and their potential effects on the company and there can be no assurances that these future developments will be those that have been anticipated. Forward-looking statements are subject to a number of risks and uncertainty, some of which are beyond the company’s control or other assumptions that may cause results or performance to be materially different from those expressed or implied in these statements, including those set forth under the caption Risk Factors in our public filings with the SEC, including an item 1A of our annual report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 15, 2024, and any updates to those factors as set forth in subsequent quarterly reports on Form 10-Q or other public filings.
Forward-looking information and forward-looking statements are made of today’s date and the company does not undertake any update to any forward-looking information and/or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities law. Management will also be discussing non-GAAP financial measures, 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. Brian, please go ahead.
Brian Ferdinand: Thank you, Devin. Good morning and thank you for joining us today. In 2022, we identified what we believe is a historic opportunity to acquire long-term operating rights to hotels with favorable economics. At that time, many of these properties were struggling in a post-pandemic trouble environment. Today, rising interest rates and looming debt maturities are creating a new class of hotel owners who are facing a refinancing environment that is considerably less favorable than in recent years with assets in this category having declined significantly. This presents owners and lenders with limited options. LuxUrban provides a much needed solution to lease these hotels on a long-term basis, which has created a significant pipeline of hotels available for lease, which LuxUrban intends to capture.
For the better part of two years, we leveraged our first mover status to address this opportunity by playing a critical role in the current commercial real estate ecosystem as a potential long-term lease partner to these owners. We’ve expanded our portfolio of hotel properties, curated a robust pipeline of opportunities in new and existing markets and signed a collaboration agreement with Wyndham that provides financial brand and operating support to advance our growth objectives, who remains committed and supportive of our business and the opportunity in front of us. In less than two short years, LuxUrban has grown into an industry recognized MLA provider, generating more than $113 million annually and generating well over $20 million EBITDA with limited capital and resources to date.
We believe the company’s business model has redefined part of the hotel landscape and with a refined approach will reach its full potential in the coming years. We have also begun to mature as an organization, which is required for the next phase of our business, which will be focused on customer engagement and professional hotel operations that are up to industry standards. We have certainly faced several challenges and have acted with a sense of focus and urgency to address them. As you’ll see in our 2023 results, we have confronted various legacy issues and taken steps to mitigate the effects of potential future headwinds. We have recently fortified our executive team and Board with the additions of industry veterans such as Elan Blutinger and Kim Schaefer to the Board of Directors and Robert Arigo as Chief Operating Officer.
You can expect to see more of these types of appointments in the coming months, as we continue to shape the organization to fully capture the opportunity in front of us, while acting with a sense of responsibility as we move forward. Our pipeline of opportunities remains incredibly strong. 2024 will be a period of measured but still significant expansion with a focus on acquiring the long-term operating rights to higher end hotel properties, once our commitment to improving our working capital, receivables and cash flow profile are realized in the coming quarter. We will continue to focus on adding depth to our core New York City market and selectively expanding our presence in Miami, New Orleans and Los Angeles, while exploring new market opportunities in destination cities across the U.S. We acknowledge that our shareholders want to own a company they can look to for growth, predictability and profitability.
I agree. As LuxUrban’s largest shareholder, I can assure you that I am committed to ensuring the company operates in a way that maximizes the financial benefits of our growth and executing a strategy that allows us to reach our full potential. My commitment is unwavering to help bring in the right executive team, directors and capital partners to optimize and properly scale the business moving on from legacy relationships as the business evolves. Before I turn the call over to Shanoop, I want to make it clear we are focused on rebuilding trust with our shareholder base, partners and being accountable for our missteps along the way. There are no excuses to make and the only solution is to set the company on a better path with the initiatives outlined to capture the full opportunity in front of us.
With a refined approach and seasoned industry veterans joining the team, the opportunity for LuxUrban is more exciting than we could ever have foreseen when we started the business. With that, I’ll turn it over to Shanoop Kothari. Thank you.
Shanoop Kothari: Thanks, Brian, and thank you for joining us today. We filed our 10-K and issued our press release on April 15. Both documents contain significant details on our operating results. With that in mind, I’ll focus my remarks on selected highlights and key items. As a reminder, our results for the year reflected a one-time negative impact from the onboarding of the company’s hotels to the Wyndham platform during the fourth quarter of 2023. During the period, the marketing and sale of our properties were taken off our prior OTAs and transitioned to the Wyndham booking platform and reservation platforms, during which time the rooms were not available to rent. All of the initial properties are now fully onboarded to the Wyndham platform.
This was a one-time occurrence and not expected to be repeated in 2024. This transition impacted revenues by approximately $5 million in EBITDA by approximately $4.5 million. Now to our 2023 results. Net rental revenue rose 159% to $113.4 million from $43.8 million driven by an increase in average units available to rent to 1,249 from 487 as well as an improvement in total RevPAR. We welcomed approximately 150,000 guests in 2023 up from approximately 80,000 in 2022. Total RevPAR for 2023 was 249 and would have been within our previously guided range if adjusted for the Wyndham transition. For some added perspective, our property level breakeven for 2023 was $160 to $180 per night. Gross profit was $8.9 million or 7.9% of net rental revenue compared to $12.4 million or 28% of net rental revenue reflecting the increase in average units available to rent and better TRevPAR per unit offset by $3 million in costs related to previously announced surrender of leases at four underperforming hotels.
Other expenses of $66.5 million reflected $24.2 million in wages, $11.2 million in commissions, $7.0 million in processing fees, $13.0 million in operating expenses such as Wi-Fi cleaning, repairs, maintenance with the balance in taxes and other costs. Based on a change in our approach to the accounting of certain matters, we had approximately $1 million impact to revenues, $2 million impact to commissions and $2 million impact to repairs and maintenance and other operating expenses in 2023 for a total impact to EBITDA of $5 million. We will see that benefit in 2024. General and administrative expense was $15.6 million compared to $6.8 million, reflecting higher payroll, supplies, legal and accounting and software costs. As a percentage of net rental revenues, G&A was just under 14%.
Excluding new accounting for the accrual financial risk or CECL in late 2023 and the additional cost of our audit, G&A as a percent of revenue would have been 13%, slightly above our guidance of 10% to 12%. For 2024, we are targeting a G&A margin in the range of 11% to 13%. Beyond G&A, our results of 2023 included quite a bit of noise. We incurred $61 million of non-cash charges and nearly $25 million of cash charges. Of this total, the majority will not recur in 2024. So we expect to be in a position to present cleaner, for lack of better term, quarterly results that are not met by various costs and charges. Let’s address these cash and non-cash items one at a time. Of the $61 million of non-cash charges we incurred $8.2 million in non-cash rent amortization which will continue in 2024, but is a non-cash item related to lease accounting under ASC 842, $11.6 million related to common stock issuance, stock compensation and stock option expenses as compared to $2.5 million of such expenses in 2022.
We expect a significant reduction in these expenses in 2024. $41.2 million in non-cash financing charges compared to $2.0 million. Non-cash financing charges in 2023 included $28.2 million in non-cash, non-recurring costs related to the May 2023 revenue share exchange agreement between the company and its pre-IPO investors that eliminated an estimated $87.5 million in future revenue share payments in exchange for a one time issuance of 6,740,000 shares of the company’s stock, subject to an extended lockup agreement. These costs will not reoccur in 2024. In addition, $12.5 million in non-cash warrant related expenses, although we record non-cash warrant expenses. Although, we will record non-cash foreign expenses in Q1 2024 in the range of $5.5 million to $6.5 million.
We do not expect any other charges of this nature beyond the first quarter. The cash charges we incurred consisted of $12.2 million related to the exit of our legacy apartment rental business. These costs will not occur in 2024. $3.4 million related to the surrender of deposits on leases at four properties that were creating a consistent drag in our operating results due to poor performance. We’re comfortable with the remaining leases in our portfolio. The expensing of $8.2 million of property taxes we owe as part of leases that historically we record as prepaid until the respective due dates for the taxes. If we peel away the charges and costs incurred in 2023, EBITDA increased to $25.3 million from $14.3 million and pro-form the impact of the Wyndham transition adjusted EBITDA increased to $29.8 million from $14.3 million.
On a percentage basis, EBITDA and adjusted EBITDA margins were 22% and 26% respectively, in line with our guidance of 20% to 25%. This does not reflect the inherent profit potential of the business. Our current business is not optimized, so over time we believe we can drive up these margins while at the same time investing in more of our properties for maintenance and updates. Moving to the balance sheet, at December 31, 2023, cash and cash equivalents were approximately $800,000 compared to $1.1 million. Total debt declined to approximately $4.3 million from total debt of $14.0 million. Accounts payable and accrued expenses increased to approximately $24.4 million from $6.3 million. The December 31, 2023 accounts payable and accrued expense balance included approximately $7.2 million in accounts payable, $8.9 million in accrued expense inclusive of the amounts to surrendered units and $8.4 million in legal exposure.
The amounts in accrued expenses and legal exposure are very conservative and we believe will ultimately come in amounts lower — to significantly lower to what has been recorded. The company expects that cash on hand, cash flow from operations and cash flow from potential capital markets transactions as a public company will be sufficient to fund operations during the next 12 months and beyond. We believe there are opportunities for us to raise capital in a strategic and efficient manner. Our strategy is focused on acquiring the long-term operations, operating rights of hotel properties at a fraction of their asset value. As Brian pointed out, the opportunity is substantial and contingent on our ability to secure the necessary capital. LuxUrban’s insider ownership is about 40%, led by Brian, who is the largest shareholder.
We will be smart about any potential financings and any such activity will be taken with the best long-term interest of our shareholders in mind. 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 over the coming quarters. Let’s talk about what we are working on for 2024 and our expectations. To assist in our growth for 2024, we entered into a master collateral trust agreement that provides up to an aggregate of $10 million of surety bonds that can be used to fund for deposit requirements under long-term leases. The provider of the bond is currently rated A+ by A.M. Best (Superior). The bonds have a 70% collateral requirement. For example, a $1 million bond would require us to post a collateral position of $700,000.
The cost of this facility is 2.5% annually. Scale derived efficiencies are also a high priority for 2024 and a primary reason we brought on Robert Arigo. Robert is a highly accomplished hand on seasonal hotel executive with 35 years experience and a track record of enhancing property level operations, optimizing supply chain relationships, elevating customer experience and realizing ancillary revenue opportunities. Ancillary revenue was not a material contributor of our results in 2023. However, the course of 2024, we believe we can add up to 5% top line revenues and drive 3% to 5% margin improvement pursuing these new revenue streams. Rob is well underway in the implementation of these initiatives. We also believe we can realize further benefits from our Wyndham relationships.
With the integration of hotel properties to the Wyndham platform completed in Q4 2023, we’re seeing increased percentage of Wyndham direct sales, which are expected to reduce our dependency on comparatively lower margin third-party OTAs. Although the top 10 sales channels represented more than 90% of revenue in 2023, sales through the Wyndham franchise platform generated approximately 22% of our revenues in Q4 2023. Over time, we expect direct bookings across the Wyndham site to account for a greater percentage of revenue, which could exceed 50% by the end of 2024. Regarding guidance for 2024. For the first quarter ended March 31, 2024, net rental revenue is expected to be in the range of $27 million to $30 million reflecting the seasonal aspect of the company’s business.
For the full year, we are reiterating our commitment to the following priorities: increase our portfolio of hotels under long-term master lease with a focus on higher quality 3.5 to 4.5 star properties. Generate increased net rental revenue and TRevPAR compared to 2024, driven partially by an increase in ancillary revenue and co-branding opportunities. Improve our working capital profile, receivables, cash flow profile by adopting slower pace of acquisitions, increasing total RevPAR, focus on higher end properties and realizing the benefits of the above referenced surrender of certain underperforming leases. I believe we have a very good business. Our business is roughly $27 million to $30 million of quarterly revenues with about $2 million of free cash flow or $6 million quarterly when properly capitalized.
We expect to clarify our outlook — further outlook for 2024 later this year. The actions we took in 2023, while painful were necessary. We still have work to do. However, we believe we have derisked many aspects of the business and have entered 2024 with a more stable, predictable and sustainable operating model. For our shareholders, we understand that the proof will be in our results. We will hold ourselves accountable to that. To that point, we did accomplish the following in 2023. We grew our units from less than 500 to over 1,400. We almost tripled revenue. We eliminated our senior debt. We eliminated rev share agreement, partnered and integrated with Wyndham. Thanks again for your time and I’ll turn the call over to the operator for questions from our analysts.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Allen Klee with Maxim Group.
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