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CorePoint Lodging Inc. (NYSE:CPLG)
Q3 2019 Earnings Call
Nov 13, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2019 CorePoint Lodging Incorporated Earnings Conference Call. [Operator Instructions] After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Ms. Becky Roseberry. Thank you. Please go ahead ma'am.

Becky Roseberry -- Senior Vice President, Finance

Good afternoon and welcome to CorePoint Lodging's Third Quarter 2019 Earnings Conference Call. Everyone should have received a copy of our earnings release issued earlier this afternoon. This release, along with our 10-Q when available can be found on our Investor Relations page. In a moment, we will have some prepared comments from Keith Cline, our President and Chief Executive Officer and Dan Swanstrom, our Chief Financial Officer. Also in the room with us today is Rob Song, our SVP of Investments.

Before we start, I would like to remind everyone that this presentation includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect the Company's current view of future events and financial performance.

Words such as outlook, expect, will, plan, anticipate, intend, believe and other similar expressions identify forward-looking statements. Any such forward-looking statements are subject to risks and uncertainties, such that the Company's future or actual results could differ materially from the historical results or current expectations or from that which is expressed or implied by any such forward-looking statements. For more details on these risks, please refer to the Company's most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission.

In addition, into this remarks, we will refer to adjusted EBITDAre and adjusted FFO, which are non-GAAP financial measures. You may find reconciliation of historical non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP in our earnings press release, which is also included as an exhibit to the Form 8-K we filed with the SEC. Which may be found at our website at www.corepoint.com. Finally, for those listening to a replay of this call after November 13, 2019, we remind you that this presentation will not be updated and it is possible that the information discussed will no longer be current.

With that, I will now turn the call over to our President and CEO, Keith Cline.

Keith A. Cline -- President and Chief Executive Officer

Thank you, Becky. Good afternoon everyone and welcome. We're pleased you could join us. You may recall that last quarter we highlighted that we believe the underperformance of our portfolio was well outside normal expectations and reflected the impact of an adverse disruption to our business, namely modifications were made by our property manager for the revenue management systems and tools, the call center interface technology and the administration of corporate and group bookings. We believe these modifications and other problems related to the transition of our hotels to the Wyndham platforms in April of this year, contributed to our lower occupancy and average daily rate as well as loss in market share.

The problems continue to the third quarter and contributed to our RevPAR weakness. After reporting a 6.1% decline in comparable RevPAR in Q2, we had a 6.3% comparable decline in Q3 with 542 basis point decline in market share. The RevPAR decline was due to a 2.7% decrease in ADR and 253 basis point decrease in occupancy. When looking at results by various buckets within the portfolio, RevPAR for our non-reposition, non-oil and non-hurricane portfolio, which represents 63% of our comparable hotels, was down 5.7% versus the third quarter last year. The balance of our portfolio, which included reposition oil and hurricane impacted assets, saw RevPAR, down 7.2%.

Adjusted EBITDA ROE for the third quarter of 2019 was $38 million, due to continuing revenue declines the softening of the broader macro lodging environment, our revised outlook for the fourth quarter, and taking into consideration the effect of asset sales and the impact of Hurricane Dorian, we are adjusting our full year outlook. Dan will go over that in a moment.

Now I'd like to briefly update everyone on the resolution of our management dispute with Wyndham. We are pleased to have reached a settlement in mid-October that we believe begins to address the core issues of the dispute, including the impact of revenue disruption that occurred following the transition and integration of our hotels in April. We have come to an agreement, on what we believe are critical revenue management and other booking functionalities to be implemented that are necessary for our hotels to deliver the level of performance. They are capable of achieving over time. The key operational and economic terms of the settlement as detailed in our recent 8-K filed with the Securities and Exchange Commission are as follows. Wyndham agreed to reestablish at its expense certain systems, tools and processes we have identified as critical to revenue management, call center technology and the administration of corporate and group bookings, that are at least reasonably equivalent to the legacy systems including implementation of an enhanced dynamic, best available rate-setting tool, implementation of an enhanced direct billing system for corporate and group clients and redeployment of certain legacy booking tools.

Wyndham has agreed to a settlement payment to CorePoint of approximately $20 million in cash. These are proceeds that were partially offset the revenue disruption in our business. We have already received approximately $10 million and the balance will be paid over time and satisfied in full by no later than June 30, 2021. As a settlement to the previously disclosed and outstanding tax matters agreement related to the spin-off, Wyndham will make a cash payment of approximately $17 million to CorePoint during November 2019. And lastly, we now have reached agreement on franchise transfer approval criteria related to asset sales, that should importantly better facilitate our disposition strategy.

We are pleased to have reached the settlement and to be collaborating with Wyndham in the newly installed leaders at their management company to improve the operating performance of the portfolio. We appreciate their willingness to reestablish these critical tools and to work alongside us to generate better performance. These improvements and the reestablishment of these tools will not happen overnight, but rather will be phased in over the next year. They are all expected to be fully functional, no later than year-end 2020. In the interim, we are working with our manager to proactively change certain in place systems, processes and resource allocation to slow the declines in RevPAR end market share that we've experienced.

With that said, we appear to be at a point in the cycle with the lodging environment is softening on a sequential basis. According to STR, overall industry expectations for 2020 are an increase in RevPAR of 1.1%. The upper midscale and economy chain scales in which we primarily compete are expected to have RevPAR growth of between 0.7% and 0.8%. Although, we're not providing guidance for 2020 at this time, we are expecting to face several headwinds in the business next year. In addition to slowed industry expectations, we will be impacted by everything we just discussed with respect to the performance of our portfolio, the timing of the full functionality of the new tools as well as limited visibility at present into any near-term potential lift from being part of the Wyndham distribution network. Notwithstanding the continued challenges we're facing from an operational perspective, we believe our recent settlement with Wyndham lays the foundation to address one of our top strategic priorities, mitigating the continued disruption to our hotels and bringing them back in line with our expectations as quickly as possible.

Our other strategic priority for 2019 has been to execute our non-core asset disposition strategy. We've had tremendous success to date in 2019 as demonstrated by the fact that through today, we've sold 36 hotels comprising 4,189 rooms for a total gross sales price of $136 million at very favorable valuation multiples of 2.4 times revenue and 29 times EBITDA. Dan will walk through more detail on the pricing multiples and implications of these sales, but it's evident to us that there is a sizable disconnect between our public valuation and the private market valuations for these assets. Based on the success of this program to date and the shareholder value created through asset sales, and in connection with our ongoing 2020 business planning process, we are continuing to assess the composition of our portfolio and we may expand our disposition program.

With that, I'll turn the call over to our CFO, Dan Swanstrom. Dan?

Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer

Thank you, Keith and good afternoon everyone. I'll focus today and providing more color on the operating results bridge, the changes to our guidance for 2019 and provide an update on our non-core disposition strategy. The $17 million year-over-year decline in adjusted EBITDAre for the third quarter of 2019 is primarily due to decreases in rooms revenues resulting from continued declines in RevPAR across the portfolio. Excluding hotels sold through September 30, 2019 and excluding the effect of the five properties that experienced unanticipated displacement from Hurricane Dorian during the third quarter of 2019.

Adjusted EBITDAre would have decreased by approximately $13 million year-over-year. I would note that five Hurricane Dorian impacted hotels are now excluded from our comparable hotel portfolio. From a performance by category perspective, our non-impacted portfolio which includes the non-repositioned, non-oil related and non-hurricane impacted hotels has the largest year-over-year decline of $7 million. During the quarter, in relation to our 2017 and 2018 hurricane impacted properties, we received $3 million in business interruption insurance proceeds, bringing us to a total of $22 million received to date, out of the total estimated business interruption insurance claims of approximately $26 million. These amounts are excluded from adjusted EBITDAre, and from our 2019 guidance. We still expect to recover the majority of the remaining $4 million of outstanding business interruption claims in the future and we will continue to provide updates on amounts and timing of incremental proceeds received. Additionally, we are also in the early stages of the business interruption insurance claims process with respect to our 2019 property displacements, including those hotels recently impacted by Hurricane Dorian. Based on preliminary estimates we expect to recover approximately $5 million in total business interruption insurance proceeds in the future, related to these 2019 claims.

Turning to our updated guidance, I will refer you to many of the details we included in our earnings release for the reduction in comparable RevPAR, adjusted EBITDAre, and AFFO per share. We are updating our RevPAR outlook to be a range of down 5% to down 4%. Adjusted EBITDAre has moved from a range of $150 million to $160 million to a range of $142 million to $148 million.

On Page 5 of our earnings release, we have provided a bridge from our previous adjusted EBITDAre guidance on August 13 at the midpoint, to the new outlook at the midpoint. We are expecting $2 million less and adjusted EBITDAre due to the asset sales completed subsequent to our prior outlook and $2 million less due to Hurricane Dorian property displacements in 2019, that were not contemplated in our prior outlook. We expect to ultimately recover most of the hurricane Dorian operating losses through future business interruption insurance proceeds. The remaining $6 million revision to adjusted EBITDAre, includes the continued impact of revenue disruption that occurred following the transition and integration of our hotels in April and the impact of a softer than expected macro operating environment in both September and October. And in particular for our midscale and economy chain scales, that is now reflected in our full year outlook. Our updated outlook includes all disposition and share repurchase activity to date. As a reminder, our 2019 outlook does not consider any unannounced closed hotel dispositions, acquisitions or capital markets activity, including share repurchases.

Turning to our balance sheet as of September 30, we had total gross debt outstanding of $973 million and after factoring in the paydowns of debt completed subsequent to quarter end, we have total gross debt outstanding of $955 million. This represents an $80 million reduction in debt outstanding as compared to our December 31, 2018 year end balance, as we continue to utilize the net proceeds from asset sales to pay down CMBS debt to at least the extent we are required to do so under the covenants. We also currently have no outstanding borrowings on our $150 million revolving credit facility.

Our work on the balance sheet demonstrates the importance we place on disciplined capital allocation. To this point we have prioritized paying down debt, returning capital to shareholders and capital investments in the portfolio. In addition to our meaningful debt repayments, during the third quarter we repurchased approximately 430,000 shares of common stock at an average price of $9.54 per share, bringing us to a total of 2.6 million shares repurchased for an aggregate purchase price of $29 million to date in 2019.

During the quarter we also invested approximately $14 million in capital improvements in the portfolio and we are pleased to report that substantial renovations are now completed at our last remaining repositioning hotel at the Los Angeles International Airport. Going forward, we continue to expect that the future deployment of the capital we raise through asset sales will be primarily concentrated on paying down our CMBS debt. That being said, we also expect to be opportunistic with share repurchases. With respect to our hotels disposition strategy to drive shareholder value, we have significant positive momentum on asset sales and the settlement agreement with Wyndham, that set objective criteria for franchise transfer approval should help us accelerate that activity.

To date, there has been no shortage of demand for these assets and the pricing has exceeded our original expectations. During the third quarter, including the seven hotels sold prior to our last released on August 13, we sold 18 non-core hotels in 12 different markets for total gross proceeds of approximately $70 million. The gross sales prices on these dispositions represents an approximate 2.4 times revenue multiple and in an approximate 38 times multiple on the trailing 12 months hotel level adjusted EBITDAre.

To date in the fourth quarter, we sold another 12 hotels in seven different markets for total gross proceeds of approximately $42 million. That brings us to a total of 36 assets sold year-to-date for total gross proceeds of approximately $136 million, which represents an approximate 2.4 times revenue multiple, an approximate 29 times multiple on the trailing 12 months hotel level, adjusted EBITDAre, on a pro forma basis where applicable. We also have another 25 hotels under contract with qualified buyers, which are expected to close by the end of the first quarter of 2020, with expected gross proceeds of approximately $115 million. The pricing on this next group of dispositions is generally consistent with revenue multiples achieved to date. We are very pleased with the progress our investments team has made over the last six months. We now have 61 of the original 78 non-core hotels that we identified earlier this year, sold or under contract, and the remaining 17 non-core hotels are in various stages of the sales process. We'll continue to keep you posted on any additional activity. The compelling and favorable valuations achieved on our asset sales to date continue to demonstrate to us the significant disconnect between public and private market valuations for our real estate. We have and will continue to unlock value from these non-core hotel sales. And as Keith mentioned, we are evaluating the composition of our existing portfolio for incremental disposition opportunities to create additional shareholder value.

With that, we'll open the line for your questions, operator?

Questions and Answers:

Omer Sander -- J.P. Morgan -- Analyst

[Operator Instructions] Our first question comes from Omer Sander with J.P. Morgan. Your line is now open.

Hey guys, thanks for taking the questions.

Keith A. Cline -- President and Chief Executive Officer

Hi Omer.

Omer Sander -- J.P. Morgan -- Analyst

So just wanted to ask about the core portfolio, maybe get a little bit more color about performance in the quarter and any other KPIs you might have, RevPAR index and how margin that those hotels are tracking? As well as, if you could provide a little bit of color on the geographic mix there?

Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer

Sure. Good afternoon, Omer. This is Dan. From a core perspective, as you kind of look at RevPAR, year-to-date versus the non-core portfolio, the core portfolio is tracking at about 100 basis points, stronger performance relative to the non-core. As we've mentioned before, the non-core portfolio consists of predominantly economy and lower mid-scale chain assets and the non-core from a geographic region, is primarily concentrated in states like Texas, Southeast Florida, Georgia and Midwest.

Omer Sander -- J.P. Morgan -- Analyst

Okay, great. And then could you comment maybe on EBITDA margins, that there was hotels relative to the rest of the portfolio?

Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer

Yeah, the margins on the core portfolio are significantly stronger than the non-core portfolio. The non-core portfolio as we had mentioned in the past and we've included in prior investment presentations, tracked in like mid to high single-digits, around 7% to 8% EBITDA margins, whereas the core portfolio is significantly higher north of 20%, closer to kind of 25% margins. So as you kind of look at the margins, in particularly for the third quarter, the core portfolio was around 23% and the non-core was in that kind of low to mid high single digits, which blends to kind of low '20s for the overall portfolio.

Omer Sander -- J.P. Morgan -- Analyst

Got it. And then, that's helpful. And then additionally, so on the Wyndham agreement and maybe just to get a sense of trends throughout the quarter. I think on the last call you called out a pretty tough July, I guess looking sequentially through the quarter and maybe early into the 4Q, have you seen kind of trends improving through your portfolio and I'll see you in a tough macro and industry environment?

Keith A. Cline -- President and Chief Executive Officer

Well, let me talk a little bit about 4Q and we can provide any additional color on 3Q that we need. If you think about 4Q one thing to keep in mind is we've got a pretty tough year-over-year comp in the fourth quarter if you could recall, to the fourth quarter of last year, our comp RevPAR performance was up well over 9% in the fourth quarter. So we had planned our year with a fairly tough comparison on a year-over-year basis as you look at the performance in the portfolio, sequentially between quarters as you go from Q2 to Q3, we did see on both a aggregate comp RevPAR performance as well as an aggregate market share performance, a slight erosion in Q3 compared to Q2.

Omer Sander -- J.P. Morgan -- Analyst

Awesome. Thank you. And if I could just sneak one last one in, you mentioned on the Wyndham agreement, addressing some of the group bookings. Could you just remind us what percentage of your business is group?

Keith A. Cline -- President and Chief Executive Officer

Well, a very small portion is Group, the biggest part of that really relates to our corporate bookings. And as you look at the direct building type tools that we're talking about, in the settlement agreement, historically about 25% of the revenue through this portfolio was booked through some type of a corporate booking agreement. And although historically, we knew that our corporate business was a larger percentage of aggregate revenue but not all of it went through a corporate agreement. So as we're looking at that specific to what we're talking about that, that 25% of portfolio revenue.

Omer Sander -- J.P. Morgan -- Analyst

Awesome. Thanks a lot.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Keith Cline for any closing remarks.

Keith A. Cline -- President and Chief Executive Officer

Great. I want thank everybody for your continued interest in CorePoint Lodging and have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Becky Roseberry -- Senior Vice President, Finance

Keith A. Cline -- President and Chief Executive Officer

Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer

Omer Sander -- J.P. Morgan -- Analyst

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