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CorePoint Lodging Inc. (CPLG)
Q1Â 2020 Earnings Call
May 20, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by and welcome to the Q1 2020 CorePoint Lodging Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Becky Roseberry, Senior Vice President of Finance and Investor Relations. Thank you. Please go ahead ma'am.
Becky Roseberry -- Senior Vice President of Finance and Investor Relations
Thank you. Good afternoon, and welcome to CorePoint Lodging's first quarter 2020 earnings conference call. In a moment, we will have remarks from Keith Cline, our CEO and Dan Swanstrom, our CFO. Rob Song, our SVP of Investments and Howard Garfield, our CAO are also on the line with us.
Before we start, I would like to remind everyone that our remarks today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today speak only to our expectations as of today. We do not undertake any duty to update forward-looking statements.
These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. For more details on some of these risks, please refer to the Risk Factors section of the Company's most recent Annual Report on Form 10-K as supplemented by the Company's current report on Form 8-K filed on May 11, 2020 and any subsequent reports filed with the Securities and Exchange Commission.
In today's remarks, we will also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release, which is available on our website at corepoint.com. Finally, for those listening to a replay of this call after May 20, 2020, 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 Keith.
Keith A. Cline -- President and Chief Executive Officer
Thank you, Becky. Good afternoon everyone, and welcome. We're pleased you could join us. The last 10 weeks have been an incredibly challenging time for all of us, and we offer our sincere thanks to those who are on the front lines fighting this pandemic every day. As it relates to our business, I will focus my time today on how we have been managing through this crisis today, our key priorities and our action plan going forward. I'll turn it over to Dan later to update you on our operating results, liquidity profile, balance sheet and non-core disposition program.
Entering the year, our top 2020 initiatives were to focus on ensuring the revenue and other platform improvements with Wyndham were completed on time and addressed our needs and to execute on the next phase of our real estate strategy. The current operating reality we've entered into including record year-over-year declines in revenue due to the impact of COVID-19 pandemic has driven a rapid reprioritization and collective change in focus for our team.
While we will obviously continue to focus on the platform improvements and real estate strategy, our most important priorities right now are to continue to implement cost containment strategies at the hotel and corporate levels to preserve cash and liquidity, maintain balance sheet resiliency and flexibility, exert strong asset management oversight and prepare for the full reopening of the economy. Our most aggressive efforts to date have reflected strong asset management oversight to significantly cut costs at the property level and to preserve as much liquidity as possible. We provided some details on our initial efforts last month, and I'll briefly give an update on these initiatives.
As of April 9, the date we reported our initial efforts, 26 of our hotels were temporarily not accepting transient guests. At peak, we had 30 such hotels. With improving demand, we are reducing that number as more hotels begin accepting transient guests and reservations. To date, 10 of the 30 hotels are reopened to transient guests and we are currently expecting the remaining 20 hotels to resume accepting all reservations over the next several weeks.
We continue to assess all of our hotels regularly to determine the best course of action, taking into consideration the safety of our guests, local circumstances and the impact of hotel room demand on our operations. Last month, we outlined a number of cost containment efforts at the property level that were under way. We have intensified those in all cases with reduced staffing levels, elimination of all non-essential amenities and the freezing of all spending at the hotels to only what is essential to run the hotel safely.
To give you some context on what actions we've taken, we have cut costs significantly across the property level P&L by over 50% to date compared to our original 2020 expectations. Labor has been the biggest driver of the cost savings, and our revised labor standards reflect a significant reduction in housekeeping hours, driven by lower occupancy, as well as reductions in areas such as breakfast, maintenance, van drivers and guest service associates to better match our cost structure with the number of rooms sold.
In the end, the goal of cost containment is to reduce our monthly cash burn rate. For perspective during the month of April, which reflected historically low performance across our industry, and as it relates to CPLG, an occupancy level of approximately 21% and a RevPAR of approximately $13.50, our preliminary property level cash burn was in the range of $9 million to $10 million. Based on our run rate from the last four weeks, which includes both the recent pickup in occupancy and the full impact of the cost containment items we've discussed, our current estimated monthly cash burn rate would be reduced by approximately $2 million to $3 million.
We have not limited our aggressive focus only to costs, we've taken the same assertive asset management approach with sales and revenue management. Together with our third-party manager, we're actively pursuing opportunities such as extended stays, medical and first responders, construction, government, as well as other local and regional relationships. We're actively working through a number of revenue management strategies that have been successful for us in the past with these assets, and the very early read on these efforts is encouraging with gains in market share and increased revenue. At the corporate level, we've also taken a number of steps to reduce costs related to corporate G&A and capital spending, and Dan will walk through those details in a moment.
And last, let me briefly touch on the other major initiatives under way for 2020. Wyndham is generally on schedule to meet the 2020 deliverables under our settlement. The enhanced direct billing system for corporate and group clients was finalized late in the first quarter with other deployments of certain legacy booking tools on schedule to be completed by June 30, 2020. And the implementation of the enhanced dynamic best available rate setting tool scheduled to go live by December 31. Recall that we had always expected the benefit from these tools to begin in late 2020 with the majority of the benefit in 2021, but their progress is encouraging nonetheless.
Our real estate strategy is a proven value creator for us and continues to be highly accretive since inception, we've completed the sale of 70 assets, totaling gross proceeds of $290 million at highly accretive hotel EBITDA multiples. The proceeds have primarily reduced our debt and enhanced our liquidity. Ultimately, we believe the sale of the 140 remaining non-core hotels over the next two years or so could generate substantial proceeds to further de-lever the balance sheet and create value. Today we have 26 hotels under contract for gross proceeds of approximately $115 million.
As I mentioned last quarter, we were monitoring and evaluating any impact from COVID-19 as it relates to these asset sales. We said it was reasonable to anticipate a disruption or a slowdown in the pace of asset sales in the near term. And we did in fact experienced some delays and disruption related to deals under contract. We have observed the financing processes slowing down including on SBA loans compared with prior periods and some buyers waiting until they have more forward visibility.
The good news is that we sold 23 hotels during the first quarter, six of those since the Q4 call on March 12, raising approximately $100 million of gross proceeds for the quarter and approximately $26 million since our last call. As you might expect, we did not have any activity in April, but we've seen a restart of the process with three deals closing so far in May for approximately $13 million in gross proceeds. Dan will provide some additional details on closed transactions in a few moments. We've said all along that this was a multi-year process and the recent pace during April doesn't change the ultimate goal or diminished a significant value creation this program has and will continue to generate.
In closing, I would like to reiterate that this is a new operating reality for CorePoint and for that matter, all of Lodging. We believe the decisive actions we've taken over the last several weeks have made a significant difference in our ability to create long-term value for our shareholders. I'm proud of the collective response, our team and look forward to updating you on our future progress.
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 start today by providing a brief review of the first quarter operating results, recent trends and our actions to preserve liquidity. I will also provide updates on our balance sheet and our non-core disposition strategy.
The first quarter operating results were generally consistent with industry RevPAR performance and the deteriorating trends that we highlighted in our operations update on April 9. The comparable RevPAR decline of approximately 23% during the first quarter was driven by a 5.5% decrease in ADR and 1,210 basis point decline in occupancy. For the month of March, comparable RevPAR declined approximately 52% year-over-year. The decrease in revenue is due to the significant reduction in room demand resulting from the impact of COVID-19, which is clearly evident in the occupancy stats, as well as the year-over-year disruption from the transition and integration of our hotels on to the Wyndham platform in April, 2019 and the impact of sold hotels. This contributed to the decline in adjusted EBITDAre to $10 million for the first quarter.
Looking at our occupancy trends from mid-March through mid-April, our total portfolio experienced a rapid decline with occupancy reaching a low point of approximately 16% for the second week of April. Since that time, we have been encouraged by early signs of some recovery in demand with occupancy levels for the second half of April around 25%, and for the first half of May around 35%. With the hotels accepting transient reservations, achieving a higher occupancy level of approximately 38%. We believe our portfolio of select service hotels, predominantly focused on the midscale segments is well positioned to capture incremental room demand coming back online. In particular as it relates to leisure travel and the associated demands for many of our drive-to-destinations hotels.
From a liquidity perspective, our cash balance today is approximately $190 million. This includes the $110 million draw that we made from our revolving credit facility and excludes lender escrows of approximately $24 million. We continue to be highly focused on controlling costs and preserving capital. In addition to the numerous cost containment initiatives at the property level that Keith walked through earlier, we have also taking a number of steps at the corporate level to implement capital preservation measures.
These actions include, one, suspending the common stock dividend, resulting in the preservation of approximately $11 million of cash per quarter were approximately $45 million on an annualized basis; two, deferring all non-essential capital investments and expenditures with the exception of life safety or critical operational needs, resulting in an estimated reduction of total capital spending of at least 60% as compared to the initial capital plans for 2020.
Therefore, we currently estimate our highly scaled back level of capex to be about $15 million to $20 million in total on an annual run rate basis. And three, implementing various cost containment measures with respect to corporate cash G&A, resulting in an estimated savings of approximately 10%. Following the implementation of these various liquidity and capital preservation initiatives we currently expect our corporate cash outlays to be approximately $4 million to $5 million per month, which includes approximately $3 million per month. For total interest expense as well as our current estimate for corporate cash G&A. In combination with the estimated hotel operations cash burn range of $9 million to $10 million for the month of April's preliminary results that Keith highlighted, this results in an overall estimated monthly cash burn range of approximately $13 million to $15 million per month.
Given the recent positive trends in room demand and occupancy for the month of May to date, we are optimistic that April could represent a low point in terms of the monthly negative contribution from hotel operations. In fact, to reiterate Keith's comments, if we assume more of a second half of April, first half of May operational approach to the estimated hotel operations cash burn range, that could reduce the overall monthly cash burn on a go-forward basis by $2 million to $3 million per month as compared to the preliminary full month of April results.
Turning to our balance sheet and debt outstanding. At the time of our last earnings call on March 12, we have paid our CMBS debt down from $921 million at year-end to $880 million through the use of asset sale proceeds. As of today, we have paid down our CMBS debt even further to $865 million using a portion of our most recent asset sale proceeds, while our revolver balance drawn is $110 million. Our current weighted average interest rate is approximately 3.3%. As of March 31, we were in compliance with both total net leverage and interest coverage financial covenants under our revolving credit facility. Subsequent to quarter end, we were pleased to execute a loan amendment with our bank group that extends the maturity of the revolver to May 31, 2021 and eliminates these two financial covenant requirements going forward through the extended maturity.
With respect to the CMBS facility, the initial maturity date is approaching in the coming weeks. We have borrower options to extend the initial maturity date of June 2020 for five successive terms of one year each. And we have provided notice to the lender to exercise our first such option to extend the facility for one year through June 2021. At this point, we expect the extension will be effective on the existing maturity date in June 2020. Both the CMBS and revolver extensions, as well as the revolver amendment provide us additional and enhanced flexibility with respect to our balance sheet.
To expand on Keith's comments regarding the continued success of our ongoing non-core disposition program, during the first quarter of 2020, we closed on the sale of 23 hotels for total gross proceeds of approximately $100 million, which included six hotel sales for total gross proceeds of approximately $26 million, following our last quarter release on March 12. These total first quarter transactions were completed at attractive valuations, an average revenue multiple of approximately 2.7 times and a Hotel Adjusted EBITDAre multiple of approximately 34 times.
Month-to-date, thus far in May, we have closed on the sale of an additional three hotels located in Midwest markets for total gross proceeds of $13 million, representing an average revenue multiple of approximately 2.8 times and a Hotel Adjusted EBITDAre multiple of approximately 16 times. As we outlined last quarter, we believe there is compelling strategic rationale for our non-core disposition program and narrowing our focus to a go-forward core portfolio of 105 hotels focused on our higher quality and growth potential assets that are primarily located in top 50 MSAs.
In light of the recent disruption caused by COVID-19 over the past 10 weeks, we have been and will continue to be patient and thoughtful in our execution of this disposition strategy to realize value for these non-core hotels. We continue to believe there are numerous long-term strategic benefits to our ongoing portfolio transformation and our timeframe to execute on this effort was always over a period of two years.
In closing, while we are encouraged by the continued demand for our non-core hotels, the ability to complete additional sales recently, albeit at a slower pace than expected pre-COVID-19 and the early signs of recovery in occupancy over the last several weeks, the fact remains that we're operating in a very challenging lodging environment with critical public health milestones ahead. We believe we have taken the right steps to best position CorePoint to continue to manage through this pandemic, and our near-term priorities remain focused on cost containment and capital preservation initiatives.
With that, we'll open the line for your questions. Operator?
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] Our first question comes from Chris Woronka from Deutsche Bank. Please go ahead.
Chris Woronka -- Deutsche Bank -- Analyst
Hey, good afternoon, guys and thanks for all the color. So could you maybe talk a little bit about the overall kind of buyer pool for the assets? Pretty impressive that you are able to close, I think you said, three hotels so far in May. I mean, do you know if these are -- new owners are planning to keep them as hotels or is there some kind of alternative use?
Keith A. Cline -- President and Chief Executive Officer
Well, these deals that it closed were deals that we had struck to kind of pre-COVID-19. And generally, the vast, vast majority of the people that they are buying these hotels are existing hotel owners that may either own a La Quinta flag or potentially even other flags. So I will tell you from the onset, these deals were closed for the purpose of continuing to operate a hotel. Now that may change over time. But the deals that we've struck -- the vast majority of those are for continuing hotel operations.
Chris Woronka -- Deutsche Bank -- Analyst
Okay, great. Appreciate that. And then, as you guys think about I guess you could go street corner by street corner, but you probably focus a little bit more on the core 105 hotels for now. I mean do you think there is the possibility that some of the competitors in those markets maybe they're older product and substandard and maybe even on branded, do you -- are you seeing any signs that there is going to be more hotel closures and your competitive set.
Keith A. Cline -- President and Chief Executive Officer
Well, you know, it's interesting, right. Obviously, the market's performing very differently by price point in terms of aggregate number of rooms that are closed. And I think you've seen the data with the economy segment really outperforming from an occupancy perspective and number of rooms open. Now in terms of our hotels, we've seen certainly a nice bounce back from the low points that we have talked about and Dan mentioned specifically in his comments. And as we mentioned in our press release as well, we're seeing occupancy numbers that are in the mid-30s and approaching 40% or higher at times. So as I think about the positioning of our hotels, relative to the competitors on our street corners. It's pretty clear that in a challenging environment, given the market share gains that we're seeing and the accelerate -- reacceleration of occupancy that the looking to brand and the location of these hotels is resonating.
Now with that said, I can't speak to additional closures from a competitive perspective. Like all hotel owners, we are evaluating on a constant basis, the number of rooms that are being sold in every single market, where we own and operate. And if a hotel has the ability, given the level of demand that exists to operate and cover fixed cost on a contribution margin basis, we'll work hard to keep those rooms available for transient guests in the the very few number of locations that can support it will suspend them for a period of time until demand comes back. And we've been pretty, pretty systematic and methodical about reviewing them
Chris Woronka -- Deutsche Bank -- Analyst
Okay, very helpful. And just one last one for me. You mentioned you've gotten up I think 35% occupancy lately 38% for the hotels that are taking transient. Is that roughly kind of a breakeven occupancy level at the property level or is there still more to go.
Keith A. Cline -- President and Chief Executive Officer
Breakeven, right, it's a nuance concept, because there's a lot of variables that significantly affect how sensitive breakeven can be and in these hotels, right. Given that we're in the select service part of the industry, Labor is a very large percentage of our cost and given the ADRs that we typically charge. ADR can make it very highly sensitive.
So as you think about it in broad strokes, if we're running let's say ADRs in the mid-60s and labor as a percentage of revenue is, let's call it 25%. Our kind of theoretical breakeven is probably close to 50% occupancy. Now to show you how sensitive that is if the labor cost only dropped by a few hundred basis points, the theoretical breakeven occupancy at the same ADR can drop 10-full points. I mean it's very sensitive.
So we're focused on on kind of optimizing rate and RevPAR in these properties and growing occupancy at a level that puts us in the best position to drive a solid economic return. So it does vary. So I would say, it's kind of in that probably 40% to 50% occupancy range depending on the architecture of how the revenue comes in.
Chris Woronka -- Deutsche Bank -- Analyst
Okay. Yes, understood. Very helpful. Thanks guys.
Keith A. Cline -- President and Chief Executive Officer
Thanks, Chris.
Operator
Thank you. Our next question comes from Omer Sander from JPMorgan. Please go ahead.
Omer Sander -- JPMorgan -- Analyst
Hey everyone, thanks for taking my questions. I hope do you -- u guys are and your families are well and healthy?
Keith A. Cline -- President and Chief Executive Officer
Same to you.
Omer Sander -- JPMorgan -- Analyst
Thank you. So first, on the proceeds from asset sales, how is your thinking on the use of proceeds change? I guess the portion of proceeds used to pay down debt, made them reading too much into it, the portion of proceeds used to pay down debt for assets sold in the 1Q and 2Q today was a bit lower than 2019. I guess with industry pressures, does the amount that you can deploy versus what you required to hold come down given the CMBS agreement?
Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer
Yes, good afternoon, Omer, this is Dan. I think big picture, the way we've been approaching it as you know the CMBS agreements require that the allocated loan proceeds plus a 5% to 10% premium. Our first net proceeds sales -- gross proceeds from sales are first allocated to paying down that to the CMBS. And so as we've managed it over time, we've paid down to at least the extent required under the CMBS, and more recently over the last six months, when we have open windows to pull out cash, we've been doing that as Keith mentioned in his remarks to enhance our liquidity. As we move forward, we would expect given the deteriorating demand and the resulting drop in EBITDA that we would be below the threshold levels in the CMBS and therefore all of the proceeds from asset sales will be required to pay down CMBS debt.
Omer Sander -- JPMorgan -- Analyst
Okay, that's helpful. Thank you. And then just one follow-up, I guess, on one of the earlier comments on the -- I was hoping you could elaborate on the state of the financing markets when you're looking at these asset sales. How much is that a sticking point versus investors or buyers really just looking to see how things kind of come together for the next couple of weeks?
Keith A. Cline -- President and Chief Executive Officer
As you mentioned in kind of our prepared remarks. During the month of April, just given the the rapid steep contraction in the worst month in the history of our industry. The financing markets paused on the deals that we had in the pipeline and the buyers of those assets had to just wait and see. Obviously, since then we've seen some rebound in occupancy, some recovery in the assets that we own and operate as well as the ones that are in the non-core portfolio and you've seen deals now start to close so as I mentioned in my comments, it's a combination of both. I think in April, really the lending markets paused to see where the bottom of this potentially could be and see if there's any recovery. And since then, we've seen the financing markets reengage but you still do that -- you still do have some buyers that are also trying to gain additional visibility by pausing. And we continue to work with those buyers on the deals that they have spent with us
Omer Sander -- JPMorgan -- Analyst
Great, thank you.
Operator
Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back over to Mr. Keith Cline, President and CEO for closing remarks. Please go ahead.
Keith A. Cline -- President and Chief Executive Officer
I want to thank all of you for your interest in CorePoint Lodging and listening in today. And we wish all your families a lot of safety and health as we all work through this. Thank you.
Operator
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Becky Roseberry -- Senior Vice President of Finance and Investor Relations
Keith A. Cline -- President and Chief Executive Officer
Daniel E. Swanstrom -- Executive Vice President, Chief Financial Officer
Chris Woronka -- Deutsche Bank -- Analyst
Omer Sander -- JPMorgan -- Analyst
