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CorePoint Lodging Inc. (NYSE:CPLG)
Q2 2020 Earnings Call
Aug 10, 2020, 7:00 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 Q2 2020 CorePoint Lodging Earnings Conference Call. [Operator Instructions]. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I'd now like to hand our conference over to your speaker today, Ms. Becky Roseberry. Please go ahead, madam.

Becky Roseberry -- Senior Vice President-Finance

Thank you. Good afternoon, and welcome to CorePoint Lodging's second 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 quarterly report on Form 10-Q for the quarter ended June 30th, 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 August 10th, 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. First, I'd like to provide an operational update, highlight our continued COVID-19 response efforts to reduce expenses and preserve liquidity and review our current cash burn levels. Then I'll briefly discuss the status of our real estate strategy. And finally, the system platform improvements under way with Wyndham. Dan will then provide an update on our operating results, liquidity profile, balance sheet and additional details on non-core hotel sales.

As it relates to operations, all of our 230 hotels are now fully open. This compares favorably to our peak of 30 hotels that were temporarily not accepting transient guests. During our first quarter earnings call in May, we shared early second quarter operating insights. Since that time, we have experienced a market improvement in operating results as evidenced by a significant reduction in our monthly cash burn rate, RevPAR index share outperformance, and a year-over-year RevPAR change for the second quarter that outperformed the broader industry.

This recent outperformance is driven by a combination of factors, including: Strengthening transient room demand, primarily leisure travel; some recovery in certain segments of corporate travel related to essential businesses, such as construction, transportation and project related businesses; and the halo effect of our properties being located primarily in transient drive-through markets adjacent to interstates as well as destination locations. Additionally, our cost containment efforts at the property level remain in place such as 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 while serving our guests during this challenging time.

More specifically, our revised labor standard reflects 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. The end goal of these containment efforts is to reduce our monthly cash burn rate. We noted in our last earnings call that for the month of April, which had an occupancy level of approximately 21% and RevPAR of approximately $13.50, our estimated property level cash burn was in the range of $9 million to $10 million, with the total Company cash burn in the range of $13 million to $15 million.

We are very pleased to report that for June, which had an occupancy level of approximately 50% and RevPAR of approximately $34, we saw a positive $3 million of property level EBITDA. This positive hotel level performance for June brings us closer to a monthly breakeven for the total Company, with our total interest expense at approximately $3 million and our cash corporate G&A between $1 million to $2 million monthly.

Additionally, as Dan highlighted last quarter, we have significantly scaled back all non-essential capital expenditures to an estimated annual spend of $15 million to $20 million. While we are pleased with this recovery to date, we remain cautious about the uncertainty in the months ahead for the lodging industry as we continue to navigate through the ongoing global pandemic. Our hotels have benefited from a strong recovery with leisure travelers as demonstrated by higher occupancy and rates on weekends compared to weekdays and relative outperformance in drive to destination markets, including those in Florida, Arizona and California.

As we look ahead to the fourth quarter of this year and the first quarter of next year, two quarters which are historically part of our slower non-peak season, we are cognizant of the potential for operational declines. We're currently benefiting from seasonal leisure travel, which could abate as we enter quarters that historically have a higher dependence on business travel.

As overall business conditions change, our cost control initiatives will continue to be adjusted accordingly. Turning to our real estate strategy. As we discussed on our previous call, we did experience a slowdown in asset sales during the first half of the second quarter due to delays in the financing process, including with SBA loans compared with prior periods and with some buyers waiting until they had more forward visibility. In the second half of the quarter through today, our investments team has been very active on existing transaction closings and dialogue with prospective buyers.

For these buyers, there continues to be a high level of interest in owning a property with the La Quinta flag. Since our last call, we have closed on an additional 14 hotels for total proceeds of approximately $67 million. We have another 19 hotels under contract that are expected to generate total gross proceeds of approximately $84 million, which, if completed this year, would bring us to a total of 59 hotels sold in 2020 for anticipated gross proceeds of $264 million.

While this rebound in assets out pace is encouraging, there could be additional headwinds due to the macro uncertainty in the months ahead. But as we have noted in the past, this is a multiyear process. We are focused on delivering on the significant value creation that we have demonstrated and believe we can continue to generate through this non-core disposition strategy. I would also note, given the current operations volatility due to the impact of COVID-19, we incurred a $52 million non-cash GAAP impairment charge during the quarter.

Lastly, I would like to provide an update on system platform improvements under way with Wyndham. Wyndham remains generally on schedule to meet the 2020 deliverables under our settlement, the deployments of certain legacy booking tools were completed and the implementation of the enhanced dynamic best available rate setting tool is required under the Wyndham settlement to be completed by no later than the end of 2020.

As a final note, I would like to take the opportunity to thank not only our corporate team for how well they have responded to the challenges we have faced over the past several months, but I would also like to thank those individuals working at our hotels to diligently provide great service to our guests in this difficult environment.

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 second quarter operating results and recent trends. I will also provide updates on our liquidity position, balance sheet and non-core disposition strategy. The comparable RevPAR decline of approximately 62% during the second quarter was driven by a 27% decrease in ADR and 3,450 basis point decline in occupancy.

As expected, the decrease in the year-over-year revenues is primarily due to the significant reduction in room demand, resulting from the impact of COVID-19 as well as the impact of sold hotels. This contributed to the decline in adjusted EBITDAre to a negative $8 million for the second quarter. We continue to be encouraged by the early signs of recovery in demand for our hotels off of their mid-April weekly occupancy low point of approximately 16%.

During the second quarter, hotel room demand increased each month on a sequential basis, resulting in an acceleration of comparable occupancy from 21% in April to 38% in May to 50% in June. This drove a gradual improvement in comparable RevPAR from $14 in April to $34 in June. And preliminary results for the month of July are even stronger than June with comparable occupancy of 53% and comparable RevPAR of $38. As we highlighted on our call last quarter, we believe our portfolio of select service hotels, predominantly focused on the mid-scale segments, is well positioned to capture room demand coming back online in particular, as it relates to leisure travel and the associated demand for many of our drive-to destination and interstate adjacent hotels.

Combined with our mostly suburban markets portfolio footprint, these characteristics have proven to be favorable for the CorePoint portfolio relative to the broader industry's recent operating performance. From a liquidity perspective, our cash balance today is approximately $195 million, which excludes lender and other escrows of approximately $31 million. Our current cash level is slightly more than $190 million of cash we had at the time of our last earnings call on May 20th. Our current liquidity reflects the significantly lower total monthly cash burn implied within our recent operating results, driven by the improvement in portfolio RevPAR and the implementation of various cost containment measures at both the corporate and hotel level and the benefit of franchise fee payment deferrals until September, totaling about $11 million. While we are encouraged by this recent improvement in operating results as compared to the month of April, the fact remains we are operating in a challenging lodging environment, and our near-term priorities remain focused on cost containment and capital preservation initiatives.

Turning to our balance sheet. At the time of our last earnings call on May 20th, we had paid our CMBS debt down to $865 million through the use of asset sale proceeds. As of today, we have paid down our CMBS debt even further to $807 million using net proceeds from our most recent asset sales, while our revolver balance drawn is $110 million. Our current weighted average interest rate is approximately 3.2%.

As we mentioned on our last call, we were pleased to execute a loan amendment with our bank group that extended the maturity of the revolver to May 31st, 2021, and that eliminated both the total net leverage and interest coverage financial covenants through the extended maturity. As part of the amendment, we are required to repay $25 million of our revolver balance outstanding in $5 million per month increments starting later this month through December of 2020.

With respect to the CMBS facility, in June, we exercised our first extension option to extend the maturity date to June 2021. We have additional borrower options to further extend the maturity date for another four successive terms of one year each. Both the CMBS and revolver extensions as well as the revolver amendment provide additional and enhanced balance sheet flexibility. The successful execution of our noncore hotel disposition program continues to be a proven value creator. During the second quarter, we closed on the sale of seven hotels for total gross proceeds of approximately $29 million. These transactions were completed at attractive valuations, an average 2019 revenue multiple of approximately 2.5 times, 2019 hotel adjusted EBITDAre multiple of approximately 16 times and about $40,000 on a price per key basis.

Subsequent to quarter end through today, we have closed on the sale of an additional ten hotels for gross proceeds of $51 million, representing an average 2019 revenue multiple of approximately 2.6 times, 2019 hotel adjusted EBITDAre multiple of approximately 21 times and about $42,000 on a price per key basis. We are very pleased to close on the sale of these 17 hotels over the last three months at highly accretive and attractive valuation levels.

As we've highlighted previously, we believe there is a 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. We have been and will continue to be patient and thoughtful in our execution of this non-core disposition program to realize meaningful value for these hotels.

With that, we'll open the lines for your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] And we do have a couple of questions already in. First question is from the line of Chris Woronka from Deutsche Bank.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good afternoon guys.

Keith A. Cline -- President and Chief Executive Officer

Hey, Chris.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, thanks for all the information and congratulations on more progress on the asset sales. Wanted to kind of ask you if, given the differences in the recovery you're seeing in different markets, does any of what you're seeing or what you expect to see over the next several quarters change any of the calculus on the asset sales in terms of selling more or selling fewer or selling different hotels?

Keith A. Cline -- President and Chief Executive Officer

So Chris, as we laid out on our last call and we kind of put a sizing on our disposition program, we stated that we're focused on this core portfolio of 105 hotels, really focused on our higher quality and higher growth potential assets, and as Dan mentioned, located primarily in top 50 MSAs, that hasn't changed. And our view that this is a multi-year process hasn't changed. And as we mentioned on our Q1 call, we did say it was reasonable to expect that some slowing would occur, and we did see that in the first part of the second quarter. But are certainly very pleased that there continues to be a high level of interest in these assets, and we're continuing to get exit valuations on these properties that are highly accretive, even if you look at 2019 multiples of both revenue and EBITDA. So our view hasn't changed, and we still believe it's a multiyear process that we'll continue to work toward.

Chris Woronka -- Deutsche Bank -- Analyst

Okay. Very helpful. And then pretty impressive market share gains in the quarter. Is there any -- do you have any sense for kind of where you're pulling that market share from? Is it -- I mean, I assume the comp sets are the same in each quarter. But do you think it has to do with some of the brands you're typically competing against? Or are you pulling demand up or down? Or is -- did you benefit from other hotels being closed? Is it possible to know any of that?

Keith A. Cline -- President and Chief Executive Officer

Well, obviously, as you think about, there's a lot of factors that can affect the market share gains in the business. Certainly, we've worked very hard to ensure that our rooms were open and available for any demand that shows up in the market and as we mentioned, we went from a peak of 30 hotels that weren't accepting transient reservations to a situation today where all of our hotels are open. The reality is, I mean, this really highlights the benefit of the chain scale that we compete in, right, mid-scale, upper mid-scale select service. We've got transient either drive through or destination locations, a lot of interstate adjacencies, which if you take a look at the STR results that are out there, the interstate locations are the markets that are clearly dominating.

What I can tell you is that the La Quinta brand in this environment has resonated with the leisure transient traveler that's out there. And certainly, the essential businesses from a corporate standpoint that are traveling are guests that know this brand well.

So we've been very focused on evaluating demand on a hotel-by-hotel basis and working alongside our management company to ensure that we're testing the elasticity and pricing in those markets to generate solid financial returns, and we've been pleased.

So I think it's a combination of factors. But clearly, right now, we're benefiting in this environment.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very good. Thanks Keith.

Keith A. Cline -- President and Chief Executive Officer

Thanks Chris.

Operator

And we do have one more question on the line from the line of Omer Sander from J.P. Morgan.

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

Hey, everyone. Appreciate the color, and thanks for taking the question.

Keith A. Cline -- President and Chief Executive Officer

Hi, Omer.

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

So just want to ask on the sequential improvement, and I saw you gave that in the release, the April, May and June, can you -- I know it's early, but can you discuss kind of those trends in July, whether it be the RevPAR, opex and cash burn for the month? Presumably, it improved just based on the SCR data improving off of the June level. And how do you think about the cash burn going forward heading out of the seasonally heavy transient travel period?

Keith A. Cline -- President and Chief Executive Officer

Well, Dan mentioned in the comments that kind of July month-to-date, occupancy is approximately 53%. So it's about 3 points above where June finished. RevPAR is at about $38, so about $4 above where June finished.

We don't have any insights into EBITDA performance at this point in terms of how the month is going to shake out, but we do continue to monitor our overall cost architecture, labor model, labor hours, etc. And we're continuing to operate within the standards that we've set over the past many months in our business. So we're certainly encouraged that in June, we came very close to breaking even at the corporate level. And we'll update the markets as we get to Q3 in terms of how that has progressed.

But you're right, we are remaining -- we are retaining a healthy amount of caution around the third quarter because there's a lot that we don't know. What does back-to-school look like? What does the end of what's typically the summer season look like? And the move from transient to corporate travel, given the corporate travel has abated quite a bit. So we're going to continue to monitor the business on an everyday basis. And we'll update the markets as we have something to share.

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

Okay. I appreciate it. And you mentioned it briefly, but the corporate travel, I know it's a small portion of your business, but is there a specific industry that your hotels have attracted over the last couple of months, whether it be -- I know you mentioned contractors, or maybe recovery workers or healthcare workers, is there anything -- is that kind of been consistent over the course of the recovery, early recovery?

Keith A. Cline -- President and Chief Executive Officer

Yeah, it has certainly mirrored, as our business levels increased, right, not only do we see an increase in transient leisure travel as we moved throughout May and into June and certainly into July, but people that are viewed as essential workers that are traveling to keep the country open, everything from the construction industry to transportation to a lot of different project related businesses you can see out in the hotels. Historically, the La Quinta brand has had a healthy mix of what we call traditional leisure and then corporate-related business. Certainly, as many people in the industry have experienced the typical white collar corporate traveler just isn't there in force yet. But as you think about blue-collar travelers, in the types of industries that we mentioned during the prepared comments, are certainly out there, and they certainly are showing their affinity for the La Quinta brand right now.

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

Okay. And then just last one. For the seven hotels sold during the quarter and then the ten sold subsequent to quarter end, were these discussions generally ones that started pre-COVID? Or were they ones that sort of developed in more recent weeks and months?

Keith A. Cline -- President and Chief Executive Officer

As we mentioned in the prepared comments, we've been focused on closing transactions that were under contract. Our investments team, led by Rob Song has constant conversations with potential buyers of our noncore portfolio. But the primary focus has been on hotels that were under contract that we were seeking to get closed.

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

Okay, appreciate it. Thanks so much.

Operator

And there are no other questions on the line.

Keith A. Cline -- President and Chief Executive Officer

Well, I want to thank everybody for their continued interest and support of CorePoint Lodging. Everyone, please have a nice day.

Operator

[Operator Closing Remarks].

Duration: 23 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

Chris Woronka -- Deutsche Bank -- Analyst

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

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