LuxUrban Hotels Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 11 speakers on the call.

Operator

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.

Operator

Please go ahead.

Speaker 1

Thank you for joining us for Luxe Urban Hotels 2023 Q3 financial results conference call. Our speakers for today will be Brian Ferdinand, Chairman and Co CEO and Shanuq Qatari, 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 1930 3 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.

Speaker 1

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 effects on the company, and there can 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 ks for the year ended December 31, 2022, and any updates to those factors set forth in subsequent quarterly reports on Form 10 Q or other public filings.

Speaker 1

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.

Speaker 2

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 1st mover status, asset light approach and focus on turnkey properties to identify and lease dislocated hotel properties in destination locations across the U.

Speaker 2

S. In the Q3 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 and L in future quarters. We remain true to our commitment to grow the business via non dilutive funding.

Speaker 2

To that end, we closed our Series A preferred stock offering in late October and generated gross proceeds of $7,000,000 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 dilutive 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.

Speaker 2

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 refinancings. With that, I'll turn it over to Shanu Kothari, our Co CEO and Chief Financial Officer, for a review of our financials.

Speaker 3

Thank you, Brian, and thank you for joining us today. As Brian noted, we are very proud of our Q3 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.

Speaker 3

Net rental revenue nearly tripled to $31,200,000 from last year's Q3, driven primarily by an increase in average units available to rent to 1423 from 5.71 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 31, 2022. Occupancy for the 1st 9 months of 2023 was 81%. Q3 2023 total cash rent expense was $7,800,000 or 25 percent of net rental revenue compared to $2,800,000 or 24% of net rental revenue in the same period last year. Non cash rent expense amortization was 2,000,000 dollars in Q3 2022.

Speaker 3

Gross profit rose to $7,800,000 or 25 percent of net rental revenue from $4,900,000 or 42 percent of net rental revenue in Q3 2022. Gross profit in 2023 Q3 included other expenses totaling $13,600,000 as compared to $3,900,000 in last year's Q3. 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 $2,000,000 from 6.4 percent or 6.4 percent of net rental revenue from $5,000,000 or 42.8 percent 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.

Speaker 3

Income from operations improved to $5,100,000 from an operating loss of 400,000 dollars Income before the provision of income taxes improved to $2,900,000 from a loss of $4,000,000 Net income improved to $4,900,000 or $0.11 per share from a net loss of 3,200,000 dollars or negative $0.13 per share. Adjusted net income adjusted cash net income rose to $5,700,000 compared to $900,000 in Q3 2022. For the quarter ended September 30, 2023, our EBITDA and EBITDA margin increased to $8,400,000 or 27% respectively, up from $2,400,000 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.

Speaker 3

At September 30, 2023, cash and cash equivalents totaled $4,800,000 a $3,700,000 improvement from December 31, 2022. Restricted cash was unchanged at 1,100,000 dollars 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 7,000,000 dollars 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 $5,200,000 from $14,000,000 at December 31, 2022 and net debt in the quarter was around $400,000 down from $4,900,000 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.

Speaker 3

Our working capital position improved to $6,600,000 from a negative $2,400,000 at June 30, 2023 and from a negative $13,900,000 in December 31, 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 4 properties, a total of 3 60 units, all in New York City. Looking at our portfolio, as of September 30, 2023, the company leased 16 properties with 1446 units available for rent. As of November 8, 2023, the company leased 18 properties with 1599 units available for rent.

Speaker 3

And as of November 9th or November 8, 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 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 RevPAR for 2023 will be between $2.50 $2.80 per room, while achieving over the year a target of quarterly gross margins of 30 plus percent, both in 2023 2024. We expect G and A including 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 2,500 to 3,000 units.

Speaker 3

As always, the timing of reaching our goals may positively impact our revenue guidance. As a result of a partnership with Wyndham, we're pursuing larger, higher quality properties than we did previously. Although this has elongated our close 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.

Speaker 3

All the initial properties are now co branded under the Bilox Urban trademark collection by Wyndham brand. 2nd, 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 2 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 2 new initiatives over the next few quarters. 1, improve occupancy in seasonal markets, which we believe will result in much higher revenues.

Speaker 3

And the second, as with the business well over $100,000,000 run rate, formally focused on ancillary revenue and co branding opportunities. We believe that over the next 2 to 4 quarters, we can add 5 plus percent top line revenues and 3% to 5% margin improvement pursuing these new revenue streams. I'll now turn the conversation back over to Brian.

Speaker 2

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

Operator

Thank you. At this time, we'll be conducting a question and answer Our first question today comes from Allen Klee of Maxim Group. Please proceed with your question.

Speaker 4

Good morning. Congratulations on the strong results. First question is on RevPAR. You don't report it, but it looks like it did drop it's up very strong year over year, but I think Q3 was down a little from Q2. My question now is, is that mix related or is it anything to do with apples to apples?

Speaker 4

And to what extent does the fact that you have to you rebranded some of the properties to London that maybe there's a temporary time forward where they're not operational when you're carrying them and that could improve once that's fixed? Thank you.

Speaker 2

Thanks, Alan. So I'll take that and then turn it over to Shneur for additional follow-up. So really a combination of 3 things. First is some seasonality within 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.

Speaker 2

So there was some 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 a lot of questions around our business is could we withstand the softening in RevPAR? And as you can see the leverage in the business, we did see a softening in RevPAR through those combination of factors and the business still performed very well, really, really well.

Speaker 2

So I think that should answer some questions in terms of the ability for RevPAR to create higher RevPARs to create additional margin expansion. And then if you do get a softening RevPAR for a variety of reasons, including a softer economy, the business really still performs. Suneet?

Speaker 3

Yes. So Alan, the front part of Brian's response, a lot of the Q2 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 coming still out of COVID summer travel pent up. And so that was part of the Q2 increase versus Q3.

Speaker 3

So the softening is light. We're not seeing the softening in New York market. Personally experienced where full occupancy were 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.

Speaker 4

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 am 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?

Speaker 4

Yes.

Speaker 2

I would go ahead, Brian. I'll let you take that.

Speaker 3

Okay. So I mean, we have 2,032 units under MLA, of which 1600 are operating. The bulk of that will be operating, I would say, 1800 plus units shortly, maybe in the next week or 2, actively discussing that on an operational level. So my thought on this is the cycles in some cases are longer just based on the process that we're going through. But I would say between $2,000 to $2,500 would be what is operational.

Speaker 3

So maybe somewhere in the middle of that, with the balance being under MLA. So we'll enter 2024 somewhere in between 25,000 to 3000, maybe on the higher end. One single property can get us well over the range, right? There's a number of assets in the pipeline that are 200, 300 keys that could easily get us over that. So it just depends on when the chips drop.

Speaker 3

But from a revenue guidance perspective, we're very comfortable as we've always been with our guidance.

Speaker 4

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 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 upfront 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?

Speaker 4

Thank you.

Speaker 2

Sure. So our strategy so the way that the Wyndham financing works is they provide key money or DAN money development 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 substantial capital into the business, can then get redeployed into the business for new acquisitions, working capital at the property level, etcetera. So we do put out the capital and then we get reimbursed on opening for the property that's going live.

Speaker 2

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.

Operator

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

Speaker 5

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 7 new properties that you brought on the 34 Star?

Speaker 5

And then I guess how Wyndham has played into the role of the developmental of

Speaker 2

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 5 star properties.

Speaker 2

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 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.

Speaker 5

Yes, that's helpful. And then as a follow-up, you talked about occupancy in 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?

Speaker 2

Sure. I'll let Shneur take that.

Speaker 3

Yes. So occupancy, so again, New York continues to stay very robust, right? 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 there.

Speaker 3

Miami continues to stay seasonal, right? So 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, coffee,

Speaker 6

focus on

Speaker 3

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 out of boys when they have great stays. They usually put a review down when they're unhappy.

Speaker 3

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 what how to improve, especially where it's seasonal, where we have to work much harder to get the occupancy up. But look, I mean, just as a management team, as the underlying comment, we've collapsed some of the team as a function of really sort of getting our hands more deeper involved in the business and focusing on the operations, which is occupancy and then I mentioned as well ancillary revenues. So these are two things that are extremely low hanging fruit.

Speaker 3

We can't guarantee that will happen next quarter, but we can definitely say that we're going to put full effort into it in the next couple of quarters, we're going to see a material impact.

Speaker 5

Awesome. Thank you, guys.

Operator

The next question is from Chris Tuttle of Caterpillar Investments.

Speaker 7

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 and I wanted to know behind your 2024 guide, what's

Speaker 4

sort of

Speaker 7

your RevPAR assumption looking at next year?

Speaker 3

Yes. So RevPAR next year, we haven't adjusted that and we're being conservative based on a couple of factors, right? So one is economic overhang, which I think from the hospitality perspective has been overdone. I mean, 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 where there's overhang with economic uncertainty.

Speaker 3

The second is RevPAR is heavily weighted on what type of properties we acquire. So 4 Star is going to be on the higher end, 3 Star is going to be a lower end. Markets also matter. New Orleans is much lower than New York, equal star comparison. So 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?

Speaker 3

We have strong visibility into what we think is coming online over the next 3 to 4 months, but after that sort of depends. So for example, in Brian's world, he'll reject the property and then they'll come back, right, because they're not quite at the refinancing deadline. They'll try to garner a better alternative, but they'll come back to the table potentially in 3 or 4 months. And so even though we may have passed on a property that's a 4 star may come back into the pipeline. So there's a number of factors.

Speaker 3

I think we're being conservative. We've always been conservative. We have initiatives here, obviously ancillary revenue and occupancy will drive RevPAR up. But we want to make sure that we provide guidance that's achievable and we'll manage through that.

Speaker 7

Okay. I think I can read into that. Can you talk a little bit about a little more about your you talked about your 2 initiatives and one of them was the ancillary 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?

Speaker 3

Yes. So early check-in, late checkout, providing at the higher end properties more of a I wouldn't call resort fee because that's not well received at this point, but more of a bundled service offering. Sundry Bar, we've got something that we're talking to, which is a large sort of a digital assistant platform. So there's a number of things that we get approached on. As we continue to grow the portfolio, we become much more of a sought after candidate to continue to enhance the guest experience through 3rd party co branding and obviously adds revenue to us.

Speaker 3

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 is a good operational team. We're going to start focusing on that.

Speaker 2

And one additional thought one additional item there is we've recently signed an agreement with Amazon Hospitality pilot program in a number of our hotels and that'll be rolling out and I believe more details on that coming soon. That sounds interesting.

Speaker 7

Just a couple more. So now that you so as you acquire and bring these properties online, they're one offs each of them with their individual contracts for the WiFi credit processing, whatever. My question is, as you guys get more scale, are you able to go to a payment processor like a Shift4 or a national communications company like an AT and T or something to get a better and more manageable deal on things like communication services and payment processing? I mean, is that 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?

Speaker 2

Chris, could you just repeat that? I just I want to make sure I fully understood the question.

Speaker 7

Yes. 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 and T for all the Wi Fi and hotel communications that gives you better price performance basically?

Speaker 2

Yes, absolutely. So there's as we get scale, there's leverage across multiple pieces of the business. Obviously, driving commissions down, right, payment processing, which is a large cost inherent in the business, 98% of the transactions or 99% are credit card processing. Lower rates there have pure incremental margin expansion, supply ordering, right? Wyndham, we're leveraging Wyndham system for a number of things in terms of retail supplies.

Speaker 2

And then in addition, we're working on a number of partnerships. When Suneet 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 a lot of the product comes for free, right? So it's pure incremental margin, and they're looking to place product even down to certain pillows, mattresses.

Speaker 2

As you get scale, there's a lot of incremental ability to generate revenue across the portfolio.

Speaker 7

Okay. All right. Thanks. I appreciate that. And let's see, I had one last question and then I'll get off is, where are we in the transition or the uptake of you guys talk about the you pay the CTA fees or the OTA fees, I should say rather.

Speaker 7

And then as you're on the Wyndham platform, you'll have the opportunity to enjoy more bookings through that platform,

Speaker 2

which is a

Speaker 7

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?

Speaker 2

Currently, our 100% of our hotels that were from the prior portfolio, those 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.

Speaker 7

Okay. All right. Thanks, guys. I'll let the next person jump in.

Speaker 2

Thanks, Chris.

Operator

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

Speaker 8

Good morning, guys. I think all my questions have been covered. Just one quick one on the taxes, that $2,000,000 benefit tax, is that just a timing issue? And then how do we look at tax rates for the Q4 and maybe even into 2024?

Speaker 9

Thanks.

Speaker 3

Yes. So the tax benefit was related to upon further inspection. You think about 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 1st year we were a C Corp.

Speaker 3

The ability to deduct the large charge from last year was determined, which we thought there was a limitation to that. So that's the hence the big benefit. And so 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 approach sort of maybe Q2 onwards next year, about 30% would be where we penciled in all in with state and federal taxes.

Speaker 8

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

Speaker 3

Yes. 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 normalize from that point forward. Again, it's based on the large deductible nature of the rev share accounting we did last quarter.

Speaker 8

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

Operator

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

Speaker 9

Good morning, gentlemen. Most of my questions have been asked, but I actually have 2 follow-up questions. First on the Wyndham relationship, can you provide some more insights in terms of how they help you with improving your RevPAR 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 our distressed property vendors coming to hotel properties coming to you and increasing volumes or the same volume as you're gaining more recognition in the market? Thanks.

Speaker 2

Great. Thanks, Leah. So first question, Wyndham has the largest rewards program in the world, approximately 110,000,000 members worldwide, 9,000 hotel footprint, 500,000 to 600,000 keys, etcetera. 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 Luxe Erving portfolio drives additional volume, should result in increased RevPAR.

Speaker 2

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 new entrant into hospitality, a couple of years old, leveraging co branding by Luxurban trademark collection by Wyndham enhances the property value.

Speaker 2

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 typical boutique hotels. So good quality control around employee interaction, customer service functions and also property level upkeep. So helping there.

Speaker 2

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.

Operator

The next question is from Matt Sculen of Ancora.

Speaker 6

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?

Speaker 3

Yes. So the way we account for it, the spirit of the agreement is 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 reduction of expenses over the 20 year course.

Speaker 3

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 So again, the spirit of it is, it's not really a liability. It's booked as a liability. It's 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.

Speaker 6

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 Luxurban? What is that going to look like on the income statement?

Speaker 3

Yes. 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 call it 3%, 4%, 5% than what we had previously.

Speaker 3

If we book if the guest books off of a 3rd party platform, they have negotiated rates off the 3rd 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 0 and day 1, as traffic goes towards their site, we would incur greater expenses. And then over time, we'd expect to achieve 70%, 80% plus of bookings off the Wyndham platform, which is a overall margin savings for us, right? So in the magnitude of a few percent, which is thinking about run rate business beyond $100,000,000 going to $200,000,000 meaningful dollars.

Speaker 6

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

Speaker 2

Yes. We think we'll see 3% to 4% minimum margin improvement, net of Penguin and All Clusive.

Speaker 6

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

Speaker 2

Sure. So those receivables are made up of we took over so the OTA receivables are pretty consistent with last Q. We took over 2 properties that had receivables due from New York City that we turned over. So that is the bulk of the increase this year. So the City of New York receivables for programs really one time.

Speaker 2

As we took over possession of 2 properties, there was receivables through the quarter. OTA receivables were about $5,000,000 or $6,000,000 consistent with last Q, it should stay static around there. That was really a one time turnover on the 2 particular hotels that we took over this Q.

Speaker 6

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.

Speaker 2

Okay. Yes. I would say 15% of the 2 revenue.

Speaker 6

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. I guess what gives you the confidence to put out kind of some big numbers like that and how confident are you in those conversions of those LOIs?

Speaker 6

Over what timeframe will they occur?

Speaker 2

Yes, sure. Highly confident, but we wouldn't have put it out. Historically, we have met or exceeded guidance, both in earnings and unit count. High conviction, deep in the process on both lease negotiations and or signing of leases on those, de 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.

Speaker 6

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

Operator

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

Speaker 10

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 receivable. The process of retained funds, I think, relates obviously to the payment processor.

Speaker 10

And I think if I recall, you all put out a press release late in 'twenty two, early in 'twenty three around the switch and 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 do you how should we think about the processor retained funds balance developing as we go forward at the rate of growth you're seeing?

Speaker 2

Yes, great. So if you see it's no longer increasing. If you see, I think it went down about $1,100,000 Q over Q, right? So we did get some release there. I think it went from 6 and change down into the 5s.

Speaker 2

So we got a release of about over $1,000,000 that came into working capital over the Q, which was deployed into the business. So I think over the next 2 or 3 Qs, you should see that come down to a negligible number. It certainly will not increase and it will come down through the balance of the next few quarters as we get those funds released working with those processors.

Speaker 10

So Brian, does that become oh, I'm sorry.

Speaker 3

And but thinking about it from when that balance peaked at the end of last year, the revenues are almost not quite, but 2.5 times. So as a percentage of revenues, it's gone down considerably, right? And so it's really meant for protection of holdbacks and so forth. But so as a percentage, it's plummeted and they've also started releasing capital.

Speaker 10

No, absolutely. But I guess where I was going because now that you're obviously payment processing almost entirely through the Wyndham platform, does that go down to just a few $1,000,000 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.

Speaker 2

It does. It should eventually go to 0, 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 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 we work over the time periods of those contracts, the money gets released.

Speaker 2

So we'll provide working capital. And it should get to 0 over the next 3 to 4 quarters.

Speaker 10

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

Operator

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

Speaker 2

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

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Key Takeaways

  • Record Q3 performance: Luxe Urban Hotels delivered its first GAAP net income quarter since going public, driven by record net rental revenue and EBITDA.
  • Non-dilutive capital raise: The company closed a $7 million Series A preferred stock offering to fund rapid portfolio expansion without diluting existing shareholders.
  • Wyndham partnership: All 17 initial properties have been onboarded under the Wyndham brand, leveraging its 110 million-member rewards program to boost distribution and margins.
  • Strong financial metrics: Q3 net rental revenue nearly tripled year-over-year to $31.2 million, RevPAR rose to $274 year-to-date, occupancy reached 81%, and net debt fell to $0.4 million.
  • Raised guidance: Management now expects to operate 2,500–3,000 units by year-end, target 2023 RevPAR of $2.50–$2.80, and sustain 20%+ EBITDA margins short term (25%+ long term).
AI Generated. May Contain Errors.
Earnings Conference Call
LuxUrban Hotels Q3 2023
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