Lodgian, Inc. Q3 2008 Earnings Call Transcript

Lodgian, Inc. (LGN)

Q3 2008 Earnings Call

November 5, 2008 11:00 am ET

Executives

Debi Ethridge - Vice President of Finance & Investor Relations

Peter Cyrus - Interim President and CEO

Jim McGrath - Vice President, Hotel Operations

James MacLennan - Executive Vice President and Chief Financial Officer

Presentation

Operator

Ladies and Gentlemen, thank you for standing by. Welcome to the Lodgian third quarter 2008 earnings conference call. (Operator's instructions) As a reminder, this conference is being recorded today November 5, 2008.I would now like to turn the conference over to our host Ms. Debi Ethridge, Vice President of Finance and Investor Relations of Lodgian. Please go ahead.

Debi Ethridge

Thank you David, and Good morning everyone. Earlier this morning Lodgian released third quarter results for the period ended September 30, 2008, and I hope everyone has had a chance to review the earnings press release by now. If you did not receive a copy of the press release, you may view a copy at our website, www.lodgian.com, by clicking on Investor Relations and then on Press Releases.

Today’s conference call is being transmitted live via telephone and webcast. A recording of the call will be available on our website as well as by telephone until midnight on Wednesday, November 12 by dialing 800-405-2236, reference number 11121025.

This conference call is the property of Lodgian and any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of Lodgian is prohibited.

Before we begin, I would like to remind you that in keeping with the SEC's Safe Harbor guidelines, today's conference call may contain forward-looking statements about Lodgian that are subject to certain risks that could cause results to differ materially from those projected. These risks are discussed in our filings with the Securities and Exchange Commission, including risks relating to the development and operation of hotels, the timing, consummation and final terms of hotels sales, the availability of capital, geopolitical events, competition and cyclicality of the lodging industry. Additional risks are discussed in our filings with the Securities and Exchange Commission.

During this call we may refer to certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, which we believe to be common in the industry and helpful indicators of our performance. In keeping with the SEC regulations, we have provided and encourage you to refer to the reconciliations of these measures to GAAP results in our earnings release.

Now to provide you with some insight into Lodgian's third quarter 2008 operating and financial results, let me introduce our speakers for today; Peter Cyrus, Interim President and Chief Executive Officer; and James MacLennan, Chief Financial Officer.

Now let me turn the call over to you, Peter.

Peter Cyrus

Thank you Debi. Good morning everyone and thank you for joining us today. The continued credit crisis and the slowing economy had certainly made for challenging times in the lodging industry. Both leisure and business travel have declined with the industry reporting revenues for available rooms or RevPAR down 1.1%. It is the industry’s first RevPAR decline since the third quarter of 2003 according to Smith Travel Research.

The next twelve to eighteen months are likely to be quite difficult for the hotel industry, but we believe that Lodgian is prepared for what lies ahead. Given the circumstances, our thirty-five continuing operations’ core hotels performed well during the 2008 third quarter posting a RevPAR decline of .5%, less than half that of the industry in general. These results include four hotels that were undergoing renovations during the 2008 third quarter.

Perhaps more important, our properties gained market share. We closed out the third quarter with a market share of 102% and we have now gained market share for five months in a row. We believe the investments we have made over the past several years to upgrade our portfolio clearly are paying off and positioned Lodgian well for the months ahead.

During the quarter, we sold one hotel, The Holiday Inn Marietta Georgia. This hotel was closed in 2006 due to a fire. Following the close of the quarter, we sold the one hundred twenty-seven room Holiday Inn in Glen Burnie, Maryland. As I mentioned, four hotels were undergoing renovation in third quarter which we calculated resulted in $400,000 revenue displacement during the reporting period.

Through September 30^th, we have deployed approximately $32 million in capital projects out of our budgeted $40 - $46 million capital allocation for the year. We would also like to announce that Jim McGrath Vice President of Operations will be leaving the Company on November 13 to pursue other business interests. He did an excellent job during his tenure here and we wish him well in his new endeavors.

We have a solid infrastructure with considerable bench strength and do not expect Jim’s departure to have any short term impact on our day-to-day operations. Our operating team has been through a number of economic cycles and has considerable expertise to face the challenges that lie ahead. We have implemented a number of cost savings and revenue generating initiatives.

I will turn over to James MacLennan to provide you with the financial details.

James MacLennan

Thank you Peter. Given the economic environment, thirty-five continuing operations hotels had a solid quarter. Twenty-two of our hotels gained market share taking us to 102% of market share in the aggregate and accomplishment of which we are pretty proud. September was our fifth consecutive month of RevPAR index improvement. During the quarter, we completed a $10 million ten month renovation of our Four Points by Sheraton Hotel in Philadelphia. We also just wrapped up a $15 million renovation of the Winton Dallas Fort Worth property and we are seeing improvements in both group and transient revenue before we were even finished with that project.

Over the past five years, we have significantly upgraded twenty-one of our continuing operations properties, which we believe makes us much more competitive than we were in the post 911 recession. These renovations have also had a positive impact on employee morale which we believe translates into higher service levels. Our guest satisfaction scores as measured by the brands are up at two thirds of our hotels year over year. And they are at the highest level they have been in four years.

While our cost containment has always been a major focus, we have redoubled our efforts this year for obvious reasons; and we have seen some excellent progress. We continue to invest in technology and systems that will allow us to operate more efficiently and cost effectively both on an outsource basis and directly.

Our single largest expense is payroll. In the third quarter, we worked hard to offset an increase in both payroll taxes and benefits. Through a better scheduling, we are able actually to reduce our total payroll. And in the third quarter we converted to a superior payroll management system which we believe will further improve the payroll management efforts beginning in the fourth quarter and into the future.

We also made real progress in our food and beverage margins. In spite of slightly lower year over year food sales, on the one hand, and higher food cost on the other, the overall profit margin in the food and beverage department improved by 110 basis points due to better control of both labor and cost.

We continually seek ways to improve the top line. We introduced a new sales and catering system in the third quarter that replaces a proprietary software program that had been unused for years. We are already beginning to see improvements in hotel sales team productivity marking efforts and increase rooms and catering revenues.

We are now in budget season for next year with a lot of our corporate clients. We have stepped up our marketing and direct sales efforts with our existing corporate accounts to meet the 2009 budget needs. We realize the corporations are cutting back on travel but we find that most are not altogether discontinuing travel. We are working closely with them to maintain the highest possible levels of occupancy and rate. And concurrently, we are working all distribution channels especially e-commerce where we are seeing the greatest year-over-year increases.

Our goal is to do our best to hold or increase rate. We believe it will be easier to build occupancy rather than rate when the economy rebounds. However, we are staying flexible and watching local market conditions very carefully and will respond accordingly.

Now for a quick recap of the numbers. In the quarter, total revenues declined slightly about $530,000 with 0.9%. We had displaced revenue of about $400,000 due to renovations and six of our hotels experienced room cancellations associated with three hurricanes in the third quarter. Fortunately, we experienced no personal injuries and no major physical damage at our one Houston and two Louisiana Hotels.

There was no major drop off in any of our key market segments but we experienced some softness in leisure and business transient guest traffic across [10:46] failure. Occupancy declined 0.3% to 71.7% and average daily rate was up by 0.2% at $106.37. Loss from continuing operations was $2.3 million compared to a loss of $1.1 million in 2007 third quarter. The decline was driven primarily by a $900,000 increase in impairment charges and a $900,000 increase in depreciation.

Partially offset by a $2.6 million reduction in corporate overhead, on a consolidated basis, including eight hotels in discontinued operations, net loss attributable to common shares was $6.2 million or $.29 per share compared to net income of $47,000 in the third quarter of 2007.

EBITDA from our thirty-five continuing operations improved $700,000 or 6.7% to $10.4 million. Adjusted EBITDA improved 1.9 % to $11.5 million. As Peter mentioned, we sold two of our hard to sell assets; one in the third quarter and one in October. In August, we sold the former Holiday Inn in Marietta, Georgia for $3.3 million. And last month, we sold the one hundred twenty-seven room Glen Burnie, Maryland Holiday Inn for gross proceeds of $7.8 million. The proceeds from the sale were used to pay down debt.

We are currently actively marketing seven further discontinued operations hotels. Two of those hotels are currently under contract with non-refundable deposits and are expected to close before the end of the year.

We continue to make steady improvements to our adjusted EBITDA margins which rose fifty basis points in the third quarter of 2008 to 19%. The improvement came from continued reduction in corporate overhead which was down $1.4 million in the third quarter of 2008 and $3.8 million for the first nine months of this year. During the second quarter, the board authorized the repurchase of an additional $10 million of Lodgian common stock over a period ending no later than April 15, 2009. During the third quarter, we acquired 382,000 shares at an average price of $7.74, total cost of approximately $3 million.

Through the end of the third quarter, we have acquired approximately $3.7 million shares of common stock since May 2006. This has reduced our float by over 15%. We also focus on the need to refinance $137 million in mortgage loans that will come due in July 2009. This debt is currently secured by seventeen hotels. We have engaged a mortgage banker to assist us and they are in preliminary discussions with several lenders at the moment.

Of our $341.3 million of total debts encumber by thirty-six hotels at the end of the third quarter approximately 50% is fixed with the remainder of floating rates. We remain comfortable with this mix. Our average weighted interest rate in the third quarter was an excellent 5.4%. We continue to have a comfortable level of cash in our balance sheet and at the end of the third quarter, we had $30 million in cash and restricted cash. We had a further $12.4 million held in reserve by our lenders to be used for capital expenditures.

Regarding the economy the future is still unclear. We know it will be difficult and we do have contingency plans in place to respond to a wide variety of scenarios. We are fortunate to have a solid portfolio and a motivated team with a flexible plan to respond to the challenges and opportunities likely to be presented to us in the current environment. Our increase in market share indicates that our strategies are working and that we are well positioned for this phase of the real estate cycle.

David that concludes our prepared remarks. We are now ready to open up the call to questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions) One moment please.

So there are no questions from the queue at this time; I would now like to turn the call over back to management.

Peter Cyrus

Thank you again for your interest in Lodgian today. Please feel free to call us if you have any additional questions. Both James and I will be available for the balance of the day. Thank you.

Operator

Ladies and Gentlemen, that concludes our conference for today. Thank you for your participation and for using ACT Teleconference.

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