Lodgian Q4 2008 Earnings Call Transcript

Lodgian, Inc. (LGN)

Q4 2008 Earnings Call

February 25, 2009 11:00 AM ET

Executives

Deborah N. (Debi) Ethridge - Vice President, Finance & Investor Relations

Peter Cyrus - Interim President and Chief Executive Officer

Joseph F. Kelly - Vice President, Operations

James A. MacLennan - Executive Vice President and Chief Financial Officer

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the Lodgian Fourth Quarter 2008 Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). As a reminder, this conference is being recorded, February 25, 2009.

I would now like to turn the conference over to Debi Ethridge, Vice President of Finance and Investor Relations of Lodgian. Please go ahead.

Deborah N. (Debi) Ethridge

Thank you, Marissa and good morning everyone. Earlier this morning, Lodgian released fourth quarter and full year results for the period ended December 31, 2008 and I hope everyone 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, 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 by telephone until midnight on Wednesday, March 4th by dialing 1800-405-2236. International investors may call 1303-590-3000. The reference number for the replay is 11124773.

A recording of the call will also be available on our website. 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, including but not limited to, statements regarding our future financial position, business strategy, projected performance and financing needs that are subject to certain risks that could cause results to differ materially from those projected.

These risks are discussed in our earnings release and our other filings with the Securities and Exchange Commission, including risks relating to the development and operation of hotels, our ability to refinance mortgage debt, 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 earnings release and our other filings with the Securities and Exchange Commission.

Such forward-looking statements are based on managements' current expectations or beliefs as well as assumptions made by and information currently available to management. Lodgian undertakes no obligation to update any information discussed on this conference call.

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 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 fourth quarter and 2008 operating and financial results, let me introduce our speakers for today: Peter Cyrus, Interim President and Chief Executive Officer; Joe Kelly, Vice President of Hotel Operations; and James MacLennan, Chief Financial Officer.

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

Peter Cyrus

Thank you. Debi. Welcome everyone and good morning. Thank you for joining us today. The fourth quarter showed the full impact of the recession which was reflected in a 9.8% downturn in RevPAR for the hotel industry at large, as reported by Smith Travel Research. Lodgian's investments in renovation and repositioning over the past several years, implementation of the new operating and marketing programs and hard work by our associates produced top-line results that were significantly better than the industry as a whole, albeit still down compared to recent years.

RevPAR for the 2008 fourth quarter declined 4.9%, half the decline of the industry as a whole. For the year, RevPAR was down 0.9% compared to a 1.9% decline for the entire industry. Our 35 continuing operation hotels outperformed their competitive set in the fourth quarter, posting a 3.9% improvement in RevPAR Index to 100.7. For the year our RevPAR Index was up 1.9% over 2007 to 100.1%. It is the first time in over five years that our core hotels have exceeded market share in RevPAR. Joe will provide you more operating details shortly. Total revenue declined 5% during the fourth quarter compared to the prior year.

Loss from continuing operations was $4.9 million compared to $4.1 million loss in the 2007 fourth quarter. On a consolidated basis, net loss attributable to common stock was $4.7 million or a loss of $0.22 per diluted share, compared to a net loss of $8.1 million or $0.34 per diluted share in 2007 fourth quarter.

In the fourth quarter EBITDA from continuing operations hotels declined $2.6 million to $7.9 million from $10.5 million in the prior year. Reflecting the worsening economy, adjusted EBITDA from continuing operations declined 16.5% in the fourth quarter to $9.4 million but was up 2.3% for the full year. James will provide more detail on the financials in a minute.

We completed renovations at 13 hotels during the year and began work on two additional hotels bringing to roughly $43 million, the amount we invested in our continuing operations properties last year. We have budgeted almost $26 million for CapEx spending in 2009. This is a substantial reduction compared to prior two years. Included in the budget is the completion of renovations related to recent franchise license renewals, with the remainder of our spending to be used primarily for necessary projects. We are fortunate that our portfolio is currently in overall good fiscal condition.

As the economy deteriorated rapidly in the fourth quarter, we took our cost-cutting efforts to the next level. Many of these problems did not take effect until late in the quarter. The economy and the hotel industry continue to decline in the first part of 2009 and we are very closely monitoring costs.

On a positive note, corporate overhead declined $1.2 million in the fourth quarter and $5.1 million for the full year, a continued benefit of our earlier corporate restructuring. Let me turn it over to Joe Kelly, our Vice President of Operations, to provide you with more detail regarding operating results.

Joseph F. Kelly

Thank you, Peter. It was a tough quarter all around for the hotel industry. Lodgian outperformed the industry as a whole and also it's competitive set for the quarter on a RevPAR basis.

Our continuing operations hotels had a solid quarter when compared to the industry, with our RevPar down 4.9% just half the industry's decline of 9.8%. Lodgian gained market share in this tough environment which we believe reflects well on both the physical condition of our hotels and the efforts of our associates.

20 of 35 hotels improved their RevPAR Index compared to the 2007 fourth quarter. Our portfolio gained share in 10 of the 12 months of 2008, with declines of 0.5% or less in the other two months. For the fourth quarter we entered hard (ph) one 3.9% increase in RevPAR Index to 101.3%. For the full year, we increased our RevPAR Index by 1.9% over 2007to 101.1%. This is the first time in over five years that the continuing operation hotels achieved more than 100% index for the full year.

This gain was due to an aggressive direct sales effort focused on our costumer relationships and strategic revenue management. We restructured the regional support team last year in order to give the general managers complete control over their sales efforts and that plan has worked well.

The drop in fourth quarter revenues did not catch us by surprise since the fall off in business was anticipated both by Lodgian and industry forecasters. As the quarter progressed, we further stepped up our cost control efforts but still experienced margin erosion.

Rooms expense as a percent of revenue increased 1.2 percentage points in 2008 due to lower average rate on a slightly higher occupancy as well as higher employee medical benefit costs. Hotel level G&A expense increased $480,000 during the year due largely to higher employee medical benefit costs. While energy consumption was down year-over-year, utility expense increased $0.25 per occupied room due to higher energy unit rates.

Maintenance and repair expense was up $740,000 due to higher automotive and employee medical benefit costs. We have ratcheted up our cost control programs. We have placed strict spending and control initiatives on travel, entertainment, pay increases, capital spending and the hiring of exempt associates.

Our new labor management system ADP TimeSaver is beginning to take effect and we expect to see benefits in 2009. As Peter mentioned, we've spent $43 million on renovations during the year. Specific projects included the commission of major renovations at the Marriott at the Denver Airport, the Wyndham at the DFW Airport and the Four Points by Sheraton in Philadelphia. The Wyndham is a good example of the benefit we achieved from renovation.

We employed an aggressive sales strategy to reintroduce the property resulting in obtaining a 68.4% occupancy rate for the 2008 fourth quarter, compared to 63.1% from the hotels competitive set. The repositioning of the Four Points by Sheraton, Philadelphia which was completed in the third quarter of last year is another good example. The hotel achieved both occupancy and ADR premiums for the fourth quarter of 2008 against its competitive set generating a RevPAR Index of 113.2%.

I am sure all of you follow the reports from Smith Travel Research. It has been a difficult start to 2009. Our properties have outperformed the industry on a RevPAR basis through the first six weeks of this year, but there continues to be pressure on margins. It will certainly be a difficult year, but our associates and properties are up to this challenge.

Let me know turn the call over to our Chief Financial Officer, James MacLennan, to provide some more details on our financial results. James?

James A. MacLennan

Thank you, Joe. Looking briefly at the fourth quarter and the year, total revenue was down roughly 5% for the quarter and it was down 0.9% for the full year. The 2008 results were affected by total revenue displacement as a result of renovation of just $50,000 during the fourth quarter, but $2.1 million for the full year.

On a consolidated basis for the 2008 fourth quarter including hotels in discontinued operations, net loss attributable to common shares was $4.7 million or $0.22 per share. This compared to a net loss of $8.1 million or $0.34 per share in the 2007 fourth quarter. The improvement was due primarily to the result of discontinued operations.

EBITDA from our continuing operations hotels declined in the fourth quarter from $10.5 million in last year's fourth quarter to $7.9 million in 2008 and for the year from $42.6 million in 2007 to $37.4 million in 2008. Adjusted EBITDA was down 16.5% in the fourth quarter to $9.4 million due to the rapid deterioration of the economy in general and the hospitality industry specifically during the quarter. For the full year, adjusted EBITDA was up 2.3% at just on $48 million.

As we mentioned in our last call, early in the fourth quarter of last year we sold the Glen Burnie, Maryland Holiday Inn. In December of 2008, we sold the Holiday Inn, Frisco in Colorado. Gross proceeds for the two properties amounted to $13.5 million, of which $7.5 million of net proceeds was used to reduce debt. The remainder of the net proceeds we used for general corporate purposes including capital expenditures. That brings to five the number of discontinued operations hotels that we sold during 2008.

We have six discontinued operations hotels remaining for sale. Of those hotels, two are under contract with non-refundable deposits and we're in various stages of the marketing process on the other four hotels. The depressed credit market has made financing extremely difficult for buyers, but we continue to work selling these non-core properties. As Joe mentioned, margins were under significant pressure in the fourth quarter. Adjusted EBITDA margins declined 240 basis points in the fourth quarter although they were still up 61 basis points for the full year.

As a part of our initiative to preserve cash, we suspended our stock repurchase program during the fourth quarter. During 2008, we acquired approximately 2.1 million shares at an average price of 927 per share for a total cost of approximately $19.3 million. We do not expect to resume acquiring stock for the foreseeable future.

We have in aggregate of approximately $169.5 million of mortgage debt maturing in March, May and December of 2009, all of which have extension rights of between one and three years. We have an additional $128.4 million of mortgage debt maturing in July 2009 that cannot be extended without the approval of the loan services. Therefore in anticipation of the July maturity date, we are pursuing a multi-faceted strategy to address the pending maturities, including firstly a refinancing or secondly, an extension of the debt by the servicers or thirdly, new mortgage debt using currently unencumbered properties.

With respect to our efforts to refinance the maturing debt, we retained Jones Lang LaSalle in 2008 to assist us. To-date, we have been unable to secure refinancing. We continue to pursue a variety of refinance alternatives including, single asset and portfolio financings with international, national and regional lenders. However, in light of the current credit markets generally and the real estate credit markets specifically and the results achieved to-date, we expect it will remain difficult to refinance the debt prior to the July maturity date.

As I mentioned, we have also requested the servicers of the maturing debt consider extensions to provide us additional time to secure financing. The servicers have indicated to us that they may be willing to engage in discussions regarding extensions, however they do not believe that conversations will be productive until closer to our July maturity date. We cannot currently predict whether our efforts to obtain extensions will be successful.

In addition to our refinancing and extension efforts, we are also seeking new financing using several of our currently unencumbered assets as collateral. Again we can't currently predict whether or to what extent these efforts will be successful.

As Joe mentioned, 2009 has presented a difficult operating environment that has impacted the hotel industry as a whole. There still is not a lot clarity regarding the remainder of the year for our industry or for the economy in general. We tend to agree with the industry forecasters that the second half of the year looks more promising than the first half. We are encouraged by our increase in market share, the good physical condition of our continuing operations portfolio and the significant steps we have taken to reduce over here.

Operator, that concludes our remarks, we are now ready to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). We show no questions at this time. Please continue.

Peter Cyrus

Thank you again for your interest in Lodgian today. James and I will be available. So you feel free to call us if you have any additional questions. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the Lodgian fourth quarter 2008 earnings conference call. You may now disconnect. Thank you for using ATC conferencing.

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