Lodgian, Inc. Q1 2008 Earnings Call Transcript

Lodgian, Inc. (LGN)

Q1 2008 Earnings Call

May 5, 2008 10:00 am ET

Executives

Peter T. Cyrus – Interim President and Chief Executive Officer

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

James R. McGrath – Vice President of Hotel Operations

Deborah N. Ethridge – Vice President, Finance & Investor Relations

Presentation

Operator

Thank you for standing by and welcome to the Lodgian First Quarter 2008 Conference Call. (Operator Instructions) This conference is being recorded today, May 5, 2008, and I would like to turn the conference over to Ms. Debi Ethridge, Vice President of Finance and Investor Relations of Lodgian. Please go ahead.

Deborah N. Ethridge

Thank you, Vince, and good morning everyone. Earlier this morning Lodgian released first quarter results for the period ended March 31, 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 Monday, May 12, 2008, by dialing 800-218-0204, reference number 11112074. A transcript of this call also will be available on our website as soon as it becomes available.

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 certain 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 general economic conditions, the development and operation of hotels, the timing, confirmation, and final terms of hotel 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 information 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, the GAAP results, in our earnings release.

Now to provide you with some insight into Lodgian’s First Quarter 2008 Operating and Financial Results, let me introduce our speakers for today: Peter Cyrus, Interim President and Chief Executive Officer; Jim McGrath, Vice President of Hotel Operations; and James MacLennan, Chief Financial Officer. Now let me turn the call over to you, Peter.

Peter T. Cyrus

Thank you, Debi. Good morning everyone and thank you for joining us.

The first quarter was a period of transition for Lodgian. The company was placed under my leadership near the beginning of the year and we are completing or undertaking major renovations at several of our properties and we are simultaneously in the process of selling more than 20% of our existing portfolio.

During the quarter we also completed a previously announced $30 million stock buy-back and announced a new stock repurchase program. And this all followed a major restructuring initiated and completed last fall.

I make these comments to provide context for investors and to set the stage relative to the strategic direction of the company.

In the first quarter RevPAR for our 35 continuing operations hotels was up 1.9%, equal to the industry average. However, 5 of our hotels were undergoing extensive renovation during this period. Excluding those properties, our RevPAR was up a strong 4.4%. Jim will provide more details in a moment.

Loss from continuing operations was $5.4 million compared to a loss of $0.5 million in the prior year’s first quarter. Most of this variance was attributable to a $2.1 million impairment charge and a $700,000 increase in depreciation expense in the 2008 first quarter. Additionally, a $1.9 million insurance settlement claim was recognized in last year’s first quarter. No such claims were recorded in 2008. James will provide more information shortly.

As we announced in the 2007 fourth quarter, we moved 9 additional hotels to discontinued operations early in the 2008 first quarter, bringing the first quarter number of hotels held for sale to 11 properties.

One of these properties, the Holiday Inn, Frederick, Maryland, was sold in April.

Following the close of the quarter, we settled our claim with our insurance carrier for the Holiday Inn, Marietta, Georgia. It had been shuttered since January 2006 following a major fire. We will now reclassify that hotel into discontinued operations effective the second quarter and will soon be marketing it for sale.

Our analysis has demonstrated to us that we would be unable to receive an appropriate return on capital if we were to redevelop the asset, therefore, we have decided to place the hotel for sale.

As a result, our core portfolio moving forward will comprise 34 hotels. We do not anticipate any further changes in our core portfolio at this time.

We continue to actively manage our core properties. We invested nearly $14 million in renovation in the first quarter as part of our ongoing program to keep these hotels in strong, competitive condition. All of these renovations were our decision rather than brand-mandated, product improvement plans, as we continue to upgrade our core hotels to keep them fresh and competitive.

I will now turn it over to Jim McGrath, our Vice President of Operations, to provide some additional details on first quarter operating results.

James R. McGrath

Thanks, Peter.

As Peter mentioned, our continuing operations hotels performed well in the first quarter. Our 29 continuing operations hotels that were open and not undergoing renovations had a very solid RevPAR growth rate of 4.4%, more than twice the industry average for the period. These hotels also showed improvement in their RevPAR index, up 3.7% compared to their competitive sets in their markets.

The hotels in our core portfolio now are on par with their competitive set and we believe they still have significant upside potential and market share.

Total revenue for all 35 core hotels rose 2.2% to $56 million. Occupancy was up 2.6% to 67.0%. Our average daily rate was off slightly, down 0.8% to $109.33 resulting in a 1.9% increase in RevPAR for the company’s 35 continuing operation hotels.

Adjusted EBITDA margins rose 60 basis points due to aggressive marketing programs coupled with lower property insurance costs.

Our food and beverage revenues were down 3.3% in the first quarter primarily due to revenue reductions at 3 hotels where meeting bookings lagged behind last year and the impact of the previously mentioned renovations. Excluding the results of these 3 properties, total food and beverage revenues for the remaining continuing operation hotels was down 0.7%, or $71,000.

Generally, our F&B sales for marketing programs continue to be very well received. Overall, we have not seen any meaningful downward trend in meetings bookings. Meetings account for approximately 25% of our overall business mix.

Although we do schedule our renovations to be as undisruptive as possible, our renovation program did cause some displacement in the 2008 first quarter. In the period we lost approximately $800,000 due to rooms that were out of service that otherwise could have been sold.

We are very focused on cost control while seeking to optimize top line revenue growth. In the first quarter margins were impacted by a number of small, but not inconsequential, items such as higher fuel costs, group insurance, debt provisions, and higher franchise fees. Given rising prices for many of the elements in a hotel, we managed costs pretty effectively in the first quarter. It more made a challenge, especially as higher fuel costs trickled down through everything from heating and air conditioning costs to higher food prices. We continue to look for ways to reduce our overall costs and have met with success in a number of areas, especially in the areas of labor productivity and energy conservation.

To recap, from an operational viewpoint, we had a solid first quarter. We remain focused on cost containment and continue to aggressively market. The results are shown in our RevPAR growth and our increase in market share. We have seen no indications in our core hotel markets of significant overbuilding or occupancy declines. Our core hotels are in good physical condition and we are strategically investing in them to keep them highly competitive.

Now, let me have Chief Financial Officer, James MacLennan, provide additional commentary on our numbers.

James A. MacLennan

Thank you, Jim.

For the first quarter total revenue rose 2.2% to $56.0 million. On a consolidated basis, including 11 hotels in discontinued operations, net loss attributable to common shares was $7.5 million, or a loss of $0.33 per share compared to a loss of $0.2 million, or $0.01 per share in the prior year’s first quarter.

EBITDA declined to $6.6 million. However, adjusted EBITDA, which we believe is the best indicator of our results, improved 6.8% from $8.2 million to $8.8 million.

As we announced in December, we placed 9 hotels in discontinued operations in the first quarter, and we began to actively market them for sale.

After the close of the 2008 first quarter, we reached a final settlement agreement with our insurance carrier relating to the property damage and business interruption claim associated with the fire that had occurred at our Marietta, Georgia, property in January 2006. Prior to the settlement the company had received $4 million in advances from our insurer. The agreement provides for an additional payment of $6.1 million, bringing the total settlement to $10.1 million.

After careful analysis we decided not to reinvest in the hotel, in part due to the extensive time it would take to complete the renovation and ramp up the business of the hotel. We will begin the process of selling this property shortly.

In April we sold the 158-room Holiday Inn in Frederick, Maryland, for $5 million. The net proceeds of $4.7 million will be used for general corporate purposes.

For the 10 discontinued operations remaining to be sold, which exclude the Marietta, Georgia, property that I just mentioned, we expect to receive aggregate gross proceeds of between $89 million-$96 million, with net proceeds, after debt reduction and after closing costs, of $34 million-$41 million.

At the close of the first quarter we had 38 hotels encumbered as collateral for various mortgage debt facilities, amounting to approximately $358 million. Our weighted average cost of debt is a very attractive 5.63% with no debt maturities requiring refinancing until July 2009.

At the end of the first quarter we had over $38 million in cash and restricted cash. We have no immediate plans to restructure any of our debt, but we will remain opportunistic in response to market conditions. We have a strong balance sheet and great flexibility to respond to opportunities, ranging from hotel renovations to stock repurchases.

For all of 2008 we expect to invest a total of approximately $40 million-$46 million in renovation projects at our core hotels, which we believe will create significant embedded growth and further strengthen the portfolio.

In the first quarter we completed the Courtyard by Marriott renovation, a $3 million project, primarily a make-over of the rooms. We began work on a $5 million renovation of the Marriott Denver Airport Hotel, and we are well into the Four Points by Sheraton, Philadelphia, and the Wyndham DFW Airport projects. Our fifth major project, the Holiday Inn Inner Harbor in Baltimore, is underway with a $3 million refurbishment program that includes renovation of soft goods in the final 100 guest rooms, a complete renovation of the restaurant, and a refresh of the lounge and lobby areas.

Peter mentioned that the company took an impairment charge of $2.1 million in the first quarter. This charge was related to the renovation program that we have underway. Certain building improvements and fixtures that were being removed from those hotels had not been fully depreciated and, therefore, we wrote down the remaining book value. While, for depreciation purposes, they still had remaining life, we believe that it was time to upgrade, which we anticipate will generate higher returns over time.

Our share repurchase program to acquire up to $30 million in common stock, was successfully completed in the first quarter. We acquired nearly 1.4 million shares at an average price of $9.51, for a total of approximately $13 million. In the total program, we have acquired just over 3 million common shares, about 12% of shares outstanding, from May 2006 through March 2008 at a total cost of approximately $33.3 million.

In April our Board authorized the repurchase of up to an additional $10 million of common stock over a period ending no later than April 15, 2009. We intend to buy back shares from time to time as market conditions warrant.

While we are beginning to see slower RevPAR growth for the hotel industry overall, we remain cautiously optimistic. We are monitoring costs and occupancy and room rate trends, both at our hotels and in our competitive sets. Our core hotels are in good physical condition and continue to gain market share in their respective markets. The upgrades that are currently underway will further strengthen our portfolio.

Operator, that concludes our remarks. We will open up the call now to questions.

Operator

(Operator Instructions)

Gentlemen, we have no questions at this time. Please continue.

Peter T. Cyrus

Thank you for calling in today. James and I will be in the office the remainder of the day. Please feel free to call us if you have any other questions. Thank you.

Operator

That does conclude our conference for today. You may now disconnect.

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