Lodgian, Inc. Q2 2008 Earnings Call Transcript

Lodgian, Inc. (LGN)

Q2 2008 Earnings Call

August 5, 2008 10:00 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

Welcome to the Lodgian second quarter 2008 earnings conference call. (Operator's instructions) I would now like to turn the conference over to Debi Ethridge, Vice President of Finance and Investor Relations of Lodgian.

Debi Ethridge

Earlier this morning Lodgian released second quarter results for the period ended June 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 Tuesday, August 12 by dialing 800-405-2236, reference number 11117139. A transcript of this call also will be posted 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 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 general economic conditions, 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 second-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 Cyrus

The credit crisis, high gasoline prices and the economy in general had a significant impact on the hotel industry in the second quarter. Despite these obstacles, Lodgian had a solid quarter. Excluding the seven hotels that were under renovation in the second quarter of this year and last year, our RevPAR rose 1.3% compared to the industry average of 1.2%.

This same group of hotels grew RevPAR index by 1% in the quarter as well. RevPAR for our 35 continuing operating hotels was up 0.3%. We believe these results indicate that our core portfolio is well positioned and a solid competitor in both good and tough times. Jim will provide you more details on this shortly.

Income from continuing operations increased from $142,000 to $284,000. We were affected by a $5.6 million impairment charge due to market conditions at the time the Worcester Crowne Plaza was reclassified from discontinued operations to continuing operations. This compares to a $155,000 impairment charge booked last year. During this year's second quarter, we benefited from a $6.1 million final payment of an insurance settlement for damages sustained in a fire at our Marietta, Georgia property. This hotel was reclassified as held for sale during the quarter.

On a consolidated basis, net income attributable to common stock was $6.4 million, or $0.29 per share compared to a loss of $300,000 or a $0.01 loss in last year's second quarter. During the quarter, we also sold two hotels for gross proceeds of $8.1 million. We will provide more details on this later in the call. We had five hotels undergoing renovation in the second quarter, and have invested approximately $24 million through the end of June of our expected $40 million to $46 million in capital to be expended for the year.

We continue to invest in our portfolio, and improve its physical condition. We believe this will enable us to continue to compete effectively. We know the economy is in a rough patch. We have adjusted our plans accordingly, trimmed costs further, and we are responding well so far this year.

Let me now turn the call over to Jim McGrath, our Vice President of Operations, who will go into more details on our second-quarter operations.

Jim McGrath

As other hotel companies have already reported, the rate of growth slowed considerably in the 2008 second quarter. Our portfolio not only held its own, but outperformed its competitive set. Of our 35 continuing operation hotels, 20 gained market shares in their respective markets and five others were undergoing major renovations during the quarter.

We completed a $5.2 million renovation at the Marriott Denver Airport during the second quarter, totally making over the rooms, the walls out, including new bathrooms, [case] goods and carpets. Additionally, we renovated the restaurant, which is now The Gateway Bistro, an upscale bistro with local fare, including bison and other Colorado specialties. Guest response has been quite favorable, and we are in great shape to host attendees for the Democratic National Convention this summer.

We will wrap up our Four Points by Sheraton Philadelphia renovation in the third quarter. Despite revenue displacement at the Four Points in June, due to the construction of a new pool enclosure, this hotel experienced RevPAR index growth of 8% in June as the guest rooms are back online and being very well received by our customers. We also expect to complete the renovation work at the Wyndham DFW Airport in the third quarter. While the public space is substantially complete, we are finishing up remaining items in the guest rooms. Short-term, these renovations displaced revenue.

At the five hotels undergoing renovations in the second quarter, we estimate the total lost revenue to be $600,000 for the period. Total revenue for our 35 continuing operation hotels improved 0.3%, to $66.9 million. These results include three hotels located in Pittsburgh, Pennsylvania, representing 8% of our continuing operations portfolio, which experienced significant revenue gains in the 2007 second quarter with the US Open hosted in Pittsburgh in June 2007.

Overall, our meeting business has remained strong, while we have seen some softness in leisure and the business transient segments. Occupancy rose by 2.3% to 75.4%. Average daily rate declined 2.1% to $108 even. RevPAR was up 0.3%. The occupancy in RevPAR growth is due to a planned strategic change in our segmentation. Nearly a year ago, we began focusing on more contract business, local negotiated accounts, and third-party Internet sources as industry experts began to lower their expectation for 2008.

Adjusted EBITDA margins rose 410 basis points as we focused intensely on costs both in the field and at corporate. James will provide more color on that shortly. Second-quarter food and beverage revenues were up 0.5% due to higher occupancies and food and beverage sales and marketing programs that we initiated last year, which continued to be well-received. By keeping a close eye on food and related transportation price increases, we were able to stay ahead of inflation by increasing our menu prices, hence, improving our food and beverage profit margins year over year for the second quarter by 70 basis points.

Even with an increase in occupancy of 2.3% in the quarter versus prior year, Lodgian's second-quarter total payroll, taxes and benefits were below prior year by $74,000, which was achieved through increased productivity. At the same time, our brand service scores through the first six months of 2008 have improved in 64% of our continuing operation hotels.

Given the current economic conditions, we gained a lot of confidence in the second quarter that our portfolio is competitive and very well positioned to respond to market changes. We are clearly focused on seeking ways to build revenues in a tight economy, and we remain focused on balanced cost containment. A significant portion of our portfolio gained market share, which speaks to the strength of our operating team and the quality of our properties.

Now, let me hand the call over to our Chief Financial Officer, James MacLennan, to discuss our balance sheet and other activities in a very busy quarter. James.

James MacLennan

It was another quite active quarter for Lodgian. Total revenue rose slightly 0.3% to $66.9 million. On a consolidated basis, including the nine hotels in discontinued operations, net income attributable to common shares was $6.4 million, or $0.29 per share. This compared to a loss of $300,000 or $0.01 per share in last year's second quarter. EBITDA improved 5.7% to $12.8 million and adjusted EBITDA, which we believe is the best indicator of our results, rose a strong 17.9% to $18.4 million.

Let me run through the changes to our portfolio during the quarter. Firstly, we sold the 158-room Holiday Inn in Frederick, Maryland, and the 156-room former Holiday Inn in St. Paul, Minnesota for aggregate gross proceeds of $8.1 million. Net proceeds of $7.7 million were used for general corporate purposes. We received $6.1 million from our insurance company in final settlement of damages resulting from a fire in early 2006 at our Marietta, Georgia Holiday Inn. This hotel will remain closed and has been reclassified into discontinued operations. The property is in a good location and in a good market, but we have chosen not to invest further in restoring the property.

We also reclassified the Crowne Plaza in Worcester, Massachusetts back into continuing operations. We received several disappointing offers on this hotel, and also we have approximately $4 million in a deposit account with our lenders for product improvement. We ultimately determined that investing those funds rather than selling the hotel at a discount would generate a better return. Returning the property to continuing operations accounted for the vast majority of the $5.6 million in impairment charges that we recorded in the quarter. All of this leaves us with nine properties for sale at the close of the second quarter.

The hotel real estate market is shifting, cap rates are moving up and there remains a considerable gap between bid and asked prices. Lenders also are more cautious. We believe this will likely slow the pace of our real estate sales, and perhaps the pricing on one or more of the hotels. As a result, it is difficult for the Company to provide an update on the estimate of the aggregate gross proceeds for the nine hotels that are held for sale.

During the quarter, we saw significant improvements in our adjusted EBITDA margins, which rose 410 basis points to 27.5%. The improvement came primarily from two sources. About $2.2 million resulted from reductions in corporate overhead, due mostly to our August 2007 restructuring. Also, we completed our annual negotiations for our property insurance in May 2008, resulting in an annual savings of $600,000, which we began to realize in June. The combination of the corporate overhead savings and insurance cost reductions should continue to flow through the remainder of the year and into 2009.

In the second quarter, the Board authorized the repurchase of an additional $10 million of its common stock over a period ending no later than April 15, 2009. Through the end of June 2008, we have purchased approximately 172,000 shares at an average cost of $8.51 per share under this program. This new repurchase program follows a $30 million repurchase program announced in August 2007. Under that program, the Company repurchased approximately 2.8 million shares at an average price of $10.62 per share, completing the program in April 2008.

From a debt standpoint, we have no maturities requiring refinancing until July of 2009. We are in the very preliminary stages of analysis regarding the best options for those hotels. As we are not yet under time pressure, this allows us several further quarters for the current credit situation to improve. Of our $351 million of total debt encumbered by 37 hotels at the end of the second quarter, approximately 52% is fixed with the remainder at floating rates. We are very comfortable with this balance at this time.

Our average weighted interest rate as of June 30, 2008 was an excellent 5.43%, which was down 20 basis points from the 5.63% average in the first quarter of this year. Our interest expense for the quarter declined by $1.9 million compared to the 2007 second quarter. On the cash side of our balance sheet, as of June 30, we had more than $45 million in cash and restricted cash compared to $38 million at the beginning of the quarter. In addition, approximately $11.4 million is held in reserves by our lenders for capital expenditures. We believe our strong balance sheet gives us more than adequate funding to underwrite our hotel renovation and stock repurchase programs.

To wrap up, while the operating environment is difficult, we believe we have the team in place to compete well in all phases of the economic cycle. Our portfolio continues to improve as a result of what we believe to be accretive upgrades and renovations.

That concludes our remarks. We would now like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Management, at this time there are no questions.

Peter Cyrus

Thank you for your interest in Lodgian today. James and I will be available the remainder of the day to answer any additional questions that you may have.

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