As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Devin Sullivan, Managing Director of The Equity Group. Thank you, Devin. You may begin.
Thank you, John. Good morning, everyone. Thank you for joining us today for LuxUrban Hotels' 2023 second quarter financial results conference call. Our speakers for today will be Brian Ferdinand, Chairman and Chief Executive Officer, and Shanoop Kothari, the company's President and Chief Financial Officer. Before we begin, I'd like to remind everyone that during this call, we will be discussing forward-looking statements, including with respect to financial and operational guidance, the success of the company's collaboration with Wyndham Hotels & Resorts, scheduled property openings, expected closing of noted lease transactions, the company's ability to continue closing on additional leases for properties in the company's pipeline, as well as the company's anticipated ability to commercialize efficiently and profitably the properties it leases and will lease in the future.
These forward-looking statements are based on current expectations and beliefs concerning future developments and their potential effect on the company. There can be no assurance that future developments will be, will be those that have been anticipated. These forward-looking statements are subject to a number of risks, uncertainties, some of which are beyond our control, or other assumptions that may cause actual results or performance to be materially different from those expressed in 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 for our 10-K for the year ended December 31, 2022, and in Item 1A of our Form 10-Q for the three months ended June 30, 2023.
The forward-looking information and forward-looking statements are made as of today's date, and the company does not undertake to update any forward-looking information and/or forward-looking statements that are contained or referenced herein, except in accordance with applicable securities law. Management will also be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in the company's press release. With that said, I'll now turn the call over to Brian Ferdinand, Chairman and Chief Executive Officer of LuxUrban Hotels. Brian, please go ahead.
Thank you, Devin. Good morning, and thank you for joining us today. Almost one year to the day after completing our initial public offering, I am proud of what we've been able to accomplish operationally, financially, and culturally. These last several quarters have been a transformative, transformative period for LuxUrban, and I am happy to say that we have entered the second half of 2023 in the strongest position in our history to drive future growth, enhance cash flow, capture the benefits of scale, and deliver long-term value to our shareholders. In the second quarter of 2023, we generated record net rental revenue, EBITDA, and cash net income. On an adjusted basis, we reported our eighth consecutive quarter of cash-based net net income and seventh consecutive quarter of positive EBITDA.
We transformed our financial profile by eliminating the entirety of the approximately $9.8 million of senior secured debt held by our pre-IPO lenders and an estimated $87.5 million in future revenue share payments, all while pursuing a focused, high conviction commitment to growth and profitability. When compared to December 31st, 2022 year-end, our quarter-end cash position more than tripled, total debt and net debt each declined significantly, and shareholders' equity improved by nearly $17 million. We continue to pursue a significant pipeline opportunity that's accelerating as hotel owners facing upcoming debt maturities. Deal flow remains incredibly strong, which allows us to pursue only the most favorable properties and deal structures to advance our growth. We continue to adhere to strict operating controls, and we believe that we currently have the lowest per night property-level breakeven costs in the markets we serve.
We also transformed the arc of our anticipated growth by announcing a partnership with Wyndham Hotels & Resorts, the world's largest hotel franchise company. Highlights of the deal include the LuxUrban Hotels initially being added to the Wyndham portfolio, are expected to be integrated into the Trademark Collection by Wyndham and in turn, Wyndham's booking channels by the end of the year, likely sooner. By using Wyndham's platform, we expect to see a significant reduction in commissions and online booking fees compared to our prior operations. As a reminder, the Wyndham Rewards program serves more than 100 million members. We have already begun the integration, and it's underway. Wyndham will provide LuxUrban with significant upfront initial non-dilutive working capital and growth capital based primarily on LuxUrban's existing property portfolio, with ongoing non-dilutive acquisition and working capital to be provided by Wyndham to fund future MLAs.
LuxUrban's properties covered under this agreement will operate on Wyndham's world-class operational and customer service support systems, which are expected to enhance LuxUrban's cash flow by optimizing enterprise-wide operating efficiencies. LuxUrban will remain operating control of its hotels while being jointly branded and marketed in partnership with Wyndham. We're incredibly enthusiastic about our alignment with Wyndham and believe that the financial brand and operating advantages will make LuxUrban an even more attractive solution for property owners looking to employ our asset-light triple-net lease alternatives while maintaining ownerships of their asset. With that, I'll turn it over to Shanoop Kothari, our President and Chief Financial Officer, for a review of our financials.
Thank you, Brian. We reported another strong quarter and continued to validate the growth and earnings power inherent in our model. Net rental revenue tripled to $31.9 million from last year's second quarter, driven primarily by an increase in average units available to rent from 565 in Q2 2022 to 1,086 in Q2 2023, as well as improved Revenue Per Available Room or RevPAR. Year-to-date RevPAR rose to 291 from 183 in Q2 2022, and from 247 at December 31, 2022. 2Q 2023 total cash rent expense was $4.8 million, or 15.2% of net rental revenue, compared to $2.1 million, or 20.9% of net rental revenue in the same period last year.
Non-cash rent expense amortization was $2.6 million, up from $1.1 million in Q2 2022. Gross profit rose to $10.2 million or 31.8% of net rental revenue from $2.9 million, or 28% of net rental revenue in Q2 2022. G&A expenses increased to $4.4 million or 13.9% of net rental revenue, compared to $900,000 or 8.7% in Q2 2022. Our net loss for the second quarter was $26.8 million or $0.78 per share, as compared to net income of $762,000 or $0.04 per share in the second quarter of last year.
The primary driver of the net loss was a $28.5 million, one-time, non-cash financing charge associated with the revenue share agreement that eliminated an estimated $87.5 million in future revenue share payments that we would have been contracted to pay. We also incurred a $1.2 million, one-time cash interest and financing costs associated with the retirement of debt and related premiums associated with this. While these charges did impact our results, they should not mask the positive impact of the elimination of these revenue share payment obligations we would have had on our business over the long term, primarily by removing the drag on our financial results, increasing our access to growth capital, and providing financial flexibility.
Exclusive of these items, adjusted cash net income improved to $7.2 million, up from just under $1.9 million in last year's second quarter, and EBITDA improved to $8.4 million. Going forward, we will not have charges related to financing, but will continue to have regular stock compensation expense associated with equity grants and non-cash rent expense amortization associated with ASC 842. For the quarter ended June 30th, 2023, our EBITDA margin increased to 26.5%. As we've discussed last quarter, our goals are to achieve +20% EBITDA margins in the short term and +25% EBITDA margins over the long term. We reiterate this guidance.
During the June 2023 quarter, our units hosting guests rose to 1,086 from 988 in the prior quarter and 479 in Q22. Moving to the balance sheet. At June 30th, cash and cash equivalents totaled $3.8 million, a $2.7 million improvement from December 31st, 2022. Restricted cash was unchanged at $1.1 million. Total debt at quarter end declined to $4.6 million from $14 million at December 31st, 2022. Net debt in the quarter and was around $800,000, down from $10.3 million at year-end 2022. We continue to work on our payables and working capital and made strides during the quarter.
Our working capital position narrowed to -$2.4 million at June 30th, 2023, from -$13.5 million at December 31st, 2022. However, removing short-term lease liabilities, our working capital for June 30th, 2023, was +$3.7 million versus -$9.6 million at December 31st, 2022. That said, we will continue to work towards improving our liquidity and working capital throughout the balance of the year. During the quarter, we deployed $4 million in security deposits and for the six months, over $8 million. As we have stated previously, we continue to make efforts in improving free cash flow and liquidity and look to improve these metrics while continuing to reduce our debt over the coming quarters. Looking at our portfolio at June 30th, 2023, and today.
As of June 30th, we operated 12 properties, 1,086 units in five cities. As of today, we operate 15 properties with 1,411 units, hosting guests in New York, Los Angeles, Miami, Washington, and New Orleans. We currently have under MLA 17 properties, totaling 1,625 short-term rental units. As of June 30th, 2023, across our portfolio, our investment in security deposits were $13,554 per unit, with the high being in New York at $17,307, and the low end in New Orleans and D.C. at $5,000 and $6,329, respectively, per unit. We expect these amounts to remain relatively consistent in the near future. Regarding guidance, we have maintained our net rental revenue and EBITDA guidance for 2023 and 2024.
We expect that all-in RevPAR for 2023 will be between $250 and $280. We expect gross margins of 30%-40%. G&A, excluding non-cash items, will approximate 10%-12% during the year. We believe that this will result in EBITDA margins of 20%-25+%. We continue to expect year-end operating units to be between 2,500 and 3,000 short-term hotel units under MLA, up from 844 at December 31st, 2022, and 1,625 as of today. The timing to reach a goal of between 2,500 and 3,000 units may positively impact our revenue guidance for the year. A few additional comments about the Wyndham partnership.
We estimate key money reduced by required CapEx provides us over $50 million of synthetic financing over the course of the initial stages of the agreement. We believe this could increase over time, subject to, one, how we perform under the agreement, two, the quality of the pipeline, and three, continued dialogue with our partner. The transaction provides us significant benefits, reducing operating expenses when we drive booking traffic to Wyndham's booking channels. Based on our expected case, we, we believe we will improve RevPAR, which will impact us starting 2024, and reduce OTA costs by about one-third based on our current booking fees. The net impact, once we're fully operational, will be after year-end.
Finally, we have yet to quantify the secondary benefits of staffing and resources at LuxUrban as we continue to become more dependent on Wyndham for items we're currently handling on an operational basis. With that, I'll turn the conversation back over to Brian.
Thank you, Shanoop. I believe we're going to open this up for questions now. Just want to thank everyone for participating, and I'll turn it over to Devin to open up for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question comes from the line of Allen Klee with Maxim Group. Please proceed with your question.
Good morning. Congrats on a very strong quarter. When I look at one area where there was a strong positive variance compared to our model was your revenue per available room. Could you just give some color on what the? There's a lot of things that go into RevPAR. What drove the jump there? Thank you.
Yeah, sure. I'll take that. Allen, so the jump, so we did $257 last quarter. The jump to, to the $291 for the six months is related to timing of certain higher quality properties that came on primarily early part of the second quarter, as well as sort of pick up for the summer season, coupled with sort of a down, you know, the downside of the January side. You know, a little bit better than we expected, but I think it's just related to the higher quality average properties that were put on at the early part of the quarter.
Thank you. In terms of Wyndham, I was looking through your 10-Q. In it, you say that you'll pay them around a 6% franchising fee on gross booking units in the beginning, which will rise to 6.5%. The cost savings you're gonna get from the order, booking orders and using their system and that your net expenses will decline as a result of that. I heard you say something reclined by one third. I didn't quite catch that. Could you talk a little about the factors and some sense of the decline in expenses that can come from Wyndham?
Yeah, sure. Franchise fees, along with, with booking fees on their platform, is about one-third less than what we currently, our OTA agreements. To the extent that we're driving traffic through Wyndham's platform, it's about a one-third reduction, basically, call it OTA and other fees. If we continue to use OTAs, you know, they have a better negotiated rate than we do. That plus the franchise fee is more expensive. We fully expect, you know, in all the guidance we've gotten from the Wyndham team is that, you know, a significant part of our future bookings, you know, over time, will go through their platform and, you know, through their, through their Wyndham Rewards, you know, members and such.
The way we've modeled it is, you know, about a little less than half is sort of the break even for it, but we fully expect to, you know, you know, be much higher than that, you know, as we fully ramp up.
Thank you. I thought I also heard you say that this would improve your RevPAR. Could you explain how the, how the Wyndham transaction would, could improve the RevPAR? Thank you.
Yeah, I'll take that. Just from a marketing perspective. Hey, Allen, it's Brian. Wyndham has over 100 million rewards members worldwide and the largest rewards program in the world. They have members that utilize both through their, you know, internally, so through the Wyndham Rewards, where, you know, the it's in particular New York City, Wyndham has limited supply of hotel rooms, so you have an oversupply of people looking and certainly in the other cities as well. We look at being able to increase RevPAR, in particular in New York, very handsomely through Wyndham's marketing programs as well as the rewards program. We think we'll see increased demand through those channels, which we don't have access to today. It's very, very substantial.
That's great. My last question, and I'll jump back in the queue, is just you also said it could provide around $50 million of synthetic capital. So they'll be providing you working capital and basically paying some of the security deposit, which has been maybe one of the higher costs that maybe constrained some of your growth, that that could get eased up. Is there anything you could add some color on how you, how you're gonna think about the benefit from that over the next year or two? Thank you. Like, maybe in terms of l ike, the amount of rooms you can add? Thank you.
Absolutely. Just, just as a, a point of fact, if you, if you go to the balance sheet, from this Q, we have invested $19.6 million into security deposits, with $3.5 million of letter of credit. Call it about $23 million total invested into the portfolio in terms of deposits, which was our largest outlay of capital for those hotels. And, you know, that portfolio generated $8.4 million of EBITDA. When you're looking at a ROI or investment, you know, you got $23 million invested into the hotel properties, and you're generating $8.4 million of EBITDA quarter, annualized, you know, about $33 million of EBITDA on $23 million invested.
You know, we had talked about $1 of, of investment into security previously, for $1 of EBITDA. We're seeing a greater return than that currently. And then in particular, Wyndham provides us, as, as part of the franchise agreement, capital, for enhancements to the property, as well as working capital for the operations of the property and a portion of the security.
Okay. Thank you very much. Congratulations. Go ahead, sorry.
And Allen, it's $15 million the way we've modeled it, not $50 million.
Oh, oh, sorry. Okay. Thank, thank you. Thank you so much.
The next question comes from the line of Bryan Maher with B. Riley Securities. Please proceed with your question.
Thank you, and good morning. We're starting to see a little bit of an acceleration in handbacks of hotels from some of our coverage companies, to the banks, you know, in lieu of refinancing difficulties. Are you subsequently seeing a pickup in inbound calls and opportunities for you? Kind of as a second part to that question, are you seeing any changes in the terms that owners are looking for today, relative to kind of what you saw up through the first quarter?
Yeah, we, we are definitely seeing, you know, several a day. You know, we're getting shown every distressed deal, you know, throughout, that's in need of a refinancing or that is overlevered. You know, we're, we're very carefully selecting, in a very disciplined approach, only the properties that really are turnkey from a CapEx perspective, and then also meet our underwriting criteria, which hasn't moved, since the start of the business. We're still seeing, significant pipeline opportunities, significant opportunities, in the same rents or underwriting bands that we have done historically. We have not moved up our underwriting criteria. We're seeing things come in at the same or lower.
Okay. Has there been any change in your target markets? You know, outside of what you've talked about in the past, are there any markets within the U.S. or outside the U.S., I think maybe you talked about London before, where you're focusing your attention?
Yeah. So, you know, it's the five cities we're in today, and then it's Boston and London, that we're actively pursuing opportunities. You know, we've, we've continued to scale rapidly, and New York represents the largest opportunity. We will be concentrated in New York City. Represents the largest part of our pipeline as well. Boston and London are two other cities that meet both our underwriting criteria and also have the attributes that we look for in terms of volume of travelers and RevPARs that are sustainable, that meet our risk profile. Really a seven-city footprint.
You know, it, it's possible that we will look at other cities in partnership with Wyndham, around specific opportunities in the future, but right now, as far as LuxUrban is concerned, you know, it's the, it's the seven-city footprint that we're focused on.
Okay. Maybe last for me, in New York City, since you brought that up, you know, you can't open a newspaper or turn on the TV without seeing, you know, inbounds staying at The Roosevelt Hotel and, you know, what kind of a disaster that is, you know, outside The Roosevelt Hotel. I, I don't know what New York City is paying Roosevelt for their rooms, but as it relates to the closed hotels in New York City that you might be able to, you know, strike a deal with, y ou know, is what's going on there with, you know, immigration and people showing up in New York impacting your ability or cost to take down any of those hotels? Just, just curious what you're seeing.
Yeah, I mean, what it provides is a short-term alternative for hotel owners that are distressed, but it doesn't allow them to refinance on a city contract. An owner who, if you look at, you know, in particular, like Row NYC, the owners, you know, went into foreclosure, took the city money, and now are trying to restructure their debt. It hasn't allowed them to restructure, so it's really a, a band-aid on a larger problem. And some owners are opting for short-term cash. I do believe that it'll create a secondary pipeline. It's about, I think, close to 100 hotels in that program. As, you know, as, as they clear out in the programs, I think it'll give us a secondary pipeline beyond that to, you know, clean up those hotels, bring them back online as hotels.
We've, we've talked to several owners, around that as well, that are in city programs that are looking for ways to take care of their debt obligations and, and restructure on long-term triple-net leases. We've even, done two deals with, with city program hotels that the owner's going to turn back, refurbish them, and then, turn them over to us from the city program. It's really just a, a secondary pipeline opportunity for us.
Okay, thank you. That's helpful.
The next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.
Hey, guys, just a follow-up on the Wyndham deal there. Can you walk us through kind of how, how you expect to get that level of kind of bookings from the Wyndham channel? Is that just a natural function of being exposed to that many members? Do, do you plan on removing your properties from any existing OTAs or, or raising rates or anything like that, through any other channels to, to kind of help direct things in that way?
Alex, could you repeat that? I'm sorry. I, I lost the last part of it. It broke up a little.
Just the question is: How do you envision Wyndham getting to, you know, that level of your bookings? Are you going to be removing your hotels from any other OTAs or channel partners or raising rates through any other channels? Or is that just gonna, do you think, happen organically as a function of being exposed to that many Wyndham members?
Yeah, I mean, I think, you know, we, we ran internally, our model with them. You know, we're 91% OTA driven today, so paying close to 15%. I think our cost was, this quarter, was $3.7 million in third-party OTA commissions, was the number, plus about $1.5 million in additional processing fees. You know, all in, about $5.2 million went out the door this quarter in, in expense. You know, they, they typically provide an urban core on their, their properties, you know, 85% direct booking. We, you know, we're, we're talking about Shanoop's modeling our, our cost savings at a third. You know, substantial leverage in.
We would not, to answer your question specifically, we would not remove them, but I think that they will pick up a large portion of our bookings, both through rewards. Also, they have a, you know, pretty sophisticated sales and distribution as well. They also have group sales, B2B sales, specific departments around that. You know, they, you know, they have, you know, 9,000+ hotels globally, largest franchise company in the world. Their sales and distribution is very powerful, almost as powerful, if not, as an OTA itself. We're looking at redistributing cost savings there. Yeah, it, it's pretty powerful. We did pretty extensive work on it.
Okay, thanks very much.
The next question comes from the line of Matthew Erdner with JonesTrading. Please proceed with your question.
Hey, guys. Thanks for taking the question. Sticking on the expenses side, what are you guys seeing in terms of property-related costs, such as utilities, labor, Wi-Fi, TV, stuff like that, and the expectation going forward? Are we gonna see increases there, kind of similar to the rent expense?
Yeah, the way we look at it, so we, we got, we got to about 26.9% EBITDA margins this quarter. We were in the low 20s last quarter. You know, part of that is, is, you know, the impact of new property additions is less of a drag. You know, as we continue to grow the portfolio, when we, when we enter into a new property, we hire on the staffing, we're, we're ramping up the revenues associated to it, you know, becomes less of an impact. As we continue to grow, you know, we, you know, we historically were very scrappy, you know, you know, startup, bootstrap company. You know, we continue to sort of run in that sort of mindset.
Consolidation of operations, you know, cross-staffing different properties, with, you know, with personnel, you know, GMs and maintenance crews and so forth. We're meeting with utility companies, actually, as we speak now, to leverage, you know, the, the, the, the economies that we're developing. I would say overall, look, I think there are still plenty of areas where we can improve. I'd actually look at it from a different perspective. As we grow and we become a more, you know, better capitalized, larger player, I think we can get some savings, you know, to offset, pricing increases. Net-net, you know, I would be looking at, sort of the same level of cost.
Okay, that's helpful there. In terms of occupancy, you guys, I believe, had your best quarter ever there at, at 80%. How is it tracking this quarter, if you have any insight into that, for the remainder of the summer? What is the expectation once the fall starts and school's back in session?
Yeah. So, so, you know, I think, I think we're gonna, we're gonna improve occupancy, you know, as, as we continue through the balance of the year. You know, it's tough in Miami, you know, right now with the weather, but that should pick up, you know, in the, in the fall. New York continues to stay very robust. I mean, you know, anecdotally, you know, I tell people that every time I come to New York, you know, it's difficult for me to find a room in one of our properties. It continues to be that way. You know, we're, we're also pretty focused on perishable, you know, selling the perishable inventory we have. You know, look, I would, I would. You know, we're, we're, we're getting better at optimizing.
You know, you picked it up in terms of, you know, occupancy. I think we, we still have some, some room to increase that. You know, we run a business where, you know, every night that goes by, we have a vacant room, you know, it's lost revenue. We have to balance that, you know, with, you know, with the brand and, and, you know, our partner and so forth. We will continue to try to increase that. I would say that, you know, for the balance of the year, you know, we would like to improve that, with, with sort of the baseline of where we're at right now.
Awesome. Thanks for taking the questions.
The next question comes from the line of Tom Kerr with Zacks Investment Research. Please proceed with your question.
Good morning, guys. One more follow-up on the Wyndham deal. Do they have any operational input? I was confused on that. Do you still operate the hotels as you see fit, and this is just a reservation pricing type deal?
Sure. It's, we, we maintain operating control, and then we collaborate on revenue management, sales, and distribution, as well as standards and customer service, and also, standards, internally on the property as well.
Does that mean you don't use your pricing algorithms that you have developed over the years, or you collaborate on that?
No, we still, we collaborate. We still run sales and distribution in connection with, their team.
Yeah. Okay, got it. A couple quick financial questions, please. Yep, the share count increased because of the revenue share agreement. The average shares or the ending shares for the third quarter will be $44.2 million? That should be the ending, isn't it?
Yeah. If you look at the cover of the Q, the shares issued are the slightly under $36 million. The way the rev share agreements are structured, the debt holder can call on additional shares. That's the $44 million. You know, that's an all-in number of what's been committed on the rev share agreement.
We don't know if those have been issued until they executed?
Yeah, they ask for those to be issued. We issued them, so that's sort of the delta between the two numbers. When they ask, we issue. eventually it'll get to that $44 million.
Okay, it could be a long way away or several quarters out?
Correct.
Yeah, there's an extended lockup on those through 2025.
Okay, that's just... Yeah. All right. Any guidance or color on the tax rates in the second half of the year? The second quarter tax rate seemed a little confusing.
Yeah, so, the majority of the non-cash expenses are nondeductible, for tax purposes, and also there's a limitation on interest expense, what you can do. You know, the, our interest expense based on our financing is kind of moving around. The way I'd calculate taxes is on a cash basis. Take out the non-cash, you know, we're roughly, you know, 28%-30%.
That's combined for the Home State.
Got it. All right, last one. The units, operating units, the 1,625 number, would that be the rough estimate of units at the end of the third quarter? Meaning average units for the third quarter would be in the 1,300s or something like that?
We, we've laid it out. If you look at the MD&A section of the Q, I've laid it out. I think it's page 19. We have 1,411 operating currently with the balance. You know, there's two properties that are, that are, that are not quite operating right now. Those, those three that are that were, that are operating this quarter were at the beginning of the quarter, so it'd be 1,400+ what we, what we open and operate between now and the end of the quarter. Probably somewhere higher than that.
Great. Appreciate it. That's all the questions I have for today.
The next question comes from the line of Allen Klee with Maxim Group. Please proceed with your question.
Oh, hi. My follow-up question was answered. Thank you.
Okay. At this time, there are no further questions. I'd like to pass it back over to Brian Ferdinand for any closing comments.
Thank you again, everyone, for your participation and continued interest in LuxUrban Hotels. We are very pleased with our progress and look forward to updating you throughout the year. Have a great day, and thank you, everyone.
Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.