LuxUrban Hotels - Q2 2024

Executive Summary

• Q2 2024 revenue fell sharply to $18.2M from $31.9M YoY, with gross loss of $(22.2)M and net loss of $(26.6)M as portfolio downsizing, presold rooms at below-market ADRs, and lease exit costs weighed on results.
• No Wall Street consensus estimates were available via S&P Global (CIQ mapping missing); beat/miss cannot be assessed for Q2 2024. Values retrieved from S&P Global were unavailable.
• Liquidity deteriorated materially: cash was $61 at quarter-end and working capital deficit widened to ~$62.6M, necessitating capital raises and debt placements; Nasdaq non-compliance added pressure with reverse split plans under consideration.
• Management expects ADR uplift as presold room agreements burn off (approx. $2M/month) and anticipates Q4 seasonal strength in NYC with potential ADR up 15–18%; 2025 ADR targeted to “low 300s” at market rates.

What Went Well and What Went Wrong

• What Went Well

  • “LuxUrban 2.0” restructuring advanced: strategic elimination of non-performing properties, cost realignment, and leadership upgrades (new CFO, refreshed board) to stabilize operations and position for future growth.
  • Portfolio focus on NYC; management targets revenue optimization and ancillary income initiatives to improve TRevPAR and cash flow as presold bookings expire.
  • Management affirmed ADR normalization: “These advanced sales will expire at the end of 2024… enter 2025 with average room rates projected… $252.11,” with further commentary aiming for “low 3s” ADR at market rates.

• What Went Wrong

  • Revenue decline and margin compression: net rental revenue down 43% YoY; gross loss of $(22.2)M driven by surrendered deposits, lease exit costs, commissions, utilities, and relocation expenses.
  • TRevPAR fell to $188 (from $257 YoY), primarily due to preselling 40% of inventory at discounted rates, and average units available dropped to 1,056 (from 1,625) as the portfolio shrank.
  • Liquidity crisis: cash dropped to $61; working capital deficit widened to ~$62.6M; delisting risk flagged by Nasdaq; dependence on dilutive financings and high-cost debt (18% notes) increased financial risk.

Transcript

Operator (participant)

Please note, this event is being recorded. I would now like to turn the conference over to Adam Holdsworth, Managing Director of Investor Relations. Please go ahead.

Adam Holdsworth (Managing Director of Investor Relations)

Thank you, and good afternoon, everyone. Thanks for joining our Conference Call to discuss the LuxUrban Hotels Second Quarter 2024 Financial Results and corporate highlights. Leading the call today will be Robert Arrigo, Chief Executive Officer, joined by Mike James, Chief Financial Officer. Before we begin, I'd like to remind everyone that our remarks today may contain forward-looking statements based on the current expectations of management, which involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including the risks and uncertainties described in the company's filings. You are cautioned not to place any undue reliance on any forward-looking statements, which speak only as of the date made and may change at any time in the future.

Although we voluntarily do so from time to time, the company undertakes no commitment to update or revise forward-looking statements, whether a result of new information, future events, or otherwise, except as required by applicable law. This call also includes references to certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in the company's quarterly report filed with the SEC. With that, I'm now pleased to turn the call over to Robert Arrigo, CEO.

Robert Arrigo (CEO)

Thank you, Adam, and we appreciate everyone who joined our call today. During this call, Mike, our CFO, and I will review the highlights from our Second Quarter of 2024, outline our strategy for success through the LuxUrban 2.0 brand, and discuss our recent corporate transformation, which includes the addition of new management team composed of hospitality veterans, and a refreshed board of directors. We look forward to discussing the significant changes we've implemented, as well as providing transparency regarding our current business operations and the necessary adjustments following the previous management team. LuxUrban Hotels leases an entire existing hotels on a long-term basis and rents out hotel rooms with the properties we manage, and in 2024, we launched a comprehensive initiative to enhance our company's management and operations, which we refer to as LuxUrban 2.0.

This initiative includes the addition of experienced professionals from the hotel and finance sectors to our management team, board of directors, and the strategic elimination of the non-performing hotel properties, and targeted efforts to reduce operating overhead. While significant work remains as we navigate the third quarter and prepare for the fourth quarter of 2024, we believe that Lux 2.0 is starting to yield the intended benefits. We currently manage a portfolio of seven hotels in Manhattan, one in Brooklyn, and one in New Orleans, all under long-term lease agreements. As of this date of this report, we have 1,056 hotel rooms available for rent across our portfolio. Over the past nine months, we are strategically reducing our domestic operations and U.S.-based portfolio, focusing solely on the properties that have the potential to generate positive cash flow.

As part of our recent 2.0 transition, we are committed to enhancing our management and operations team by recruiting talented directors and officers with significant experience in the hospitality and financial sectors. I was appointed in June of 2024, bringing 36 years of experience in the hotel industry, while Michael James joined as Chief Financial Officer in the same month, bringing extensive financial expertise. We are also pleased to welcome Elan Blutinger and Kim Schaefer, veterans in the hotel and travel technology, to our Board of Directors. Our ongoing efforts to strengthen management and operational expertise across all areas of our company include actively recruiting new personnel and reallocating existing management to areas where the skills can be mostly affected and utilized.

With my extensive experience in hotel management and successfully operating a variety of properties, I am confident in the tremendous opportunities that lie ahead for LuxUrban Hotels. Our strategic approach through Lux 2.0 positions us to generate sustainable positive cash flow moving forward. This quarter presented challenges, including write-offs from the previous management team, but I believe we are at a pivotal inflection point. One significant hurdle we encountered was a decision to pre-sell 40% of our room inventory, which resulted in funds being collected at an average room rate in Q2 of $220.96. However, I am pleased to report that these advanced sales will expire at the end of 2024. I wanna repeat that.

These advanced sales will expire at the end of 2024, allowing us to enter 2025, with average room rates projected in the same period, same quarter of $250 to $311, which is a $31 increase just within that quarter. We are implementing transformative changes with LuxUrban that will enhance our financial stability and provide a solid foundation for future growth. I am excited about the potential that these initiatives hold for positioning our company as a leader in the market. Now, I will turn the call over to Mike to provide detailed review of the financial results. Mike, please take it from here.

Michael James (CFO)

... Thanks, Rob. As highlighted, the financials for the second quarter reflect write-offs and necessary accounting adjustments to properly reflect the financial position of the company. It's important to note that the figures we're presenting today pertain to our core properties and operations, which form the foundation of the portfolio. Despite these challenges, we are focused on leveraging our existing assets and driving operational improvements to strengthen our financial outlook moving forward. I look forward to discussing the specific results in detail and sharing how our strategic initiatives are positioning us for success. Net rental revenue for the three months ended June 30th, 2024, was $18.2 million, as compared to $31.9 million for the three months ended June 30th, 2023, a decrease of 43%.

The decrease predominantly resulted from the decrease in average units available to rent from 1,625 for the three months ended June 30th, 2023, to 1,056 for the three months ended June 30th, 2024. This decrease in net rental revenues was exacerbated by booking of guaranteed reservations at relatively low rates for the three months ended June 30th of 2024, as compared to the same period during the prior year. The TRevPAR, or revenue per available room, was $257 for the three months ended June 30th, 2023, versus $188 for the three months ended June 30th, 2024.

The lower TRevPAR in the current quarter is attributable to the impact of the pre-selling of the rooms at lower rates versus the same period last year, which we are forecasting to increase after the pre-booked guests have stayed at the property. Cost of revenue increased from $21.7 million in the three months ended June 30, 2023, to $40.4 million for the three months ended June 30, 2024, an increase of 86%. Primarily as a result of the company expensing the unamortized lease acquisition cost and security deposits surrendered for the properties that were exited during the period, as well as the increase in cost related to utilities, labor, cable, Wi-Fi, credit card processing fees, commissions, and costs related to the relocation of guests from our terminated properties to alternative properties.

Gross profit decreased $22.2 million in the three months ended June 30th, 2024, from $10.2 million in the three months ended June 30th, 2023, a decrease of $32.6 million or 318%. The decrease is primarily as a result of the company expensing the unauthorized lease acquisition cost and security deposits surrendered for the properties that were exited during the period, as well as deposit surrenders and commission costs to relocate guests from the terminated properties to alternative properties. Total operating expenses incurred for the three months ended June 30th, 2024, decreased approximately $1.2 million from the three months ended June 30th, 2023. Of the decrease, general and administrative expenses were reduced, offset by $600,000 for costs related to the exit of a partnership with Wyndham.

Total other expense for the three months ended June 30th, 2024, was a 185,000 as compared to 29.7 million for the three months ended June 30th, 2023. The decrease is primarily due to the lower cash interest and financing costs during the three months ended June 30th, 2024, as compared with the three months ended June 30th, 2023, as a result of the Greenle revenue share transaction.

As of June 30th, 2024, our cash and cash equivalents were $61, as compared to $752,848 at December 31st, 2023, and the total current assets were $3,315,844 at June 30th of 2024, as compared to $19,721,057 at December 31st, 2023. The working capital deficit was $62.6 million at June 30th, 2024, versus a deficit of $13.4 million at December 31st, 2023. We continue to explore capital-raising transactions as well as strategic initiatives to improve the company's cash position.

Through Lux 2.0 and the recent changes from the previous management team, we are optimistic that our knowledge and strong work ethic, alongside our investors and bankers, will change the business for the positive as we enter the fourth quarter and into 2025. I will now pass the call back over to Rob.

Robert Arrigo (CEO)

Thank you, Mike. I'm optimistic about the future of our company, especially in the light of the significant changes we've made to our personnel and the strategic direction. We anticipate that the fourth quarter will yield a positive impact on our overall operating results, particularly as the New York hotel market typically performs at its strongest during this period. With our focus on optimizing operations, we expect to generate revenues at higher daily average room rates. As we implement our strategy, we are committed to maintaining transparency with our shareholders. We will keep you informed of our progress through regular communications, including press releases and media updates. This is a transformative moment in our company's history, and we are excited about the opportunities that lie ahead. With that, I will turn it over to the Operator to facilitate questions from the audience.

Operator (participant)

We'll now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. And our first question today comes from Jon Old with Long Meadow Investors. Please go ahead.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Thank you. Rob and Mike, first, thanks for battling through all the tough issues you've had to deal with. Appreciate all your hard work, and feels like we're close to coming out the other side, so putting all the tough stuff aside, let's look forward to the next year when all the resold rooms are gone and you're sort of starting fresh. What is... I know you wouldn't want to give detailed projections, but RevPAR with a clean slate feels like it could be in the 300 range maybe, and EBITDA margins still, you know, 25%-ish, 30%-ish. Just give us some guidance as to what a, you know, clean, fresh year might look like to the extent that you can. Thank you very much.

Robert Arrigo (CEO)

John, Mike, if I could take this. John, one, I want to thank you for your support. Without the investor support, we wouldn't be Lux 2.0. So at this point, I'm gonna say this is. We all know that the presale had a substantial impact on our overall ability to sell, and there were times where the rates were being sold at $50 or $100 to $150 below market. So we know that same store next year, there's gonna be substantial RevPAR growth naturally, just in the fact that our inventory will be released. So this is the time I can say this. Our VP of Revenue Management, who's one of the most talented people, he's been in the market 38 years. They're very excited about what's gonna happen in Q4 as well as 2025.

They have control of the entire inventory, and everyone that sees our portfolio knows we have great hotels and strategic locations. The increase in ADR will be significant. We're also gonna realize a year that we're not gonna have all these extraordinary changes. You know, we've gone through a complete repricing, resegmentation of the hotel. We're also gonna be looking at all new segmentations for our properties. We've been an OTA provider since the beginning of the operations of the company. We are gonna be going after the highest segments with the quality of the hotels that we have within New York, and that's the reason why we changed our approach. We wanted to narrow the field, focus on what we're good at, and deliver better results, and we've gone through some heavy lifting to do that.

But with the ADR lift, the demand that we see in New York is not going to wane based on what we see. With the migrant housing of over sixteen thousand keys, the elimination of Airbnb of forty-four thousand keys, keys in New York are extremely valuable, and we have a great portfolio to start to build from. What's gonna be fantastic for us in 2025 for our audience is we're not gonna be riddled by a lot of the legacy challenges we've had in the operations. We have made substantial reductions in labor. We've made tremendous headway with all of our vendors. We are in great standing with the key vendors that are closest to us. So what we see in 2025 is a opportunity to show tremendous growth, but naturally, it's not a promise.

It's gonna happen because we've already done the heavy lifting. Now we just need to see the results. Hopefully, I answered your question.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay, thanks. But... So ADRs should be, what, you know, what would be sort of a market number right now based on, you know, comparable hotels and et cetera, et cetera, like three fifty, something like that?

Robert Arrigo (CEO)

I think that we're gonna. I feel confident to say we'll be in the low threes.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay.

Robert Arrigo (CEO)

It's safe to say that if the market doesn't change dramatically, which, just to say this, we're seeing Q1 numbers that we've never seen before. I've mentioned this to a few other investor reviews, where Q1, historically, New York, has always been incredibly soft. What we're seeing now because of the moderate weather, it's a key factor in Q1. Moderate weather in New York has allowed people to start booking conferences and meetings in Q1 that typically happened throughout the year, but ADRs have grown substantially. So we see a tremendous opportunity in Q1 that we've never seen before. The other opportunity that we've seen in the market, you know, hotels have shoulder nights traditionally. They were Thursdays and Sundays.

Because of the new office, where many people do not travel to the home office Monday or Friday, those Thursdays and those Sundays are becoming great selling nights in the hotel industry because people are already getting to their location Thursday night and working from that location. Same thing on Sunday. They're missing those traditional travel days. We're seeing a flattening out of occupancy, which is great, which allows us to compress and to charge. Q1, I'm bold on, and I think that we're gonna perform well. Q4, just to, you know, I see, you know, strong ADR growth in Q4. I'll say this, many of you, the New Yorkers, they know that shopping week, about ten years ago, you know, became very weak, and over the last three years, it's become, again, what it used to be.

New York is vibrant. There's a tremendous amount of activity going on, entertainment-wise, as well as other opportunities in New York. So, you know, two thousand Q4, we'll see. I'm confident saying at least 15% growth in ADR, maybe it's even, maybe even 18%. And we'll see that continue all the way through 2025.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Great, thanks. And then a quick one for Mike. Mike, thanks for, I know it's been tough getting all the Q's up to date, given all the issues, but assume we can expect a cleaner third quarter without as much noise and on time, going forward.

Michael James (CFO)

That's my number one goal, to be on time and, to put out a great product. So going forward, that's what we're looking for.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay. Thanks very much, guys. Appreciate all your hard work.

Robert Arrigo (CEO)

Thank you.

Michael James (CFO)

Thanks, Jon.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question comes from Alan Klee with Maxim Group LLC. Please go ahead.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Yes, good afternoon. Could you just review for the quarter, how much was what you would characterize as one-time operating expenses?

Michael James (CFO)

I don't have that right now available, but I could, you know, work that up and get you what that number is.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay. Thank you. Do you think that-

Michael James (CFO)

We also restated Q1, so a bunch of the expenses were in Q1 when you look at the year-to-date numbers. So there were a bunch of one-time expenses in Q1 as well as in Q2.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Right. I was just curious for Q2 at this point, but both of them would be helpful. But, I mean, do you feel like, besides the one-time cost, there's other things you'll be doing on the expense side going forward? Or do you think that the run rate that you are, excluding the one-time costs, is you're comfortable with?

Michael James (CFO)

We've reduced overhead by a few million dollars by cutting back on the labor. Part of it was due to getting rid of the properties and the other part which rolled into COGS, and then the other part were just other individuals that we lightened up on. So we're running a you know thin lean business. So you know the cost should stay relatively low for quite some time. And then you know as we scale into the future we'll you know we would add people going forward.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Thank you. Do you think that... You said you're at nine properties now, do you think that there's more that you'll have to sell, or that you feel good about that number?

Michael James (CFO)

No, we feel good about that number.

Robert Arrigo (CEO)

Right. I mean, if I could expand on that, I, I've recently spent a lot of time within the hotel industry and, you know, our products, the hotel leasing product, you know, we're kind of redesigning who we are to be able to deliver a product that's interesting. I sat in front of a bunch of hotel owners, and I said to them, "You know, third-party management companies, their success historically, is the ability to bill the owner for everything and charge, and charge a gross revenue fee of 2% to 3%." We want to design a program that's, that is, and going forward, that is very transparent to the owner as well to us, to make sure that we're designing leases that are successful for both parties.

With today's economy, there's a lot of hotel owners seeking relief, seeking a new management option. So there is a lot of people very interested in our formula, and so we want to make sure the formula is right going forward. That's why we're focusing our efforts in New York. The demand is there, the opportunities are there, but we want to make sure the formula works well there before we look at other bigger markets. But the reality is, New York has so many opportunities for us, and the timing couldn't.... We believe the perfect storm is right now to look for the future owners. We're excited about the future. We really are.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Thank you. So for the property leases that you've gotten out of, what's left in terms of the, if there is any, of the liability or potential litigation related to them?

Robert Arrigo (CEO)

I mean, we've exited Florida. The reason why these hotels we've exited recently was Florida, LA, and these assets were less than, many of them were less than seventy-five keys. They were not strategic. They were not high performers. So the reality is, Florida, most of that has been resolved. There'll be some legal costs and some settlement costs, but, you know, we don't believe it's gonna be that substantial. So, you know, those are things we're working through, but, you know, I don't foresee those to be substantially gonna change the future financial results of this company. You know, I think many of the owners realize, too, that you know, the solution that we were giving them was not designed the right way for them as well.

So I don't see it to be a hindrance substantially in the future.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Okay, thanks. My last question is, I'm looking at the Subsequent Events section of your 10-Q, and it looks like related to... Tell me if I got this wrong, I did it back of the envelope. You've raised around $10 million net subsequent to quarter end, and then I guess, how do we think about so if that number is right, let me know, or in the ballpark. And then you said that the net working capital deficit is a little over $60 million. So how do you feel about kind of those factors?

Michael James (CFO)

So that, yeah, the $10 million is a realistic number for Q3. And, you know, we're fighting an uphill battle, just burning off the pre-sold rooms. As of the June quarter, I believe we had about $11.2 million unrealized unearned revenue on the balance sheet. That, that'll burn off. We're burning off about $2 million a month. So as we get towards year end, that'll be about $400,000. So right there, we'll, you know, we'll take in, let's say, $10.8 million. We'll reduce that liability. And, you know, we're gonna continue focusing on getting the company cash flow positive and looking to work that number down quite a bit.

Allen Klee (Managing Director and Senior Equity Research Analyst)

So the unearned revenue that you... That's, that'll be cash coming in over the second-

Michael James (CFO)

No, no, no.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Is that the way to think of it?

Michael James (CFO)

We've already collected that cash, so that cash has actually been collected and spent. Yeah, so the number is $11.264 million. So it's been collected and spent. As the guests come and stay, that's when we earn it. So when the guest shows up, that's when we earn that revenue. So from a GAAP accounting standpoint, each month we're burning off, let's say, roughly $2 million. Then next year, you know, if everything remains the same, then that $2 million, let's say we still rent those rooms out for the exact same rate as you're doing, same store sales, then it would be, we would be collecting that cash.

But since we're not, you know, pre-selling like they were before at the discounts that they were doing, we would expect it to be higher, assuming that the marketplace doesn't change drastically.

Allen Klee (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Thank you so much. Appreciate it. Good luck.

Michael James (CFO)

You're welcome.

Operator (participant)

And our last question will come from Mike Wells, private investor. Please go ahead.

Good evening.

Michael James (CFO)

Good evening.

I was curious how you're gonna handle the Nasdaq compliance.

So I'll take that, Rob. So, right now, what we're looking to do is, we'll probably do reverse stock split. That will get the price of stock above the 10-cent level, above the dollar level, and then it's kind of up to us to properly project how we're turning the business around. We'll be answering, you know, questions to the NASDAQ on that. And, we, you know, hopefully the stock will cooperate, and we get the market cap above $35 million, at which point we'd be in compliance with the NASDAQ at that point.

Timing?

I'm sorry, say it again?

What's your timing?

The timing on that, if we were to file a proxy, that's probably gonna be thirty to forty-five days out. We have a hearing set with Nasdaq in October, and we'll know a lot after that meeting.

Okay. Good luck.

Thank you.

Robert Arrigo (CEO)

Thank you.

Operator (participant)

That concludes our question and answer session. I would like to turn the conference back over to Robert Arrigo for any closing remarks.

Robert Arrigo (CEO)

I would like to say this during the call. I'm getting so many texts, positive support. I do wanna say this: The ownership groups that we've been working with have been exceptional. They see the value of Lux 2.0. They see that in five months, we've taken a company to positive cash flow, rebuilt vendor relationships, changed an entire leadership team at the property level, as well at the top level, and we brought some of the most talented people in a company that was challenged. Everyone on the team, I can say this with absolute confidence and support, everyone within LuxUrban is excited about the future. They're excited about turning around a company that they know that the formula that we have behind us is really what the economy needs.

Hotel owners today are just embattled with costs between third-party management companies, franchise companies, and asset managers. They can no longer afford that level. So this opportunity for us to do it right, we scaled ourselves down for a reason. We wanna make sure that we are focused, we are forward, and we are strong when we present ourselves to owners. The strength of Mike and I in the last six months working together, he's been an exceptional partner, is being honest and being transparent, and that's the formula that we're gonna use with owners, and that's what owners have not had historically. They've had third-party management companies hide themselves within their P&L statements. We're opening the book, and we're gonna make a difference in this real estate market, and we are gonna be...

When we finish what we do, the formula that we run is how everyone should operate or own their hotels in the future. So it's been a heavy lift for six months, but as they say, "It's the heart that makes you great." Lux 2.0 will be great. Q4 will start to show the real results, and I'm excited that the team gets to see it as much as the owners and, of course, never mind the guests of our hotel. So, we look forward for the future, and we thank everybody for their support. Thank you.

Operator (participant)

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.