By Thomas Kerr, CFA
NASDAQ:LUXH
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LuxUrban (NASDAQ:LUXH) hosted a well-attended investor event on February 6, 2024 in New York City. Highlights include:
➢ LuxUrban is playing an important role in the Commercial Real Estate ecosystem. Following over two years of extension on Commercial Mortgage Backed Security loans, approximately $25 billion of these loans are coming due in 2024. Due to substantially higher borrowing costs and tougher credit criteria, this is creating challenges for hotel owners to refinance their properties. The company's asset-light lease focused business model as well as its Wyndham partnership creates solutions for hotel owners and creates a significant pipeline of opportunities.
➢ The typical property acquisition math works out to a 6-month payback on average. If they acquire (lease) a room at $13,465 and use 2023 TRevPar YTD of $274 and a 24% EBITDA margin, the initial investment payback could be approximately 6 months.
➢ The company provided additional details and benefits from the Wyndham partnership. The Property Improvement Plan (PIP) investments provided by Wyndham are expected to drive higher TRevPAR, elevate customer experience, and preserve or enhance asset value for both the LuxUrban and hotel owners. Under this arrangement, the company is now able to pursue larger hotel properties, including those with over 200 rooms. The agreement also gives them access to over 100 million members of the Wyndham Rewards Program which accounts for a significant number of domestic hotel bookings. In addition, when hotels are onboarded to Wyndham's booking channels, it is expected to reduce Online Travel Agency costs by up to 33% from prior costs incurred by LuxUrban. Secondary benefits related to staffing and operations are expected to materialize beginning in 2024.
➢ The company emphasized the importance of a TRevPar calculation when discussing growth metrics and financial outlooks. TRevPar (as compared to traditional RevPar) includes ancillary revenue sources on top of actual room rates which can include items such as baggage fees, parking, cancellation fees, and pass through tax charges. A typical ADR does not include these ancillary revenue sources.
➢ Long-term TRevPar growth drivers include greater occupancy, higher ADRs, quality of hotels under lease, and the development of ancillary revenues. In addition, according to industry sources, leisure travel in 2024 is expected to exceed non-covid years such as 2019 and 2023 levels. In 2023, international tourism was at approximately 88% of pre-pandemic levels. The remaining pent-up demand, increased air connectivity, and a stronger recovery of Asian markets and destinations are expected to drive a full recovery at some point in 2024.
➢ The company provided two TRevPar breakeven scenarios for two hotels in New York, one being a 3-star and the other being a 4-star property. This is used to show that in the event of a period of reduced ADRs, the company would be able to drive down the breakeven level with reduced staffing, reduced utility usage, and other cost savings measures.
➢ LuxUrban provided additional details on its Accounts Receivable balances as of the 3rd quarter of 2023. Approximately 52% of the $12.9 million A/R balance was from Online Travel Agencies which was related to the diversification away from their largest OTA and the associated changes in payment terms. 40% was due from the city of New York, which was related to Hotel 46 and Hotel 27, that were part of the migrant program and subsequently canceled after the execution of lease agreements on the hotel. The company expects the city to release these funds in 2024 at some point. The other 8% is due from landlords because of a lease audit in which the company determined that certain expenses incurred were for the benefit of common spaces and re-billed to the landlord in accordance with the lease agreement. LuxUrban expects that receivables will normalize over time to no more than 10% of quarterly revenues as the business continues to mature.
➢ The company slightly revised its 2023 revenue outlook from $120-$125 million to $115-$122 million which was primarily due to onboarding issues of their properties to the Wyndham platform. 2023 EBITDA outlook was also lowered from $27-$32 million to $25-$30 million for the same reasons. 2024 estimates remained unchanged from prior guidance and calls for revenues in the $265-$270 million range and EBITDA in the $60-$70 million range.
➢ The company provided a list of operational items in which they can show improvement in 2024 and subsequent years. These include:
▪ Develop greater operating efficiencies by leveraging scale
▪ Maximize daily room rates, especially during tight booking windows
▪ Provide more services and drive more revenues per room outside of the initial "rental rate"
▪ Better leverage landlord relationships
▪ Improve working capital
▪ Deepen bench strength (industry experience) to reflect its growth and maturation
▪ Continue to evolve shareholder base to long-term institutions
▪ Refine shareholder communications - the company will only announce acquisitions when they are opened for hosting guests and have completed the entire MLA process.
The J Hotel by LuxUrban
On January 30, 2024, the company announced that it had signed and funded a 15-year Master Lease Agreement (MLA), plus two five-year options, to operate The James NoMad Hotel in New York City. LuxUrban expects that The James will be rebranded as The J Hotel by LuxUrban, a Wyndham Grand® Hotel. The Company expects to take possession of the property and begin welcoming guests on or before March 1, 2024.
This 353-room property, which carries a rating of 4.5 on Tripadvisor, is located in midtown Manhattan and just a short walk from the Empire State Building, Madison Square Garden and Grand Central Station. Eclectic, post-modern touches define the lobby and works by local artists adorn the walls. The hotel, which was designed by renowned architect Thomas Juul-Hansen, has been described as an "urban sanctuary." Guests can enjoy indoor/outdoor Italian dining at Scarpetta, which has received a James Beard nomination for 'Best New Restaurant in America' as well as a coveted three-star review from the New York Times. The hotel also has a throwback, speak-easy style cocktail lounge called The Seville.
This is the company's largest acquisition to date, and they worked with hotel owner GFI Hospitality to consummate the transaction. This deal is indicative of the size and quality of hotels the company is now able to target due to Wyndham's support.
Allen Gross, CEO of GFI, stated, "GFI looks forward to collaborating with LuxUrban on additional transactions. In our view, LuxUrban's unique MLA model coupled with its' partnership with Wyndham Hotels & Resorts, which boasts the largest rewards program in the world, has positioned the Company for great success. As a developer and owner of over $4 billion of hospitality assets, we are very excited to be working with LuxUrban."
Valuation and Estimates
We adjust our 2023 revenue and EPS estimates based on recent management commentary. Our 2023 revenue estimate is $118.2 million, and our 2023 EPS estimate is $0.19. Our 2024 revenue estimate is $265.3 million and EPS estimate is $0.81. Our 2024 EBITDA estimate is $25.4 million.
Our primary valuation tool utilizes a Discounted Cash Flow process which assumes high levels of growth in additional rooms available to rent in the near-to-mid term as the company continues to add a steady flow of Master Leases on dislocated properties. Over the next 3-5 years, we expect Adjusted EBITDA margins to reach the high end of the company's objectives, which is approximately 25%.
We maintain our price target of $11.00 pending the release of the company's 4th quarter and full year 2023 financial results.
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