Xenia Hotels & Resorts, Inc. (XHR) Q1 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Xenia Hotels & Resorts First Quarter 2015 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Ramey, Vice President of Finance. Please go ahead.

Thank you. Good morning, everyone, and welcome to the First Quarter 2015 Earnings Call and Webcast for Xenia Hotels & Resorts. I'm here with Marcel Verbaas, our President and Chief Executive Officer; Andy Welch, our Chief Financial Officer; and Barry Bloom, our Chief Operating Officer. Marcel is going to begin by providing you with a quick update on the industry, a discussion of our first quarter results and activities and our outlook for the rest of 2015. Andy will provide additional details on our first quarter performance and our balance sheet. We will then open the call up for Q&A. Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K and other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, May 14, 2015, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks in this morning's earnings release. An archive of this call will be available on our website for 90 days. With that, I'll turn it over to Marcel to get started.

Thanks, Lisa. And welcome, everyone, to our First Quarter Earnings Call. We are excited about this inaugural call and look forward to the future as a now-independent, publicly traded lodging REIT. This quarter has been a busy one for Xenia as we completed our spinoff from InvenTrust Properties, formerly Inland American, and listed on the New York Stock Exchange in early February. We are thrilled with the news that we will be added to the MSCI U.S. REIT Index on May 29. Since listing, we have added several new employees, including most recently, Joe Johnson as our Senior Vice President and Chief Accounting Officer. Joe brings a wealth of accounting, finance, real estate and lodging experience, and we are very pleased we were able to add him to our executive team. We are working diligently to complete the transition from our former parent company and have already terminated several services under our transition services agreement. We feel confident in our ability to terminate the balance of these services before the end of this year. Fundamentals for the lodging industry remain very positive. The first quarter was strong for the U.S. lodging industry in general, with STR reporting occupancy up 3.1% year-over-year and ADR posting a healthy 4.7% gain, which resulted in RevPAR growth of 8%. Turning to our portfolio. We were pleased with our operating results for the first quarter. Our RevPAR growth of 2.6% was comprised of strong ADR growth of 5.1%, which helped offset a decrease in occupancy of 2.3% primarily due to renovation activities during the quarter at 3 of our largest hotels. We did not make any adjustments to our 2014 numbers to account for the adoption of the 11th addition of the Uniform System of Accounts for the Lodging Industry. If we had, we estimate that RevPAR growth would have been at least 100 basis points higher, primarily as a result of the reclassification of resort fees at the Aston Waikiki Beach Resort and the Hyatt Key West Resort and Spa. We also estimate that without the impact of the significant capital improvement projects, our RevPAR growth would have been an additional 300 basis points higher. We are pleased with the margin improvements experienced at the hotel level, as our hotel EBITDA margin increased by approximately 112 basis points in the first quarter, a number that would have been higher without the expected real estate tax increase we experienced. This resulted in adjusted EBITDA of $65 million for the quarter, reflecting 15% growth and adjusted FFO per share of $0.45 per share. Let's turn to an update on renovation and remediation activity during the quarter. The remediation of the damage at our Andaz Napa property from the earthquake is now complete, with the hotel having fully reopened in January of this year. As for renovations, the largest project that was underway during the quarter was a guest room renovation and bathroom conversion at the Marriott San Francisco Airport Waterfront, where significant progress was made during the quarter on this $18 million project. Due to port delays on the West Coast, product deliveries were delayed, and there will be a longer-than-anticipated continuation of renovation disruption in the second quarter. As a result of our previous investment in the property to create the M Club Lounge, we will be adding 3 guestrooms at the hotel as we convert the former concierge lounge to additional keys. We are excited about this opportunity, as we believe that these rooms offer significant upside potential at a cost that was substantially below replacement cost in a robust San Francisco market. The 2 other significant renovation projects, both of which were completed during the quarter, included a $7.5 million (sic) [$7.6 million] guestroom renovation at the Hyatt Regency Santa Clara and a $2.5 million (sic) [$2.3 million] pool deck renovation at the Aston Waikiki Beach Resort. We are extremely pleased with the outcome of the room renovation in Santa Clara and the technical execution of all of our renovations. Also of note, we added 3 keys to the Hyatt Regency Orange County as a result of converting the former GM's apartment to hotel rooms. While renovation disruption has impacted this quarter's results, we believe that the first quarter was the most optimal time to execute on large projects in these high-growth markets. We are confident in our ability to take advantage of the positive dynamics in each of these markets and continue to expect our hotels to exceed overall market performance as they quickly ramp up after the renovation period. Two frequent topics of discussion in our space today are the impact of oil prices on the Houston market and the impact of the strong dollar. And despite significant headwinds in Houston as a result of low oil prices, our Houston portfolio achieved positive, albeit muted, year-over-year RevPAR growth of approximately 1%. We, along with our operators, recognize the potential for a softer year relatively early, and we've put in place a variety of revenue-enhancement and cost-containment strategies in order to mitigate the potential downturn in business. We believe that we are located in the very best submarkets in Houston, namely The Galleria and Woodlands markets. And we will continue to alter and redefine our strategies to focus on a higher rate of transient and shorter-term group business to offset specific groups that have canceled meetings that would have occurred later in 2015. Partially offsetting some of the challenges in the Houston markets, the decline in oil prices has benefited energy expense in our overall portfolio, with utilities expense down by approximately 6% for the quarter on a comparable basis. Because of the composition of our portfolio, we believe we have seen relatively little impact from the strong U.S. dollar, except in Honolulu where it has impacted the entire markets. While the Aston Waikiki Beach Resort has a very significant domestic focus, slackening demands from Asian countries impaired the market's ability to grow rates during the first quarter. With regards to the 2 hotels we currently have under development, both are progressing in line with our expectations. The Grand Bohemian Charleston is expected to open during the third quarter, and we are eager to expand our footprint to the highly desirable and supply-constrained Charleston, South Carolina markets. Grand Bohemian Mountain Brook has an anticipated completion date in the fourth quarter of this year and is located in an upscale suburb of Birmingham, Alabama. Both of these lifestyle hotels will be affiliated with Marriott's Autograph Collection. We are excited about the projects and look forward to adding these hotels to our operating portfolio. While these projects allow us to expand into these desirable markets, I do want to point out that development and joint ventures are not and will not be a primary focus for us going forward. We announced our quarterly dividend of $0.23 per share in March. The first quarter dividend was prorated to account for the time during which we were an independent listed company. Our dividend policy will be reviewed quarterly by our boards, but we are pleased with the current level and yield we are able to provide to our investors. On the acquisition front, we maintain a healthy pipeline of potential transactions as we continue to execute our strategy of investing primarily in the top 25 lodging markets and key leisure destinations. We have a successful track record of executing on our strategy and will remain focused on upgrading our portfolio through targeted acquisitions as well as potential dispositions. As we evaluate growth opportunities, we intend to remain disciplined, and we will not surpass pricing levels that we deem prudent at this point of the cycle. Before I turn the call over to Andy, I would like to discuss our 2015 guidance. Based on first quarter actual results and our forecast for the remainder of the year, we are reaffirming our previous guidance of adjusted EBITDA of $275 million to $295 million and adjusted FFO of $212 million to $232 million. We are adjusting our RevPAR guidance range to 5% to 7%, maintaining the low end of the range but reducing the high end by 50 basis points. We are reiterating our CapEx guidance of $50 million to $60 million, which includes the renovation projects completed in the first quarter, but does not include capital spend to complete the earthquake-damaged remediation work at our 2 Napa hotels. I will now turn the call over to Andy, as he will provide some additional details on our first quarter performance and an update on our balance sheet.

Thanks, Marcel. And good morning. Before I get to the numbers, I want to address the difficulty in comparing our operating results for this quarter and the remainder of this year to same periods for 2014. Prior to our listing on the New York Stock Exchange in February, our financial statements were carved out from our former parent's consolidated financial statements and reflect significant assumptions and allocations. These include allocations of corporate overhead costs, certain corporate and shared functions, interest expense and income taxes. In addition, significant costs were incurred in connection with the separation and listing, and we have incurred and will incur onetime costs transitioning to an independent publicly traded company. During 2014, we sold 55 hotels, 52 of which are reflected in our discontinued operations. There have also been reclassifications of revenue and expense line items to other categories. These reclassifications resulted from the 11th edition changes to the uniform system of accounts, which is the financial reporting standard followed by the lodging industry, and other reclassifications detailed in our 10-Q which will be filed later today. In other words, this is going to be a bit of an apples-to-oranges comparison this year. We will do our best this quarter and throughout the year to clarify these items and their impact. As a reminder, our first quarter same-property hotel results include all hotels owned as of March 31, 2015, except for the 2 hotels under development. We have included all properties under renovation, as they remained open during the quarter, but removed a guarantee payment from 1 hotel to better provide a clear picture of hotel-level operating performance. RevPAR growth in our 46-same-property portfolio increased 2.6%, which as Marcel mentioned, was primarily impacted by renovation projects underway at 3 of our largest hotels: the Marriott San Francisco Airport Waterfront, the Hyatt Regency Santa Clara and the Aston Waikiki Resort Beach. Our portfolio mix is approximately 70% transient and 30% group. 2015 group booking revenue pace is ahead of same time last year by roughly 5%, largely driven by increases in projected rate, as total group room nights are down slightly due largely to weakness in Texas markets. Our strong-performing markets in terms of 2015 group pace include Atlanta, Santa Clara and New Orleans. In regard to 2016, it is still too early in the booking window. However, total booking revenue pace for 2016 is up over 5%, as compared to the same period in 2014, looking towards 2015. As detailed in our press release, we have categorized our portfolio by geographical region according to STR. Our 3 hotels under renovation in the first quarter are in the Pacific region. Excluding this region, our portfolio RevPAR growth was 5.3%, illustrating strong performance throughout the portfolio. The overall Pacific region continues to show robust growth, and we look forward to reaping the benefits of the substantial renovations at our most significant assets in the region after the completion of these projects. For the quarter, top-performing RevPAR markets in our portfolio include Boston, downtown Chicago, Key West, Phoenix, Pittsburgh and St. Louis, which all had double-digit RevPAR growths. Our weakest markets included Waikiki and San Francisco due to the renovation disruption, as well as Houston, which Marcel discussed earlier. We are pleased with our strong flow-through and margin expansion, with hotel EBITDA margin of 30.7%, an increase of 112 basis points for the quarter. We had outstanding expense control during the quarter, with hotel-level expenses increasing just 1.9% despite a substantial increase in real estate taxes related to our 2013 acquisitions. These increases were underwritten with each acquisition and are part of our 2015 guidance, but are due to both tax reassessments at the time of acquisition as well as the expiration of several real estate tax abatements. We continue to aggressively pursue valuation reassessments in multiple jurisdictions and are optimistic for potential reductions. A quick update on the 2 Napa hotel earthquake insurance claims. As we have previously outlined, the Marriott Napa Valley hotel sustained limited damage and fully reopened in October 2014. The Andaz Napa, which was substantially closed during the entire fourth quarter of last year, partially reopened in late December and fully reopened in January of this year. We estimate $2.4 million in damage at the Marriott and $7.2 million in damage at the Andaz, all of which we expect will be reimbursed by property insurance proceeds, less a small deductible. Through the end of the first quarter, we received business interruption insurance proceeds of $3.7 million, which is included in other income on our operating statement, net of hotel-related expenses. We are not including these BI insurance proceeds related to 2014 lost income in either adjusted EBITDA or adjusted FFO for 2015. Corporate and general administrative expenses for the quarter totaled $7 million, which includes $1.7 million of amortization of share-based compensation. In addition, we incurred $25 million of onetime expenses related to our separation from our prior parent, our listing on the New York Stock Exchange, the completion of our modified Dutch tender offer and startup costs. The recurring cash G&A expense for the quarter was $5.3 million, which is in line with our annual cash G&A expense of between $20 million and $22 million included in our 2015 guidance. Adjusted EBITDA for the quarter was $64.7 million, up 15.3% year-over-year. Adjusted FFO was $50.8 million, an increase of 23.7%, and adjusted FFO per share was $0.45. Now let's turn to our capital market activities during the quarter and our balance sheet. Concurrently with our listing, we announced a modified Dutch tender offer for up to 20 -- for up to $125 million of our common stock at a price between $19 and $21. The tender was undersubscribed. And on March 5, we repurchased approximately 1.8 million shares at $21 for a total of approximately $37 million. At the end of the quarter, we had $238 million of cash. Our total debt was just under $1.2 billion. And there was no outstanding balance on our $400 million line of credit, which closed effective with our listing in February. This quarter, we also extended the mortgage on our Marriott Griffin Gate property and repaid the $26 million mortgage on our Andaz San Diego hotel. Our net debt-to-EBITDA ratio, as defined in our line-of-credit agreement, was 3.7x, which translates into a current borrowing rate on the line of LIBOR plus 175 basis points. The weighted average interest rate on our outstanding debt is 4%, and we have 19 unencumbered hotels. Included in our press release are additional details on our debt profile, including interest rate, outstanding balance and maturity date by loan. We have a very manageable debt maturity profile with 1 loan maturing later this year and 5 loans maturing next year. We are evaluating a number of options to address each loan with the idea of extending our maturity profile, lowering our cost of capital and further unencumbering our portfolio. We have substantial liquidity and financial flexibility with which to execute our business plan. As discussed, we continue to pursue acquisition opportunities, but we'll also continue to evaluate other alternatives to best utilize our excess cash. I want to thank you again for joining our inaugural earnings call as an independent public company. We look forward to continuing our dialogue in the future and have concluded our prepared remarks. Operator, we would be happy to answer questions now.

[Operator Instructions] And our first question comes from Aaron Meyer of Wexford.

I just wanted to have a couple of answers on the adjusted numbers, so just trying to understand. You talked about outperforming your group across your markets. I just wanted to understand, when you sort of take out the disruption and then take out the reclassification, what you think the sort of overall adjusted RevPAR might be. In sort of the calculations that you've talked about, it's somewhere in the 6s, but is that sort of a fair way to look at it, same on same?

Absolutely, that is the right way to look at it, as we described in our adjustments. The USALI impact was about 100 basis points, and the impact of the renovations was about 300 basis points, so it's fair to say that we would be -- on a comparable basis, would have been in the mid-6 range.

Okay, perfect. The other question I had was you ended up the quarter with a lot of cash on the balance sheet, even more than I thought. Obviously, as a new company, you always want to have a little more flexibility, but it's actually, if you compare yourselves to the peers on your pro forma guidance, you're looking at something like under 3x, so that's way below peers. And you're also at a valuation that's well below peers. So either way I look at this is in either you should either be more aggressively returning capital, or looking at share repurchase, though as a REIT, it may not be the best use of capital. But what I perceive is it looks to me like you should be paying out a lot more cash here, so help me understand how you guys think about that.

Sure. Happy to answer that as well. We obviously, at the end of the first quarter, came on the heels of doing our first quarter tender offer that we did after our listing. The tender offer was undersubscribed, so obviously that resulted in additional cash on our balance sheet as a result of that. We are evaluating various utilizations of the cash, as Andy pointed out, and that obviously includes looking at acquisitions that will be -- would be accretive for the company, as well as other uses of the cash. I mean we've -- clearly, we've set our dividends at a level with a long-term view of being at a prudent payout ratio, so certainly, we intend to be able to maintain that level. But we certainly will look at utilization of cash, whether that is acquisitions that we are pursuing currently, future debt reductions potentially, or also would evaluate whether a stock buyback would be the best use of the cash.

Sorry, just to follow up on that point and just trying to understand the math that you look at when you consider acquisitions versus a higher payout or at least using more of the cash. Given unencumbered assets and a lot of room on your revolver as well, I'm just trying to understand the thought process of not at least returning some amount of that total $320 million of cash and then using a little bit of debt, which seems to make a lot of sense given how low the rates that you could borrow at as well. So just any more commentary on how you think about the balance of capital usage.

No, I think I frankly can't say a lot more than what I've said. I mean, obviously, we're looking at the various uses of the cash. And when you're adding up kind of those numbers, obviously, you're looking at a little -- a lot of different pieces of or parts of the cash balance, including restricted FF&E reserves and those type of things. But as we look at our cash balance, we're absolutely looking at best utilization of such, and I'm sure you will see that here over the next few quarters.

Sorry, but I'll just leave this at this. The reason I say it is because, assuming that you guys have some cash after dividends, you collect enough cash and then you sort of don't have much of a choice when you're at 2x levered and peers -- you're trading at 20% discount to peers, peers who have 4x or 4.5x levered at a much higher valuations, you sort of set yourselves up for takeouts or not having control of your destiny. So that's really why I make that statement.

Understood. I -- we appreciate your questions. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Marcel Verbaas for closing remarks.

Thank you, operator. I'd like to thank everyone again for joining us for our inaugural call. We, as I've pointed out, are excited about the future. We think that the lodging industry dynamics are very positive today. And we look forward to informing you over the next few quarters of our progress.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.