Good day and welcome to the Xenia Hotels & Resorts, Inc. Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Ms. Lisa Ramey, Vice President of Finance. Ms. Ramey, please go ahead.

Thank you, Anita. Good afternoon, everyone, and welcome to the second quarter 2019 earnings call and webcast for Xenia Hotels & Resorts. I'm here with Marcel Verbaas, our Chairman and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer; and Atish Shah, our Chief Financial Officer. Marcel will begin with an overview of the lodging industry as well as a discussion of our second quarter performance. Barry will follow with additional details on our results and operational highlights as well as a discussion of our capital expenditure projects. And Atish will conclude our remarks with a discussion of our revised 2019 outlook and our current balance sheet. We will then open the call 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, August 1, 2019, 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 to net income and the definitions of certain items 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. Good afternoon, everyone, and thank you for taking the time to join our call this quarter.The U.S. lodging industry experienced moderate growth during the second quarter of 2019 as RevPAR increased by 1.1% on 1.2% rate growth and occupancy decline of 10 basis points as supply increases, an uncertain economic climate and Easter shifting into the middle of April tempered overall growth rates.However, it should also be noticed that industry RevPAR increased by 4% during the second quarter of 2018, providing a difficult comparison this year. Despite a challenging operating environment, we were pleased with our overall performance as our RevPAR growth modestly exceeded our expectations, and we continue to reap the benefits of our asset management teams and operators' focus on expense controls throughout the portfolio.For the second quarter, we had net income attributable to common stockholders of $12.8 million or $0.11 per share. Our adjusted EBITDAre was $89.5 million and our adjusted FFO was $71.5 million.Our adjusted FFO per diluted share was $0.63, a decline of 4.5%, reflecting a 0.6% decline in adjusted FFO and a higher weighted average share and partnership unit count as compared to the second quarter last year.As outlined in our earnings release, our adjusted EBITDAre and adjusted FFO for the second quarter includes $800,000 of business interruption insurance proceeds compared to $2.6 million received in the second quarter last year.We have now settled all our outstanding business interruption insurance claims related to the 2017 hurricanes and wildfires and anticipate no additional proceeds for the remainder of the year as it relates to these natural disasters.Our 1.3% same-property RevPAR growth modestly exceeded our internal expectations. While several of our large group hotels were challenged in April as a result of Easter shifting to the middle of the month, RevPAR was only down…

Thank you, Marcel. Good afternoon.As a reminder, the portfolio information I'll be speaking about is reported on a same-property basis for the 40 hotels we own today. Same-property RevPAR increased 1.3% for the quarter with occupancy up 63 basis points and an ADR growth of 0.5%.Group business was down approximately 2.7% for the quarter compared to last year, which was offset by transient and contract business that were up 3.4%. Part of this change in mix to last year was related to the shift of the Easter holiday into the middle of April, which negatively impacted group business at our hotels during the quarter.Looking at our top 10 EBITDA contributing markets: Houston, up 10%, and San Diego and Napa, each up 6.1%, were our top RevPAR markets for the quarter. Houston had a great quarter due to strength at our Westin properties in the Galleria following the renovations last year as we lap the minor renovation disruption in last year's second quarter. And the market continues to appreciate the high-quality offerings at each of the towers in this complex. Marriott Woodlands also had a strong quarter with good group production.Our San Diego hotels performed well during the quarter as increased convention activity helped compress the market despite poor weather in the area, which affected leisure demand. While we plan the extensive renovation of Park Hyatt Aviara, we continue to work with Hyatt on positive initiatives to drive revenue and control expenses, which will benefit the property over the long term. Napa experienced a solid quarter with each of our hotels having a strong group base, which enabled them to drive rate around several special events in the market.Our Marriott San Francisco Airport was also a notable performer again this quarter with RevPAR up 4.5% driven by strong group performance in…

Thank you, Barry. Good afternoon, everyone.This afternoon, I'll discuss two topics. First, I will discuss our current 2019 outlook; and second, I will discuss our balance sheet.Beginning with our outlook for the remainder of the year. While our second quarter results were slightly ahead of our expectation, we are not making any change to our full year adjusted EBITDAre guidance.Part of the upside we saw in the second quarter was due to the realization of $800,000 of business interruption insurance proceeds and a property tax refund relating to a sold hotel that was approximately $300,000.We had a good start to the third quarter. July RevPAR growth for our portfolio was approximately 3.5%. This is occupancy-driven with markets such as Orlando, Houston, Dallas and Phoenix performing well. While July is the month with the lowest weighting of the quarter at under 30%, we are encouraged by the share gains we are seeing. As for our group definites, our full year group revenue pace has declined.Our full year group revenue pace declined from up 2% to up 0.5% over the last 3 months. This was primarily due to the second quarter's in-the-quarter for-the-quarter group production, which was much lower than last year. However, and more important to our outlook, our group revenue pace for the second half has increased about 40 basis points versus three months ago.As of the end of the June, group pace for the second half was negative 2.5%. As we look forward, September, October and November each have group revenue pace that is negative as of the end of June. But our hotels' operating teams are working hard to put more group on the books during those months.We continue to expect RevPAR growth for the full year to be between 1% and 2.5%. This rate reflects approximately 20…

[Operator Instructions] First question today comes from David Katz with Jefferies. Mr. Katz, please go ahead.

I wanted to just walk through how we get - given there's some moving parts from '19 into '20. And I know - recognize you're not guiding for '20, but if we can make an assumption about organic growth and then go through the other sort of puts and takes, I think that would be a little helpful, if you don't mind.

Yes, sure. I'll give you some high-level kind of puts and takes. I think some of these items we talked about in the past, but just to go through. I think on the positive side, you've got citywide pace that are stronger in several markets as you look to next year, including Denver, Boston, D.C., Dallas. The citywide pace as of now in those markets is up greater than 15%. You've got other markets as well that have better pace.I think one of the projects that Barry spoke about, the ballroom that we're building at Grand Cypress here in Orlando, will be completed as we go into next year, so that's obviously a positive.And then we certainly continue to see positive results from the hotels that we've acquired over the last couple of years, whether it's Scottsdale, Denver, certainly some of the lift that we're seeing because of our asset management practices or in certain cases, applying capital. That's a multiyear story, and we expect that to continue as we go into next year. So those are certainly some of the high-level positives.I think on the headwinds side, we have disruption that we'll experience due to the renovation of the Park Hyatt Aviara, so that certainly will be more disruptive to us particularly given the size of the asset.And then we continue to see new supply in some markets that we talked about in the past, Portland, Denver, Savannah. So we'll be dealing with that, as will other owners of hotels in the market. So I think that covers the list for now.

Yes. No. That was pretty much our list also. And then my follow-up on that is really with respect to Aviara, there is seemingly a change in views around what the fundamental environment's going to be like. Does that alter your assumptions around the Aviara timing or magnitude of what you're going to do with it in any way?

No. David, it's our - we're very far along in our planning of this project, and we are very firm believers in what we're doing to the asset and how transformational this renovation will be. And as I'm sure we've spoken about before with you and others, when we've underwritten deals like this, we've really kind of baked in the fact that we think it's a relatively muted overall RevPAR growth environment but that there is some very specific levers that we can pull with some of these newer acquisitions that we've made.And Aviara is a very striking example of that where we believe that the property has just underperformed from where it naturally should be performing. And by doing the type of renovation that we're doing, we're really putting it in position to be very competitive again in its - within its set and in the great area there.So we feel very strongly about we're doing the right thing. As Barry pointed out in his remarks, we're very pleased with how everything is progressing, both from our project management team and our outside consultants. And it's really starting to take shape, and we're very excited about tackling that project here starting in the fourth quarter.

The next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

So appreciate the detail and comments you provided on July RevPAR trends, which really is in stark contrast to more of the cautious commentary we've heard around demand trends from others in the industry. And so just curious if you could share some of what you're seeing and as it relates to transient pace. I know you provided some color on group over the next several months in your markets. And then if there's anything concerning that you're starting to see on the demand side.

I'll start off and then turn it over to Barry to give you a little bit more feedback. But what I would say overall is that what we've seen the last couple of months has been pretty much in keeping with what our expectation was last quarter. We always knew that in the quarter, that April was going to be a little bit more difficult on the group side just because of the timing of April. May was a pretty solid month all around. June was a tough month that we saw coming because of the fact, for example, that you were dealing with five Sundays in June that you didn't have last year. Last year was just four Sundays, and that's impactful. As silly as it sounds, that 1 day does make a difference.So we knew that it was going to be a little bit more difficult. July, frankly, came in a little bit stronger than what we anticipated a few months ago. So we're pleased with that performance.Maybe a little bit differently from some of our peers, we never looked at the second half of the year as a kind of uptick period or a period that was going to be stronger for us. We always knew we had some holes on the group side, and Atish pointed out that the pace has actually improved a little bit for the second half of the year, but it's still slightly negative.So we always knew that the second half was going to be a little bit more difficult for us. So maybe that's just a little different expectation that we had. But so far, what we're seeing on the ground is really not too different from what our forecast really showed us a few months ago.

I'd just add to that, Austin. For July, and obviously very preliminary numbers, but group and transient were pretty evenly balanced right around that RevPAR growth of about 3.5%, which is - which to us is a good sign for our portfolio that each of group and transient grew at about the same pace.And sitting here today through Q3, which is really as far as we look out on transient pace, we feel pretty good about transient pace in the portfolio, which again is a little bit different than I think we're hearing from some of the peers. But we're certainly seeing that week in, week out, we're performing well in both our corporate transient and our leisure transient segments.

No. That's helpful detail. And maybe, Atish, for you, we're halfway through the year. You guys have achieved margin increases versus your expectation - margin increases through the first half of the year versus I think your expectation was flat overall. You continue to work through your POP initiatives across 7 hotels.And so I was wondering if there's anything specific on either the renovation side or otherwise that could drive margin declines in the back half of the year. Or is it just general cautiousness given some of the wage pressures and other upward pressure on expenses?

I think your question is a really good one, and we have been very focused on margins and, frankly, that's been an area of outperformance for us. We started the year saying that margins were going to be flat for the full year. I think on the May call, I said it would be up 10 bps.Now we expect to do a little bit better than that. That obviously implies a tougher second half. It's not sort of one or two areas in particular. It's just we expect the comparisons are a little bit tougher, and we're seeing the same pressure that others are.I will say though that we have been surprised by and benefited from some of the things that our managers have been able to achieve and particularly coming out of the POP processes at several of these properties. So we're optimistic about margin performance continuing to have a positive and good impact to our overall results.

Next question comes from Michael Bellisario with Baird. Please go ahead.

Just want to go back to your comments on the group side. Are you guys seeing any difference in booking trends for maybe the SMERF and association segment versus the corporate business customer today?

Nothing particularly notable. When we look through - and obviously, part of our review is not just pace as a number but pace hotel-by-hotel and what the sources of business are. We can - it continues to be fairly well balanced between corporate group, which certainly continues to book well.But we have also - I mean I think when we talk about as we have for a while now about grouping up, and the grouping up piece is both in corporate, but it's also really making sure our properties are focused on those softer periods and the natural holes, so around the holidays, around softer periods. And that business, we've been successful in identifying and trying to plug in more association and SMERF-type business.

And then switching gears just on the disposition front, kind of looking for your high-level thoughts here on the topic. But are you seeing any more buyer interest or changes in buyers' pricing expectations or appetite for putting capital to work today given the weaker fundamental outlook, at least with what you and your peers are underwriting or expecting right now?

Well, we - as you know, we haven't completed any dispositions this year, so can't really speak to specific transactions and what the appetite necessarily was in those situations. We will continue to evaluate that. And as I mentioned in my remarks, we'll always look to upgrade and fine-tune the portfolio over time. So certainly, we wouldn't rule out that we may complete some dispositions on the relatively near term.But as it relates to interest in transactions just from the ones you see taking place in the markets, I think there is still good, robust interest in high-quality assets, and those - you've seen some pretty big trades happening recently and being reported, where clearly, there has been very strong interest in those type of assets. So I wouldn't say that at least from kind of our overall market knowledge, that we're seeing any fundamental shift there at this time.

And then just last one for me on Buckhead. You mentioned some weakness there. Was that expected? And has your near-term outlook for that asset ramped up - changed at all?

Yes, it was expected. And I may or may not have said that in my remarks. But for sure, we're working deeply with Hilton Waldorf on really remixing the property from what it was before to what it's going to be going forward and in that - and we're very much in line with what we thought the hotel would be, both for the first half as well as where we think we're going to be for full year.

Next question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Most of my questions have been asked and answered. But a question on margins, which - it's been impressive how you've been able to hold margins in the face of cost increases. And sorry if I missed this, but what were labor cost increases in the second quarter?

Total labor and benefits were up 2.5%, approximately.

And then what was the kind of biggest offset to that, that you've been able to control on the cost side to keep your margins roughly flattish?

I would say - and some of it shows up in the other revenue. So when we go into the, in particular, the acquisition properties and properties that are new to us, we're really, as we've talked about before, through the POP process and through what our asset managers are doing, we're often identifying very high margin - or very low margin in terms of cost opportunity.So we look at every revenue item in the hotel, whether that's departure fees, charges for rollaway beds, charges for refrigerators, things like that, that are in some cases pure profit when we're able to implement those. And we have hotels that hadn't previously implemented charges like that. So that's been a huge plus as it relates to overall margin.In terms of expenses themselves, it's every day looking at in our hotels what are they doing? How can we improve it. So we're still implementing green systems into a number of our hotels in terms of optional housekeeping services.We're introducing bulk amenities in a number of the hotels. We're asking our managers to constantly take a look at food cost and menu pricing, which obviously have a - both of which can be incredibly helpful. So it's literally been, through the portfolio, 1,000 little things replicated in all of our 40 hotels hopefully 365 days a year.

And then shifting gears and kind of following up a little bit on Mike Bellisario's question on dispositions. As it relates to that Chicago Marriott where you took the impairment, can you drill down a little bit deeper as to what happened there? And especially after a recent renovation and why you wouldn't, and maybe you are, just consider disposing of it at this point.

Yes. I mean I'll start with this one. So I mean first of all, keep in mind, it's a very small hotel for us, and we own one other hotel in Chicago. It's 1% of our company EBITDA. It's not a much higher percentage of our book value, so it's just not a very significant market for us, and it never was.I think as it relates to this asset in specific, if you look back from '14 to '18, GOP declined about 25% during that time period. Property taxes, which I cited, were up over 100% over that 4 years. EBITDA is down about 60% over that 4-year period.And I think as we look forward, we just don't see the property returning or recovering to those prior earnings levels. And that really informed our decision to take the impairment on the hotel just taking a look at what the outlook is for this property.And I cited some of the reasons beyond the ones that I just mentioned right now during my prepared remarks. So that's really how - what's evolved at this property. And I think as to the future, I mean, certainly we're open to a variety of options, including potentially disposing of the assets. So I think that's how we're thinking about this hotel overall.

So you bring up a good point with the property tax, and I know it's only a modest component of your overall tax - expenses in a particular property. But it begs the question, with it up 100% in 4 years, why own anything in Illinois? And for that matter, where it's located in the Northeast, why own anything in some of these marketplaces where property taxes continue to go to the moon? I mean is that a consideration you look at when making acquisitions or deciding upon dispositions because it's becoming such a large number?

Well, what is an overall consideration for us is just an overall cost structure that exist in certain places. So as you know, I mean, there are places that are very interesting from a potential demand perspective where we're not necessarily located right now. And in some of those cases that is purely because we're concerned about overall cost pressures and real estate taxes are absolutely a component of that.So I would say that that's a consideration why we're not overly exposed in markets like Chicago, and why we haven't found anything that works for us in markets like Seattle, for example, where you have some pretty onerous overall just cost structures in hotels in many cases. So it's one component. It certainly is not the one thing that we say it absolutely would drive us off, but it's certainly something that comes into consideration.

The next question comes from Brian Dobson with Nomura Instinet. Please go ahead.

Most of my questions have been asked, but you gave some very good color on group pace, which is very helpful. I know it's a smaller component, but as you're talking to your corporate clients, what do you think is driving their behavior here regarding committing to future group business?

I mean as I'm sure you know, we are not in direct conversation with our group customers. Our management companies and sales leaders of those hotels are doing that. Obviously, we're tied in closely to that process and get regular updates on that. So what I'll - my answer is more secondhand rather than firsthand in nature.But as it relates to group, in particular, we continue to see companies want to have group functions. They want to get their people together. I think in some cases, at least in our hotels, that the companies feel a real need to get their people together for annual events, particularly where they have people that are working in more remote geographies, more people who work from home, more people who spend less time physically in the office.And we're certainly seeing that, and that's part of what's led us, as we've talked about before, led the catering teams in our hotels to put together a really good program for them when they're on-site and really have some interesting events and quality food and beverage and things like that. But the feedback we're getting is that people want - they want to meet, they want to meet in hotels, they want to bring their people together.

The next question comes from Bill Crow with Raymond James. Please go ahead.

Atish, just on the housekeeping front, can you remind us why your share count and guidance is a couple million shares higher than where it is today?

Yes, sure. That count change reflects both shares and units. So I think that's maybe one of the reasons. I think the other piece is we did issue equity last year, so that might not be in your - those are the two big drivers of the share count change. But it hasn't changed from last quarter to this quarter, that 114.4 million. It's just that if you look at our shares outstanding versus the total count we're giving.

Appreciate all the color on the demand side. On the supply side, as you think about your big markets, where are the big changes next year? Which markets have more? Which markets have less?

In terms of supply growth.

Yes.

What we're looking at in terms of next year, some of the similar markets where we've had supply pressure, like Savannah, certainly Portland. You've got a little bit of new supply coming in, in downtown Orlando. So some markets are similar to what where we've seen higher levels of supply growth, and there's a couple of other markets which are new.But I would say overall, if you look at the supply numbers for next year, they're roughly the same as - at least at this stage as they are for this year, up in the 2.75% range. And as we've seen over the last few years, the supply growth numbers tend to come down as things get pushed out, so that could also happen as we look - as we get closer to next year.

Marcel, I think in your prepared remarks, you talked about the pipeline kind of being disappointing from an acquisition perspective. I've heard some brokers say they think the second half of this year is going to be much better. And I'm just curious whether there's a sense that owners, would-be sellers might be getting a little bit nervous based on some of the economic and fundamental data that we're seeing and might indeed be a better opportunity in the second half of the year. Any thoughts there?

Could be. We - when we're thinking about the overall potential acquisition climate, brokers are always going to be optimistic about what's coming on. I'll start off with that, I guess. Every time you talk to a broker, they think there's a lot more stuff going. What we've seen in the past, I think, is that - I've mentioned this before in my comments, is that - and you referred to this as well.The potential sellers haven't felt a lot of pressure to need to sell assets unless they really feel like they're getting the absolute top price that they're looking for, because they're perfectly comfortable with the current environment and with the fact that they are able to refinance out in many cases, their equity.So that - I think that's held back the overall pipeline a little bit. And whether that will change, if there is a little bit more softness, it certainly could. But it's a little bit too early to say that.

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

Thanks, Anita. Thank you all for joining us today. We continue to be excited about the prospects of - within our portfolio and particularly with some of the bigger projects that we'll be embarking on and that we have been embarking on. So we look forward to updating you again next quarter. And again, thank you for joining us today.

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