Xenia Hotels & Resorts Inc (XHR) 2015 Q2 法說會逐字稿

Good morning and welcome to the Xenia Hotels & Resorts second-quarter 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 second-quarter of 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 an update on the industry, a discussion of our second-quarter results, our recent activities and our outlook for the remainder of 2015. Andy will provide additional details on our second-quarter performance and our balance sheet. We will then open up 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 as of today, August 13th, 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 the call over to Marcel to get started.

Thanks, Lisa, and good morning, everyone. Welcome to our second-quarter 2015 earnings call and webcast. We have another good quarter to tell you about, but first I would like to give you a quick update on our transition from our former parent company. We are pleased to announce that as of the end of July, we are no compensating InvenTrust for any transition services. As is to be expected, there are a handful of corporate items for which we are obligated to provide mutual cooperation, but we are no longer relying on them for any support functions.

Next, I would like to provide a brief lodging industry update. Overall, the industry remains strong, as evidenced by a 6.5% RevPAR increase in the second quarter. The majority of this increase came through the rate growth as ADR increased by 4.8% and occupancy increased by 1.6%. While certain markets are seeing an increase in supply, we are encouraged that demand growth is projected to remain strong and achieve anticipated supply growth in the near future.

We are happy to report substantial increases in our adjusted EBITDA and adjusted FFO per share for the quarter. Adjusted EBITDA increased to $80.2 million, reflecting growth of 10.5% over last year, while our adjusted FFO per share was $0.57, a 14% increase. Our second quarter RevPAR growth, as adjusted for the 11th addition of the Uniform System of Accounts for the Lodging Industry, or USALI, was 4.7%, driven by an ADR increase of 5.2%. This significant ADR increase was slightly offset by an occupancy decrease of 0.5%.

One of the biggest differences between the 10th and 11th addition of USALI is the treatment of resort fees that are charged by hotels. While previously these resort fees were included in average rate, we now recognize these fees as other revenue. On an unadjusted basis, and thus not an apples-to-apples comparison, our RevPAR increased by 3.9% in the second quarter. We estimate that our second-quarter RevPAR growth was impacted negatively by about 60 basis points as a result of the impact of the guest room renovation and bathroom conversion at the Marriott San Francisco Airport Waterfront, which we completed during the quarter. We are pleased that we were able to increase our hotel EBITDA margin to 34.1% in the quarter, a 70 basis-point increase despite the headwinds provided by the anticipated increased real estate taxes at some of our more recent portfolio additions.

Now I would like to turn to some our recent activities, including our completed and pending acquisitions of four high-quality hotels. Subsequent to the end of the second quarter, we completed the acquisition of three Kimpton-managed hotels, the RiverPlace Hotel in Portland, the Canary Hotel in Santa Barbara and the Hotel Palomar in Philadelphia and we also announced our agreement to acquire the hotel Commonwealth in Boston upon the completion of its current 96-room expansion project. We were able to acquire the three Kimpton hotels by acting very decisively in a limited marketing process. We are excited about further enhancing this relationship, as we now own seven Kimpton-managed hotels in excellent strategic locations. The addition of the three hotels allowed us to enter three new markets and successfully execute on our strategy of increasing our presence in the lifestyle boutique segment in top lodging markets and key leisure destinations.

Our acquisition of the Hotel Commonwealth in Boston will be another exciting step as we continue to improve our portfolio quality and market diversification. This hotel will be a tremendous addition to our portfolio upon closing this transaction in early 2016. Not only is Boston a dynamic lodging market, where we currently have relatively low exposure, but after acquiring the property upon completion of its expansion, we will own a very well located hotel that will be partially new and otherwise newly renovated, with substantial upside potential from its already strong performance base. In addition to targeted acquisitions such as these, we continue to evaluate opportunities to recycle capital from anticipated slower growth assets and markets. We are considering the potential sale of several hotels in our portfolio and will provide further updates if and when we proceed with those potential transactions.

In addition to these acquisitions, we are also pleased to have finalized an agreement that will add STK Rebel as the restaurant tenants at our Andaz San Diego hotel in early 2016. The STK Rebel concept is an extension of the primary STK brands, offering a menu and price point targeted to a broader market. We believe that the restaurant will be a great addition to the hotel.

Turning to our renovation activity in the second quarter, we completed the renovation at the Marriott San Francisco Airport Waterfront in May and are happy to have our major renovations this year behind us. We added three guest rooms at the hotel as a result of this renovation. We also added one additional key at our Hyatt Regency Santa Clara. We look forward to fully reaping the upsized of our recent renovation as the hotels continue to ramp up.

Looking ahead to our upcoming projects, we will begin a comprehensive renovation of the guest rooms at the Napa Valley Marriott Hotel and Spa in December, which we expect to complete in first quarter of 2016. Additionally, both of our development projects are nearing completion, with the Grand Bohemian Charleston anticipated this month and the Grand Bohemian Mountain Brook in November. We look forward to adding these two great assets to our operating portfolio.

As continues to be the case, the Houston market performance is a frequent discussion in the lodging space and as anticipated, the impact of oil prices has caused challenges in the markets. Overall market RevPAR was down 4.6%, due largely to a decline in occupancy. As most of you know, we are located in two diverse sub-markets in Houston, the Galleria and the Woodlands, and the performance of each varied for the quarter. The Westin Galleria and Oaks struggled this quarter on the top line, with RevPAR down nearly 9%, but we have been successful in implementing numerous cost control strategies, (technical difficulty) EBITDA to remain virtually flat compared to last year.

Thus far, the Marriott Woodlands has held up better than the Galleria sub-market hotels, with revPAR for the hotel up 3.5% for the quarter. The property has worked diligently to backfill larger group cancellations with higher rate of transient and small group business and continues to focus its efforts on maintaining this momentum for the balance of the year. When excluding our Houston assets, our portfolio RevPAR increased 6.3%, which is indicative of the strength of our portfolio overall. Andy will provide greater detail on additional specific market performance later during the call. In June we announced our second-quarter dividend of $0.23 per share. While we are pleased with the current level and yield, our Board will continue to review our dividend policy on an ongoing basis.

Now before I turn the call over to Andy I would like to discuss our updated 2015 guidance. We have updated our guidance for the remainder of 2015 to incorporate the three recent acquisitions, the Company's second-quarter performance, and our expectations for the balance of the year. We have increased our EBITDA range to $288 million on the low end to $297 million on the high end, with $7 million to $8 million being contributed by the three recently acquired hotels. Our revised adjusted FFO forecast ranges from $227 million to $236 million, which accounts for the changes in our debt structure and the performance of our assets.

Our revised RevPAR range is 5% to 6%. This range includes our projected performance for the hotels that we acquired as well as our year-to-date performance and the continued weakness in the Houston market. As I alluded to earlier, our asset management team has done a great job in cost containment and margin expansion through the first half of the year and we anticipate this to continue through the end of the year. Finally, we are adjusting our full-year capital expenditure guidance range down $5 million to $45 million to $55 million, primarily due to project timing. This range includes our renovation projects but excludes the expenditures related to the earthquake damage remediation at the Napa hotels. I will now turn the call over to Andy, as he will provide some additional details on our second-quarter performance and an update on our balance sheet.

Thanks, Marcel, and good morning. We are pleased with our second-quarter operating results. We are also pleased that this is the first quarter where our financial statements have not been carved out from our foreign parent and that all reporting responsibilities have been transitioned in Orlando.

Before getting into further details for the quarter, let me remind you that there have been re-classifications of revenue and expense line items to other categories, both due to changes in USALI, as well as other internal re-classifications. The combination of these items, in addition to the carved out financial statements prior to this quarter, means our line-item operating results for this quarter and this year are difficult from a comparison standpoint to the same periods of 2014. In an ongoing effort to provide more detailed and granular information on our portfolio, our second-quarter press release contains full-year 2014 EBITDA by hotel. Going forward, we anticipate providing annual EBITDA by hotel when we release our fourth-quarter results each year.

So let's discuss our second quarter in a bit more detail. Our second quarter same property hotels results include all 46 hotels owned as of June 30, 2015, which excludes our two hotels under development as well as the three hotels acquired in July. RevPAR for the second quarter grew 4.7%, without Houston, it grew 6.3%. We had solid performance in a number of markets, with 17 of our hotels growing RevPAR by more than 9%. Our top performing markets included Santa Clara, up 16%, New Orleans, up 15.5%, San Diego up 12.9%, Washington, DC, up 10.3%, Dallas up 9.8%, and Boston up 9.7%.

In addition to Houston, our weakest markets were San Francisco, due to the renovation disruption Marcel mentioned earlier, and Baltimore, down 8.3%, due to the civil unrest early in the quarter that the city has been slow to recover from. As detailed in our press release, we have categorized our portfolio by geographic region according to STR. Our strongest performing region for the quarter was the Mountain, where our properties in Denver, Salt Lake City and Phoenix all performed well. Despite the disruption from our San Francisco asset, the Pacific was our second strongest region, as San Diego and Santa Clara, post renovation, posted strong results. The West South Central, as previously noted was impacted by our Houston properties, although our Dallas and Austin properties performed very well. Our portfolio mix is approximately 70% transient and 30% group. 2015 group booking revenue pace is ahead of the same time last year by 7%, largely driven by increases in projected rate. Our strongest performing markets in terms of 2015 group pace, compared to 2014, include Atlanta, Santa Clara and New Orleans. We are pleased with our flow-through and margin expansion, with hotel EBITDA margin of 34.1% for the quarter. We had strong expense control during the quarter, with hotel level expenses increasing, 2.6% impacted by the anticipated increase in real estate taxes related to our more recent acquisitions, and anticipated increases in incentive management fees. We continue to aggressively manage -- pursue valuation reassessment in multiple jurisdictions.

A quick update on the two Napa hotel earthquake insurance claims. We are close to finalizing the property damage claim for both hotels, which totals approximately $9.5 million. To date, we have received property insurance proceeds of $7.9 million. In addition, we expect the business interruption claim related to 2014 lost income to total $5.6 million. Of this amount, we received $3.7 million in the first quarter and anticipate receiving 90% of the balance of the claim in the third quarter, with the remainder in the fourth quarter. We are not including net business interruption proceeds related to 2014 lost income in either adjusted EBITDA or adjusted FFO.

Corporate, general and administration expenses for the quarter totaled $6.9 million, which includes $1.8 million of amortized share-based compensation. In addition, we incurred $1.2 million of one-time expense associated with start-up costs incurred while continuing the transition to an independent listed Company. The recurring cash G&A expense for the quarter was $5.1 million, which is in line with the annual cash G&A expense of between $20 million and $22 million included in our 2015 guidance.

At the end of the quarter we had $179 million -- I'm sorry, $197 million of cash, as well as $86 million of restricted cash, consisting primarily of FF&E reserves. During the quarter we paid off the $55 million mortgage on our Houston Garden Inn, Washington, DC, and we finished the quarter with total debt of $1.1billion and no outstanding balance on our $400 million line of credit. Since our listing in February, we have paid off $86 million of mortgage debt and unencumbered two properties. Subsequent to quarter end, we used cash and drew on our line of credit to fund the acquisition of the three hotels. Currently, our cash balance is approximately $60 million and there's $127 million outstanding on our line of credit.

We have substantial liquidity and financial flexibility with which to execute our business plan. The weighted average interest rate on our outstanding debt is now below 4% and we have 23 unencumbered hotels. While we have a well-balanced debt profile, we continue to focus on further unencumbering our portfolio, locking in attractive long-term rates and extending our maturity profile. We are evaluating and pursuing several financing transactions and will keep you updated as progress is made.

I want to thank you again for joining our second-quarter earnings call. This concludes our prepared remarks. Operator, we would be happy to answer questions now.

We will begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Thomas Allen from Morgan Stanley. Please go ahead.

Hey, good morning.

Good morning, Thomas.

So just on the acquisition and disposition front, you've done a number -- you've either done or announced a number of deals over the past few months. Can you just give us some more granularity on how you're envisioning your liquidity today and any more color you can give around your view on potential acquisitions and dispositions in the second half of the year? Thank you.

Sure. This is Marcel, Thomas. Thanks for joining today. As you point out, we obviously did -- we announced four acquisitions, three of which we've closed on, the one that we will not close on until early 2016. As we are looking at our current balance sheet, Andy pointed out what our current cash balance is and the availability we have under our line. As we've talked about consistently, we absolutely want to be at a leverage level that remains sub-[5] and clearly we're well within that range. So we will continue to look for appropriate acquisition opportunities, but I would say that the second half of the year, you might actually see a little bit more of a focus from us on dispositions than you will see on acquisitions.

Okay. And then on the RevPAR guidance, you guys took down the high end of the range. Wondering what drove that. I mean, you gave some color on impact in Baltimore, Texas, I mean, did those -- were those unexpected? And you did highlight that, I think, your group booking base has actually accelerated in the quarter, so trying to understand if the high end of RevPAR guidance cost is more of an industry thing or is it more kind of idiosyncratic with a couple of your properties? Thanks.

Well, as we pointed out, I think it's kind of a number of combinations, but certainly the Houston impact that we saw in the second quarter and that we continue to expect in the third and fourth quarter was probably the main driver for us, in our portfolio, to say that we have to take the top end of the range down from the 7% to the 6%.

If I could just fit one last one in. As we think about your RevPAR for the third and the fourth quarter, can you just help us think about either one-time comp things or seasonality we should think about the growth for both 3Q and 4Q? Thanks.

Yes, third quarter, and I think this won't come as a surprise to you or other people following the industry, the third quarter is a little bit tougher compared to last year, primarily because of some of the timing issues that you're dealing with in September as it relates to both the Jewish holidays and the timing of Labor Day a little bit later in the month than it was last year. So that's impacting the September numbers a little bit. So our comparison in the third quarter is a little bit tougher.

The fourth quarter looks very strong for us and that's really driven by a number of things. Andy pointed out the strong performance of Santa Clara after we completed that renovation in the first quarter and that hotel continues to do very well and we're expecting some acceleration to come out of our San Francisco airport assets after we completed that renovation. Those are things that will really be a driver for us going into the fourth quarter and then, obviously we have some of the easier Napa comparisons, too, as we have the earthquake issues last year.

Okay. And then just to clarify. There aren't going to be any meaningful renovation issues in the fourth quarter for you this year, right?

The only thing that I highlighted in my prepared remarks is the renovation of the Napa Valley Marriott. But the way we're spacing that hotel renovation is that we're getting started in December so there won't be much of an impact anyway in the fourth quarter, but also, when you look at the seasonality of the Napa markets, doing it here towards the end of the year and then going into the early part of next year, it really will not have a very substantial disruption at all, certainly not anything compared to what we saw from our Santa Clara and San Francisco renovations.

Great. Thank you very much.

The next question comes from Aaron Meyer from Wexford. Please go ahead.

Hey, guys. You guys have really managed the margins incredibly well and excluding Houston, which we sort of knew, was really good report. Now, I just wanted to understand how you're thinking about the acquisitions, the cap rates, but also, now that your stock is back below the tender range, how you think about it in the context of your comments on dispositions versus acquisitions. I think it's really helpful you provided the property-by-property EBITDA, sort of shows you're an even a much larger discount to the NAV than I thought. I guess more in line with how you think about these acquisitions and what you paid versus what you look at as your Company cap rate, and just how you think about the capital structure in context of that.

This is Marcel. Thanks, Aaron. We, obviously, are always evaluating uses of capital and obviously, capital is a scarce commodity for us and we're making decisions based on what we think is the right thing for us as a Company longer term. We felt that having the opportunity to acquire these hotels that are very accretive to the quality level of our portfolio is a very good step in the evolution of our Company. That being said, we are, obviously keeping a very close eye on what's going on with markets overall and certainly, our view of where we're trading versus NAV and that's something that, obviously is something that's impacting the lodging industry overall at this point. We will -- we, obviously look at it very carefully and continue to look at what do we think, whether a stock buyback would be an appropriate use at some point. As I pointed out, we are evaluating a number of dispositions and as we are progressing on those, we'll give you some more color and context as far as how we view the balance sheet shaping up here over the next short and medium term.

Okay. Thanks. I appreciate that. How about just a little more on your thought process on terming out the debt. You did a good job of, obviously, unencumbering some properties as well. Just looking at the average interest rates coming way down. For the time being, any more color you could give us on the thought process on extending the maturity profiles, given what it looks like, very favorable rates and especially versus your cap rate and your potential distributable growth?

Sure. Aaron, we're in process of doing a number of transactions, as I alluded to in my comments and we'll announce when we complete those, what we've done. But certainly looking to take advantage of the current rate environment, extend the maturity profile, fix a bit more of our debt while continuing to unencumber properties.

Thanks so much, guys. Really appreciate it.

The next question comes from Mike Swotes from Castle Ridge Investment Management. Please go ahead.

Yes, thanks. I'm trying to make sure that I understand your adjusted RevPAR guidance. It looks to me like there's some inconsistency in the definition between Q1 and Q2. Initially, you guided to 5% to 7% RevPAR growth without any mention of USALI and now you're guiding to 5% to 6% adjusted for USALI. So it looks to me like that's actually 140 basis point reduction in RevPAR guidance apples to apples with the first quarter. Can you clarify that, please?

Sure. I'll be happy to do so. Actually, what you're saying is incorrect. Our guidance that we gave initially, the 5% to 7%, was also USALI adjusted. What we did not do particularly good job of, frankly, was clarifying that in the first quarter and we did clarify in the first quarter the 100 basis point impact on the numbers. Frankly, there's one of the things that we wanted to clarify more in the second quarter release and as we're increasing which I think, frankly, hopefully the investors and analysts view this as a positive. We're obviously trying to increase transparency over time, which is something we are attempting to do after the separation from InvenTrust and initially having to carve out our financials out of InvenTrust. That was a little more difficult to do.

It truly is an apples-to-apples comparison. If you look at what we're using as our guidance range and how we're adjusting for USALI, that is completely consistent with the way that our peers are doing it and also the way that the industry numbers are being reported. So it is an apples-to-apples comparison.

Okay. It read very, very differently. So I wanted to make sure I understood that.

No problem.

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

Thank you, operator. Once again, I would like to thank everyone for joining us today and we look forward to speaking to you in the future, (technical difficulty) and updating you on our progress. Thanks.

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