Xenia Hotels & Resorts Inc (XHR) 2015 Q3 法說會逐字稿

Good morning and welcome to the Xenia Hotels & Resorts third-quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Lisa Ramsey, Vice President of Finance. Please go ahead.

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 will provide you with an update on the industry, a discussion of our third-quarter results, some recent activities, and an update on near-term outlook.

Andy will provide additional details on our third-quarter performance and our balance sheet. We will then open up the call for Q and 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, November 12th, 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 on this morning's earnings release.

An archive of this call will be available on our website for 90 days. With that I will turn it over to Marcel to get started.

Thanks, Lisa. Good morning, everyone. As always, we appreciate you taking the time to participate in our earnings call this morning.

As you are all aware at this point the third quarter presented its challenges for the lodging industry due in part to a late Labor Day holiday which negatively impact late August and early September lodging demands and a shift in the Jewish holidays. However, despite the calendar disruption we are pleased with our portfolio's third-quarter results.

During the third quarter our hotels delivered strong bottom-line results which increased our adjusted EBITDA to $74.9 million, a 25.5% growth year-over-year, and resulted in adjusted FFO per share of $0.57, up 46.2% over last year.

These results were positively impacted by a substantial reduction in G&A compared to last year when we were a subsidiary of InvenTrust. Andy will provide further detail on this later on.

Same-property RevPAR for the portfolio increased 4.6% due almost entirely to an increase in average rate as occupancy remained virtually flat year-over-year. Keep in mind that this RevPAR growth is based on adjusting 2014 results for the adoption of the 11th edition of the Uniform System of Accounts for the Lodging Industry, or USALI, as we have previously discussed.

We are also pleased with our same-property hotel EBITDA margin of 31.8% in the quarter, a 60-basis point increase over last year despite the fact that real estate tax for the quarter increased 18% on a portfolio-wide basis. While the third quarter was not impacted by large-scale renovations such as the ones we completed in the first and second quarter of this year, our portfolio results continued to feel the impact of lower demand in the Houston market resulting from the persistently low oil prices.

Excluding our Houston area hotels our portfolio RevPAR would have increased by 5.9%, an indication of the continued strength of the portfolio overall. I should point here that we did benefit from very strong year-over-year performance at our two hotels in Napa, California since the earthquake impacted last year's results.

Although Andy will provide additional color on market specific performance later during this call, I would like to focus on the performance of our Houston area hotels in a bit more detail now. Overall Houston market RevPAR for the quarter was down 3.7% due entirely to a decline in occupancy as ADR was up slightly for the quarter.

When discussing our portfolio this remains a tale of two submarkets, the Galleria and Woodlands. As was the case last quarter the Galleria struggled with RevPAR down 10% in the third quarter. Thus far the Marriott Woodlands continues to hold up as evidenced by its RevPAR growth of 6% for the quarter.

The main difference between the hotels in our portfolio has been the fact that transient demand has remained stronger in the Woodlands while The Galleria hotels have suffered from significant declines in project consulting business. Unfortunately the resulting shift in demand mix at Marriott Woodlands creates challenges on the food and beverage side of the hotel as cancellations from larger groups with higher catering contributions have impacted the hotel this year.

Going into 2016 we maintain a strong focus in Houston on both cost controls and group sales efforts that we expect to yield positive results in a very competitive landscape.

Now I would like to discuss some of our recent activities including several changes to our portfolio both during and subsequent to the quarter. As we discussed in our second-quarter call in July 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. We are well underway with the integration of these three hotels into our asset management platform, and we are pleased with the progress we and the hotels are making in implementing a number of Xenia best practices particularly in the areas of guest room pricing, ancillary revenue pricing and cost efficiencies.

In August we announced our agreement to purchase the Hotel Commonwealth in Boston upon completion of the property's current expansion project. The expansion is on schedule and we anticipate closing the transaction in early 2016. We look forward to adding this outstanding hotel to our portfolio.

Finally during the quarter we completed the development of the 50-room Grand Bohemian Hotel Charleston and Marriott Autograph Hotel in Charleston, South Carolina, which opened to guests in late August. The hotel has been well received in the community and we are excited to own the premier hotel in one of the most desirable leader destinations in the country.

Subsequent to quarter end we successfully opened the Grand Bohemian Hotel Mountain Brook, a 100-room Autograph Collection hotel located in an affluent suburb of Birmingham, Alabama, and we sold the Hyatt Regency Orange County in Garden Grove, California for a price of $137 million.

As I stated on our second-quarter earnings call, while continuing to evaluate potential acquisition opportunities, our expectation was for us to be net sellers for the balance of the year. The sale of the Hyatt Regency Orange County was a strategic disposition that we had considered for some time and we felt that the timing was right to take advantage of the private market valuation for a legacy hotel in our portfolio.

The asset performed well after the significant renovation we undertook after acquiring the property in 2008. However, we projected below average growth over the next several years due to additional supply coming into the greater Anaheim market and this submarket in particular.

This, coupled with near-term capital requirements and the fact that a number of international investors expressed strong interest in the hotel, resulted in our decision to dispose of the property. In addition to the net sales proceeds we were also able to retain the $5.9 million balance in a capital expenditure reserve account.

The hotel's RevPAR during the first half of the year was approximately 19% below the Company's overall portfolio RevPAR, indicative of its position in our portfolio. We were pleased to be able to transact smoothly and achieve attractive pricing at 11.8 times our 2015 EBITDA forecast. In addition to this disposition we are considering the sale of certain other hotels on the lower end of our portfolio and we will provide an update when more definitive strikes are made in this regard.

In October we transitioned the management of four of our urban upscale hotels to Sage Hospitality including the Courtyard Pittsburgh Downtown, the Hilton Garden Inn Evanston, the Courtyard Kansas City Country Club Plaza, and the Homewood Suites Houston Galleria. We initiated this change as we wanted to take advantage of an opportunity to achieve additional scale with one of our strong management relationships while reducing the number of third-party operators in our portfolio. We are excited to grow our relationship with Sage who already manages the Marriott Napa Valley Hotel and Spa and the Residence Inn Denver City Center for us, and will continue to manage the Hotel Commonwealth upon completion of that acquisition.

Turning briefly to renovation activity in the third quarter, we spent $9.7 million in mostly routine capital expenditures at our hotels since we completed our major renovation projects for the year in the second quarter with the completion of our Marriott San Francisco Airport Waterfront, guest room renovation and bathroom conversion.

In the second half of 2015 we will have completed or made significant progress on a number of additional renovation projects including public space upgrades at the Loews New Orleans Hotel, the Renaissance Austin Hotel, the Fairmont Dallas, and Marriott Griffin Gate Resort and Spa, and food and beverage enhancements at the Renaissance Austin, Hotel Monaco Denver, Hotel Monaco Chicago, and Hyatt Key West Resort and Spa.

Through the third quarter we have spent approximately $38 million on capital expenditures this year and we now expect to spend between $45 million and $50 million in 2015. As it relates to fourth quarter and early 2016 capital projects, we have embarked on a guest room renovation at our Marriott Napa Valley Hotel and Spa which we anticipate completing early next year.

We anticipate spending approximately $6.8 million on the hotel's guest rooms and corridors including the conversion of bathtubs to showers in 82 of the guest bathrooms. In addition to the guest room renovation we are transforming the hotel's historically underutilized pool and courtyard area through a $3.5 million investment that will create a sophisticated pool environment as well as highly desirable outdoor function space. While the overall property renovation is a significant one we expect relatively little displacement as we have scheduled the work during the time of relatively soft demand in the Napa market.

Turning to our dividend payouts, in September we announced our third-quarter dividends 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 as we evaluate our portfolio evolution and ongoing cash flows.

Now before I turn the call over to Andy, I would like to walk you through our revised full-year guidance. As you know, we updated our guidance on October 5th, based on our preliminary third-quarter results and outlook for the fourth quarter at that time.

We revised our full-year RevPAR projection to 4.5% to 5.25% and indicated that we believed our 2015 adjusted EBITDA would fall between the low and midpoints of our previous guidance of $288 million to $297 million. As a result of our third-quarter performance, our current fourth-quarter outlook and the sale of the Hyatt Regency Orange County we are now providing the following updated guidance.

We continue to expect that our same-property 2015 RevPAR growth will fall between 4.5% on the low end and 5.25% on the high end which is supported by the 6.7% RevPAR growth that we achieved in October. Our new adjusted EBITDA range is $288 million to $293 million and our adjusted FFO range is now $236 million to $241 million.

Although the sale of the Hyatt Regency Orange County resulted in a projected EBITDA reduction of approximately $1.9 million for the remainder of 2015, margin expansion and G&A savings essentially offset this reduction allowing us to maintain the adjusted EBITDA range indicated in early October.

Andy will provide additional detail regarding our projected income taxes, interest expense, and G&A and how they are impacting our upwardly revised adjusted FFO guidance. And with that I will now hand the call over to Andy.

Thanks, Marcel, and good morning. Before discussing our third-quarter results in greater detail, let me remind you that there have been reclassifications of revenue and expense line items to other categories both due to changes in USALI as well as other internal reclassifications.

The combination of these items in addition to the carved-out financial statements in the first quarter and 2014 means our line item operating results for this quarter and this year are difficult from a year-over-year comparison standpoint. Our third-quarter RevPAR and EBITDA margin data are presented on a same-property pro forma basis and include 49 hotels as if they were owned for all periods presented but exclude the Grand Bohemian Hotel Charleston which opened in late August.

We had solid performance in a number of markets, with 10 of our hotels growing RevPAR by double digits. Our top performing markets included Napa due largely to an easy year-over-year comp, San Francisco up 13.5%, Orlando up 12.3%, Birmingham up 12%, and Salt Lake City up 11.3%. In addition to Houston, our weakest markets were Fort Worth, down 7.7%, Charleston, West Virginia down 6.2%, and Baltimore, down 5.5%.

2015 group booking revenue pace is ahead of same time last year by over 6%. Our strongest performing markets in terms of 2015 group pace compared to 2014 include Atlanta, Santa Clara, Orlando, and Philadelphia. Group revenue pace for the fourth quarter is strong up 12% over this time last year.

We are pleased with our flow-through and margin expansion with same property hotel EBITDA margin expanding 60 basis points for the quarter and 90 basis points for the year. We had good expense control during the quarter with hotel level expenses increasing only 2.9% despite the anticipated increase in real estate taxes.

This quarter -- our third-quarter real estate taxes increased $1.6 million or 18%, and for the year to date period have increased 15%. We continue to aggressively pursue valuation reassessments in multiple jurisdictions.

Our recurring cash corporate general and administrative expenses for the quarter totaled $4 million, representing a decline of $6.4 million, or 61% compared to prior year. As we have discussed on prior calls, our 2014 G&A expense was an allocation from InvenTrust and a part of our carved out financial statements.

Our total G&A expense for the quarter was $5.4 million, including $1.3 million of non cash amortization of share-based compensation. The recurring cash G&A expense for the nine months was $14.7 million.

Based on actual results through October, we anticipate our annual recurring cash G&A expense to now be between $20 million and $21 million.

A quick update on the two Napa hotel earthquake insurance claims. We have finalized both the property damage and the business interruption claims for each hotel.

The property damage claim has been paid in full, and we expect to receive the remainder of the business interruption claim prior to the end of this year. As a reminder, we are not including net BI proceeds related to 2014 lost income in either adjusted EBITDA or adjusted FFO.

In addition to the positive G&A variance, the acquisition of the three Kimpton hotels in July and continued margin expansion led to the significant year-over-year growth in adjusted EBITDA. In addition, adjusted FFO was impacted by a $2 million positive variance in income taxes.

Again, our 2014 income taxes were based on carved out financial statements. In September, our Board approved a 336E IRS tax election which enables us to step up the tax basis in our hotels to the estimated fair market value on the spin-off date. As a result, this election will increase our depreciation and lower our taxable net income.

Now let us turn to our balance sheet and our recent capital market activities. As of September 30th we had $99 million of cash as well as $83 million of restricted cash consisting primarily of FF&E reserves.

Our net debt to EBITDA ratio, as defined in our line of credit agreement, was four times. As we discussed with you during our last earnings call, we have been focused on proactively extending our debt maturity profile, locking in attractive long-term rates, further unencumbering our portfolio and providing financing for the acquisition of the Hotel Commonwealth.

October was a very busy month for us on the corporate finance front. On October 22nd, we completed two unsecured term loan facilities totaling $300 million.

The first term loan for $175 million matures in February 2021, and the proceeds were used to repay the $117 million balance on our line of credit and pay off the mortgage on our Marriott San Francisco Airport Waterfront Hotel. In connection with this loan we executed several swap agreements to fix LIBOR over the life of the loan at 1.29%.

Based on our current leverage ratio, the annual interest rate on this term loan is 2.89%. The second term loan for $125 million matures in October 2022, and we have deferred funding this loan until early 2016 as we intend to use the proceeds for our acquisition of the Hotel Commonwealth. Upon funding we intend to execute swaps to fix LIBOR for the life of this loan as well.

Also in October we refinanced the $30 million mortgage on the Residence Inn Cambridge with a new 10-year $63 million loan at 4.48% which lowers the interest rate by more than 1% and puts leverage at a more appropriate 55% to 60% loan-to-value ratio.

With the excess proceeds from this refinancing we paid off the $19 million mortgage encumbering the Hilton Garden Inn Evanston and a $13 million mortgage on the Hampton Inn and Suites Denver Downtown. Additionally we paid off the $73 million mortgage on our Marriott Woodlands property with the net proceeds from the sale of the Hyatt Regency Orange County.

In November we exercised our right for $7.5 million of additional proceeds on our Andaz Napa loan. Our earnings release this morning includes a debt summary as of September 30th and as of today to provide you with a clear picture of our recent debt financing activity and mortgage payoffs.

We have substantial liquidity and financial flexibility with which to execute our business plan. Pro forma for the completed financing transactions we have mortgage debt of $954 million, the $175 million unsecured term loan, and full access to our $400 million unsecured line of credit.

The weighted average interest rate on our outstanding debt is now 3.57%, and we have 27 unencumbered hotels representing nearly half of our EBITDA. As of today approximately 50% of our debt is at a fixed rate.

We are working on several other financings and look forward to sharing the details when appropriate. Finally, let me provide you details on three items that are positively impacting our adjusted FFO and adjusted EBITDA guidance.

First, as mentioned earlier, we now anticipate full-year recurring cash G&A expense to be $20 million to $21 million compared to our previous guidance of $20 million to $22 million. Second, based on the variance balance sheet activities we have undertaken including the refinancing at lower interest rates and the debt payoffs completed subsequent to the end of the quarter, we now anticipate an additional $2 million of interest expense savings.

Third, year to date we have taken a conservative approach on expected income taxes. After an extensive review of all operating leases after our spin-off from InvenTrust we now anticipate significantly lower taxable income at the TRS level, and therefore lower income taxes.

Thank you again for joining us on our third-quarter earnings call. We have concluded our prepared remarks. Danielle, we would be happy to answer questions now.

(Operator Instructions)

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

Hi, guys. How are you?

Good morning, Thomas.

Two questions on RevPAR. In terms of the 6.7% growth you had in October, how does that compare to what your expectations were for the month when you pre-announced on October 5th, I believe it was?

And then second question is, any way to think about the gives and takes in November and December in terms of whether it will accelerate or decelerate versus that October growth number? Thanks.

Sure. The expectations that we had on the RevPAR side for October were very similar to where we actually came in for the month.

So as you saw when we looked at our RevPAR projection that we had at the end of September, basically when we talked about our guidance on October 5th, it did come in very much in line with where we expected things to shape up. The remaining months of the quarter are still relatively in line, too.

I think we've seen is a little bit more strength in November than what we anticipated at the end of September and probably a little bit more down in December, but overall the expectations for the fourth quarter are in line on the RevPAR side.

Okay, helpful. Thank you. And then in terms of, I noticed you switched, I think it was four hotels managers to Sage. My guess is that's because of -- one of the things that drove that was the sale of the -- them actually selling the Commonwealth to you.

I just wanted to tell if you could give a little bit more color on how that contract was put together, and then we've heard from a couple of your peers recently about manager changes that have created a bit of disruption. Anything that you could give us, we can get some color on whether you expect that to happen here? Thanks.

Sure. Yes, happy to answer that as well. As we pointed out it's a change that we initiated at the end of the third quarter, and frankly it was really driven by two things.

As you know, we have a fair number of third-party operators in our portfolio. In a lot of ways we like having a large number of different operators in our portfolio, because we think it creates a lot of opportunities for us to look at best practices and applies those throughout the portfolio, and also frankly provide some opportunities when we're looking at making investments decisions on acquisitions or even potentially dispositions.

That being said, we did like having the opportunity to reduce that stable by a few players that just weren't quite as significant in our portfolio at this time. So the opportunity to kind of consolidate particularly some of these urban upscale hotels under Sage's management, we thought was a great opportunity, particularly in light of obviously adding the Commonwealth, too.

I would say it wasn't necessarily a matter of tying things together between the Commonwealth acquisition and this change. This change really kind of stood on its own in a lot of ways, but clearly Sage became a more attractive long-term partner for us as we added the Commonwealth going forward.

The other part of your question as it relates to disruptions, I think the thing to keep in mind here is that you're dealing with a transition where the brand is staying in place. You're not changing anything on reservation systems or any of those type of things, and many of the employees that exist at the properties actually transferred over as part of the switch to Sage at these properties.

So you clearly -- this is not the type of situation where you should expect any kind of significant disruption or downside from that change in the short term.

Okay. Very helpful. Thank you.

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

Thanks, Danielle. As I said at the beginning of the call we appreciate everyone joining us on this call.

As you all know we spun out from InvenTrust on February 3rd. We're about nine months into our life as an independent public company, and we're very pleased with the progress that we've been able to make this year.

I'll leave it at that and would like to thank you for joining us today.

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