Xenia Hotels & Resorts Inc (XHR) 2016 Q2 法說會逐字稿

Good day, and welcome to the Xenia Hotels and Resorts Inc. second-quarter earnings conference call and webcast.

(Operator Instructions)

Please also note that this event is being recorded. I would now like to turn conference over to Ms. Lisa Ramey, Vice President Finance, please go ahead.

Thank you, Andrea. Good morning, everyone, and welcome to the second-quarter 2016 earnings call and webcast for Xenia Hotels and Resorts. I'm here with Marcel Verbaas, our President and Chief Executive Officer; Atish Shah, our Chief Financial Officer; and Barry Bloom, our Chief Operating Officer. Marcel will begin with a discussion of our second-quarter performance and details on various activities during the quarter. Barry will follow with additional details regarding our operating performance. Atish will conclude our remarks with a discussion on our capital allocation strategy and balance sheet, as well as an update on our outlook for the remainder of the year. 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 works 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 and the earnings release that we issued earlier this morning, along with comments on this call, are made only as of today, August 5, 2016, 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 definitions of certain items referred to in our remarks in this morning's earnings release. An archive of this call will be able on our website for 90 days.

With that, I'll turn it over to Marcel to get started.

Thank you, Lisa.

Good morning and thank you all for joining our second-quarter call. As most of you are aware, the outlook for revenue growth in the lodging industry has moderated as demand is increasing at a slower rate of growth and supply is starting to catch up in many markets. With this backdrop, we believe it is important to reiterate the pillars of our Company strategy, as we discussed during our Investor Day in May. We continue our transaction-oriented mindset, with a focus on diversification, quality, and portfolio enhancements. We are dedicated to aggressive asset management initiatives, and leveraging our relationships with both brands and managers, and we maintain an emphasis on a conservative leverage profile and a healthy balance sheet throughout various lodging cycles. We believe these fundamentals will serve us well as we navigate through a more challenging operating environment.

Turning to our second-quarter same-property results: consistent with industry performance, it was a soft quarter, with results varying by month. April results benefited from the shift of the Easter holiday into March, and our portfolio RevPAR was up approximately 5% for the month. May was essentially flat, and June rebounded slightly with RevPAR up nearly 1%. For the quarter, our same property portfolio RevPAR grew 1.8%, due entirely to an increase in rates, as occupancy remained stable.

While our hotels in Houston continue to be a drag on the portfolio, evidenced by our Houston hotels being down over 12% in RevPAR for the quarter and year to date, the balance of our portfolio outperforms, and grew RevPAR 3.8% for the quarter, and 3.4% for the year. Year-to-date, our same property portfolio RevPAR has increased by 1.3%. For the second half of the year we expect RevPAR growth to be lower than that and have therefore reduced our RevPAR guidance to be flat to up 1%. Our reduction primarily relates to a lower expectation, based on a soft July, weaker transient trends, and continuing weakness at out hotels located in Houston. Atish will provide more detail on our revised guidance later during this call.

During the quarter we have net income attributable to common stockholders of $25.8 million, an increase of 8.5% over last year. Our adjusted EBITDA grew 9.6%, or $7.7 million, to $88 million for the second quarter. And we delivered adjusted FFO per share growth of 14%. Our hotel EBITDA margin grew 115 basis points over last year, to 36.3%. The majority of this growth was a result of an increase in rooms margin. And approximately 40 basis points was due to real estate tax-related benefits. We are pleased with this margin expansion, particularly during the time of tepid RevPAR growth.

Next, I would like to discuss our continued focus on prudent capital allocation, and owning a high-quality diversified portfolio of hotels. Throughout the second quarter, we have continued to refine the portfolio by selling four lower-tier hotels. The four hotels, with an average RevPAR that was more than 25% below the remainder of the portfolio, generated a combined sales price of $136 million. We discussed the sales of the Doubletree in Washington, DC, in April, and the Embassy Suites on Valley in May extensively during our first-quarter call, so I won't go into to detail on those today. The transaction we announced this morning, is the sale of the Marriott Atlanta Century Center and the Hilton Phoenix Suites. We sold these two hotels to a single buyer in late June for a combined price of $50.8 million.

As has been the case with each of our recent dispositions, these two hotels have significant near-term capital requirements, collectively totaling over $25 million. Adjusting for this required capital investment, the sale price represented an 11.4 times EBITDA multiple and a 7% cap rate on trailing 12 months, as of the end of the first quarter.

In addition to approaching very significant renovations, the two hotels share similar characteristics to some of our previous dispositions: both hotels are located in secondary locations within their respective markets, which made it difficult to drive appropriate growth in the long term. Each hotel generated RevPAR around $100, and EBITDA per key that was 50% below our portfolio, a clear indication of their quality level compared to the rest of our assets.

Since last fall we have sold six hotels, all of which were the lower end lower-end of our portfolio from a quality perspective, for nearly $310 million, representing a 10.8 times multiple on 2015 EBITDA, the last period for which we have the relevant data for all of these assets. In addition, we were able to avoid nearly $90 million of total near-term capital investment at these hotels, which would have been a very significant capital outlay for us, and something we did not believe to be prudent from a return stand point. Adjusting for this anticipated capital, the total sales price represented a 13.9 times multiple on 2015 EBITDA. On average, these hotels had RevPAR over 25% below the remainder of the portfolio and an EBITDA per key discount of over 40%.

We are pleased with our disposition activity since last fall, all told, we have sold assets representing roughly 10% of our total asset base. These sales have improved the overall quality of the portfolio, the RevPAR level, and the EBITDA per key, and have been accretive. In addition, the sales have enabled us to strengthen our balance sheet and return capital to shareholders. And together with our acquisitions, this has resulted in a total portfolio RevPAR which is 8.3% higher than our portfolio generated in the second quarter of 2015.

Now I would like to turn to our capital investments during the second quarter. During the quarter we completed the guestroom renovation and the new resort-style pool and outdoor function space at the Marriott Napa Valley Resort and spa. This was an extensive project that we started late last year, and we are extremely pleased with results. A few finishing touches are being applied to the meeting room and function space, but the most significant part of that renovation is also complete. Busy season has begun in Napa, and we are happy to have completed the project in time to participate with a fully renovated and vastly improved property.

The only other large-scale renovation currently in process is the meeting and ballroom renovation at the Renaissance Atlanta Waverly. This was one of our top-performing hotels for the quarter, and we continue to work with our hotel to complete the renovation while limiting disruption. We anticipate this project continuing for the remainder of the year.

Year to date, we have spent approximate $20 million in capital expenditures on the portfolio; we have reduced full-year CapEx guidance slightly, due to timing of projects. While we were able to avoid significant near-term renovations at the hotels we have sold since the end of last year, only a small portion of those expenditures would have taken place in 2016, since we knew these hotels were potential disposition candidates for us, and thus had relatively limited CapEx budgets for the year.

We have several large projects slated to begin during the third and fourth quarters, all of which continue to be on track. The guestroom renovation and upgrade to the Hyatt Centric [branch] at the Hyatt Key West is expected to be complete before year end. Our renovations at the Andaz San Diego and the Westin Galleria in Houston are expected to finish up early next year.

And with that, I will now turn it over to Barry to provide additional market color, and details on our operating performance.

Thank you Marcel, and good morning, everyone.

I will be providing further detail and insight into our market and propulum performance in Q2. All the portfolio information I will be speaking about is reported on the same-property basis for 43 hotels. In terms of RevPAR, we are pleased with the performance of many of our hotels, and an overall portfolio that gained a point of market share, or RevPAR index, built to our competitive sets compared to the second quarter of last year. Our top RevPAR markets were San Francisco, up 28%, as our Marriott same square foot property continues to demonstrate great results, along last year's comprehensive rooms renovation. Atlanta, up 12%; and Baltimore, up nearly 12%. Ten of our markets achieved RevPAR growth over 4%, and 18 of our markets had positive RevPAR growth for the quarter.

As mentioned earlier, Houston continues to be our toughest market, down 12.3% during the second quarter. Results on our other large exposure markets were mostly positive: in order their of weighting within our portfolio, Dallas was up 2.2%, Denver up 4.3%, Washington, DC and Virginia up 1.3%, Silicon Valley up 3.7%, Honolulu down 1.4%, Napa down 1.4% due to the Marriott renovation, and Chicago up 0.6%. Although not included in our comparable hotel statistics, the recently acquired Hotel Commonwealth's performing very well, with RevPAR nearly equal to last year, despite the addition of 96 rooms to the previously 149-room property. EBITDA continues to be on track with our original projections and is expected to more than triple this year. We're very pleased with our basis in the asset, in light of recent transactions this market, and are hopeful for an extended Red Sox baseball season.

I'd like to touch on Houston in a bit more detail. As a reminder, we own hotels in two distinct sub markets, The Woodlands and the Galleria. Our Marriott in the Woodlands has had a challenging year thus far, largely due to additional supply in the sub market, which we obviously anticipated. There are two new hotels in the Woodlands that are competing aggressively on price, particularly for our high-rated corporate transient traveler. While we truly believe the market and our hotels specifically will benefit from these additional rooms over the longer term, it will take some time for this new supply to be absorbed.

Our Galleria properties have had their own challenges, most of which are directly related to the decline in energy-related business. Not only have our Galleria hotels been impacted directly by a reduced business from companies in the energy business, but also by the lack of historically lucrative business traveler generated by ancillary and support services for that industry, namely consulting, accounting, and legal services. We have, however, been quite successful in attracting new accounts to the hotels from other properties within the competitive set.

On the group side we've seen both cancellations from corporate group business as well as significant attrition from corporate-related association business. Our hotels continue to attempt to mitigate declines in both occupancy and ADR, and we remain hyper-focused on expense controls in this difficult environment.

As Marcel mentioned, we achieved an increase of 115 basis points of hotel EBITDA margin for the quarter. Over 60 basis points of the increase was a result of improvement in our departmental operating margins, most notably in the rooms department, while approximate 40 basis points was derived from significant real estate tax refunds received related to prior years, and accrual true-ups. These results were a strong reflection of the efforts of our asset management team in working with our properties on ways to contain costs during this period of slowing RevPAR growth.

News of our business mix, transient business, which makes up about 70% of our revenue, was up approximate 2.5% during the quarter, while group business was virtually flat year-over-year. We had more attrition than anticipated as several larger pieces of group business did not pick up their blocks in line with our expectations. Our declines in food and beverage revenue can be directly attributed to our group results at several of our larger, more group-oriented hotels. As we look ahead to the balance of the year, our group pace for the full year is slightly behind last year. We have taken a conservative approach when evaluating group business for the balance of the year and believe we have removed significant risk from the forecast. We're focused on working with our operators to improve our group base, as we move forward.

We continue our focus on cost containment and revenue strategies through our property optimization process we highlighted during are recent Investor Day, and have had continued success in rolling our the process to additional hotels within the portfolio. To date, these deep dive operational reviews have identified and implemented approximately $3.3 million in ongoing net revenue enhancements and expense reductions across our portfolio. We look forward to continued success from this program.

With that, I will turn the call over to Atish to finish up our prepared remarks.

Great, thanks, Barry and good morning.

I would like to cover two topics today. First, I will discuss our liquidity and balance sheet position; and second, I will discuss our outlook for the full year. Let me start first with our liquidity and balance sheet position. We continue to have a strong level of liquidity: we have approximate $280 million of unrestricted cash; this reflects an increase of nearly $120 million since the of the first quarter. The increase is primarily due to the asset disposition proceeds. In addition, we have full availability on our $400 million revolving credit facility, and we also have the ability to expand our term loans. This capacity gives us the flexibility to be opportunistic with regard to transactions.

As to our balance sheet position, we're focused on maintaining a strong leverage profile; our net debt to EBITDA of 3.6 times is among the lowest, of our full-service lodging REIT peers. This level reflects our full leverage, and we have no other senior capital outstanding. We anticipate our leverage ratio to decline to below 3.5 times by the end of the year. During the quarter, we reduced our gross leverage slightly by paying off the $22 million loan at the Courtyard Pittsburgh in advance of its maturity.

Moving on to our upcoming dept maturities, we have two maturities in December -- these loans are secured by the Renaissance Atlanta Waverly and the Renaissance Austin. We intend to utilize our cash liquidity to pay off each loan. By year end we expect 26 of our 46 hotels will be owned free and clear, with no property-level debt. The weighted average interest rate of all of our debt will decline by over 30 basis points to the low 3% range as a result of the payoff of these two loans. And as we look ahead we have approximately $50 million of debt maturities in 2017. We believe this to be quite manageable as it represents less than 4% of our total debt outstanding. As we look farther out, we have ample resources and a strong profile with which to access the markets in advance of our maturities in 2018 and 2019.

Before turning to our revised guidance, let me address our recent share repurchase activity. We continue to repurchase stock, given our belief in its intrinsic value. We purchased approximate $12 million of stock from the beginning of the second quarter through July 29. And as of July 29 we have repurchased a total of $61 million of stock to date under our current authorization. Our weighted average purchase price is $14.71. We have approximately $39 million of remaining capacity under our current authorization and we intend to prudently utilize this tool to drive shareholder value over time.

Now I'd like to turn to our current outlook for 2016. We have revised our full-year RevPAR guidance down by approximately 250 basis points. We currently expect full-year RevPAR to be between flat to up 1% relative to 2015. Our outlook reflects weaker levels of demand, growth coupled with the impact of new supply in several of our markets. In addition, lower group pace, as well as limited forward visibility are factors that we considered when establishing our outlook.

As Barry mentioned, our hotels in Houston continue to lag the rest of the portfolio. The performance of our hotels in Houston is projected to be a more significant headwind than had we expected a quarter ago. We had expected Houston to stabilize later this year due to easier year-over-year comparisons and what seemed to be a stabilization of oil prices. Since May, oil price volatility has increased; as such, demand continues to decline. We are also experiencing the impact of new supply in the Houston market. We now anticipate continued downward progression and RevPAR through the fourth quarter; and for the full year we expect RevPAR to decline 13% to 16% for our Houston-area hotels.

Excluding our hotels in Houston, we expect our same-property portfolio RevPAR to increase 2% to 3%, which is in line with industry outlook. While RevPAR guidance has been reduced, our adjusted EBITDA guidance has not declined as much. Our adjusted EBITDA forecast is currently $288 million to $296 million. This is approximate $12 million lower than our prior guidance. Approximately $2.5 million of the variance from prior guidance is attributable to the dispositions of the Marriott Atlanta Century Center and the Hilton Phoenix Suites that we announced today. The remainder of the reduction in guidance is due to our lower revenue expectations.

The midpoint of our adjusted EBITDA guidance, excluding dispositions, declined by approximate 3%. The reason for the implied strong flow-through is our continued focus on finding efficiencies in our operations, some of which Barry just described. As such, we expect higher levels of EBITDA margin growth in the second half of 2016 versus the first half.

Now turning to our outlook outside of hotel operations. We expect slightly lower cash G&A expense for the year; we now expect it to be in the $21 million to $22 million range as we continue to manage our corporate level cost. We have reduced our cash interest expense down by about half a million dollars, due to the prepayment of the Courtyard Pittsburgh loan as well as the expected payoff of the two CMBS maturities that I previously mentioned.

Finally, our income tax expense has also have been reduced. We now expect total income tax expense to be in the $5.5 million to $6.5 million range due to a lower expected level of taxable income and the fine tuning of our estimate as the year progresses.

In summary, we are well-positioned for current lodging industry fundamentals. We have a high-quality collection of assets, and an experienced team focused on driving efficiencies through the cycles. Our strong balance sheet gives us flexibility and will allow us to take advantage of opportunities when they arise.

We continue to yield a strong dividend that is supported by our solid operating cash flow, and we continue to believe that our strategy of owning in a diverse group of markets across various types of hotels will lead to strong value creation over time. We also believe that our portfolio of primarily branded hotels and our broad group of operating partners positions us well for the long-term.

That concludes our prepared remarks. Andrea, we will turn the call back over to you, and take our first question, please.

(Operator Instructions)

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

Good morning.

I'm just trying to get some more granularity around the Houston RevPAR guidance. You came in down 12, and you are forecasting down 13, or 16, you gave us some color but is that where you're seeing higher cancellations, what was July RevPAR?

Anything else would be helpful. Thank you.

Really a combination of a couple things, Thomas. And thanks, that was an appropriate question. It is really, it is a little bit different between the two properties, but there's a couple themes that definitely are consistent. We're certainly seeing shorter-term cancellations, more than we'd expected, we're seeing some softness in booking pace, looking into Q3 and Q4, and we're definitely seeing this continued challenge on the corporate transient side where, where we've got competitors in both markets that are lowering rates for high-quality volume accounts. But we've, quite frankly, have done a good job of matching, and continuing to win that business, but it's at lower rates.

In terms of specificity about the month of July, there in Houston, it was a challenging month for us, but it is also the weakest, historically the weakest month, for us in Houston, particularly on the group side. We don't see the July trend continuing through the rest of Q3 and Q4, and we actually have some fairly decent group business on the books for the traditionally strong group months of September and October.

Very helpful.

Then just in terms of asset management and cost management. Where would you say you are in terms of the level of intensity of, cost cutting. And what things haven't you started doing yet, and you would start doing if the RevPAR environment continues to get more challenging. Thank you.

Sure, so, again, another good question.

What we've been doing and we've been working on this program for a long time is not just our profit optimization process, which we've talked about where we go into the deep dives, bit the asset managers are working with each of our hotels on specific improvement plans. We have certainly picked up the intensity of those, in terms of implementation, I would say we're probably sub-50%, in terms of implementation, moving toward 100%, but we're also very cautious to do that on a market by market basis.

We've had, we've really been at a very high level in Houston, for really the last 15 to 18 months, given the declines we've seen there, and we've had a really good focus on expense controls there. As we see markets turn, and as we look at markets that we think may continue to soften, we pick those up fairly aggressively. And we have a lot of tools in the kit. We have a very experienced team of asset managers, who have been through in many cases, two or three significant down cycles. So we're pretty confident that we've got the right tools to do that.

What I would add to that, to Thomas, is we spoke in our release, and I talked about in my remarks this morning, a little bit about some of the benefits we got from some of the very active appeals within the real estate tax side, which helped us a little bit on margin. But what I don't, what I don't want to have lost that conversation is that, by far the bulk of our margin improvement came from the departmental, from the departmental side, and particularly on the room side. So I think, when you are thinking about some of these initiatives that Barry has talked about in quite a lot of detail, we're certainly seeing the benefit of that in a quarter like the second quarter, where we were looking at RevPAR growth in the 1.8%, but being to drive the margins that we were able to drive during our quarter.

Helpful. Thank you.

Our next question comes from Bill Crow, of Raymond James, please go ahead.

Good morning, just a follow-up question on Houston if I might. As you look at the area around your hotels, how much supply is out there that has yet to open? We talked about easier comps and maybe stability in the energy markets at some point, but if they are still supply to hit, seems like that's going to defer any benefits.

Great question, Bill, this is Marcel. Particularly in our two sub markets, we have seen supply that has entered the market. Barry talked about the two hotels that have opened up in The Woodlands and we also had some additions in the Galleria with the Hyatt open relatively recently there.

You look at our specific sub markets, that takes a lot off the board frankly, because they aren't any hotels that are really coming up right in those sub markets at this point. More of what's happening in Houston is still in the supply side is in some of the other sub markets, particularly downtown. Now that's certainly, we're not closing our eyes to them, and some of those additions in downtown, particularly with the big hotels still opening up there will impact the market overall particularly as a relates to the Galleria. But we really have seen the bulk of what we think is going to happen very specifically close to our assets at this time.

Great. That was only thing I had. Thanks.

(Operator Instructions)

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

Thanks Andrea.

Again I would like to point, that obviously a couple of questions came about Houston, and some impact that we see in the Houston market, and that's certainly a number that is dragging a performance a little bit. However when you look at the rest of the portfolio, and how everything plans out, I think you can see that we are performing very well, the portfolio overall, and particularly on how we are able to drive those margins in that environment.

We certainly have taken a little bit more of a cautious outlook as we look at the remainder of the year, but certainly feel good about where we, how we can manage this environment as Atish pointed out as well. We appreciate everyone's interest today and look forward to continue to update you on future calls.

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