Xenia Hotels & Resorts, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Xenia is a lodging REIT focused on premium full-service and lifestyle hotels. At quarter-end, it owned 37 hotels with 10,775 rooms across 18 states and Washington, D.C.
Financial performance
Dollar amounts are in millions except per-share data. Comparisons are with the same 2016 period.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $244.4 | $261.4 | $462.9 | $496.4 |
| Operating income | $38.9 | $45.1 | $59.3 | $56.2 |
| Net income | $71.0 | $26.1 | $79.2 | $17.0 |
| Net income attributable to common stockholders | $69.4 | $25.8 | $77.5 | $16.9 |
| Diluted EPS | $0.65 | $0.24 | $0.72 | $0.15 |
| Adjusted EBITDA attributable to common stock and unit holders | $79.6 | $88.0 | $138.7 | $150.5 |
| Adjusted FFO attributable to common stock and unit holders | $63.3 | $70.2 | $110.9 | $117.3 |
- Revenue and operating trends: Revenue fell 6.5% in Q2 and 6.8% in the first half. First-half portfolio RevPAR rose 3.4% to $155.72, with occupancy flat at 76.1% and ADR up 3.5% to $204.75. Q2 total-portfolio RevPAR increased 0.8% to $164.10.
- Profit and margins: GAAP net income rose sharply, but included a $49.2 million gain on hotel sales in 2017; the prior-year first half included $10.0 million of impairment charges. Adjusted EBITDA declined 9.6% in Q2 and 7.9% in the first half; adjusted FFO declined 9.9% and 5.4%, respectively. Operating margin was approximately 15.9% in Q2 versus 17.2% and 12.8% in the first half versus 11.3%.
- Cash flow: First-half operating cash flow was $116.9 million versus $113.0 million. Investing used $50.7 million, including the Grand Cypress acquisition and capital spending, partly offset by hotel-sale proceeds. Financing used $80.4 million, primarily for debt repayment and distributions. Cash and cash equivalents ended at $201.8 million, down $14.2 million from year-end.
- Debt and liquidity: Debt was $1.070 billion gross ($1.063 billion net of discounts and financing costs), with a 3.70% weighted-average rate. Restricted cash and escrows were $65.8 million. The $400 million revolving facility had no balance outstanding at quarter-end; the company reported compliance with debt covenants. No mortgage loans were recourse to the company.
Material changes and notable items
- Xenia acquired the 815-room Hyatt Regency Grand Cypress in May for $205.5 million, funded with cash; the hotel contributed approximately $7.3 million of revenue and $0.7 million of net income from acquisition through quarter-end.
- Six hotels were sold in the first half for $193.0 million gross proceeds, generating a $49.2 million gain. The portfolio also reflected 15 hotel dispositions since early 2016, which reduced reported revenue but changed portfolio mix.
- In April, Xenia agreed to sell the Marriott West Des Moines for $19 million. It was classified as held for sale at June 30; the sale closed in July 2017 and generated an approximately $1.8 million gain.
- During Q2, Xenia obtained a $115 million mortgage on the Marriott San Francisco Airport Waterfront and repaid approximately $128 million of mortgages on three hotels. It also drew and repaid $80 million on its revolving facility during the quarter.
Outlook, risks, and contingencies
- Management described U.S. lodging-industry growth as moderate and noted industry RevPAR increased 2.7% in Q2. It expects industry supply growth to dampen RevPAR growth for the remainder of 2017. The filing provides no numerical company-wide earnings or RevPAR guidance.
- Houston-area hotels remained under pressure from weak corporate demand, new supply, and renovations. Their RevPAR fell 18.6% in Q2 and 8.2% in the first half. Management expected further declines for the remainder of 2017, at a more modest pace, while renovations continued at the Westin Galleria and were scheduled to begin at Westin Oaks in Q4.
- The three Houston-area hotels accounted for 9% of Q2 and 11% of first-half revenue. The filing identifies lodging cyclicality, economic and demand changes, hotel supply and competition, interest rates, debt service, renovations, labor, natural disasters, and reliance on third-party operators among relevant risks.
- Debt maturities include approximately $273.4 million in 2019 and $179.2 million in 2021. A permanent 1% interest-rate move on variable-rate debt outstanding at June 30 would affect annual earnings and cash flows by approximately $2.4 million.
- Capital expenditures were $31.4 million in the first half; $51.5 million was held in furniture, fixtures, and equipment reserves. Management said legal claims arising in the ordinary course were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Separate recurring hotel operating performance from the $49.2 million sale gain and assess the declines in adjusted EBITDA and adjusted FFO.
- Track Houston demand, occupancy, renovation disruption, and the expected timing and effects of Westin Galleria and Westin Oaks work.
- Review the 2019 and 2021 maturities, refinancing capacity, variable-rate exposure, and covenant headroom.
- Assess capital needs and the impact of acquisitions and dispositions on portfolio RevPAR, cash flow, and comparability between periods.
- Monitor the post-quarter Marriott West Des Moines sale and the potential balance-sheet effects of the lease-accounting standard the company expected to adopt in 2019, including potentially significant lease assets and liabilities.