Xenia Hotels & Resorts, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same periods in 2018. Xenia is a hotel REIT focused on luxury and upper-upscale properties. At quarter-end it owned 40 hotels with 11,167 rooms across 17 states.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $304.3 million | $277.1 million | $598.0 million | $541.6 million |
| Operating income | $31.6 million | $48.2 million | $67.7 million | $81.0 million |
| Net income | $13.2 million | $29.5 million | $30.5 million | $86.6 million |
| Net income attributable to common stockholders | $12.8 million | $28.8 million | $29.5 million | $84.5 million |
| EPS, basic and diluted | $0.11 | $0.26 | $0.26 | $0.78 |
| Operating margin, calculated | 10.4% | 17.4% | 11.3% | 15.0% |
| Net margin, calculated | 4.3% | 10.7% | 5.1% | 16.0% |
| Adjusted EBITDAre attributable to common stock and unit holders | $89.5 million | $89.8 million | $167.5 million | $163.6 million |
| Adjusted FFO attributable to common stock and unit holders | $71.5 million | $71.9 million | $131.5 million | $128.1 million |
- Hotel performance: Total-portfolio RevPAR rose 1.7% to $181.09 in Q2 and 4.4% to $175.72 for the first half. Portfolio occupancy was 79.9% in Q2, down 20 basis points, while ADR increased 2.0% to $226.74. First-half occupancy increased 10 basis points to 77.5%, and ADR rose 4.3% to $226.73.
- Cash flow: First-half operating cash flow was $132.9 million, versus $130.4 million. Capital expenditures and tenant improvements were $36.6 million; financing cash outflow was $70.4 million, including $63.1 million of dividends. Cash and restricted cash totaled $187.5 million at June 30, up from $161.6 million at year-end.
- Debt and liquidity: Gross debt outstanding was approximately $1.156 billion, with a 3.88% weighted-average interest rate; balance-sheet debt net of discounts and financing costs was $1.149 billion. Cash and cash equivalents were $110.4 million, with $77.1 million restricted. The senior unsecured revolving facility had no outstanding balance. Mortgage covenants were reported in compliance, and mortgage loans were non-recourse to the Company.
- Distributions: The Company declared quarterly dividends of $0.275 per share/unit in both Q1 and Q2, or $0.55 for the first half.
Material changes versus prior periods
- Revenue increased 9.8% in Q2 and 10.4% in the first half. Management attributed much of the growth to four premium full-service hotels acquired in 2018; portfolio changes also included three hotel dispositions during 2018. Food and beverage revenue growth was especially strong, reflecting the acquired hotels’ restaurants and event facilities.
- Despite higher revenue, Q2 net income fell 55.3%, and first-half net income fell 64.8%. The first-half comparison includes a $42.4 million gain on the 2018 sale of Aston Waikiki Beach Hotel, which had no counterpart in 2019. Other drivers included a $14.8 million impairment charge in 2019, lower business-interruption insurance gains, and reduced operating income from hotels sold in 2018.
- Comparable-hotel RevPAR increased 1.5% in Q2 and 2.9% for the first half. Adjusted EBITDAre decreased 0.4% in Q2 but increased 2.4% for the first half; Adjusted FFO decreased 0.6% in Q2 and increased 2.7% for the first half.
- Interest expense declined 5.2% in Q2 and 6.7% for the first half. The Company repaid a $90 million mortgage in March and funded the remaining $85 million available under its $150 million unsecured term loan in February.
Management commentary, outlook, and risks
- Management described U.S. lodging industry RevPAR growth as modest: 1.1% for Q2 and 1.2% for the first half, with industry supply growth slightly exceeding demand growth in Q2. The filing provides no specific quantitative company earnings or RevPAR guidance.
- In Q2, the Company recorded a $14.8 million impairment on Marriott Chicago at Medical District/UIC, citing projected lower operating profits related to demand trends, expected expense changes, and the estimated holding period. The valuation used Level 3 assumptions, including discounted cash flows and market-participant values.
- Business-interruption insurance gains were $0.8 million in both Q2 and the first half of 2019, compared with $2.6 million in the corresponding 2018 periods. The 2019 proceeds primarily related to earlier lost income associated with Hurricane Irma’s effects on the Key West market.
- Management expects seasonal revenue and operating income generally to be highest in Q2, followed by Q1, Q3, and Q4, based on the current portfolio. It also cautioned that hotel performance is exposed to economic cycles, local market conditions, labor and other operating costs, interest rates, weather events, and the performance of third-party hotel managers.
- Orlando exceeded 10% of revenue in the reported Q2 and first-half periods; Orlando and Phoenix each exceeded 10% in the first-half periods. The Company highlighted these market concentrations as potential sources of exposure to adverse local conditions.
- A 1 percentage-point sustained change in market rates on variable-rate debt outstanding at June 30 was estimated to change annual interest expense, earnings, and cash flow by approximately $2.2 million. Interest-rate swaps had an aggregate notional amount of $689.5 million.
- The Company adopted lease accounting Topic 842 on January 1, 2019. At June 30 it reported a $46.8 million right-of-use asset and a $27.7 million lease liability. Management reported no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Review whether the $14.8 million Chicago hotel impairment and its Level 3 valuation assumptions remain appropriate as operating results and holding-period expectations evolve.
- Assess comparable-hotel operating trends separately from the effects of 2018 acquisitions and dispositions, including RevPAR, occupancy, ADR, and hotel expense growth.
- Check debt maturities and refinancing needs: scheduled principal maturities include approximately $180.4 million in 2021, $182.9 million in 2022, and $211.9 million in 2023.
- Evaluate available liquidity after restricted FF&E reserves of $67.8 million and other escrows, and consider the Company’s capital spending, debt service, and dividend commitments.
- Monitor Orlando and Phoenix market exposure, seasonality, and sensitivity to interest rates, labor costs, and broader lodging demand.