Xenia Hotels & Resorts, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Xenia is a U.S. hotel REIT focused on premium full-service and lifestyle properties. At September 30, 2018, it owned 40 hotels with 11,239 rooms across 17 states and Washington, D.C. This unaudited report covers the three and nine months ended September 30, 2018; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $241.0 | $223.3 | $782.5 | $686.1 |
| Operating income | $19.2 | $21.0 | $100.2 | $80.3 |
| Net income | $9.3 | $11.8 | $95.9 | $91.0 |
| Net income attributable to common stockholders | $9.2 | $11.6 | $93.7 | $89.2 |
| EPS, basic and diluted | $0.08 | $0.11 | $0.85 | $0.83 |
| Operating margin (operating income / revenue) | 8.0% | 9.4% | 12.8% | 11.7% |
| Adjusted EBITDAre attributable to common stock and unit holders | $60.5 | $63.6 | $224.1 | $202.2 |
| Adjusted FFO attributable to common stock and unit holders | $51.4 | $53.1 | $179.5 | $164.1 |
- Q3 portfolio RevPAR was $155.88, down 0.8%; occupancy was 75.8%, down 350 basis points, while ADR was $205.65, up 3.8%. For the nine months, RevPAR was $164.13, up 5.1%; occupancy was 76.9%, down 20 basis points, and ADR was $213.53, up 5.4%. These portfolio figures include acquired and disposed hotels.
- Nine-month operating cash flow was $196.8, compared with $171.2 in 2017. Investing cash use was $29.7, versus $56.6; financing cash use was $149.5, compared with financing inflow of $111.7 in 2017. Cash and restricted cash totaled $148.0 at period end, including $90.0 unrestricted cash.
- Debt outstanding was approximately $1,141.8 gross, or $1,133.9 net of discounts and financing costs, compared with $1,330.0 gross at year-end 2017. Weighted-average interest rate was 3.82%, versus 3.71%. Variable-rate debt fell to 14% of total debt from 28% at year-end. The $500 million revolving facility was undrawn at quarter-end.
Material changes and significant activity
- Revenue rose 7.9% in Q3 and 14.0% year to date, but common-stockholder net income fell 20.6% in Q3 and increased 5.1% year to date. Q3 Adjusted EBITDAre declined 4.7% and Adjusted FFO declined 3.4%; nine-month figures increased 10.8% and 9.4%, respectively.
- Growth reflected portfolio turnover as well as operations: Xenia acquired six hotels since May 2017 and sold eight hotels since April 2017, including the March 2018 sale of Aston Waikiki Beach Hotel. Q3 acquisitions included The Ritz-Carlton, Denver, for $99.5 and Fairmont Pittsburgh, for $30.6. The Aston sale generated $196.9 net proceeds and a reported $42.3 gain.
- Comparable-hotel RevPAR and rooms revenue weakened. Management cited renovations, Hurricane Harvey and Irma comparisons, holiday-calendar shifts, and lower Q3 occupancy; stronger group business lifted food-and-beverage revenue. Nine-month results also benefited from acquired properties and $2.9 of business-interruption insurance proceeds.
- The company issued 5.72 million shares through its at-the-market program in the first nine months, generating $137.4 gross proceeds; $62.6 of capacity remained. Common shares outstanding increased to 112.6 million from 106.7 million at December 31, 2017. Dividends declared were $0.275 per share per quarter.
Outlook, risks, and unusual items
- The filing provides no specific financial or operating guidance. Management expects seasonal revenue and operating income generally to be highest in the first and second quarters, subject to portfolio composition and economic conditions.
- Management described liquidity sources as operating cash flow, cash, the revolver, refinancing, asset sales, and equity issuance. It reported compliance with debt covenants and no off-balance-sheet arrangements.
- Debt maturities and refinancing needs remain relevant: scheduled principal payments include $180.4 in 2021 and $272.5 in 2022; the filing’s contractual-obligations table includes principal and interest. A 1% sustained rate change on quarter-end variable-rate debt was estimated to affect annual earnings and cash flows by about $2.0.
- Key risks include lodging cyclicality and seasonality, occupancy and rate declines, economic or market-specific downturns, hotel renovations and fixed ownership costs, reliance on third-party managers and brands, capital access, debt refinancing and interest rates, natural disasters, labor, competition and cybersecurity. Orlando represented approximately 11.2% of nine-month revenue.
- Unusual items include $2.9 of business-interruption insurance recognized year to date, a $42.3 gain on the Aston Waikiki sale, and no impairment charge in 2018 (versus $2.2 of impairment and other losses in Q3 2017). Q3 2018 included a $2.0 income-tax benefit; nine-month tax expense was $8.3.
- After quarter-end, Xenia funded $65 of its $150 million unsecured term loan. It also acquired the remaining 25% interests in two Grand Bohemian hotel entities for $12.2 and repaid their $43.4 of mortgage debt. Management estimated adoption of the new lease standard in 2019 would add right-of-use assets and lease liabilities of less than 3% of total assets and liabilities, respectively.
Important facts for investors to verify
- Whether comparable-hotel performance stabilizes after renovations, and how occupancy, ADR, and RevPAR develop apart from acquisition and disposition effects.
- Whether operating cash flow can support capital spending, debt service, and distributions; assess the restricted nature of $58.0 of cash and the ongoing renovation requirements.
- Debt maturities, refinancing terms, variable-rate exposure, and the effect of the post-quarter term-loan funding and mortgage repayments.
- The earnings contribution and seasonality of recent acquisitions, and the dilution and capital-allocation implications of ATM share issuance.
- The sustainability of dividends and the distinction between GAAP earnings, cash flow, and non-GAAP measures; the filing cautions that Adjusted EBITDAre and Adjusted FFO are not liquidity measures.