Xenia Hotels & Resorts, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Xenia is a self-advised REIT focused on premium full-service, lifestyle and urban upscale hotels. At June 30, 2016, it owned 46 hotels with 11,594 rooms, including 75% interests in two consolidated hotel entities. It acquired the 245-room Hotel Commonwealth in January and sold five hotels during the first half. The company cautions that 2015 comparisons may be affected by pre-spin-off carve-out accounting and allocated corporate costs.
Key financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $261.4 | $251.2 | $496.4 | $479.1 |
| Operating income | $45.1 | $40.4 | $56.2 | $41.6 |
| Net income | $26.1 | $23.8 | $17.0 | $8.9 |
| Net income attributable to common stockholders | $25.8 | $23.7 | $16.9 | $8.9 |
| Diluted EPS | $0.24 | $0.21 | $0.15 | $0.08 |
| Operating margin | 17.2% | 16.1% | 11.3% | 8.7% |
- Revenue grew 4.0% in Q2 and 3.6% year to date. Portfolio RevPAR was $162.72 in Q2, up from $150.19, and $150.53 for the first half, up from $142.44. First-half ADR rose 6.6% to $197.78 while occupancy declined to 76.1% from 76.8%.
- Management reported Adjusted EBITDA of $88.0 million in Q2, up 9.6%, and $150.5 million for the first half, up 3.7%. Adjusted FFO per share increased 14.0% in Q2 and 5.9% year to date. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
- Operating cash flow was $112.4 million versus $82.4 million in the first half of 2015. Investing activities provided $17.4 million, including $160.1 million of hotel-sale proceeds, partly offset by the Hotel Commonwealth purchase and capital expenditures. Financing activities provided $26.1 million.
- At June 30, cash and cash equivalents were $278.1 million; restricted cash and escrows were $83.9 million, including $71.2 million of hotel replacement reserves. Gross debt was approximately $1.274 billion, net debt carrying value $1.266 billion, with a 3.49% weighted-average interest rate. The $400 million revolving facility was undrawn.
- Two mortgage loans totaling $180 million mature in December 2016; management said it intended to repay them with cash on hand. The company was in compliance with debt covenants. Approximately $23 million of debt was recourse to the company.
Material changes versus prior comparable periods
- Growth reflected acquisitions, two hotels opened in 2015, and the disposition of lower-RevPAR hotels, alongside improved performance at several California properties. Portfolio changes limit like-for-like interpretation.
- The four Houston hotels remained pressured by energy-market volatility and new supply: Q2 RevPAR fell 12.3% on average, with both ADR and occupancy lower.
- First-half earnings included $10.0 million of impairment charges on hotels subsequently sold and $4.8 million of debt-extinguishment losses, versus none and $0.3 million, respectively, in the prior-year period. Lower 2015 separation/start-up costs also make year-over-year comparisons less direct.
- Debt increased from year-end, including a $125 million term loan used in connection with the Hotel Commonwealth acquisition. The company repurchased 4.13 million shares for $60.7 million in the first half; $39.3 million remained under the authorization at quarter-end.
Outlook, commentary, risks and unusual items
- Management described continued softening trends in U.S. lodging, although industry Q2 RevPAR rose 3.5%, mainly from rate growth. No specific company earnings or RevPAR guidance was provided in the filing text.
- Management expects short-term liquidity from cash, operating cash flow, the revolving facility and refinancing or extensions as needed; longer-term needs may be met through borrowings, securities issuance or hotel sales. The company noted seasonal patterns, generally weaker first quarters and stronger third quarters.
- Interest-rate exposure remains material. The filing estimates that a sustained 1% change in rates on variable-rate debt outstanding at June 30 would change annual interest expense and cash flow by approximately $5.8 million. Swaps hedged $360 million of notional debt; their fair-value liability was $12.2 million, and approximately $3.8 million was expected to be reclassified to interest expense over the next 12 months.
- Other risks include lodging demand and economic cycles, hotel competition and operating costs, reliance on third-party managers and brands, renovations, debt service and refinancing, and REIT qualification. Management said ordinary-course litigation was not expected to have a material adverse effect; the filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
- Unusual items include management-transition and severance costs in the first half, asset impairments, debt repayment/refinancing costs, and significant prior-year spin-off/start-up expenses. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $180 million December 2016 maturities were repaid, refinanced or extended, and the resulting liquidity and interest cost.
- Comparable-property operating trends, especially continued Houston weakness and whether portfolio-mix changes account for reported RevPAR growth.
- Cash available for distributions after required hotel capital spending, restricted reserves, debt service and ongoing share repurchases.
- The durability of Adjusted EBITDA and Adjusted FFO growth after excluding impairments, transaction and transition costs, and other adjustments.
- Exposure to variable interest rates and changes in swap fair value, including the expected $3.8 million near-term reclassification to interest expense.