Xenia Hotels & Resorts, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Xenia is a lodging REIT focused on premium full-service, lifestyle and urban upscale hotels. At quarter-end, it owned 46 hotels with 11,594 rooms, including two properties held through 75%-owned consolidated ventures.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $233.9 | $248.5 | $730.4 | $727.6 |
| Operating income | $32.1 | $29.5 | $88.3 | $71.2 |
| Net income | $20.4 | $17.8 | $37.4 | $26.7 |
| Net income attributable to common stockholders | $20.2 | $18.1 | $37.1 | $27.0 |
| Diluted EPS | $0.19 | $0.16 | $0.34 | $0.24 |
| Adjusted EBITDA | $72.9 | $74.7 | $223.4 | $219.8 |
| Adjusted FFO attributable to common stock and unit holders | $61.8 | $63.4 | $179.1 | $178.1 |
Q3 revenue declined 5.8%, while operating income rose 8.8%; nine-month revenue increased 0.4% and operating income rose 24.1%. Operating margin, calculated as operating income divided by revenue, was approximately 13.7% in Q3 2016 versus 11.9% in Q3 2015, and 12.1% versus 9.8% for the nine-month periods. Management attributed the higher reported net income largely to one-time separation and start-up costs in 2015; 2016 included impairment and debt-extinguishment charges.
Portfolio RevPAR increased 6.3% to $156.63 in Q3 and 5.8% to $152.49 for the first nine months. ADR rose 6.6% year to date, while occupancy declined from 77.6% to 77.0%. Management said portfolio-mix changes, acquisitions, new hotel openings and sales of lower-RevPAR hotels influenced these results. Four Houston-area hotels remained a notable weak spot: Q3 RevPAR declined 24.5%, with ADR down 11.5% and occupancy down 10.94 percentage points.
Cash flow, balance sheet and capital
- Cash and liquidity: Cash and cash equivalents were $185.3 at September 30, compared with $122.2 at year-end 2015; restricted cash and escrows were $85.6. The $400 million unsecured revolving credit facility had no borrowings outstanding.
- Cash flow, nine months: Operating cash flow was $172.6, versus $141.7 in 2015. Investing used $2.2, compared with $331.6 used in 2015; financing used $107.2, versus $126.3 provided in 2015. Ending cash increased by $63.2.
- Debt: Gross debt was $1,176.1, with a 3.39% weighted-average interest rate; debt net of discounts and financing costs was $1,169.1. Approximately $23.0 was recourse. The company reported compliance with debt covenants. A 1 percentage-point sustained change in rates on variable-rate debt was estimated to affect annual earnings and cash flows by about $5.0.
- Capital allocation: Nine-month cash uses included $66.3 for repurchases of 4.47 million shares and $85.3 for common distributions. The quarterly dividend was $0.275 per share. Capital expenditures were $38.1; furniture, fixtures and equipment reserves were $71.6.
- Equity and properties: Total assets were $2,946.8 and total equity was $1,622.9. During the period, Xenia acquired the 245-room Hotel Commonwealth for $136 million and sold five hotels, generating $161.1 in sale proceeds. It recorded $10.0 of impairment charges on properties subsequently sold.
Material changes, outlook and risks
- Q3 Adjusted EBITDA declined 2.4% and Adjusted FFO declined 2.5%; for the first nine months, they increased 1.6% and 0.5%, respectively. These non-GAAP measures are not substitutes for GAAP results or cash available for distributions.
- Management described signs of softening in the U.S. lodging industry, although industry Q3 RevPAR increased 3.3%, principally from rate growth. Xenia noted seasonality: it generally experiences lower activity in Q1 and higher activity in Q3.
- The filing provides no specific numerical earnings or operating guidance. Management expects to meet short-term liquidity needs through cash, operating cash flow, its revolver and refinancing or extensions; longer-term funding could include additional borrowing, securities issuance or hotel sales.
- After quarter-end, Xenia repaid $130.7 of mortgage balances and accrued interest, obtained $41 of additional proceeds through modifications of two mortgages, and extended those loans to January 2022. By November 4, it had repurchased 4.87 million shares for approximately $72.5; in November the board authorized an additional $75 million of repurchases.
- Key disclosed risks include lodging demand and rate volatility, economic and regional conditions, competition and new supply, dependence on third-party hotel managers and brand relationships, renovation and acquisition execution, debt and interest rates, and REIT qualification and tax requirements. Management said ordinary-course legal matters were not expected to have a material adverse effect; the filing reported no material change in previously disclosed risk factors.
- Comparability has limitations: 2015 included carved-out pre-spin-off allocations and substantial separation/start-up expenses. Management cautioned that actual stand-alone costs in that period could have differed materially from allocated costs.
Investor facts to verify
- Whether Houston-area weakness and broader lodging-industry softening persist, and how they affect occupancy, ADR and RevPAR.
- Debt maturities, refinancing terms, covenant headroom and the effect of interest-rate changes after the October transactions.
- Whether operating cash flow supports distributions, capital needs and continued share repurchases; restricted cash is not fully available for general purposes.
- The sustainability of reported earnings growth after separating recurring operations from impairments, debt-extinguishment costs, acquisition and transition expenses, and other adjustments in non-GAAP measures.
- Whether the portfolio changes and acquisition integration improve ongoing returns, given that the filing’s reported portfolio metrics reflect acquisitions, developments and dispositions.