Xenia Hotels & Resorts, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2015. Xenia became a standalone, publicly traded hotel REIT following its February 3 spin-off from InvenTrust Properties Corp. At quarter-end, it owned 46 hotels with 12,639 rooms and had majority interests in two hotels under development. The company intends to qualify as a REIT and leases its hotels to taxable REIT subsidiaries.
Comparisons require caution: 2014 results were prepared on a carved-out basis while Xenia was part of InvenTrust, and the hotel portfolio changed materially. The 52-property Suburban Select Service Portfolio was sold in November 2014 and is presented as discontinued operations; continuing-operations hotel counts were 46 at March 2015 and 49 at March 2014.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $227.9 million | $218.5 million |
| Operating income | $1.3 million | $18.7 million |
| Net income (loss) | ($14.9 million) | $2.3 million |
| EPS, basic and diluted | ($0.13) | $0.02 |
| Operating cash flow | $4.9 million | $36.0 million |
| Adjusted EBITDA | $64.7 million | $56.2 million |
| Adjusted FFO | $50.8 million | $41.1 million |
- Revenue rose 4.3%. Comparable operating indicators were ADR of $182.16, up 6.6%; occupancy of 73.9%, down from 75.0%; and RevPAR of $134.59, up 5.0%. Hotel operating income increased 10.6% to $83.5 million.
- Reported operating income fell sharply, principally reflecting $25.3 million of separation and startup costs. Total expenses increased to $226.6 million from $199.8 million. Net loss also included $5.1 million of income tax expense, including $2.9 million relating to a one-time taxable gain on a hotel transfer.
- Cash from operations declined to $4.9 million, which management attributed largely to one-time separation costs and the changed portfolio. Investing cash use was $22.9 million, including capital expenditures and development investment. Financing provided $93.0 million, including net contributions from InvenTrust, partly offset by debt repayments and the share tender offer. Cash increased $75.1 million to $238.1 million.
- Adjusted EBITDA and Adjusted FFO are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or measures of liquidity.
Debt, liquidity, and capital allocation
- Debt was $1.178 billion at March 31, down from $1.295 billion at December 31, 2014. Mortgage debt had a 4.01% weighted-average rate. Approximately $23.2 million was recourse to Xenia.
- Xenia entered a new $400 million unsecured revolving facility upon separation, with an uncommitted option to increase capacity by up to $350 million. No amount was drawn at quarter-end; the company reported compliance with debt covenants. Cash and cash equivalents were $238.1 million, and restricted cash and escrows were $82.9 million.
- Scheduled debt maturities include $357.4 million in 2016 and $326.7 million in 2019. Management reported that a 1 percentage-point sustained change in rates on variable-rate debt would affect annual earnings and cash flows by about $5.6 million.
- The board declared a prorated first-quarter dividend of $0.1457 per share, paid April 15. The filing describes an anticipated regular quarterly dividend of $0.23 per share, equivalent to $0.92 annualized, and expects operations to cover distributions over the long term.
Outlook, risks, and unusual items
- Management estimated 2015 capital expenditures of approximately $50 million to $60 million, excluding remediation of earthquake damage at two Napa-area hotels. First-quarter capital expenditures were $17.1 million, including $0.7 million for earthquake repairs.
- The August 2014 Napa earthquake affected two hotels. First-quarter results included $3.7 million of business-interruption insurance recovery, net of $1.4 million of related hotel expenses, and $0.3 million of excess property-insurance recovery. A $4.6 million property-damage insurance receivable remained at March 31; additional recovery gains were contingent on resolution of outstanding matters.
- The $25.3 million of separation and startup expenses was a significant nonrecurring charge associated with the spin-off, NYSE listing, tender offer, and transition to standalone operations. Xenia also repurchased 1,759,344 shares at $21 per share for $36.9 million.
- Management noted lodging-industry seasonality, with typically weaker first-quarter results and stronger third-quarter results. Risks include demand and rate volatility, competition, reliance on third-party hotel managers and brands, renovation needs, debt and interest-rate exposure, natural disasters and insurance recoveries, standalone-company transition, and maintaining REIT qualification. Management said there were no material changes to previously disclosed risk factors.
- The company reported no material expected adverse effect from ordinary-course legal claims, no off-balance-sheet arrangements, and effective disclosure controls. It stated that InvenTrust had advised it the SEC concluded its investigation of InvenTrust without intending to recommend enforcement action.
Important facts for investors to verify
- How much of the reported loss and reduced operating cash flow reflects nonrecurring separation costs, and how recurring standalone expenses develop.
- Whether hotel operating trends, including occupancy and RevPAR, sustain improvement across the portfolio, accounting for the smaller and changed property base.
- The status and timing of remaining Napa earthquake insurance recoveries and the related hotel reopening and remediation work.
- Liquidity and refinancing plans for significant 2016 and 2019 debt maturities, as well as exposure to variable interest rates.
- Actual 2015 capital spending versus the $50–$60 million estimate, and the ability to fund planned distributions from ongoing cash generation.
- Progress toward REIT qualification and the company’s transition from InvenTrust-provided services to standalone operations.