Xenia Hotels & Resorts, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2015. Xenia is a hotel REIT focused on premium full-service, lifestyle and urban upscale properties. At quarter-end, it owned 50 hotels with 13,104 rooms and held a majority interest in one hotel under development. Xenia became a stand-alone public company in February 2015 after its spin-off from InvenTrust.
Comparisons require care: prior-period results include carved-out allocations from InvenTrust, while 2015 includes substantial spin-off and start-up costs. Acquisitions, property dispositions, discontinued operations and accounting reclassifications also affect comparability.
Financial and operating highlights
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $248.5 million (+7.5%) | $231.1 million | $727.6 million (+4.4%) | $696.7 million |
| Operating income | $29.5 million | $22.6 million | $71.2 million | $78.1 million |
| Net income attributable to Xenia | $18.1 million | $9.5 million | $27.0 million | $34.7 million |
| EPS attributable to common stockholders | $0.16 | $0.08 | $0.24 | $0.31 |
| Hotel operating income | $92.8 million (+11.4%) | $83.3 million | $274.7 million (+8.7%) | $252.7 million |
| RevPAR | $147.31 (+6.4%) | $138.47 | $144.11 (+5.4%) | $136.74 |
| Occupancy / ADR | 79.0% / $186.37 | 78.8% / $175.66 | 77.6% / $185.77 | 78.0% / $175.38 |
Q3 hotel operating income margin was approximately 37.3%, versus 36.0% a year earlier; nine-month margin was approximately 37.8%, versus 36.3%. Nine-month GAAP operating income and earnings declined despite higher revenue, reflecting $26.9 million in separation and start-up expenses, among other changes. Q3 Adjusted EBITDA was $74.9 million versus $59.7 million; nine-month Adjusted EBITDA was $219.8 million versus $188.3 million. Adjusted FFO was $63.5 million for Q3 and $178.1 million for nine months. These are non-GAAP measures and are not substitutes for GAAP results or cash flow.
For the first nine months, operating cash flow was $141.7 million, down from $190.5 million. Investing used $331.6 million, principally for three July hotel acquisitions ($245 million), capital improvements ($40.9 million) and development investments ($30.8 million). Financing provided $126.3 million. Cash and equivalents were $99.4 million at September 30, down from $163.1 million at year-end; restricted cash was $83.1 million, including $74.4 million reserved for hotel improvements.
Balance-sheet debt was $1.186 billion, compared with $1.232 billion at December 31, 2014. The debt maturity disclosure includes approximately $62 million of debt on the hotel held for sale, producing total contractual debt of about $1.248 billion including the revolving facility. The company had $117 million drawn on its $400 million unsecured revolver at quarter-end; it reported covenant compliance. Total equity was $1.701 billion.
Material changes, outlook, risks and unusual items
- Q3 RevPAR growth reflected a 6.1% increase in ADR and slightly higher occupancy. Revenue also benefited from three hotels acquired in July and recovery from the 2014 Napa earthquake; acquisitions, dispositions and USALI revenue reclassifications complicate comparisons.
- In July, Xenia acquired the Canary Santa Barbara, Hotel Palomar Philadelphia and RiverPlace Hotel for $245 million, excluding closing costs. It also agreed to acquire Hotel Commonwealth for $136 million, subject to the seller completing an expansion; a $20 million non-refundable deposit was recorded.
- The Hyatt Regency Orange County sale for $137 million closed October 27, 2015. Subsequent financing included a $175 million term loan with LIBOR fixed at 1.29% by swaps, additional mortgage repayments and a $125 million term loan intended to fund the Hotel Commonwealth acquisition. Fourth-quarter debt prepayment fees of approximately $5.1 million were expected.
- Management expected 2015 capital expenditures of approximately $45–$50 million, excluding Napa earthquake remediation. The filing provides no numeric full-year revenue, earnings or RevPAR guidance. Management expected to meet liquidity needs through operating cash, borrowing capacity and refinancing or extending debt as it matures.
- Risks include lodging cyclicality and seasonality, economic and demand changes, competition, reliance on third-party operators and brands, labor and operating cost pressures, acquisition and renovation execution, debt and interest-rate exposure, and maintaining REIT qualification. A 1% sustained interest-rate change on variable-rate debt outstanding at quarter-end was estimated to affect annual earnings and cash flows by approximately $5.6 million.
- Management reported ordinary-course legal matters and believed their resolution would not materially affect the company. InvenTrust’s SEC investigation concluded without an enforcement recommendation; InvenTrust agreed to indemnify Xenia for specified related claims and losses. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported debt with the maturity schedule, including the Orange County mortgage classified with liabilities held for sale, and review subsequent refinancing, repayments and prepayment costs.
- Assess the sustainability of RevPAR and margin gains after separating comparable-hotel performance from acquisitions, earthquake recovery and reclassifications.
- Review the impact of $26.9 million in spin-off/start-up expenses and the substantial difference between GAAP earnings and adjusted non-GAAP measures.
- Confirm funding, closing conditions and execution for the Hotel Commonwealth acquisition and development commitments, and the planned capital expenditure range.
- Consider cash available for general use separately from restricted cash, as well as the effect of dividends, debt maturities and REIT distribution requirements on liquidity.