Xenia Hotels & Resorts, Inc. annual report, FY2015

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Xenia Hotels & Resorts, Inc. — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Xenia became a separate publicly traded company on February 3, 2015; pre-spin-off financials are carved out of InvenTrust and include allocations, so comparisons may not reflect standalone costs.

Business context and operating performance

Xenia is a self-advised REIT focused on premium full-service, lifestyle and urban upscale hotels. At year-end it owned 50 hotels with 12,548 rooms across 21 states and Washington, D.C.; 48 hotels were wholly owned. Third-party managers operate the hotels. Approximately 81% of rooms were affiliated with Marriott, Hilton, Kimpton or Hyatt.

  • Portfolio occupancy was 76.2% in both 2015 and 2014; average daily rate rose 5.8% to $187.04 and RevPAR rose 5.8% to $142.59. These portfolio statistics reflect changes in properties owned during each year.
  • For the 35 comparable hotels identified by management, room revenue increased $21.4 million, with RevPAR up 4.6% and ADR up 3.9%.
  • Fourth-quarter revenue was $248.6 million and net income attributable to the Company was $61.8 million, or $0.55 per common share. Fourth-quarter 2014 net income included substantial discontinued-operations income, limiting direct comparison.

Financial results and liquidity

  • Revenue: $976.1 million, up 5.3% from $926.7 million. Room revenue increased 5.0% to $663.2 million; food and beverage revenue increased 10.2% to $259.0 million. Other revenue declined 9.7% to $53.9 million, partly reflecting classification changes.
  • Operating results: Hotel operating income was $365.9 million, up 9.8%; hotel operating margin was approximately 37.5%, versus 36.0% in 2014. GAAP operating income was $104.1 million, versus $94.5 million.
  • Profit: Net income attributable to the Company was $88.8 million, compared with $109.8 million; diluted EPS was $0.79 versus $0.97. Continuing-operations net income increased to $89.1 million from $34.7 million. The prior-year total included $75.1 million of discontinued-operations income, including a $135.7 million gain on sale, while 2015 included a $43.0 million gain on the Hyatt Regency Orange County sale.
  • Supplemental non-GAAP measures: Adjusted EBITDA increased 21.2% to $292.5 million; Adjusted FFO increased 32.0% to $241.2 million. The filing cautions these measures are not substitutes for GAAP results or measures of cash available for distributions.
  • Cash flow and investment: Operating cash flow was $193.2 million, compared with $181.6 million. Investing activities used $216.7 million, including $53.8 million of capital expenditures, $36.1 million for development and $245.0 million for three hotel acquisitions; proceeds included $133.4 million from the Orange County sale. Cash and cash equivalents were $122.2 million at year-end; restricted cash and escrows were $77.3 million.
  • Debt and liquidity: Balance-sheet debt was $1.095 billion, excluding debt presented with assets held for sale; gross debt outstanding was approximately $1.131 billion, including the $27.8 million Gainesville mortgage. The $400 million unsecured revolver had no balance outstanding. Year-end weighted-average debt rate was 3.51%. Approximately $583.3 million, or 51.6% of debt, was variable-rate and unhedged; management estimated a 1% rate change would affect annual cash flow and earnings by about $5.8 million. The $175 million term loan was swapped to a 2.79% effective rate; a separate $125 million term loan was funded in January 2016.
  • Distributions: Common dividends declared totaled $0.84 per share for 2015. Xenia reported $93.6 million of common dividends declared. REIT status generally requires distribution of at least 90% of REIT taxable income.

Material changes versus the prior period

  • Revenue and hotel operating income rose, supported by rate growth, acquisitions and two hotel openings. Results also reflect hotel sales, the changing portfolio and the spin-off; management notes the periods are not fully comparable.
  • General and administrative expense fell to $25.6 million from $38.9 million, largely because 2014 included $16.2 million of InvenTrust allocations. 2015 included $26.9 million of separation and startup costs, $5.0 million of acquisition costs and $1.4 million of pre-opening costs.
  • Debt declined from $1.198 billion on the balance sheet at year-end 2014 to $1.095 billion at year-end 2015. Xenia repaid $300.9 million of hotel mortgages, completed refinancing and issued the $175 million term loan; debt-extinguishment loss was $5.8 million.
  • Capital activity included a $36.9 million tender-offer repurchase in March 2015. A separate $100 million repurchase authorization was approved in December; no shares were bought under it by year-end. The company subsequently repurchased about $40.2 million of shares through March 1, 2016.

Outlook, risks and unusual items

  • Management cited industry RevPAR growth of 6.3% for 2015 and expected industry growth of 5%–5.5% in 2016; this is industry commentary, not company-specific financial guidance. Management expected full-year contribution from 2015 acquisitions and developments, partly offset by property sales.
  • Houston represented about 11% of rooms and remained pressured by energy-sector weakness; management cited an industry forecast of an 8.6% Houston RevPAR decline in 2016. Approximately 39% of rooms were in Texas and California.
  • Key risks include lodging-cycle and seasonal volatility, fixed operating costs, new supply and alternative accommodations, dependence on third-party managers and major brands, geographic and brand concentration, renovation needs, refinancing and interest-rate exposure, and the ability to maintain REIT qualification and distributions.
  • Unusual items include $26.9 million of spin-off/listing and startup expenses; a $43.0 million gain on the Orange County hotel sale; and $3.9 million of net business-interruption insurance recoveries recognized in 2015 relating to the 2014 Napa earthquake. The filing states that ordinary-course legal proceedings were not expected to have a material effect.
  • The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting as of year-end. Its REIT election began with a short taxable year in 2015; the filing discusses tax risk associated with the spin-off election and the IRS’s potential disagreement with asset valuations.

Important facts for investors to verify

  • Review the audited financial statements and reconciliations for GAAP earnings, Adjusted EBITDA and Adjusted FFO; distinguish continuing operations from discontinued operations and account for the non-comparable carve-out period.
  • Check debt maturity and covenant details, the treatment of held-for-sale debt, variable-rate exposure, and the impact of 2016 borrowing and refinancing after year-end.
  • Track Houston and other Texas properties, renovation and capital requirements, and whether management’s outlook assumptions are borne out.
  • Assess REIT qualification, taxable-subsidiary taxes, distribution coverage and the funding and effect of share repurchases.
  • Confirm the completion and financial effects of the Hotel Commonwealth acquisition and Gainesville sale, which closed after year-end.