Xenia Hotels & Resorts, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2015. Xenia, a hotel REIT focused on premium full-service, lifestyle and urban upscale properties, became a stand-alone public company after its February 3, 2015 spin-off from InvenTrust Properties. At quarter-end it owned 46 hotels with 12,643 rooms and held 75% interests in two hotels under development. Comparisons require caution: prior periods include allocated parent-company costs and a different property portfolio; the Suburban Select Service Portfolio appears as discontinued operations.
Financial performance and position
- Q2 revenue: $251.2 million, up 1.7% year over year. Operating income was $40.4 million versus $36.9 million; net income attributable to Xenia was $23.7 million versus $22.9 million. Basic and diluted EPS were $0.21 versus $0.20.
- First-half revenue: $479.1 million, up 2.9%. Operating income declined to $41.6 million from $55.5 million; net income attributable to Xenia fell to $8.9 million from $25.2 million. EPS was $0.08 versus $0.22.
- Margins: Q2 operating margin was approximately 16.1% versus 14.9%; first-half operating margin was approximately 8.7% versus 11.9%. First-half results included $26.5 million of separation and start-up expenses.
- Hotel performance: Q2 RevPAR rose 4.8% to $150.19, as ADR increased 5.4% to $188.43 while occupancy eased to 79.7% from 80.1%. First-half RevPAR increased 4.9% to $142.44; ADR rose 5.8% while occupancy declined to 76.8% from 77.5%.
- Adjusted measures: Adjusted EBITDA was $80.2 million for Q2, up from $72.5 million, and $144.9 million for the first half, up from $128.6 million. Adjusted FFO was $63.8 million for Q2 versus $57.1 million, and $114.5 million for the first half versus $98.2 million. These are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
- Cash flow and liquidity: First-half operating cash flow was $82.4 million versus $119.1 million; investing cash outflow was $76.0 million and financing cash inflow was $27.9 million. Cash and cash equivalents were $197.3 million at June 30, plus $85.9 million of restricted cash, including $79.1 million in property-improvement reserves.
- Debt: Debt was $1.127 billion at June 30 versus $1.295 billion at year-end; mortgage debt carried a 3.93% weighted-average rate. The $400 million unsecured revolver had no borrowings at quarter-end, but $127 million was outstanding as of August 13. Approximately $23.2 million of debt was recourse to the company. Scheduled 2016 maturities were $356.5 million.
- Equity and distributions: Xenia repurchased 1.76 million shares for $36.9 million in its tender offer. It declared a regular $0.23-per-share Q2 common dividend, payable July 15; $25.7 million was accrued at quarter-end.
Material changes, outlook and commentary
- Management attributed stronger hotel metrics to higher ADR and RevPAR, although occupancy was slightly lower. Reported revenue growth also reflects portfolio changes and reclassifications under the updated lodging-industry accounting system.
- First-half cash from operations and GAAP earnings were weighed down by the spin-off, NYSE listing, tender-offer and stand-alone start-up costs. Prior-year results also included discontinued operations and a gain related to consolidation of an entity.
- Management expected approximately $45 million to $55 million of 2015 capital expenditures, excluding Napa earthquake remediation. It expected to refinance or extend maturing debt and identified cash, operating cash flow and the revolver as short-term liquidity sources. No earnings or RevPAR guidance was provided in the supplied filing text.
- In July, Xenia completed the acquisition of three hotels for $245 million, excluding closing costs; the $24.5 million deposit was recorded at quarter-end. In July it also agreed to acquire the Hotel Commonwealth in Boston for $136 million, with closing expected in Q1 2016 subject to completion of expansion and customary conditions.
- The company reported $3.7 million of business-interruption insurance recovery in the first half related to the 2014 Napa earthquake and a remaining $4.6 million property-damage insurance receivable at June 30. Insurance recoveries above recorded losses were not recognized pending resolution of contingencies.
- Risks include hotel demand and seasonality, room-rate and occupancy declines, reliance on third-party managers and brands, debt refinancing and interest-rate exposure, acquisition and renovation execution, and maintaining REIT status. A 1% sustained change in rates on variable-rate debt was estimated to affect annual earnings and cash flows by approximately $5.6 million. Management said it was in compliance with debt covenants; ordinary-course legal matters were not expected to have a material adverse effect.
- The SEC informed former parent InvenTrust it did not intend to recommend enforcement action following its investigation. InvenTrust’s separation indemnity covers specified investigation- and litigation-related losses.
Important facts for investors to verify
- How much of the first-half operating cash-flow and earnings decline is nonrecurring separation cost versus ongoing stand-alone expense.
- Actual financing, integration costs and operating contribution from the three acquired hotels, and whether the Boston acquisition closes on the stated schedule and price.
- Ability to refinance or extend the $356.5 million of scheduled 2016 maturities, especially following the post-quarter $127 million revolver draw.
- Whether RevPAR and margins can improve despite softer occupancy, and how portfolio changes affect comparable-property trends.
- Timing and collectability of the remaining Napa insurance receivable, plus earthquake repair costs excluded from the capital-spending estimate.
- That non-GAAP Adjusted EBITDA and Adjusted FFO reconciliations, dividend coverage, and REIT qualification requirements remain consistent with the company’s stated assumptions.