Xenia Hotels & Resorts' (XHR) CEO Marcel Verbaas on Q4 2015 Results - Earnings Call Transcript

| About: Xenia Hotels (XHR)

Xenia Hotels & Resorts, Inc. (NYSE:XHR)

Q4 2015 Earnings Conference Call

February 23, 2016, 13:00 ET

Executives

Lisa Ramsey - VP, Finance

Marcel Verbaas - President & CEO

Barry Bloom - COO

Andy Welch - CFO

Analysts

Thomas Allen - Morgan Stanley

Operator

Welcome to the Xenia Hotels & Resorts Fourth Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Lisa Ramsey, please go ahead.

Lisa Ramsey

Thank you, Austin. Good afternoon everyone and welcome to the fourth quarter and year-end 2015 earnings call and webcast for Xenia Hotels & Resorts. I am here with Marcel Verbaas, our President and Chief Executive Officer; Barry Bloom, our Chief Operating Officer; and Andy Welch, our Chief Financial Officer. Marcel will provide you with an update on the industry and discuss fourth quarter and 2015 results and recent activities and details on our 2016 guidance and outlook for the year. Barry will follow with additional information on our operating performance and specific market detail. Andy will conclude our remarks with a discussion on our financials, recent capital markets activity and balance sheet. We will then open up the call for Q&A.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements. These statements are subject to numerous risks and uncertainties as described in our annual report on form 10-K and other SEC filings which could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, February 23, 2016. And we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold.

You can find a reconciliation of non-GAAP financial measures referred to in our remarks in this morning's earnings release. An archive of this call will be available on our website for 90 days. With that, I'll turn it over to Marcel to get started.

Marcel Verbaas

Thanks, Lisa. Welcome and good afternoon everyone. 2015 was a momentous year for our Company, as we completed our separation from our prior parents and emerged as a standalone publicly-traded company. It was an active year, both on the acquisition and disposition front, as well as with capital market initiatives to solidify our already strong balance sheet. We added five hotels to our portfolio, including two brand-new development projects and completed significant renovations at two of our largest hotels. In addition, we sold one hotel and completed nearly $900 million of financings.

Before getting into the detailed operating results for our portfolio and Company, I first would like to give you a brief update on the overall lodging industry performance in 2015. In the fourth quarter the lodging industry posted a RevPAR increase of 4.8% which consisted of an increase of 3.6% in ADR and 1.2% occupancy growth. For the full year 2015 industry RevPAR increased by 6.3% which was primarily driven by ADR growth of 4.4% while occupancy increased 1.7%. While it appeared RevPAR increases are slowing, overall fundamentals between supply and demand remain favorable. And supply growth remains below the long term historical average.

Our strategy of targeting primarily top 25 markets and key leader destinations has proven to be beneficial, as the majority of our markets do not see the same impact of the strengthening dollar and alternative rental accommodations as you see in the gateway markets. We remain cautiously optimistic about where we're in the cycle and look forward to 2016.

Now turning to our portfolio, same-property RevPAR for the fourth quarter increased 5.3% due to a 3.9% increase in average rates and 1.4% increase in occupancy. We were pleased with our fourth quarter top-line increases, although we should note that our results were aided by the easier year-over-year comparisons as a result of the impact of the Napa earthquake last year. However, when excluding our Andaz Napa from fourth quarter results, our portfolio RevPAR still increased by 3.5%, as sign of the strength of the portfolio overall, particularly in light of the headwinds we continue to experience in Houston, a market that will provide additional color on later during this call.

For the year, our portfolio same-property RevPAR increased 4.7% driven entirely by our 4.9% rate growth, as occupancy was down slightly to last year. While the Houston market continues to be challenged due to energy markets and the impact on demand, the balance of our portfolio performed well in the fourth quarter and throughout 2015, evidenced by our same-property RevPAR growth of 6.1%, for full year 2015 when excluding our Houston area assets. As we have stated each quarter, keep in mind that this RevPAR growth is based on adjusting 2014 results for the adoption of the 11th addition of the uniform system of accounts for the lodging industry or USALI.

During the fourth quarter and for the full year 2015 our hotels delivered strong bottom-line results. Our fourth quarter adjusted EBITDA increased $20 million to $72.7 million, a 37.8% increase year over year. Full-year adjusted EBITDA of $292.5 million was near the high end of our previously provided guidance and represented a 21.2% increase over 2014. Adjusted FFO per share for the fourth quarter and full year 2015 was $0.56 per share and $2.15 per share respectively, up 60% and 33.5% over the same time periods last year. These results were positively impacted by our acquisition of three hotels during the year, the Napa earthquake impact last year and the substantial reduction in G&A compared to last year when we were a subsidiary of InvenTrust. Andy will provide further detail on this later in the call.

We were pleased with our same-property EBITDA margin for the year of 32.3%, an increase of 107 basis points over last year, despite the fact that real estate taxes for the year increased nearly 15% in a portfolio-wide basis. We believe this performance is a testament to the asset management practices we have deployed within our portfolio and particularly those assets that have been added to our portfolio relatively recently.

Now onto several portfolio changes we made during the fourth quarter and subsequent to year end. As discussed on our third quarter call, the 100-room Grand Bohemian Hotel Mountain Brook, an Autograph Collection hotel located in an affluent suburb of Birmingham, Alabama opened in late October. The completion of this hotel followed the completion of the 50-room Grand Bohemian Charleston in the third quarter. We have no further development properties in our pipeline at this time and do not anticipate being active in this arena in the near future.

Additionally during the quarter we sold the Hyatt Regency Orange County in Garden Grove, California for $137 million, an 11.8 times multiple on our 2015 EBITDA forecast. And we also retained the $5.9 million balance in the CapEx reserve account. Also as previously discussed, we transitioned the management of four of our urban upscale hotels to Sage Hospitality in October.

In mid-January we closed the acquisition of the Hotel Commonwealth in Boston. We announced this [Technical Difficulty] purchase back in August and closed the transaction upon completion of a substantial expansion project that included a new wing with 96 additional guest rooms, over 7000 square feet of indoor meeting space, nearly 1700 square feet of outdoor patio space overlooking Fenway Park and a three-level parking garage. Sage will continue to manage the hotel and we're excited to add this great independent luxury hotel to our portfolio.

In February we completed the sale of the Hilton Gainesville for $36 million. In addition to the sale proceeds, we were able to retain the $2 million balance in the capital expenditure reserve account. The sale of the hotel was a strategic disposition, allowing us to exit a tertiary market where we did not see appropriate long term growth potential, particularly given upcoming capital requirements. The sale price represented a 9 times 2015 EBITDA multiple. And when including the future capital investment as announced by the buyer, the pro forma invested capital represented a 12.3 times 2015 EBITDA multiple or a 6.9% cap rate. We're continuing to evaluate additional dispositions and will provide details when appropriate.

As we discussed in our previous earnings calls, the first half of 2015 saw the largest renovation projects for the year. However, during the fourth quarter we began a $12 million renovation at our 275-room Marriott Napa Valley consisting of a guest room and bathroom renovation, including 82 tub-to-shower conversions, corridor and meeting space renovation and a complete pool and outdoor function space transformation which will be completed in early 2016. Also in 2015 we completed a number of additional renovation projects including public space upgrades at the Loews New Orleans, Renaissance Austin, Fairmont Dallas and Marriott Griffin Gate and food and beverage enhancements at the Renaissance Austin and the Hotel Monaco Denver.

In December we declared our fourth quarter dividend of $0.23 per share. We continue to be pleased with our yields and comfortable with our payout ratio. However, our Board will continue to evaluate our dividend policy on an ongoing basis. Also in December our Board approved $100 million share repurchase program, as previously announced. While we did not purchase any shares during the fourth quarter, as of February 16 we have purchased 2.4 million shares at a weighted average price of $14.11.

Finally, I want to discuss our 2016 outlook and the guidance provided earlier this morning in our earnings release. For full year 2016 we anticipate same-property RevPAR growth of 2% to 4% which excludes the Grand Bohemian Hotel Charleston and the Grand Bohemian Mountain Brook, as both properties commenced operations in the second half of 2015; the Hotel Commonwealth, as the property underwent a substantial expansion project in late 2015 making year-over-year results non-comparable; and the Hilton Gainesville which was sold in February 2016. Excluding Houston, where we project significant RevPAR declines for the year, we anticipate same-property RevPAR growth of 3.5% to 5.5% for the remainder of the portfolio. Our Outlook does not anticipate any further acquisitions or dispositions and takes into account current economic conditions, including worldwide economic uncertainty and continued turbulence in the energy industry.

We provided an adjusted EBITDA range of $303 million to $317 million which includes a full year of operations from our three 2015 acquisitions and operations at the Hotel Commonwealth from our January 15 acquisition date, as well as cash G&A expense of $21.5 million to $23.5 million. Our adjusted FFO guidance of $247 million to $261 million includes cash interest expense of $46 million to $47 million and state and federal income taxes of $9 million to $10 million. While we do not provide quarterly guidance, as a result of the seasonality of our portfolio the ramp-up of both the Grand Bohemian development projects and the Hotel Commonwealth tend and the shift of Easter into March we anticipate our first quarter EBITDA to be roughly 20% of our annual guidance.

We anticipate spending between $62 million and $72 million on capital projects throughout the year. In addition to the completion of the renovation at the Marriott Napa Valley, this guidance includes a barroom and meeting room renovation at the Renaissance Atlanta Waverley and a guestroom and bathroom reverently at the Westin Galleria Houston which is anticipated to begin in the fourth quarter. Other notable projects scheduled for 2016 include guestroom renovations at the Hyatt Key West and the Andaz San Diego which are scheduled to commence in the third and fourth quarter respectively.

We continue to look at value-add opportunities at our hotels. And thus far in 2016 we have added three keys to the Hyatt Regent Santa Clara. And we plan to add two keys to the Hyatt Key West and one to the RiverPlace Hotel in Portland later in the year. Now I will turn the call over to Barry to provide additional color on the performance and outlook of our portfolio.

Barry Bloom

Thanks Marcel and good afternoon. Before discussing our fourth quarter results in greater detail, I want to remind you that there have been reclassifications of revenue and expense line items to other categories, both due to changes in USALI as well as other internal reclassifications related to our separation. The combination of these items, in addition to the carved-out financial statements for the first quarter and 2014, makes it difficult to compare our line item operating results.

In our ongoing effort to provide further disclosure and transparency, we've included a schedule in our earnings release that includes property-level RevPAR and EBITDA for 2015 as well as 2014 RevPAR in addition to the 2014 EBITDA we have previously disclosed. We hope this is useful to you in better understanding our property-level performance year over year. Our fourth quarter RevPAR and EBITDA margin data are presented on a same-property pro forma basis and include 48 hotels as if they were owned for all periods presented. This date excludes the Grand Bohemian Hotel Charleston and Grand Bohemian Hotel Mountain Brook which opened in the second half of 2015 and the Hyatt Regency Orange County which was sold in October.

We had solid performance in a number of markets, with eight of our hotels achieving double-digit RevPAR growth for the fourth quarter. Our top-performing markets, excluding Napa, were San Diego, up 20.6%; Dallas, up 14.4%; Santa Clara, up 13.2%; San Francisco, up 12.3%; Philadelphia, up 11.5%; and Atlanta, up 11%. In addition to Houston which was down 11.2%, our weakest markets were New Orleans, down 9% and Pittsburgh down 5.8%. For the full year, 15 or nearly half of our markets, grew RevPAR by over 7%, with our largest growth markets, again excluding Napa, being Santa Clara, up 11.1%; San Diego, up 10.8%; Phoenix, up 10.6%; and Orlando, up 9.3%. Four of our markets experienced negative RevPAR growth for the year, with Houston down 5.5%, Baltimore down 1.8%, Pittsburgh down 0.4% and Fort Worth down 0.2%.

A few notable market highlights in our best markets for the of that contributed to their strong performance includes significant corporate demand as well as full utilization of the new Levi Stadium in Santa Clara, a revamping of our sales and revenue management structure in San Diego, the impact of Super Bowl XLIX in Phoenix and a new MLS soccer team and performance arts center in Orlando. You've heard from us previously regarding our softer markets, including challenging energy markets in Houston, civil unrest in Baltimore and significance supply additions in Pittsburgh.

Looking ahead to 2016, we expect our strongest RevPAR performance to come from the West Coast as we reap the benefits of last year's rooms innovations in San Francisco and Santa Clara. Our California leisure destinations, including Napa and Santa Barbara, are also expected to lead the overall portfolio. We anticipate continued strong growth in the Boston and Philadelphia markets, as well as San Diego and Atlanta, as a result of specific property-level initiatives. On the downside we expect RevPAR declines in Houston due to the challenging overall market, as well as Pittsburgh, primarily as a result of additions to supply. Overall, however, we believe our specific submarkets are in good shape as it relates to potential impact of supply additions in 2016.

Overall, our 2016 group booking revenue pace is ahead of the same time last year by 4.3%, with our top 10 group revenue producing hotels up 6.1% over last year. Among these major group producing hotels, our strongest markets at this point in terms of 2016 group pays compared to 2015 include San Francisco, Dallas, Houston and Atlanta.

We're very pleased with our flow-through in margin expansion for the quarter, with same-property hotel EBITDA margin expanding 196 basis points for the quarter, resulting in an increase of 107 basis points for the year. The continued to maintain good expense control during the quarter, with hotel operating expenses increasing only 2.4%, aided in part by lower utility costs and a strong focus on expense controls at the hotels. For the full year, hotel operating expenses increased by 2.7%, despite real estate taxes increasing by nearly 15%.

I will now turn to Houston which remain challenged in the fourth quarter and which we expect to continue to be challenging throughout 2016. Our asset management and executive teams continue to remain heavily focused on our properties in the Houston market which represent 11% of total rooms as well as 2016 projected hotel EBITDA. Our overall Houston market RevPAR for our four hotels was down 11.2% for the fourth quarter and 5.5% for the full year. Despite this very challenging operating environment, our hotels performed relatively well on the bottom line. For the four Houston hotels, hotel EBITDA declined by 6% in 2015, with EBITDA margin declining by only 9 basis points, reflecting the specific cost-containment strategies that have been put in place at each hotel.

While both of our submarkets continue to be challenged along with the overall Houston market, the Marriott Woodland's performance held up significantly better for the quarter and the full year than our Galleria hotels. The Marriott Woodland's experienced a decline in RevPAR of 1.4% for the quarter but an increase of 3.3% for the year, while RevPAR at our hotels in the Galleria declined 15% in the fourth quarter and nearly 9% for the year. Going into 2016 we maintain a strong focus in Houston on business mix, particularly on enhancing group sales efforts as well as cost controls. We have worked with the property operating team to significantly revamp the market strategies and sale structures for each hotel, have been creative and effective in implementing cost-containment measures.

On a positive note, our group booking pace for 2016 is up over 9% at the Marriott Woodlands and over 12% at the Westin Oaks in Galleria. However, despite this positive progress on the group side of the business we still anticipate RevPAR at our hotels to be down 9% to 13% in 2016 due to continuing declines in transient business. We anticipate that both the overall market and our hotels will have a particular difficult first half of the year but the year-over-year comparisons will improve as the year progresses. Andy will now provide additional details on our financial performance and balance sheet.

Andy Welch

Thanks Barry and good afternoon. As Marcel mentioned, our fourth quarter results were positively impacted by a substantial reduction in corporate G&A expense. Our recurring cash corporate G&A for the fourth quarter total $4.8 million, representing a decline of $9.8 million or 67% compared to the prior year. Our total G&A for the quarter was $6.1 million which included $1.3 million of non-cash amortization of share-based compensation. As we discussed on prior calls, our 2014 G&A was an allocation commitment trust and a part of our carved-out financial statements. And to be fair, included certain costs related to our separation and preparation for our listing.

Our total recurring G&A for the year was $25.6 million, including $6.1 million of non-cash compensation. The recurring cash G&A for the year was $19.5 million which is slightly less than our previously provided guidance of $20 million to $21 million. As we transition to an independent publicly-traded Company, we incurred nearly $27 million of one-time expenses during the first nine months of 2015.

These non-recurring expenses included costs related to our separation from our former parent and our listing on the New York Stock Exchange, as well as other startup costs incurred while transitioning to a standalone publicly-traded company. No other transition expenses were incurred in the fourth quarter and we do not expect to have any going forward.

In addition to the positive G&A variance, the acquisition of three hotels in the quarter, in the third quarter, the earthquake impact in Napa in 2014 and as Barry addressed in his comments, continued margin expansion led to significant year-over-year growth in adjusted EBITDA and adjusted FFO. In addition, adjusted FFO was positively impacted by a quarter -- for the quarter by a $2 million reduction in income taxes compared to the prior year. The variance was due to utilization of the remaining NOLs of our TRS this year and taxes for 2014 for an allocation from our former parent.

Let me point out three other one-time items during the quarter. First, we recorded a $43 million gain on the sale of the Hyatt Regency Orange County. Second, we incurred a $5.5 million loss on the extinguishment of debt in connection with the prepayment of six mortgages. Lastly, we recorded $585,000 in pre-opening costs associated with the completion of our two Grand Bohemian development property.

Now let's turn to our balance sheet and our recent capital market activities. As of December 31, 2015 we had $122 million of cash and $77 million of restricted cash, as well as full availability of our $400 million line of credit. Our leverage ratio of net debt to EBITDA as defined in our line of credit agreement was 3.5 times. As discussed in our third quarter conference call and further detailed in our press release, in October we completed two unsecured term loan facilities totaling $300 million.

The first term loan for $175 million matures in February 2021 and has a fixed rate of 2.79% based on our current leverage ratio. The second term loan for $125 million matures in October 2022 and has a fixed rate of 3.63%, again based on our current leverage ratio. Proceeds from these two facilities were used to repay the balance on our line of credit, prepay the mortgage on the Marriott San Francisco and to fund the acquisition of the Hotel Commonwealth.

In October we refinanced the $30 million mortgage on the Residence Inn Cambridge with a new 10-year $63 million loan at 4.48%, lowering the interest rate by more than 1%. The excess proceeds from this refinancing were used to prepay two mortgages that were to mature in 2017. Additionally, we paid off the $73 million mortgage on our Marriott Woodlands property with the net proceeds from the sale of the Hyatt Regency Orange County. In December we amended the $110 million mortgage on the Westin Galleria and Oaks by lowering the interest rate spread by 65 basis points. All of the material terms remain the same, including the maturity date.

Subsequent to the quarter end, in January we secured a $60 million mortgage on the Hotel Palomar Philadelphia. The new line matures in 2023 and bears an interest rate of LIBOR plus 260 basis points which we swapped into an effective fixed rate of 4.14%. We're working proactively to address our remaining 2016 and 2017 maturities and will share details on those plans when appropriate.

We've made substantial progress on our balance sheet strategy of extending our debt maturity profile, unencumbering a greater percentage of our properties and EBITDA and lowering our weighted average interest rate, while shifting towards a greater percentage of fixed rate debt. Since our listing just over a year ago, we have lengthened our debt maturity profile by nearly two years, we have unencumbered five properties and approximately one-half of our EBITDA is now unencumbered. We have lowered our weighted average interest rate by nearly 50 basis points to 3.49% and 55% of our debt is now at fixed rates. Overall, we're pleased with what we've accomplished in our first year as a public Company.

Thank you for joining us. Operator, we're now ready to answer questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Thomas Allen

Can you give some color on how year-to-date trends are running? A lot of your peers have talked about either how January RevPAR went or how the first six weeks are going. Then separately, can you just talk about the Super Bowl and how it impacted your properties? Thanks.

Marcel Verbaas

Yes. We can -- I'll let Barry talk a little bit more specifically about the results around the Super Bowl. I think as you know we did benefit in the area there from Super Bowl. In our particular portfolio had some disruption last year. So we clearly benefited year-over-year comparisons there. I think we, so far with the results that we've seen the first six weeks of the year, are very much consistent with what our guidance is and what our expectations were budget-wise going in for the year. But I'll let Barry go into a little bit more detail specifically as it relates to the Super Bowl impact.

Barry Bloom

We can look at Super Bowl 50 as a modest success for both of our properties in the Bay Area, specifically Hyatt Regency Santa Clara and Marriott SFO. Obviously Hyatt Regency Santa Clara was at the event venue, but it was nearly 40 miles away from the majority of the weekend's events. And that made the full weekend stays a little more difficult than we thought they might be. Having said that, we recognize that when the NFL booked the Super Bowl there and focused our strategy on longer term business from NFL affiliates that were actually spread out over the entire two-week period surrounding the event.

And we based on Star Reports, certainly had a clear win over our competitors in that market. The San Francisco Airport Marriott was a little bit betwixt and between in terms of where activities took place. But they did a very good job of finding non-Super Bowl related business both prior to and after the Super Bowl. And again, that was very evident in their outperformance of their comp set over that period.

Marcel Verbaas

And in general, kind of turned back to your first part of the question. I think the trends that we were seeing so far in our portfolio are very much consistent with some of the remarks that we had today as far as where we're seeing some strength and some weaknesses overall within the portfolio. Clearly Houston is continuing to be a tough market for us and it will continue throughout particularly the first half of the year. But we're seeing general strength in the rest of the portfolio.

Thomas Allen

And then just in terms of your 2016 RevPAR guidance, I mean you do mention that you are forecasting 9% to 13% declines in the Houston area but 3.5% to 5.5% growth in RevPAR in -- for the rest of your properties. I think if we think about your peers, Matt's guide to 3% to 5%, Starwood, 2% to 4% and then a lot of the REITs have been coming the 2% to 4%, 3% to 5% range. That kind of you core business ex-Houston, you seem a little bit more optimistic than others. What's driving that optimism? Thanks.

Marcel Verbaas

Well, I think it's particularly some of the markets that Barry spoke about in his comments, particularly we're expecting good strength in the West Coast, particularly in our portfolio when you look at year-over-year comparisons due to some of the renovations we did last year. We're also expecting strength in some of those leisure markets that we have on the West Coast. And markets like Atlanta, San Diego are looking very strong for us as well this year.

So I think kind of going back to the earlier comments, we do believe that the overall portfolio mix and diversification that we have in the mix is helping us out somewhat with what we believe to be our RevPAR trends in the remainder of the portfolio.

Thomas Allen

And just final question. I know Baltimore's a small market for you guys. But on a prior call one of the other REITs mentioned that that market seemed to be getting better. Are you seeing similar trends or not really?

Barry Bloom

Yes, I think it's certainly improved from the challenges we had in that market last April and May. And it's literally gotten better every month since then. So yes, certainly improving. But again, very small market for us with two urban upscale hotels.

Operator

[Operator Instructions]. At this time we're showing no further questions. I will turn the call back to Marcel Verbaas for any closing remarks.

Marcel Verbaas

Thank you. We appreciate everyone joining us today. And we were pleased to be able to share our performance as a first-year Company with you today. We're pleased with all the progress we've made over the last year. And we look forward to sharing additional information with you on future quarterly calls. Thank you for your participation and interest today.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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