Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q4 2022 Earnings Call Transcript March 1, 2023
Operator: Good afternoon. Thank you for attending today’s Xenia Hotels & Resorts Inc. Q4 2022 Earnings Conference Call. My name is Tamia, and I’ll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunities for questions and answers at the end. . It is now my pleasure to pass the conference over to your host, Amanda Bryant, VP of Finance. Please proceed.
Amanda Bryant: Thank you, Tamia. Good afternoon, and welcome to Xenia Hotels & Resorts Fourth Quarter 2022 Earnings Call and Webcast. I’m here with Marcel Verbaas, our Chairman and Chief Executive Officer; Barry Bloom, our President and Chief Operating Officer; and Atish Shah, our Executive Vice President and Chief Financial Officer. Marcel will begin with a discussion on our performance and recent investment activity. Barry will follow with more details on operating trends and capital expenditure projects. And Atish will conclude our remarks on our balance sheet and outlook for 2023. We will then open 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 this morning, along with the comments on this call, are made only as of today, March 1, 2023, 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 to net income and definitions of certain items referred to in our remarks in this morning’s earnings release and earnings supplemental which is available on Investor Relations section of our website.
The fourth quarter property-level portfolio information we’ll be speaking about today is on a same-property basis for 30 hotels. This excludes Hyatt Regency Portland and the Oregon Convention Center and W Nashville. An archive of this call will be made available on our website for 90 days. I will now turn it over to Marcel to get started.
Marcel Verbaas: Thanks, Amanda, and good afternoon to all of you joining our call. Following a slow start to 2022 as Omicron virus variant significantly impacted all demand segments, industry fundamentals and our portfolio’s performance improved meaningfully as the year progressed. Leisure and group demand strengthened significantly in the second quarter and this was followed by a steady recovery in business strategy and demand during the third and fourth quarters. Our 2022 results substantially exceeded the expectations we had at the beginning of the year, and our fourth quarter results allowed us to finish out the year near the high end of the guidance we provided after the third quarter for net income adjusted EBITDAre and adjusted FFO per share.
Same-property portfolio RevPAR for full year 2022 declined 5.1% relative to 2019, driven by a double-digit increase in average daily rate growth. Notably, the RevPAR gaps in 2019 narrowed as occupancy improved over the course of the year, and ADR growth remained strong. On the same-property basis, 2022 hotel EBITDA of $256.4 million was roughly 3% below 2019 levels. Margins were 40 basis points higher as compared to 2019. In 2022 authority over same-property hotels achieved positive hotel EBITDA. However, only 12 of our hotels and resorts generated EBITDA in excess of 2019 levels, supporting our belief that we still have considerable recovery potential across a majority of our portfolio. This is particularly evident in six of our larger corporate and group focused hotels, namely Marriott San Francisco Airport, Hyatt Regency Santa Clara, our two Dallas hotels and our two Westerns in the Houston Galleria markets.
As these hotels were collectively over $30 million behind in terms of hotel EBITDA in 2022, as compared to 2019. Now turning to our fourth quarter results. We reported net income was $35.3 million, adjusted EBITDAre of $64.6 million and adjusted FFO per share of $0.41. Our same-property RevPAR for the fourth quarter increased 0.6% as compared to 2019, representing the second quarter of positive growth relative to 2019 since the onset of the pandemic. Average rate growth remained very strong with a 15% increase compared to the fourth quarter of 2019, which offset about nine points lower occupancy. Margins improved 17 basis points compared to 2019 despite continued inflationary pressures, particularly in labor and utilities. We continue to successfully execute our long-term corporate strategy in 2022.
Through transaction activity, we improved the overall quality and anticipated growth profile of our portfolio. We acquired W Nashville early in the year for roughly $328 million. And we sold three hotels for an aggregate sale price of $133.5 million including Bohemian Hotel Celebration, and Hotel Monaco Denver in the fourth quarter. Collectively, our 2022 dispositions prepare that extremely attractive valuation multiples, despite a challenging transaction market in the second half of the year. On a blended basis, the aggregate sale price for the three dispositions reflected a weighted average multiple of 15.4 times 2019 in hotel EBITDA. The sale price for the two properties we sold in fourth quarter, represented a combined 17.1 times multiple on the hotel EBITDA generated during the trailing 12 month period ending September 30.
These valuations were particularly attractive in light of alternative uses for our capital. W Nashville continue to ramp up in his first full year of operations. We and Marriott had several important learnings over the year, including the seasonality of the Nashville market, the optimal mix of group and transient business, great strategy, and food and beverage optimization and positioning. Although the results during our first nine months of ownership were below our expectations, we are confident these learnings will benefit us going forward, and we remain optimistic that the hotel will achieve our expected stabilized profitability in the years ahead. Meanwhile, we are encouraged by the results we achieved in 2022 at our most recent acquisition, Hyatt Regency portal at the Oregon Convention Center during its first full week calendar year of operations.
Despite an extremely difficult operating environment in a market that was slow to reopen, its EBITDA matched our initial underwriting for its first full year of operations, held by an excellent job by highest managing costs. We’re optimistic that an improved events calendar and encouraging group pace will result in steady EBITDA increases in the next few years. We expect that both W Nashville and high ratings in Portland will be significant drivers for our future portfolio EBITDA growth. Over the year, we balanced the range of capital allocation priorities, including returning capital to shareholders through share repurchases, and reinstating a $0.10 per share quarterly dividends. Additionally, we further fortified our balance sheet, and now have no debt maturities until 2025.
Atish will discuss our balance sheet activities in greater detail shortly. And during the year, we also invested in several important internal ROI projects on key properties, and completed planning work for several upcoming projects that we expect to generate meaningful earnings growth in the years ahead. While Barry will provide details on these various projects in his remarks, I would like to highlight one large and exciting project we are expecting to complete over the next two years. In early February, we announced plans to invest approximately $110 million in a complete transformation and expansion of the 491 room, Hyatt Regency Scottsdale Resort and Spa at Gainey Ranch. The investment is intended to maximize value of a high performing asset and a strategically important market by optimizing its ability to capture a premium rate of group and leader transient business and compete most effectively with other luxury resorts in the Phoenix Scottsdale market.
Upon completion, which we currently expect to recur in late 2024, the property will be rebranded as a Grand Hyatt Resort with an additional five keys, a substantial increase in meeting and events base, significantly upgraded and exciting new food and beverage offerings, the rebound full complex and a substantially enhanced room product. While the resort generated record EBITDA in 2022 as a result of extremely strong post-COVID domestic leader demands, we believe that this investment will allow the property to optimize its long-term mix of group and transcend demands, and maintain and improve its ability to drive premium rates. Upon stabilization, we expect the property to generate 50% higher RevPAR and a near doubling of hotel EBITDA from pre-pandemic stabilized levels, effectively closing the performance gap with the properties competitive set, which has also experienced meaningful capital investment in recent years.
While this transformative renovation will cause short-term cash flow disruption to a high performing asset in our portfolio, we strongly believe this project is both attractive from an ROI perspective, as well as appropriate lead times to drive long-term profit growth and value appreciation in an important market for our company. Xenia had a long and successful relationship with Hyatt, which underscores our confidence in our ability to generate attractive risk adjusted returns in Scottsdale. This includes two recent successful ROI investments at Park Hyatt Aviara and Hyatt Regency Grand Cypress. Both properties have achieved significant improvement in earnings and market share, following our capital investment after acquiring these outstanding resorts in 2018 and 2017 respectively.
Following the acquisition of Park Hyatt Aviara in late 2018, our approximately $58 million additional capital investment has resulted in a more than doubling the properties EBITDA and meaningful increase in RevPAR index. While we already reached our projected stabilized EBITDA range of 2022 despite the lingering impact of COVID, particularly on group business, we see substantial opportunities for further gains in the coming years. Great growth has been particularly impressive, but we believe that improved group business will allow us to drive occupancy and further optimize the demand names in the years ahead. And in Hyatt Regency Grand Cypress, our post acquisition capital investment of approximately $45 million, including renovation and expansion of the meeting space, as well as the targeted renovation of all guestrooms.
The property performed extremely well through the pandemic increasing its EBITDA by approximately 50% between 2018 and 2022 and continuing to gain market share. However, it’s still very much in the early innings when it comes to optimizing group business and reaping the full benefits of the expanded and upgraded mean expensive. We expect a 25,000 square foot ballroom addition, will allow us to unlock significant growth in the years ahead, as Orlando remains a very attractive market for group business and the property is well-positioned to take market share. Similarly to the two resorts I just highlighted, we acquired Hyatt Regency Scottsdale at a very attractive basis in 2017. Our projected capital investments will raise our bases in the resort to approximately $680,000 per key.
We believe that this basis remains extremely attractive for luxury resort in the Scottsdale markets, especially when compared to recent transactions for comparable assets and current replacement cost. To conclude my remarks, we are extremely proud of our performance and strategic actions that we’ve taken over the past several years. We navigated through a very challenging period for the lodging industry. Yet we emerge with a higher quality portfolio and a better expected growth profile supported by conservative capital structure and ample liquidity. We are optimistic looking ahead to 2023 and beyond, despite a continued cloudy outlook for the general economy, especially as we look toward the second half of the year. We believe our efforts during the pandemic and in the early phases of the recovery acquisitions has positioned us well to remain opportunistic as it relates to potential acquisitions, and other potential ROI opportunities that could be additional drivers of earnings growth in the years ahead.
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And we expect that the stabilization of our recent acquisitions, the recovery potential of our urban group and business transient and service hotels, and the further growth opportunities for our recently renovated properties will be meaningful in term of EBITDA growth drivers. With that, I will turn the call over to Barry who will provide additional details on our fourth quarter performance and our capital expenditure projects.
Barry Bloom: Thank you, Marcel, and good afternoon everyone. For the full year 2022, our 30 same-property portfolio RevPAR was $166.08 based on occupancy of 63.9% at average daily rate of $259.92. As Marcel noted in his remarks, same-property portfolio RevPAR decreased 5.1% as compared to 2019. This decrease reflected nearly 13 points lower occupancy, which was partially offset by 13.8% increase in advocated rate as compared to full year 2019. Our property is achieving strong RevPAR growth as compared to 2019 included Centric Key West, Park Hyatt Aviara, Royal Palms, and Bohemian Savannah, all of which benefited from robust leisure demand throughout the year. Conversely, the RevPAR declines compared to 2019 will experience Marriott San Francisco Airport, Hyatt Regency Santa Clara and Hotel Palomar Philadelphia, which are more dependent on business transient and group demand.
For the fourth quarter our 30 same-property portfolio RevPAR was $166.87 based on occupancy of 64.1%, and an average daily rate of $260.19. Same-property portfolio RevPAR increased 0.6% in the quarter as compared to the same period in 2019. For the fourth quarter, the same-property leaders and laggards for the same as for the full year. We know that each of the lighter hotels achieve significant growth in Q4. In 2022, over Q4 of 2021, suggesting that recovery is well underway. As expected, results in the fourth quarter vary across the months given the timing of holidays and the usual seasonal mixtures. Same-property RevPAR October and November declined 0.1% and 0.4% respectively as compared to 2019 while December RevPAR increased 2.6% compared to 2019.
Overall business in the fourth quarter, reflecting the transition in our business from what has been primarily leisure demand over the past few quarters. To more traditional mix of leisure, corporate transient and group demand. Midweek occupancies continue to improve, particularly in October, in several weeks of mid-week occupancy above 80%. October trends follows similar patterns of September. This was driven by an increase in occupancy, consistent with expected seasonal patterns in business transit group and generally coincided with a marked increase in return to office and business travel. Overall October occupancy of 70.9% was a post COVID record relative to 2019, with occupancy down less than 10. Rate growth remained robust in the quarter, average daily rate at our same-property portfolio of 15% as compared to 2019.
Of our 30 same-property hotels, only five achieved higher average daily rate in the fourth quarter of 2022 than they did in the fourth quarter of 2019. We’re optimistic regarding corporate and group rates, particularly as we achieve higher mid-week occupancies in a number of our urban markets, including Santa Clara, San Francisco, Houston and Dallas on Tuesday and Wednesday nights providing significant rate compression opportunities. Our managers anticipate further improvements in corporate transient business fundamentals expect negotiated corporate rates the increase in the high single digit percentage range this year. Similar to prior quarters we saw continued rate strengthen our resorts and our drive to leisure markets with average daily rates for the quarter compared to 2019 are more than 30% than our properties in Arizona, Key West, Napa and San Diego.
For each group, in the quarter our group business benefited from a solid in the quarters that were built bookings and double digit rate growth, resulting in group rooms revenue exceeding fourth quarter of 2019 levels by over 5%. Our performance reflected healthy demand from corporate groups particularly in our larger group Bohemian Hotel in Orlando, Scottsdale and San Diego. Our full year 2022 groupings revenue ended up 9% lower than 2019. Looking ahead to 2023 the group revenue rate is currently about 21% of 2022 and group rates for 2023 reflect the high single digit increase over 2020. Now, turning to expenses and profit. Fourth quarter, same-property hotel EBITDA was $65.4 million, an increase of 3.3% on a total revenue increase of 2.7% compared to the fourth quarter of 2019, resulting in 17 basis points of margin improvement.
This modest growth in hotel EBITDA margins for the quarter is primarily impacted by a continuation of higher labor and utility costs. On a full year basis, hotel EBITDA margins increased 40 basis points relative to 2019, reflects primarily the outside increase we achieved in the second quarter of 2022. With respect to labor, and as we discussed in the third quarter, our operator successfully established to meet the strong recovery and demand where necessary. In general, our fully recovered hotels are offering an fully staffing levels between 90% and 95% and pre pandemic levels, while hotels where still substantial opportunity for recovery for our fully staffing levels between 60% and 70% of pre-pandemic. Now turning to CapEx. During the fourth quarter and over the full year, invested $29.7 million and $70.4 million in portfolio improvements respectively.
This compares to our initial expectation approximately $95 million in total capital spending for the year, as a number of projects had portions of their spend delayed into 2023. During 2022, some of the significant renovation projects in our portfolio included at Kimpton Canary Santa Barbara, we completed a comprehensive renovation of public spaces, including the meeting space, lobby, restaurant, bar, and rooftop. We also began a comprehensive guestroom renovation in the fourth quarter, which is expected to be completed in the second quarter of 2023. A Grand Bohemian Hotel Orlando, we conducted a comprehensive renovation of public spaces, including meeting space, lobby, restaurant, bar, starbucks, and the creation of a rooftop bar we expect to be completed in the first quarter of 2023.
The comprehensive renovation of the guestrooms, including substantial tub-to-shower conversions will commence in the second quarter. At Park Hyatt Aviara, we refurbished nearly 30 year old golf course including replacement turfgrass, bunkers, irrigation heads and controls, cart paths and curbing, all which will result in significant reduction in water use. They’re also well underway with the implementation of a combined heat and power system, which should substantially lower our utility costs. In the fourth quarter, we began work on a significant upgrades the resorts spa and wellness amenities, which we branded as a Miraval of Life and Balance Spa upon completion late in the second quarter of 2023. And Waldorf Astoria Atlanta Buckhead. Early in the year we completed a guestroom renovation, including all soft goods and a restaurant and lobby renovation, including reconstituting of the restaurant bar.
At the Marriott Woodlands in Houston, we completed a full bathroom renovation of all guestrooms, including conversion tubs, showers in 75% of the guest rooms. At Marriott Dallas Downtown, Royal Palms and Vermont Pittsburgh, we renovated meeting and prefunction space, in Fairmont, Pittsburgh and a licensed Starbucks outlet. At the Ritz-Carlton Denver, we’re continuing work on the renovation and reconfiguration of suites, which will result in three additional keys upon completion this quarter. At the Kimpton Hotel Monaco Salt Lake City, we continue planning work on a comprehensive renovation of meeting space, restaurant, bar, and guestrooms is expected to commence in the second quarter of 2023. Including the ongoing projects I just mentioned, in 2023 we expect to spend approximately $130 million to $150 million on capital expenditure projects, the most significant of which is the transformation and upgrade Hyatt Regency Scottsdale as discussed earlier by Marcel.
The said project is expected commenced in the second quarter of this year with completion expected late next year on the property will be upgraded to Grand Hyatt brand. We are excited about the work in-house project management team has completed over the past several years and we’re even more excited about a project that we have underway at various stages of planning. With that I will turn the call over to Atish.
Atish Shah: Thanks Barry. Good afternoon. Our balance sheet and guidance. First on our balance sheet. We further strengthened it in January by extending our debt maturities. And we now have no debt maturities until the second half of 2025. We thank our long standing bank partners for their continued support. In addition, our base of unencumbered assets has grown out of our 32 hotels 29 do not have property level debt, which reflects an additional source of capital. Our liquidity is strong with an undrawn $450 million revolver and approximately $300 million of cash. At year end, our leverage ratio was approximately 4.5 times trailing 12 months net debt-to-EBITDA which is inside of our long term target of sub five times leverage.
Turning to return of capital. Since last fall, we’ve repurchased about 2.5% of our outstanding shares at an average price of about $14.50 per share. We have over $150 million of remaining capacity under our current board repurchase authorization. We continue to view share repurchases a favorable capital allocation tool, given that we still trade at about a 30% discount to our average external NAV estimate, which is about $21 per share. In addition, we declared a $0.10 per share dividend in the fourth quarter. Our effective annual yield is about 2.75% based on our current share price. Now turning to my second topic or full year guidance, we provided in this morning’s release. As the recovery continues, we are encouraged by strengthening group and business transient demand.
We expect full year 32 hotel RevPAR to increase approximately 6% at the midpoint to about $173 that is inclusive of 200 basis points of room revenue displacement due to renovations. As a quarterly cadence, we expect RevPAR growth in the mid 20% range in the first quarter driven by occupancy gains. During the second half we expect flattish RevPAR relative to last year due to tougher comps as the year progresses, as well as the impact of renovations. For the full year, we expect adjusted EBITDAre to be about flat to last year, while we anticipate growth from our new hotels, W Nashville and Hyatt Regency Portland, as they continue ramping up, as well as solid top line growth in many of our other urban and group hotels. These gains are expected to be offset by three items relative to last year.
The three items are number one, lower cancellation and attrition fees, number two, the dispositions that we made last year, and number three renovations. These three items represent nearly $30 million EBITDA headwind when comparing to last year. As to seasonality, an adjusted EBITDAre expected for this year. We expect to earn about 60% in the first half and about 40% in the second half. Turning head to adjusted FFO for the full year, we expect to earn $1.48 per share at the midpoint. That is approximately 4% behind last year, due to both higher interest expense and higher income tax expense. In conclusion, we’ve continued to be optimistic about the recovery. The long-term outlook is promising as demand continues to improve, while the number of new hotels being built in the U.S. continues to decline.
We expect the rate of new supply growth to continue to fall and hit historic lows. With demand growth that should result in strong pricing power for hotel owners. Xenia continues to be well-positioned with a high quality, well located asset base and multiple levers for growth. We expect the capital expenditure projects that we’ve discussed today to lead to a favorable setup for years to come. And our balance sheet is flexible and strong, which will allow us to take advantage of opportunities that are likely to unfold in the years ahead. That concludes our prepared remarks. With that we’ll turn the call back over to Tamia for our Q&A session.
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