Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q3 2023 Earnings Call Transcript
Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q3 2023 Earnings Call Transcript November 5, 2023
Operator: Hello, everyone. And welcome to the Xenia Hotels & Resorts, Inc. Q3 2023 Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Amanda Bryant, Vice President of Finance to begin. Amanda, please go ahead.
Amanda Bryant: Thank you, Charlie and welcome to Xenia Hotels & Resorts third quarter 2023 earnings call and webcast. I'm here with Marcel Verbaas, our Chair 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. Barry will follow with more details on operating trends and capital expenditure projects, and Atish will conclude today's remarks on our balance sheet and outlook. 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 and 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 yesterday, along with the comments on this call, are made only as of today November 1, 2023 and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find reconciliations of non-GAAP financial measures to net loss and definitions of certain items referred to in our remarks in the earnings release, which is available on the Investor Relations section of our website. The third quarter 2023 property-level information we will be speaking about today is on a same-property basis for all 32 hotels, unless specified otherwise. An archive of this call will be available on our website for 90 days. I will now turn it over to Marcel to get started.
Marcel Verbaas: Thanks, Amanda. And good morning, everyone. Overall results in the third quarter were in line with our expectations. Our demand segmentation mix continues to revert towards pre-pandemic levels, as business transient and group demand continues to recover. A couple of important renovation projects have essentially wrapped up and the transformation of the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch is well underway. And our recently acquired hotels W Nashville and Hyatt Regency Portland at the Oregon Convention Center reported a solid quarter of earnings contribution, as they were among our top-performing assets during the third quarter. For the quarter, we reported a net loss of $8.5 million, adjusted EBITDAre $46.3 million, and adjusted FFO per share was $0.26.
Same-property RevPAR in the quarter was $158.48, a 0.4% increase, as compared to the third quarter of 2022. Occupancy increased 70 basis points, while average daily rate decreased 0.6%. Our results were meaningfully impacted by three of our properties undergoing significant renovations in the quarter. This included the comprehensive renovation at Kimpton Hotel Monaco Salt Lake City, the guestrooms renovation at Grand Bohemian Hotel Orlando, and the transformative renovation at Hyatt Regency Scottsdale. As Barry will discuss in more detail in his remarks, the Salt Lake City renovation has now been completed. The Orlando project will be completed in the next several days. And the Scottsdale project is progressing as planned. Excluding Hyatt Regency Scottsdale, RevPAR increased 4%, as compared to the third quarter of 2022, highlighting the impact this project had on our results in the third quarter, and we'll continue to have in the near term, as compared to the third quarter of 2019 for the 29 hotels we currently own that were open at that time, excluding Hyatt Regency Scottsdale, RevPAR was down 1.1% in the third quarter.
For these 29 hotels, occupancy was, roughly, 11 points below 2019, while ADR was up 14.3%. While expense growth continues to put pressure on bottom-line results in the lodging industry, margin contraction for our portfolio moderated in the third quarter. That's hotel EBITDA margin on a same-property basis, declined by 169 basis points, compared to the third quarter of 2022, which was in line with our expectations. Excluding Scottsdale, margins contracted just 60 basis points, which is a significant improvement, compared to the second-quarter margin decline. Recall that property-level expenses in the third quarter of last year started normalizing, as many of our properties filled open positions and resumed services, as the year progresses. Turning to our individual markets, in the third quarter the strongest RevPAR growth occurred in several markets, that are more dependent on business transient and group demand.
Houston, Dallas, Portland and Nashville reported double-digit RevPAR growth, while Pittsburgh and San Francisco experienced high single-digit RevPAR growth. Due to renovation disruption, Phoenix and Salt Lake City were our two weakest RevPAR markets in the quarter. While several leisure-oriented markets, including Napa and Savannah, experienced mid-teen percentage RevPAR declines. We are clearly seeing signs of leisure demand normalizing from its historically high post-pandemic levels, both within our portfolio and in overall industry data. However, our portfolio has always benefited from a balanced mix of group, business transient and leisure demand. And we are continuing to see the gradual shift back to our pre-pandemic segmentation mix. Group business remains a bright spot.
Group room revenue in the third quarter was up a little over 3% over the third quarter of 2022. And excluding Scottsdale in both periods, our group room revenue was up about 9%. We continue to see meaningful improvements in group business at our important group-oriented hotels in Orlando, Portland, Atlanta, and Dallas. By way of reminder, we estimate the group has historically been about a third of our overall business mix. Group revenue base for full year 2023 is up about 13% versus last year for our same-property portfolio, and up about 16%, if we exclude Scottsdale, where the meeting space is now mostly unavailable. Group ADR for the full year 2023 is up about 4%, again excluding Scottsdale. Atish will provide an early look into our 2024 group base during his remarks.
Business transient demand continues to improve during the third quarter. Overall, occupancy improved on Mondays, Tuesdays and Wednesdays, as compared to the third quarter of 2022, while weekend occupancy was down slightly, as compared to the same quarter last year. Two of our four strongest RevPAR growth markets reflected results from our most recent acquisitions, Hyatt Regency Portland at the Oregon Convention Center and W Nashville, with RevPAR increasing by 26.8% and 17.3%, respectively, at these hotels for the quarter. Both properties are benefiting from significant growth in group business, as they continue on our path towards stabilization. For 2023, group room revenue on the books at both properties has increased by more than 40% over 2022 levels, driven by solid increases in room nights.
Business transient production is also driving growth, as both properties increased volumes with important corporate accounts in recent months. Our other top-performing markets for the quarter were both located in Texas, where the Houston and Dallas markets reported third-quarter RevPAR growth of 25.2% and 14.2%, respectively. Our hotels in these markets, not only drove outstanding third-quarter results, but they are also well-positioned to capture additional growth in the coming years because of favorable market dynamics and important capital investment base in recent years. Overall market fundamentals reflect the favorable supply and demand backdrop. Texas continues to be a high-growth state, both in terms of population growth and business incubation and relocations.
Supply growth through 2025 in our specific sub-markets is also benign. The Dallas CBD sub-market is expected to peak at 2.3%, the Houston Woodlands sub-market at 2.7%, and the Houston Galleria sub-market is expected to see no new supply over the next two years. In terms of earnings contribution, our Houston properties peaked in 2015, and since that time has successfully broadened their base of business and reduced reliance on city-wide conventions. We also invested a significant amount of capital into our three Houston hotels, leading up to and through the pandemic. The two western received about $50 million in capital, mostly by renovating and upgrading guest-facing areas. And in 2020 and 2022, we invested, approximately, $12 million in additional capital expenditures at Marriott Woodlands, primarily on significant improvements the guestrooms and guest bathrooms.
We are pleased to see the benefits of these investments, as the market continues its recovery from the pandemic, and as economic activity in the region continues to improve. And despite the significant capital expenditure we have made into these hotels during our ownership period, our overall investment basis of, approximately, $360,000 per key, on average for the three hotels, remains attractive, especially given their excellent locations, high quality and extensive meeting facilities and supporting amenities. I would now like to turn to our Scottsdale project. As I mentioned earlier, this transformational renovation is progressing as planned, from a schedule and cost perspective. While the disruption to our short-term results is significant, this disruption also continues to be in line with our expectations.
As we anticipated, demand in the Phoenix, Scottsdale market has softened a bit this year, particularly after a very strong first quarter that was aided by the Super Bowl in early February. The market is experiencing similar signs of moderating leisure demand that we are witnessing in other markets. As we indicated when we initially announced this transformational renovation, our strategy revolves around further optimizing the demand segmentation mix of the resort, and being able to drive greater and higher-rated group business. We also are aiming to create and upgrade the experience that will allow the resorts to compete more effectively within its luxury competitive set for higher-rated corporate, transient and leisure demand. This competitive set includes a number of resorts that have also received significant capital investments in recent years.
The expansion of our meeting space, the significant upgrades through our pool complex, the relaunching and revitalization of our food and beverage amenities, the substantial investment in our upgraded rooms products, and the ultimate branding to a Grand Hyatt Resort are all important components of this transformation. When we initially discussed this project, we indicated that we believe that the record 2022 results at the resorts were driven by an unusually high level of post-pandemic domestic leisure demand, as well as expenses that were well below normalized levels. We also spoke about view in 2019, as a more normalized year, both from a demand segmentation perspective and earnings base for the property. Given the resorts aging facilities and an expected normalization of leisure demand in the U.S. overall in the Phoenix Scottsdale market in particular, we completed an extensive analysis of long-term supply and demand trends, the competitive landscape, and the challenges and opportunities that the resort presented.
Everything we are seeing in the market this year has further increased our confidence in the decision we made to commence this transformative renovation and upbranding to a Grand Hyatt, from both a scope a timing perspective. The Phoenix Scottsdale market continues to be very attractive for all segments of hotel demand, which will be bolstered by the expected economic and population growth in the markets in the years and decades ahead. With a well-located and upgraded and expanded Grand Hyatt Resort, we believe we will be able to compete very effectively in the Scottsdale luxury resort market. And as a result, we expect the resort to grow earnings significantly over both the 2019 pre-pandemic peak year and the outsized leisure-driven results we achieved in 2022.
As a reminder, we have relatively low investment basis in the resort, and we will continue to do so after making this approximately $110 million additional investment. Our anticipated gross investment basis of less than $700,000 per key upon completion of the project is especially attractive, when compared to recent sales of comparable resorts. We remain extremely excited about the resort's future and continue to believe strongly that this project will be a meaningful driver for portfolio earnings growth in the years ahead. Despite a lot of economic and geopolitical uncertainty right now, the year has unfolded largely as expected, as it relates to our portfolio performance. While we have been impacted by substantial renovation disruption as anticipated, we are optimistic that our continued investments in our portfolio will drive attractive returns.
Atish will provide additional details regarding our revised full-year 2023 outlook. We have slightly lowered the midpoint of our projected adjusted EBITDAre range to reflect the recent demand trends. However, we continue to believe that our portfolio is well-positioned to outperform in the years ahead, given its high quality, excellent locations, diversity of demand mix and recent and ongoing capital investments. I will now turn the call over to Barry, as he will provide more detail on our portfolio's performance and an update on our capital expenditure projects.
Barry Bloom: Thank you, Marcel. And good morning, everyone. As Marcel indicated in his remarks, the leading markets, in terms of RevPAR growth in the quarter, include many of our hotels that cater to group and business transient customers, supporting our view that the recovery has extended beyond leisure-oriented properties. As expected, results in the third quarter reflected renovation impact, along with challenging year-ago growth comparisons. The quarter began with occupancy of 63.7% in July, with an ADR of $245.01, resulting in RevPAR of $156.12, a 1.2% increase, compared to July 2022. August occupancy was 62.6% with an ADR of $237.23, resulting in RevPAR of $148.54, a 2.1% increase, compared to 2022. The strongest month of the quarter, as expected, was September with occupancy of 65% at an ADR of $263.51, resulting in RevPAR of $171.18.
However, this represented a 1.9% decline to September 2022. Excluding Hyatt Regency Scottsdale, same-property RevPAR increased 4% in the quarter, as compared to the third quarter of 2021. Similar to last quarter, average daily rates at our same-property portfolio moderated in the third quarter, declined 0.6%, as compared to the third quarter of 2022, which has grown substantially over the third quarter of 2021. As expected, rate declines in some of our leisure-oriented hotels in the third quarter exceeded that of our same-property portfolio, as compared to the third quarter of 2022. However rates at these properties remain well below -- well above 2019 levels. For instance, rates in Key West, Napa and Savannah for, approximately, 26%, 21% and 12% above third quarter 2019 levels, respectively.
Same-property occupancy for the third quarter improved by 70 basis points, compared to the third quarter of 2022. Most of this improvement was driven by higher mid-week occupancies, as weekend occupancies declined slightly, as compared to last year. Reflecting our commentary regarding further opportunity for recovery, particularly in the corporate segment for the 29 hotels we owned at the time and excluding Hyatt Regency Scottsdale, Monday to Thursdays are still down approximately 16% in occupancy from 2019 levels, while weekend occupancy are down, approximately, 11%. We are continuing to see rate growth due to compression, particularly on Tuesday and Wednesday nights, but are seeing some softening in rates on weekends. Business from the largest corporate accounts across our portfolio continues to improve year to date, and we estimate that room night demand is still down about 20% from 2019 levels.
We continue to benefit from healthy group momentum with pace being driven by increases in both room nights and rate. Including our two most recent acquisitions, Hyatt Regency Portland and W Nashville but excluding Hyatt Regency Scottsdale, group room revenue on the books for full year 2023 is currently about 16% ahead of last year, and about 6% ahead of 2022 levels for the fourth quarter of 2023. We believe there is continued opportunity for further recovery and growth in group business, even as we close the gap to 2019. Our current group room revenue on the books for 2023 is about 3% behind 2019 levels, excluding Scottsdale in both periods. Now, switching gears to expenses and profit. Third quarter same-property hotel EBITDA was $51.2 million, a decrease of 7.9% on a total revenue decrease of 0.8%, compared to the third quarter 2022, resulting in 169 basis points of margin erosion.
Excluding Hyatt Regency Scottsdale, margin declined by just 60 basis points. This decrease in hotel EBITDA margin in the third quarter was consistent with our expectations. The margin declines were moderate in the second half of the year, as we lap the lower staffing levels that were in place last year. Although rooms and food and beverage department margins decreased in the quarter, as compared to the third quarter of 2022, salaries and benefits stabilized and over time was significantly reduced, as staffing levels normalized. A&G expenses grew a little over 1%, compared to the prior year, and property operations and maintenance expenses declined by, approximately, 1%. Utility expenses grew by, approximately, 6%. Now turning to CapEx. During the third quarter, we invested $35.5 million in portfolio improvements, bringing our year-to-date total to $69.5 million;.
In the third quarter, we continued guestroom renovations at the Grand Bohemian Hotel Orlando, which is expected to be completed in the next few days. Earlier in the year, we completed the comprehensive renovation of all public spaces, including meeting space, lobby, restaurant, bar, Starbucks, and the creation of a rooftop bar. At the Park Hyatt Aviara Resort, we completed a significant upgrade to the resort's fitness amenities and spa, which reopened as a branded Miraval Life in Balance Spa. And finally, at Kimpton Hotel Monaco Salt Lake City, we completed the comprehensive renovation of meeting space, lobby, restaurant, bar and guestrooms in the third quarter. The $110 million transformer renovation and upbranding of the 491-room Hyatt Regency Scottsdale is underway and proceeding as planned.
Major components, including the meeting space expansion pool complex and guestrooms, have all been contracted in line with budget levels, and all phases remain on track to be completed by the end of 2024. Our expectation for total capital expenditures this year are now at a range of $120 million and $130 million, a reduction of $5 million the midpoint due to timing of deposits and cash flow. We are excited about the projects we have underway, and look forward to their completion. With that, I will turn the call over to Atish.
Atish Shah: Thanks, Barry. I will provide an update on our balance sheet and discuss our guidance. First on our balance sheet. At the end of the third quarter, our leverage ratio was about 4.7 times net debt to EBITDA. All of our debt is at fixed rates. The quarter-end interest rate was about 5.5%. And our next debt maturity is in August 2025. We continue to have a fully undrawn line of credit that, together with our unrestricted cash, reflected approximately $670 million of liquidity at quarter end. During the quarter, we bought back just over $5 million of our senior notes in the open market at, roughly, 1% below par. In addition, we continue to repurchase shares. Year-to-date through today, we've repurchased 6.5% of our outstanding shares, at an average price of $12.72 per share.
We have, approximately, $73 million remaining on our Board repurchase authorization. We paid a $0.10 per share dividend in the third quarter on an annualized basis that reflects a yield of, approximately, 3.4% on our stock. It also reflects a payout ratio under 40% projected FAD, based on the midpoint of our FFO guidance. Second, I will turn to our full-year outlook. We have lowered our expectation for RevPAR growth by 50 basis points to 4.5% at the midpoint. While third-quarter results were in line with prior guidance, our revised outlook reflects tempered fourth quarter expectations. This reflects lower weekend demand than had been previously expected, as leisure demand continues to normalize. And it also reflects the continued improvement in business transient demand, albeit at a slightly more gradual pace than we had previously estimated.
On a preliminary basis, we estimate October RevPAR declined 2.3% versus last year. Excluding Hyatt Regency Scottsdale, October RevPAR increased about 2.4% versus last year. The impact of the Scottsdale renovation on RevPAR was about 100 basis points higher in October than it was in the third quarter. As a reminder, October has historically been the most significant month of the quarter with nearly 50% of our fourth-quarter EBITDA earned during the month. As we look ahead to November and December, our pace is significantly impacted by the Scottsdale renovation. Transient room revenue pace for the two months is 2% lower than last year. Excluding Scottsdale transient pace is up 6%. As at the end of the third quarter, group room revenue pace for November and December was down about 4% versus last year.
Again, excluding Scottsdale's pace for the two months was up 2%. As the hotel's EBITDA margins, we expect them to decline, approximately, 200 basis points during the fourth quarter, as compared to the fourth quarter of last year. Excluding Scottsdale, fourth-quarter margins are expected to be flat to slightly positive. As to adjusted EBITDAre, we have lowered the midpoint by $4 million to $250 million. Our adjusted FFO guidance of $167 million at the midpoint is $1 million lower than prior guidance. This is a result of the $4 million in lower expected adjusted EBITDAre, offset by slightly lower interest expense and slightly lower income tax expense. Our G&A expense guidance is unchanged. On a per-share basis, we expect an FFO of -- at $1.51 at the midpoint, which is $0.005 higher than prior guidance due to buybacks, since we last reported.
Looking ahead to 2024, while it's still early, there are a few data points that we can offer for now. First, on our group outlook, as of the end of the third quarter, we had about 45% of our group revenues for next year already definite. That group room revenues for 2024 is pacing flat. Excluding Scottsdale group pace is up about 10% for next year. Second on corporate rates. We expect corporate negotiated rates for 2024 to be in the low to mid-single-digit percentage range. That's based on preliminary feedback from our operators. And third on new supply growth. Across our market tracks. we expect supply growth to be up just over 1% next year, based on our weighted geographic room mix. This is considerably lower than annual supply growth has been over the last few years.
While we will not yet be providing 2024 guidance and we'll do so when we report the fourth quarter, we are providing an impact -- or providing an estimate of the impact of disruption from our Scottsdale project. We expect the impact to EBITDA to be about $12 million over the course of next year. By quarter, our estimate is $3 million in the first quarter, $5 million in the second quarter, $3 million in the third quarter, and $1 million in the fourth quarter. By way of reminder, in 2023, the EBITDA impact, due to the Scottsdale renovation, is expected to be about $14 million. By quarter, that was approximately $2 million in the second quarter, $5 million in the third quarter. And we estimate it will be, approximately, $7 million in the fourth quarter, which we also expect to be the peak absolute level of quarterly EBITDA displacement from the renovation.
So as we look at next year, we will see the largest year-over-year net renovation impact in the first half. By the time we get to the second half, we will be lapping this year's heavily disruption. Despite less renovation disruption next year, we expect EBITDA from Scottsdale property to be lower than in 2023. This is because leisure and group demand were particularly strong during the first four months of this year, and the property also benefited from the Super Bowl this year. We expect we will undertake some other capital expenditure projects next year that are likely to negatively impact EBITDA, similar to what we've done in any given year. While it's a bit premature to pinpoint that impact as we have typically done, we will do so when we next report.
I'd like to conclude by mentioning that the Company continues to be well-positioned with no near-term debt maturities, high-quality portfolio and strong relationships industry participants, including brands managers, lenders and others. We're executing and on track on several potential high-value projects that we expect to continue to drive strong growth in the years ahead. And with that, we'll turn the call back over to Charlie for our Q&A session.
Operator: [Operator Instructions] Our first question comes from Bryan Maher of B. Riley Securities. Bryan, your line is open. Please go ahead.
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