Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q1 2024 Earnings Call Transcript

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Sat, May 4, 2024, 7:39 AM 20 min read

Aldo Martinez: Thank you, Alex, and welcome to Xenia Hotels & Resorts' first quarter 2024 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 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 yesterday afternoon, along with the comments on this call, are made only as of today, May 3rd, 2024, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold. You can find the reconciliation of non-GAAP financial measures to net income and definitions of certain items referred to in our remarks in our first quarter earnings release, which is available on our Investor Relations section of our website. The property-level information we'll be speaking about today is on the 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, Aldo, and good morning, everyone. Our operating results continued to be encouraging in the first quarter as strong group demand and steady improvement in business transient demands grew same-property portfolio RevPAR and total revenues that exceeded our expectations for the quarter. A consistent focus on expense controls by our operators and asset management team in a continued inflationary environment allowed us to also achieve a same-property hotel EBITDA margin that was a bit ahead of our expectations. As a result, our adjusted EBITDAre came in above our internal forecast as well. For the first quarter of 2024, we reported net income of $8.5 million, adjusted EBITDAre of $65.3 million, and adjusted FFO per share of $0.44.

While adjusted EBITDAre declined from the first quarter of 2023, we had anticipated this as Hyatt Regency Scottsdale at Gainey Ranch had record high performance last year when Phoenix hosted the Super Bowl and overall market demand was extremely strong. Despite the lapping of this outperformance and the high level of EBITDA disruption resulting from the ongoing transformative renovation at our Scottsdale resort during the quarter, our adjusted FFO per share increased by 10% over last year. This was mostly driven by the significant amount of share buybacks we completed in 2023, which we continued at a slower pace during the early part of the first quarter this year. Although same-property RevPAR for our 32 hotel portfolio decreased by 1.5% for the quarter, RevPAR actually increased by a healthy 3.7% when excluding Hyatt Regency Scottsdale, despite the negative impact of the Easter holiday occurring at the end of March this year.

This increase was mainly driven by a significant 310 basis point increase in occupancy for these 31 hotels. We saw particular strength in a number of our large group-oriented hotels such as our Houston hotels, Hyatt Regency Portland, and Park Hyatt Aviara, as well as at Marriott San Francisco Airport and Hyatt Regency Santa Clara. We continue to believe that these two high-quality hotels possess some of the greatest earnings growth potential within our portfolio. Additionally, Grand Bohemian Hotel Orlando is hitting its stride now that the comprehensive renovation is fully behind us and Canary Hotel Santa Barbara had outsized revenue and earnings growth compared to last year as we lapped the room renovation that took place mainly in the first quarter of last year.

On a same-property basis, first quarter same-property hotel EBITDA of $70.7 million was 8.5% below 2023 levels and hotel EBITDA margin decreased 228 basis points. Excluding Hyatt Regency Scottsdale, first quarter Hotel EBITDA increased 4.7%, and Hotel EBITDA margin decreased just 14 basis points. We continue to be pleased with these margin results as overall inflation remained at an elevated level during the quarter. As we have noted over the past several quarters, the trends across our portfolio continue to indicate that our demand segmentation mix is reverting towards pre-pandemic levels with group and business transient demand recovering and leisure demand normalizing. Group demand was a particular bright spot during the first quarter. same-property group room revenues excluding Hyatt Regency Scottsdale increased 8.1% as compared to the same period last year.

We also saw a modest improvement in business transient demand with continued increases in midweek occupancy. And while leisure demand has largely stabilized across the portfolio, we did see some further retracement in a few of our more leisure-dependent assets and markets in the quarter, particularly in Napa and Savannah. Now, turning to our capital expenditure projects. We continue to project that we will spend between $120 million and $130 million on property improvements during the year. While Barry will provide additional details on the $33.4 million we invested into the portfolio during the quarter in his remarks, I would like to highlight the progress we are making on the transformational renovation and upgrading of Hyatt Regency Scottsdale.

The project is progressing as planned and we still anticipate a completion by the end of 2024 with approximately $65 million to $70 million that will be spent during this year. After completing the adult pool and its H2Oasis pool bar in January, the large family pool and its F&B amenities were fully completed and operational in early April. The new pool complex is spectacular and significantly improved over the resort's previous amenities. The earlier reviews have been very positive and we expect that this new pool complex will be well received by our anticipated higher-rated leisure and group demand. We also believe that this upgrade of the pool complex will enable us to attract significant staycation leisure demands during the slower summer season in the years ahead.

We also continue to make progress on the renovation of all guest rooms. We have now completed the renovation of 230 rooms and we anticipate that a total of almost 300 out of our current 491 rooms will be fully renovated by the end of May. The remaining guest rooms, including the additional five rooms that will be created as part of this project, will be completed in continual phase until final completion by the end of the third quarter. We are also making good progress on the approximately 12,000 square foot expansion of the Arizona ballroom. We continue to expect that this ballroom expansion, as well as the renovation of all existing ballrooms, meeting spaces, and pre-function space will be completed by the end of the year. We have also commenced the renovation of the public space, including the lobby, lobby bar, hotel market, and all indoor and outdoor dining spaces.

As announced last quarter, we are collaborating with celebrity chef, Richard Blais on all food and beverage offerings at the relaunched resort. We are thrilled we are expanding our relationship with Chef Blais, with whom we have developed an excellent working relationship at Park Hyatt Aviara, Hyatt Regency Grand Cypress, and Hyatt Centric Key West. We continue to expect completion of these components by the end of the third quarter. Restaurant concepts and menus are nearly finalized as work has now begun in each of the food and beverage outlets. And finally, we continue to expect completion of all improvements to the resort's building facade, infrastructure and grounds to be completed by the end of 2024. The renovation and transformation of all of these components will continue to displace a significant amount of revenue and EBITDA as the overall guest experience is meaningfully impacted.

We expect that the majority of the remaining revenue disruption will occur during the second and the third quarters and subside as the fourth quarter progresses. We now expect the impact of renovation disruption to be a bit higher than previously projected as we have gotten deeper into the project and the sequencing of demolition and construction has become clear. Atish will provide further details on our outlook, including our renovation disruption during his remarks. We continue to be extremely excited about this project and the earnings growth potential that we expect will be created by this transformation. The Phoenix Scottsdale luxury resort market remains strong and the soon-to-be-launched Grand Hyatt Scottsdale will be a formidable competitor in this luxury peer set.

Looking ahead across the portfolio, we remain cautiously optimistic for the remainder of 2024. As we have previously outlined, we believe we have significant embedded earnings growth potential within our portfolio, primarily through our recently renovated properties, our hotels that primarily cater to group and business transient customers, and our two most recent acquisitions, W Nashville and Hyatt Regency Portland at the Oregon Convention Center. Additionally, we continue to expect strong RevPAR growth at our properties in our recovering northern California markets, San Francisco and Santa Clara. We saw these themes play out in the first quarter as we experienced encouraging results at our recently renovated properties, Grand Bohemian Orlando and Canary Hotel Santa Barbara, as well as further gains at properties that were renovated in recent years, including Hyatt Regency Grand Cypress, our Houston properties and Waldorf Astoria Atlanta Buckhead.

We also had strong results at our other large Group-oriented hotels, our Northern California assets, and our most recently acquired hotels, particularly Hyatt Regency Portland. We are off to a good start in the second quarter. We estimate that excluding Scottsdale, same-property of RevPAR increased 6.2% in April as compared to the same period in 2023. When including Hyatt Regency Scottsdale, which continued to deliver very strong results through May of 2023, we estimate that April RevPAR is up 0.9% compared to last year. Given its performance through May of last year and the renovation disruption we are experiencing this year, we continue to expect that Hyatt Regency Scottsdale will be a drag on RevPAR growth through the first half of the year, after which, the comparisons will become more favorable.

We remain particularly optimistic regarding our portfolio performance and earnings growth potential, as we look ahead to 2025 and beyond. We expect recent demand trends in our portfolio to continue, and are looking forward to the additional growth we expect to get from completion of the Scottsdale project. We continue to believe that supply growth will remain muted in our submarkets over the next several years, and especially in the upper upscale and luxury segments where our hotels and resorts are positioned. This will provide a very favorable backdrop for potential RevPAR growth, as we have seen in previous cycles in the lodging industry, when supply growth has been subdued. With our high quality and further improved portfolio, we expect to be well-positioned to take advantage of these dynamics.

An aerial view of a luxurious upper-upscale hotel in a US location, showing the scale of the business the company operates in.

I will now turn the call over to Barry to provide more details on our operating results and our capital projects.

Barry Bloom: Thank you, Marcel, and good morning, everyone. For the first quarter, our 32 Same-Property portfolio RevPAR was $176.86, based on occupancy of 67.4%, at an average daily rate of $262.39, a decrease of 1.5% as compared to the first quarter in 2023. Excluding Hyatt Regency Scottsdale, first quarter RevPAR was $178.07, an increase of 3.7% as compared to 2023. This increase reflected 3.1 points of occupancy gain and a decline of 1% in average daily rate as compared to the first quarter of 2023. As Marcel indicated in his remarks, the Same-Property leaders in terms of RevPAR growth in the quarter included our hotels that were lapping first quarter 2023 renovations at Canary Santa Barbara and Grand Bohemian Orlando. Additionally, RevPAR grew significantly at Hyatt Regency Santa Clara, up 26.3%, Waldorf Astoria Atlanta Buckhead up 15.9%, Fairmont Pittsburgh up 9.8%, Portland, where our two hotels were each up approximately 9.5%, Houston, where each of our hotels were up over 8.5%, Park Hyatt Aviara up 7.6%, and Marriott San Francisco Airport, which was up 5%.

The growth in these markets is a result of clearly improving business transient and Group demand that we are seeing across the portfolio. Conversely, we experienced RevPAR weakness compared to the first quarter of 2023 at a couple of our leisure-driven properties, including Bohemian Savannah Riverfront and Andaz Napa. As expected, results in the first quarter grew as each month progressed. Looking at each month of the quarter, excluding Hyatt Regency Scottsdale, January RevPAR was $157.14, up 11.1% to January 2023. February RevPAR was $178.71, up 0.6% compared to February 2023. And March RevPAR was up -- was $198.40, up 0.9% compared to March 2023. Notably, occupancy grew each month during the quarter. We are optimistic about the recovery in corporate and Group rates as we continue to achieve higher midweek occupancies across the portfolio, particularly on Tuesday and Wednesday nights, where these higher occupancies are providing meaningful rate compression opportunities.

We note that compared to 2019, which excludes Hyatt Regency Scottsdale, Hyatt Regency Portland, and W Nashville, daily occupancies still trail by approximately 5.5 to 7 occupancy points each day of the week, with the exception of Mondays and Thursdays, which have been slower to recover, trailing 2019 by approximately 10 to 11 occupancy points. Business from the largest corporate accounts across our portfolio continues to be significantly behind 2019, while corporate business from small and medium-sized accounts has recovered much more significantly. Group business continues to be a bright spot across the portfolio, where we continue to see a reversion to pre-pandemic patterns. For the first quarter, excluding Hyatt Regency Scottsdale, Group room revenues were up just over 8% as compared to the first quarter of last year.

Notably, much of this growth was in occupancy, with room nights up approximately 7%, with rate up approximately 1%. This reflects a continued trend in our mix of Group business, with association Group business now recovering at a stronger pace than corporate Group business. Now, turning to expenses and profit, first quarter, same-property Hotel EBITDA was $70.7 million, a decrease of 8.5% on a total revenue decline of 0.6% compared to the first quarter of 2023, resulting in 228 basis points of margin decline. Excluding Hyatt Regency Scottsdale, Hotel EBITDA was $67.2 million, an increase of 4.7% on a total revenue increase of 5.3%, resulting in a margin decline of just 14 basis points. This modest decline in Hotel EBITDA margin for the quarter reflected our operator's ability to manage expenses while continuing to improve guest services and satisfaction.

Overall, labor expenses increased over last year, which was expected due to higher occupancy levels. Our operators continue to control overtime more effectively now that staffing levels have normalized. In the undistributed departments, expenses in A&G and property operations were well controlled, while sales and marketing expenditures continue to increase as hotels grow their sales teams and continue expenditures on digital marketing efforts. Energy expenses for the quarter declined year-over-year as a result of the warmer weather and reduced pricing in certain markets compared to last year. Turning to CapEx. During the first quarter we invested $33.4 million in portfolio improvements. As Marcel discussed, we continued our significant work on the approximate $110 million transformative renovation and upbranding of the 491-room Hyatt Regency Scottsdale Resort and Spa at Gainey Ranch, and are pleased that the project continues to be both on time and on budget.

In addition to our work in Scottsdale, in the first quarter, we completed the renovation of all meeting rooms at the Waldorf Astoria Atlanta Buckhead, a complete renovation and reconcepting of the restaurant at Bohemian Hotel Savannah, and a renovation of ELWAY'S Downtown Steakhouse at the Ritz-Carlton Denver. Planned renovations will take place in our Texas hotels during the seasonally slower summer months, including renovation of the restaurant and creation of an M-Club at Marriott Woodlands Waterway, renovation of the lobbies at the Wesson Oaks and Gallery of Houston, relocation of the fitness facility, and addition of a concierge lounge at the Wesson Oaks Houston, and continuing with approximately $20 million of infrastructure and sustainability projects across the portfolio as the year progresses.

We are excited about the work our in-house project management team has completed, and even more excited about the projects that we have underway and in various stages of planning in 2024. With that, I will turn the call over to Atish.

Atish Shah: Thank you, Barry. I will provide an update on two items, our balance sheet and our 2024 guidance. As to our balance sheet, we continue to have a strong balance sheet with ample liquidity. With no near-term maturities, a significant unencumbered asset base, and limited interest rate exposure, balance sheet continues to be a point of strength for the company. At quarter end, our leverage ratio was 5.2 times trailing 12 months net debt to EBITDA. As a reminder, our long-term target is a leverage ratio in the low 3 times to low 4 times range. We expect to move closer to that range in 2025 as we see the Scottsdale project ramp up post-renovation. To wrap up the balance sheet discussion, note that we repurchased a small amount of stock, about $6 million during the quarter.

As you may recall, during 2023, we repurchased about 9% of our outstanding shares at about $12.75 per share. While we continue to consider our stock at the current price level to be an attractive use of our capital, we are balancing that with a few other factors, including liquidity in our stock, current-year CapEx outlays, and reducing our leverage target -- our leverage ratio to be closer to our target range. Next, I'll turn to our 2024 guidance. At the midpoint, our current full year guidance is in line with the guidance we provided at the end of February. While the first quarter came in better than expected, given that we are still early in the year and visibility of the back half of the year continues to be limited, we are maintaining guidance midpoints at prior levels.

What has increased is our level of confidence in achieving full year guidance, and we will continue to monitor recent trends to see if the broad momentum over the last several weeks continues over the months ahead. With regard to our first quarter results, adjusted EBITDAre benefited from nearly $1 million of business interruption insurance proceeds that were recognized a quarter earlier than expected. As for our full year RevPAR, we continue to expect same-property RevPAR to increase 3.5% at the midpoint of the range, or 4% exclusive of Scottsdale. Looking at our business by demand segment on the group side and excluding Scottsdale, our group room revenue case for the second through fourth quarters is up nearly 4%. Of the 4% increase, 90% is driven by rate.

About 25% of expected group room nights for the balance of the year have yet to be booked. In terms of booking activity or group production, it continues to increase as group rooms revenue booked in the first quarter for future quarters in the year was ahead of that booked during the first quarter of 2023 for the comparable period. As to leisure demand, as we look ahead to the summer, our operators are expecting robust demand, including more international travelers as well as more US travelers staying domestic when compared to trends observed last year. Finally, as to corporate transient demand, during the first quarter, we benefited from higher-than-expected midweek business transient demand, particularly at some of our larger hotels, and we expect that to continue.

As to the expense picture, we continue to experience moderation in expense pressure relative to last year. For the second to fourth quarter, we expect Hotel EBITDA margin to decrease about 25 basis points. Excluding the impact of Scottsdale, we expect Hotel EBITDA margin for the second to fourth quarters to increase -- excuse me, decrease about 15 basis points. As to adjusted EBITDAre, the midpoint of our full year range is $254 million. By quarter, the second quarter weighting is slightly ahead of the weighting we had in the first quarter or in the approximate mid-to-high 20% range. For the third quarter, we expect to earn about 20% of full year adjusted EBITDAre. In the final quarter of the year, we expect to earn nearly 30% of full year adjusted EBITDAre.

This weighting reflects a slightly lower mix of earnings in the second quarter versus prior guidance. One of the drivers of this change is higher-than-expected renovation disruption in the second quarter. As reflected in last night's release, we now expect renovation disruption for the year to be $16 million versus the $14 million we had previously expected. This change is due to the fine-tuning of construction timing at Scottsdale, and it's more impactful in the second quarter. As we get into the second half of 2024, the comps become easier, and our renovation activity turns into a comparative tailwind as the year progresses. And finally, our adjusted FFO per diluted share guidance is unchanged with the midpoint at $1.69, which reflects about 9% growth in adjusted FFO per diluted share versus 2023.

To wrap up, during the first quarter, our portfolio benefited from stronger-than-expected business transient and Group demand, particularly in some of our larger hotels. We are hopeful that this broad momentum continues into the remainder of the year. Our focus on the ramp-up of consumer properties, certain markets which are still in recovery, as well as successful execution on Scottsdale continues, and we expect that the setup for 2025 and beyond will continue to improve in the months ahead. And with that, we'll turn the call back over to begin our Q&A session.

Operator: [Operator Instructions] Our first question comes from Michael Bellisario of Baird. Your line is now open. Please go ahead.

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Xenia Hotels & Resorts, Inc. (NYSE:XHR) Q1 2024 Earnings Call Transcript

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