Xenia Hotels & Resorts, Inc.

Good morning. Thank you for attending today's Xenia Hotels and Resorts first quarter 2023 earnings conference call. My name is Megan and I'll be your moderator for today's call. All lines will be muted in the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Amanda Bryant, VP of Finance. Amanda, please go ahead.

Thank you, Megan. Good morning, and welcome to Xenia Hotels and Resorts' first quarter 2023 earnings call and webcast. I'm here with Marcel Robas, our chair and chief executive officer, Barry Bloom, our president and chief operating officer, and Atisha, 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 Datish will conclude today's 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 10K 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, along with the comments on this call, are made only as of today, May 3rd, 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 income 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. First quarter 2023 property level portfolio information we will be speaking about today is on the same property basis for all 32 hotels. 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.

Thanks, Amanda, and good morning to everyone joining our call today. We are pleased with our first quarter results, which reflect a strong start to the year. As expected, our portfolio experienced significant growth in the first quarter, as compared to 2022, particularly in January and February, as we lacked the negative impact of the Omicron variant in the beginning of last year. Overall demand in the quarter reflected the continued transition in our business to a more normalized mix of leisure, corporate transient, and group demand. This trend particularly aided performance in our hotels and resorts that have traditionally been more dependent on corporate transient and group demand. and that in many cases were more significantly impacted by the Omicron variant during the early part of last year. For the quarter, we reported net income of $6.3 million, adjusted EBITDA REIT of $71.3 million, and adjusted FFO per share of 40 cents, with all of these measures reflecting significant increases over the first quarter of last year. Same property RAC bar in the quarter was $179.55. an increase of 23.9 percent as compared to 2022. The majority of rent bar growth came from occupancy, which increased roughly 10 points as compared to the first quarter of 2022, while average daily rates increased 5.2 percent. As compared to the first quarter of 2019, rent bar for the 30 hotels we currently own that were open at that time was down just 1.6 percent for the quarter. For these 30 hotels, which exclude Hyde, Regency, Portland, and W Nashville, occupancy was roughly 10 points below 2019, while ADR was up 13.5%. Adjusted EBITRE of $71.3 million reflected growth of 42.8% over the first quarter of 2022. Margins improved 167 basis points compared to the first quarter of 2022, despite continued inflationary pressures, particularly in labor and utilities. Importantly, the demand recovery continues to broaden. In the first quarter, eight of our 10 largest markets, as measured by 2022 EBITDA contribution, reported double-digit REFER increases as compared to the first quarter of 2022. Rathbard Prairie Dallas hotels increased more than 50 percent, while Rathbard grew more than 30 percent in our Houston, Atlanta, and San Francisco San Mateo hotels. Outside of our top 10 markets, Portland and Santa Clara experienced Rathbard increases of more than 60 percent and 70 percent, respectively. These are all markets with larger hotels with a relatively higher dependence on business frangent and group demand and that are still performing well below 2019 levels. Therefore, we continue to believe that these markets continue to present the greatest potential for recovery and earnings growth in the quarters ahead. Conversely, the two top-ten markets with red bar declines in the quarter, Key West and Napa, left particularly strong performance in the first quarter of 2022, as Omicron did not meaningfully impact demand in these markets. Additionally, the unusually rainy weather had a substantial negative impact on demand in Napa for the quarter. with the bad weather conditions also impacting leisure demands in the remainder of California. Despite lots of uncertainty in the economy, we have not yet observed any signs of broad-based demand slowing. The second quarter is off to a good start against a challenging year-ago growth comparison. We estimate that our preliminary April same-property RAP bar is approximately $196, which would be down roughly 2 percent as compared to April 2022. Preliminary April occupancy of 70.7 percent is nearly flat to 2022, and preliminary ADR is down approximately 2 percent. Reflecting the demand mix shift we are witnessing in the portfolio. For the 30 hotels that were open in 2019, preliminary REFPR for April was approximately $197, which would be a 1.1 percent increase as compared to April of 2019. These preliminary results are encouraging, given the historical seasonal strength of the month of April within our portfolio, including very strong leisure driven performance in April last year. We remain cautiously optimistic for the balance of 2023 and beyond, based on the trends we continue to see in our business. With first quarter results coming in as we expected two months ago, and preliminary top line performance in April also matching our expectations, We are reiterating the midpoints of our full-year outlook for RECPAR growth and adjusted EBITRE. Atish will provide additional details on our updated guidance during his remarks. Let me highlight four key factors supporting our long-term optimism. First, as I have mentioned, our portfolio is returning to a more traditional mix of business. Historically, about a third of our mix was group. And with continued momentum in group booking pays for 2023, Our current group room revenue on the books for 2023 is only about 6% behind 2019 levels for the 30 hotels that were open at that time. Including our recent acquisitions, High Green Sea Port on the Oregon Convention Center and WNASCO, group room revenue on the books for 2023 is currently about 20% ahead of 2022 levels, driven by increases in both room nights and rates. We are also seeing continued momentum in corporate transient business. Mid-week occupancies continue to improve meaningfully in the first quarter, increasing by mid-teen percentage points on both Tuesday and Wednesday nights as compared to the first quarter of 2022. Second, we have numerous growth drivers embedded in our existing portfolio that we believe will support growth this year and beyond. As mentioned previously, We have recovery potential in our larger urban group and business transit-focused hotels, mainly Marriott San Francisco Airport, Hyde Regency Santa Clara, our two Dallas hotels, and our three Houston hotels. These seven hotels reported more than 40% rec bar growth on average in the first quarter as compared to 2022. However, even out of these seven hotels in the first quarter of 2022, we're still approximately 22% below the first quarter of 2019. Also, we own several recently renovated properties and properties undergoing renovations that are soon to be completed that we expect to be meaningful internal EBITDA growth drivers. These include High-Gredency Grand Cypress, Park Hyatt Aviara, Waldorf Astoria Atlanta Bookhead, and Grand Bohemian Hotel Orlando, amongst others. Looking further ahead, our upcoming transformation of the High-Gredency Scottsdale Resort and Spa at Ganey Ranch to a luxury Grand Hyatt resort is expected to be a meaningful contributor to our future growth. And I agree it's important that the Oregon Convention Center and NW National are continuing to ramp as the base of group business builds to both properties. We continue to believe that both will serve as significant drivers of future EBITDA growth as these properties stabilize over the next few years. Third, our flexible balance sheet, which was further strengthened as a result of our recent activities, supports continued investment in our portfolio while also balancing returns to shareholders in the form of share repurchases and our $0.10 per share quarterly dividend. And fourth, ZN's portfolio of high-quality hotels and resorts will continue to benefit from diminishing levels of new competitive supply as the environment for new hotel development remains challenging. Based on the most recent data from Lodging Econometrics, weighted room supply growth in our submarkets is expected to be just 1.2% in 2023 and 1% in 2024. This represents a meaningful reduction in growth from about 3% annually just a few years ago. As for the transaction environment, we believe we are very well positioned to remain opportunistic as it relates to potential future acquisitions. We continue to look at opportunities that meet our criteria, including top 25 markets and key leader destinations. However, we are willing to be patient as the overall environment continues to evolve and as we evaluate whole avenues to drive shareholder value. And with that, I will turn the call over to Barry. Thank you, Marcel, and good morning, everyone. As Marcel indicated in his prepared remarks, the same property leaders in terms of rent per growth in the quarter included many of the hotels that lagged over the past two years, suggesting that recovery is now more broad-based. Rev Park grew in excess of 30% at our hotels in Dallas, Santa Clara, San Francisco, Houston, Philadelphia, Washington, D.C., Atlanta, and Portland. While it may seem surprising that we caught up strength in San Francisco given much of the negative press, our hotel, the 688-room Marriott at the San Francisco Airport, is recovering very well. This property is benefiting from improving group demand, recovering international air travel, and improving business transit demand, particularly from life science-related corporate accounts. As expected, results in the first quarter varied across the months in the quarter as we lapped the impact of the Omicron variant in early 2022. Same property rev par in January increased a very robust 49.5% and moderated to a rev par increase of 10.4% in March as compared to 2022, despite impact from several renovations and severe weather that impacted several of our California properties. Great growth in the first quarter, our same property portfolio moderated a bit from the mid-teens percentage increases in the last several quarters to up 5.2% as compared to 2022. We're optimistic regarding corporate and group rates, particularly as we achieve higher midweek occupancies in a number of our larger hotels and urban markets, including Santa Clara, San Francisco, Houston, and Dallas, particularly on Tuesday and Wednesday nights, where these higher occupancies are providing meaningful rate compression opportunities. Our managers anticipate further improvement in corporate transient business fundamentals and continue to expect negotiated corporate rates to increase in the high single-digit percentage range this year. Business from the largest corporate accounts across our portfolio continues to improve, with March representing the strongest recovery to 2019 since the beginning of the pandemic. On average, rate growth at our leisure-oriented hotels in the first quarter was below that of our same property portfolio, but still positive as compared to the first quarter of 2022 with rates well above 2019 levels. We saw rate declines in Key West and Napa off of historic highs through the pandemic, yet rates are nearly 40% above 2019 levels, and rates did increase in Key 1 and our other leisure-oriented properties in Orlando, Savannah, Charleston, and Arizona. Now, turning to expenses and profit. First quarter same property hotel EBITDA was $77.2 million, an increase of 33.6% on a total revenue increase of 25.9% compared to the first quarter of 2022, resulting in 167 basis points of margin improvement. The significant improvement in hotel EBITDA margin for the quarter reflects our operators ability to manage expenses while also benefiting from significantly better revenue in areas such as food and beverage, up more than 35% for 2022, with banquet and catering revenues up over 60% compared to 2022 as a result of high quality group business, both of which contributed to significant levels of food and beverage profits. Good control of rooms expenses also contributed to the EBITDA margin expansion as improved occupancy spread the fixed operating costs over a broader base. whose payroll expense was up roughly 20% compared to the first quarter of 2022. Good margins in the operating departments were somewhat offset by increases in areas such as utilities, which were up approximately 24%. With respect to labor overall, our operators successfully staffed up last year to meet the strong recovery and demand where necessary and have been able to better fill open positions. In general, our fully recovered hotels are operating at FTE staffing levels between 90 and 95% of pre-pandemic levels, while hotels where there is still substantial opportunity for recovery are operating at FTE staffing levels of approximately 75% of pre-pandemic levels. Now turning to CapEx, during the first quarter, we invested $11.6 million in portfolio improvements. At the Grand Bohemian Orlando, we completed the comprehensive renovation of public spaces, including meeting space, lobby, restaurant, bar, Starbucks, and the addition of a new rooftop bar. A comprehensive renovation of the guest rooms will commence in the next several weeks. At Canary Hotel in Santa Barbara, we have just completed the comprehensive guest room renovation and are now looking forward to the benefits of a fully renovated hotel. At the Ritz Carlton Denver, the recently completed renovation and reconfiguration of the premium suites resulted in three additional keys added as of April 1st. At Park Hyatt Aviara, we continue to work on the significant upgrade to the resort's spa and wellness amenities, which will be branded as a Miraval Life and Balance Spa upon completion late in the second quarter. We also continue planning work at the Hotel Monaco Salt Lake City on a comprehensive renovation of meeting space, restaurant, bar, and guest rooms. It is also expected to commence in the second quarter. And finally, the comprehensive $110 million renovation and up-branding of the 491-room High Regency Scottsdale Resort and Spa at Ganey Ranch is expected to begin in June with expected completion of all phases by the end of 2024. The project will formally kick off with a complete renovation of a two-acre pool complex in early June with an expected completion date by the end of this year. Doubling the size of the largest existing ballroom to 24,000 square feet and renovation of the existing meeting space will begin in early July and is expected to be completed along with the renovation of all other meeting spaces by the end of 2024. Guest room renovations are expected to begin in the fourth quarter and is expected to be completed in the second quarter of 2024. Finally, the comprehensive renovation of all other public-facing spaces including the lobby and the transformation of all food and beverage venues is expected to begin in the second quarter of 2024 to be completed by the end of 2020. we know that this renovation is nearly all guest space as the building systems have been very well maintained over the property's history upon completion the property will have five additional keys or 496 rooms and will be rebranded as a grand high resort Including the aforementioned projects, in 2023 we expect to spend approximately $130 to $150 million in capital expenditure projects. Of this amount, approximately $45 million will be spent at Higher Regency Scottsdale. This is consistent with our initial guidance provided in early March. We are excited about the work our in-house project management team has completed and are even more excited about the projects we have underway and in various stages of planning in 2023. With that, I will turn the call over to Atish. Okay, thanks, Barry. I will provide an update on our balance sheet and discuss our guidance. As to our balance sheet, it continues to be a strength of the company. As we previously discussed, in January, we completed a recast of our line of credit, entered into new bank term loans, and refinanced one property mortgage loan. These actions improved our balance sheet profile. At present, we have no debt maturities until the second half of 2025, and about 80% of our debt has fixed interest rates. We continue to have a fully undrawn line of credit and a strong liquidity position. We continue to be active on the share buyback front. In addition to the shares we repurchased last year, thus far in 2023, we have repurchased nearly 3% of our outstanding shares at an average price of about $13.50 per share. At our current stock price, our implied value is approximately $270,000 per key for the portfolio, which we believe to be attractive given its high quality. We have approximately $125 million remaining on our share repurchase authorization. As for our dividend, we paid a $0.10 per share dividend in the first quarter on an annualized basis that reflects a yield above 3% on our stock. It also reflects a payout ratio of below 40% of projected FAD based on the midpoint of our FFO guidance. Moving ahead to our outlook, group revenue pace continues to strengthen. with 2023 group revenue pays for the last three quarters of the year up about seven percent to last year this reflects room night pays for the second through fourth quarter up about three percent and room rates up about three and a half percent overall the year is evolving as expected with a very strong first quarter followed by expectations for Lower levels of growth in quarters two through four given tougher year-ago comparisons and the impact of renovations. The midpoint for our full-year guidance for adjusted EBITDA RE is unchanged from early March. The midpoint of our FFO per share guidance increased slightly due to share buybacks. And our guidance on interest expense, income tax expense, and G&A expenses were unchanged. As to our expected seasonality of earnings, our estimated percentage weighting of full-year adjusted EBITDA RE by quarter is as follows. For the second quarter, about 30 percent. For the third quarter, about 20 percent. And for the fourth quarter, in a low 20 percent range. I'd like to wrap up by reiterating that Xenia is well positioned with a curated collection of high-quality properties managed by leading operators and located in desirable markets. With lower industry-wide new supply additions on the horizon, we expect to have a long, long way for growth. Our portfolio has several embedded drivers that we expect to utilize and we expect to utilize our balance sheet to drive additional growth over the next few years. We have historically done well managing through the various ups and downs in this business and expect our nimble profile and highly focused team to continue to deliver strong results. And with that, we will turn the call back over to Megan for our Q&A session.