Lisa Ramey - VP, Finance Marcel Verbaas - President and CEO Atish Shah - CFO Barry Bloom - COO.

Thomas Allen - Morgan Stanley Bill Crow - Raymond James.

Good day and welcome to Xenia Hotels & Resorts, Inc. Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that this event is being recorded.

I would now like to turn the conference over to Ms. Lisa Ramey, Vice President, Finance. Please go ahead..

Thank you, Andria. Good morning everyone and welcome to the second quarter 2016 earnings call and webcast for Xenia Hotels & Resorts. I’m here with Marcel Verbaas, our President and Chief Executive Officer; Atish Shah, our Chief Financial Officer; and Barry Bloom, our Chief Operating Officer.

Marcel will begin with the discussion of our second quarter performance and details on various activities during the quarter. Barry will follow with additional details regarding our operating performance.

Atish will conclude our remarks with the discussion on our capital allocation strategy and balance sheet as well as an update on our outlook for the remainder of the year. We will then open up the call for Q&A.

Before we get started, let me remind everyone that certain statements made on this call are not historical facts and are considered forward-looking statements.

These statements are subject to numerous risks and uncertainties, as described in our annual report on Form 10-K and in other SEC filings, which could cause our actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued earlier this morning, along with the comments on this call, are made only as of today, August 5, 2016, and we undertake no obligation to publicly update any of these forward-looking statements as actual events unfold.

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

Thank you, Lisa. Good morning and thank you all for joining our second quarter call. As most of your aware, the outlook for revenue growth in the lodging industry has moderated as demand is increasing at a slower rate of growth and supply starting to catch up in many markets.

With this backdrop, we believe it is important to reiterate the pillar of our Company strategy as we discussed during our Investor Day in May. We continue our transaction oriented mindset with the focus on diversification, quality and portfolio enhancement.

We’re dedicated to aggressive asset management initiatives and leveraging our relationships with both brands and managers, as we maintain an emphasis on a conservative leverage profile and a healthy balance sheet throughout various learning cycles.

We believe these fundamentals will serve us well, as we navigate through a more challenging operating environment. Turning to our second quarter same-property results. Consistent with industry performance, it was a soft quarter with results varying by month.

April results benefited from the shift of the Easter holiday into March, and our portfolio RevPAR was up approximately 5% for the month. May was essentially flat and June rebounded slightly with RevPAR up nearly 1%. For the quarter, our same-property portfolio RevPAR grew 1.8% due entirely to an increase in rates as occupancy remains stable.

While our hotels in Houston continue to be a drag on the portfolio, evidenced by our Houston hotels being down over 12% in RevPAR for the quarter and year-to-date, the balance of our portfolio outperformed and grew RevPAR at 3.8% for the quarter and 3.4% for the year. Year-to-date, our same-property portfolio RevPAR has increased by 1.3%.

For the second half of the year, we expect RevPAR growth would be lower than that, and have therefore reduced our RevPAR guidance to be flat to up 1%. Our reduction primarily relates to a lower expectation based on a soft July, weaker transient trends and continued weakness at our hotels located in Houston.

Atish will provide more detail on our revised guidance later during this call. During the quarter, we had net income attributable to common stockholders of $25.8 million, an increase of 8.5% over last year. Our adjusted EBITDA grew 9.6% or $7.7 million to $88 million for the second quarter. And we delivered adjusted FFO per share growth of 14%.

Our hotel EBITDA margin grew 115 basis points over last year to 36.3%. The majority of this growth was a result of an increase in rooms’ margin, and approximately 40 basis points was due to real estate tax related benefits. We are pleased with this margin expansion, particularly during a time of tepid RevPAR growth.

Next, I would like to discuss our continued focus on prudent capital allocation and owning a high quality, diversified portfolio of hotels. Throughout the second quarter, we have continued to refine the portfolio by selling four lower tier hotels.

The four hotels with an average RevPAR that was more than 25% below the remainder of the portfolio generated a combined sales price of $836 million. We discussed the sales of the DoubleTree in Washington DC, in April, and the Embassy Suites Hunt Valley, in May, extensively during our first quarter call. So, I won’t go into detail on those today.

The transaction that we announced this morning is the sale of the Marriott Atlanta Century Center and Hilton Phoenix Suites. We sold these two hotels to a single buyer in late June for a combined price of $50.8 million.

As has been the case with each of our recent dispositions, these two hotels have significant near-term capital requirements, collectively totaling over $25 million. Adjusting for these required capital investments, the sale price represented an 11.4 times EBITDA multiple and a 7% [ph] cap rate on trailing 12 months as of the end of the first quarter.

In addition to approaching very significant renovations, the two hotels shared similar characteristics to some of our previous dispositions. Both hotels are located in secondary location within their respective markets, which made it difficult to drive appropriate growth in the long-term.

Each hotel generated RevPAR around $100 and EBITDA per key that was 50% below our portfolio, a clear indication of their quality level compared to the rest of our assets.

Since last fall, we have sold six hotels, all of which were at the lower end of our portfolio from a quality perspective, for nearly $310 million, representing a 10.8 times multiple on 2015 EBITDA, the last period for which we had the relevant data for all of these assets.

In addition, we were able to avoid nearly $90 million of total near-term capital investment at these hotels, which would have been a very significant capital outlay for us and something we did not believe to be prudent from a return standpoint.

Adjusting for this anticipated capital, the total sales rise represented a 13.9 times multiple on 2015 EBITDA. On average, these hotels had RevPAR over 25% below the remainder of the portfolio and an EBITDA per key discount of over 40%. We are pleased with our disposition activity since last fall.

All told, we have sold assets representing roughly 10% of our total asset base. These sales have improved the overall quality of the portfolio, the RevPAR level and the EBITDA per key and have been accretive. In addition, the sales have enabled us to strengthen our balance sheet and return capitals to shareholders.

And together with our acquisitions, this has resulted in a total portfolio RevPAR, which is 8.3% higher than our portfolios generated in the second quarter of 2015. Now, I would like to turn to our capital investments during the second quarter.

During the quarter, we completed the guestroom renovation and the new resort style pool and outdoor function space as at the Marriott Napa Valley Resort & Spa. This was an extensive project that we started late last year, and we’re extremely pleased with the results.

A few finishing touches are being applied to the meeting room and function space, but the most significant part of that renovation is also completed. Busy season has begun in Napa, and we’re happy to have completed the project in time to participate with a fully renovated and vastly improved property.

The only other large scale renovation currently in process is the meeting and the boardroom renovation at the Renaissance Atlanta Waverly. This was one of our top performing hotels for the quarter, and we continue to work with that hotel to complete the renovation while limiting disruption.

We anticipate this project continuing for the reminder of the year. Year-to-date, we have spent approximately $20 million in capital expenditures on the portfolio. We have reduced our full year CapEx guidance slightly due to timing of projects.

While we were able to avoid significant near term renovations at the hotels we have sold since the end of last year, only a small portion of those expenditures would have taken place in 2016, since we knew that these were potential disposition candidates for us and thus had relatively limited CapEx budgets for the year.

We have several large projects slated to begin during the third and fourth quarters, all of which continue to be on track. The guestroom renovation and upgrade to the Hyatt Centric brands at the Hyatt Key West, is expected to be complete before year-end.

Our renovations at Andaz San Diego and the Westin Galleria in Houston are expected to finish up early next year. And with that, I will now turn it over to Barry, to provide additional market color and details on our operating performance..

Thank you, Marcel, and good morning everyone. I’ll be providing further detail and insight into our market and property level performance in Q2. All the portfolio information I will be speaking about is reported on a same-property basis for 43 hotels.

In terms of RevPAR, we are pleased with the performance of many of our hotels and an overall portfolio that gained a point of market share or RevPAR index built to our competitive sets compared to the second quarter of last year.

Our top RevPAR markets were San Francisco, up 28%, as our Marriott San Francisco Airport property continued to demonstrate great results, while in last year’s comprehensive room renovation; Atlanta up 12% and Baltimore up nearly 12%. 10 of our markets achieved RevPAR growth over 4% and 18 of our markets had positive RevPAR growth for the quarter.

As mentioned earlier, Houston continues to be our toughest market, down 12.3% during the second quarter.

Results on our other large exposure markets were mostly positive and order of their weighting within our portfolio, Dallas was up 2.2%, Denver up 4.3%, Washington DC and Virginia up 1.3%, Silicon Valley up 3.7%, Honolulu down 1.4%, Napa down 1.4% due to the Marriot renovation, and Chicago up 0.6%.

Although not included in our comparable detail statistics, the recently acquired Hotel Commonwealth is performing very well with RevPAR nearly equal to last year, despite additional of 96 rooms to the previously 149-room property. EBITDA continues to be on track with our original projections and is expected to more than triple this year.

We’re very pleased with our base in the asset in light of recent transaction in this market and are hopeful for an extended Red Sox baseball season. I’d like to touch on Houston in a bit more detail. As a reminder, we own hotels in two distinct submarkets, the Woodlands and the Galleria.

Primarily Woodlands has had a challenging year thus far largely due to additional supply in the submarket, which we obviously anticipated. There are two new hotels in the Woodlands that are competing aggressively on price, particularly for our high-rated corporate transient traveler.

While we truly believe the market and our hotels specifically will benefit from these additional rooms over the longer term, it’ll take some time for this new supply to be absorbed. Our Galleria properties had their own challenges, both of which are directly related to the decline in energy-related business.

Not only have our Galleria hotels been impacted directly by reduced business from companies in the energy business but also by the lack of historically lucrative business traveler generated by ancillary and support services for that industry the consulting, accounting and legal services.

We have however been quite successful in attracting new accounts to the hotels from other properties within the competitive set. On the group side, we have seen both cancellations from corporate group business as well as significant attrition from corporate related association business.

Our hotels continues to attempt to mitigate declines of both occupancy and ADR and we remain hyper-focused on expense controls in this difficult environment. As Marcel mentioned, we achieved an increase of 115 basis points in hotel EBITDA margin for the quarter.

Over 60 basis points of the increase was a result of an improvement in our departmental operating margins, most notably in the rooms department while approximately 40 basis points was derived from significant real estate tax refunds just related to prior years and approval true-ups.

These results are a strong reflection of the efforts of our asset management team have been working with our properties on ways to contain costs during this period of slowing RevPAR growth.

In terms of our business mix, transient business, which makes up about 70% of our revenue, was up approximately 2.5% during the quarter, while group business was virtually flat year-over-year. We had more attrition than anticipated as some of our larger pieces of group business did not pick up their block in line with our expectations.

Our declines in food and beverage revenue can be directly attributed to our group results at several of our larger more group branded hotels. As we look ahead to the balance of the year, our group pace for the full year is slightly behind last year.

We have taken a conservative approach when evaluating group business for the balance of the year and believe we have removed significant risk from the forecast. We are focused on working with our operators to improve our group base as we move forward.

We continue our focus on cost containment and revenue strategies through a property optimization process we highlighted during our recent Investor Day and had continued success in rolling out the process to additional hotels in the portfolio.

To-date these deep dive operational reviews have identified and implemented approximately $3.3 million in ongoing net revenue enhancements and expense reductions across our portfolio. We look forward to continued success from this program. With that I will turn the call over to Atish to finish up our prepared remarks..

Great. Thanks, Barry, and good morning. I would like to cover two topics today. First, I will discuss our liquidity and balance sheet position; and second, I will discuss our outlook for the full year. Let me start first with our liquidity and balance sheet position. We continue to have a strong level of liquidity.

We have approximately $280 million of unrestricted cash, this reflects an increase of nearly $120 million since the end of the first quarter. The increase is primarily due to the asset disposition proceeds. In addition, we have full availability on our $400 million revolving credit facility and we also have the ability to expand our term loans.

This capacity gives us the flexibility to be opportunistic with regard to transactions. As to our balance sheet position, we are focused on maintaining a strong leverage profile. Our net debt to EBITDA of 3.6 times is among the lowest of our full service lodging REIT peers.

This level reflects our full leverage and we have no other senior capital outstanding. We anticipate our leverage ratio to decline to below 3.5 times by the end of year. During quarter, we reduced our gross leverage slightly by paying off the $22 million loan at the Courtyard Pittsburgh in advance of its maturity.

Moving on to our upcoming debt maturities, we have two maturities in September. These loans are secured by the Renaissance Atlanta Waverly and the Renaissance Austin. We intend to utilize our cash liquidity to pay off each loan. By year-end, we expect 26 of our 46 hotels will be owned free and clear with no property level debt.

The weighted average interest rate of all of our debt will decline by over 30 basis points to the low 3% range, as a result of the payoff of these two loans. And as we look ahead, we have approximately $50 million of debt maturities in 2017. We believe this to be quite manageable as it represents less than 4% of our total debt outstanding.

As we look further out, we have ample resources and a strong profile with which to access the markets in advance of our maturities in 2018 and 2019. Before turning to our revised guidance, let me address our recent share repurchase activity. We continue to repurchase stock given our belief and its intrinsic value.

We purchased approximately $12 million of stock in the beginning of the second quarter thorough July 29th. And as of July 29th we have repurchased the total of $61million of stock to-date under our current authorization. Our weighted average purchase price is $14.71.

We have approximately $39 million of remaining capacity under our current authorization, and we intend to prudently utilize this tool to drive shareholder value over time. Now, I would like to turn to our current outlook for 2016. We have revised our full year RevPAR guidance down by approximately 250 basis points.

We currently expect full year RevPAR to be between flat to up 1% relative to 2015. Our outlook reflects weaker levels of demand growth coupled with the impact of new supply in several of our markets. In addition, lower group pace as well limited forward visibility are factors that we considered when establishing our outlook.

As Barry mentioned, our hotels in Huston continue to lag the rest of the portfolio. The performance of our hotels in Huston is projected to be a more significant headwind than we had expected a quarter ago. We had expected Huston to stabilize later this year due to easier year-over-year comparisons and what seems to be a stabilization of oil prices.

Since May, oil price volatility has increased, as such demand continues to decline. We’re also experiencing the impact of new supply in the Huston market. We now anticipate continued downward progression in RevPAR through the fourth quarter and for the full year, we expect RevPAR to decline 13% to 16% for our Huston area hotels.

Excluding our hotels in Huston, we expect our same-property portfolio RevPAR to increase 2% to 3%, which is in line with the industry outlook. While RevPAR guidance has been reduced, our adjusted EBITDA guidance has not declined as much. Our adjusted EBITDA forecast is currently $288 million to $296 million.

This is approximately $12 million lower than our prior guidance. Approximately $2.5 million of the variance from prior guidance is attributable to the dispositions of the Marriott Atlanta Century Centre and the Huston Phoenix Suites that we announced today. The remainder of the reduction in guidance is due to our lower revenue expectations.

The midpoint of our adjusted EBITDA guidance excluding dispositions has declined by approximately 3%. The reason for the implied strong flow-through is our continued focused on finding efficiencies in our operations, some of which Barry just described.

As such, we expect higher levels of EBITDA margin growth in the second half of 2016 versus the first half. Now turning to our outlook outside of hotel operations. We expect slightly lower cash G&A expense for the year; we now expect it to be in the $21 million to $22 million, as we continue to manage our corporate level costs.

We have reduced our cash interest expense down by about $0.5 million due to the prepayment of the Courtyard Pittsburgh loan as well as the expected payoff of the two CMBS maturities that I previously mentioned. Finally, our expected income tax expense has also been reduced.

We now expect total income tax expense to be in the $5.5 million to $6.5 million range due to a lower expected level of taxable income and the fine tuning of our estimate as the year progresses. In summary, we are well-positioned for the current lodging industry fundamentals.

We have a high quality collection of assets and an experienced team focused upon driving efficiencies through the cycles. Our strong balance sheet gives us flexibility and will allow us to take advantage of opportunities when they arise. We continue to yield the strong dividend that is supported by our solid operating cash flow.

And we continue to believe that our strategy of owning in a diverse group of markets across various types of hotels will lead to strong value creation over time. We also believe that our portfolio of primarily branded hotels and our broad group of operating partners positions us well for the long term. That concludes our prepared remarks.

Andria, I will turn the call back over to you to take our first question please..

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

I am just trying to get some more granularity around the Houston RevPAR guidance. You came in down 12 and you are forecasting down 13 or 16; you gave us some color.

But, is that where you’re seeing higher cancellations, what was July RevPAR, anything else would be helpful?.

Really a combination of a couple of things Thomas, and thanks; it’s obviously an appropriate question. We -- it’s really -- it’s a little bit different between the two properties but there are couple of things that definitely are consistent.

We’re certainly seeing shorter term cancellations more than we’d expected, we’re seeing some softness in booking pace, booking in the Q3 and Q4, and we’re definitely seeing this continued challenge on the corporate transient side where we’ve got competitors in both markets that are lowering rates for high quality volume accounts.

So, we quite frankly, have done a good job of matching and continuing to win that business but it’s at lower rates. In terms of specifity about the month of July there in Houston, it was a very -- it was a challenging month for us but it’s also the weakest -- it’s historically the weakest month for us in Houston, particularly on the group side.

We don’t see the July trend continuing through Q3 -- the rest of Q3 and Q4, and we actually have some fairly decent group business on the books for the traditionally strong group months of September and October. .

And then, just in terms of asset management and cost management, where would you say you are in terms of the level of intensity of cost cutting? And maybe what things haven’t you started doing yet and you would start doing, if the RevPAR environment continues to get more challenging?.

Sure, so another good question. So, what we’ve been doing, and we’ve been working on this program for a long time, it’s not just our property acquisition process, which we’ve talked about, where we go into the deep dives, but the asset managers are working with each of our hotels on specific improvement plans.

We have certainly picked up the intensity of those. In terms of implementation, I would say, we’re probably sub-50% in terms of implementation moving toward 100%, but we’re also very cautions to do that on a market by market basis.

We’ve really been at a very high level in Huston for really the last 15 to 18 months, given the declines we’ve seen there, and we’ve had a really good focus on expense controls there. As we see markets turns and as we look at markets that we think may continue to soften, we picked those up fairly aggressively. And we have a lot of tools in the kit.

We have a very experienced team of asset managers who’ve been through in many cases, two or three significant down cycles. So, we’re pretty confident that we’ve got right tools to do that..

Yes, what I would add to that to Tom is that we spoke in our release and I talked about it in my remarks this morning little bit about some of the benefits we got from some of the very active appeals within the real estate tax side, which helped us a little bit on margin.

But, what I don’t want to have lost in that conversation is that by far the bulk of our margin improvement came from the departmental side and particularly on the room side.

So, I think when you’re thinking about some of these initiatives that Barry has talked about in quite a lot of detail, we’re certainly seeing the benefit of that in a quarter like the second quarter where we were looking at RevPAR growth in that 1.8% but been able to drive the margins that we were able to drive during that quarter..

Our next question comes from Bill Crow of Raymond James. Please go ahead..

Just a follow-up question on Houston, if I may. As you look at the area around your hotels, how much supply is out there that has yet to open? We talk about easier comps and maybe stability in the energy markets at some point, but if there is still supply to hit, it seems like that’s going to defer new benefits..

Great question, Bill. This is Marcel. Particularly in our two submarkets, we have seen supply that has entered the market. Barry talked about the two hotels that opened up in the Woodlands and we also had some additions in the Galleria with Hyatt opening up relatively recently there.

When you look at our specific submarkets that takes a lot off the board, frankly, because there aren’t any hotels that are coming up right in those submarkets at this point. More of what’s happening in Huston still in the supply side is in some of the other submarkets, particularly downtown.

Now that’s certainly -- we are not closing eyes to them and then some of those additions in downtown, particularly with the big hotels still opening up there will impact the market overall, particularly as relates to Galleria. But we really have seen the bulk of what we think is going to happen very specifically close to our assets at this time..

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Marcel for any closing remarks..

Thanks, Andria. Again, I would like to really point out, there are obviously couple of the questions about Houston and some of the impact that we see in the Houston market and that’s certainly a number that’s drag on our performance a little bit.

However, when you look at the rest of the portfolio and how everything went out, I think you can see that we’re performing very well the portfolio overall, and particularly on how we are able to drive those margins in that environment.

We certainly have taken a little bit more of a cautious outlook as we look at the remainder of the year, but certainly feel good about where we -- how we can manage this current environment, as Atish pointed out as well. So, we appreciate everyone’s interest today and look forward to continue to update you on future calls..

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