XHR - Xenia Hotels & Resorts: Doing Well During Economic Uncertainty

Summary

• XHR is slowly trading up its hotel portfolio.
• Its balance sheet is strong allowing it to mitigate any external risk factors such as recession risk or further interest rate hikes.
• Asset managers have been increasing its stake in this company so investors take note.

Xenia Hotels & Resorts ( XHR ) is a lodging-focused REIT operating luxury and upscale hotels and resorts across the US. It owns 32 hotels comprising of 9,508 rooms across 14 states. Some of the brands it operates under includes Marriott, Hyatt, Kimpton, Fairmont, Loews, Hilton, The Kessler Collection, and Davidson.

XHR is doing all the right things to increase value in the company, from improving its hotels with a growing capital expenditure program, share buybacks, to minimizing debt risk. I believe the fundamentals are there to drive its stock price higher in the long run.

XHR is Trading Up with its Hotel Portfolio

In continuing its focus on higher quality hotels, XHR sold its weaker-performing assets in exchange for a higher-quality one:

• Jan 2022 , 191-room Kimpton Hotel Monaco in Chicago, Illinois was sold at a price of $36.0MM
• Nov 2022 , 15-room Bohemian Hotel Celebration, Autograph Collection, was sold at a price of $27.8MM
• Dec 2022 , 189-room Kimpton Monaco Denver was sold for $69.75MM

These assets were sold in markets where management felt there wasn't much room for further income growth. In Chicago, the steady growth of hotels in the area had led management to divest its Kimpton Hotel Monaco.

Also some of these hotels required further renovations, and management felt from a cost benefit standpoint, it wasn't worth making the necessary investments. That is why the decision was made to sell these assets. In exchange, the following hotel was purchased:

• March 2022 , 346-key W Nashville was purchased for a price of $328.7 million

This 346-room hotel was built in 2021 and assuming a stabilized NOI of ~$25MM, it is an approximate 7.6% cap rate. The hotel is also located in the Nashville tourist area, one of the fastest-growing lodging markets in the country. Management here foresees a larger than usual growth in the upcoming years.

XHR Has an Active Capital Expenditure Program

XHR operates in the high end hotel category so spending on renovations to keep its accommodations and amenities fresh is important to its business. In the last 2 years, ~$100MM was spent on the following items:

In the upcoming year ~$140MM is budgeted to be spent. As a percentage of net property assets, XHR averages more than 3% in capital expenditures a year with 2021 being the exception where it was only 1.62%. In 2023, the capital expenditure will rise to more than 6%:

Note: the buildings and other improvements above do not include land values

XHR Has a Stellar Balance Sheet

In looking at the F-Score where a score of 9 shows a financially strong company and a score of 0 showing a weak one. XHR scored an 8 in its 2022 annual financial statements:

Across all ratios in the F-Score, XHR performed much better than the prior year. Its operating cash flow improved, funds from operations (FFO) increased and asset turnover went up. Even its leverage ratio had dropped a notch in the middle of rising interest rates.

Admittedly, the hotel industry is very cyclical because in 2020 (in the thick of Covid), XHR did have a F-Score of 2. During Covid when everything was shut down, this negatively impacted XHR.

The cyclical industry aside, XHR has taken a lot of steps to fortify its balance sheet and improve its stock price:

• It recently obtained better financing and extended its liabilities to 2026 with a 1 year extension option.
• It is continuing its share buyback program . As per management there is still ~$150MM left to use.
• From its recent management earnings call, 29 of its 32 hotels are unencumbered so there is further financing possibilities if XHR needs it.

On the dividends front. The company does have ample cash so its dividend payout is sustainable. The current ratio is more than 2 to 1 and had actually increased during Covid.

Risk Factors to Consider: Interest Rate Hikes

There is a chance the Federal Reserve may keep hiking the interest rate, or at least keep interest rates high. A rise in interest rates means the cost of doing business becomes more expensive, leading to fewer consumer spending. This will negatively impact the hotel industry.

If the US economy does enter a recession, one of the first industries to suffer are the hotels. When consumers are faced with fewer spending dollars one of the first items to be cut are likely vacations and hotel stays.

Investors considering XHR should keep this risk factor in mind.

Overall XHR is a Buy

Management is running XHR well. For a company that operates in a cyclical industry, its balance sheet is relatively sound. There is ample cash to sustain a dividend and engage in share buybacks. Also, the company is increasing its capital expenditures for 2023 to renovate and improve its existing hotels.

Even asset managers are taking notice. Normura Asset Management has increased its stake in the company. Allianz Asset Management GmbH boosted its stock position in XHR as well. If asset managers are getting interested in XHR then clearly XHR is doing something right.

The risk of recession is the one headwind here. But given everything XHR has done so far, I'm bullish on Xenia Hotels & Resorts.

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