Xenia Hotels & Resorts (NYSE:XHR) is an intriguing investment opportunity in the hospitality space. Structured as a REIT, the company buys properties under franchise agreements with major hotel brands, and often invests significant amounts in renovations to improve properties' revenue and portfolio value. The small-cap hotelier owns 40 properties, and its results can diverge from its larger peers, which often operate under the opposite business model as franchisors.

Such was the case this quarter. Xenia's revenue per room growth exceeded the flattish results of larger hotel stalwarts like Wyndham and Hilton. As we review results from the company's third quarter, which were released on Thursday morning, note that all comparisons refer to the prior-year quarter.

A bird's-eye view of the quarter

Metric Q3 2019 Q3 2018 Change
Revenue $268.9 million $241 million 11.6%
Net income $10.3 million $9.2 million 12%
Diluted earnings per share $0.09 $0.08 12.5%

Data source: Xenia Hotels & Resorts.

Highlights from the earnings report

A multi-story hotel complex with white facade, flanked by palm trees.

Image source: Getty Images.

  • Same-property revenue per available room, or RevPAR, increased 2.5%, in contrast to the flat RevPar growth common among major hotel brands in Q3. Xenia's RevPAR growth was comprised of a 1.4% increase in occupancy, and average daily rate (ADR) growth of 0.7%.
  • The company's total portfolio RevPAR improved by 5.2%.
  • Same-property hotel EBITDA increased 1% to $67.8 million.
  • Same-property hotel EBITDA margin (hotel EBITDA expressed as a percentage of sales) dipped 10 basis points to 25.2%.
  • Adjusted funds from operations, or FFO, a metric common to REITS, improved by 3.8% to $53.3 million.
  • Hurricane Dorian dragged on the results for properties in South Carolina, Georgia, and Florida in September. Xenia estimated that the hurricane shaved $1 million off revenue and $500,000 off hotel EBITDA. 
  • Part of Xenia's ability to improve RevPAR in a weak industry environment stems from its strategy of continually upgrading properties. In Q3, the company recorded $26 million in capital expenditures spread over a number of renovation projects. These included casita and suite upgrades at the Hyatt Regency Scottsdale Resort & Spa at Gainey Ranch, renovations to the Daily Grill Restaurant within the Westin Galleria Houston, and ongoing renovations at the Marriott Woodlands Waterway Hotel in Texas.
  • The company confirmed that its planned $50 million to $60 million renovation of the Park Hyatt Aviara Resort, Golf Club & Spa in San Diego will begin in November, with the first phase (guestrooms and meeting spaces) slated for completion in the first half of 2020.

Management's perspective on the quarter and the year so far

In the earnings press release, CEO Marcel Verbaas emphasized the trends that have propelled Xenia Hotels & Resorts' vigorous earnings growth, and its total year-to-date stock return of 27%: 

As we near the end of 2019, we are pleased with the results of our strategic portfolio improvements, as reflected in our year to date performance. A 2.6% Same-Property RevPAR increase during the first nine months of the year and a 39 basis point improvement in Same-Property Hotel EBITDA Margin are noteworthy achievements. Additionally, our efforts to continually enhance the competitive positioning and quality of our portfolio have resulted in an increase of our Total Portfolio RevPAR by 4.7% compared to the first three quarters of last year...While we remain cautious in our near-term outlook, we continue to believe strongly in the long-term growth prospects for our well-located, diversified, and high quality portfolio

Outlook revisions

Given its strong quarter, Xenia revised its projected 2019 net income range to $58 million to $64 million, up from the previous forecast of $53 million to $63 million. The hotelier bumped up the low end of its 2019 RevPAR growth projection by half a percent to 1.5%, while lowering the high end of the range by the same amount, to 2%. 

Similarly, management increased the low end of its projected 2019 FFO range by $2 million to $243 million, at the same time crimping the top end of the projection by $2 million to $249 million. In all, investors appreciated the strong results and the elevated guidance, sending shares up by about 1.5% Thursday amid a declining session in the broader market.