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EX-10.3 - EXHIBIT 10.3 - Xenia Hotels & Resorts, Inc.xenia-directorcompensation.htm
EX-10.2 - EXHIBIT 10.2 - Xenia Hotels & Resorts, Inc.xhrlp-secondamendmenttopar.htm

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended ______ to ______
Commission file number 001-36594
___________________________

Xenia Hotels & Resorts, Inc.

(Exact Name of Registrant as Specified in Its Charter)
_______________________
Maryland
 
20-0141677
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
200 S. Orange Avenue
Suite 1200, Orlando, Florida
 
32801
(Address of Principal Executive Offices)
 
(Zip Code)
(407) 317-6950
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
þ

 
Smaller reporting company
o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of August 13, 2015, there were 111,671,372 shares of the registrant’s common stock outstanding.
 




XENIA HOTELS & RESORTS, INC.
TABLE OF CONTENTS


Part I - Financial Information
 
Page
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
Combined Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
 
 
Combined Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014
 
 
Combined Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2015
 
 
Combined Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014
 
 
Notes to the Combined Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
 
Signatures
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XENIA HOTELS & RESORTS, INC.
Combined Condensed Consolidated Balance Sheets
As of June 30, 2015 and December 31, 2014
(Dollar amounts in thousands, except per share data)
 
 
 
 
 
June 30, 2015
 
December 31, 2014
Assets
(Unaudited)
 
 
Investment properties:
 
 
 
Land
$
337,093

 
$
338,313

Building and other improvements
2,739,186

 
2,710,647

Construction in progress
62,599

 
39,736

     Total
$
3,138,878

 
$
3,088,696

Less: accumulated depreciation
(576,406
)
 
(505,986
)
Net investment properties
$
2,562,472

 
$
2,582,710

Cash and cash equivalents
197,300

 
163,053

Restricted cash and escrows
85,925

 
87,296

Accounts and rents receivable, net of allowance of $286 and $251, respectively
31,283

 
26,504

Intangible assets, net of accumulated amortization of $15,562 and $15,143, respectively
62,448

 
64,541

Deferred tax asset
1,883

 
2,393

Other assets
48,098

 
29,254

Total assets (including $63,292 and $41,054, respectively, related to consolidated variable interest entities)
$
2,989,409

 
$
2,955,751

Liabilities
 
 
 
Debt
$
1,127,187

 
$
1,295,048

Accounts payable and accrued expenses
81,576

 
88,356

Distributions payable
25,684

 

Other liabilities
51,190

 
51,426

Total liabilities (including $41,476 and $27,679, respectively, related to consolidated variable interest entities)
$
1,285,637

 
$
1,434,830

Commitments and contingencies


 

Stockholders’ Equity
 
 
 
Preferred stock, $0.01 par value, (liquidation preference of $1,000) 50,000,000 shares authorized, 125 shares issued and outstanding as of June 30, 2015 and 0 shares authorized, issued or outstanding as of December 31, 2014
$

 
$

Common stock, $0.01 par value, 500,000,000 shares authorized, 111,671,372 issued and outstanding as of June 30, 2015 and 100,000 shares authorized, 1,000 issued and outstanding as of December 31, 2014
1,117



Additional paid in capital
1,992,266

 
1,781,427

Distributions in excess of retained earnings
(297,330
)
 
(264,161
)
Total Company stockholders’ equity
$
1,696,053

 
$
1,517,266

Non-controlling interests
7,719

 
3,655

Total equity
$
1,703,772

 
$
1,520,921

Total liabilities and equity
$
2,989,409

 
$
2,955,751

See accompanying notes to the combined condensed consolidated financial statements.

1

XENIA HOTELS & RESORTS, INC.
Combined Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2015 and 2014
(unaudited)
(Dollar amounts in thousands, except per share data)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Room revenues
$
172,792

 
$
170,257

 
$
325,882

 
$
316,740

Food and beverage revenues
64,954

 
61,727

 
127,207

 
119,339

Other revenues
13,477

 
15,128

 
26,007

 
29,559

Total revenues
$
251,223

 
$
247,112

 
$
479,096

 
$
465,638

Expenses:
 
 
 
 
 
 
 
Room expenses
37,348

 
36,478

 
72,534

 
69,622

Food and beverage expenses
41,311

 
40,632

 
81,498

 
79,749

Other direct expenses
4,385

 
8,317

 
8,651

 
16,474

Other indirect expenses
56,226

 
53,497

 
109,484

 
103,809

Management and franchise fees
13,618

 
14,284

 
25,070

 
26,590

Total hotel operating expenses
152,888

 
153,208

 
297,237

 
296,244

Depreciation and amortization
35,889

 
36,512

 
72,276

 
70,396

Real estate taxes, personal property taxes and insurance
11,805

 
10,745

 
23,999

 
21,563

Ground lease expense
1,322

 
1,484

 
2,597

 
2,538

General and administrative expenses
6,947

 
8,297

 
13,992

 
13,756

Business management fees

 

 

 
1,474

Acquisition transaction costs
856

 
10

 
885

 
1,130

Provision for asset impairment

 

 

 
2,998

Separation and other start-up related expenses
1,165

 

 
26,461

 

Total expenses
$
210,872

 
$
210,256

 
$
437,447

 
$
410,099

Operating income
$
40,351

 
$
36,856

 
$
41,649

 
$
55,539

Gain on sale of investment property

 
962

 

 
962

Other income (expense)
(148
)
 
(1,070
)
 
2,434

 
(945
)
Interest expense
(13,048
)
 
(14,710
)
 
(26,230
)
 
(29,158
)
Equity in (losses) and gain on consolidation of unconsolidated entity, net

 
(32
)
 

 
4,216

Income before income taxes
$
27,155

 
$
22,006

 
$
17,853

 
$
30,614

Income tax expense
(3,405
)
 
(2,006
)
 
(8,484
)
 
(3,924
)
Net income from continuing operations
$
23,750

 
$
20,000

 
$
9,369

 
$
26,690

Net income (loss) from discontinued operations

 
2,884

 
(489
)
 
(1,484
)
Net income
$
23,750

 
$
22,884

 
$
8,880

 
$
25,206

Net income attributable to non-controlling interests
(3
)
 

 
(3
)
 

Net income attributable to the Company
$
23,747

 
$
22,884

 
$
8,877

 
$
25,206

Distributions to preferred stockholders
(8
)
 

 
(8
)
 

Net income attributable to common stockholders
$
23,739

 
$
22,884

 
$
8,869

 
$
25,206

Basic earnings per share
 
 
 
 
 
 
 
Income from continuing operations available to common stockholders
$
0.21

 
$
0.18

 
$
0.08

 
$
0.23

Income (loss) from discontinued operations available to common stockholders
$

 
$
0.02

 
$

 
$
(0.01
)
Net income per share available to common stockholders (basic)
$
0.21

 
$
0.20

 
$
0.08

 
$
0.22

Weighted average number of common shares (basic)
111,676,096

 
113,397,997

 
112,316,767

 
113,397,997

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

XENIA HOTELS & RESORTS, INC.
Combined Condensed Consolidated Statements of Operations - Continued
For the Three and Six Months Ended June 30, 2015 and 2014
(unaudited)
(Dollar amounts in thousands, except per share data)


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Diluted earnings per share
 
 
 
 
 
 
 
Income from continuing operations available to common stockholders
$
0.21

 
$
0.18

 
$
0.08

 
$
0.23

Income (loss) from discontinued operations available to common stockholders
$

 
$
0.02

 
$

 
$
(0.01
)
Net income per share available to common stockholders (diluted)
$
0.21

 
$
0.20

 
$
0.08

 
$
0.22

Weighted average number of common shares (diluted)
111,914,085

 
113,397,997

 
112,460,712

 
113,397,997

See accompanying notes to the combined condensed consolidated financial statements.

3


XENIA HOTELS & RESORTS, INC.
Combined Condensed Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2015
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Preferred Stock
 
Common Stock
 
 
 
 
 
Non-controlling Interests
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional paid in capital
 
Distributions in excess of retained earnings
 
Operating Partnership
 
Consolidated Joint Venture
 
Total Non-controlling Interests
 
Total
Balance at January 1, 2015

 
$

 
1,000

 
$

 
$
1,781,427

 
$
(264,161
)
 
$

 
$
3,655

 
$
3,655

 
$
1,520,921

Net income

 

 

 

 

 
8,877

 
3

 

 
3

 
8,880

Issuance of preferred shares, net of issuance costs
125

 

 

 

 
102

 

 

 

 

 
102

Contributions from InvenTrust Properties Corp., net

 

 

 

 
248,135

 


 

 

 

 
248,135

Issuance of common shares in connection with separation from InvenTrust Properties Corp.

 

 
113,396,997

 
1,134

 
(1,134
)
 

 

 

 

 

Repurchase of common shares, net

 

 
(1,759,344
)
 
(17
)
 
(36,929
)
 

 

 

 

 
(36,946
)
Dividends, common shares / units ($0.3757)

 

 

 

 

 
(42,038
)
 
(34
)
 

 
(34
)
 
(42,072
)
Dividends, preferred shares ($61.11)

 

 

 

 

 
(8
)
 

 

 

 
(8
)
Share-based compensation

 

 
32,719

 

 
665

 

 
926

 

 
926

 
1,591

Contributions from non-controlling interests

 

 

 

 

 

 

 
3,169

 
3,169

 
3,169

Balance at June 30, 2015
125

 
$

 
111,671,372

 
$
1,117

 
$
1,992,266

 
$
(297,330
)
 
$
895

 
$
6,824

 
$
7,719

 
$
1,703,772

See accompanying notes to the combined condensed consolidated financial statements.

4


XENIA HOTELS & RESORTS, INC.
Combined Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2015 and 2014
(unaudited)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
8,880

 
$
25,206

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
70,420

 
92,754

Amortization of above and below market leases and other lease tangibles
1,856

 
2,860

Amortization of debt premiums, discounts, and financing costs
2,191

 
2,414

Loss on extinguishment of debt
283

 
1,081

Gain on sale of investment property, net

 
(962
)
Provision for asset impairment

 
2,998

Equity in losses and gain on consolidation of entity, net

 
(4,216
)
Share-based compensation expense
3,448

 

Other non-cash adjustments
(343
)
 

Changes in assets and liabilities:
 
 
 
Accounts and rents receivable
(4,964
)
 
(12,158
)
Deferred costs and other assets
6,227

 
4,658

Accounts payable and accrued expenses
(5,746
)
 
5,327

Other liabilities
116

 
203

Prepayment penalties and defeasance

 
(1,061
)
Net cash flows provided by operating activities
$
82,368

 
$
119,104

Cash flows from investing activities:
 
 
 
Purchase of investment properties

 
(171,991
)
Acquired goodwill, intangible assets, and intangible liabilities

 
(11,837
)
Capital expenditures and tenant improvements
(30,951
)
 
(15,361
)
Investment in development projects
(23,149
)
 
(7,286
)
Proceeds from sale of investment properties

 
12,654

Consolidation of joint venture

 
(2,944
)
Distributions from unconsolidated entities

 
(30
)
Restricted cash and escrows
1,371

 
(20,202
)
Deposits for acquisition of hotel properties
(24,500
)
 

Other assets
1,239

 
10,071

Net cash flows used in investing activities
$
(75,990
)
 
$
(206,926
)
Cash flows from financing activities:
 
 
 
Distribution to InvenTrust Properties Corp.
(23,505
)
 
(842,041
)
Contribution from InvenTrust Properties Corp.
176,805

 
940,349

Proceeds from mortgage debt and notes payable
13,489

 
70,848

Payoffs of mortgage debt
(81,468
)
 
(15,626
)
Principal payments of mortgage debt
(4,573
)
 
(7,033
)
Payment of loan fees and deposits
(2,926
)
 
(1,172
)
Contributions from non-controlling interests
3,169

 
980

Proceeds from issuance of preferred shares, net of offering costs
102

 

Repurchase of common shares
(36,946
)
 

Dividends, common shares
(16,270
)
 

Dividends, preferred shares
(8
)
 

Payments for contingent consideration

 
(1,932
)
Net cash flows provided by financing activities
$
27,869

 
$
144,373

Net increase in cash and cash equivalents
34,247

 
56,551

Cash and cash equivalents, at beginning of year
163,053

 
89,169

Cash and cash equivalents, at June 30, 2015 and 2014
$
197,300

 
$
145,720

See accompanying notes to the combined condensed consolidated financial statements.

5



XENIA HOTELS & RESORTS, INC.
Supplemental Cash Flow
For the Six Months Ended June 30, 2015 and 2014
(unaudited)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
25,930

 
$
20,757

 
 
 
 
In conjunction with the acquisition, the Company recorded the following:
 
 
 
Purchase of investment properties
$

 
$
183,000

Other assets

 
500

Real estate taxes

 
386

Other liabilities

 
(58
)
Total
$

 
$
183,828

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Consolidation of assets of joint venture
$

 
$
21,833

Liabilities assumed at consolidation of joint venture

 
446

Assumption of mortgage debt of joint venture

 
11,967

Accrued capital expenditures
4,341



Assumption of allocated unsecured line of credit facility by InvenTrust Properties Corp.
(96,020
)

(78,397
)
Non-cash distributions to InvenTrust Properties Corp.
1,220

 

Distributions payable
25,684

 

See accompanying notes to the combined condensed consolidated financial statements.


6


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015


1. Organization
Xenia Hotels & Resorts, Inc. (the "Company" or "Xenia") is a Maryland corporation that invests primarily in premium full service, lifestyle and urban upscale hotels. Prior to February 3, 2015, Xenia was a wholly owned subsidiary of InvenTrust Properties Corp. ("InvenTrust" formerly known as Inland American Real Estate Trust, Inc.), its former parent.
On February 3, 2015, Xenia was spun off from InvenTrust through a taxable pro rata distribution by InvenTrust of 95% of the outstanding common stock, $0.01 par value per share (the "Common Stock"), of Xenia to holders of record of InvenTrust's common stock as of the close of business on January 20, 2015 (the "Record Date"). Each holder of record of InvenTrust's common stock received one share of Common Stock for every eight shares of InvenTrust’s common stock held at the close of business on the Record Date (the "Distribution"). In lieu of fractional shares, stockholders of InvenTrust received cash. On February 4, 2015, Xenia’s Common Stock began trading on the New York Stock Exchange ("NYSE") under the ticker symbol "XHR." As a result of the Distribution, the Company became a stand-alone, publicly-traded company. Xenia intends to qualify as a real estate investment trust ("REIT") for federal income tax purposes.
Substantially all of the Company's assets are held by, and all the operations conducted through XHR LP (the "Operating Partnership"). XHR GP, Inc. is the sole general partner of XHR LP. XHR GP, Inc. is wholly owned by the Company. At June 30, 2015, the Company owned 99.5% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.5% of the common units are owned by the other limited partners. To qualify as a REIT the Company cannot operate or manage its hotels. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to XHR Holding Inc. (collectively with its subsidiaries, "XHR Holding"), the Company's taxable REIT subsidiary ("TRS"), which engages third-party eligible independent operators to manage the hotels.
The accompanying combined condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, XHR Holding, as well as all wholly owned subsidiaries and consolidated joint venture investments. The Company's subsidiaries and joint ventures generally consist of limited liability companies ("LLCs"), limited partnerships ("LPs") and the TRS. The effects of all significant inter-company transactions have been eliminated.
As of June 30, 2015, the Company owned 46 lodging properties with a total of 12,643 rooms and owned a 75% interest in two properties under development.
2. Summary of Significant Accounting Policies
The unaudited interim combined condensed consolidated financial statements and related notes have been prepared on accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The unaudited financial statements include normal recurring adjustments, which the Company considers necessary for the fair presentation of the combined condensed consolidated balance sheets, combined condensed consolidated statements of operations, combined condensed consolidated statements of changes in equity and combined condensed consolidated statements of cash flows for the periods presented. The unaudited combined condensed consolidated financial statements should be read in conjunction with the combined consolidated financial statements and notes thereto as of and for the year ended December 31, 2014, included in the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2015. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of actual operating results for the entire year.
Basis of Presentation
As described in Note 1, on February 3, 2015, Xenia was spun off from InvenTrust. Prior to the separation, the Company effectuated certain reorganization transactions which were designed to consolidate the ownership of its hotels into its operating partnership, consolidate its TRS lessees in its TRS, facilitate its separation from InvenTrust, and enable the Company to qualify as a REIT for federal income tax purposes. The accompanying combined condensed consolidated financial statements prior to the spin-off have been "carved out" of InvenTrust’s consolidated financial statements and reflect significant assumptions and allocations. The combined condensed consolidated financial statements reflect the operations of the Company after giving effect to the reorganization transactions, the disposition of other hotels previously owned by the Company, and the spin-off, and include allocations of costs from certain corporate and shared functions provided to the Company by InvenTrust, as well as costs associated with participation by certain of the Company's executives in InvenTrust’s benefit plans. Corporate costs directly associated with the Company's principal executive offices, personnel and other administrative costs are reflected as general and administrative expenses on the combined condensed consolidated statements of operations. Additionally, prior to the spin-off, InvenTrust allocated to the Company a portion of its corporate overhead costs based upon the Company's percentage share of the average invested assets of InvenTrust, which is reflected in general and administrative expenses. Based on these presentation matters, these financials may not be comparable to prior periods.
As InvenTrust was managing various asset portfolios, the extent of services and benefits a portfolio received was based on the size of its assets. Therefore, using average invested assets to allocate costs was a reasonable reflection of the services and other benefits received by the Company and complied with applicable accounting guidance. However, actual costs may have differed from allocated costs if the Company had operated as a stand-alone entity during such period and those differences may have been material.
Each property maintains its own books and financial records and each entity's assets are not available to satisfy the liabilities of other affiliated entities, except as otherwise disclosed in Note 7.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management's best judgment, after considering past, current and expected economic conditions. Actual results could differ from these estimates.
Involuntary Conversion of Assets
On August 24, 2014, Napa, California experienced a 6.0 magnitude earthquake that impacted two of the Company's lodging properties. The Company recorded involuntary losses of $9.0 million, which represents the book value of the properties and equipment written off for the property damage. As it is probable that the Company will receive insurance proceeds to compensate for the property damages, the Company also recorded an offsetting insurance recovery receivable of $9.0 million. Related to this receivable, the Company has received $4.6 million, of which $0.3 million was in excess of the receivable related to one of the properties and was recorded as a gain and is included in other income on the combined condensed consolidated statement of operations for the six months ended June 30, 2015. As of June 30, 2015, the remaining receivable related to property damage insurance recoveries is $4.6 million. Any amount expected to be received above the recorded involuntary loss will be treated as a gain and will not be recorded until contingencies are resolved.
The Company will not record an insurance recovery receivable for business interruption losses until the amount for such recoveries is known and the amount is realizable. The business interruption insurance recovery for the six months ended June 30, 2015 was $3.7 million and is included in other income on the combined condensed consolidated statement of operations.
Income Taxes
The Company intends to elect to be taxed as, and operate in a manner that will allow the Company to qualify as, a REIT for federal income tax purposes. So long as the Company qualifies for taxation as a REIT, it generally will not be subject to federal income tax on taxable income that is currently distributed to stockholders. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distributes at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders. If the Company fails to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, the Company will be subject to federal, state and local income tax on its taxable income at regular corporate tax rates and will not be eligible to re-elect REIT status during the four years following the failure. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.
To qualify as a REIT, the Company cannot operate or manage its hotels. Accordingly, the Company, through its Operating Partnership, leases all of its hotels to subsidiaries of its TRS. The TRS is subject to federal, state and local income tax at regular corporate rates. Lease revenues at REIT subsidiaries or landlords and lease expense from the TRS lessees are eliminated in consolidation for financial statement purposes.
The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversal of existing taxable temporary differences, future projected taxable income and tax-planning strategies. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company’s analysis in determining the deferred tax asset valuation allowance involves management judgment and assumptions.
Income tax expense in the combined condensed consolidated financial statements for the period from January 1, 2015 through February 3, 2015 and for three and six months ended June 30, 2014 was calculated on a “carve-out” basis from InvenTrust.
Share-Based Compensation
The Company has adopted a share-based incentive plan that provides for the grant of stock options, stock awards, restricted stock units, performance units and other equity-based awards. Share-based compensation is measured at the estimated fair value of the award on the date of grant, adjusted for forfeitures, and recognized as an expense on a straight-line basis over the longest vesting period for each grant for the entire award. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether certain of these awards will achieve parity with other operating partnership units or achieve performance thresholds. Share-based compensation is included in general and administrative expenses in the accompanying combined condensed consolidated statements of operations and capitalized in building and other improvements in the combined condensed consolidated balance sheets for certain employees that manage property, developments, renovations and capital improvements.
Non-controlling Interests
The Company’s combined condensed consolidated financial statements include entities in which the Company has a controlling financial interest. Non-controlling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a consolidating parent. Such non-controlling interests are reported on the combined condensed consolidated balance sheets within equity, separately from the Company’s equity. On the combined condensed consolidated statements of operations, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and non-controlling interests. Income or loss is allocated to non-controlling interests based on their weighted average ownership percentage for the applicable period. The combined condensed consolidated statement of equity includes beginning balances, activity for the period and ending balances for stockholders’ equity, non-controlling interests and total equity.
However, if the Company’s non-controlling interests are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, they must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to non-controlling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract. As of June 30, 2015, all share-based payments awards are included in permanent equity.
As of June 30, 2015, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the common units in the Operating Partnership held by the Company's executives and Board of Directors, and (ii) the outside ownership interest in our two joint ventures.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing the net income available to common stockholders by the weighted-average number of common shares outstanding for the period, excluding the weighted average number of unvested shared-based compensation awards outstanding during the period. Diluted EPS is calculated by dividing net income available to common stockholders, by the weighted average number of common shares outstanding during the period plus the effect of any dilutive securities. Any anti-dilutive securities are excluded from the diluted earnings per-share calculation.
Reclassifications
Reclassifications have been made to the prior year's combined condensed consolidated financial statements to conform to current year's presentation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective, although it will not affect the accounting for rental related revenues. The new standard is effective for the Company, January 1, 2018, pursuant to ASU No. 2015-09 which deferred the adoption date by one year. Early adoption is permitted. The Company is evaluating the effect that ASU No. 2014-09 will have on its combined condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis. The ASU amends the consolidation guidance for variable interest entities ("VIEs") and general partners' investments in limited partnerships and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities. The ASU is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the effect of the ASU on the Company's combined condensed consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard is effective for annual reporting periods beginning after December 15, 2015, with early adoption of the standard permitted, and should be applied retrospectively to all periods. Upon adoption of the standard, the Company will reclassify deferred financing costs from other assets to be shown net of debt in the liabilities section of the Company's balance sheet.
3. Acquired Properties
In June 2015, the Company entered into a purchase agreement to acquire a portfolio of three hotels: the RiverPlace Hotel in Portland, Oregon, the Canary Hotel in Santa Barbara, California, and the Hotel Palomar in Philadelphia, Pennsylvania (the "Kimpton Portfolio") for a total purchase price of $245 million, excluding closing costs. As of June 30, 2015, a deposit of $24.5 million was included in other assets on the combined condensed consolidated balance sheet. These acquisitions closed in July 2015.
During the six months ended June 30, 2014, the Company acquired one lodging property for a purchase price of $183 million. The Company records identifiable assets, liabilities, and goodwill acquired in a business combination at fair value. For the property acquired during the six months ended June 30, 2014, the Company recorded revenue of $13.2 million and net income of $1.6 million, not including related expensed acquisition costs. During the six months ended June 30, 2014, the Company incurred $1.1 million of acquisition costs.
The following is a summary of the acquisition for the six months ended June 30, 2014 (in thousands):
Property
Location
Acquisition Date
Rooms
Purchase Price
Aston Waikiki Beach Resort
Honolulu, Hawaii
2/28/2014
645
$183,000

7


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

The following table summarizes the allocation of purchase price for the acquisition of the Aston Waikiki Beach Resort during the six months ended June 30, 2014 (in thousands):
 
June 30, 2014
Building
$
144,076

Furniture, fixtures, and equipment
27,087

Total fixed assets
$
171,163

Below market ground lease
9,516

Net other assets and liabilities
2,321

Total purchase price
$
183,000

The acquired property was included in the Company's results of operations from the date of its acquisition.
4. Disposed Properties
During the six months ended June 30, 2015, the Company did not sell any lodging properties. One land parcel, valued at $1.2 million, was transferred to InvenTrust on January 15, 2015 and was included in net contributions from InvenTrust in the accompanying combined condensed consolidated statement of changes in equity.
The Company disposed of 55 hotel properties during 2014. The operating results of three hotel properties, including the Crowne Plaza Charleston, Doubletree Suites Atlanta Galleria, and Holiday Inn Secaucus, are included in the Company's combined condensed consolidated financial statements as part of continuing operations in accordance with ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08") as they did not represent a strategic shift or have a major effect on the Company's results of operations.
On November 17, 2014, InvenTrust sold a portfolio of 52 lodging properties (the "Suburban Select Service Portfolio"), which were properties previously overseen by the Company. This disposition represented a strategic shift and had a major effect on the Company's results of operations. Accordingly, the results of operations of these 52 lodging properties are presented as discontinued operations in the combined condensed consolidated financial statements for the three and six months ended June 30, 2015 and 2014 pursuant to ASU 2014-08.
As discontinued operations, the components are presented below and include the results of operations for the respective periods that the Company owned such assets or was involved with the operations of such ventures during the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
$

 
$
67,226

 
$

 
$
123,091

Depreciation and amortization expense

 
12,702

 

 
25,305

Other expenses

 
43,693

 
511

 
83,439

Operating (loss) income from discontinued operations

 
10,831

 
(511
)
 
14,347

Interest expense

 
(7,947
)
 

 
(15,831
)
Gain on sale of properties

 

 
22

 

Net income (loss) from discontinued operations
$

 
$
2,884

 
$
(489
)
 
$
(1,484
)
Net cash provided by operating activities from the properties classified as discontinued operations for the six months ended June 30, 2014 was $24.3 million. Net cash used for investing activities by the properties classified as discontinued operations for the six months ended June 30, 2014 was $11.3 million, consisting primarily of capital expenditures. Net cash used in financing activities by the properties classified as discontinued operations at June 30, 2014 was $7.2 million, consisting of primarily of repayments of mortgage debt.

8


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

5. Investment in Partially Owned Entities
Consolidated Entities
During 2013, the Company entered into two joint ventures for each to develop a lodging property, the Grand Bohemian Mountain Brook and the Grand Bohemian Charleston. The Company has ownership interests of 75% in each joint venture. These entities are considered VIE's as defined in FASB Accounting Standards Codification ("ASC") 810, Consolidation, because the entities do not have enough equity to finance their activities without additional subordinated financial support. The Company determined that it has the power to direct the activities of the VIE's that most significantly impact the VIE's economic performance, as well as the obligation to absorb losses of the VIE's that could potentially be significant to the Company, or the right to receive benefits from the VIE's that could potentially be significant to the Company. As such, the Company has a controlling financial interest and is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company.
The following are the liabilities of the consolidated VIE's, which are non-recourse to the Company, and the assets that can be used to settle those obligations (in thousands):
 
June 30, 2015
 
December 31, 2014
Net investment properties
$
62,599

 
$
39,736

Other assets
693

 
1,318

Total assets
$
63,292

 
$
41,054

Mortgages, notes and margins payable
(34,704
)
 
(21,214
)
Other liabilities
(6,772
)
 
(6,465
)
Total liabilities
$
(41,476
)
 
$
(27,679
)
Net assets
$
21,816

 
$
13,375

Under the terms of the two joint venture agreements, the Company's total capital investment in these two development properties is limited to $9.6 million and $7.2 million for the Grand Bohemian Mountain Brook and the Grand Bohemian Charleston, respectively, and as of June 30, 2015 a total of $0.9 million and $0.9 million, respectively, is the remaining amount to be invested by the Company.
Unconsolidated Entities
Prior to February 21, 2014, the Company owned an interest in one unconsolidated partnership entity. On February 21, 2014, the Company bought out its partner's interest in this entity and began consolidating this investment in its financial statements. In connection with this acquisition, the Company recorded the assets and liabilities of the entity at fair value resulting in a gain of $4.5 million. Prior to the entity being wholly owned, the equity method of accounting was used to account for this investment and the Company’s share of net income or loss was reflected in the combined condensed consolidated financial statements as equity (losses) and gain on consolidation of unconsolidated entity. In November 2014, this property was sold as part of the Suburban Select Service Portfolio and as of June 30, 2015, the Company does not have any remaining investments in unconsolidated entities.

9


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

The summarized results of operations of the Company's investment prior to the purchase of the remaining interest in the joint venture for the six months ended June 30, 2014 are presented below (in thousands):
Statement of Operations:
January 1 -
February 20, 2014
Revenues
$
932

Expenses:

Interest expense and loan cost amortization
43

Depreciation and amortization
129

Operating expenses, ground rent and general and administrative expenses
802

Termination fee
325

Total expenses
1,299

Net loss
$
(367
)
Company's share of net loss
$
(293
)
6. Transactions with Related Parties
The following table summarizes the Company’s related party transactions (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
General and administrative allocation (a)
$

 
$
5,448

 
$
1,135

 
$
10,131

Business management fee (b)

 

 

 
1,474

Loan placement fees (c)

 

 

 
68

Transition services fees (d)
247

 

 
502

 

(a)
General and administrative allocations include costs from certain corporate and shared functions provided to the Company by InvenTrust, as well as costs associated with participation by certain of the Company's executives in InvenTrust's benefit plans. InvenTrust allocated to the Company a portion of its corporate overhead costs which was based upon the Company's percentage share of the average invested assets of InvenTrust. As InvenTrust was managing various asset portfolios, the extent of services and benefits a portfolio received was based on the size of its assets. Therefore, using average invested assets to allocate costs was a reasonable reflection of the services and other benefits received by the Company and complied with applicable accounting guidance. However, actual costs may have differed from allocated costs if the Company had operated as a stand-alone entity during such period and those differences may have been material. For the three and six months ended June 30, 2014, the general and administrative allocation related to the Suburban Select Service Portfolio was $1.3 million and $2.3 million, respectively, and was included in discontinued operations on the combined condensed consolidated statement of operations. Following the time of the spin-off, the Company was not allocated any further general and administrative expenses.
(b)
During the first quarter of 2014, InvenTrust paid a business management fee to its external manager, Inland American Business Manager and Advisor, Inc. (the "Business Manager") based on the average invested assets. The Company was allocated a portion of the business management fee based upon its percentage share of the average invested assets of InvenTrust. On March 12, 2014, InvenTrust entered into a series of agreements and amendments to existing agreements with affiliates of The Inland Group, Inc. pursuant to which InvenTrust began the process of becoming entirely self-managed (collectively, the "Self-Management Transactions"). In connection with the Self-Management Transactions, InvenTrust agreed with the Business Manager to terminate its management agreement with the Business Manager. The Self-Management Transactions resulted in a final business management fee incurred in January 2014. As a result, the Company was not allocated a business management fee after January 2014.
(c)
The Company paid a related party of InvenTrust 0.2% of the principal amount of each loan placed for the Company. Such costs were capitalized as loan fees and amortized over the respective loan term. As a result of the spin-off, the Company will no longer be allocated any loan placement fees.

10


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

(d)
In connection with the Company's separation from InvenTrust, the Company entered into a transition services agreement with InvenTrust under which InvenTrust has agreed to provide certain transition services to the Company, including services related to information technology systems, financial reporting and accounting and legal services. The expiration date varied by service provided and the agreement terminates on the earlier of March 31, 2016 or the termination of the last service provided under it. In June 2015, the Company terminated all fee-based services provided under the transition services agreement effective July 31, 2015, and thereafter, no additional fees are expected to be incurred for services provided by InvenTrust.
As of June 30, 2015 and December 31, 2014, the Company owed $7.3 million and $12.7 million, respectively, to InvenTrust which is included in other liabilities in the combined condensed consolidated balance sheets. As of June 30, 2015, amounts due to InvenTrust primarily included (i) $3.5 million for purchases of furniture, fixtures and equipment funded by InvenTrust and (ii) $3.6 million in insurance claims proceeds (related to property damage claims associated with Napa Earthquake) owed under the terms of the Separation and Distribution Agreement entered into with InvenTrust in connection with the separation. As of December 31, 2014, the amount due to InvenTrust was related to transaction and separation costs associated with the spin-off.
7. Debt
Mortgages Payable
Mortgage loans outstanding as of June 30, 2015 and December 31, 2014 were $1,127 million and $1,201 million and had a weighted average interest rate of 3.93% and 3.96% per annum, respectively. Mortgage premiums and discounts was a net $1 million and $1.7 million as of June 30, 2015 and December 31, 2014, respectively. The following table shows scheduled debt maturities for the next five years and thereafter (in thousands):
 
 
As of
June 30, 2015
 
Weighted average
interest rate
2016
 
$
356,535

 
5.09%
2017
 
195,976

 
5.18%
2018
 
197,114

 
2.95%
2019
 
326,700

 
2.66%
2020
 
51,812

 
3.06%
Total mortgage premiums and discounts, net
 
(950
)
 
 
Total
 
$
1,127,187

 
3.93%
On February 27, 2015, one mortgage was extended to 2016, on March 2, 2015, one mortgage was paid off in the amount of $26.3 million, and on June 19, 2015, one mortgage was paid off in the amount of $55.2 million. Of the total outstanding debt, approximately $23.2 million is recourse to the Company. Certain loans have options to extend the maturity dates if exercised by the Company, subject to being compliant with certain covenants and the prepayment of an extension fee. We expect to refinance or extend our maturing debt as it becomes due.
Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios, investment restrictions and distribution limitations. As of June 30, 2015, the Company was in compliance with all such covenants.
Unsecured Credit Facility
Prior to the consummation of the spin-off transaction, the Company was allocated $96.0 million of InvenTrust's revolving credit facility. Effective February 3, 2015, this allocation was terminated and the Company entered into a new $400 million unsecured revolving credit facility with a syndicate of banks. The new revolving credit facility includes an uncommitted accordion feature which, subject to certain conditions, allows the Company to increase the aggregate availability by up to an additional $350 million. Borrowings under the revolving credit facility bear interest based on LIBOR plus a margin ranging from 1.50% to 2.45% (or, at the Company's election upon achievement of an investment grade rating from Moody’s Investor Services, Inc. or Standard & Poor’s Rating Services, interest based on LIBOR plus a margin ranging from 0.875% to 1.50%). In addition, until such election, the Company expects to pay an unused commitment fee of up to 0.30% of the unused portion of the credit facility based on the average daily unused portion of the credit facility; thereafter, the Company expects to pay a facility fee ranging between 0.125% and 0.35% based on the Company's debt rating.

11


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

As of June 30, 2015, there was no outstanding balance on the unsecured revolving credit facility and during the three and six months ended June 30, 2015 the Company incurred an unused fee of approximately $0.3 million and $0.5 million, respectively. As of August 13, 2015, the outstanding balance on the revolving credit facility amounted to $127 million.
8. Fair Value Measurements
In accordance with FASB ASC 820, Fair Value Measurement and Disclosures, the Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1 - Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access.
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company has estimated the fair value of its financial and non-financial instruments using available market information and valuation methodologies it believes to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.
Non-Recurring Measurements
Investment Properties
During the six months ended June 30, 2014, the Company identified a hotel property which had a reduction in the expected holding period and reviewed the probability of the asset's disposition. The Company recorded an impairment of investment properties of $3.0 million for the six months ended June 30, 2014 based on the estimated fair value using letters of intent and purchase contracts. The property was subsequently sold in August 2014. No impairments were recorded for the three and six months ended June 30, 2015.
The following table summarizes activity for the Company’s asset measured at fair value on a non-recurring basis as of June 30, 2015 and June 30, 2014, respectively (in thousands):
 
Fair Value at Measurement Date Using
 
June 30, 2015
 
June 30, 2014
 
Significant
Unobservable Inputs
(Level 3)
 
Significant
Unobservable Inputs
(Level 3)
Investment property
$

 
$
12,600

Total
$

 
$
12,600

Financial Instruments Not Measured at Fair Value
The table below represents the fair value of financial instruments presented at carrying values in the combined condensed consolidated financial statements as of June 30, 2015 and June 30, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Carrying Value
Estimated Fair Value
 
Carrying Value
Estimated Fair Value
Mortgages payable
$
1,127,187

$
1,161,172

 
$
1,200,688

$
1,194,237

Unsecured credit facility
$

$

 
$
96,020

$
96,020


12


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

The Company estimates the fair value of its mortgages payable using a weighted average effective interest rate of 2.85% and 3.96% per annum as of June 30, 2015 and December 31, 2014, respectively. The fair value estimate of the unsecured credit facility approximates the carrying value. The assumptions reflect the terms currently available on similar borrowing terms to borrowers with credit profiles similar to the Company's. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.
9. Income Taxes
The Company intends to elect to be taxed as, and operate in a manner that will allow the Company to qualify as, a REIT under the Internal Revenue Code of 1986. To qualify as a REIT, the Company cannot operate or manage its hotels. Accordingly, the Company, through its Operating Partnership, leases all of its hotels to subsidiaries of its TRS. The TRS is subject to federal, state and local income tax at regular corporate rates. Lease revenue at the REIT landlord subsidiaries and lease expense at the TRS lessees are eliminated in consolidation for financial statement purposes.
During the three and six months ended June 30, 2015, the Company recognized income tax expense of $3.4 million and $8.5 million, respectively, of which $1.9 million for the six months ended June 30, 2015 related to taxes on a one-time gain on the transfer of a hotel resulting in a more optimal structure in connection with the Company’s intention to elect to be taxed as a REIT. The Company's effective tax rate differed from the federal statutory rate predominately due to the dividends paid deduction, state income taxes, and changes to valuation allowances. During the three and six months ended June 30, 2014, the Company recognized $2.0 million and $3.9 million income tax expense which was calculated on a “carve-out” basis from InvenTrust.
10. Stockholders' Equity
Preferred Shares
The Company is authorized to issue up to 50 million shares of preferred stock, $0.01 par value per share. On January 5, 2015, the Company issued 125 shares of preferred stock of the Company, designated as 12.5% Series A Cumulative Non-Voting Preferred Stock, $0.01 par value per share, with a liquidation preference of $1,000 per share (the "Series A Preferred Stock”), in a private placement to approximately 125 investors who qualify as “accredited investors” (as that term is defined in Rule 501(a) of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) for an aggregate purchase price of $125 thousand.
Common Shares
The Company is authorized to issue up to 500 million shares of its Common Stock, $0.01 par value per share. On February 3, 2015, the Company spun off from InvenTrust, its former parent, through a taxable pro rata distribution by InvenTrust of 95% of the Common Stock as of the close of business on January 20, 2015. Each holder of record of InvenTrust's common stock received one share of Common Stock for every eight shares of InvenTrust's common stock held at the close of business on the Record Date. In lieu of fractional shares, stockholders of InvenTrust received cash. On February 4, 2015, Xenia’s Common Stock began trading on the NYSE under the ticker symbol “XHR.” As a result of the Distribution, the Company became a stand-alone, publicly-traded company.
On February 4, 2015, in conjunction with the listing of the Company's common stock on the NYSE, the Company commenced a modified “Dutch Auction” self-tender offer (the “Tender Offer”) to purchase for cash up to $125 million in value of shares of the Company’s Common Stock at a price not greater than $21.00 nor less than $19.00 per share, net to the seller in cash, less any applicable withholding of taxes and without interest. The Tender Offer expired on March 5, 2015. As a result of the Tender Offer, the Company accepted for purchase 1,759,344 shares of its Common Stock at a purchase price of $21.00 per share, for an aggregate purchase price of $36.9 million (excluding fees and expenses relating to the Tender Offer), which was funded from cash on hand. The 1,759,344 shares of Common Stock accepted for purchase in the Tender Offer represented approximately 1.6% of the Company’s Common Stock outstanding as of February 3, 2015, the last day prior to the commencement of the Tender Offer. Stockholders who properly tendered and did not properly withdraw shares of Common Stock in the Tender Offer at or below the final purchase price of $21.00 per share had all of their tendered shares of Common Stock purchased by the Company at $21.00 per share.
As of June 30, 2015, the Company had 111,671,372 shares of Common Stock outstanding.
Distributions
On March 13, 2015, the Company’s Board of Directors authorized a cash dividend of $0.1457 per share of the Company’s Common Stock for the first quarter of 2015. The dividend represented the Company’s anticipated regular quarterly dividend of $0.23 per share, prorated for the period from February 3, 2015 through March 31, 2015, which were paid on April 15, 2015.
On June 4, 2015, the Company’s Board of Directors authorized a cash dividend of $61.11 per share of the Company’s Series A Preferred Stock for the six months ended June 30, 2015. The dividend represents the Company's anticipated regular semi-annual dividend of $62.50 per share, pro-rated for the period from February 5, 2015 through June 30, 2015. These dividends were paid on June 30, 2015.
Additionally, on June 4, 2015, the Company’s Board of Directors authorized a cash dividend of $0.23 per share of the Company’s Common Stock for the second quarter of 2015. As of June 30, 2015, the Company had accrued $25.7 million in distributions payable on the combined condensed consolidated balance sheet. These dividends were paid on July 15, 2015.
Non-controlling Interest of Common Units in Operating Partnership
As of June 30, 2015, the Operating Partnership had 521,450 long-term incentive partnership units (“LTIP units”) outstanding, representing a 0.5% partnership interest held by the limited partners. Of the 521,450 LTIP units outstanding at June 30, 2015, 23,401 units had vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described below in the Share-Based Compensation footnote.
As of June 30, 2015, the Company accrued $34 thousand in dividends related to the LTIP units, which were paid in July 2015.
11. Earnings Per Share
Basic earnings per common share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested share-based compensation (participating securities) have been excluded, as applicable, from net income or loss available to common stockholders used in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of non-controlling interests in the earnings per share calculations.
For periods prior to the spin-off, basic and diluted earnings per share was calculated by dividing net income attributable to the Company by the 113.4 million shares of Common Stock outstanding upon the completion of the spin-off (based on a distribution ratio of one share of Common Stock for every eight shares of InvenTrust common stock).


13


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

The following table reconciles net income to basic and diluted EPS (in thousands, except share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
23,750

 
$
20,000

 
$
9,369

 
$
26,690

Net income attributable to non-controlling interests
(3
)
 

 
(3
)
 

Dividends, preferred shares
(8
)
 

 
(8
)
 

Dividends, unvested share-based compensation
(28
)
 

 
(46
)
 

Undistributed earnings attributable to share-based compensation

 

 

 

Net income from continuing operations available to common stockholders
23,711

 
20,000

 
9,312

 
26,690

Net income (loss) from discontinued operations, net of tax

 
2,884

 
(489
)
 
(1,484
)
Net income available to common stockholders
$
23,711

 
$
22,884

 
$
8,823

 
$
25,206

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
111,676,096

 
113,397,997

 
112,316,767

 
113,397,997

Effect of dilutive share-based compensation
237,989

 

 
143,945

 

Weighted average shares outstanding - Diluted
111,914,085

 
113,397,997

 
112,460,712

 
113,397,997

 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.21

 
$
0.18

 
$
0.08

 
$
0.23

Income (loss) from discontinued operations, net of tax
$

 
$
0.02

 
$

 
$
(0.01
)
Net earnings per share
$
0.21

 
$
0.20

 
$
0.08

 
$
0.22

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.21

 
$
0.18

 
$
0.08

 
$
0.23

Income (loss) from discontinued operations, net of tax
$

 
$
0.02

 
$

 
$
(0.01
)
Net earnings per share
$
0.21

 
$
0.20

 
$
0.08

 
$
0.22


14


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

12. Share Based Compensation
2014 Share Unit Plan
On September 17, 2014, the board of directors of InvenTrust and the Company’s Board of Directors adopted and ratified the Xenia Hotels & Resorts, Inc. 2014 Share Unit Plan (the “2014 Share Unit Plan”). The 2014 Share Unit Plan provided for the grant of notional “share unit” awards to eligible participants. Refer to Exhibit 99.1 of the Company's Registration Statement on Form 10, filed on August 8, 2014, as amended, for additional information regarding the 2014 Share Unit Plan. The 2015 Incentive Award Plan as defined below replaced the 2014 Share Unit Plan in connection with the Company’s separation from InvenTrust, and the 2014 Share Unit Plan was terminated in connection with the implementation of the 2015 Incentive Award Plan. Awards outstanding under the 2014 Share Unit Plan at the time of its termination will remain outstanding in accordance with their terms, and the terms and conditions of the 2014 Share Unit Plan will continue to govern such awards.
During 2014, InvenTrust and the Company granted share units to certain members of management, the vesting of which was conditioned upon a triggering event, such as a listing or a change in control (the "2014 Share Unit Grants"). A triggering event occurred in February 2015 upon the completion of the spin-off of the Company. As of June 30, 2015, 169,377 of the 2014 Share Unit Grants were outstanding to certain members of management that vest annually over a three year period and are based on continued employment. Additionally, as of June 30, 2015, 172,842 of the 2014 Share Unit Grants were outstanding to certain members of management that cliff vest in March 2017 and are based on continued employment. Each 2014 Share Unit Grant is convertible to one unit of Common Stock upon vesting.
2015 Incentive Award Plan
On January 9, 2015, the Company adopted, and InvenTrust as its sole common stockholder approved, the Company's 2015 Incentive Award Plan (the “2015 Incentive Award Plan”) effective as of February 2, 2015 (the date prior to the date of the Company's separation from InvenTrust), under which the Company may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which the Company competes. Refer to Exhibit 99.1 of the Company's Registration Statement on Form 10, filed on January 9, 2015, as amended, for additional information regarding the 2015 Incentive Award Plan. The plan allows for the grant of both share units of the Company's common stock and common units, of LTIP units, in the Operating Partnership.
In February 2015, the Board of Directors and certain members of management were granted 25,988 fully vested shares of Common Stock which had a weighted average grant date fair value of $20.55 per share.
Share Unit Grants
In May 2015, the Compensation Committee ("the Compensation Committee") of the Board of Directors of the Company granted share units to certain members of management (the "2015 Share Unit Grants"). The 2015 Share Unit Grants include 66,160 share units that are time-based and vest over a three year period, and 17,032 share units that are performance based. Both the time-based and performance-based units are subject to continued employment and have a weighted average grant date of $15.93 per share.
Of the performance-based 2015 Share Unit Grants, twenty-five percent (25%) are designated as absolute total stockholder return ("TSR") units (the "Absolute TSR Share Units"), and vest based on varying levels of the Company’s TSR over the defined performance period. The other seventy-five percent (75%) of the performance-based 2015 Share Unit Grants are designated as relative TSR share units (the "Relative TSR Share Units") and vest based on the ranking of the Company’s TSR as compared to its defined peer group over the defined performance period.
LTIP Unit Grants
LTIP Units are a class of limited partnership units in the Operating Partnership. Initially the LTIP Units do not have full parity with common units of the Operating Partnership with respect to liquidating distributions. However, upon the occurrence of certain events described in the Operating Partnership's partnership agreement, the LTIP Units can over time achieve full parity with the common units for all purposes. If such parity is reached, vested LTIP Units may be converted into an equal number of common units on a one for one basis at any time at the request of the LTIP Unit holder or the general partner of the Operating Partnership. Common units are redeemable for cash based on the fair market value of an equivalent number of shares of the Company’s Common Stock, or, at the election of the Company, an equal number of shares of the Company’s Common Stock, each subject to adjustment in the event of stock splits, specified extraordinary distributions or similar events.

15


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

In May 2015, the Compensation Committee approved the issuance of 409,874 performance-based LTIP Units (the "Class A LTIP Units") and 88,175 time-based LTIP Units (the "Time-Based LTIP Units") of the Operating Partnership under the 2015 Incentive Award Plan that had a weighted average grant date fair value of $15.93 per unit.
In June 2015, pursuant to the Company's Director Compensation Program, as amended and restated as of May 29, 2015, the Company approved the issuance of 23,401 fully vested LTIP Units of the Operating Partnership under the 2015 Incentive Award Plan to the Company's seven non-employee directors upon election to our Board of Directors with a weighted average grant date fair value of $22.44 per share.
Each award of Time-Based LTIP Units will vest as follows, subject to the executive’s continued service through each applicable vesting date: 33% on February 4, 2016, the first anniversary of the vesting commencement date of the award (February 4, 2015), 33% on the second anniversary of the vesting commencement date, and 34% on the third anniversary of the vesting commencement date.
A portion of each award of Class A LTIP Units is designated as a number of “base units.” Twenty-five percent (25%) of the base units are designated as absolute TSR base units, and vest based on varying levels of the Company’s TSR over the defined performance period. The other seventy-five percent (75%) of the base units are designated as relative TSR base units and vest based on the ranking of the Company’s TSR as compared to its defined peer group over the defined performance period.
LTIP Units (other than Class A LTIP Units that have not vested), whether vested or not, receive the same quarterly per-unit distributions as common units in the Operating Partnership, which equal the per-share distributions on the common stock of the Company. Class A LTIP Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distribution paid on common units in the Operating Partnership.
The following is a summary of the non-vested incentive awards under the 2014 Share Unit Plan and the 2015 Incentive Award Plan as of June 30, 2015:
 
2014 Share Unit Plan Share Units
 
2015 Incentive Award Plan Share Units
 
2015 Incentive Award Plan LTIP Units(1)
 
Total
Outstanding as of January 1, 2015
817,640

 

 

 
817,640

Adjustment for final units at spin-off date
(462,959
)
 

 

 
(462,959
)
Granted

 
83,192

 
521,450

 
604,642

Vested
(8,977
)
 

 
(23,401
)
 
(32,378
)
Expired

 

 

 

Forfeited
(3,485
)
 

 

 
(3,485
)
Outstanding as of June 30, 2015
342,219

 
83,192

 
498,049

 
923,460

Vested as of June 30, 2015
8,977

 

 
23,401

 
32,378

Weighted average fair value of outstanding shares/units
$
20.19

 
$
20.20

 
$
16.26

 
$
18.06

(1)
Includes Time-Based LTIP Units and Class A LTIP Units.

The fair value of the time-based awards is determined based on the closing price of the Company’s common stock on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. The grant date fair value of performance awards was determined based on a Monte Carlo simulation method with the following assumptions and compensation expense is recognized on a straight-line basis over the performance period:

16


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

Performance Award Grant Date
 
Percentage of Total Award
 
Grant Date Fair Value by Component ($ in thousands)
 
Volatility
 
Interest Rate
 
Dividend Yield
 
 
 
 
 
 
 
 
 
 
 
May 5, 2015
 
 
 
 
 
 
 
 
 
 
Absolute TSR Share Units
 
25%
 
$40.5
 
26.85%
 
0.09% - 1.05%
 
4.25%
Relative TSR Share Units
 
75%
 
$206.4
 
26.85%
 
0.09% - 1.05%
 
4.25%
Absolute TSR Class A LTIPs
 
25%
 
$838.5
 
26.85%
 
0.09% - 1.05%
 
4.25%
Relative TSR Class A LTIPs
 
75%
 
$4,274.7
 
26.85%
 
0.09% - 1.05%
 
4.25%
The absolute and relative stockholder returns are market conditions as defined by ASC 718, Compensation - Stock Compensation. Market conditions include provisions wherein the vesting condition is met through the achievement of a specific value of the Company’s common stock, which is total stockholder return, in this case. Market conditions differ from other performance awards under ASC 718 in that the probability of attaining the condition (and thus vesting in the shares) is reflected in the initial grant date fair value of the award. Accordingly, it is not appropriate to reconsider the probability of vesting in the award subsequent to the initial measurement of the award, nor is it appropriate to reverse any of the expense if the condition is not met.
Therefore, once the expense for these awards is measured, the expense must be recognized over the service period regardless of whether the target is met, or at what level the target is met. Expense may only be reversed if the holder of the instrument forfeits the award by leaving the employment of the Company prior to vesting.
For the three and six months ended June 30, 2015, the Company recognized approximately $0.5 million and $1.1 million, respectively, of share-based compensation expense related to vested stock and LTIP Unit payments under 2014 Share Unit Plan and the 2015 Incentive Award Plan, of which approximately $0.5 million and $1.1 million, respectively, was provided to the Board of Directors and approximately $9 thousand was provided to certain executive officers during the first quarter of 2015. No share-based compensation related to vested stock or LTIP Unit payments was provided to executives during the three months ended June 30, 2015.
In addition, in connection with the 2014 Share Unit Plan and the 2015 Incentive Award Plan, during the three and six months ended June 30, 2015 the Company recognized approximately $1.4 million and $2.6 million, respectively, in compensation expense (net of forfeitures) related to share units, Class A LTIP Units and Time-Based LTIP Units provided to certain of its executive officers and members of management and capitalized approximately $82 thousand and $170 thousand, respectively, related to restricted stock units provided to certain members of management that oversee development and capital projects on behalf of the Company. Additionally, this includes a cumulative catch up for compensation expense related to the fourth quarter of 2014 because the effectiveness of the grants was subject to the completion of the spin-off of the Company from InvenTrust, which occurred on February 3, 2015. As of June 30, 2015, there was $13.2 million of total unrecognized compensation costs related to non-vested restricted share units, Class A LTIP Units and Time Based LTIP Units issued under the 2014 Share Unit Plan and the 2015 Incentive Award Plan, which are expected to be recognized over a remaining weighted-average period of 10 additional quarters.

17


XENIA HOTELS & RESORTS, INC.
Notes to Combined Condensed Consolidated Financial Statements (unaudited)
June 30, 2015

13. Commitments and Contingencies
Certain leases and operating agreements require the Company to reserve funds relating to replacements and renewals of the hotels' furniture, fixtures and equipment. As of June 30, 2015 and December 31, 2014, the Company had a balance of $79.1 million and $76.3 million, respectively, in reserves for such future improvements. This amount is included in restricted cash and escrows on the combined condensed consolidated balance sheet as of June 30, 2015.
The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial statements of the Company.
In addition, in connection with the Company's separation from InvenTrust, on August 8, 2014, the Company entered into an Indemnity Agreement, as amended, with InvenTrust pursuant to which InvenTrust has agreed to the fullest extent allowed by law or government regulation, to absolutely, irrevocably and unconditionally indemnify, defend and hold harmless the Company and its subsidiaries, directors, officers, agents, representatives and employees (in each case, in such person’s respective capacity as such) and their respective heirs, executors, administrators, successors and assignees from and against all losses, including but not limited to "actions" (as defined in the Indemnity Agreement), arising from: (1) the non-public, formal, fact-finding investigation by the SEC as described in InvenTrust's public filings with the SEC (the "SEC Investigation"); (2) the three related demands (including the Derivative Lawsuit described below) received by InvenTrust ("Derivative Demands") from stockholders to conduct investigations regarding claims similar to the matters that are subject to the SEC Investigation and as described in InvenTrust' public filings with the SEC; (3) the derivative lawsuit filed on March 21, 2013 on behalf of InvenTrust by counsel for stockholders who made the first Derivative Demand (the "Derivative Lawsuit"); and (4) the investigation by the Special Litigation Committee of the board of directors of InvenTrust. In each case, regardless of when or where the loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, and regardless of whether such loss, claim, accident, occurrence, event or happening giving rise to the loss existed prior to, on or after February 3, 2015, the separation date or relates to, arises out of or results from actions, inactions, events, omissions, conditions, facts or circumstances occurring or existing prior to, on or after February 3, 2015, the separation date.
On March 25, 2015, InvenTrust announced that the SEC had informed InvenTrust that the SEC had concluded its formal, non-public investigation of matters related to InvenTrust. The SEC informed InvenTrust that, based on the information received to date, it did not intend to recommend any enforcement action against InvenTrust.
14. Subsequent Events
In June 2015, the Company entered into a purchase agreement to acquire a portfolio of three hotels: the RiverPlace Hotel in Portland, Oregon, the Canary Hotel in Santa Barbara, California, and the Hotel Palomar in Philadelphia, Pennsylvania for a total purchase price of $245 million, excluding closing costs. As of June 30, 2015, a deposit of $24.5 million was included in other assets on the combined condensed consolidated balance sheet. These acquisitions closed in July 2015.
In July 2015, the Company entered into a purchase agreement to acquire the Hotel Commonwealth in Boston, Massachusetts for a purchase price of $136 million, excluding closing costs. The Company currently expects to close on this hotel in the first quarter of 2016 upon the completion of the hotel expansion and satisfaction of other customary closing conditions.

 

18


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include statements about Xenia’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions.  Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Xenia and its management based on their knowledge and understanding of the business and industry, are inherently uncertain.  These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others: the risks, uncertainties and factors set forth in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K, as may be updated elsewhere in this report; and other Quarterly Reports on Form 10-Q that we have filed or will file with the SEC; business, financial and operating risks inherent to real estate investments and the lodging industry; seasonal and cyclical volatility in the lodging industry; macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms; contraction in the global economy or low levels of economic growth; levels of spending in business and leisure segments as well as consumer confidence; declines in occupancy and average daily rate; fluctuations in the supply and demand for hotel rooms; changes in the competitive environment in lodging industry and the markets where we own hotels; events beyond our control, such as war, terrorist attacks, travel-related health concerns and natural disasters; our reliance on third-party hotel management companies to operate and manage our hotels; our ability to maintain good relationships with our third-party hotel management companies and franchisers; our failure to maintain brand operating standards; our ability to maintain our brand licenses at our hotels; relationships with labor unions and changes in labor laws; loss of our senior management team or key personnel; our ability to identify and consummate acquisitions of additional hotels; our ability to integrate and successfully operate any hotel properties acquired in the future and the risks associates with these hotel properties; the impact of hotel renovations, repositioning, redevelopments and re-branding activities; our ability to access capital for renovations and acquisitions on terms and at times that are acceptable to us; the fixed cost nature of hotel ownership; our ability to service our debt; changes in interest rates and operating costs; compliance with regulatory regimes and local laws; uninsured or under insured losses, including those relating to natural disasters or terrorism; changes in distribution channels, such as through internet travel intermediaries; our status as an emerging growth company; the amount of debt that we currently have or may incur in the future; provisions in our debt agreements that may restrict the operation of our business; our separation from InvenTrust, our former parent, and our ability to operate as a stand-alone public company; potential business conflicts of interests with InvenTrust; our organizational and governance structure; our status as a real estate investment trust (a “REIT”); our taxable REIT subsidiary (“TRS”) lessee structure; the cost of compliance with and liabilities under environmental, health and safety laws; adverse litigation judgments or settlements; changes in real estate and zoning laws and increase in real property tax rates; changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs; changes in governmental regulations or interpretations thereof; and estimates relating to our ability to make distributions to our stockholders in the future.
These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 
The following discussion and analysis should be read in conjunction with the Company’s Combined Condensed Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q.


19


Overview
Xenia Hotels & Resorts, Inc. ("we", "us", "our", "Xenia" or the "Company") is a self-advised and self-administered REIT that invests primarily in premium full service, lifestyle and urban upscale hotels, with a focus on the Top 25 Markets as well as key leisure destinations in the United States. A premium full service hotel refers to a hotel defined as "upper upscale" or "luxury" by STR Inc. ("STR"). A lifestyle hotel refers to an innovative hotel with a focus on providing a unique and individualized guest experience in a smaller footprint by combining traditional hotel services with modern technologies and placing an emphasis on local influence. An urban upscale hotel refers to a hotel located in an urban or similar high-density commercial area, such as a central business district, and defined as "upscale" or "upper midscale" by STR. As of June 30, 2015, we owned 46 hotels, comprising 12,643 rooms, across 19 states and the District of Columbia, and had a majority interest in two hotels under development. Our hotels are primarily operated by industry leaders such as Marriott ®, Hilton ®, Hyatt ®, Starwood ®, Kimpton ®, Aston ®, Fairmont ® and Loews ®, as well as leading independent management companies.
We plan to grow our business through a differentiated acquisition strategy, aggressive asset management and capital investment in our properties. We primarily target markets and sub-markets with particular positive characteristics, such as multiple demand generators, favorable supply and demand dynamics and attractive projected room revenue per available room ("RevPAR") growth. We believe our focus on a broader range of markets allows us to evaluate a greater number of acquisition opportunities and thereby be highly selective in our pursuit of only those opportunities which best fit our investment criteria. We own and pursue hotels in the upscale, upper upscale and luxury segments that are affiliated with premium, leading brands, as we believe that these segments yield attractive risk adjusted returns. Within these segments, we focus on hotels that will provide guests with a distinctive lodging experience, tailored to reflect local market environments rather than hotels that are heavily dependent on conventions and group business.
We also seek properties that exhibit an opportunity for us to enhance operating performance through aggressive asset management and targeted capital investment. While we do not operate our hotel properties, our asset management team and our executive management team monitor and work cooperatively with our hotel managers by conducting regular revenue, sales, and financial performance reviews and also perform in-depth on-site reviews focused on ongoing operating margin improvement initiatives. We interact frequently with our management companies and on-site management personnel, including conducting regular meetings with key executives of our management companies and brands. Through these efforts, we seek to improve property efficiencies, lower costs, maximize revenues, and enhance property operating margins which we expect will enhance returns to our stockholders.
Basis of Presentation
On February 3, 2015, Xenia was spun off from InvenTrust. Prior to the separation, we effectuated certain reorganization transactions which were designed to consolidate the ownership of our hotels into our operating partnership; consolidate our TRS lessees in our TRS; facilitate our separation from InvenTrust; and enable us to qualify as a REIT for federal income tax purposes. The accompanying combined condensed consolidated financial statements prior to the spin-off have been "carved out" of InvenTrust’s consolidated financial statements and reflect significant assumptions and allocations. The combined condensed consolidated financial statements reflect our operations after giving effect to the reorganization transactions, the disposition of other hotels previously owned by us, and the spin-off, and include allocations of costs from certain corporate and shared functions provided to us by InvenTrust, as well as costs associated with participation by certain of our executives in InvenTrust’s benefit plans. Corporate costs directly associated with our principal executive offices, personnel and other administrative costs are reflected as general and administrative expenses on the combined condensed consolidated statements of operations. Additionally, prior to the spin-off, InvenTrust allocated to us a portion of its corporate overhead costs based upon our percentage share of the average invested assets of InvenTrust, which is reflected in general and administrative expenses. Based on these presentation matters, these financials may not be comparable to prior periods. In addition, certain reclassifications were made for presentation of lodging related activities on the combined condensed consolidated statements of operations for the three and six months ended June 30, 2015.
Our Revenues and Expenses
Our revenue is primarily derived from hotel operations, including room revenue, food and beverage revenue and other operating department revenue, which consists of parking, telephone, other guest services and tenant leases.
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other indirect and direct operating expenses. Room expense includes housekeeping wages and payroll taxes, reservation systems, room supplies, laundry services and front desk costs.

20


Food and beverage expense primarily includes the cost of food, beverages and associated labor. Other direct and indirect hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with general and administrative departments, sales and marketing, and repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel.
Key Indicators of Operating Performance
We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as RevPAR; average daily rate ("ADR"); occupancy rate ("occupancy" or "OCC"); earnings before interest, income taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA ("Adjusted EBITDA"); and funds from operations ("FFO") and Adjusted FFO ("Adjusted FFO"). We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. See "Non-GAAP Financial Measures" for further discussion of the Company's use, definitions and limitations of EBITDA and FFO and Adjusted EBITDA and Adjusted FFO.
Results of Operations
Overview
At June 30, 2015 and 2014, we owned 46 hotels and 49 hotels, respectively. On November 17, 2014, InvenTrust sold the Suburban Select Service Portfolio for an aggregate gross disposition price of $1.1 billion. Prior to the sale transaction, the Company oversaw the Suburban Select Service Portfolio. This sale reflected a strategic shift pursuant to ASU No. 2014-08 and had a major impact on our consolidated financial statements; therefore the operations of these 52 hotels are reflected as discontinued operations on the combined condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014.
Additionally, the following three other hotels were disposed of in 2014: Crowne Plaza Charleston, Doubletree Suites Atlanta Galleria, and Holiday Inn Secaucus. Our combined condensed consolidated financial statements include these hotels as part of continuing operations in accordance with ASU No. 2014-08 as they did not represent a strategic shift.
The remaining 46 properties owned at June 30, 2015 have been included in our results of continuing operations during the respective periods since their dates of acquisition. Operating results for the Aston Waikiki Beach Resort are not comparable for the six months ended June 30, 2015 and 2014 as it was acquired in February 2014.
Operating Information
The following table sets forth certain operating information for the three and six months ended June 30, 2015 and 2014:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
Variance
 
2015
 
2014
 
Variance
Number of properties
46
 
49
 
(6.1)%
 
46
 
49
 
(6.1)%
Number of rooms
12,643
 
13,117
 
(3.6)%
 
12,643
 
13,117
 
(3.6)%
Occupancy (1)
79.7%
 
80.1%
 
(0.5)%
 
76.8%
 
77.5%
 
(0.9)%
ADR (1)
$
188.43

 
$
178.76

 
5.4%
 
$
185.45

 
$
175.23

 
5.8%
RevPAR (1)
$
150.19

 
$
143.27

 
4.8%
 
$
142.44

 
$
135.85

 
4.9%
Hotel operating income (in thousands) (2)
$
98,335

 
$
93,904

 
4.7%
 
$
181,859

 
$
169,394

 
7.4%
(1)
For hotels acquired during the applicable period, only includes operating statistics since the date of acquisition.
(2)
Hotel operating income represents the difference between total revenues and total hotel operating expenses.

21


The following table shows the geographic diversification of our hotel properties as of June 30, 2015 (1):
Region (2)
 
Number of Hotels
 
Number of Rooms
South Atlantic
 
 
 
 
 
(Florida, Georgia, Maryland, Virginia, West Virginia, Washington D.C.)
 
15

 
3,269

West South Central
 
 
 
 
 
(Louisiana, Texas)
 
9

 
3,339

Pacific
 
 
 
 
 
(California, Hawaii)
 
7

 
3,066

Mountain
 
 
 
 
 
(Arizona, Colorado, Utah)
 
5

 
1,016

Other
 
 
 
 
 
(Alabama, Illinois, Iowa, Kentucky, Massachusetts, Missouri, Pennsylvania
 
10

 
1,953

Total
 
46

 
12,643

(1)
The table excludes our two hotels under development.
(2)
Represents the diversification of our hotel properties as defined by STR.
The following table sets forth certain operating information for our 46 and 49 hotel properties by geographic diversification for the three and six months ended June 30, 2015 and 2014 (1):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015 (3)
 
2014 (3)
 
2015 (3)
 
2014 (3)
Region (2)
 
OCC
 
ADR
 
RevPAR
 
OCC
 
ADR
 
RevPAR
 
OCC
 
ADR
 
RevPAR
 
OCC
 
ADR
 
RevPAR
South Atlantic
 
81.0
%
 
$186.67
 
$151.26
 
81.4
%
 
$172.36
 
$140.26
 
79.2
%
 
$183.33
 
$145.25
 
79.0
%
 
$169.28
 
$133.76
West South Central
 
74.6
%
 
$190.24
 
$141.92
 
73.9
%
 
$189.25
 
$139.95
 
75.0
%
 
$192.47
 
$144.34
 
75.2
%
 
$188.29
 
$141.65
Pacific
 
82.3
%
 
$196.14
 
$161.36
 
84.2
%
 
$185.08
 
$155.77
 
76.9
%
 
$194.07
 
$149.15
 
81.2
%
 
$182.54
 
$148.14
Mountain
 
83.0
%
 
$174.73
 
$145.06
 
82.4
%
 
$165.28
 
$136.21
 
81.9
%
 
$176.50
 
$144.51
 
81.4
%
 
$165.55
 
$134.71
Other
 
80.5
%
 
$183.50
 
$147.67
 
81.0
%
 
$171.45
 
$138.89
 
73.1
%
 
$167.98
 
$122.88
 
71.9
%
 
$158.78
 
$114.20
Total
 
79.7
%
 
$188.43
 
$150.19
 
80.1
%
 
$178.76
 
$143.27
 
76.8
%
 
$185.45
 
$142.44
 
77.5
%
 
$175.23
 
$135.85
(1)
Includes only hotels in our portfolio, excluding our two hotels under development, as of the end of the applicable period.
(2)
Represents our diversification of our hotel properties as defined by STR.
(3)
Full year 2014 was negatively impacted by the August 2014 earthquake in Northern California, which resulted in damage at two of our hotels, the Marriott Napa Valley Hotel & Spa and the Andaz Napa. The Marriott sustained limited damage and fully re-opened in October 2014. The Andaz partially re-opened in December 2014 with a total of 17,106 room nights out of order in the second half of 2014, and another 682 nights out of order in January 2015.
Operating Information Comparison
Revenues
Revenues consists of room, food and beverage, and other revenues from our hotels, as follows (in thousands):
 
Three Months Ended June 30,
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2015
 
2014
 
Increase / (Decrease)
 
Variance
 
2015
 
2014
 
Increase / (Decrease)
 
Variance
Number of properties
46
 
49
 
(3)
 
(6.1)%
 
46
 
49
 
(3)
 
(6.1)%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Room revenues
$
172,792

 
$
170,257

 
$
2,535

 
1.5%
 
$
325,882

 
$
316,740

 
$
9,142

 
2.9
%
Food and beverage revenues
64,954

 
61,727

 
3,227

 
5.2%
 
127,207

 
119,339

 
7,868

 
6.6%
Other revenues
13,477

 
15,128

 
(1,651
)
 
(10.9)%
 
26,007

 
29,559

 
(3,552
)
 
(12.0)%
Total revenues
$
251,223

 
$
247,112

 
$
4,111

 
1.7%
 
$
479,096

 
$
465,638

 
$
13,458

 
2.9
%

22


Room revenues
Room revenues increased by $2.5 million, or 1.5%, to $172.8 million for the three months ended June 30, 2015 from $170.3 million for the three months ended June 30, 2014, of which $7.7 million was attributable to a 4.4% improvement in ADR and a 3.9% improvement in RevPAR for our 46 comparable hotels that were owned during the three months ended June 30, 2015 and 2014. These net increases for the three months ended June 30, 2015, were offset by a decrease in revenue of $4.1 million related to three properties disposed of in 2014. In the first quarter of 2015 we transitioned to Eleventh Revised Edition of the Uniform System of Accounts for the Lodging Industry ("USALI"), which resulted in $1.1 million of resort fees being recorded in other revenues rather than room revenues, of which $0.9 million of the decrease was attributable to Aston Waikiki Beach Resort.