Braemar Hotels & Resorts Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2018; filed August 9, 2018. Braemar is a REIT focused on luxury hotels and resorts. At quarter-end it owned interests in 12 hotels (3,549 total rooms; 3,314 net rooms) and operated as one hotel-investment segment. Comparisons are affected by acquisitions and dispositions, including the April acquisition of the Ritz-Carlton, Sarasota, and June sale of the Tampa Renaissance.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $121.1 million | $116.1 million | $223.6 million | $213.4 million |
| Operating income | $21.4 million | $12.4 million | $35.7 million | $19.7 million |
| Net income | $12.9 million | $0.4 million | $17.1 million | $0.1 million |
| Net income attributable to common stockholders | $9.8 million; $0.30/share diluted | $(2.6) million; $(0.09)/share diluted | $12.1 million; $0.37/share diluted | $(4.3) million; $(0.16)/share diluted |
| Operating margin | 17.7% | 10.7% | 16.0% | 9.2% |
| Adjusted EBITDAre (non-GAAP) | $38.3 million | $33.7 million | $68.1 million | $58.6 million |
| Adjusted FFO (non-GAAP), company and OP unitholders | $23.9 million | $21.1 million | $42.4 million | $37.6 million |
Q2 total hotel revenue rose 4.4%, while rooms revenue fell 1.3% and food-and-beverage revenue fell 9.2%; higher other hotel revenue included insurance proceeds and a settlement. For all hotels reported, Q2 occupancy was 84.90% versus 84.07%, ADR was $278.96 versus $263.65, and RevPAR was $236.85 versus $221.65. For the 10 hotels owned throughout both Q2 periods, RevPAR declined to $232.80 from $234.72. Six-month all-hotel RevPAR increased to $223.45 from $212.35, while the nine comparable hotels’ RevPAR declined to $212.90 from $227.24.
Operating cash flow was $38.7 million for the first half, versus $30.6 million a year earlier. Investing used $122.3 million, including the Sarasota acquisition and $32.4 million of property improvements; financing provided $150.6 million. Cash and cash equivalents were $169.2 million, with restricted cash of $83.1 million, at June 30.
Gross debt carrying value was $993.8 million ($985.2 million net of deferred loan costs), up from $826.2 million gross at year-end 2017. All debt was variable-rate. A 25-basis-point rate change was estimated to affect annual results by approximately $2.5 million. The company reported compliance with debt covenants; its revolving-credit-facility leverage ratio was 49.9% and fixed-charge coverage ratio was 2.12x. The $100 million revolver had no borrowings outstanding.
Material changes, outlook, and risks
- Acquired the 266-room Ritz-Carlton, Sarasota for $171.7 million and adjacent land for $9.7 million; financed $100 million with a floating-rate mortgage. The hotel contributed $15.1 million revenue and a $719,000 net loss from acquisition through quarter-end.
- Sold the Tampa Renaissance for $68 million, recording a $15.7 million gain. Refinanced $357.6 million of mortgages with a $435 million interest-only loan at LIBOR plus 2.16%; the refinancing also generated $4.2 million of loan-cost and exit-fee write-offs.
- First-half results included $10.1 million of hurricane-related business-interruption revenue, $1.9 million of Napa wildfire-related revenue, and $3.3 million from a settlement concerning the 2010 BP oil spill. The company had received $34.0 million of hurricane insurance proceeds during the first half and reported a $10.4 million net liability for insurance proceeds received in excess of amounts recognized to date.
- Q2 earnings also reflected a $6.0 million unrealized loss on the Ashford Inc. investment, which fell to $12.6 million fair value from $18.1 million at year-end, and higher interest expense. First-half advisory-fee expense rose to $10.1 million, including equity compensation and an incentive fee; equity compensation included accelerated vesting following an executive officer’s death.
- No specific earnings or operating guidance was provided in the supplied filing text. Management expected to meet short-term liquidity needs with operating cash flow, cash balances and, if needed, the revolver; longer-term capital needs may require debt or equity financing, asset sales, or insurance proceeds. Management cautioned that seasonal hotel results are not necessarily indicative of full-year performance and that access to capital is subject to market and lender conditions.
- Key risks include exposure to rising interest rates, hotel seasonality and operating performance, hurricane and wildfire impacts, debt maturities and covenants, cash-trap provisions, reliance on external advisor Ashford LLC, related-party conflicts, and REIT qualification requirements. Various legal proceedings remain pending; management did not expect them to have a material adverse effect, but outcomes are uncertain.
Important facts for investors to verify
- How much reported revenue and earnings came from insurance recoveries, the BP settlement, the Tampa sale gain, and newly acquired hotels, versus recurring comparable-hotel operations.
- The performance and renovation timeline of the hurricane-affected Ritz-Carlton, St. Thomas, and whether remaining insurance recoveries and the recorded insurance liability change.
- Debt maturities, extension conditions, covenant headroom, and sensitivity to LIBOR increases; confirm the reported rate-risk estimate against the company’s hedging arrangements.
- The sustainability of adjusted EBITDAre, adjusted FFO, and the common dividend, noting these are non-GAAP measures and do not equal cash available for distributions.
- Related-party advisory and management fees, incentive-fee calculations, and transactions involving Ashford Inc. or its affiliates.