Braemar Hotels & Resorts Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing includes fourth-quarter results; it is not a standalone quarterly filing.
Business context
Braemar is an externally advised hotel REIT focused on luxury hotels and resorts with high RevPAR. At year-end 2018, it owned interests in 12 hotels; it acquired the Ritz-Carlton, Lake Tahoe in January 2019, bringing the portfolio to 13 properties. The company has no employees and relies on Ashford LLC for advisory and asset-management services and third-party managers to operate its hotels.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $431.4 million | $414.1 million |
| Operating income | $65.8 million | $62.6 million |
| Net income | $2.6 million | $28.3 million |
| Net income (loss) attributable to common stockholders | $(5.9) million; diluted EPS $(0.19) | $16.2 million; diluted EPS $0.51 |
| Cash from operating activities | $70.7 million | $70.6 million |
| FFO available to common stockholders and OP unitholders | $32.1 million | $44.9 million |
| Adjusted FFO | $66.4 million | $71.0 million |
| Hotel EBITDA | $137.6 million | $128.3 million |
- Revenue increased 4.2%, while net income attributable to the company fell 94.3%. The lower result reflected higher interest and advisory costs, an $8.0 million unrealized loss on the Ashford Inc. investment versus a $9.7 million gain in 2017, and lower hotel-sale gains.
- Full-portfolio occupancy was 81.31%, ADR was $272.02 and RevPAR was $221.17, versus 80.97%, $254.92 and $206.42, respectively, in 2017. For the nine comparable hotels, RevPAR declined 1.8% to $213.28.
- Fourth-quarter revenue was $98.9 million and net loss was $13.9 million; common-stockholder loss was $14.4 million, or $0.44 per diluted share. In fourth-quarter 2017, net income was $28.4 million and diluted EPS was $0.65, including a $23.8 million gain on the Plano hotel sale.
- At December 31, cash and cash equivalents were $182.6 million, with a further $75.9 million restricted. Total assets were $1.64 billion and net indebtedness on the balance sheet was $985.9 million; gross debt was $992.6 million, up from $826.2 million in 2017.
- All year-end mortgage debt was variable rate; the weighted-average rate was 5.01%. Management estimated that a 25-basis-point rate increase would add approximately $2.5 million to annual interest expense. The $100 million revolving credit facility had no year-end borrowings, and the company reported compliance with its covenants.
Material changes and unusual items
- Acquired the Ritz-Carlton, Sarasota in April 2018 for $171.4 million plus $9.7 million for vacant land, financed in part with a $100 million mortgage. Sold the Tampa Renaissance in June for $68.0 million, recognizing a $15.7 million gain.
- Issued 1.6 million Series D preferred shares in November, raising approximately $37.9 million net. The shares carry an 8.25% annual dividend on a $25 liquidation preference and rank senior to common stock.
- Hurricanes Irma and Maria significantly disrupted the Ritz-Carlton, St. Thomas. Only 59 rooms were available at year-end, versus 180 before the storms; the hotel planned to reopen under the Ritz-Carlton brand in fourth-quarter 2019. 2018 results included $13.9 million of hurricane business-interruption revenue. Napa wildfires also generated $1.9 million of business-interruption revenue at two properties.
- Other hotel revenue rose 71.4%, in part due to insurance-related business-interruption revenue and acquisitions. The company received $48.1 million in hurricane-related insurance proceeds during 2018 and reported a $17.1 million net liability for proceeds received in excess of costs and revenue recorded to date.
- Advisory services fees increased to $20.0 million from $9.1 million, including a $2.0 million incentive fee and $6.5 million of equity-award expense. The company reported approximately $80 million of estimated capital expenditures through 2019 and $48.8 million of estimated debt interest and principal payments through 2019.
Outlook, risks and contingencies
The board expected a 2019 common dividend of $0.16 per share quarterly, subject to quarterly review and board discretion. Management stated that existing cash and operating cash flow should cover anticipated interest and principal payments, working capital, capital expenditures and REIT-required distributions for the next 12 months, excluding potential final-maturity principal payments. The filing does not provide formal earnings or RevPAR guidance.
In January 2019, Braemar acquired the Ritz-Carlton, Lake Tahoe for $103.3 million, plus land and capital reserves, and obtained a $54 million floating-rate mortgage. It also entered an Enhanced Return Funding Program under which Ashford LLC is to provide funding equal to 10% of qualifying acquisition prices in exchange for FF&E; the initial commitment is up to $50 million, with a possible increase by mutual agreement. Funding is subject to conditions, including an Ashford LLC cash threshold.
Key risks include variable-rate debt and refinancing needs, hotel-market cyclicality and seasonality, property-specific exposure to hurricanes and other severe weather, capital requirements, and cash-trap provisions in certain loans. The company also highlights conflicts arising from its external-advisor structure and related-party arrangements with Ashford LLC, Ashford Inc., Remington Lodging and Premier. Legal proceedings were pending; management did not expect their resolution to materially affect financial position or results, but noted outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Progress on the St. Thomas restoration, room capacity and planned Ritz-Carlton relaunch, as well as the timing and collectability of remaining insurance recoveries.
- Underlying comparable-hotel trends, separating operating performance from acquisitions, dispositions, renovations and insurance-related revenue.
- Debt maturities, extension conditions, covenant headroom, cash-trap triggers and the effect of further LIBOR increases; the filing reports key refinancings completed after year-end.
- Delivery and terms of ERFP funding, including the $10.3 million associated with Lake Tahoe, and the related-party fees and incentives paid to Ashford-affiliated providers.
- Whether planned 2019 capital spending, dividends and debt obligations remain supportable from liquidity and operating cash flow.