Braemar Hotels & Resorts Inc. annual report, FY2020

Braemar Hotels & Resorts Inc. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. Braemar is an externally advised hotel REIT focused on luxury hotels and resorts. At year-end it held interests in 13 hotels (3,722 rooms; 3,487 net rooms). The year’s results were severely affected by COVID-19, including temporary suspension of operations at 11 properties.

Financial and operating results

Metric	FY2020	FY2019
Total revenue	$227.0 million	$487.6 million
Operating income (loss)	$(79.9) million	$64.4 million
Net income (loss)	$(124.7) million	$1.2 million
Net income (loss) attributable to common stockholders	$(115.5) million; $(3.39) per diluted share	$(9.8) million; $(0.32) per diluted share
Cash from operating activities	$(50.3) million	$66.3 million
Hotel EBITDA	$13.4 million	$142.2 million
FFO available to common stockholders and OP unitholders	$(68.2) million	$30.8 million

Revenue fell 53.5% year over year. Rooms revenue declined 55.2%, food and beverage revenue 56.3%, and other hotel revenue 41.1%. Portfolio occupancy dropped to 30.27% from 78.73%; ADR rose 11.5% to $329.83, but RevPAR fell to $99.83 from $232.99. Comparable-hotel occupancy was 29.61% versus 79.40%, and comparable RevPAR was $92.21 versus $225.72.

Operating expenses decreased 29.3% to $317.0 million, substantially less than the revenue decline. Depreciation and amortization was $73.4 million; advisory services fees were $18.5 million. The company recorded a $10.1 million gain on final Hurricane Irma insurance settlement and $3.9 million of loan-cost and exit-fee write-offs. Non-GAAP figures are company-defined measures and are not substitutes for GAAP results or cash flow.

Balance sheet, liquidity and debt

At December 31, 2020, cash and cash equivalents were $78.6 million, restricted cash was $34.5 million, and $12.3 million was due from third-party hotel managers, primarily cash available for hotel operations. Cash, cash equivalents and restricted cash totaled $113.2 million.
Gross debt principal was approximately $1.129 billion ($1.131 billion net carrying value), up from $1.065 billion gross at year-end 2019. All debt was variable-rate; weighted-average rate was 2.53% (LIBOR plus 2.44%). A 25-basis-point rate increase was estimated to raise annual interest expense by about $2.8 million.
Property-level debt is non-recourse. Several loans experienced payment defaults beginning in April 2020; the company entered into forbearance or other agreements with lenders. It reported no loans in default at December 31, 2020 and said it was current on ground-lease payments. Cash-trap provisions had nevertheless been triggered on some mortgages.
The $75 million revolving facility was fully drawn and amended in June 2020 into a $65 million term loan after a $10 million repayment. Quarterly principal amortization of $5 million was scheduled to begin March 2021. A February 2021 amendment extended covenant waivers and allowed use of approximately $9.3 million of certain FF&E reserves for capital spending.
Debt maturities absent extensions total $567.2 million within one year, including the four-hotel $435 million loan shown with a June 2021 maturity and a $67.5 million Park Hyatt Beaver Creek loan shown with an April 2021 maturity. Forbearance, extension conditions and subsequent amendments affect the actual refinancing timetable.

Management reported using $9.7 million of cash, cash equivalents and restricted cash during the fourth quarter. It concluded that available liquidity, lender agreements, forecast cash flows and cost-control actions alleviated substantial doubt about continuing as a going concern for the assessment period, while cautioning that conditions could change. The auditor identified forecast hotel cash flows and COVID-related assumptions as a critical audit matter.

Material changes, outlook and key risks

COVID-19 and outlook: Management expects the pandemic to negatively affect results, financial position and cash flow in 2021 and potentially longer; it did not provide earnings or recovery guidance. Planned 2021 capital expenditures were approximately $20–$24 million, and estimated 2021 debt interest was approximately $28 million based on the December 31 LIBOR rate.
Dividends and funding: Common dividends were suspended in March 2020 and were not paid for FY2020; the company said the suspension would continue into 2021 and that it did not expect common dividends in the foreseeable future. Preferred dividends were declared. The company raised common equity through its ATM program and, by March 3, 2021, had sold about 1.2 million shares under a new standby equity distribution agreement for approximately $6.4 million. Further equity funding can dilute existing holders.
Debt and liquidity risks: Continued weak hotel demand, cash burn, covenant compliance, refinancing and lender forbearance remain material uncertainties. The company disclosed that available cash could be exhausted within 12 months under certain circumstances. Its advisor, Ashford Inc., separately disclosed substantial doubt about its own ability to continue as a going concern, creating potential service and funding risks for Braemar.
Controls and audit: BDO issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness concerned controls over accounting for troubled debt restructurings; the related interim misstatement was corrected, but the new control had not been tested by year-end. Disclosure controls were also deemed ineffective.
Investigation, disputes and related parties: The SEC issued subpoenas seeking information on related-party transactions and accounting controls; the outcome and potential consequences were not predictable. Litigation with Accor concerns the Sofitel Chicago management agreement and a disputed performance-test cure amount; no amount was accrued. Approximately $500,000 was accrued for a hotel manager employment matter, while a separate certified California employment class action had no estimable loss. Braemar also relies on Ashford-affiliated entities for advisory, management, project and financing services, with disclosed conflicts of interest and significant fees.
Unusual items and operating exposure: Hurricane Irma insurance proceeds supported results, including the $10.1 million FY2020 settlement gain and business-interruption revenue. The portfolio is concentrated in hotels and exposed to travel demand, labor and property costs, weather events, interest rates and ground-lease obligations.

Important facts for investors to verify

Current hotel operating trends, cash burn, unrestricted liquidity and access to lender-held reserves against the company’s 12-month obligations.
Status, extension conditions and refinancing plans for the large 2021 maturities and all property-level forbearance agreements.
Whether covenant waivers and the revised fixed-charge coverage tests remain satisfied when testing begins in 2022.
Progress in remediating the material weakness and any further developments in the SEC investigation or Accor and employment litigation.
Subsequent equity issuance, potential dilution, preferred dividend obligations and the timing or conditions for any common-dividend resumption.
Reliability of non-GAAP measures, particularly Hotel EBITDA and FFO, alongside GAAP losses and negative operating cash flow.