Braemar Hotels & Resorts Inc. quarterly report, Q1 FY2018

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Braemar Hotels & Resorts Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Braemar is a REIT focused on luxury hotels and resorts. At quarter-end it owned interests in 12 hotels with 3,576 rooms (3,341 net rooms). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial and operating performance

  • Revenue: Total hotel revenue was $102.5 million, up 5.4% from $97.3 million; total revenue rose 5.3%. Rooms revenue declined 2.8% to $65.5 million and food and beverage revenue declined 4.0% to $23.5 million. Other hotel revenue increased to $13.5 million, including $4.9 million of hurricane-related business-interruption revenue and $1.8 million, net of deductibles, related to Napa wildfires.
  • Hotel indicators: Across all properties, occupancy was 78.67% versus 78.43%, ADR was $266.01 versus $258.00, and RevPAR was $209.27 versus $202.35. For the ten properties owned throughout both periods, occupancy was 78.86% versus 79.24%, ADR was $235.37 versus $264.92, and RevPAR was $185.62 versus $209.93.
  • Profit: Operating income was $14.3 million, compared with $7.3 million. Net income attributable to the company was $4.0 million versus a $13,000 loss; net income attributable to common stockholders was $2.3 million versus a $1.7 million loss. Diluted EPS was $0.07 versus a loss of $0.07 per share. The filing reports a $0.16 common dividend declared per share in each period.
  • Margins and non-GAAP measures: Operating margin was approximately 13.9% of revenue versus 7.4%. Adjusted EBITDAre was $29.8 million versus $24.9 million; FFO available to common stockholders and OP unitholders was $14.9 million versus $9.3 million, and Adjusted FFO was $18.5 million versus $16.5 million. These company-defined measures are not substitutes for GAAP results or operating cash flow.
  • Cash flow: Operating cash flow was $3.9 million, down from $4.6 million. Investing activities used $22.2 million, primarily for hotel improvements, a Sarasota acquisition deposit, and the OpenKey investment. Financing activities used $8.4 million, including $7.5 million of dividends and distributions. Cash, cash equivalents, and restricted cash totaled $158.6 million at quarter-end, including $95.2 million unrestricted cash.
  • Debt and liquidity: Debt principal was $825.5 million ($821.1 million net of deferred loan costs), essentially unchanged from year-end. Approximately $817.4 million was variable-rate debt. The $100 million revolving credit facility had no balance at March 31; the company reported compliance with its debt covenants, including a 47.8% leverage ratio and 2.17x fixed-charge coverage ratio. Restricted cash was $63.4 million.
  • Other balance-sheet items: Total assets were $1.423 billion and total liabilities were $894.6 million at March 31. Insurance receivable increased to $14.2 million, primarily relating to hurricane and wildfire claims.

Material changes and notable items

  • Year-over-year results reflect the 2017 acquisitions of Park Hyatt Beaver Creek and Hotel Yountville and the November 2017 sale of Plano Marriott Legacy Town Center. Therefore, reported portfolio comparisons are not fully like-for-like.
  • At Ritz-Carlton, St. Thomas, hurricane damage and renovation left only 83 of 180 rooms in service during the quarter. The ten comparable hotels reported lower room revenue, largely reflecting St. Thomas, renovations and other property-level changes.
  • Advisory services fees rose to $5.2 million from $0.9 million. The increase included higher equity-based compensation, including accelerated vesting following the death of an executive officer, and a $170,000 incentive fee. Corporate general and administrative expense fell to $28,000 from $3.9 million, partly because the 2017 quarter included proxy-contest and litigation costs and the 2018 quarter included related insurance recoveries.
  • Interest expense rose 24.1% to $10.2 million, reflecting acquisition-related mortgage debt and higher average LIBOR. The filing estimates that a 25-basis-point rate increase on quarter-end variable-rate debt would increase annual expense by approximately $2.0 million, before considering subsequent changes or hedging effects.
  • The company invested $2.0 million in OpenKey for an 8.2% interest. On April 4, 2018, it acquired the Ritz-Carlton Sarasota and nearby vacant land for a combined $180.7 million, financed in part with a $100 million floating-rate mortgage; it also drew $40 million on its revolver on April 2. On May 8, it announced an agreement to sell Renaissance Tampa for $68 million, expected to close in Q2.

Outlook, risks, and contingencies

  • The filing provides no specific numerical earnings or operating guidance. Management expects to meet short-term liquidity needs through operating cash flow, cash balances and, if needed, revolver borrowings; longer-term needs may require debt, equity, preferred equity, asset-sale or insurance proceeds.
  • Management notes hotel seasonality and says quarterly results are not necessarily indicative of full-year results. It expects operating cash flow and cash on hand to support distributions needed to maintain REIT status, but does not assure future distributions.
  • Key exposures include variable interest rates, access to capital, refinancing and debt maturities, covenant compliance, hotel performance and cash-trap provisions, required property renovations, hospitality-market conditions, and REIT qualification. The company relies on Ashford LLC for advisory and asset-management services and disclosed potential conflicts involving related parties.
  • The company reported various legal proceedings but said their resolution was not expected to materially affect financial position or results; outcomes remain uncertain. It reported no material changes to the risk factors in its 2017 Form 10-K and no material changes in internal control over financial reporting.

Important facts for investors to verify

  • Progress, timing and collectability of the $14.2 million insurance receivable, including hurricane and wildfire claims, and the continuing operating impact at St. Thomas.
  • Performance of the ten comparable hotels, particularly the declines in ADR and RevPAR, and the extent to which reported revenue growth reflects acquisitions and insurance recoveries.
  • Funding and integration of the Sarasota acquisition, use of the revolver, and completion and economics of the proposed Tampa sale.
  • Variable-rate debt exposure, available interest-rate protection, upcoming maturities and extensions, and continued compliance with covenants and cash-trap provisions.
  • Recurring advisory and equity-compensation costs, related-party arrangements, and the sustainability of cash flow relative to dividends and capital spending.