Braemar Hotels & Resorts Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Braemar is a REIT focused on luxury hotels and resorts; it owned interests in 13 hotels with 3,722 rooms (3,487 net rooms). Results remained affected by the recovery from COVID-19 disruption.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Hotel revenue | $97.1 million | $12.9 million | $181.0 million | $130.4 million |
| Operating loss | $2.8 million | $39.9 million | $6.5 million | $43.1 million |
| Net loss attributable to company | $9.2 million | $47.9 million | $17.9 million | $60.9 million |
| Net loss attributable to common stockholders | $15.5 million | $50.5 million | $26.7 million | $66.0 million |
| Loss per common share | $0.32 | $1.53 | $0.61 | $2.02 |
| Adjusted EBITDAre (non-GAAP) | $19.6 million | $(18.5) million | $36.2 million | $(0.03) million |
Q2 occupancy was 49.18% versus 6.81% a year earlier; ADR was $382.21 versus $282.64, and RevPAR was $187.97 versus $19.24. For the six-month period, occupancy was 43.13% versus 33.25%, ADR was $405.58 versus $341.44, and RevPAR was $174.92 versus $113.53. Q2 and half-year revenue increased as hotel activity recovered, while the company continued to report losses.
Cash flow: Operating activities provided $31.5 million in the first half, compared with $23.3 million used in the prior-year period. Investing activities used $10.3 million, including $9.1 million of hotel improvements and a $3.0 million deposit for the Mr. C acquisition. Financing activities provided $80.7 million, principally from debt and equity issuance, partly offset by debt repayments and distributions. Cash, cash equivalents and restricted cash totaled $215.1 million at June 30.
Liquidity and debt: Unrestricted cash was $157.7 million and restricted cash was $57.4 million; $21.5 million was due from third-party hotel managers, primarily cash held for hotel operating costs. Net indebtedness was $1.144 billion. The company issued $86.25 million of 4.50% convertible notes due 2026, receiving approximately $82.8 million net, and used part of the proceeds to repay its $61.5 million secured term loan. No loans were in default and the company reported compliance with debt covenants. Management concluded that previously existing substantial doubt about the company’s ability to continue as a going concern had been resolved, based on its financing, liquidity, operating forecasts and other actions.
Material changes and unusual items
- Q2 revenue rose sharply from the exceptionally weak 2020 comparison, when COVID-19 restrictions and hotel closures severely reduced operations. Q2 2021 hotel operating expenses also increased with the recovery in activity.
- Interest expense and loan-cost amortization declined to $7.2 million in Q2 from $17.4 million, and to $14.0 million for the half year from $29.3 million. The filing attributes the reduction mainly to lower LIBOR and amortization of default interest and late charges, partly offset by convertible-note interest.
- Q2 results included an $800,000 gain from a San Francisco transfer-tax settlement, a $189,000 billing-dispute gain, a $197,000 gain on sale of FF&E, and $296,000 of transaction costs related to the Mr. C acquisition. The half-year results also included a $481,000 insurance-claim gain.
- Common shares outstanding increased from 38.3 million at December 31, 2020 to 57.3 million at June 30, 2021. The company raised equity through multiple programs, including its at-the-market offering, SEDA, Lincoln Park agreement and Virtu distribution agreement; it also exchanged Series B preferred shares for common stock. These transactions supported liquidity but increased potential dilution.
- The common-stock dividend remained suspended. The company planned 2021 capital expenditures of approximately $20 million to $30 million and said future common dividends would be evaluated quarterly. No earnings or operating forecast was provided.
Outlook, risks and contingencies
Management said hotel operating levels and future financial performance remained uncertain. Risks include renewed COVID-19 surges, travel restrictions, hotel closures, access to capital, interest-rate changes, cash-trap provisions on certain mortgage loans, and potential lender remedies if obligations or covenants are not met. Approximately $1.1 billion of debt was variable-rate; a 25-basis-point rate increase was estimated to affect annual results by approximately $2.7 million. The company also noted that its minimum advisory fee can remain payable even if market capitalization or performance declines.
Related-party matters warrant attention: Ashford LLC advises and asset-manages the portfolio, and Ashford-affiliated entities provide other services. The SEC had issued subpoenas seeking information about related-party transactions and related accounting and controls; the company said it was responding. A California employment-related matter had approximately $500,000 accrued, subject to partial indemnification. Other disclosed proceedings included an Accor management-contract dispute, with no amount accrued, and a certified California employment class action for which the company said any potential loss was not reasonably estimable. The company reported that a previously identified material weakness in debt-transaction review controls was remediated as of June 30, 2021.
Subsequent event: On August 5, 2021, Braemar acquired the 138-room Mr. C Beverly Hills Hotel and five adjacent luxury residences for approximately $74 million, subject to adjustments. Consideration included $10 million cash, 2.5 million operating-partnership units, 500,000 warrants and assumption of a $50 million mortgage; Braemar repaid $20 million of that mortgage at closing.
Investor verification priorities
- Track hotel occupancy, ADR, RevPAR and cash generation against the pandemic-recovery comparisons and the company’s seasonal patterns.
- Review unrestricted versus restricted liquidity, manager-held cash availability, working-capital movements and the funding of planned capital expenditures.
- Assess debt maturities, extensions, variable-rate exposure, cash-trap restrictions and the terms and potential dilution of convertible notes and equity-raising programs.
- Monitor common-dividend policy, preferred-dividend obligations and additional equity issuance; reconcile share-count growth with proceeds raised.
- Follow the SEC inquiry, related-party arrangements, litigation accruals and the integration and financing of the Mr. C acquisition.