Braemar Hotels & Resorts Inc. quarterly report, Q2 FY2017

Business context and reporting period

The supplied filing is Ashford Hospitality Prime, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017—not a filing under the requested company name, Braemar Hotels & Resorts Inc. The issuer mismatch should be verified. Ashford Prime was a REIT focused primarily on luxury, high-RevPAR hotels; at June 30 it owned interests in 13 hotels with 3,975 total rooms (3,740 net rooms).

Financial performance

Second-quarter total-portfolio RevPAR was $221.65, up 0.2%; occupancy declined to 84.07% from 86.47%, while ADR rose to $263.65 from $255.90. For the 11 comparable hotels, RevPAR increased 0.5% to $224.73. First-half total-portfolio RevPAR rose 2.6% to $212.35; comparable-hotel RevPAR increased 1.4% to $213.60.

At June 30, cash and cash equivalents were $129.7 million and restricted cash was $34.8 million. Debt was $915.0 million gross ($907.0 million net of deferred loan costs), up from $767.0 million gross at year-end 2016. Shareholders’ equity was $369.1 million. The company reported $30.6 million of first-half operating cash flow, $263.1 million of investing cash outflow and $232.3 million of financing cash inflow. Interest expense and loan-cost amortization were $18.1 million for the first half. Dividends declared were $0.16 per common share for Q2 and $0.32 for the first half.

Material changes versus prior comparable periods

• Revenue growth reflected the 2017 acquisitions of Park Hyatt Beaver Creek and Hotel Yountville, partly offset by the 2016 sale of Courtyard Seattle Downtown and weaker results at certain existing properties. Comparable first-half hotel revenue increased 0.9%.
• Common-stockholder results turned negative in both periods. First-half operating income fell 10.5%, while lower interest expense and reduced corporate and advisory costs partly offset higher depreciation and acquisition-related costs.
• Results included a $5.0 million one-time payment tied to the amended advisory agreement, $6.4 million of first-half transaction costs, and a $2.0 million write-off of loan costs and exit fees. Fair-value changes also affected earnings: first-half unrealized derivative losses were $1.0 million, versus gains of $6.1 million in 2016.
• The company acquired Park Hyatt Beaver Creek for $145.5 million and Hotel Yountville for $96.5 million. Related mortgage financing totaled $118.5 million. First-half hotel-property acquisition cash outflow was $243.7 million.
• It issued common stock for net proceeds of approximately $66.5 million and Series B preferred stock for approximately $40.2 million. Outstanding common shares increased to 31.95 million from 26.02 million at year-end 2016; Series B preferred shares increased to about 5.0 million.

Outlook, risks and unusual items

Management’s stated strategy was to concentrate future investment on luxury hotels, targeting properties with RevPAR at least twice the U.S. national average. Four hotels were designated non-core, with possible repositioning or sale. The company announced a 2017 common-dividend policy increase from $0.12 to $0.16 quarterly per share, a target leverage level of 45% net debt to gross assets, and a target cash balance of 10%–15% of gross debt. These are stated targets and policies, not guaranteed outcomes.

The amended advisory agreement became effective June 21, 2017. It fixes the base management fee at 0.70% and has an initial 10-year term, with potential successive 10-year renewals. Termination may require a termination fee and an additional “Uninvested Amount”; the agreement also sets a minimum net-worth covenant of $390 million plus 75% of qualifying post-2016 equity proceeds and restricts dividends if payment would breach that threshold. The agreement limits certain termination rights.

Most debt carried floating rates: $906.9 million of $915.0 million total debt was variable-rate. Management estimated a 25-basis-point rate increase would add approximately $2.3 million in annual interest expense at period-end balances. Interest-rate caps covered $847.5 million notional; the company reported compliance with debt covenants and no revolving-credit-facility borrowings at June 30. The credit-facility net-debt-to-EBITDA covenant ratio was 5.89x against a 6.00x limit, tightening to 5.75x beginning October 2017.

Management cited seasonality, capital-market access, refinancing and interest-rate exposure, hotel operating performance, REIT qualification requirements, and conflicts involving affiliated advisor and management parties as risks. None of the loan cash-trap provisions were triggered at quarter-end. A shareholder derivative suit was dismissed with prejudice as to the plaintiff on July 25, 2017, but a hearing on the plaintiff’s fee petition was scheduled for October 25, 2017. Management said other legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty. No formal earnings guidance was provided in the supplied text.

Important facts for investors to verify

• Confirm the issuer identity: the requested company is Braemar Hotels & Resorts Inc., while this filing names Ashford Hospitality Prime, Inc.
• Assess the advisory agreement’s long term, termination economics, growth covenant and minimum-net-worth/dividend restrictions, including the $5.0 million payment.
• Review debt maturities, extension conditions, covenant headroom, variable-rate exposure and interest-rate-cap coverage.
• Separate recurring operating performance from acquisition effects, advisory and transaction charges, refinancing costs, and derivative and investment fair-value movements; review the company’s definitions of Adjusted EBITDA and Adjusted FFO.
• Monitor the acquired hotels’ subsequent performance and any final purchase-price-allocation adjustments, particularly for Hotel Yountville.
• Check the outcome of the plaintiff’s fee petition and any material developments in other legal proceedings.