Braemar Hotels & Resorts Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Braemar is a REIT focused on luxury, high-RevPAR hotels. At quarter-end it owned interests in 15 hotels with 3,971 rooms (3,736 net rooms). Results reflect the continuing recovery in hotel demand and acquisitions of Mr. C Beverly Hills (August 2021) and The Ritz-Carlton Reserve Dorado Beach (March 2022).
Key financial results
Amounts below are in millions except per-share data and operating statistics.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Hotel revenue | $174.9 | $97.1 | $336.8 | $181.0 |
| Operating income (loss) | $26.8 | ($2.8) | $53.2 | ($6.5) |
| Net income (loss) | $16.7 | ($11.4) | $32.3 | ($22.4) |
| Net income (loss) attributable to common stockholders | $10.3 | ($15.5) | $21.7 | ($26.7) |
| Basic EPS | $0.14 | ($0.32) | $0.31 | ($0.61) |
| Adjusted EBITDAre | $50.1 | $19.6 | $99.3 | $36.2 |
| FFO available to common stockholders and OP unitholders | $30.1 | $0.6 | $60.2 | $5.5 |
| Adjusted FFO | $35.3 | $12.9 | $72.3 | $23.1 |
- Revenue and hotel trends: Q2 revenue rose 80.1% year over year. Occupancy was 71.15% versus 49.18%, ADR was $435.24 versus $382.21, and RevPAR was $309.68 versus $187.97. For the six-month period, revenue grew 86.1%; occupancy was 63.18% versus 43.13%, and RevPAR was $304.32 versus $174.92. Management attributed growth chiefly to recovery from COVID-19 and the two acquisitions; the acquired hotels contributed $15.3 million of Q2 revenue.
- Profitability: Q2 operating margin was approximately 15.3%, compared with a loss-making prior-year quarter. Hotel operating expenses rose 71.6%, less than revenue growth, while interest expense increased 42.3% to $10.3 million. Q2 net income included a $1.2 million unrealized derivative gain, substantially associated with warrants and interest-rate caps.
- Cash flow: Six-month operating cash flow was $79.8 million, versus $31.5 million. Investing cash outflow was $106.8 million, including $86.8 million for Dorado Beach and $19.9 million in hotel improvements. Financing cash inflow was $62.8 million. Cash and cash equivalents were $251.0 million at June 30; cash, cash equivalents and restricted cash totaled $299.1 million.
- Debt and liquidity: Indebtedness, net, was $1.238 billion, up from $1.173 billion at year-end 2021. Approximately $1.2 billion was variable-rate debt and $86.3 million was fixed-rate convertible notes. Management estimated that a 25-basis-point rate increase on variable debt would add about $2.9 million of annual interest expense. The company reported covenant compliance and no loans in default. Its $435 million and $195 million mortgage loans were in cash traps at quarter-end.
- Capital and dilution: Six-month financing included $71.0 million of preferred-stock proceeds. Common shares outstanding increased to 71.3 million from 65.4 million at year-end, including 6.0 million shares issued as part of the Dorado Beach acquisition. After quarter-end through August 3, Braemar reported additional net proceeds of $44.1 million from Series E and $6.5 million from Series M preferred shares.
Changes, outlook and risks
- Compared with Q2 2021, the improvement from a net loss to profit was driven by stronger hotel revenue and operating results, partly offset by higher hotel expenses and interest costs. The prior-year comparison also included a loan-cost write-off and gains on legal and asset settlements.
- The March 2022 Dorado Beach acquisition involved $104.0 million cash, 6.0 million common shares valued at approximately $35.0 million, and assumption of a mortgage with $54.0 million principal (fair value approximately $58.6 million). The company also refinanced the Park Hyatt Beaver Creek loan with a $70.5 million floating-rate loan.
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected operating cash flow and existing cash balances to cover anticipated interest and principal payments (excluding potential final-maturity payments), working capital, capital expenditures and required REIT distributions for the next 12 months, but gave no assurance. It noted reliance on capital markets for longer-term funding and capital improvements.
- Key risks: Variable-rate debt and rising interest rates; hotel and travel demand, including potential renewed COVID-19 effects; access to debt and equity capital; cash traps and lender remedies; required property renovation spending; and potential dilution from future securities issuance. The company also disclosed seasonality and its dependence on Ashford LLC for advisory and asset-management services, with related-party relationships and fees.
- Contingencies and unusual items: The Accor dispute was settled in February 2022; a $0.868 million gain related to the 2018 performance-test settlement was recorded in Q1, and a further $0.114 million of accrued interest was recognized in Q2. A certified California employment class action remains unresolved; no loss was accrued because the potential loss was not reasonably estimable. Management stated other proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- The company adopted convertible-instrument accounting guidance in January 2022, increasing reported debt and reducing equity by approximately $5.6 million; the adoption reduced Q2 non-cash interest expense by $0.273 million.
Important facts for investors to verify
- Whether hotel demand, occupancy, ADR and RevPAR remain strong, and how much reported growth depends on acquisitions versus comparable hotels.
- Debt maturities, extension conditions, cash-trap status and the effect of higher floating rates on interest expense and liquidity.
- Cash generation after hotel capital expenditures, debt service, preferred dividends and common distributions; management’s liquidity expectation excludes potential final-maturity payments.
- Potential dilution and distribution priority from common and redeemable preferred-stock issuance, convertible securities and other equity programs.
- Developments in the California employment litigation and the unresolved arbitration concerning Accor’s 2020 and 2021 performance tests.
- Related-party advisory costs and governance oversight, given Ashford Inc.’s role in advisory, management and other services.