Braemar Hotels & Resorts Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, dollar amounts below are in millions. Braemar is a REIT focused on luxury hotels and resorts; it owned interests in 13 hotels with 3,722 rooms at quarter-end.
Financial results and liquidity
- Revenue: Q2 revenue was $12.9, down 89.1% from $118.5 a year earlier. Six-month revenue was $130.4, down 47.2% from $247.0. The declines reflected COVID-19’s effect on hotel demand and closures.
- Hotel performance: Q2 occupancy was 6.81% versus 79.98%; RevPAR was $19.24 versus $232.60. For the first half, occupancy was 33.25% versus 77.69% and RevPAR was $113.53 versus $236.33. First-half ADR increased to $341.44 from $304.19.
- Profit and loss: Q2 operating loss was $39.9, compared with operating income of $12.7 in 2019; net loss was $51.5 versus $5.6, and loss attributable to common stockholders was $46.3 versus $7.0. For the first half, operating loss was $43.1 versus income of $26.8; net loss was $66.9 versus $6.9, and common-stockholder loss was $61.8 versus $10.6.
- Cash flow: First-half operating cash flow was negative $23.3, compared with positive $32.5 in 2019. Investing cash outflow was $9.8 versus $183.2, largely reflecting lower capital spending and no hotel acquisition in 2020. Financing provided $46.7 versus $42.7. Cash, cash equivalents and restricted cash totaled $144.0 at June 30, including $102.6 unrestricted cash and $41.5 restricted cash. The company used $43.2 of cash, cash equivalents and restricted cash during Q2.
- Debt and balance sheet: Debt principal was approximately $1.13 billion, all variable-rate; indebtedness net of loan costs was $1.12 billion. Total assets were $1.72 billion and total equity was $302.1 million. A 25-basis-point rate change was estimated to affect annual results by approximately $2.8 million.
Material changes and notable items
- COVID-19 led the company to suspend operations at 11 of 13 hotels during much of Q2; two remained closed at June 30. As of August 4, the other 11 were open. Q2 room revenue fell 91.3% year over year.
- The company drew its $75 million revolving facility and, on June 8, converted it to a $65 million secured term loan after repaying $10 million. The amended facility has an October 2022 maturity, quarterly $5 million amortization beginning March 2021, revised covenants, and no ability to reborrow repaid amounts.
- Beginning April 1, the company missed at least one interest payment under nearly all loan agreements, constituting defaults. Forbearance or other agreements conditionally waived or deferred defaults on approximately $760 million of roughly $1.1 billion in property-level debt. Lenders may accelerate debt or foreclose if defaults are not resolved.
- Common dividends were suspended for Q1 and Q2, with management indicating they were likely suspended for all of 2020 and not expected in the foreseeable future. Preferred dividends remained declared in the reported period.
- First-half capital improvements were $12.3 million. Management reduced planned 2020 capital spending to $15–$25 million and reported efforts to cut hotel and corporate costs.
- Hurricane-related business-interruption revenue was $4.0 million in the first half, including $0.4 million in Q2. Q2 also included $2.2 million of loan-cost and exit-fee write-offs associated with lender amendments.
Outlook, risks and contingencies
- Management expects COVID-19 to materially harm results, financial position and cash flow for at least the remainder of 2020 and into 2021; the full impact could not be reasonably estimated. Management cited improving monthly results in June but warned that renewed pandemic-related disruption could reverse that trend.
- The company concluded that substantial doubt exists about its ability to continue as a going concern within one year after issuance of the financial statements. It said available cash could be exhausted within 12 months under certain circumstances and that financing, asset sales and additional forbearance could not be counted as probable remedies for this assessment.
- The company was working to finalize a forbearance agreement on its last mortgage loan then in default; success was not assured. Forbearance may bring higher costs and rates, tighter covenants and other lender protections. Turning over collateral hotels to lenders was also identified as a possible alternative.
- Other risks include cash-trap provisions, ground-lease obligations, reliance on Ashford LLC for advisory and corporate services, and related-party arrangements. The SEC issued subpoenas to Braemar and related Ashford entities seeking information on related-party transactions and controls; the company was responding and could not predict the outcome.
- Accor litigation over the Sofitel Chicago management agreement was ongoing. A separate hotel-manager employment-practices case could result in an estimated $0.3–$0.5 million loss if settled; no amount was accrued, and a trial loss was not estimable. The filing also identifies other legal proceedings.
Important facts for investors to verify
- Progress and terms of the remaining loan forbearance, including whether defaults are cured and whether lenders exercise acceleration or foreclosure rights.
- Unrestricted cash burn, availability of restricted and manager-held reserves, and compliance with the amended term-loan covenants and $20 million minimum-liquidity requirement.
- Hotel reopening status, occupancy, RevPAR and cash-flow recovery, particularly given management’s warning of possible renewed pandemic disruption.
- Whether the company can meet debt service, preferred dividend and capital requirements while common dividends remain suspended.
- Developments in the SEC inquiry, Accor dispute and California employment litigation, as well as any resulting costs or financial-statement impacts.