Braemar Hotels & Resorts Inc. — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Braemar is a REIT investing in luxury hotels and resorts. At quarter-end, it owned interests in 13 hotels with 3,719 rooms (3,484 net rooms). Comparisons are affected by the April 2018 acquisition of the Ritz-Carlton, Sarasota, the June 2018 sale of the Tampa Renaissance, and the January 2019 acquisition of the Ritz-Carlton, Lake Tahoe. Dollar figures below are in millions unless noted.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $128.5 | $102.5 |
| Operating income | $14.1 | $14.3 |
| Net income (loss) attributable to Braemar | $(1.0) | $4.0 |
| Net income (loss) attributable to common stockholders | $(3.5); $(0.11) per share | $2.3; $0.07 per share |
| Net cash from (used in) operations | $(0.6) | $3.9 |
| Adjusted EBITDAre (non-GAAP) | $34.8 | $30.1 |
| Adjusted FFO (non-GAAP), available to common stockholders and OP unitholders | $19.2 | $19.6 |
- Revenue rose 25.4%, while total expenses increased 29.7%. Operating margin was approximately 11.0%, down from 13.9%.
- Portfolio occupancy was 75.38% versus 78.67%; ADR increased to $318.53 from $266.01; RevPAR increased to $240.11 from $209.27. For the 11 hotels owned throughout both periods, RevPAR was nearly unchanged at $209.75 versus $210.09.
- Interest expense and loan-cost amortization rose 39.4% to $14.2 million, reflecting additional acquisition debt and higher average LIBOR (2.50% versus 1.65%). A $0.9 million unrealized derivative loss also weighed on results, versus a $0.1 million gain in Q1 2018.
- Cash, cash equivalents and restricted cash totaled $160.1 million at March 31, including $73.8 million unrestricted cash. Cash and equivalents alone fell from $182.6 million at year-end. Investing activities used $148.9 million, principally for the Lake Tahoe acquisition ($112.1 million) and hotel improvements ($36.6 million); financing activities provided $51.1 million.
- Indebtedness was $1,054.5 million before deferred loan costs ($1,046.7 million net on the balance sheet), versus $992.6 million before costs at year-end. All debt was variable-rate. Management estimated a 25-basis-point rate change would affect annual results by approximately $2.6 million.
Material changes and unusual items
- The $120 million Ritz-Carlton, Lake Tahoe acquisition contributed $13.5 million revenue and $3.0 million net income after its January 15 closing; it was financed in part by a $54 million, five-year interest-only mortgage.
- On January 22, Braemar refinanced approximately $186.8 million of debt with a $195 million, five-year interest-only loan at LIBOR plus 1.70%, secured by the Capital Hilton and Hilton La Jolla Torrey Pines.
- Q1 2019 included $6.0 million of hurricane-related business-interruption revenue, compared with $4.9 million in Q1 2018; the prior period also included $1.8 million of wildfire-related revenue. No related insurance proceeds were received in either quarter. The Ritz-Carlton, St. Thomas was closed for renovation beginning March 1, 2019.
- Adoption of the lease standard on January 1, 2019 added $82.3 million of right-of-use assets and $60.6 million of operating lease liabilities at quarter-end; management said adoption did not materially affect the income statement or cash flows.
Outlook, risks and contingencies
The filing provides no specific earnings or operating guidance. Management said existing cash and expected operating cash flow should cover anticipated requirements for the next 12 months, including interest, working capital, capital expenditures and REIT-related distributions, excluding potential final-maturity principal payments. It expects to rely on debt and equity markets for acquisitions and significant capital projects. The company noted hotel seasonality and warned that reduced property performance could trigger lender cash traps, restricting access to hotel cash. At March 31, it reported compliance with debt covenants; the secured revolver matured in November 2019, subject to extension options. Legal proceedings were ongoing, but management did not expect their resolution to materially affect financial position or results, while acknowledging outcomes are uncertain. No material changes to the 2018 Form 10-K risk factors were reported.
Additional investor considerations include the company’s 100% variable-rate debt exposure, hotel renovation and operating risks, and related-party arrangements: Ashford LLC advises and asset-manages the portfolio, and affiliated entities provide services. The January 2019 funding agreement provides for up to $50 million (potentially $100 million by mutual agreement) of acquisition-related funding in exchange for hotel FF&E; $10.3 million was due in connection with the Lake Tahoe acquisition as future FF&E purchases.
Most important facts for investors to verify
- Whether comparable-hotel demand, especially occupancy and RevPAR, stabilizes and whether revenue growth from acquisitions translates into improved operating income and cash flow.
- Debt maturities, extensions and refinancing terms, covenant headroom, and sensitivity to higher rates given the all-variable-rate debt structure.
- Timing and remaining amounts of hurricane-related insurance recoveries and the St. Thomas renovation reopening and operating costs.
- Capital spending needs, unrestricted liquidity, and the availability and terms of external financing and the Ashford-related FF&E funding.
- Performance and distributions after preferred dividends, and the assumptions behind non-GAAP Adjusted EBITDAre and Adjusted FFO.