Braemar Hotels & Resorts Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Braemar owns and operates a portfolio focused on luxury, high-RevPAR hotels. At quarter-end it owned interests in 12 hotels with 3,549 total rooms. The company is a REIT and is externally advised by Ashford LLC.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $108.8m | $108.1m | $332.5m | $321.5m |
| Operating income | $11.2m | $9.6m | $46.9m | $29.2m |
| Net income (loss) | ($0.6m) | ($0.2m) | $16.5m | ($0.1m) |
| Net income (loss) attributable to common stockholders | ($3.6m) | ($2.7m) | $8.6m | ($7.0m) |
| Basic and diluted EPS | ($0.12) | ($0.09) | $0.25 | ($0.25) |
- Revenue and operating trends: Q3 hotel revenue rose 0.7%. Rooms revenue declined 3.9% and food-and-beverage revenue declined 8.5%, partly offset by higher other hotel revenue, including $3.8m of hurricane-related business interruption revenue. For the nine-month period, revenue rose 3.4%; other hotel revenue included $13.9m of hurricane-related business interruption revenue and $1.9m of Napa wildfire-related revenue.
- Margins: Operating margin was approximately 10.3% in Q3 versus 8.9% a year earlier, and 14.1% for the nine months versus 9.1%. Lower hotel expenses and higher revenue supported operating income. These comparisons also reflect portfolio changes and unusual items.
- Hotel indicators: Across all hotels, Q3 occupancy was 85.86%, ADR $272.72 and RevPAR $234.17, versus 83.71%, $254.65 and $213.17, respectively, in 2017. For the nine comparable hotels, nine-month RevPAR declined to $220.15 from $226.82, as ADR fell despite higher occupancy.
- Cash flow: Nine-month operating cash flow was $52.9m, compared with $46.6m. Investing cash outflow was $141.5m, including $177.9m for the Sarasota acquisition and $51.6m of hotel improvements, partly offset by sale and insurance proceeds. Financing cash inflow was $142.1m. Cash and cash equivalents were $163.8m; including restricted cash, total cash was $238.8m.
- Debt and liquidity: Debt principal was $993.3m ($985.7m net of deferred loan costs), up from $826.2m at year-end 2017. All debt was variable-rate; a 25-basis-point rate change would affect annual results by approximately $2.5m, before considering hedges. The $100m revolving facility had no borrowings outstanding. The company reported compliance with debt covenants, including a 48.5% leverage ratio and 2.06x fixed-charge coverage ratio under the facility.
- Distributions: Common dividends declared were $0.16 per share for Q3 and $0.48 per share for the nine-month period. Preferred dividends were $5.1m for the nine months.
- Non-GAAP measures: Nine-month Adjusted EBITDAre was $98.9m versus $87.3m; Adjusted FFO available to the company and operating-partnership unitholders was $59.8m versus $56.9m. These company-defined measures are not substitutes for GAAP results or operating cash flow.
Material changes and unusual items
- Acquired the Ritz-Carlton, Sarasota in April for $171.4m, plus a vacant-land parcel for $9.7m; financed the acquisition with a $100m floating-rate mortgage.
- Sold the Tampa Renaissance in June for $68.0m, recording a $15.7m gain. The sale and acquisition were part of a reverse 1031 exchange.
- Refinanced $357.6m of mortgages with a $435m interest-only loan, initially due in 2020 with extension options. The refinancing generated $4.2m of loan-cost and exit-fee write-offs during the nine months.
- Interest expense and loan-cost amortization increased 25.0% to $35.9m for the nine months, reflecting additional borrowing and higher LIBOR.
- Advisory fees rose to $15.9m from $5.8m for the nine months, including a $2.2m incentive fee and higher equity compensation. Approximately $2.2m of equity-compensation expense related to accelerated vesting following the death of an executive officer.
- Hurricanes Irma and Maria continued to affect the Ritz-Carlton, St. Thomas; approximately 83 of its 180 rooms were in service while renovations continued. The company recorded a $5.4m net liability for hurricane insurance proceeds received in excess of recognized related costs and revenue at quarter-end.
- Adopted ASU 2018-07 in Q3, changing the measurement of nonemployee share-based compensation to grant-date fair value. Management said the change materially affects equity-compensation expense; prior periods were not restated.
Outlook, risks and contingencies
No specific earnings or operating guidance was provided. Management said existing cash and expected operating cash flow should cover anticipated interest and principal payments, working capital, capital expenditures and REIT-required dividends over the next 12 months, excluding potential final maturity principal payments. The filing highlights reliance on debt and equity markets for acquisitions and property investment, rising interest rates, refinancing and covenant risks, seasonal hotel performance, possible cash traps under certain loans, and conflicts of interest involving the external advisor and related parties. Significant stated loan maturities include a $42m mortgage in December 2018 and several loans in 2019; extensions are subject to conditions. Management did not expect pending litigation to have a material adverse effect, while noting outcomes remain uncertain. It reported no material changes to the prior annual report’s risk factors and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and timing of the St. Thomas renovation, remaining rooms out of service, and collectability and recognition of insurance recoveries.
- Comparable-hotel operating trends, particularly the nine-month RevPAR decline, and the extent to which reported revenue growth depends on acquisitions and business interruption proceeds.
- Ability to refinance or extend near-term maturities, interest-rate exposure on variable-rate debt, and continued covenant compliance.
- Recurring advisory and incentive fees, related-party service arrangements, and the ongoing effect of the revised equity-compensation accounting.
- Cash available for capital spending and dividends after restricted cash, debt service, and hotel renovation needs.