Braemar Hotels & Resorts Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Braemar owns interests in 13 luxury hotels with 3,722 total rooms and operates as a REIT. Results reflect the early impact of COVID-19; most subsequent loan defaults and hotel suspensions occurred after quarter-end.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $117.5 million | $128.5 million |
| Operating income (loss) | $(3.2) million | $14.1 million |
| Net loss attributable to common stockholders | $(15.5) million; $(0.48) per share | $(3.5) million; $(0.11) per share |
| Net cash used in operating activities | $0.9 million | $0.6 million |
| Adjusted EBITDAre | $18.5 million | $34.8 million |
| Adjusted FFO | $5.3 million | $19.2 million |
At March 31, cash and cash equivalents were $141.8 million, restricted cash was $45.4 million, and indebtedness was $1.14 billion gross ($1.13 billion net of deferred loan costs). Total liabilities were $1.31 billion. All debt was variable-rate; management disclosed that a 25-basis-point rate change would affect annual results by approximately $2.9 million. Interest expense and loan-cost amortization was $11.9 million for the quarter.
Operating performance and changes
- Occupancy fell to 59.77% from 75.38%; ADR rose to $348.16 from $318.53; RevPAR declined to $208.10 from $240.11.
- Revenue decreased 8.6%. Rooms revenue fell 8.2% and food and beverage revenue fell 10.3%. Higher room rates and the reopening of Ritz-Carlton, St. Thomas after hurricane-related renovations partly offset lower occupancy.
- Total expenses rose 5.5% to $120.7 million despite lower revenue. Hotel operating expenses increased 6.4%, and depreciation and amortization increased 9.9%. The company reported an operating loss versus operating income a year earlier.
- Q1 revenue included $3.6 million of hurricane business-interruption proceeds, versus $6.0 million in Q1 2019. The Ritz-Carlton, Lake Tahoe was acquired in January 2019, affecting comparability.
- Cash and cash equivalents increased from $72.0 million at year-end, primarily reflecting a $75 million draw on the revolving facility. Investing cash outflow was $6.6 million, including $7.5 million of hotel improvements.
Liquidity, outlook and material risks
- COVID-19: Management reported significant declines in occupancy and RevPAR, cancellations, and event postponements. By the filing date, 11 of 13 hotels had temporarily suspended operations; the other two were operating at reduced levels. Management said the pandemic’s full impact could not be reasonably estimated and expected a significant negative effect on 2020 results, financial position and cash flow.
- Liquidity actions: The company drew the full $75 million revolving credit facility, suspended its common dividend, reduced planned 2020 capital spending from $45–$65 million to $15–$25 million, and cut hotel staffing by approximately 90%. Management estimated hotel cash utilization at about $10 million monthly, debt interest at about $3 million monthly, and corporate G&A and advisory fees at about $1.3 million monthly. It also identified $17.0 million due from hotel managers as available for hotel costs, subject to access.
- Defaults and going concern: Although in compliance with debt covenants on March 31, the company did not make at least one interest payment on nearly all mortgage and mezzanine loans beginning in April. Those missed payments constituted events of default; defaults on more than $200 million of mortgage and mezzanine debt also triggered a default under the revolving facility. Lenders may increase rates, accelerate debt or foreclose on collateral. The company also missed rent payments on two ground leases after quarter-end. It was negotiating forbearance or waivers, but stated that substantial doubt existed about its ability to continue as a going concern for the following year. No successful forbearance or other remedy was assured.
- Capital and distributions: No common dividend was declared for Q1, and management indicated suspension would likely continue through the remainder of 2020. Preferred dividends were declared for the quarter, but the filing cautions they may not continue. No Series E or Series M preferred shares had been issued by May 22.
- Other items: Subsidiaries received Paycheck Protection Program loans after quarter-end and returned all proceeds by May 7. A California employment-practices lawsuit could result in a $300,000–$500,000 settlement loss; no amount was accrued. The filing also describes litigation with Accor concerning the Sofitel Chicago management agreement.
Guidance: The filing provides no conventional earnings or operating forecast. Management said the duration and full financial effects of COVID-19 were uncertain and that it could not assure cash resources would meet requirements over the next 12 months.
Investor verification priorities
- Obtain updates on lender and ground-lessor negotiations, defaults, any forbearance terms, acceleration notices, or foreclosure actions.
- Verify unrestricted cash, access to restricted reserves and manager-held funds, and actual cash burn as hotels reopen or remain closed.
- Track occupancy, ADR, RevPAR, hotel suspensions, reopening costs, and capital spending against management’s estimates.
- Confirm the status of common and preferred dividends and any ability to raise capital, including registration and preferred-share offerings.
- Review potential covenant and maturity obligations, including the effect of rate increases and the April 2020 Park Hyatt Beaver Creek loan extension.
- Monitor the Accor dispute and California employment litigation, including any settlement or updated loss estimate.