Braemar Hotels & Resorts Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Braemar is a REIT focused on luxury hotels and resorts; at quarter-end it owned interests in 16 hotels with 4,192 rooms (3,957 net rooms). Results are unaudited.
Financial performance
- Q2 revenue: Hotel revenue was $186.7 million, up 6.8% year over year. Operating income was $17.4 million, down 35.0%; operating margin was approximately 9.3%, versus 15.3%.
- Q2 earnings: Net loss attributable to the company was $1.8 million, compared with income of $14.4 million a year earlier. Net loss attributable to common stockholders was $13.0 million, or $0.20 per diluted share, versus income of $10.3 million, or $0.12 per diluted share.
- Six-month results: Revenue was $402.0 million, up 19.4%; operating income was $55.2 million, up 3.7%. Net income attributable to the company was $14.2 million, down 51.1%; common-stockholder loss was $9.8 million, or $0.14 per diluted share, versus income of $21.7 million, or $0.27 per diluted share.
- Hotel metrics: Q2 portfolio occupancy was 70.91% versus 71.15%; ADR was $430.68 versus $435.24; and RevPAR was $305.39 versus $309.68. For the first half, occupancy rose to 67.90% from 63.18%, ADR increased to $491.69 from $481.70, and RevPAR increased to $333.84 from $304.32. Period comparisons include acquired hotels, so are not fully like-for-like.
- Cash flow and investment: Six-month operating cash flow was $62.0 million, versus $79.8 million. Investing used $36.1 million, including $36.2 million in hotel improvements; financing used $150.1 million. Cash and cash equivalents were $128.0 million at June 30, down from $261.5 million at year-end; restricted cash was $63.4 million.
- Debt and liquidity: Net indebtedness was $1.136 billion, down from $1.334 billion at year-end. Approximately $1.1 billion was variable-rate debt; management estimated a 25-basis-point rate move would affect annual results by about $2.6 million before considering caps. The company reported compliance with debt covenants at June 30 and net debt to gross assets of 37.3%. A $293.2 million mortgage was in a cash trap, with approximately $1.1 million of restricted cash subject to it.
- Margins and costs: Q2 hotel revenue grew, but hotel operating expenses increased 10.2%, property taxes, insurance and other rose 78.1%, and interest expense and loan-cost amortization increased to $23.6 million from $10.3 million. The filing attributes the interest increase mainly to higher rates and the Scottsdale acquisition.
Material changes and notable items
- Q2 revenue growth reflected the December 2022 acquisition of Four Seasons Resort Scottsdale and higher food-and-beverage revenue; comparable-property room revenue was lower. First-half results also included Dorado Beach, acquired in March 2022.
- In June, Braemar extended a $435 million mortgage secured by four hotels for 12 months, paying down $142 million with corporate cash and reducing the balance to approximately $293 million.
- In July 2023, after quarter-end, Braemar entered a $200 million senior secured facility: a $150 million term loan and $50 million revolver, with approximately $46 million drawn on the revolver at closing. Term-loan proceeds repaid mortgages on three properties. The facility is interest-only for three years, with SOFR-based pricing and leverage and fixed-charge-coverage covenants.
- Preferred dividends and deemed dividends increased the burden on common shareholders. In the first half, the company raised $97.9 million net from preferred stock, repurchased 3.9 million common shares for approximately $18.9 million, and completed its $25 million repurchase authorization.
- A $2.3 million first-half gain on debt extinguishment resulted from repayment of the Dorado Beach mortgage. Derivative gains were $0.7 million for the first half, including $4.1 million of realized interest-rate-cap gains offset by unrealized losses.
Outlook, risks and contingencies
- The filing provides no quantified full-year operating guidance. Management expects cash flow and existing cash to cover anticipated operating needs, debt interest and principal payments (excluding potential final-maturity payments and extension paydowns), capital expenditures, and REIT-required dividends over the next 12 months, but gives no assurance.
- Management highlights exposure to rising interest rates and inflation, lodging demand and economic volatility, capital-market access, refinancing and maturity risk, cash-trap provisions, weather disruptions, and the ability to maintain REIT qualification. A large portion of debt is variable-rate.
- The company expects to invest approximately $25 million in a renovation of Mr. C Beverly Hills, rebranded as Cameo Beverly Hills and available for booking through Hilton beginning August 4, 2023. The renovation is expected to finish by the end of 2025; the hotel is planned to join LXR Hotels & Resorts afterward.
- A California employment class action involving a hotel manager remains unresolved. The company says a loss is reasonably possible but not reasonably estimable; no amount was accrued. Other legal proceedings were not expected by management to have a material adverse effect, though outcomes remain uncertain.
- Management disclosed a material weakness in controls over complex transactions and earnings-per-share accounting, related to deemed dividends on redeemable preferred stock. Disclosure controls were deemed ineffective at June 30; remediation was not yet complete. Management nevertheless stated the financial statements were fairly stated in all material respects.
Most important facts for investors to verify
- Near-term refinancing and extension requirements, including the impact of the new secured facility, its covenants, and the cash-trapped mortgage.
- Whether higher interest rates, hotel operating costs, and preferred-stock dividends continue to pressure earnings and common-stockholder returns.
- Like-for-like hotel performance, separating acquired properties and renovations from comparable-property trends.
- Progress in remediating the EPS-related material weakness and the accuracy of future common-stockholder earnings reporting.
- Cash needs and funding for the planned Cameo Beverly Hills renovation, other capital projects, and dividends.
- Developments in the employment class action and any resulting exposure or change in accruals.