Braemar Hotels & Resorts Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. Braemar owns interests in 16 luxury hotels and resorts, with 4,192 rooms, and operates as a REIT. Its hotels are managed by third parties, while Ashford LLC provides advisory and asset-management services.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Hotel revenue | $159.8 | $161.2 | $561.8 | $498.0 |
| Operating income | $0.7 | $3.1 | $55.8 | $56.3 |
| Net income (loss) | $(22.6) | $(8.4) | $(9.1) | $23.9 |
| Net income (loss) attributable to common stockholders | $(33.1) | $(16.7) | $(42.9) | $2.8 |
| Basic loss per share | $(0.50) | $(0.24) | $(0.63) | $0.04 |
| Adjusted EBITDAre | $27.0 | $34.0 | $139.3 | $133.3 |
| Adjusted FFO available to common stockholders and OP unitholders | $(5.4) | $12.6 | $41.1 | $80.6 |
Operating margin, calculated as operating income divided by hotel revenue, was approximately 0.4% in Q3 2023 versus 1.9% a year earlier, and 9.9% for the first nine months versus 11.3%. These are simple calculations from reported figures. Preferred dividends and deemed dividends materially widened the loss attributable to common stockholders.
- Q3 operating indicators: Across all hotels, occupancy was 68.37% versus 71.50%, ADR was $379.97 versus $398.16, and RevPAR was $259.78 versus $284.69. For the 15 comparable hotels, RevPAR fell to $263.79 from $284.69.
- Nine-month indicators: Across all hotels, occupancy was 68.06% versus 66.00%, ADR was $453.87 versus $451.01, and RevPAR was $308.88 versus $297.66. The two acquired hotels contributed $36.8 million of the year-over-year increase in rooms revenue; revenue at the 14 comparable hotels was broadly flat.
- Cash flow: Operating cash flow was $73.0 million versus $104.0 million for the first nine months. Investing used $55.6 million, including $55.6 million of hotel improvements. Financing used $126.3 million. Cash and cash equivalents were $149.5 million at quarter-end, down from $261.5 million at year-end 2022; restricted cash was another $57.3 million.
- Debt and liquidity: Net indebtedness was $1,178.7 million, compared with $1,334.1 million at year-end. The company reported net debt to gross assets of 38.6%. Approximately $1.1 billion of debt was variable-rate; management estimated a 25-basis-point rate increase would add about $2.8 million in annual interest before considering interest-rate caps. The company said it was in compliance with debt covenants.
Material changes and financing
- On July 31, Braemar entered a $200 million secured facility: a $150 million term loan and $50 million revolver, with potential expansion subject to conditions. The facility is interest-only, has a three-year initial term and a one-year extension option, and is secured by three hotels. Proceeds refinanced mortgages on those properties; about $46 million was drawn on the revolver at closing.
- In June, Braemar extended a $435 million mortgage loan secured by four hotels and paid down $142 million. The balance was about $293 million at September 30.
- In September, the Four Seasons Resort Scottsdale mortgage was increased from $100 million to $140 million and its final maturity extended to December 2028. After quarter-end, the Ritz-Carlton Lake Tahoe loan maturity was extended to January 2025, with a one-year extension option.
- Higher rates and the Scottsdale acquisition contributed to interest expense rising to $23.3 million in Q3 from $14.5 million, and to $69.8 million for nine months from $33.3 million. The nine-month period also included a $2.3 million gain on extinguishment of debt and $2.8 million of loan-cost and exit-fee write-offs.
- Preferred-stock financing increased redeemable Series E and Series M balances. The Series E and M offerings closed in February 2023; the company reported approximately $369.5 million and $47.6 million of net proceeds, respectively. Preferred dividends totaled $31.8 million for the first nine months, versus $13.4 million a year earlier.
- Braemar repurchased about 3.9 million common shares for approximately $18.9 million during the first nine months and completed its $25 million repurchase authorization by September 30.
Outlook, risks and unusual items
- Management said operating cash flow and existing cash were expected to cover anticipated interest and principal payments, working capital, capital expenditures and REIT-required dividends for the next 12 months. This assessment excludes potential final-maturity principal payments and extension-test paydowns; management gave no specific earnings or revenue guidance.
- The company expected a $0.05-per-share quarterly common dividend for 2023, but stated that future dividends remain subject to quarterly board review. Its stated liquidity sources include operating cash flow, cash balances, capital markets and the revolving facility.
- Risks include high variable-rate exposure, refinancing and extension requirements, covenant compliance, inflation and operating costs, access to debt and equity capital, hotel seasonality, and possible cash restrictions under lender cash-trap provisions. No mortgage loans were subject to cash traps at September 30.
- A California employment class action remains unresolved. The company said a loss was reasonably possible but not reasonably estimable, and accrued no amount. A Q3 cyber incident may have exposed employee personal information; customer information exposure was not identified, hotel operations were minimally affected, and additional costs remain possible but uncertain.
- Management concluded disclosure controls were not effective at September 30 due to an unremediated material weakness in accounting for complex transactions affecting earnings per share. Management said the financial statements were fairly stated in all material respects under GAAP.
- The planned Cameo Beverly Hills renovation is expected to cost approximately $25 million, with completion expected by the end of 2025, when the hotel is expected to join Hilton’s LXR brand.
Important facts for investors to verify
- Upcoming debt maturities, extension conditions, required paydowns, borrowing availability and compliance with the facility’s leverage and fixed-charge coverage covenants.
- Whether hotel-level performance and margins stabilize, particularly at comparable properties, and how acquisition-related revenue compares with its added operating costs.
- Cash available for operations and capital spending after restricted reserves, debt service, preferred dividends and any common dividends.
- The cost, timing and funding of the Cameo renovation, and whether further property capital requirements emerge.
- Progress remediating the earnings-per-share control weakness, and developments in the employment litigation and cyber incident.