Braemar Hotels & Resorts Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Braemar owns interests in 13 luxury hotels and resorts, with 3,722 rooms (3,487 net rooms), and is a REIT. Its hotels are operated by third-party or affiliated managers.
Financial performance
Amounts below are in millions, except per-share data and hotel operating statistics.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $44.8 | $118.9 | $175.2 | $365.9 |
| Operating income (loss) | $(14.3) | $7.3 | $(57.4) | $34.1 |
| Net income (loss) | $(23.1) | $(9.0) | $(94.5) | $(15.9) |
| Net loss attributable to common stockholders | $(21.2) | $(11.9) | $(87.2) | $(22.5) |
| Basic and diluted loss per share | $(0.63) | $(0.37) | $(2.63) | $(0.71) |
| Adjusted EBITDAre | $(3.1) | $28.6 | $(3.2) | $95.9 |
| FFO available to common stockholders and OP unitholders | $(16.0) | $3.8 | $(54.2) | $25.5 |
| Adjusted FFO | $(9.3) | $12.4 | $(33.8) | $49.4 |
Hotel operating metrics: Q3 occupancy was 26.88%, versus 83.21% a year earlier; ADR was $304.68, up from $282.72; and RevPAR was $81.89, down from $235.24. For the first nine months, occupancy was 31.11% versus 79.55%, ADR was $330.77 versus $296.62, and RevPAR was $102.90 versus $235.97.
Cash flow and balance sheet: Operating cash flow was negative $35.6 million for the first nine months, versus positive $49.0 million in 2019. Investing cash outflow was $18.9 million and financing cash inflow was $47.1 million. At September 30, cash and cash equivalents were $88.2 million and restricted cash was $34.7 million; cash, cash equivalents and restricted cash totaled $122.9 million. Debt, net, was $1.133 billion, compared with $1.058 billion at year-end 2019. Total assets were $1.702 billion and total equity was $282.6 million.
Material changes and unusual items
- COVID-19 drove a 62.4% year-over-year Q3 revenue decline. Braemar temporarily suspended operations at 11 of 13 hotels in March; 12 were open by September 30, and The Clancy reopened October 1.
- Hotel operating costs fell, but not enough to offset lost revenue. Q3 total expenses were $69.2 million, down from $110.4 million. The company recorded a $10.1 million gain from finalizing its Hurricane Irma insurance settlement; the settlement included a $6.5 million receivable at quarter-end.
- Quarterly results included a $3.6 million unrealized gain on derivatives and $3.6 million of other expense, primarily a realized loss on interest rate floors. Nine-month results also included $3.6 million of loan-cost and exit-fee write-offs.
- The company corrected its accounting for default interest and late charges under troubled debt restructurings: rather than reversing them immediately, it capitalized them into loan balances for amortization over the remaining loan terms. This added $4.0 million and $8.6 million of interest expense for Q3 and the first nine months, respectively, and followed a $4.6 million adjustment to previously reported Q2 results. Management deemed the prior-period error immaterial; the filing revises comparative statements.
- Common dividends were suspended for Q1–Q3 2020; management said it did not expect common dividends in the foreseeable future. Preferred dividends continued to be declared.
Liquidity, debt, outlook and risks
- All reported debt was variable-rate. Management estimated that a 25-basis-point rate change would affect annual results by approximately $2.8 million. The secured $75 million revolving facility was amended in June into a $65 million term loan, with $5 million quarterly amortization beginning March 2021, a maturity in October 2022, and a $20 million minimum unrestricted-cash covenant through June 2021. The fixed-charge coverage covenant was waived through March 2021.
- Beginning April 2020, the company missed at least one interest payment under nearly all loan agreements. It entered into forbearance or other agreements covering loans secured by multiple hotels; as of September 30, it reported no loans in default and said it was current on ground-lease rent. Lenders may have acceleration and foreclosure rights if the company breaches applicable agreements.
- Management reduced hotel expenses, limited planned 2020 capital expenditures to approximately $25 million, drew its revolving facility before its conversion, and worked with lenders and managers to access reserves. It reported $21.1 million of cash, cash equivalents and restricted cash used in Q3. Management concluded these measures alleviated substantial doubt about going concern, while warning that conditions could change and future performance could not be estimated reliably.
- Management expected the pandemic to materially hurt results, financial position and cash flow through at least the remainder of 2020 and into 2021, potentially longer. No specific recovery timetable or quantified earnings guidance was provided. A resurgence of infections, travel restrictions, prolonged weak demand, liquidity needs, refinancing access, covenant compliance and additional hotel closures remain key risks.
- The filing reports an SEC administrative investigation involving the company and related Ashford entities, including requests concerning related-party transactions and accounting controls; the outcome is unknown. It also discloses a material weakness in review controls over troubled-debt-restructuring accounting, rendering disclosure controls ineffective as of September 30. Management said it would use a third-party accounting expert for similar transactions.
- Other contingencies include Accor litigation concerning the Sofitel Chicago management agreement and California employment litigation involving a hotel manager. Certain potential losses were not estimable and no amounts were accrued for the described matters.
Investor verification priorities
- Confirm the terms, ongoing compliance and payment schedules under each loan forbearance, including deferred interest, capitalized charges and future amortization.
- Track unrestricted liquidity, use of restricted reserves, cash burn, the $20 million minimum-liquidity covenant and the ability to fund hotel operations and capital needs.
- Assess the pace of occupancy and RevPAR recovery, hotel reopening status and whether the company’s outlook changes as pandemic restrictions evolve.
- Review remediation of the material weakness and the corrected Q2/Q3 reporting, including the effects of capitalized default interest on reported and adjusted metrics.
- Monitor the SEC investigation, related-party arrangements and legal contingencies, as well as common and preferred dividend status.
Adjusted EBITDAre, FFO and Adjusted FFO are non-GAAP measures; the filing cautions that they are not substitutes for GAAP results or operating cash flow.