BHR - Braemar Hotels & Resorts: Avoid The Commons Forever

2023-08-06 22:42:12 ET

Summary

• Braemar's dividend yield has been pushed to a 3-year high on the back of stock price weakness.
• The hotel REIT has seen adjusted funds from operations and revenue per available room decline over their year-ago comps.
• Dividend coverage sits at around 100%, but future payouts look uncertain against a $435 million debt maturity next year in June.

Braemar Hotels & Resorts ( BHR ) should not have the dire total returns it does, down 20.6% since the start of 2023 and sporting a steeper 70% loss over the last 5 years. I l ast covered this REIT early this year. The REIT focuses on full-service luxury hotels and resorts with a portfolio of 16 hotels with 3,957 net rooms as of the end of its fiscal 2023 second quarter. Its revenue per available room ("RevPAR") as of the end of the second quarter was $309, around 3.3x the average RevPAR for US hotels across all categories for 2022. Around 10 of its 16 properties are resort locations, a portfolio positioning that should have placed the REIT beyond the negative zeitgeist surrounding the impact of remote working on demand for urban hotels. Bulls would be right to flag that the dividend is seemingly on its way up, but the broader returns profile has always been negative.

The REIT last declared a quarterly cash dividend of $0.05 per share , in line with its prior payout and for a 6.1% annualized forward yield. This is the highest yield in over 3 years, but the income is not the prize here. The direction of Braemar's tangible book value ("TBV") has been the enemy of its shareholders for years. This came in at $372.7 million as of the end of its second quarter, down $15 million sequentially from $444.7 million in its year-ago quarter. This pullback has been more dramatic on a per share basis as Braemar's outstanding share count has ballooned 113% over the last 3 years. Critically, this has been dilution below TBV, the direct opposite action to typically accretive share offerings conducted at premiums to TBV.

Ashford And The TBV Conundrum

Braemar is externally advised by Dallas-based Ashford ( AINC ), a company that's down 90% over the last 5 years, currently sports a $30 million market cap, and whose other managed hotel REIT Ashford Hospitality Trust ( AHT ) looks set to transfer 19 portfolio hotels to its lenders. An externally managed REIT is only as good as its manager and Ashford's management has left Braemar's shareholders worse off. The pandemic was beyond their control, but total returns in the five years before the pandemic were also deeply negative. What's the play here? Avoid the commons.

The preferreds offer more value. The Series D preferreds ( BHR.PD ) and the convertible Series B preferreds ( BHR.PB ) offer a yield on cost of 9.17% and 9.97% respectively, markedly higher than the commons and have been significantly more stable over the last 3 years. To be clear, Braemar is being externally managed by a company that's presided over the aggregate loss of $1.05 billion in value over three companies over the last 5 years. Braemar's second-quarter earnings were decent. The hotel REIT recorded a $4.47 million beat on revenue which at $186.71 million was a 6.8% increase over its year-ago comp.

Total hotel operating expenses moved up $11.6 million to $125.25 million with food and beverage expenses recording a comparatively larger increase of 14% versus its revenue growth. Comparable RevPAR of $309 for all hotels fell 4.2% over the prior year with the comparable average daily rate ("ADR") also decreasing over its prior year by 5.2% to $436. Occupancy was at 70.9% as of the end of the second quarter, roughly flat from occupancy of 71% in the year-ago comp.

Balance Sheet And The Outlook For Growth

Net income attributable to common stockholders actually came in negative during the second quarter, a deterioration from a profit of $10.3 million in the year-ago period. This negative direction was majorly driven by interest expenses that jumped to $22.9 million from $9.7 million. However, adjusted funds from operations was $0.20 per diluted share for the second quarter on the back of adjusted EBITDAre of $46.3 million. The earnings were fundamentally decent with Braemar exiting the second quarter with cash and equivalents, including restricted cash, of $191.4 million. However, whilst AFFO could cover the annualized dividend by 100%, there is simply no room for further weakness. AFFO was down materially from $0.37 in the year-ago comp.

The REIT could lean on its cash pile to maintain the dividends to its common and preferred holders, but this is unlikely to be a prudent strategy in the medium to long term. At the core of Braemar's issue is $1.1 billion of loans held as of the end of the second quarter. This had a blended average interest rate of 7% with 79% of the total being fixed and the remaining 21% at floating rates. Braemar has had to extend the maturity of a $435 million mortgage loan secured by four properties by 12 months to June 2024. The REIT might have to explore asset divestitures to meet this new maturity or like the other Ashford hotel REIT simply hand back the four urban hotels to the lenders. Now, I'm rating Braemar as a sell against a falling AFFO profile and near-term debt maturity uncertainty.

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