BHR - Braemar Hotels & Resorts: Bad Q2 Even Worse Balance Sheet

2023-08-08 12:16:46 ET

Summary

• Braemar Hotels & Resorts reported a net loss of $13 million in Q2 2023, with a decline in revenue per available room and average daily rate.
• Concerns arise from the company's substantial debt obligations due next year.
• The company's historical share price, a reflection of market sentiment, shows a long-term decline.

Introduction

In recent months, I have written about several hospitality REITs. These have ranged from select-service REITs such as Apple Hospitality REIT (APLE) to full-service REITs such as Pebblebrook Hotel Trust (PEB) and Hersha Hospitality Trust (HT). The focus of today's article, Braemar Hotels & Resorts (BHR), falls into the latter category. The company released its Q2 2023 earnings last week. In this article, I will evaluate the company based on the latest available information to determine if it should be a consideration for my portfolio.

The Portfolio

Braemar Hotels & Resorts is a full-service hospitality REIT. As at the end of Q2 2023, the company has a portfolio of 16 hotels, comprising approximately 4,000 rooms. The company splits its portfolio into 2 distinct categories - resort (10 hotels) and urban (6 hotels). The below image shows the location of its hotels - the bulk of them are located in either California or Florida.

Q2'23 Performance

For the second quarter, the company reported a net loss of $13 million, or $0.20/share. Its adjusted funds from operations (AFFO), a key measure for any REIT, stood at $0.20/share. In comparison, during the same period last year, the company boasted a net income of $10.3 million, equivalent to $0.12/share, with its AFFO coming in close to double at $0.37/share. The company's performance for the second quarter is also a substantial decline from its results earlier this year, when AFFO for the first quarter was $0.44/share. Looking at the company's performance in greater detail, it should be noted that there was actually an increase in occupancy, with comparable occupancy increasing by 1.0% to 70.9% for the quarter. However, both comparable revenue per available room (RevPAR) and average daily rate (ADR) saw declines of 4.2% and 5.2% respectively compared to Q2 2022. Despite this, there are several points of optimism for the company.

First, the company's urban portfolio reported growth for the ninth consecutive quarter. During the earnings call , management added that this portfolio is expected to be the primary growth driver for the company in the coming quarters, underlining its belief that the demand for the company's urban portfolio is expected to increase.

Next, both of the company's recent acquisitions - Four Seasons Scottsdale and Ritz-Carlton Reserve Dorado Beach - have outperformed expectations. The Four Seasons Scottsdale, acquired in December 2022, delivered a RevPAR of $415, driven by an ADR of $852 and 49% occupancy. This addition aligns seamlessly with Braemar's strategy of owning high RevPAR luxury establishments. The Ritz-Carlton Reserve Dorado Beach, located advantageously in Puerto Rico, demonstrated a 7.2% growth in RevPAR, amounting to $1,454, based on an impressive ADR of $2,270 and 64% occupancy. These acquisitions, showcasing robust performance that surpassed initial projections, have exhibited yields on cost of 9.2% and 7.2% for the Ritz-Carlton Reserve Dorado Beach and Four Seasons Resort Scottsdale, respectively, over the trailing 12 months. I think these acquisitions showcase management's ability to identify well-performing assets.

Balance Sheet

Looking at its balance sheet, the company's cash holdings stood at $128 million, complemented by restricted cash of $63.4 million, with the bulk of this sum allocated to lender and manager-held reserve accounts. An additional $15.4 million was due from third-party hotel managers, and this amount is also available to fund hotel operating costs. This liquidity shows a dip from the $281.5 million reported in Q1 2023, with the variance attributable to the repayment of a portion of an existing loan, extending its maturity by a year to June 2024.

On the debt front, the company has a total debt of approximately $1.1 billion, of which 79% is effectively fixed rate debt and the remaining 21% floating rate debt. Of more significance is the company's debt schedule, with half of the total debt, or $550 million, due by the end of next year. It is worth highlighting that the company's debt due next year should be even more - the above partial repayment of the June 2024 loan has been marked as due in 2025 in the schedule below as the company has the option to extend its loan by a final, fifth year to June 2025, subject to certain conditions. Even assuming the company is able to meet these conditions, there is still the small matter of repaying the $550 million due.

This concern was raised during the earnings call, where management acknowledged that even with the recent injection of $200 million in corporate financing , the company will still be unable to meet its debt obligations. Management expressed confidence in being able to refinance these loans, adding that they had begun talks in that regard. Nevertheless, should these talks fail, the potential for asset sales is a distinct possibility and one investors should be aware of.

Dividend

Prior to the pandemic, the company was consistently distributing a quarterly dividend of $0.16/share. However, and with good reason, the pandemic prompted a complete suspension of these dividends. The dividends were only resumed in 2022, albeit at a nominal rate of $0.01/share, underlining management's cautious approach. At the start of this year, however, the company increased its quarterly dividends to $0.05/share, which has been maintained thus far, giving the company a projected annual dividend of $0.20/share. With the company's share price at around $3.30, this gives the company a forward dividend yield of approximately 6%. This dividend has been comfortably covered by the company's performance, net loss for the quarter notwithstanding, and the dividends seem fairly secure.

Valuation

The company's valuation, per the Seeking Alpha quant rating, has an "A" rating. This rating highlights the company's appealing valuation compared to its peers, and primarily stems from the company's low price-to-book ratio (P/B ratio) and price-to-adjusted funds from operations (P/AFFO ratio), both of which are significantly lower than its peers. From a quantitative standpoint, the company's shares appear to be trading at a significant discount compared to the value of the company's assets.

However, there is a noticeable divergence between this valuation and the historical performance of the company's share price. The historical price chart shows a stock which has found no love among investors. While past performance is certainly no indication of future performance, the fact that the company's share price has fallen continuously over the past decade is something worth considering.

Conclusion

Braemar Hotels & Resorts evidently hasn't had the best quarter, though judging the company's performance based on a single quarter can be hasty. However, the company's balance sheet, with its impending debt obligations, presents a legitimate cause for concern. While management seems confident in navigating this challenge, any missteps will almost inevitably lead to asset sales which will in turn affect the future performance of the company. The company's historical share performance is also another cause for concern - it is a reflection of market sentiment, and not a good one at that. While high dividends are certainly welcome, it should not come at the cost of substantial capital losses. Based on these points, I rate the company as a "Sell", though I will be looking forward to the next earnings call to see if management has made any progress on its debt schedule.

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