BHR - Braemar Hotels & Resorts: Occupancy Rates Are Coming Up Fast

2023-05-27 03:51:04 ET

Summary

• The comparable RevPAR in Q1 2023 increased by 8.4% to $369, occupancy showed an impressive increase of 18.4% to 64.9%.
• The company is trading on attractive valuations with only 0.65x its book value.
• In December, they declared a significant rise in the company's quarterly dividend from its 2022 figures.

Braemar Hotels & Resorts Inc. ( BHR ) is steadily bouncing back from the pandemic impact with a rapid resurgence in occupancy, and RevPAR rates despite lower ADR rates in the first quarter. If the management can efficiently handle the balance sheet and debt, and the hotel staff shortage doesn't significantly affect 2023 occupancy rates, the company is poised to have a strong 2023. Given its current market value and the recently reinstated dividend with a 5% forward dividend yield, BHR could present an attractive investment opportunity in the Hotel REIT sector.

Q4 vs Q1 results

The company demonstrated a more positive financial performance in Q1 2023 compared to Q4 2022. The comparable RevPAR in Q1 2023 increased by 8.4% to $369, although the ADR decreased by 8.5% to $569. Despite this, occupancy showed an impressive increase of 18.4% to 64.9%. Just to put it into context, in Q1 2019 the occupancy rate of all hotels was 75.5%. So the company is coming back to pre-pandemic occupancy levels, and in my opinion, by Q1 2024, the occupancy rate will likely match the Q1 2019 figures.

BHR recorded a net income of $3.2 million or $0.05 per diluted share in the first quarter of 2023, a stark improvement from the net loss of $13.5 million or -$0.19 per diluted share in the fourth quarter of 2022. AFFO figures were stronger in Q1 2023 at $0.44 per diluted share compared to $0.16 per diluted share in the prior quarter.

The company's Adjusted EBITDA for Q1 2023 reached $66.1 million, a growth rate of 34% over the prior-year quarter, and substantially higher than Q4 2022's $39.2 million. Moreover, BHR's financial position improved with an increase in cash and cash equivalents to $281.5 million and a reduction in the net debt to gross assets ratio of 37.1%.

This also lowered the relatively high debt-to-capital ratio. The company also reported higher capital expenditure in Q1 2023 at $18.7 million compared to Q4 2022's $12.6 million, suggesting an investment in the company's growth and development. Based on these figures investors can confidentially say that the pandemic is almost over in the hotel industry.

Recent acquisitions’ performance so far

Braemar Hotels & Resorts, Inc. made two acquisitions , a Four Seasons Resort, and a Ritz-Carlton Hotel. These acquisitions fit with the management’s strategy of owning high RevPAR luxury hotels and resorts. Four Seasons Resort Scottsdale at True North is a 210-room luxury resort that was acquired in early December 2022.

The hotel has performed well since then, exceeding the company's expectations. For the first quarter of 2023, the resort delivered Revenue per available room growth of 25% over the prior year period. The Four Season Scottsdale delivered RevPAR of $749 based on 53% occupancy and an Average Daily Rate ADR of $1,403. Over the trailing 12 months, the Four Seasons Scottsdale achieved a 7.4% yield on cost.

The Ritz-Carlton Reserve Dorado Beach was also acquired last year and continues to perform very well. For the first quarter, the Ritz-Carlton Reserve Dorado Beach delivered a RevPAR of $1,753 based on 56% occupancy and an outstanding ADR of $3,115. Over the trailing 12 months, the Ritz-Carlton Reserve Dorado Beach has achieved an 8.6% yield on cost.

Management expectations for 2023

The management is expecting positive trends to continue for the rest of 2023. They express satisfaction with the strong growth and momentum of their urban hotels and are encouraged by the performance of their newly acquired hotels. I anticipate that growth will be driven primarily by their urban hotels, and a gradual return of demand in these areas.

They're enthusiastic about their recent acquisitions, which have outperformed expectations, and they look forward to the prospects for these properties throughout the year. However, they also said that they want to slow down acquisitions a bit in 2023. The team also emphasizes its good capital position and continued focus on balance sheet flexibility, with ongoing work to further enhance its attractive maturity schedule.

The external trends are turning in their favor and that is why the management is optimistic about group bookings increasing year-over-year, and they believe their portfolio is well-positioned for both near and long-term performance.

Hotel industry projections for 2023

In 2023, the hotel industry is projected to surpass 2019 demand levels and achieve new revenue heights. However, hotels will face increasing prices and supply chain disruptions, with hospitality-related inflation likely to continue at 5-10% for the next few quarters. The industry is expected to see a strong revival of meetings and events, with 61% of planners having larger budgets. (That is almost exactly BHR’s management’s expectations.) Additionally, the ancillary service model, offering personalized amenities and upselling, is set to gain momentum as a crucial revenue strategy.

Workforce challenges

Despite recovery efforts, the hotel industry continues to grapple with workforce shortages. From nearly 2.4 million employees in 2019, the industry was down to about 1.7 million in 2020 due to the pandemic. In 2022, numbers improved to nearly 2 million, still 400,000 fewer than in 2019. While a 7.4% increase to nearly 2.1 million employees is expected in 2023, this is still 260,000 fewer than in 2019. This could be one of the challenges BHR faces if they want to surpass the 2019 occupancy levels.

Valuation and dividend

BHR had some issues with its financing especially if we look at its debt-to-capital ratio which is approximately 20% higher than its peers, and it is currently standing at 60% . However, it is worth noting that at the beginning of 2023, this figure was around 63% but investors should not jump to big conclusions just yet. Let’s see how the rest of the year goes, at the moment I see this figure as a risk factor.

The company recently extended short-term loans with the same lender for their property-level mortgages. They're looking to refinance towards more comprehensive corporate-level financing, which is more flexible. Their debt situation hasn't been impacted by the banking turmoil which is good news.

The company is cautious about pursuing acquisitions until they have more clarity on their balance sheet, so I do not expect more than 1 or 2 hotel acquisitions in 2023. They plan to monetize their development parcels and condominiums but are waiting for favorable conditions in my opinion, this could take months if not years to realize these gains.

The company is trading on attractive valuations with only 0.65x its book value. It is in the low territory and one of the lowest if we do not calculate the pandemic shock. Its current dividend yield and dividend policy could also present opportunities for income-seeking investors who consider investing in Hotel REITs.

In December, they declared a significant rise in the company's quarterly dividend from its 2022 figures. BHR did not pay any dividends in 2020 and 2021. Braemar Hotels declared a $0.05 per share quarterly cash dividend, yielding an annualized 5%. Moreover, the Board has approved the dividend policy for 2023 which suggests a quarterly distribution of $0.05 per share or a total of $0.20 per share annually.

The company also launched a $25 million common share buyback program, signaling confidence in its portfolio's growth. Recent acquisitions, including Four Seasons Resort Scottsdale and Dorado Beach, a Ritz-Carlton Reserve, aim to enhance revenue and earnings (we have already seen some promising results in Q1).

Summary

BHR is gradually recovering from the pandemic, and occupancy rates, RevPAR, and ADR rates are coming back fast. If the management can manage the balance sheet and its debts well, and the staff shortage will not cause significant harm to occupancy rates, the company will likely close in 2023. With its current valuation and newly reinstated dividend, investors might find BHR stock a great buying opportunity in the Hotel REIT space.

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