Braemar Hotels & Resorts - Q2 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Braemar Hotels & Resorts Inc. second quarter 2024 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to Deric Eubanks, Chief Financial Officer. Please go ahead.

Deric Eubanks (CFO)

Good morning, and welcome to today's call to review results for Braemar Hotels & Resorts for the second quarter of 2024, and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer, as well as Chris Nixon, Executive Vice President and Head of Asset Management. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the internet, were distributed yesterday in a press release. At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the safe harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties, and known or unknown risks, which could cause actual results to differ materially from those anticipated.

These factors are more fully discussed in the company's filings with the Securities and Exchange Commission. The forward-looking statements included in this conference call are only made as of the date of this call, and the company is not obligated to publicly update or revise them. Statements made during this call do not constitute an offer to sell or a solicitation of an offer to buy any securities. Securities will be offered only by means of a registration statement and prospectus, which can be found at www.sec.gov. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed on Form 8-K with the SEC on July 31st, 2024, and may also be accessed through the company's website at www.bhrre.com.

Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. Also, unless otherwise stated, all reported results in this call compare the second quarter ended June 30, 2024, with the second quarter ended June 30, 2023. I will now turn the call over to Richard Stockton. Please go ahead.

Richard Stockton (President and CEO)

Good morning, and welcome to our 2024 second quarter earnings conference call. I'll begin today's call by providing an overview of our business, an update on our portfolio, and our recently announced plans to create additional shareholder value. Then, Deric will provide a review of our financial results, and Chris will provide an update on our asset management activity. Afterwards, we will open the call for Q&A. We have several key themes for today's call. First, our urban hotels delivered strong performance in the quarter with comparable RevPAR growth of 6% over the prior year quarter. Second, our most recent acquisition, the Four Seasons Resort Scottsdale at Troon North, continues to perform well and achieve RevPAR growth of 10% in the quarter. Third, as we continue to diligently work through our refinancing program, we have refinanced, extended, or paid down all of our 2024 debt maturities.

Fourth, we're pleased with the progress we have made in our recently announced shareholder value creation plan with the closing of the sale of the Hilton La Jolla Torrey Pines at an attractive value. Let me first turn to our results. We reported comparable RevPAR of $305, which reflected a 1.5% decrease over the prior year quarter, and comparable hotel EBITDA of $51.1 million. We continue to be very encouraged by the strong performance of our urban hotels, which achieved RevPAR growth of 6% in the quarter. Regarding our Urban Assets, RevPAR for the quarter was $228, and comparable hotel EBITDA was $22.1 million. Looking ahead, we remain very encouraged by the continued momentum for this segment of our portfolio. However, this impressive performance was offset by softness in our resort average daily rates, which are still coming off historic highs that follow the pandemic.

Nevertheless, our luxury resort portfolio delivered admirable performance with hotel EBITDA of $29 million during the second quarter. The brightest spot within our resort portfolio was our most recent acquisition, the Four Seasons Resort Scottsdale at Troon North, which continues to exceed our expectations. The property was acquired in December 2022 and fits perfectly with our strategy of owning high RevPAR luxury hotels and resorts. It delivered a strong second quarter performance with hotel EBITDA of 21.6%. We continue to be very excited about the prospects for this hotel. While the Ritz-Carlton Reserve Dorado Beach had a challenging quarter, both of our recent acquisitions continue to perform well compared to our acquisition costs and our initial underwriting. Over the trailing 12 months, the Ritz-Carlton Reserve Dorado Beach achieved a 9.2% yield on cost, while the Four Seasons Scottsdale achieved an 8% yield on cost.

These luxury assets have both outpaced our underwriting, and looking ahead to the next several quarters, we remain very encouraged about the prospects for these well-positioned properties. Looking at Braemar's capital position, we continue to emphasize balance sheet flexibility. With the recent closing of the sale of the Hilton La Jolla Torrey Pines, we have now addressed all of our 2024 debt maturities. During the quarter, we announced a shareholder value creation plan, which has four components. They are, number one, execute select non-core asset sales, including the recent sale of the Hilton La Jolla Torrey Pines. Number two, the repayment of our remaining 2024 debt maturities. Number three, a $50 million preferred share redemption program. And number four, a $50 million common share buyback authorization. Subsequent to quarter end, we sold the Hilton La Jolla Torrey Pines for $165 million, or $419,000 per key.

Including anticipated capital expenditures of $40 million, the sale price represents a 7.2% capitalization rate on net operating income for the trailing 12 months ended March 31st, 2024. Looking ahead, we are also evaluating the sale of two more hotels. To date, we have redeemed approximately $40.1 million of our non-traded preferred stock. We believe these announcements reflect our commitment to maximize value for our shareholders and look forward to providing more updates in the coming weeks and months as we work through our plan. In summary, Braemar has a unique, well-positioned portfolio and a solid liquidity position. As we look ahead to the remainder of 2024, we believe Braemar is on firm footing to perform well in both the near and long term. I will now turn the call over to Deric to take you through our financials in more detail.

Deric Eubanks (CFO)

Thanks, Richard. For the quarter, we reported a net loss attributable to common stockholders of $21.9 million, or $0.33 per diluted share, and AFFO per diluted share of $0.10. Adjusted EBITDAre for the quarter was $42.7 million. At quarter end, we had total assets of $2.2 billion. We had $1.2 billion of loans, of which $44.3 million related to our joint venture partner share of the loans on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined loans had a blended average interest rate of 8.1%, taking into account in-the-money interest rate caps. Based on the current level of SOFR and our corresponding interest rate caps, approximately 77% of our debt is effectively fixed and approximately 23% is effectively floating. As of the end of the second quarter, we had approximately 40.4% net debt to gross assets.

We ended the quarter with cash and cash equivalents of $120.3 million and restricted cash of $60.7 million. The vast majority of that restricted cash is comprised of lender and manager-held reserve accounts. At the end of the quarter, we also had $17.1 million in due from third-party hotel managers. This primarily represents cash held by one of our brand managers, which is also available to fund hotel operating costs. With regard to dividends, we again announced a quarterly common stock dividend of $0.05 per share, or $0.20 per diluted share on an annualized basis. This equates to an annual yield of approximately 5.6% based on yesterday's stock price. Our board of directors will review the company's dividend policy on a quarter-to-quarter basis with a view to increasing it as financial performance improves.

During the quarter, we paid off the $30 million loan secured by the Cameo Beverly Hills in Beverly Hills, California. This property is now unencumbered. As of June 30, 2024, our portfolio consisted of 16 hotels with 3,963 net rooms, but with the recent sale of the Hilton La Jolla Torrey Pines, the portfolio currently consists of 15 hotels with 3,667 net rooms. Our share count currently stands at 73.9 million fully diluted shares outstanding, which is comprised of 66.5 million shares of common stock and 7.4 million OP units. This concludes our financial review. I'd now like to turn it over to Chris to discuss our asset management activities for the quarter.

Chris Nixon (EVP and Head of Asset Management)

Thank you, Deric. For the quarter, comparable hotel RevPAR for our portfolio was down 1.5% compared with the prior year quarter at $305. This represents a 22% increase compared to the second quarter in 2019. Group revenue pace for the portfolio continues to drive results for the second half of the year, showing strength. Our urban assets have benefited from strong citywide calendars, resulting in 7% growth in total revenue over the prior year quarter. Lastly, our team's involvement at the Four Seasons Scottsdale helped drive 22% growth in hotel EBITDA over the prior year quarter. I will now go into more detail on some of the achievements completed throughout the quarter. Group pace continues to accelerate across the portfolio. Group rooms revenue for the full year is pacing ahead of last year by 3%, with the third quarter through the balance of year pacing ahead by 5%.

This represents a 71% increase in group rooms revenue compared to full-year 2019. Group rate alone has increased by 26% compared to full-year 2019. Our 2025 group rooms revenue pace is currently ahead by 20% compared to the prior year. While year-over-year group lead volume has started to normalize, conversion rates remain strong, and the average group booking size continues to increase. This has resulted in increased sales efficiencies across many of our hotels. We are seeing continued growth from the incentive market, which represents corporations rewarding their highest-performing employees and partners. The Ritz-Carlton St. Thomas has performed particularly well in the incentive market during the second quarter, with group revenue exceeding the prior-year quarter by 31%. In addition, the hotel has partnered with Inspire Event Solutions, which provides audiovisual services to in-house groups.

During the second quarter, audiovisual revenue increased approximately 200% per occupied group room compared to the prior year. Inspire Event Solutions understands clients' needs to deliver unique experiences and exceptional services, providing a win-win for the client and our hotel. We are seeing continued success across our urban hotels during the second quarter, with hotel EBITDA increasing 8% over the prior year quarter. Additionally, hotel EBITDA margin increased by 40 basis points. Our largest hotel, Capital Hilton, just finished a transformative guest room renovation, which lasted from the first quarter of 2023 through the first quarter of 2024. While under renovation, the hotel grew full year 2023 total revenue by 28% compared to the prior year. Now that the renovation is fully complete, the hotel is positioned for even further growth, as evidenced by the second quarter performance.

During the second quarter, the hotel increased total revenue by 14% over the prior-year quarter. Additionally, hotel EBITDA increased by 24% and expanded hotel EBITDA margin by approximately 330 basis points over the prior-year quarter. We have also been particularly pleased with the performance of our most recent acquisition, the Four Seasons Scottsdale. We created and executed a detailed takeover plan in which our team identified value-add opportunities for creating and optimizing the asset's value. During the second quarter, total revenue increased 13% over the prior-year quarter. More impressively, hotel EBITDA increased 22% over the prior-year quarter. We expanded our sales solicitation efforts targeting markets and segments that had underperformed. The team secured a large buyout program as well as other entertainment groups by expanding solicitation efforts to target underdeployed markets and segments. Group revenue for the quarter was up 74% over the prior-year quarter.

In addition, our team implemented several initiatives focused on driving margin, including a deep dive into food and beverage, implementing dynamic pricing on spa treatments, minimizing the cost per spa treatment, and only backfilling critical positions. These efforts and more led to the hotel improving hotel EBITDA margin by approximately 210 basis points compared to the prior year quarter. Moving on to capital expenditures, in the second quarter of 2024, we made significant progress on multiple major renovations. At the Ritz-Carlton Sarasota, we started the transformation of an unused outdoor bar into a new courtyard bar. We also started construction on an epicurean retail market at the Four Seasons Scottsdale by converting underutilized back-of-house space into a retail outlet. Lastly, we initiated several transformational renovations at the Ritz-Carlton Lake Tahoe, including the relocation and expansion of the living room bar, the fitness center, meeting space, and outdoor pool area.

In the third quarter of 2024, we will embark on several major renovations across our portfolio. These include comprehensive updates to the restaurants at the Ritz-Carlton Sarasota, the Ritz-Carlton St. Thomas, the Ritz-Carlton Lake Tahoe, and the Ritz-Carlton Reserve Dorado Beach. Additionally, we will begin renovating underutilized beach space at the Ritz-Carlton St. Thomas by adding five luxury beachside cabanas. In the fourth quarter, we plan to begin a guest room renovation at Hotel Yountville. For 2024, we anticipate spending between $80 million and $100 million on capital expenditures. We are already executing new initiatives to further enhance our portfolio, which include the transformative full property brand conversion and the potential development of underutilized land. With these new initiatives underway, we are optimistic about the future for this portfolio. I will now turn the call back to Richard.

Richard Stockton (President and CEO)

Thank you, Chris. In summary, I'd like to reiterate that we continue to be pleased with the performance of our hotels. We also remain very well-positioned with a solid balance sheet and promising outlook. We look forward to updating you on our progress in the quarters ahead. This concludes our prepared remarks, and we'll now open the call for Q&A. Please note that our comments regarding the recent settlement with Blackwells will be limited to what has been publicly filed, so we will not be able to respond to questions on that specific matter. Please limit your questions to those concerning the company's assets, operations, management's industry outlook and capital allocation priorities, as well as our recently announced shareholder value creation plan. Thank you.

Operator (participant)

At this time, I'd like to remind everyone, in order to ask a question, simply press star followed by the number 1 on your telephone keypad. Our first question will come from the line of Tyler Batory with Oppenheimer. Please go ahead.

Tyler Batory (Executive Director and Senior Analyst)

Hey, good morning. Thanks for taking my questions. So in terms of the softness in resort ADR that you're seeing, can you just address that a little bit more in depth? I'm not sure how much of that is kind of asset-specific versus macro versus a demand pullback, just really trying to get a good sense of what's driving some of that.

Chris Nixon (EVP and Head of Asset Management)

Yeah. Hey, Tyler. It's Chris. I can take that. So our resorts are down year-over-year when we look at kind of revenue performance. However, they're still up significantly versus 2019. Our resorts were up over 45% versus 2019. And so there is some softening in demand. We think there's a few things at play there. I think the resort and leisure kind of segments are normalizing a bit. There was also some impact in Q2 with the Easter and spring break shift. We saw kind of that last week in March. There were significantly more spring breaks, schools on spring break this year than there were last year. That first week in April was roughly the same, but that second week in April, there were significantly fewer spring breaks this year than there were last year.

There was a shift in demand kind of out of April and into March, which also affected the resorts. When you look at our resorts, our two ski resorts, Ritz-Carlton Lake Tahoe and Park Hyatt Beaver Creek, both experienced significantly softer snowfall than we've seen the prior year. That resulted in the mountains closing earlier in April this year than they did last year and had a pretty significant impact to resort revenue across the portfolio. It was a combination of all those things.

Richard Stockton (President and CEO)

Yeah, Tyler, I'd add to that that if you look at the portfolio-wide hotel EBITDA performance, which is down about 5%, all of that and more can be accounted for by the performance of Dorado Beach and the EBITDA drop year-over-year at that property. And yes, Chris said a lot of factors at play there, most notably the Easter timing shift into the first quarter from the second quarter. So Dorado Beach certainly missed out in the second quarter as a result of that, but it's really just a shift in timing that accounted for that.

Tyler Batory (Executive Director and Senior Analyst)

Okay. Okay. Makes sense. And then quick follow-up on portfolio trends. There's been some discussion about D.C. impact from the upcoming election. Is that something that you're seeing in your forward bookings now, especially on the group side of things in November?

Chris Nixon (EVP and Head of Asset Management)

Yeah. At Capital Hilton, I mean, group pace on the whole is very strong there. D.C.'s got a strong citywide calendar this year. We are seeing some softness specifically as it relates to government groups and government business. Luckily for that hotel, we've been able to effectively offset it with other segments and other group segments. And so that hotel, I think the renovation timing was spot on. As you heard with my prepared remarks, through the renovation, we drove revenue. We had a very strong year. And now that the renovation is behind us, the market is really the customers are really responding well to the new product. And so we're very excited about the outlook. But yes, we're certainly seeing some softness as it relates to specifically those government segments through kind of the inauguration period.

Tyler Batory (Executive Director and Senior Analyst)

Okay. And then last for me, in terms of the shareholder value creation plan, you checked off a number of boxes there. Talk more about the two hotels you could sell, what might go into that decision, what you're seeing out there in the markets. And then you bought back, I think, $40 million of the preferred, but you still got the share buyback that's out there as well. So talk about how you're thinking about potentially executing on that too.

Richard Stockton (President and CEO)

Sure. Sure. Yeah. On the two potential asset sales, we're still going through the internal process of evaluating the right candidate for that, leaning towards what I would say are more non-core, so therefore non-luxury hotels as those candidates. We don't have anything actively in marketing right now, but in the coming months, we'll finalize our work on that and get moving. So that's still very much in play. In terms of the share buyback and progress on that, there's a couple of things there that are considerations for the appropriate timing. We have the authorization in place. The first kind of hurdle for us was ensuring that we have adequate liquidity to move forward because we did announce also this preferred redemption program at the same time. With the sale of Torrey Pines, we've shored up our liquidity pretty significantly.

But then the other—I don't necessarily call it hurdle, but the other factor here is when do we, as management, have the ability to go into the market to buy shares by not having non-public information. And the timing has coincided in terms of the sale of Torrey Pines with our earnings and some other announcements that we made, etc., that have prevented us from proceeding. But we hope to be back in action on that front shortly as well.

Tyler Batory (Executive Director and Senior Analyst)

Okay. Appreciate all that detail. That's all for me. Thank you.

Operator (participant)

Our next question comes from the line of Bryan Maher with B. Riley. Please go ahead.

Bryan Maher (Managing Director)

Thank you and good morning. Just a couple from me. Tyler got most of mine. It seems like only a few quarters ago, and maybe it was a year, year and a half, that I felt like we were talking about being in the market buying one or two hotels a year. And now we just sold an asset, possibly two more for sale. What's been the key change that has kind of changed course for the company there? Is it really kind of cost of capital, higher interest rates? I mean, maybe you can give it a little color on that, Richard or Deric.

Richard Stockton (President and CEO)

Yeah. Sure. Sure, Bryan. Yeah. When we said that that was our plan, it was 100% our objective. I think we've all been surprised by the higher-for-longer environment that we've been in. Cost of capital significantly higher. But our availability of excess cash flow has also been constrained. And so as a result, that puts us on the sidelines. Yeah. I would say that there are probably some interesting acquisition opportunities still available out there. And we've seen some of our peers pursuing those. But for us, we're really much more focused on our balance sheet and doing the various CapEx projects that we have on tap as well. And so that's been the highest and best use of our liquidity is to pursue those things rather than new acquisitions.

Bryan Maher (Managing Director)

That's maybe a good segue to my second question, which is the Cameo. What's going on there? I mean, RevPAR is pretty weak. I think it was down 18% for the quarter. Is the renovation there underway? When is it planning on starting? How deep is it? Can you tell us what the plans are for that property?

Richard Stockton (President and CEO)

Yeah. We're very excited about the outlook of that hotel once we get it rebranded, fully renovated, converted to the LXR brand. Right now, we're working through the model room with Hilton. We want to make sure that we get that right. So the full-on guest room renovation hasn't started. We're going through design. We're going through the model room, figuring out the public spaces, the pools. But what we've got so far, we're very, very excited about. Until then, we're in kind of this period where we're white-labeled. We're on Hilton's website, but more as an independent hotel. The biggest impact there has been the loss of American Express Fine Hotels & Resorts.

That's a segment of business that generated millions of dollars for the hotel each year. Without the strong brand on the hotel, we're no longer in that program. Part of the big influence in why we selected LXR is every LXR branded hotel is in that program. And so we're very optimistic that once the renovation is complete, we'll be back in that program. But outrunning that revenue stream has been the biggest impact.

Bryan Maher (Managing Director)

Maybe sticking with the Cameo for one more second, I think that there was, correct me if I'm wrong, I think there was like five kind of residences/condos. I remember touring them a few years ago. I thought that there was a plan to sell those. What's the current thought process on that asset of the component of the portfolio of that property?

Richard Stockton (President and CEO)

Yeah. Bryan, your memory serves you correctly. That is still the plan. We've been working through a city regulation recently in order to get the permission to sell those. That approval process has taken a little bit longer than we would have liked. Nevertheless, we have hired an agent to sell those residences and expect that process to start moving forward more rapidly very soon.

Bryan Maher (Managing Director)

Okay. Thank you.

Operator (participant)

Again, for any questions, press star one. And our next question will come from the line of Michael Bellisario with Baird. Please go ahead.

Michael Bellisario (Managing Director)

Thank you. Good morning, everyone.

Richard Stockton (President and CEO)

Morning, Michael.

Chris Nixon (EVP and Head of Asset Management)

Morning.

Michael Bellisario (Managing Director)

A couple of questions for you. First for Deric, just maybe on the incentive fee. Can you remind us of the calculation? Is there a cap on the payment? And sort of what are the inputs there to come up with that calc on the incentive fee side?

Deric Eubanks (CFO)

Yeah. The incentive fee under the advisory agreement is purely based on total shareholder return, outperformance versus peers. So we look at the peer average. It's done on an annualized basis, so it won't be firm and final until the end of the year. But during the year, we do accrue for that if it would be owed. And that's what happened in the quarter. It's purely as a result of the stock performance of Braemar year-to-date. And there is a cap on it. And the cap is based on the outperformance is capped at 25%, and it's 5% of the outperformance. So it's 1.25% of the equity market cap is the cap on that fee.

Michael Bellisario (Managing Director)

Is that equity market?

Deric Eubanks (CFO)

Equity market.

Michael Bellisario (Managing Director)

Is that equity market cap?

Deric Eubanks (CFO)

Yeah. It is.

Michael Bellisario (Managing Director)

Is that shares outstanding, or is that preferred as converted shares outstanding?

Deric Eubanks (CFO)

It's just the current equity market cap. Common equity market cap does not include the preferreds.

Michael Bellisario (Managing Director)

Got it. Helpful. And then just switching gears a little on capital allocation, elevated CapEx this year. I know some of that's on some one-time projects. Maybe help us understand sort of the underlying run rate for spend within the portfolio and then how you're balancing some of the cash inflows and outflows over the next 12-24 months, especially given that that CapEx number is greater than your cash flow from operations.

Richard Stockton (President and CEO)

Yeah. Michael, thanks for the question. So with a portfolio of this size, you're going to see kind of more volatility in terms of average run rate based on the projects that we're doing. We've got a number of projects that we're very excited about that are underway this year. We just finished the guest rooms at Bardessono, the renovation we mentioned at Capital Hilton. We've got a number of projects that are ongoing at Ritz-Carlton Lake Tahoe that we're very excited about. That hotel is going to be completely transformed.

We finished up the guest rooms and are doing all the public and meeting space and the outdoor space now. Some smaller value-add projects you heard me cite in my opening remarks. And so there is a spike this year. I think the percentage of revenue is slightly higher than we've had in the past. From a stabilized basis, as we go forward, we're looking to get back under historic levels. I think that's what you'll see from us in terms of percentage of revenue and what we spend going forward. There is some volatility here just in terms of where projects fall having a portfolio this size.

Chris Nixon (EVP and Head of Asset Management)

Yeah. I'd add to that also that, Michael, this is something we're looking at very closely in terms of kind of sequencing our projects. We've had a specific goal this year to reduce our amount of owner-funded CapEx, which we've been able to reduce by close to 30%. So that's definitely an objective as well to conserve cash flow.

Michael Bellisario (Managing Director)

Okay. And just remind me, what's the 30% figure?

Richard Stockton (President and CEO)

The amount of owner-funded CapEx this year versus last year.

Michael Bellisario (Managing Director)

Got it. Okay. And then just lastly, sort of along the same lines, I guess balance sheet leverage is 40%. In prior quarters, you've talked about a 35% target. You haven't talked about that in a while. I guess, one, is that still a target? Where's leverage pro forma for La Jolla? And then kind of what's the timeline or the plan to get that back down to 35%? And that's all for me. Thank you.

Richard Stockton (President and CEO)

Yeah. Yeah. I'll let Deric chime in as well. That's definitely our plan with La Jolla sale. I don't know that that moves the needle too much. Deric's going to let us know in a second. But I think once we have the two other asset sales that we've talked about, we'll be honing in on that 35% or lower, which I would anticipate we'll achieve by this time next year.

Operator (participant)

With that, I'll turn the call back to management for any closing remarks.

Richard Stockton (President and CEO)

All right. Thank you for joining us on our second quarter earnings call. We look forward to speaking with you all again next quarter. Thank you.

Operator (participant)

This does conclude today's earnings call. Thank you all for joining. You may now disconnect.