Braemar Hotels & Resorts Inc. (BHR) Earnings Call Transcript

Good afternoon, everyone. Welcome to Investor Summit's Third Quarter 2021, the first day here. With me right now, I have Braemar Hotels & Resorts. And presenting for them will be Deric Eubanks, CFO; and Jordan Jennings, Head of Investor Relations. Deric and Jordan, thanks for being here. And go ahead and take it away.

Great. Thank you. And thank you all for joining us this afternoon, and we're excited to share with you a little bit more about Braemar Hotels & Resorts. This first picture here in our presentation is of the newest addition to our portfolio, which is the Mr. C Hotel in Beverly Hills. And this is from the meeting space there at the top of the hotel, and it's just got phenomenal views of Los Angeles. And so we'll talk more about that in just a minute. But flipping forward a couple of pages here, I'll tell you a little bit more about the management team. So Richard Stockton is the President and CEO of Braemar, he's been with the company about 5 years. And I'm the CFO, Deric Eubanks. And I have been with the company and predecessor companies for about 18 years. So I spent the vast majority of my career here with the Ashford Group of Companies and Braemar Hotels & Resorts. And then Jeremy Welter is our Chief Operating Officer, and he's also spent the vast part of his career with this platform as well. So you've got a very tenured management team that's been together a long time. So going forward to the next page, there's really 4 points we want to talk about today. And the first is just the market outlook and the fact that the recovery that we're seeing right now in the hospitality space really favors luxury resorts, which our portfolio is heavily skewed towards, and we're seeing that in our operating results. Secondly, we'll just talk a little bit more about our portfolio and just the high-quality nature of our portfolio. It's the highest-quality portfolio in the publicly traded space. We can highlight our recent results and recent developments within the company, and then we'll talk a little bit more about our balance sheet as well. I'd also like to add that there is the opportunity to ask questions as we go. You should be able to do that down at the bottom of your screen. And if we have some time left towards the end of the presentation, we'll try to get to as many of those as we can. So the first section is just the market outlook. And as I mentioned, what we're seeing is -- the hospitality industry, obviously, is bouncing back after dealing with the shutdowns and the pandemic and COVID, et cetera. And what we're really seeing is that the luxury chain scale is bouncing back the fastest. And that's really what this chart shows that luxury is coming back very strongly. Our portfolio focuses on luxury. And so we are seeing that in our results. And if you go to the next slide, it also shows how resorts are bouncing back the fastest. And we've got 14 hotels in our portfolio, 8 of those are luxury resorts and about 6 is what we call more urban properties. The urban properties have been a little bit slower to recover. But the luxury resorts are bouncing back very quickly, and so we're very happy with how our portfolio is positioned. We're really benefiting from that bounce back in the market that we're seeing. So I'll talk a little bit more about the portfolio. This slide really walks through each of our assets, and you can kind of see where they are geographically. This is the highest-quality portfolio in the publicly traded space. We're very proud of the portfolio that we've put together. As I mentioned, we focus on luxury and we're even skewed toward luxury resorts. And I'll just kind of start there on the top left and kind of work clockwise. So you start in Napa, which is Bardessono and Hotel Yountville. Both of those hotels are in Yountville, which is really right in the heart of the Napa Valley wine country. It's really where you want to stay, if you're visiting wine country. They're just great locations and great assets. So we're very -- and we're seeing strong performance out of those properties as well. Then we've got the Ritz-Carlton Lake Tahoe, which is on the Northstar Ski Resort. It's located mid-mountain, close to Truckee. And just a great location, a great asset. The Marriott Seattle is located right on the water, about 1 block from the Pike Place Fish Market. So a great location there. All the rooms face the water. It's a very unique property of the great location in downtown Seattle. Then we've got the Sofitel Chicago, which is about 1 block off of Michigan Avenue. It's in the Gold Coast submarket of Chicago, and also a very architecturally unique property and just a great asset. The Notary Hotel is in downtown Philadelphia, it's right across the street from City Hall. And that property was just recently converted from a Marriott's Courtyard brand to Marriott's Autograph Collection. And so The Notary is now part of Marriott's Autograph Collection. We did a significant renovation of that property, and it just opened right before COVID hit, opened in 2019, and really hadn't had the benefit of ramping up before the pandemic hit. And so we're very optimistic for the prospects for that property postconversion and postrenovation. The Capital Hilton there is 2 blocks from The White House. If you looked a little bit to the right of that picture, you would see The White House back there. It's around K Street, 2 blocks from The White House. It's just a great location in the -- right in the heart of Washington, D.C. and a very unique property there. The Ritz-Carlton Sarasota is a -- that's the Beach Club, which is not located at the hotel. The hotel is located in downtown Sarasota. But there's a Beach Club on Lido Key, and that's the Beach Club that hotel guests have access to. And we also have a Tom Fazio-designed golf course at that property that's located a little bit further away from the hotel itself. But it's a very unique resort that's got both the Beach Club and the golf course. And so that asset, as you can imagine, is doing remarkably well right now as well. We've also got the Ritz-Carlton in St. Thomas, which is in the U.S. Virgin Islands. And recently went through a massive renovation after Hurricane Irma. It was significantly impacted by the hurricane in late 2017 and had reopened in early 2020, right as COVID was coming and the pandemic really shut it back down. But that property has bounced back remarkably well and is really having a great year. Also, the Pier House Resort in Key West, which is located right at the end of Duval Street. If you're familiar with Key West, Duval Street is really the main drag and where you want to be if you're in Key West. And that's a great property that's located right at the end of Duval Street there in Key West. The Park Hyatt Beaver Creek is right at the bottom of the Beaver Creek ski mountain. It's located right in the village, A+ location in Beaver Creek and really just a phenomenal hotel. We had just recently renovated the lobby there, and so it's got a new lobby. And that's really the hotel where people want to hang out after they've been skiing, even if they're not guests at the property. This is a -- it's just -- you're kind of right there if you're skiing, and so it's a great place to hang out. As I mentioned, the newest addition of the portfolios are Mr. C in Beverly Hills, and this is located right there, close to Beverly Drive and just a great asset, a great addition to our portfolio. We feel like we really acquired this property at a great basis and are really excited about adding this hotel to the portfolio. We closed on it a week or so ago, and we changed out the property manager to Remington, which is our affiliated property management company. And we will also do a renovation over the next couple of years, and we're still kind of trying to finalize the scope of what that renovation will be. It will probably be around a $10 million renovation or so. But we're really excited about adding that property to the portfolio. Then we've also got the Hilton La Jolla Torrey Pines, which is right on the 18th fairway of the south course of Torrey Pines, just hosted the U.S. Open a few weeks ago. And really a great location, not only for leisure business, but also for corporate business in that it's surrounded by medical offices, some hospitals, and so you get a lot of medical business as well. So not only leisure-oriented from a resort standpoint, but also some decent business in corporate and group demand as well. And then The Clancy hotel is in downtown San Francisco. It was also recently converted for Marriott's Courtyard brand to Marriott's Autograph Collection. And that actually happened during 2020. And so we're also excited about the prospects for that property as it ramps up from its recent conversion and renovation. So moving forward, as I mentioned, it's the highest-quality portfolio in the public space. This is a recent research note from Raymond James. They don't cover Braemar, but they did an analysis of all the TripAdvisor rankings of all the publicly hotel REITs -- publicly traded hotel REITs, and Braemar ranks #1. And this is based on guest reviews. And so again, not only highest quality but highest ranked as it relates to guest experience and guest service feedback as well. So a portfolio that we're very, very proud of. In terms of some of our recent performance, the next few slides walk through our recent stats as it relates to occupancy, ADR and RevPAR. And here, you could see how our resort properties -- we've broken it up between resort, urban and then the total portfolio. And you can see how our urban -- our resort properties, excuse me, are really leading the way from an occupancy standpoint. But we're also very encouraged by the recent uptrend that you're seeing from our urban properties. So we're starting to see significant uptick in the occupancy for our urban properties, which is very encouraging to us. And the next slide walks through our average daily rate. So you can see the rate that we're getting at our resort properties are really leading the way, but we're also starting to see an uptick there from our urban properties. And then the last slide is the RevPAR and really the same relationship holds there, that resort properties are leading the way, but we're starting to see some significant increases from our urban properties which is very encouraging and great to see. So this walks through our second quarter performance for our portfolio. We generated almost $25 million of hotel EBITDA in the quarter. So really strong performance. Two of our hotels had over $1,000 average daily rates, which is -- just is phenomenal, just fantastic results. And we still had 5 assets that were generating negative hotel EBITDA. So we had strong results in spite of the fact that we've still got a few urban properties that were struggling. And even some of our resort properties, which are really out of season -- the seasonal ones there, the mountain properties, the Ritz-Carlton Lake Tahoe and Beaver Creek. Second quarter is historically a low seasonality in terms of those properties, so they had some negative EBITDA there as well. But really strong results in the second quarter. This slide just walks through the portfolio, a little bit more of a breakdown where you can see we're really, really focused on luxury. That is our primary focus, luxury and resorts. So that's really the theme of the day, luxury and resorts. And you could see just a breakdown in terms of room revenue, brand contribution, Ritz-Carlton is our biggest brand from that standpoint. We love Ritz-Carlton brand. I think it's a very high-quality brand. We've got a great relationship with Marriott, and guests love that brand. And so we really like having that brand in the portfolio, and those assets are performing very well for us. This slide just walks through a little bit more of our quarterly historical numbers as it relates to hotel EBITDA and RevPAR. You can see there in the second quarter of 2020 when our business came to a screeching halt, kind of what happened to the portfolio. But you can also see how quickly it's bounced back. And I would say that the Braemar portfolio has bounced back really quicker than any of our peers. And we really feel like that's a testament to just the high-quality nature of our portfolio, the location of our portfolio and the fact that we've got really sought-after resorts in great locations that people want to go stay at and they're paying high rates to go do that. So this is some of our recent performance. And then this is just how we relate to some of our peers, both when looking at 2019 results and then when looking at the most recent results in the second quarter. And so you can see that even in 2019, we were the hotel REIT with the highest RevPAR. We're still the hotel REIT with the highest RevPAR. In fact, that lead has been extended. Our RevPAR results are far outpacing our peers. And the same thing applies when you look at it on an EBITDA per room basis. We were historically the hotel REIT with the highest EBITDA per room and that lead has even been extended as well. So very, very strong performance from our portfolio that's far, far outpacing our peers, and something that we're very excited about. So going forward to some of our more recent results, this walks through the second quarter 2021 compared to both the second quarter of 2020 as well as the second quarter of 2019. I think a lot of people in our industry kind of look back at 2019 as really a benchmark year to say, okay, when does your portfolio get back to 2019 results. I would tell you that for Braemar specifically, looking at 2019, is not a great benchmark year to look at because we had a lot of things going on in the portfolio in 2019 that impacted our performance. I mentioned the fact that the Ritz-Carlton in St. Thomas was impacted by Hurricane Irma, and so that property was really off-line for most of 2019. So it wasn't -- it was under renovation and it was off-line, and so it really wasn't performing at its best. The Notary and The Clancy renovations were -- those were both under renovation. Those conversions had not happened yet. And we had some other things going on, too. We were adding a presidential villa at our -- at Bardessono Resort in Napa, and that really didn't have a full year of benefit of that room addition or real high-quality room addition to that asset. And then I talked about Sarasota and the fact that we had a Beach Club that's located around the beach there. One of the things that was happening in 2019 is the Army Corps of Engineers was going through and extending the beach. And so we also didn't have a real -- a full year benefit of having a great extended beach. And so there were several things going on in our portfolio that made 2019 really not a great year for us to point to. And if we were going to look back and say that -- if our portfolio had been clicking on all cylinders, we think it would have performed much better than our actual 2019 results. All of that to say, I think we will probably get back to our actual 2019 results a lot sooner than a lot of our peers for those reasons that I just mentioned. But going back to our second quarter, let me just highlight the second quarter and go back one slide, please. The ADR -- I'd like to highlight the ADR. Our ADR in the second quarter of this year was 30% higher than our ADR in the second quarter of 2019. So significant growth in ADR. And from a total RevPAR standpoint, we were still about 20% below our 2019 results. And that was really all occupancy. So when you look at it from an occupancy perspective, we're not back yet from an occupancy standpoint, but great performance from an ADR standpoint. And then from a hotel EBITDA standpoint, about 36% below. So we still have some room to go in terms of getting back to 2019 results from a hotel EBITDA standpoint, but we're making good progress, and so we're excited about that. The next slide highlights just a little bit more highlights from the quarter. A few things that I would point to is adjusted EBITDAre, which is really corporate adjusted EBITDA of $19.6 million, so strong total corporate EBITDA performance. We also, during the quarter, closed on an $86 million private placement of some convertible notes that are due in 2026 that allowed us to pay off our corporate term loan and also use the proceeds to complete the Mr. C acquisition. And so we're excited about that as well. One of the things we focus on is our leverage, and our net debt to gross assets at the end of the quarter was 49%. That's a little bit above what our historical target has been, which is about 45%. But we do have a goal of continuing to lower that leverage over time. And so that's something that we will continue to work on from here is lowering that leverage, probably closer to something in the mid-30s, 35% or so range. We do think that's a more reasonable level to run the portfolio. And so I think you'll see us migrate towards that level over time. And then CapEx during the quarter, we've dialed back our CapEx significantly. And a lot of that is just due to the fact that our portfolio doesn't need a lot of CapEx because we've spent a lot on CapEx over the last few years. And so our portfolio is in really, really good shape. And so we spent $4.4 million in CapEx during the quarter. The next slide talks about even more recent performance, and so this is for July. And we did put out a press release a few days ago highlighting our performance in July. And the really interesting thing here is that in the month of July, we did exceed our 2019 RevPAR. So if you just look at it on a RevPAR basis, our RevPAR exceeded 2019 by 14%. So I'm not sure there's any other hotel REITs out there that can say that. Now we'll have to see where we go from here, but we're very excited to at least have a month that we can look back and say, "Okay, we have now exceeded our 2019 results." And hopefully, that will continue. I mean we'll probably have some ups and downs as we go forward from here, but very excited to be able to report that. And we also reported that when we look at our forecast for Bardessono, the Hotel Yountville and Pier House, which are our 3 Remington-managed properties -- Remington-managed resort properties really before we added Mr. C to the portfolio, those forecasts are looking very strong for August and September. And right now, we're forecasted to be around 30% higher than the same months in 2019. So we're continuing to see strong bookings and strong performance out of our resort assets, and we're very excited about that. This next slide walks through the Mr. C acquisition in a little more detail. So it's 138 rooms. The total consideration was about $78 million. We did assume a $30 million loan as part of this acquisition. There are 5 what we'll call residences that are currently part of the hotel that can be rented out to hotel guests, but we'll probably ultimately look to sell those over time. But when you look at it on a price per key basis, about $475,000 a key for the hotel, which we feel like is a very attractive basis for a luxury hotel-owned fee simple in Beverly Hills. So we're very excited about our basis and just think it's a great acquisition for us. As I mentioned, we think we'll spend about $10 million in renovation over the next couple of years. Remington did take over property management. So we're excited about what we think Remington can do with that property from a hotel management standpoint. And then from a renovation standpoint, we'll continue to kind of fine-tune the scope of what we're going to spend that money on. We're not really prepared to launch that yet or talk about it yet. It's something we're still working on. So we'll see, but very attractive acquisition for us. Let me spend a little bit now talking about our balance sheet and just our liquidity. And we ended the second quarter with $158 million of cash. We also had $57 million of restricted cash. So that restricted cash could be a combination of cash that's held by lenders for CapEx reserves or property tax escrows or in some cases, we have loans that are in cash traps where the lenders hold excess cash. That is restricted cash. And then we've got what we call due from third-party hotel managers, which is really also our cash but is held by one of our property management companies. And that cash is available for hotel operating costs, it's just not freely available at the corporate office for us to do with whatever we choose. But when we look at our liquidity, we look at about $237 million of cash and liquidity at the end of the quarter, which we feel very good about. And then when you look at it from a cash flow standpoint and a cash utilization standpoint, year-to-date, we are cash flow positive. And so $36 million of adjusted EBITDAre year-to-date through the second quarter. When you look at our interest expense, about $13 million and about $13 million of preferred dividends and CapEx. So after everything, after corporate costs, interest expense, dividends, CapEx, we're still generating positive cash flow, which we're excited about. Now there's still some uncertainty on the horizon with the Delta variant and COVID cases picking up. So we do think it's important and prudent to continue to bolster our liquidity because you just don't know what could happen from here, but we have been very excited about our performance year-to-date and happy with where our liquidity stands today. The next slide walks through our cost of debt. We've got a very attractive cost of debt at about 2.6% or so. We do have a strategy to hold about 10% of our debt in cash on our balance sheet. And so that is part of our strategy, just to have that cash available. We don't have a credit facility, so we want to have liquidity access to cash if we need it to either pay down assets, to defend assets or to be -- to play offense, to go use for acquisitions if we find great opportunities. So that is part of our strategy. We also focus on floating rate debt. We think there are a lot of benefits to having floating rate debt. In spite of what might look like a rising interest rate environment, we think floating rates have a natural hedge to our cash flows. They're -- they provide more flexibility. We're more easily able to get out of debt and refinance and take advantage of opportunities that we see. So we like having floating rate financing, and we've got great, long-standing lender relationships as well. This next slide just walks through our maturity schedule. And so we've got no debt maturities for the remainder of this year. Our next final debt maturity is in April of 2022. And it's done at Park Hyatt Beaver Creek. We could go refinance that hotel today if we wanted to. I think we'd pay probably about 200 -- 150 to 200 basis points higher in spread. So we're going to be patient and wait until we get a little bit closer to that maturity date to go refinance that property. And then we've also got the Bardessono and Hotel Yountville that mature in 2022. I'm optimistic that we'll be able to probably extend those maturities as well. So I feel like we're sitting very good from a maturity standpoint with very, very, very manageable and not significant maturities over the next couple of years, while at the same time, having a very attractive cost of debt on the loans that we have in place right now. So that's our maturity schedule. The next thing I'd highlight is just you've got insiders that own a lot of stock in the company as well. So second-highest insider ownership, and that's a significant amount of money, $36 million or so of value based on that insider ownership. So you got a management team that's highly aligned with investors. And so I think that's important for investors to understand. And just to wrap it up, again, the key takeaways are the -- with the current market outlook, the recovery is favoring luxury resorts, which our portfolio is heavily skewed to. We've got the highest-quality portfolio in the publicly traded hotel REIT world, and it's a great portfolio. Our recent results have been very strong. We're outperforming our peers significantly. And our recent developments have all been very positive. The acquisition of the Mr. C is a great addition to our portfolio. The refinancing of our term loan gave us some more flexibility. And from a balance sheet standpoint, we've got great liquidity and a very attractive maturity schedule and a very low cost of debt. So those are the takeaways. I'm just checking to see if we have any questions. It doesn't look like we have any questions, so I think that will end our presentation. So thank you guys for taking the opportunity to learn more about Braemar Hotels & Resorts. And feel free to reach out to us if you'd like to discuss any further. So thank you all.