Earnings Call Transcript - BHR Q4 2020

Operator, Operator

Greetings, and welcome to the Braemar Hotels & Resorts Incorporated Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jordan Jennings, Investor Relations for Braemar. Thank you, Ms. Jennings. You may begin.

Jordan Jennings, Investor Relations

Good morning, and welcome to today's call to review results for Braemar Hotels & Resorts for the fourth quarter and full year 2020 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Chief Operating Officer.

Richard Stockton, President and CEO

Good morning. And welcome to our fourth quarter 2020 earnings conference call. I'll begin by providing an overview of our business and an update on our portfolio, which includes our hotels again achieving positive hotel EBITDA for the quarter. After that, Deric will provide a review of our financial results, and Jeremy will provide an update on our asset management activity. Afterwards, we'll open the call for Q&A. The four key themes for today's call are: luxury resort outperformance resulting in positive portfolio-wide hotel EBITDA, very strong forward bookings, significantly reduced monthly cash utilization, and no near-term debt maturities. 2020 was an extraordinary year. While the COVID-19 pandemic has created both social and economic disruption on an unprecedented level, it has created a volatile landscape throughout the hospitality industry. The rollout of vaccines gives us hope that the hospitality industry can return to a more normal environment in the near future.

Deric Eubanks, CFO

Thanks, Richard. For the fourth quarter of 2020, we reported a net loss attributable to common stockholders of $28.3 million or $0.77 per diluted share. For the quarter, we reported AFFO per diluted share of negative $0.17. Adjusted EBITDAre for the quarter was negative $1.4 million. At quarter end, we had total assets of $1.7 billion. We had $1.1 billion of mortgage loans, of which $49 million related to our joint venture partner share of the loan on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined loans had a blended average interest rate of 2.5%. Our loans are entirely floating rate. At the end of the fourth quarter, we had approximately 54% net debt to gross assets. Our next final debt maturity is in April 2022. We ended the quarter with cash and cash equivalents of $78.6 million and restricted cash of $34.5 million. The vast majority of our restricted cash is comprised of lender and manager-held reserve accounts. At the end of the quarter, we also had $12.3 million in due from third-party hotel managers. This primarily represents cash held by one of our property managers, which is also available to fund hotel operating costs. All of our loans are current and out of default. As we highlighted with our positive hotel EBITDA for the quarter, our monthly cash burn in our hotels has been reduced to close to zero. Richard mentioned that our hotel EBITDA in December was positive $3.3 million. There are some additional items that are below the line at the properties, so hotel operating cash flow was approximately $3 million.

Jeremy Welter, CFO

Thank you, Deric. Comparable RevPAR for our portfolio decreased 59.8% during the fourth quarter, and we were able to generate hotel EBITDA flow-through of 59%. As Richard mentioned, our hotel EBITDA in December was solid, driven by our resorts, which saw strong demand over the holiday season. Despite all the closures and travel restrictions, our resort hotels performed quite well in 2020 relative to our urban assets. Fourth quarter comparable hotel EBITDA for resorts was $7.1 million compared to negative $5.5 million of comparable hotel EBITDA for our urban hotels. When you look at full year 2020 results, the story is the same: $31 million of comparable hotel EBITDA for resorts, and negative $17.5 million of comparable hotel EBITDA for our urban hotels. We expect our resorts to continue to outperform our urban hotels for some time, but we are optimistic the demand at our urban properties will continue to accelerate as we progress through 2021.

Richard Stockton, President and CEO

Thanks, Jeremy. In summary, we are in the early stages of recovery, but we can now see a clear path to normalcy. This sets us up nicely for a slow but steady recovery in our financial results. We have taken decisive actions to navigate the near-term challenges of this crisis, and we are well positioned moving forward with a solid balance sheet and unique, diversified portfolio. We are encouraged as we look ahead that we have in place the appropriate runway to get back to positive cash flow this year. I'm proud of our efforts to protect our assets and maintain financial flexibility to position us for future success. We look forward to updating you on our progress as we move through 2021. This concludes our prepared remarks, and we will now open the call for Q&A.

Operator, Operator

Our first question comes from Alex Kubicek with Baird.

Alex Kubicek, Analyst

Richard, I want to start with just a high-level question for you. How do you position yourself today to be in a better place to be a potential acquirer down the road, whether it's 12, 24 months? Obviously, fundamentals improving is a big help. But just curious what defense you think you still have to play before you can turn to offense?

Richard Stockton, President and CEO

Yes. Thanks for that question, Alex. Look, I think in order to be ahead in terms of acquisitions, I view acquisitions either as cash or by OP unit acquisition, which is something we have previously considered, but still a possibility. If it's a cash-type acquisition, I think we need to get to a place with our balance sheet that we feel is secure and comfortable for investors. Right now, we have ample liquidity, but we're still using cash on a monthly basis. I think we have to reach cash flow positive. We will need to adhere to our leverage policy. Historically, we have sought to maintain 10% of our gross debt balance as cash on the balance sheet and have a leverage target of 45% net debt to gross assets. We will have to let those assets return to cash flow positive and build our reserves before we can become aggressive on the acquisitions front. So we will remain financially disciplined. Luckily — and I anticipate many questions about this — we are not seeing a lot of opportunities in the luxury hotel space, and frankly, I'm not sure we will see many appealing opportunities at attractive prices. There has been so much capital raised aimed at hotel acquisitions that the weight of capital will likely keep prices elevated rather than allowing for some sort of a feeding frenzy. Therefore, I am not really anticipating that. We are focusing on restoring the company, and we are clearly on the back end of the crisis.

Alex Kubicek, Analyst

And then as a follow up, just you spoke to cash to OP units, to equity. Just wondering if you have an updated view on preferred today, given that the B's are trading a lot closer to par. Just where does that rank on the capital hierarchy you have today?

Richard Stockton, President and CEO

Yes. So our preferred pricing is a little wider than when we issued the preferred. Some of our peers have issued convertible instruments, which is something I wouldn't rule out in the future. There are certainly benefits to long-term balance sheet stability if that is convertible. That said, anything that we are looking into would need to be announced, but I can tell you the pricing is getting increasingly appealing. Our preferreds at the height of the pandemic traded at over a 20% yield. They hovered around 10% for a while, and now we're sub-9%. Clearly, this is a positive trend.

Jeremy Welter, COO

One thing I'd add to that is if you look back to pre-pandemic, we had filed for a non-traded preferred offering at Braemar that we planned to do through Ashford Securities but postponed during the pandemic. However, we plan to utilize our broker-dealer network through Ashford Securities in the future. We believe that we have a very attractive source of capital that could be beneficial to Braemar, traditionally targeting retail investors, which tends to be resilient in all cycles. Even during the pandemic, this alternative investment space has shown resilience in raising capital, and we hope to share more about this in the future.

Alex Kubicek, Analyst

Yes. And then just one quick housekeeping question. It looks like there's a small reversal in the incentive fee this quarter. Can you remind us of the moving parts there? And should we expect any more reversals in 2021?

Deric Eubanks, CFO

Yes. This is Deric. So the reversal is due to an incentive fee that can be paid over a 3-year period under the advisory agreement, but each payment is subject to an FCCR calculation. Given the drop in our earnings, the last tranche of that payment was not triggered. That's why you saw the reversal, which had previously been recorded in our earnings a few years ago.

Alex Kubicek, Analyst

So there shouldn't be any in 2021, given that there wasn't any in 2019, Deric?

Deric Eubanks, CFO

Well, today, each year, there's a task for the incentive fee, which relates to an incentive from a few years ago. So there could be a reversal if there's outperformance calculated based on total shareholder return. We'll just have to see how the year plays out.

Operator, Operator

Our next question comes from Tyler Batory with Janney Capital Markets.

Tyler Batory, Analyst

First question I have is on ADR. This is the second quarter in a row that it's been up and quite strong. The commentary for January and February was also positive as well. Can you touch a little bit more on revenue management and sales strategies in place in terms of driving that strength?

Richard Stockton, President and CEO

Sure. I think ADR needs to be dissected by demand segment. There are two things I'd note: One is that our group business is way down, typically coming at a discount to retail and transient business, which helps our ADR. The second point is that retail demand and other transient demand are substantially up. Our pace for February shows retail demand's ADR up by 50%. This is driven by pent-up demand among leisure travelers who have been largely confined to their homes for a year. This helps inflate our ADR. The third trend is the composition of the hotels driving our ADR. Historically, we had a more balanced mix between luxury resorts and urban hotels. However, our luxury resorts are performing exceptionally well, and while urban hotels are down, they are not down enough to offset the strong performance of our luxury resorts. We are observing ADR of $400 or more across the portfolio for February, with March currently booked at over $500. This is indicative of the highest ADR in the history of the company during the first quarter.

Jeremy Welter, COO

One aspect to consider from a revenue management perspective is that most of our resorts that are open are uniquely positioned. For example, Ritz St. Thomas is attracting many individuals who prefer not to travel outside the U.S. but want to visit the Caribbean. We are gaining a lot of first-time guests. Being one of the only resorts open to U.S. travel in Florida markets is advantageous. We recognize that high-end travelers are willing to travel and spend money. Thus, we have been pushing rates as we have less competition than when all resorts were open. Additionally, we have effectively marketed our suite inventory, leading to increased demand from guests wanting more space due to COVID. We expect this trend to continue, indicating ongoing desires for resort travel.

Tyler Batory, Analyst

Great. As for St. Thomas in the fourth quarter to the first quarter, I was hoping to take a vacation down there, but I noticed the rates are well over $1,000. With most nights sold out, that’s great for you but less so for my vacation plans. I'm interested in hearing more about the demand in St. Thomas and how the mix of business looks in terms of new versus repeat guests. Additionally, what has been the guest feedback? How beneficial is the current situation regarding limits on international travel?

Jeremy Welter, COO

Yes. I'm happy to address that. We are fortunate because the resort underwent significant capital improvements that have far exceeded expectations. The outcome from our settlement with the insurance companies and the quality of improvements were remarkable. This work was completed before the pandemic, in November 2019. Before the pandemic, we saw significant year-over-year growth in January and February, particularly at St. Thomas. This presented a great opportunity as we had made those improvements. We are attracting many first-time guests, especially from the Northeast, who typically visited other Caribbean islands but opted to stay in the U.S. Their satisfaction with the resort has been wonderful. Historically, this resort ranked low within the Ritz-Carlton brand in terms of guest satisfaction, but we had plans for improvements. Now we are receiving excellent feedback, leading to many first-time guests returning to the resort. Our team has done a fantastic job after going through the challenges of Irma and the pandemic; the property is energized and we are very excited about its future.

Tyler Batory, Analyst

Very helpful. Lastly, there's a report about an asset in one of your markets rumored to be for sale at $2 million per key, which supports the value of your real estate. Interestingly, there seems to be less distress in terms of assets than many anticipated. Can you share your views on that? What's contributing to this, and if you foresee a possible wave of distress coming soon?

Richard Stockton, President and CEO

Yes. Thanks, Tyler. There are two main factors driving pricing support in the market: first, the widespread availability of lender forbearance between March and November; and second, the surge of capital raised in private equity formats to acquire real estate, especially hotel real estate, over the last 12 months. The first factor means banks have been more accommodating, but this could change in the future with forbearance policies shifting, leading to increased distress sales. The second factor is the immense capital raised, resulting in a strong demand for deals, providing pricing support. While we don't foresee deeply discounted hotel sales anytime soon, we may see opportunities for acquisitions that were previously unavailable due to pandemic dynamics.

Operator, Operator

Our next question comes from Bryan Maher with B. Riley.

Bryan Maher, Analyst

We all know that the resort business has been doing pretty well, and you commented that bookings remained strong. Can you provide some color on the five urban assets? Are they just dead in the water for a while? Are you seeing any pickup there at all? Is there any inbound group business for the second half of this year? Just give us a little more color there.

Jeremy Welter, COO

Sure. Bryan, it continues to be a very short booking window without substantial visibility. I can't say we've seen any trends that are meaningful at this point. However, we are outperforming our internal forecasts, which are quite pessimistic, as we want to manage with a low-cost structure and anticipate adverse outcomes to drive better performance. But we do see an increase in bookings as we look at forecasts from January or February—not just for the resort locations. While it's not a significant snapback, there is an acceleration in demand. As cases decline significantly and vaccination efforts ramp up, we know that people will travel again; it's merely a matter of when and not if.

Deric Eubanks, CFO

I'll provide more context for you, Bryan. Our urban portfolio was operating in the mid to high teens occupancy during the fourth quarter, and as of last week, we reached over 30% occupancy. This is a good trend, suggesting a slow comeback. Our goal is for those properties to break even and for the company to achieve positive cash flow during the second half of this year. With declining case numbers, business travel could start to increase, which is essential for urban assets to break even. Additionally, the return of citywide events and large conferences will further propel results.

Richard Stockton, President and CEO

One additional point to remember about our business's seasonality is that urban hotels traditionally perform counter-seasonally to our resorts. The resort properties typically outshine urban properties in the winter, but as demand for business travel increases, we hope to see improved performance in the second and third quarters of this year.

Bryan Maher, Analyst

Great. Regarding the resort hotel that underperformed, La Jolla—RevPAR was down 73%. That surprised us, given its proximity for easy access from San Diego and L.A. Was there something specific affecting that property's performance?

Richard Stockton, President and CEO

Yes. That property is tricky to categorize. We call it a resort, but historically, it has performed at a rate between that and a more urban-style property. A significant portion of its demand comes from biotech business, and its performance aligns more closely with urban venues. We've classified it as a resort due to its location near the famous Torrey Pines Golf Course. Its recovery will be influenced by market trends impacting urban properties. If we were to classify it outside of resorts, our resort portfolio would be performing exceptionally well.

Jeremy Welter, COO

To add more context to Torrey Pines, it has traditionally been one of our key properties where group ADR has outperformed transient ADR. It has historically done well with group business, which is currently absent. California's heavy restrictions during Q4 2020 significantly impacted its performance. For example, in November, restrictions tightened, ultimately preventing us from achieving our usual business levels until after Q4.

Bryan Maher, Analyst

Great. Just two quick ones for me. Why did you choose to execute the standby equity distribution agreement for the 7.8 million shares instead of a regular ATM?

Deric Eubanks, CFO

Bryan, it's Deric. We currently have our ATM in place, which has capacity. The standby equity distribution is something we implemented years ago at AHT. Certain time periods require us to pause our ATM, so we thought it wise to have another option available as needed. It represents another layer of flexibility, which we deem prudent for capital management.

Bryan Maher, Analyst

Lastly, the Waldorf Astoria in Chicago recently traded for $54 million, which seems like a buy to me. Did you bid on that, or did you pass because of challenges posed by Chicago's market? Are you seeing similar opportunities where you might get a substantial discount and consider holding off for 12 to 24 months before executing?

Richard Stockton, President and CEO

Yes, Bryan, we indeed looked into that. However, we deemed the hotel insufficiently profitable for our goals. The luxury market within a two-mile radius is highly competitive, featuring properties like the Peninsula, the Four Seasons, and the Park Hyatt. That location struggles to gain adequate market share to become profitable. Despite the attractive dollar-per-key headline figure, for our company that emphasizes generating cash flow for our shareholders, it was not a suitable fit.

Operator, Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Richard Stockton, President and CEO

Sure. Well, thank you all for joining us on our fourth quarter earnings call, and we look forward to speaking with you again on the next call. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's webcast. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.