Braemar Hotels & Resorts Inc.

and welcome to the Braemar Hotels and Resorts Inc. second quarter 2019 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jordan Jennings. Please go ahead.

Good morning and welcome to today's call to review results for Braemar Hotels and Resorts for the second quarter of 2019 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer, Derek Eubanks, Chief Financial Officer, Jeremy Walter, Chief Operating Officer. 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 that has been covered by the financial media. 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 risk, 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. 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 8K with the SEC on July 31, 2019, and may also may also be accessed through the company's website at www.bhreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release. I will now turn the call over to Richard Stockton. Please go ahead, Richard.

Good morning. Thank you for joining us to discuss our second quarter results. In the second quarter, we continue to make progress on our portfolio realignment strategy, including completing the conversion of the notary hotel and revealing the name of the Clancy, our San Francisco autographed property. We're excited about the meaningful progress we are making and believe the continued execution of this strategy will lead to solid growth and strong financial performance for the company going forward. Our acquisition of the Ritz-Carlton Lake Tahoe in January of this year was our first purchase to utilize the ERFP program with Ashford, Inc., We received $10.3 million from Ashford Inc. related to that acquisition. We anticipate that the ERFP funding will increase our returns on this acquisition from a projected 10% to 12% on levered IRR. We continue to be excited about the prospects for this acquisition, as the hotel's performance during the first six months of this year has significantly exceeded our expectations, with REVPAR growth of 23.3% over the prior year period. Let me now turn to our second quarter results. For the second quarter, comparable rev par for all hotels declined by 2.3%, while comparable rev par for hotels not under renovation decreased 1.9%. Our portfolio was negatively impacted by the weak Seattle market and the renovation disruption at the notary. If you exclude those two properties, comparable rev par growth for the portfolio was positive at 0.8%. We reported adjusted EBITDA RE of $32.8 million and AFFO per share of of 42 cents for the quarter. Our overall portfolio trailing 12-month comparable rev par of $231 continues to be the highest in the lodging REIT sector. During the quarter, we continue to actively manage our insurance recoveries at the Ritz-Carlton St. Thomas related to Hurricane Irma. We are working closely with our insurers both to seek recoveries for physical damage to the hotel as well as to minimize the impact to the property's P&L through BI insurance recoveries, which totaled $6.6 million in the quarter. We expect recoveries to continue at least through our planned reopening, which remains on track for the fourth quarter 2019. We have open reservations starting December 1st and will allow earlier bookings as the completion date approaches. The market has lost approximately 35% of its rooms inventory, positioning us well for a strong ramp-up. Quoted rates of the property are approximately 10% higher than pre-hurricane levels. We're also pleased with the progress we have made on the conversions of our Courtyard Philadelphia and Courtyard San Francisco properties to Autograph Collection Hotels. On July 17th, we announced the opening of the converted Courtyard Philadelphia as the Notary Hotel and Autograph Collection Property. Located in downtown Philadelphia, the property underwent a $20 million plus renovation and features 499 guest rooms over 10,000 square feet of conference space throughout 12 event rooms. We also recently announced the rebranding of the Courtyard San Francisco to the Clancy, an autograph collection property. Expected to be completed in January 2020, the Clancy is ideally situated in San Francisco's vibrant South Market District, which has established itself as a hub for international visitors, regional day trippers, and locals enjoying music, art, multimedia, and technology-driven culture. The hotel, which features 410 guest rooms and almost 10,000 square feet of meeting space, is within walking distance of notable attractions including Moscone Convention Center, Oracle Park, Union Square, Urba Buena Gardens, and the Metreon Complex. During the second quarter, we reported 4.6% Red Park growth at the hotel, even while the property was under renovation, which, when combined with only modest supply growth and the recent reopening of the expanded Moscone Convention Center near the hotel, continues to fuel our excitement for the upcoming repositioning of this property. Thus far, we have spent approximately $37 million on these conversions and anticipate spending an additional $20 million during the remainder of 2019 and the first quarter of 2020. On the capital markets front, as a result of our recent financing activity over the last year, we continue to have a very attractive maturity schedule. Our next hard maturity is not until March 2020 and is an amount representing less than 10% of our assets. We've also been active on the investor relations front. During the remainder of 2019, we'll continue to get out on the road to meet with investors to communicate our strategy and the attractiveness and investment in our platform. We'll have our annual investor day in New York City on October 3rd and hope to see many of you there. We believe we have made great progress executing on our strategy this past quarter. We're optimistic about the upcoming performance of the portfolio as demand continues to be strong in our markets with limited new supply. We also continue to believe there are several unique stories in our portfolio that could result in red-par performance in excess of the broader market.

I will now turn the call over to Derek. Thanks, Richard. As Richard mentioned, during the second quarter, we recognized $6.6 million of business interruption income for the Ritz-Carlton St. Thomas, which is reflected in the other hotel revenue line of our income statement. These insurance recoveries related to the months of March 2019 through May 2019 are and we expect business interruption income to continue until at least the reopening of the hotel as a Ritz-Carlton, which is anticipated to occur in the fourth quarter of this year. As a reminder, in the prior year quarter, we recorded business interruption income of $5.2 million at the Ritz-Carlton St. Thomas, $172,000 at Bartosono, $19,000 at Hotel Yonthill, and $3.3 million for the Tampa Renaissance for lost profits related to the BP Deepwater Horizon oil spill in the Gulf of Mexico in 2010, for a total of $8.7 million. For the second quarter of 2019, we reported a net loss attributable to common stockholders of $7 million, or 22 cents per diluted share, and we reported AFFO per diluted share of 42 cents. Adjusted EBITDA RE for the quarter was $32.8 million. At quarter's end, we had total assets of $1.8 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 in Hilton, La Jolla, Torrey Pines. Our total combined loans had a blended average interest rate of 4.7%. Our loans are entirely floating rate, and the vast majority of interest rate caps in place As of the end of the second quarter, we had approximately 49% net debt to gross assets, and our trailing 12-month fixed charge coverage ratio was approximately 1.6 times. Our next loan maturity is not until March 2020. Our cash and cash equivalents at the end of the quarter was $80 million, with an additional $70 million of restricted cash. The majority of that restricted cash is earmarked for CapEx projects, including our autograph conversions. So we've already set aside a significant amount of cash we plan to spend in 2019. We also ended the quarter with networking capital of $75 million. As of June 30, 2019, our portfolio consisted of 13 hotels with 3,484 net rooms. Our share count currently stands at 37.7 million fully diluted shares outstanding, which is comprised of 32.9 million shares of common stock and 4.8 million OP units. In our financial results, we include approximately 6.6 million shares in our fully diluted share count associated with our Series B convertible preferred stock. With regard to dividends, the Board of Directors declared a second quarter 2019 cash dividend of 16 cents per share or 64 cents per diluted share on an annualized basis. This equates to an annualized yield of approximately 7% based on yesterday's stock price. I'd also like to point out that during the quarter we booked a $1.7 million property tax refund at our park high at Beaver Creek, which related to the 2017 and 2018 tax years. Our asset management team aggressively appeals our property tax assessments, and we are pleased to report this significant refund. This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Thank you, Derek. Comparable red par for our portfolio decreased 2.3% during the second quarter. Comparable rev par for hotels not under renovation decreased 1.9%. This rev par decrease led to a gap of 0.7 percentage points relative to our hotel's sub-market chain scales. Despite revenue contracting, second quarter hotel EBITDA flow-through for the entire portfolio was 60%. Year-to-date, comparable rev par has grown 0.3%. Easter occurring later in April 2019 hurt April this year relative to 2018. The Pier House Resort did not show any signs of suffering from the Easter shift and was our portfolio's best performing asset during the second quarter. On a call last quarter, we mentioned Pier House's strong group pace, which led to comparable Red Park growth of 6.5% during the second quarter. This robust Red Park growth resulted in Pier House increasing its share relative to both the Key West Florida sub-market and the Florida Keys market by 2.9 and 1.9 percentage points, respectively. As the Key West market continues to recover from Hurricane Irma, we strategically increased length of stay restrictions for our OTA business, especially on weekends, in order to drive higher-rated retail and AAA business. The strategy worked as evidenced by the hotel's 4.6% rate growth during the second quarter. Here today, comparable rate of par has grown a robust 8.5%. During the second quarter, hotel EBITDA grew 18.2%, or $485,000, resulting in a 9.2% increase in hotel EBITDA margin and 100% hotel EBITDA flow-through. Not far behind the Pier House Resort, the iconic Hilton La Jolla Torrey Pines also performed well during the second quarter. Comparable red part grew 4.4% driven by strong rate growth of 5.7%. This red part growth represents 5.3 and 4.6 percentage point growth relative to the upper upscale San Diego California market class and the upscale and above chains in San Diego La Jolla California sub market respectively. Last year, a lot of emphasis was placed on attracting groups for the second quarter of 2019, and the strategy was successfully brought to fruition by means of more corporate meetings as well as convention and association business. Because of the increased group business, banquet revenues grew substantially, leading to food and beverage revenue increasing by $880,000. This cost-effective banquet business also led to food and beverage department profit margin increasing 54.2%. Hotel EBITDA increased 23%, Hotel EBITDA margin increased 10.5%, and Hotel EBITDA flow-through was 63%. Year-to-date, Hotel EBITDA flow-through has been an even stronger 68%. The successful conversion of the Courtyard Philadelphia downtown to the Notary Hotel and member of Marriott's autograph collection occurred a couple of weeks ago on July 16. In conjunction with the conversion, the new restaurant and bar opened serving a local twist on Spanish tapas. In the common areas, Premier Project Management used a combination of original finishes coupled with new historic collections, including antique typewriters, bronze art sculptures, and a neon sculpture in the lobby vestibule. Given the ongoing renovation, Comparable Red Park during the second quarter did suffer and decreased 13.1%. However, the hotel is positioned well for growth during the second half of 2019. In addition to the notary hotel, I wanted to quickly touch on the number of our hotels that face unique obstacles during the second quarter. The available rev par at the Marriott Seattle waterfront decreased 12.7%, driven by fewer city-wise compared to 2018, and the opening of the 1,200-room Hyatt Regency in December 2018. A group of the airline crew at the hotel were also both down. This rev par decrease was actually less than the decrease for upscale and above change in the Seattle CBD submarket and the hotel's competitors by 1.8 and 1.4 percentage points, respectively. Also, comparable red par at the Park High at Beaver Creek decreased 21.9% due to a number of factors, including the commencement of the lobby renovation on April 8th and GM and director of sales turnover during the quarter. Despite these hurdles, Hotel EBITDA actually grew 1.2 million with Hotel EBITDA flow-through of 268%. Finally, the Hotel Yachtville had comparable red part decrease of 7.5% during the second quarter. The hotel continues to feel the impact of the similarly priced Bellagio and Vintage Supply in the market. In particular, group business at our hotel was down. Again, despite the top line decrease, Hotel EBITDA grew with Hotel EBITDA margin increasing 3.3% and Hotel EBITDA flow through at 109%. Looking ahead a few more months, We continue to be excited about the Courtyard San Francisco downtown and its upcoming conversion to the autograph collection under the name The Clancy. The lobby, restaurant, bar, and coffee shop are all shut down with Premier Project Management focusing on minimizing impacted guests during the conversion renovations. The hotel's performance continues to be strong. Comparable rev par grew 4.6% during the second quarter, driven by 3.5% rate growth. This rev par growth represents... increases of 5.8 and 3.3 percentage points relative to upscale and above chains in the San Francisco market, street sub-market, and the San Francisco-San Mateo market, respectively. Occupancy during the second quarter reached 92.4%, driven by nearly double the citywide business in the market relative to the second quarter of 2018. Motel EBITDA flow-through was also strong at 100%. Year-to-date comparable rent per growth has been 15.9%, and hotel EBITDA has increased $891,000. The soon-to-be Clancy remains on track to complete its conversion in January 2020. I will now turn to capital investment. During 2019, we will continue to invest in our portfolio in order to maintain competitiveness. In total, we estimate spending approximately $80 to $90 million in capital expenditures during the year, excluding insurance. As I mentioned, we recently completed the conversion of the Courtyard Philadelphia downtown to the Notary Hotel, which is now part of Marriott's autograph collection. We continue to make capital expenditures comprised predominantly of the strategic acceleration of capital projects in order to mitigate renovation impact, specifically pulling forward additional amenity enhancements at the Ritz-Carlton St. Thomas while the resort is under renovation and work related to the Courtyard San Francisco downtown, which will be completed early next year. Finally, we have identified highly accretive opportunities to add additional keys within our portfolio. Specifically, we will be adding 10 keys at the Ritz-Carlton Sarasota, two keys at the Hilton La Jolla Torrey Pines, and completing work on the three key presidential villa at Barta Sono. Construction at the Ritz-Carlton St. Thomas remains on track for an expected opening by the end of the year. Building D is nearly complete with the five other lodging buildings progressing on schedule. Construction of the family pool is underway. Reservations as a Ritz-Carlton are open for December 1, 2019 and beyond, and that date could move up as we gain more certainty on the remaining timeline. The U.S. Virgin Islands are primed for strong growth going forward. The St. Thomas Airport is 100% operational and in final stages of planning a $230 million renovation and expansion. Island attractions and amenities are at or near 100% pre-storm capacity. However, lodging supply is trailing at roughly 65%, providing ample growth potential for our hotel. We're currently experiencing some favorable supply dynamics, not only with the Ritz-Carlton St. Thomas, but throughout our portfolio. Over the past two years, our portfolio's markets have experienced slightly greater than 3% annual supply growth. We estimate this number to reduce to roughly 2% annually over the next two years. Recently, we have seen how our hotel's performance can benefit from modest supply growth. Specifically, supply growth has been muted in San Diego, San Francisco, Chicago, and Florida Keys markets, all markets in which our hotels have performed well. Although group bookings generally represent only 25% of our rooms revenue, looking forward, our group pace for full year 2020 is 4%. I will now hand it back to Richard.

Thank you, Jeremy. We're pleased with our second quarter performance and continue to believe Braemar is well positioned for strong growth in the second half of 2019. While industry forecasts remain muted, demand continues to be strong in our markets with limited new supply. Our specific portfolio of investments has a number of unique stories that should allow us to continue to drive material red part growth and increase profitability. This concludes our prepared remarks and we'll now open up the call for Q&A.

Thank you. Thank you. If you'd like to ask questions, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll take our first question from Tyler Batori from the Janey Capital Market.

Hi. Thank you. Good morning. So just a couple questions for me. I wanted to start in Philadelphia with that conversion all completed. Now, can you just remind us?

Tyler, are you still there?

Mr. Tyler? We'll take our next question from Brian Mayher from the B. Riley FBR.

No, actually skipping Philadelphia for a moment. Can you talk a little bit more kind of holistically here with your cash position that you have, how you're now thinking about acquisitions utilizing the ERFP versus buybacks with the stock here in the mid-8s at the moment?

Yeah, thanks, Brian. Yeah, I think at the moment acquisitions are not top priority. I think we've got Excess cash, as you know, that is earmarked for the completion of our capital expenditure projects. And, you know, we do have an authorization for a share buyback program in place. So, you know, we will continue to assess the share price and figure out if that's an option for us. You know, the benefits of the share buyback, of course, are always weighed against the resulting increase in leverage and reduction in float. And so it has to be a very attractive price to tip the scales for us.

That's what I'd say on the cash point. And then as we look at Beaver Creek, we were a little bit surprised by the performance there. And I understand that there was the lobby issue. And I guess you have a turnover in the GM. Is the new GM in place yet?

Yeah, the new GM is in place. And then we had just a bad situation with our sales team. And so we did turnover in that as well, and we have a new director of sales at the property. But that person has not started just yet because his wife just recently had a baby.

Okay. And then kind of lastly on St. Thomas, I know because I was just at the property about a month ago that it's pretty far along at this point. When will the new family pool actually be completed again? And also, when you look at new supply in that market, specifically Frenchman's Reef, which I know is pretty far away from being updated, probably at least a year, year and a half. Is there any other news about coming online in the next, let's say, 12 to 24 months?

Yeah, this is Jeremy. As far as new supply coming on, it's kind of remained to be proven out because there You know, Caneel Bay, I just don't see a near-term resolution, given this on a government ground lease. And so I think you can expect that to be offline for quite some time. And then there's Sugar Bay, which is another pretty nice-sized hotel, but not really competitive to the Ritz-Carlton. But that's been actively shopped in the market and sold. and I don't know what they're going to do with the property. It needs a tremendous amount of capital. So it really hasn't – they haven't moved forward with any type of redevelopment, renovation plan. So I would expect that to be well beyond Diamond Rocks, Frenchman's Reefs. So I would expect that it's going to be relatively slow for a lot of that supply to come back. In terms of the kids' pool – Our expectation is to have that open when we open the resort. I was there recently in July, and it was moving along really, really well, but then it hit a stall just in terms of getting access to concrete to pour the other half of the pool. We're competing with other demands on the island for supplies and subcontractors. Once we get that done, the pool should move pretty quickly. I mean, it's all formed. It looks great. But there is quite a bit more work to be done on the pool itself. Our deadline for that is in October. But that may slip. But I would expect that to be done certainly before we open the resort.

And then just lastly, and maybe this was Tyler's question, on the notary, which is now, I guess, fully open as the notary, and my suspicion is all construction is done. Can you give us a little idea about how trends have been in the past few weeks?

Yeah, it takes a little bit of time to ramp up. And it's actually, I would say that it's been a little bit more difficult transition initially in the short term, just because we're moving from Marriott's select service management team to their full service management team. And there was a period of time, both in terms of Expedia and Booking.com, that we were dark in the property. And so it's going to take a little bit of time, and I don't think you're going to see a huge increase necessarily in the third quarter. But by the fourth quarter is when you're going to really see the ramp begin. And we do have a little bit of tailwinds because you'll have a year-over-year comparison where it was under renovation the year before. But I do expect Q4, the property, to really start to ramp up pretty aggressively. All right. Thanks, Jeremy.

Thank you. We'll take our next question from Mr. Chris Veronica from Dushi Bank.

Hey, guys. I want to start off with a question about the Ritz Sarasota. I noticed in the quarter – You had roughly flat ref park worth, but rate was up, I think, 10%. OCC was down. But you lost a fair amount of EBITDA, or margin anyway, and a little bit of EBITDA. Can you explain what kind of what – was that a mixed shift or something else there?

Yeah, you just picked up on it. Big shift. The rooms profit was up because of that change from occupancy to ADR. But because we had a much bigger increase in transient versus group, our banquet and catering revenue was down pretty significantly, and the profit in banquet and catering was down $700,000 to $800,000 roughly, which is I think the property itself was down $400,000 in EBITDA. And so that really comprises more than the decrease itself. But then in addition to that, We did have an increase in property taxes of $170,000, and that was associated with the reset of the valuation upon acquisition of the property.

Okay.

Chris, let me make another point on Sarasota that's worth noting. You remember last summer we had an infestation of red tide at the property. There's no evidence of an algae bloom this season. And so I think that's something to kind of keep your eye on, which should be very helpful to the performance of the property and the market as a whole. Okay.

Great. Appreciate that. And then on the, just going back to the Philadelphia opening of the notary, do you, and you mentioned the transition from Marriott's select serve to full serve. Do you remind us if there's a, do you have any kind of performance guarantees or anything that will, would protect you in the ramp up?

Not, not really. And it's, it's going to be a immaterial wash when it's all said and done, because you're talking about a relatively short time period. Uh, and so when we talk in terms of the, the, the ramp itself, it's, it's really just a, you know, a year over year comparison. We're not, we haven't really seen it in the first few weeks. Uh, and so it's not going to be that material, uh, over the long term of the, you know, the transition.

Okay, great. And then just a final question maybe for Richard. Richard, I guess you're coming up on three years and, you know, you've done a lot of, I think a lot or maybe everything that you kind of set out to do at the beginning with the portfolio and, you know, the stock obviously. It's been kind of a rough ride, especially recently. What do you think the disconnect is? I mean, obviously you have a lot of projects. You have a lot of moving parts. You have a lot of things coming online later this year. And, you know, we can model it the best we can. But, I mean, what do you think the streets miss? You know, why? It just seems like there's some kind of disconnect. And I'm curious as to your thoughts and what you think possibly kind of remedies that.

Yeah, I think as we look at how we're setting up, ourselves for, you know, 2020. I think that's the year that is going to really matter. We've got major capital expenditure projects that are completing this year, right? It's the notary, it's the Clancy, we've got the presidential villa at the Bartosono, three key presidential villa that's completing this year, and we have Ritz Carlton St. Thomas reopening, coming back online. All those projects will bear fruit in 2020, and that's kind of how I'm thinking about it, and I think you know, the market will start to see that in our results, and, you know, we'd hope to get rewarded for it. So there is, you're right, some bumpy road between where we are now and getting there, but we're going to, you know, keep kind of marching forward and keep our eye on the ball, and I think that's the strategy that ultimately will pay off.

Okay, got it. And just kind of given all those things – I mean, is there some kind of, you know, internal measuring stick that you're trying to hit? Or maybe a different way to ask it differently is, you know, I know historically you haven't given guidance, but, I mean, to the extent that the, you know, if the market's continuing to kind of, you know, there's this disconnect, do you think at some point as you head into next year it makes sense to consider at least kind of framing some of the numbers and providing people a framework to, even if it's not a formal number, just to see the trajectory? Is that something you guys would consider?

Yeah, it's something we wrestle with all the time. And with such a small portfolio, it's a real challenge to be able to do that accurately. So we continue to assess it, but we hate to provide any sort of guidance that's inaccurate. And with such a small portfolio, there's a high chance high possibility of that, right? So we're going to continue to look at it and test our own kind of forecasting capabilities internally. And, yeah, if there's reason to do it, you know, we will. But we haven't determined that yet.

Okay. Very good. Thanks, guys.

Once again, if you'd like to ask a question, please press star one. We'll take our next question from Amanda Switzer from Baird. Please go ahead.

Good morning. Thanks for taking my question. Can you just talk about how the board is thinking about the dividend today, just kind of balancing some of the slower industry fundamentals we've seen with the better outlook for your portfolio? particularly given that you don't necessarily need to maintain your current payout based on your taxable income?

Yeah, so we increased the dividend by 33% at the beginning of 2017. And while we've had these major capital expenditure projects ongoing, we've held it constant for 17, 18, and now 19. I think, as I kind of referenced before, we get into 2020, we'll be able to take a look at the contributions to EBITDA from these various CapEx projects. And at that point, I think the board will reassess and say, you know, are we at the right payout ratio? Is it too low? You know, that sort of thing. But I think that's a little bit far off because we need to really see the results of these capital expenditure projects.

That's helpful. That's it for me. Thank you.

Thank you.

This concludes today's question and answer session. I will now turn the call back to management for any closing remarks.

Thank you. We'd like to thank you all for joining us on our second quarter earnings call today, and we hope to see you at our Investor Day in New York on October 3rd, and look forward to speaking with you again on our next call. Bye.

This concludes today's call. Thank you for your participation. You may now