Braemar Hotels & Resorts Inc.

Greetings and welcome to the Braymar Hotels and Resorts, Inc. First Quarter 2021 Results Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jordan Jennings, Manager of Investor Relations for Braymar Hotels and Resorts. Thank you. You may begin.

Good morning, and welcome to today's call to review results for Braemar Hotels and Resorts for the first quarter of 2021 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, and Jeremy Walter, Chief Operating Officer. Your 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 and accompanying earnings relief and accompanying tables or schedules, which have been filed on form 8K with SEC on May 5th, 2021 and may also be accessed through the company's website at www.bhreit.com. Each listener is encouraged to review those reconciliations provided in earnings relief together with all other information provided in the relief. I will now turn the call over to Richard Stockton. Please go ahead, Richard.

Good morning. Welcome to our first quarter earnings conference call. I will 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 third quarter in a row. After that, Derek will provide a review of our financial results, and Jeremy will provide an update on our asset management activity. Afterward, we will open the call for Q&A. Four key themes for today's call are the outperformance of our luxury resort portfolio, resulting in $20 million in hotel EBITDA for our entire portfolio and an average daily rate of $433 for the quarter, which is the highest quarterly ADR in our history. Our portfolio is well positioned to outperform with very strong forward bookings as we look at the second quarter. We were cash flow positive at the corporate level for the quarter and Our balance sheet is in good shape with no near-term debt maturities. I'm pleased to report that during the first quarter, we continued to achieve positive hotel EBITDA across our portfolio. We reported hotel EBITDA of $20.5 million during the quarter, driven by strong occupancy levels at our resort properties and a 25.3% increase in ADR over the prior year quarter, which resulted in the highest quarterly ADR in our history. While leisure demand is ramping up quickly, particularly on weekends, any significant uptake in a REVPAR performance is likely to rely on the recovery of corporate transient demand and ultimately group demand. Overall, our resorts continue to perform well and forward bookings are strong throughout our portfolio. For the month of April, our preliminary REVPAR was $177 with occupancy of 43.9% and an ADR of $403. Our current bookings for May and June also look strong, with current occupancy on the books of 32% for May and 27% for June. Many of our hotels are in drive-thru leisure markets and have been well-positioned to benefit from the resurgence of pent-up leisure demand in recent months. In total, eight of our 13 hotels are considered resort destinations. These hotels include the Ritz-Carlton Sarasota, Bar De Sona, Hotel Yonville, Ritz-Carlton Lake Tahoe, Pier House Resort, Park Hyatt Beaver Creek, Hilton La Jolla Torrey Pines, and Ritz-Carlton St. Thomas. We are pleased to report that this thesis continues to play out just as we expected as these hotels had a combined hotel EBITDA of $25.7 million for the quarter. While it is still early in the recovery, It is clear from the early feedback we are hearing that guests are enthusiastic about traveling again. Additionally, we were cash flow positive at the corporate level for the quarter. While our balance sheet was in good shape as we entered 2021, this puts us in a much better position financially, and I could not be more proud of the incredible work and dedication of the entire team. Our unique portfolio focused on the luxury segment with many properties and drive-to leisure markets. positions us to perform well in the near term, as well as for the ultimate recovery in our industry. Looking forward, we continue to believe that Braemar presents a compelling opportunity in the lodging REIT space. We are a differentiated story, with the majority of our assets in very desirable resort locations, the highest quality portfolio in the public markets, a portfolio that is generating positive hotel EBITDA and cash flow, and what we believe is a solid liquidity position and balance sheet, with attractive debt financing in place. I will now turn the call over to Derek. Thanks, Richard.

For the first quarter of 2021, we reported a net loss attributable to common stockholders of $11.2 million, or 28 cents per diluted share. For the quarter, we reported AFFO per diluted share of 20 cents, which represents growth of 67% over the prior year quarter. Adjusted EBITDA RE for the quarter was $16.6 million. At quarter end, we had total assets of $1.7 billion. We had $1.1 billion of loans, of which $49 million related to our joint venture partner's 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. As of the end of the first quarter, we had approximately 52% net debt to gross assets and our next final debt maturity is in April of 2022. We ended the quarter with cash and cash equivalents of $85.7 million and restricted cash of $39.3 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 $18.6 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. All of our loans are current, and we have no defaults. As Richard mentioned, our hotel EBITDA during the quarter was $20.5 million. Our current monthly run rate for debt service is approximately $2.6 million, and our current monthly run rate for corporate G&A and advisory fees is approximately $1.5 million. During the quarter and subsequent to the end of the quarter, we issued approximately 2.7 million shares under our ATM, raising approximately $16.1 million in gross proceeds. During the quarter, we also entered into a standby equity distribution agreement, or CETA, pursuant to which we are able to sell up to approximately 7.8 million shares of our common stock to a counterparty at any time during a 36-month commitment period. Since entering into the CETA, we have issued 1.45 million shares under the CETA for approximately $8.4 million in proceeds. We view these capital-raising transactions as an important way to improve our liquidity as we continue to strengthen our balance sheet. Since the beginning of the year, we've also completed several privately negotiated exchanges of our Series B convertible preferred stock into shares of our common stock. These exchanges have all been completed at a discount to the par value of the preferred stock, and in total, we've exchanged 1,237,557 shares of our Series B preferred stock, equating to 24.6% of the original share count, into approximately 4.5 million shares of our common stock. These exchanges not only remove the cash dividend associated with these preferred shares, but also serve to lower our leverage and increase our float. During the quarter, we completed an amendment to our term loan that extended our covenant waiver through the fourth quarter of 2021 and reduced our fixed charge covenant through the end of 2022. As of March 31st, 2021, our portfolio consisted of 13 hotels with 3,487 net rooms. Our share count currently stands at 52.4 million fully diluted shares outstanding. which is comprised of 47.9 million shares of common stock and 4.5 million OP units. In our financial results, we include approximately 5.1 million shares in our fully diluted share count associated with our Series B convertible preferred stock. 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 23% during the first quarter. and we were able to generate hotel EBITDA flow-through of 80%. For the first quarter, Braymar recorded an impressive 66% of its 2019 REVPAR compared to 58% to the U.S. market as a whole. We believe our market outperformance over the first quarter is a testament to the quality of this portfolio and the tireless efforts of our asset management team. Our asset management team has worked relentlessly to drive performance at each of our hotels. This is not only evident in our portfolio ADR, which was 35% higher than 2019 levels for the first quarter, but also in the overall strength of our hotel EBITDA recovery. For example, our resort hotels delivered a noteworthy 81% of first quarter hotel EBITDA relative to the comparable 2019 period. The Ritz-Carlton St. Thomas just finished an incredibly strong March, achieving $8.7 million in revenue, which is the highest total monthly revenue in the resort's history. In addition, we saw strong occupancy numbers of 79% in the first quarter. More impressively, the hotel averaged over $1,000 in ADR for the quarter, and in fact, one night in March, the hotel achieved an ADR in excess of $1,600. This outperformance is largely being driven by the spectacular renovation that was recently completed. Looking ahead, we anticipate a continuation of strong leisure transient demand. Currently, transient pace is up more than 100% compared to the second quarter of 2017, the last comparable period prior to Hurricane Irma. The Ritz-Carlton Sarasota has been a standout performer. In March, the resort finished the month with an impressive $3.9 million in hotel EBITDA, which is the single highest month in the resort's history. The team did an excellent job navigating the spring break demand and ensuring that strategies were optimized to drive ADR. In fact, ADR was 32% higher during the first quarter than the comparable 2019 period. Additionally, I want to mention how successful our membership program has been at the property. We achieved $1.4 million of membership revenue in the first quarter, which is up 17% over the same period in 2020. The Rich Carlton Lake Tahoe also had a strong quarter with Hotel EBITDA coming in at 98% compared to the prior year period. This was a result of a remarkable 96% Hotel EBITDA flow through. These results are especially meaningful when you consider that California was under a mandatory stay-at-home order from December 10th until January 25th, which resulted in over $2.8 million in cancellations for the hotel during the first quarter. The success of this property can largely be attributable to the operational changes that our asset management team put in place, such as labor reductions, limiting amenities, and selectively opening F&B outlets to match projected occupancy. The Pier House Resort and Spa also had a solid first quarter with $4.2 million in hotel EBITDA. That exceeds 2019's first quarter hotel EBITDA by 3%. In addition to the pent-up leisure demand that the Key West market is seeing, this success is largely due to a marketing shift that focused on driving direct bookings and becoming less reliant on OTAs. This campaign resulted in a shift towards higher rated business rather than discounted segments. The strategy was overwhelmingly successful resulting in $1.7 million in revenue. That strategy also helped push the hotel to over 95% occupancy 41 out of 90 days during the quarter. On those days, Pier House averaged an outstanding $555 in ADR. With this new strategy, we anticipate that the hotel will continue to take advantage of the leisure demand during the summer months. Moving on to capital investment. we invested heavily in our portfolio to enhance our competitive advantage. These investments uniquely position our portfolio to benefit from the pent-up demand that we are seeing in the market. In 2021, we are looking forward to restarting several value-add projects across the portfolio. These include adding 10 keys at a new cafe at the Beach Club at the Ritz-Carlton Sarasota, the construction of luxury retail space at the Ritz-Carlton Lake Tahoe, a new grab-and-go market at Hilton La Jolla Torrey Pines, and a guest room renovation at Marriott Seattle. These strategic renovations will take advantage of the current demand cycle in order to minimize the revenue displacement that we typically encounter when doing these types of projects. In total, we anticipate spending approximately $20 to $30 million on capital expenditures in 2021. We're extremely bullish about the future performance of our portfolio, particularly given our recent capital investments, as well as recent up branding of the plan C and the notary. As we mentioned above, we are seeing extraordinary performance in some of our assets, and we anticipate this outperformance continuing as we start to see urban destinations recover allowing us to fully realize the upside of the notary and the Clancy convergence. I will now turn the call back over to Richard for final remarks. Thank you, Jeremy.

In summary, we are still in the early stages of the recovery, but we can now see a clear path to normalcy. This sets us up nicely for a continued 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 a unique, diversified portfolio. I am 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.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Kyle Menges with B Reilly Securities. Please proceed with your question.

Hi, this is Kyle. I'm for Brian. As you've mentioned, ADRs at several of your key luxury resort hotels have actually been higher than pre-pandemic levels. Just curious if you think that's actually sustainable as we move throughout 2021 and things begin to open up and international travel restrictions are loosened as vacationers will essentially have more options of where to go.

Yeah, thanks, Kyle. Look, I think that's a good observation. We've been astounded by the ADR performance of the portfolio and maybe didn't even properly appreciate the benefit of international restrictions on travel that I think we have benefited from. I think there are a couple of properties that we'll see some of that demand diffuse, but the counterbalancing benefit would be international demand coming back to our market. So that's one trend. I think another trend that we're keeping our eye on is the tradeoff between increased occupancy via the return of the group segment and lower rated business. So I think our EBITDA trend will continue to improve, but we do expect to continue to build on our group business And we have a very strong pace outlook for the third and fourth quarter. But that will come at some cost to ADR. And I think that's just kind of part of the business. But I think your instincts are right. But overall, I think the change and recovery that we're expecting is still going to be beneficial.

Yeah, just to add a little bit more specificity to the outlook is that ADR is actually forecasted to be up to 2019 in five of the nine months so far, Q2 through Q4. And that trend may continue.

Great. That's helpful. And I was also curious, I mean, your portfolio is better positioned than a lot of other hotel operators and your balance sheet's in pretty good condition. Do you think there's opportunity out there to maybe acquire some assets from hotel operators that are less well positioned than you guys are and maybe an opportunity to expand the portfolio?

Yeah, that's a good question. We are absolutely on the lookout for acquisition opportunities. I think there's a couple of challenges. One is we still are being very conscious of our liquidity and cash balances. So that's something that we're being very protective of at the moment. And then also, we've seen some pretty heady pricing out there, particularly in the luxury segment. And we have always maintained very strict financial discipline on our acquisitions and have targeted specific unlevered IRRs, which aren't necessarily penciling in some of the pricing that we've seen out there. So we continue to look. We're hopeful that we can do something. We are certainly open to merging a hotel into the partnership via the issuance of OP units if we can do that in an accretive manner. And, you know, we'll be further updating you all as these opportunities arise.

Great. Thanks. That's all from me.

Thank you. Our next question comes from the line of Tyler Bathory with Janney Capital Markets. Please proceed with your question.

Thank you. Good morning. A few questions for me. And just to start, I wanted to go back to the margin and the flow through performance in the quarter, which was really quite strong. How much of that is related to what's going on with ADR versus other factors? And where are you in terms of offering performance guest amenities, services, in terms of operations, and how is that impacting the cost structure?

Let me take the second question first, and then maybe Jeremy will talk about flow through. You know, the amenities, the reinstatement of amenities and services is, there's no general answer to that. It's very, very much on a case-by-case basis, which is driven by occupancy at the hotels. As occupancy increases and as profitability increases at each of the hotels, these things are being reinstated in order to attract further demand and differentiate to competing products. I will say that there are some things that we've cut back on that are here to stay. One of them is optional stay over housekeeping and turned down service, for instance. These are things that, whereas were perfunctory in the past, will probably, in many cases, be optional going forward. And that will result in better margins for us. And so that's certainly a change that we welcome. But in terms of introducing other amenities and services, it really does depend on the general manager assessing situation on the ground.

I'll answer the question on flow-throughs. You're right. ADR is certainly contributing to it. Also, our struggle with having access to rehiring and staffing up our hotel. Labor shortages has contributed a little bit as well. I do think regardless of those two factors, we would have had incredible flow-throughs still with this portfolio because of our prudent and thoughtful discipline that we have with the asset management team working with the properties. I mean we have been very, very hands on with all of these assets and I can't thank my team enough because they've done so much more with less resources as we've had to deal with this challenging situation we've had over the course of the last year. But we have a great process that we've put in place with all of our teams, the asset management group, as well as with all of our property management companies, as well as the regionals and area leaders of those companies to be very thoughtful on how we add back staffing. And we have internal expectations where we've gone through and we've dissected these hotels to a very granular level And our expectation is coming out of the pandemic, once we get to full occupancy levels, the 2019 repertoire levels, that we will operate these hotels more leanly than we did pre-pandemic. And we have individual staffing models for every one of our hotels to do that. And there's no positions that are added back without our approval. So we have been very active. like I said, hands-on with the properties, but it's been a very constructive process with our teams, and I'm very optimistic that coming out of this pandemic, and once we get to full REVPAR levels, that there will be a benefit in our margins because of some of the things we've uncovered through this process.

Okay, very helpful. And to follow up on the labor issue, comments um you know the resorts and luxury assets obviously high guest expectations in terms of service right now you're running high occupancy is labor a bigger issue at those properties than perhaps an urban hotel or or some other asset types and then in some of the resort markets where and how do you source your your labor are you using uh international employees at all or is it seasonal labor that's only available at the peak time periods?

Yeah, it's such a case-by-case basis, so it's hard to put a generalized statement over, because even with a smaller portfolio like what we have at Braymar, they're very different assets. And so if you start with urban, urban would be, I think, a big challenge for sure, except for the fact that those are the assets that are at the lowest occupancy. So So we're not having as much of a challenge at the urban properties just because we don't have as much need. But when you look at the resort hotels, Pure House being a great example, it's been tough. And what happened in Key West is that a lot of the residents in Key West that were at maybe lower income levels have left because of the pandemic and went to different markets. And they haven't come back, and so we've had a struggle with labor there. And so in some cases we've used contract labor. In other cases we definitely – there is a good labor force of international labor in Key West from actually Eastern European labor pools. But then you can look at a hotel like Rich Carlton St. Thomas, and we're employing primarily local labor there. residents of the U.S. Virgin Islands, and we have an incentive to do that in terms of our relationship with the government where we get some incentives for having a bias towards local labor. But we're still having some struggles there, even though there is available labor. They're just getting folks back to work and sending them to get back to work. And so I think that what happened in the first quarter for us, is that we were optimistic, and we've been optimistic in terms of this portfolio performing really well, but it definitely exceeded our expectations. And I don't think we would have thought at the beginning of the first quarter that we would have the numbers we had as we sit today. And as aggressive as our team was to try to ramp back up the properties, particularly at St. Thomas, I think would be a great example, We struggle. We struggle to have, you know, the service levels that we would want to have, and that's just something that we're continuing to address and we will address, but it's been a challenge for sure.

Okay. And last question for me, in terms of the preferred for common exchange, can you talk more about that, why you think it makes sense? Is that something that you'd like to continue doing in the future? Sure.

Hey, Tyler, it's Derek. I'll chime in on that. I think we view that as just opportunistic, and we saw it as an opportunity to, as long as it's an attractive ratio for our common shareholders, to take out the preferred at a discount to par and believe that's accretive to our common shareholders. It's a way that it saves on the cash dividend on that preferred as well. And so I think looking forward, we'll just be opportunistic about it. If we think it makes sense for our common shareholders, then it's something that we'll entertain.

All right, great. That's all for me. Appreciate the detail.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Alex Kubiak with Baird. Please proceed with your question.

Good morning. Moving back to the balance sheet, lots of moving pieces this quarter. Just curious how you see the company's leverage profile and just the capital stack generally progressing over the more near to the more long term. And then kind of back to the preferred, with kind of having the private exchanges on one hand, but the series E and M on the other, how do you see that part of the stack changing in the future?

Yeah, thanks, Alex. This is Richard. I'll take that question. On the leverage profile, look, I think all lodging rates have increased their leverage, I'm generalizing a bit, over the last year. And Our sense is that investors would prefer the sector to be running on a bit lower leverage. So that's the guidance that we'll follow in the coming years, and it's measured as years. I think one thing that we've been pretty adamant about is not to try to do anything drastic in terms of the balance sheet, but move towards a less leveraged structure than we have now. And that can come through a variety of means, whether it's retaining cash or opportunistically doing these preferred exchanges, which we view as accretive to the share price, or raising a bit of equity capital along the way in very, very small bits. So that's where we're headed. We've historically had a target of 45% net debt to gross assets. We're above that now because we've used cash during the past year and took on some more debt. We'll seek to get through that and even below that going forward and that's measured in years. In terms of the series E&M, that's still a strategy that we're pursuing. That is also a strategy that is very incremental and kind of built slowly over time. So we may see some activity on that front in the second half of the year, but we'll assess that as we learn more about that market and really understand the appetite for the securities we're able to offer.

That's helpful. And then just one more for me. Most people in my seat are comparing the cadence of the recovery to 2019 REVPAR and EBITDA. But for your guys' portfolio, probably isn't fair with the hurricane disruption in 2019. So just kind of curious how you guys are thinking about the magnitude and timing of getting back to a more comparable prior peak.

Yeah, that's a good question. And this is Derek. I'll take it and I'll let these other guys chime in. But you raise a good point. We do hear a lot of people talk about 2019 performance and getting back to 2019. But when you look at the Braemar portfolio, there were a lot of things going on in 2019 that doesn't really make 2019 a good benchmark year for us. The notary in Philadelphia had not ramped up. The Clancy in San Francisco wasn't even open or totally converted yet. And then, as you mentioned, in St. Thomas, that hotel was closed, and we were basically getting business interruption income there. There was also a few other smaller things going on at a few other assets at the Presidential Villa, Bartosono, and beach remediation and rebuilding at Sarasota. So I don't think we're prepared to provide guidance in terms of when we get back to 2019, but I think we can say that if our portfolio was clicking on all cylinders, we'd expect it to exceed what our actual results were in 2019 because of those factors.

What I would add is if you go and turn back the clock to January and February of 2020, When, you know, we were relatively late in the cycle regardless of the pandemic, and nobody really knew the pandemic would be so impactful that it was to our industry as we stood in early 2020. But if you look at January and February, we were well outperforming the industry. I mean, well outperforming them. I believe that my recollection was I think in February we might have been up 20% year-over-year in revenues. at the Braymore portfolio, which was phenomenal. When you think of being that late in the cycle, it was absolutely phenomenal. So we were, we were very optimistic of what 2020 could have been. Obviously it didn't play out the way we wanted it to play out, but I do think you can look at those numbers and say, okay, well, that's probably more reflective of what Braymore should have been in 2019, just because we were, really reposition that portfolio for long-term success. And we haven't gotten the benefit from that yet, and we will. And I do believe that relative to a lot of other REITs that are out there, I would hope that we would be a heavy outperformer going forward and continuing for the near future.

Thanks. That's helpful, Collar.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to management for any final comments.

Well, thank you all for joining us on our first quarter earnings call. We look forward to speaking with you again on our next call. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.