The Gloomy Future Of Braemar Hotels And Ashford (NYSE:BHR)

When I last covered Braemar Hotels & Resorts (NYSE:BHR), the core message was poignant; avoid the commons forever. The commons have dipped by 23% as BHR fights to address a wall of debt maturities and higher interest expenses that have heavily discombobulated its ability to earn cash on its portfolio of hotels and resorts. The REIT, externally managed by Ashford (AINC), faces a murky future with its dividend not covered. The share price collapse of AINC whose board also recently approved a plan to cancel the registration of its common stock on the NYSE adds to this picture. While this will have no near-term impact on BHR, it adds to the REIT’s specter of risk and could contribute to a continuation of negative investor sentiment.

BHR last declared a quarterly cash dividend of $0.05 per share, kept unchanged sequentially and $0.20 per share annualized for an 8% dividend yield. However, adjusted funds from operations of $0.04 per share during its fiscal 2023 fourth quarter means the REIT is currently only covering its dividend by 80%, a roughly 125% payout ratio. BHR’s wall of upcoming debt maturities is extremely front-loaded with 100% of its total debt balance initially coming due for repayment within three years. The REIT held a total debt balance of $1.17 billion at the end of its fourth quarter with 50% of this scheduled for repayment and amortization in 2024. This comes as base interest rates are likely set to stay at their current 22-year high of 5.25% to 5.50% for the entirety of 2024.

Debt, FFO Dip, And Dividend

BHR has since been able to extend and refinance $300 million of $330 million in debt maturing in 2024. This included the refinancing of its 550-room Capital Hilton in Washington, DC with a new $110.6 million mortgage maturing in 2026 but with two 1-year extension options. Its $80 million loan on its 142-room Pier House Resort & Spa in Key West, Florida was also extended by a year to September 2025. BHR still faces $30 million of maturing debt this year, against cash and equivalents of $85.6 million. There is another $80.9 million in restricted cash held in lender and manager-held reserve accounts.

BHR recorded fourth-quarter revenue of $177.5 million, up 3.4% over its year-ago comp and beating consensus estimates by $1.94 million. This came as comparable Revenue Per Available Room (“RevPAR”) for all hotels dipped 4% year-over-year to $288 as BHR’s comparable Average Daily Rate fell 3.6% over its year-ago comp. Revenue growth was driven by an increase in group revenue from higher short-term group booking activity. However, BHR’s comparable occupancy dipped 0.9% over the prior year quarter to 63.6%.

BHR’s total debt balance drove a quarterly interest expense of $25.1 million during its fourth quarter, with total interest expense for 2023 at $98 million. This was up 2x over BHR’s year-ago comp. Critically, fourth quarter AFFO at $0.04 per share dipped materially from AFFO of $0.16 per share a year ago with BHR set to continue to see headwinds as its debt is refinanced or extended at still high base interest rates. The REIT will have to choose whether it wants to continue paying out its dividend from its already dwindling cash balance.

Cash And The Fed

BHR’s cash position will come under intense pressure as the REIT continues to overpay on its dividend and as its cash position is set to extend itself in addressing what’s left of near-term debt maturities. BHR does manage a high RevPAR portfolio with its focus on resort properties which form 62% of its portfolio. The REIT’s RevPAR is higher than the national average for the luxury hotel space but BHR’s leverage has left its balance sheet overextended with occupancy of 63.6% keeping FFO growth muted.

Overall, the fracas with the public trading of AINC’s shares, the collapse of sister lodging REIT Ashford (AHT), and BHR’s lack of dividend coverage against base interest rates now definitely set to stay higher for longer keeps the REIT as a hard avoid. However, BHR is currently only trading for 3.9x its 2024 AFFO of $0.64 per share and its resort-heavy portfolio has placed the REIT in a better position regarding headwinds from higher rates of working from home faced by more urban-focused lodging REITs. The situation with interest rates is also fluid and there is still a small probability for at least three base rate cuts of 75 basis points this year if inflation begins to moderate. Do I still think this is one to avoid forever? Yes. The preferreds (NYSE:BHR.PR.D) and (NYSE:BHR.PR.B) will remain rated as a hold.