Lower Interest Rates Could Spur Gains


Interest Rate Cuts Could Spur Gains From BHR Stock

Things are looking up for Braemar Hotels & Resorts Inc (NYSE:BHR), a real estate investment trust (REIT) with a portfolio of luxury hotels and resorts. It’s been a long time coming.

The hospitality industry was hammered during the COVID-19 pandemic. Before the 2020 health crisis, the hotel occupancy rate in the U.S. was 65.8%, with an average daily rate (ADR) of $131.63 and revenue per available room (RevPAR) of $86.67. (Source: “The Pandemic and the Hospitality Industry: From Impact to Recovery,” The Plasencia Group, July 28, 2023.)

The industry hit a low in February 2021, with a hotel occupancy rate of 41.1%, ADR of $95.32, and RevPAR of $39.16. Fast-forward to February 2023, and the industry was approaching its pre-pandemic levels. National occupancy across all chain scales stood at 63.3%, while ADR reached $151.13, resulting in an overall RevPAR of $95.32. 

Despite the great data, many investors don’t trust the strong industry tailwinds and aren’t willing to step back into the hospitality industry just yet.

As of this writing, the broader hotel and motel REIT sector of the stock market is down by almost 14% over the last year, while the S&P 500 has rallied by 21.5%. Since April 2020, the hotel and motel REIT sector has fallen by 35.5%, compared to the S&P 500’s gain of 73.5%. (Source: “REIT-Hotel & Motel,” Yahoo! Finance, last accessed April 17, 2024.)

Braemar Hotels is a REIT that focuses on investing in luxury hotels and resorts. Its real estate portfolio currently includes 16 hotels: 10 resort hotels and six urban hotels. (Source: “4th Quarter 2023 Earnings Update,” Braemar Hotels & Resorts Inc, last accessed April 17, 2024.)

Its top five properties by percentage of total 2023 revenues are Ritz-Carlton Sarasota (11%), Ritz-Carlton Reserve Dorado Beach (11%), Ritz-Carlton St. Thomas (10%) Four Seasons Scottsdale (nine percent), and Capital Hilton (eight percent).

Not all hotel REITs are created equal, and Braemar Hotels & Resorts Inc’s management holds that its portfolio is well positioned to outperform in the near and long terms. That should help convince even the most bearish investors.

In Q4, Company’s Resort Hotels Outperformed Pre-Pandemic Levels

For the fourth quarter of 2023, Braemar Hotels announced that its revenues increased by 3.4% year-over-year to $177.5 million. Its net loss in the quarter was $31.1 million, or $0.47 per share. (Source: “Braemar Hotels & Resorts Reports Fourth Quarter and Full Year 2023 Results,” Braemar Hotels & Resorts Inc, February 29, 2024.)

The REIT’s adjusted funds from operations (AFFO) in the fourth quarter were $0.04 per diluted share, while its adjusted earnings before interest, taxes, depreciation, and amortization for real estate (EBITDAre) inched lower to $37.4 million.

In the fourth quarter, the company’s comparable RevPAR for all of its hotels decreased by four percent year-over-year to $288.0. Meanwhile, its comparable ADR went down by 3.6% year-over-year to $452.00 and its comparable occupancy rate decreased by 0.9% year-over-year to 63.6%.

Braemar Hotels & Resorts Inc’s full-year 2023 revenues climbed by 10.4% to $739.3 million. Its full-year net loss was $74.0 million, or $1.15 per share, and its full-year AFFO was $0.61 per diluted share. Its full-year adjusted EBITDAre climbed by three percent to $176.7 million.

The REIT’s comparable RevPAR for all hotels went down in 2023 by 1.6% to $307.00. Its comparable ADR decreased in the year by 4.9% to $458.00 and its comparable occupancy rate increased by 3.5% to 66.9%.

Commenting on the results, Richard J. Stockton, Braemar Hotels & Resorts Inc’s president and CEO, said, “During the fourth quarter, our resort hotel performance continued to meaningfully outperform pre-pandemic levels while our urban hotel portfolio continues on its upward recovery trend as business transient and corporate group demand rises steadily.” (Source: Ibid.)

Stockton added, “We also remain pleased with the performance of our two most recent acquisitions, the Ritz-Carlton Reserve Dorado Beach and the Four Seasons Resort Scottsdale at Toon North, which reported strong RevPAR growth of 9% and 5%, respectively, during the quarter.”

Management Declared Cash Dividend of $0.05 Per Share

Like many hotel REIT stocks, Braemar Hotels stock’s dividend was suspended during the COVID-19 pandemic. That shouldn’t be a big surprise.

Before the pandemic, Braemar Hotels & Resorts Inc’s quarterly dividend stood at $0.16 per share. The company reinstated BHR stock’s dividend in April 2022 at $0.01 per share and raised it in January 2023 to $0.05 per share. (Source: “BHR Dividend History,” Nasdaq, last accessed April 17, 2024.)

The REIT has held its payout at that level since then. On April 10, Braemar Hotels & Resorts Inc declared another quarterly cash dividend of $0.05 per share, to be paid on July 15 to stockholders of record as of June 28.

As of this writing, the company’s dividend translates to a yield of 7.94%.

Braemar Hotels Stock Popped From 4-Year Low

Suffice it to say, the emergence of the COVID-19 crisis in 2020 and the suspension of Braemar Hotels & Resorts Inc’s dividends didn’t exactly help BHR stock’s share-price performance. From the start of 2020 through March 19, 2020, the stock lost almost 90% of its value.

Braemar Hotels stock staged an early comeback in late 2020 but has been choppy since then and has yet to return to its pre-pandemic levels. As of this writing, BHR stock has gone up by 40% over the last month and 18% over the last three months.

Why the big upward moves?

The prospect of falling interest rates means borrowing costs will decline and margins will improve. Well-heeled REITs can take advantage of more favorable financing terms to expand their portfolios, acquire new properties, and refinance existing debt.

As mentioned earlier, Braemar Hotels recently acquired the Ritz-Carlton Reserve Dorado Beach and the Four Seasons Resort Scottsdale at Toon North. It also recently refinanced or extended almost all of its 2024 debt maturities. (Source: “Braemar Hotels & Resorts Inc,” February 29, 2024, op. cit.)

Management anticipates a more favorable refinancing environment, which is expected to reduce the company’s interest expenses.

Chart courtesy of StockCharts.com

The Lowdown on Braemar Hotels & Resorts Inc

Braemar Hotels is a hotel REIT that has made big moves since the sector was gutted during the pandemic.

The company has high-quality assets with high barriers to entry, its portfolio’s ADR and RevPAR are well above their pre-pandemic levels, and its occupancy levels have stabilized (down just slightly from its Q4 2019 levels). The occupancy rates of the REIT’s urban properties are nearing full recovery, while the occupancy rates of its resort properties are up significantly from their 2019 numbers.

This helped Braemar Hotels & Resorts Inc report solid fourth-quarter results, with management noting that the results signal the potential for a steady recovery. To that end, the company announced that it would be making major capital expenditures of $90.0 to $100.0 million in 2024.

After a quiet 2023, look for Braemar Hotels to be more aggressive. In an interview with Hotel News Now, Stockton said the company’s interest expenses tripled in 2023, forcing management to be very cautious about how the company used its available credit that year. (Source: “Braemar CEO Hopes for Aggressive 2024 After Quiet 2023,” CoStar Group, February 20, 2024.)

He said the caution will pay off for Braemar Hotels & Resorts Inc this year: “I think we’re in a great position for 2024 because it looks like interest rates are coming down … and this is exactly what we need.”

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