Braemar Hotels & Resorts: Dividend Payouts Are Growing (NYSE:BHR)

Braemar Hotels & Resorts (NYSE:BHR) recently declared a quarterly per share cash dividend payout of $0.05, in line with the prior and for a forward annualized yield of 4.20%. The rising yield profile comes after three peppercorn $0.01 payouts which followed a two-year suspension that started at the onset of the pandemic. I first covered the externally managed hotel REIT back in April 2020 with Is The Collapse Of Braemar Hotels & Resorts A Buy The Dip Opportunity?

The bull case then was purely focused on an abnormal discount to tangible value and the small window of opportunity for creating alpha that this presented. Hence, I closed out my position after a good return. The current bull case has pivoted to the potential for the commons to recover to their immediate pre-covid level as the REIT follows through with an ambitious plan to expand its portfolio of upscale hotels and resorts.

A High-Quality Luxury Portfolio

Braemar holds a portfolio of 16 properties comprising 4,184 rooms across the US and its territories. The REIT last added Four Seasons Resort Scottsdale, a 210-room luxury resort in North Scottsdale. Braemar is paying $267.8 million for the property which is forecasted to bring in a revenue per available room (RevPAR) of $407 for 2022. The REIT completed its acquisition of the 96-room Dorado Beach, a Ritz-Carlton Reserve in Dorado, Puerto Rico earlier in 2022.

The raft of acquisitions, reinstatement of a decent payout, and a recently announced $25 million share buyback signal management’s confidence in the underlying portfolio which is one of the highest quality on a RevPAR basis on the public markets.

The REIT last reported results for its fiscal 2022 third quarter which saw its comparable RevPAR increase by 19% year-over-year to $288. Total revenue was $161.19 million, an increase of 38.7% over the year-ago quarter but a miss by $3.54 million on consensus estimates.

The portfolio, split across resorts and upscale urban hotels in cities like San Francisco and Seattle, has essentially recovered to its pre-pandemic figures with RevPAR for resorts already ahead by 17%. This was driven by a 1.8% increase in comparable average daily rate (ADR) and a 16.5% increase in comparable occupancy to 71.5% over the year-ago comp. However, comparable occupancy was 12.1% lower versus the third quarter of 2019. This was countered by an ADR that was 35.7% higher and RevPAR that was 19.2% higher.

Adjusted funds from operations (AFFO) was $0.16 per diluted share for the quarter, a small decline of $0.01 on their year-ago figure. With a total debt-to-capital ratio of 63.22%, Braemar is at least 29% more geared than its peer group median. Hence, with only 41% of the REIT’s consolidated debt being fixed via interest rate caps, AFFO will likely come under some pressure with interest rates set to rise further. However, the company’s cash and equivalents ended the quarter at $358.9 million which provides balance sheet flexibility.

The Series B Vs. Series D Preferreds

Braemar’s Series B and Series D preferreds offer two ways to play the REIT’s recovery as well as to hedge broader economic risks being posed in 2023. Braemar Hotels & Resorts 5.50% Series B Cumulative Preferred Stock (NYSE:BHR.PB) has a $1.375 annual coupon paid quarterly which works out to be an 8.2% yield against the current price.

Trading at $16.74, the Series B preferreds are way past their June 11, 2020 call date. Their convertible clause is relatively unique and drives the core difference with Braemar’s 8.25% Series D Cumulative Preferred Stock (NYSE:BHR.PD). The Series D pays out a $2.06 coupon in quarterly instalments for a yield of 8.6% on the current price, around 40 basis points higher than the Series B. Both of these offer yields 2x what’s available on the commons. The Series D have a call date later this calendar year on November 20, 2023.

Braemar issued 1.6 million shares valued at $40 million back in 2018 and there is very much a chance, albeit small, that these are redeemed at their call date. However, I think this is unlikely with interest rates significantly higher than they were in 2018. Ashford (AINC), the external manager, is currently underway with raising more capital for Braemar through the offering of non-tradeable Series E and M redeemable preferreds. These come with a 7.75% and 8.2% coupon rate, respectively.

Hence, based purely on yield, the Series D would be a better choice. Both preferreds are cumulative and had their dividends maintained throughout the pandemic. The Series B can be converted to 1.3228 common shares at an initial conversion price of $18.90 per share. However, the last time Braemar traded at this level was in 2013. There is also a forceful conversion option held by Braemar that gives them the option to convert the Series B in the event their commons price exceeds 110% of the conversion price for 45 consecutive trading days. This would be an even higher $20.80 minimum to essentially place the Series B as an almost forever fixed-income security.

Whilst bears would highlight external management as an immediate feature that would dampen appetite for a long position in the commons, this would miss the broader point of a REIT trading 20% below its book value and growing through strong acquisitions. I’m attracted to the company’s portfolio with the view of buying the safer Series D preferreds.