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Edited Transcript of BHR earnings conference call or presentation 3-May-18 3:00pm GMT

Q1 2018 Braemar Hotel & Resorts Inc Earnings Call

Dallas May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Braemar Hotel & Resorts Inc earnings conference call or presentation Thursday, May 3, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deric S. Eubanks

Braemar Hotels & Resorts, Inc. - CFO

* Jeremy J. Welter

Braemar Hotels & Resorts, Inc. - COO

* Joe Calabrese

* Richard J. Stockton

Braemar Hotels & Resorts, Inc. - President & CEO

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Conference Call Participants

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* Chris Jon Woronka

Deutsche Bank AG, Research Division - Research Analyst

* Matthew David Boone

B. Riley FBR, Inc., Research Division - Associate

* Michael Joseph Bellisario

Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure

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Presentation

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Operator [1]

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Good day, and welcome to the Braemar Hotels & Resorts, Inc. First Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead, sir.

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Joe Calabrese, [2]

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Thanks, Abby. Good morning, everyone, and welcome to today's call to review results for Braemar Hotels and Resorts for the first quarter 2018 and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, 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 afternoon in the 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 Private Securities Litigation Reform Act of 1995. 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 risk 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 and schedules, which have been filed on Form 8-K with the SEC on May 2, 2018, and may also be accessed through the company's website at www.bhrreit.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, sir.

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [3]

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Good morning. Thank you for joining us. Let's begin the call today by discussing our recent rebranding from Ashford Hospitality Prime to Braemar Hotels & Resorts. We began trading on the New York Stock Exchange under our new ticker symbol, BHR, on April 24, 2018. Rebranding to Braemar Hotels & Resorts marks a key milestone in the company's strategy to focus on owning luxury hotels and resorts, and capitalizing on the long-term superior performance of that segment of the lodging industry. We're excited about this rebranding, and believe that having a distinct identity in the capital markets will be advantageous to our shareholders. For more information, please visit our new website, www.bhrreit.com.

Since announcing our revised strategy in early 2017, we have made substantial progress in rationalizing our noncore portfolio, and have announced the acquisition of 3 world-class luxury hotels, the Hotel Yountville in Napa Valley California, the Park Hyatt in Beaver Creek, Colorado and the Ritz-Carlton in Sarasota, Florida. Currently, Braemar has the highest portfolio RevPAR of any lodging REIT, and thus the highest quality hotel portfolio in the public markets.

During the quarter, the company's hotel operations and financial results continued to be adversely impacted by the challenges following Hurricane Irma and, to some degree, the wildfires in Northern California last fall. As we've discussed, we have comprehensive insurance in place with all of our hotels, and we continue to work closely with our insurers to both seek recoveries for physical damage to our hotels as well as to minimize the impact to our property's P&L through business interruption insurance recoveries, which totaled $6.6 million during the quarter, while the recovery of business interruption proceeds should be nearing an end at the Pier House, Bardessono and Hotel Yountville, as those properties return to normal operations.

We would expect these recoveries to continue for some time at the Ritz-Carlton St. Thomas, as that property may take up to 2 years to fully recover.

Now I would like to discuss our operating results. As expected, the impact of the events of last fall significantly impacted our comparable RevPAR figures, resulting in a decline of 9.8%, inclusive of the covered properties. However, due to the fact that we have been successful in finalizing our business interruption claims, proceeds of which have been booked as other revenue, our comparable hotel EBITDA posted 0.9% growth in the quarter. With regard to the company as a whole for the quarter, we reported adjusted EBITDAre of $29.8 million versus $24.9 million in the prior-year quarter, reflecting 19.7% growth, and FFO per share of $0.44 versus $0.46 in the prior-year quarter. Our overall portfolio TTM RevPAR of $213 continues to be the highest in the lodging REIT sector.

Turning to our strategic plan. In January of last year, we announced a revised strategy with a focus of investing in the luxury segment. Evidence has shown that the luxury segment has had the greatest RevPAR growth over the long term, which can translate into superior shareholder returns. We believe that clearly aligning our portfolio with this segment will differentiate us relative to our REIT peers. As part of our revised strategy, we identified 4 hotels that were designated as noncore to the portfolio. We stated that our intent was to either reposition or opportunistically sell these hotels.

We've also made significant progress in our investment strategy as, in April, we completed the acquisition of the 266-room Ritz-Carlton Sarasota for $171 million. This high-quality luxury resort property is located in a popular growing market on the Florida Gulf Coast. With RevPAR of $284 in 2017 and strong cash flow, this acquisition will increase our overall portfolio RevPAR, and we believe will be a very attractive acquisition for our shareholders.

The initial EBITDA yield is 7.8%, and we expect it to stabilize at 9.5%. Our downside is protected by a $5.5 million GOP hold-back guarantee provided by the sellers for 3 years. In conjunction with this, we also closed on the acquisition of a 22-acre plot of vacant land adjacent to the golf course for $9.7 million that is currently entitled for residential development. Concurrent with the completion of the acquisition, we financed the hotel with a $100 million nonrecourse mortgage loan, and Deric will give more details on that in a moment.

Looking ahead, our team will continue to focus on enhancing shareholder value by delivering solid operational performance and continuing to execute on all aspects of our business plan. We'll also continue to work on increasing investor awareness of our story through our focused Investor Relations efforts. I will now turn the call over to Deric.

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Deric S. Eubanks, Braemar Hotels & Resorts, Inc. - CFO [4]

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Thanks, Richard. During the quarter, as Richard mentioned, we recognized $6.6 million of business interruption income, which is reflected in the other revenue line of our income statement, for the Ritz-Carlton, St. Thomas and Pier House Resort, the insurance recoveries related to the months of December through February, and included approximately $4.5 million for the Ritz-Carlton St. Thomas and $360,000 for the Pier House Resort. For the Bardessono and Hotel Yountville, these insurance recoveries related to the months of October through December, and included approximately $958,000 for the Bardessono and $800,000 for the Hotel Yountville. While we expect the business interruption proceeds to continue for some time at the Ritz-Carlton, St. Thomas, we do not expect significant recoveries at the other 3 properties, as they have returned to more normal operations. Consistent with how we treated the uninsured losses from Hurricane Irma, we also added back the uninsured losses of the Bardessono and Hotel Yountville of $500,000 related to our deductible for purposes of calculating adjusted EBITDAre and AFFO.

For the quarter, we reported net income attributable to common stockholders of $2.3 million or $0.07 per diluted share, and we reported AFFO per diluted share of $0.44 compared with $0.46 for the same quarter last year. Beginning with our first quarter results, we have started reporting EBITDA for real estate, or EBITDAre, as defined by NAREIT and adjusted EBITDAre. Previously, we reported adjusted EBITDA. Adjusted EBITDAre is calculated in a similar manner as adjusted EBITDA without the deduction of noncontrolling partners' pro rata share of adjusted EBITDA, which totaled $2 million in the first quarter. The rationale for including 100% of EBITDAre for consolidated affiliates with noncontrolling interest is that the full amount of any debt of these affiliates is reported in our consolidated balance sheet. And therefore, metrics using total debt to EBITDAre provide a better understanding of the company's leverage. This is also consistent with NAREIT's definition of EBITDAre. Adjusted EBITDAre for the quarter was $29.8 million, which reflected a 19.7% growth rate over the prior year. At quarter's end, we had total assets of $1.4 billion. We had $826 million of mortgage debt, of which $47 million related to our joint venture partner share of the debt on the Capital Hilton and Hilton La Jolla Torrey Pines. Our total combined debt had a blended average interest rate of 4.7%, and was almost entirely floating rate.

All of our floating rate debt has interest rate caps in place. As of the end of the first quarter, we had approximately 41% net debt to gross assets, and our trailing 12-month fixed charge coverage ratio was approximately 2.2x. Our next hard debt maturity is not until 2019. We ended the quarter with net working capital of $151 million. As of March 31, 2018, our portfolio consisted of 12 hotels, with 3,341 net rooms. Our share count currently stands at 37.7 million fully diluted shares outstanding, which is comprised of 32.5 million shares of common stock and 5.1 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 first quarter 2018 cash dividend of $0.16 per share or $0.64 per diluted share on an annualized basis. This equates to an annual yield of approximately 6.2% based on yesterday's closing price, one of the highest in the lodging REIT space.

On the capital markets front, while we did not complete any financings during the quarter, in early April, we closed on a $100 million mortgage loan to finance the acquisition of the Ritz-Carlton Sarasota. This loan has a 5-year term and provides for a floating interest rate of LIBOR plus 2.65%. We continue to see very attractive debt financing markets for high-quality hotels, such as ours. As is typical for periods of rising short-term interest rates, we have seen spreads for hotel mortgage loans continue to compress over the last 12 to 18 months. We will continue to assess our portfolio for additional refinancing opportunities to capitalize on these favorable trends.

This concludes our financial review. I'd now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [5]

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Thank you, Deric. Comparable RevPAR for our portfolio declined by 9.8%. However, for all hotels not under renovation during the first quarter, comparable RevPAR grew by 2.3%. Hotel EBITDA flow-through for the entire portfolio was strong at 104%. Despite a 7% decline in comparable total hotel revenues, comparable hotel EBITDA increased by $292,000 or 0.9%, with margins increasing by 256 basis points.

Our most recent group pace for 2018 shows definite group room revenue increasing 8% for the remainder of the year, and 2019 pace is up 9.1%. Due to a comparably slow start to the year, full year 2018 pace is up 2.9%. The foregoing pace numbers exclude the Ritz-Carlton, St. Thomas since its pace data is not comparable. This quarter's best-performing asset was, once again, the Courtyard Philadelphia Downtown, which grew RevPAR by 24.1%, driven by rate growth of 15.3% and 7.6% occupancy growth. This robust RevPAR growth resulted in a property increasing share relative to both the Philadelphia CBD submarket and the upscale Philadelphia market by 9% and 12.5%, respectively. Increased citywide demand drove the occupancy growth, as Philadelphia hosted 6 citywides during the first quarter of 2018 compared to 1 citywide in the first quarter of 2017.

In addition, transient volume grew due to 2 home playoff games for the Eagles in the month of January and 250 more room nights at a $33 higher rate on Super Bowl Sunday. Not only did we increase the top line, but hotel EBITDA flow-through was 68% during the first quarter. And margins increased by 822 basis points, resulting in a $1 million or 64.1% increase in hotel EBITDA. These continued strong results help fuel our excitement regarding the future conversion of this hotel to Marriott's Autograph Collection.

In addition to the outstanding performance of the Courtyard Philadelphia Downtown, I wanted to briefly mention that our next best-performing asset, the Hilton La Jolla Torrey Pines, grew RevPAR 5.7% during the first quarter, driven by 8% occupancy growth. The hotel outperformed its competitors in the upper upscale San Diego market by 6.2% and 5.7%, respectively. While group business declined for the quarter, the increase in transient volume more than compensated for the loss. Not only did the property experience robust RevPAR growth, but F&B revenue also increased by $1.3 million or 29.9% due to fewer rooms-only groups. Additionally, this property experience solid 55% hotel EBITDA flow-through, which led to strong hotel EBITDA growth of $972,000 or 25%, and made this property one of the top performers in our portfolio. The Ritz-Carlton, St. Thomas continues to experience the impact from the hurricanes Irma and Maria, posting a 59.6% RevPAR decline during the first quarter. Interim structural roof repairs began in April in preparation for the permanent rooms are being installed. Guestroom model room review will be held in early July, and construction on the rooms is expected to start in September and continue until completion in September 2019. The lobby renovation should start in August, including construction of a new specialty restaurant. The ballroom and meeting space renovation, including expansion of the pre-function area, is expected to begin in October.

Additionally, we are currently working on a new sundry shop concept and a new kids pool. Another property posting a significant RevPAR decline for the quarter was Capital Hilton. Due to the presidential inauguration in January of 2017, this property faced a very difficult comparison, in addition to having meeting space renovation ongoing. I'd also like to provide an update on the other 3 hotels affected by natural disasters at the end of last year, all of which are starting to stabilize following their respective disasters.

During the quarter, the Pier House Resort & Spa RevPAR declined by 3.7%, while the Bardessono and Hotel Yountville experienced 4.4% and 3.3% declines in RevPAR, respectively. The first quarter at Pier House was weaker than hoped due to people not booking in September and October 2017 for the beginning of 2018 because of Hurricane Irma. Therefore, we had to run more promotions and increase OTA volume.

Also, the main thoroughfare and bridges through the Florida Keys were not completely cleared of debris until February, which likely lessened the demand due to the perception that the area remained affected by the hurricane.

At Hotel Yountville, room revenue improved each month and performed as expected and in line with budget. Bardessono struggled with both transient and group business in January, with solid performance during the remainder of the quarter, but was able to grow RevPAR share relative to the property's competitors during the first quarter by 2%. For 2018, we continue to invest in our hotel -- our portfolio to maintain competitiveness. In total, we estimate spending approximately $60 million to $80 million in capital expenditures during the year, which is $10 million to $25 million higher than we mentioned on last quarter's call, and excludes insurance fund to CapEx. This increase is predominantly comprised of the strategic acceleration of capital projects to limit displacement both at the Courtyard San Francisco as well as pulling forward additional amenity enhancements at the Ritz-Carlton, St. Thomas while the resort is under renovation. This CapEx spend includes significant work related to the Courtyard San Francisco and Courtyard Philadelphia conversions to Marriott's Autograph Collection. Additionally, we have identified highly accretive opportunities to add additional keys within our portfolio. Specifically, we will be adding 7 keys in the Park Hyatt Beaver Creek and a 3-key presidential villa at the Bardessono Hotel. This concludes our prepared remarks, and we will now open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Tyler Batory with Janney Capital Markets.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [2]

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So I was wondering if you can talk a little bit about leisure travel trends and corporate travel trends in the first quarter in our portfolio. Just wondering if you much difference in either of those 2 segments.

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [3]

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Yes. This is Jeremy. That's a great question. When you look specifically at this portfolio, there's just way too much noise to really see any trends, particularly in leisure because a lot of our leisure market hotels were heavily impacted. I can say that there was certainly anecdotal evidence for Torrey Pines that we have some strong leisure demand. And that hotel, obviously, wasn't impacted by any of the natural disasters. Business transient, we are seeing some pickup in business transient. We're seeing that in the first quarter a little bit as well as when we look on a forward basis. But there's just too much noise to really give you a trend specifically from this portfolio for leisure.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [4]

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Okay, that's helpful. And then when you look at Key West, and then the Napa Valley assets, I mean, are you back to normal at those 3 properties? Or is there still some continued disruption ongoing right now just from some of those natural disasters?

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [5]

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Yes. This is Richard. I think we're back on track on those properties. I think we would expect performance that is comparable to last year. And if it's not, it's not due to the ongoing impact of those events of last fall. So I think we're back.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [6]

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Okay, great. And then just last question. I apologize if I missed this. I jumped on a little late. But is there any update on the sale of Tampa? So that's still on schedule, process playing out, as you guys have expected?

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [7]

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Yes, the process is still ongoing. We're in negotiation. And hopefully, we'll have something to announce on that before long.

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Operator [8]

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Our next question comes from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [9]

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I wanted to ask you kind of what you're seeing maybe this quarter versus last quarter on acquisition opportunities. Is there any more -- has there been any more movement from the type of properties you're looking at, more willingness to sell or change in pricing, anything like that?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [10]

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Yes. I'd say that our pipeline is probably the thinnest it's been since I've been here. Buyers -- I mean, sorry, sellers continue to, in many cases, have heightened expectations on pricing. So I would characterize our posture as browsing at the moment. We're definitely looking at some things that are in the market. Frankly, we've got a lot of CapEx underway this year. And we're focused very much on organic growth within the portfolio, including our major renovation projects and, in the case of Ritz-Carlton, St. Thomas, a rebuilding project. So yes, I would characterize our acquisitions activity is rather light.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [11]

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Okay, fair enough. And probably a question for Jeremy. We've seen some pretty good performance across the board. I would include you guys in that with the expense side despite, I think, what we thought might be more inflation. How sustainable do you think that is at a high level? And are there any puts and takes that you think are coming down the road positively or negatively?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [12]

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I think we're -- great question. I mean, we're certainly still getting a load of the wage pressure with the Braemar portfolio. A lot of that we've already kind of experienced, and a lot of that is somewhat behind us. We have some of the markets that were pretty aggressive locally of instituting some increases in their minimum wages. Another headwind I would say is we're still seeing some increases in property taxes. And jurisdictions continue to be aggressive on their assessments, and we are much more aggressive fighting back on those assessments. So it's just a give-and-take and a complete battle across-the-board on a lot of our assets. We do believe that our renewal comes up here in June for our property insurance. And as it stands right now there's -- we're on the market -- we've been on the market for 3 months marketing our combined program of insurance. And what I could tell you right now is, for a range of increases, I would estimate probably a 30% to 50% increase in our property insurance cost for next year. Just to give you a number, that's probably only $1 million to $2 million. So it's not a significant impact to Braemar. And it actually puts us in line with probably where we were on this portfolio in the 2011 and 2013 time frame. We've been able to cut a lot of costs in our insurance program, but we're going to have to give a lot of those savings back up in this renewal. So there's several headwinds. What I could say is, on the positive side, we're starting to see some of the cost savings through the synergy that the Marriott's getting. And we've got a handful of Marriott Hotels -- Marriott-managed hotels. And so those are continuing to come in a little bit. And then also, I think that we've had so much adversity just the last couple of quarters. And we quoted the group pace the rest of the year and what we see in 2019. So I think that we have some good revenue to look forward to coming up. And revenue growth and ADR growth certainly alleviate a lot of those wage pressures and other cost pressures that we have. So overall, I think that this portfolio is positioned very, very nicely on a go-forward basis, given that we've got lot of the tough things behind us. And what I say is I'm very pleased with having dealt with all the adversity of the team, our risk management group, our asset management group, our revenue authorization teams, of what they've been able to accomplish, given all the renovations we've had, the natural disasters we've had, the comparably difficulty with the inauguration at Capital Hilton, and yet we're still able to generate decent EBITDA for the properties, certainly strong flow-through. So overall, we're very pleased with what we've done. And we're looking forward to the upcoming months, for sure.

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Operator [13]

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We'll take our next question from Michael Bellisario with Robert W. Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [14]

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I was hoping you can share your view on M&A and how you think about any potential strategic benefits of maybe either being a buyer or a seller in light of all the chatter around this front lately?

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [15]

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Yes. Well, there's a lot going on. It's interesting to look at it from our perspective. And we're kind of on the sidelines, as I think you know. With us, where we're trading, I think as we said in the past, our shares are significantly under what we would or what even you would put as intrinsic value or fair value. It doesn't make it that easy to pursue acquisitions. That said, there's always the opportunity for someone to see that and approach us. And we haven't ruled that out. That certainly could happen. So -- but at the moment, there's nothing new to report on that front.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [16]

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And any update in your thought process relative to your CapEx or expected CapEx spend on the buyback front to trying to help close that valuation discount?

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Deric S. Eubanks, Braemar Hotels & Resorts, Inc. - CFO [17]

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In terms of share buybacks? Is this the question?

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [18]

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Yes. Just as a follow-up to the comment on the shares being significantly below intrinsic value and...

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Deric S. Eubanks, Braemar Hotels & Resorts, Inc. - CFO [19]

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Yes. It's our experience and our view that, that is not something that would close the valuation gap, that the reduction in liquidity would have much more of a detrimental effect than a benefit of improving our valuation metrics. Our valuation metrics are very attractive already. So we're much more focused on ensuring that people understand the portfolio and the strategy and the story, and see the value on the portfolio and what we have to bring to it going forward.

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Operator [20]

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(Operator Instructions) And we'll take our next question from Matt Boone with B. Riley FBR.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [21]

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Sorry if I missed this, but with regard to the business interruption income, something from the hurricanes and wildfires, what should we expect, if anything, for the next 2 quarters and the balance of the year?

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Deric S. Eubanks, Braemar Hotels & Resorts, Inc. - CFO [22]

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Matt, it's Deric. We don't provide guidance on that. I would point you to the trailing EBITDA numbers that we report in our earnings release for St. Thomas. If you look at kind of second quarter last year, we would have the trailing 12 EBITDA in there for that property. I mean, that's probably the right way to model it, is to assume that we would get that. As we mentioned for those other properties, we expect pretty limited BI recoveries from those going forward, just given the fact that the operations there have recovered to more normal operations.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [23]

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Okay. And then one more. Just with the status of the renovations, when do you expect St. Thomas to be fully operational again?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [24]

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This is Jeremy. Right now, we're expecting it in October timeframe of 2019. And so there's some ability potentially to accelerate that. There's certainly some challenges that might delay it, but I think that's probably the best date that I can give you right now.

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Operator [25]

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And this does concludes today's question-and-answer session. I would now like to turn the call back to management for any additional or closing remarks.

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [26]

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So thanks, everybody, for joining us on our first quarter earnings call, and we look forward to speaking with you again on the next call. Have a good day.

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Operator [27]

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Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.