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Edited Transcript of BHR earnings conference call or presentation 2-Aug-18 3:00pm GMT

Q2 2018 Braemar Hotel & Resorts Inc Earnings Call

Dallas Jun 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Braemar Hotel & Resorts Inc earnings conference call or presentation Thursday, August 2, 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 & Treasurer

* 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 Second Quarter 2018 Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Joe Calabrese with the Financial Relations Board. Please go ahead.

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Joe Calabrese, [2]

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Good morning, everyone, and welcome to today's call to review results for Braemar Hotels & Resorts for the second 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 a press release and has been covered by the financial media. At this time, I'll 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 following 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 August 1, 2018, can 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 of the information provided in the release. I'll 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. In January of last-year, we announced a revised strategy with a focus of investing in the luxury hotel segment. We took concrete steps to realign our portfolio to this strategy since that time including selling 2 properties, announcing an agreement to up brand 2 properties and acquiring 3 others. Empirical evidence shows that the luxury segment has the greatest RevPAR growth over the long term, which can translate into superior shareholder returns. Bolstered by strong consumer confidence trends and a healthy macroeconomic outlook, this thesis is proving true with the luxury segment, meaningfully, outperforming the overall industry during both the first and second quarters of 2018. According to Smith travel research, in the first quarter, Luxury segment RevPAR was up 6.6%, while in the second quarter, the Luxury segment posted 4.9% RevPAR growth versus 4% growth for all hotels. SCR and other industry forecasters expect this trend to continue for the remainder of 2018 and into 2019. By clearly aligning our platform with this segment, we believe Braemar is well-positioned to capitalize on these trends and continue to outperform our REIT peers. For the quarter, comparable RevPAR, excluding hotels under renovation, grew by 4.5%., while overall comparable RevPAR declined 1.1%. Much of this decline for the portfolio overall is explained by the negative RevPAR performance of the Ritz-Carlton, St. Thomas, which is under significant rehabilitation this year following Hurricane Irma. We reported adjusted EBITDA RE of $38.3 million versus $33.7 million in the prior year quarter, reflecting 14% growth, and an AFFO per share of $0.56 versus $0.50 in the prior year quarter reflecting 12% growth. Our overall portfolio TTM RevPAR of $223, continues to be the highest in the lodging REIT sector. During the quarter, we continue to actively manage our insurance recoveries related to the covered events last fall, namely Hurricane Irma and the Northern California Wild Fires. As we've discussed, we have comprehensive insurance in place for all of our hotels, and we continue to work closely with our insurers to both, seek recoveries from physical damage to our hotels as well as to minimize the impact to our property's P&L through business interruption insurance claims, which totaled $8.7 million during the quarter. While the recovery of business interruption proceeds should be complete at our Yountville properties as those properties have returned to normal operations, we would expect these recoveries to continue for some time at the Ritz-Carlton, St. Thomas, at least, through our planned reopening in October 2019. Business interruption proceeds recorded during the quarter, included $3.3 million for the Tampa Renaissance for lost profits related to the BP Deepwater Horizon oil spill in the Gulf of Mexico in 2010. We've been working on this dispute for several years, and it finally concluded with a settlement in the second quarter. Consistent with our portfolio of realignment strategy, during the second quarter, we completed the sale of the 293 room Renaissance Tampa International Plaza Hotel in Tampa, Florida for $68 million. We also continue to be on track with our Autograph Collection conversions at both the Courtyard Philadelphia Downtown and Courtyard San Francisco Downtown, which are expected to be completed in June and December 2019, respectively. We've also continued to make progress on our reinvestment strategy, as during the quarter, 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 downtown 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 is expected to yield attractive returns to the portfolio.

The initial EBITDA yield is 7.8%, and we expect it to stabilize at 9.5%. Our underwriting took into account some initial softness in room night demand as the market absorbs some new supply, but our downside is protected by a $5.5 million GOP holdback guarantee for 3 years. Despite RevPAR being down for the hotel this quarter, due to identified cost savings, we do not anticipate needing to draw on our GOP guarantee for 2018. In conjunction with this acquisition, 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. We continue to work through financial feasibility analysis related to our options for this land parcel. Concurrent with the completion of this -- of the acquisition, we financed the hotel with a $100 million nonrecourse-mortgage loan. Additionally, during the quarter, we refinanced 2 mortgage loans with existing outstanding balances totaling approximately $358 million, with a new $435 million loan. Deric will give more details on both of these financings in a moment. We believe, we have made great progress in the first half of this year in advancing our strategy. And we have seen that reflected in our strong total shareholder return performance through the first half of the year. Year-to-date, through the end of the second quarter, our total shareholder return was 21% versus 12.7% for our peers, an out-performance of 8.3 percentage points. Going forward, 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 will 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 & Treasurer [4]

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Thanks, Richard. During the quarter, as Richard mentioned, we recognized $8.7 million of business interruption income, which is reflected in the other hotel revenue line of our income statement. For the Ritz-Carlton St. Thomas, the insurance recovery is related to the months of March through May, and totaled, approximately $5.2 million. For the Bardessono and Hotel Yountville, these insurance recoveries related to the months of January through March, and included approximately $172,000 for the Bardessono and $19,000 for the Hotel Yountville. We also recognized $3.3 million for the Tampa Renaissance for lost profits related to the BP Deepwater Horizon oils spill in the Gulf of Mexico in 2010.

While we expect the business interruption proceeds to continue for some time at the Ritz-Carlton St. Thomas, we expect minimal to no further recoveries at the other 3 properties. For the quarter, we reported net income attributable to common stockholders of $9.8 million or $0.29 per diluted share, and we reported AFFO per diluted share of $0.56 compared with $0.50 for the same quarter last year. Adjusted EBITDA RE for the quarter was $38.3 million, which reflected a 14% growth rate over the prior year. At quarter's end, we had total assets of $1.6 billion. We had $994 million of mortgage debt, of which $47 million related to our joint venture partner's 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 4.6% and is entirely floating rate. All of our floating rate debt has interest rate caps in place. As of the end of the second quarter, we had approximately 45% net debt to gross assets and our trailing 12-month fixed charge coverage ratio was approximately 2.1x. Our next hard debt maturity is not until March of 2020.

We also ended the quarter with net working capital of $205 million. As of June 30, 2018, our portfolio consisted of 12 hotels with 3,314 net rooms. Our share count currently stands at 37.6 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 on our fully diluted share count, associated our Series B convertible preferred stock. With regards to dividends, the Board of Directors declared a second 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, as Richard indicated, during the quarter we closed on $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%. Additionally, we refinanced 2 mortgage loans with existing outstanding balances totaling approximately $358 million. The previous mortgage loans that were refinanced were the Morgan Stanley Pool and the Chicago Sofitel loans with final maturity dates in February 2024 and March 2019, respectively.

The new loan totals $435 million, and has a 2-year initial term with 5, 1-year extension options subject to the satisfaction of certain conditions. The loan is interest-only and provides for a floating interest rate of LIBOR plus 2.16%. Because we structured this financing as an agented CNBS transaction, we believe we achieved the lower spread than we otherwise would have on a principal loan. We continue to see very attractive debt financing markets for high-quality hotels, such as ours, and 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. As Richard mentioned, comparable RevPAR for our portfolio declined by 1.1%. However, for all hotels not under renovation during the second quarter, comparable RevPAR grew by 4.5%. Our portfolios' comparable RevPAR growth led to market share gains of 2 percentage points and 1.7 percentage points relative to both our hotels competitive sets and submarket chain scales, respectively. Hotel EBITDA flow-through was strong at 142%, driven by the business interruption income we reported during the quarter. Despite a 3.9% decline in total hotel revenue, hotel EBITDA increased by $2 million or 5.3% with margins increasing by almost 300 basis points.

In addition, year-to-date hotel EBITDA flow-through was robust at 125%. Easter following -- falling earlier this year on April 1, positively impacted April results. In addition, corporate transit demand remained strong with growth accelerating during the second quarter. This quarter's best-performing asset in terms of comparable RevPAR was at Courtyard San Francisco Downtown. The hotel completed the initial phase of its guestroom renovation early in the second quarter on April 15. The classroom renovation represents the first major milestone in our project to re-brand this property as an Autograph Collection hotel. In order to rebrand, as an Autograph, we plan on going back into the guestrooms to do construction, primarily modifications to the bathrooms from September to December 2018 followed by small installations in 2019 that will not cause displacement. So far, year-to-date guest satisfaction scores have more than tripled relative to last year, due in large part, we believe, to the superior room product we now offer. Coupled with a favorable comparison related to the Moscone Center closing last year, these new rooms have contributed to the hotel, growing comparable RevPAR by 27.2%. This RevPAR growth was comprised of rate growth of 13.6% and occupancy growth of 11.9%. This robust RevPAR growth resulted in the property increasing market share relative to both its competitive set and the upscale and above San Francisco/San Mateo market by 17.3 and 18.1 percentage points, respectively. Year-to-date, comparable RevPAR increased by 11.4%, representing increases relative to its competitive set and the upscale and above San Francisco/San Mateo market of 10.3 percentage points and 7.5 percentage points, respectively.

The strong performance of the hotel led to incentive management fees increasing by $719,000 during the second quarter. Despite incentive management fees increasing, hotel EBITDA margins still increased by 286 basis points, resulting in a $1.1 million or 39.8% increase in hotel EBITDA. Upon completion in the fourth quarter of 2019, the rebranding will have added 3 additional keys, a neighborhood centric restaurant concept, an open and enlivened public space, and an entirely new building envelope. The continued strong results fuel our excitement regarding the future conversion of this hotel to the Autograph Collection, and we have yet to see the full impact of the Moscone Center reopening, which is on track for December 2018. In addition to the outstanding performance of the Courtyard San Francisco Downtown, I wanted to briefly mention that another top performing asset, the Courtyard Philadelphia Downtown grew comparable RevPAR by 7.3% during the second quarter with 5.1% occupancy growth and 2.1% rate growth. This RevPAR growth represents 5.7 and 5.1 percentage point increases in RevPAR relative to properties competitive set and the upscale and above Philadelphia market, respectively.

Group and contract room nights increased 1,400 and 900 room nights, respectively, relative to last year, helping to drive 92.1% occupancy during the second quarter. The hotel revenue increased 10% resulting in hotel EBITDA growth of 9.6%. The second quarter results are the continuation of a strong start to 2018 for the Courtyard Philadelphia Downtown. Year-to-date comparable RevPAR has grown 13.8%, representing increases in share, relative to the upscale and above Philadelphia market and upscale change in the Philadelphia [CBD] of 7.9 percentage points and 6.5 percentage points, respectively. Hotel EBITDA flow-through was 58%, with hotel EBITDA increasing by $1.4 million or 24.5%. Similar to the Courtyard San Francisco Downtown, the continued strong performance of our Courtyard Philadelphia Downtown has us excited for its future as an Autograph Collection hotel. One item to note during the quarter was the performance of the Ritz-Carlton St. Thomas, which continued to experience the aftermath of the impacts from hurricanes, Irma and Maria, posting a 56.3% comparable RevPAR decline during the second quarter. Through our business interruption insurance, we were able to report $5.2 million for the second quarter.

Our risk management group, on the Ashford asset management team is a true differentiator when it comes to peers in the industry, and their work and expertise continue to be highlighted throughout the Ritz-Carlton St. Thomas recovery process. Our teams are working diligently on the remodeling, including recent visits by the senior team to assess the model rooms that have been built and finalize the selection materials and furnishings. Additionally, non-recovery related leisure guests are already returning to the property and it is, again, available on the Marriott central reservation system as a non-branded St. Thomas Great Bay Resort, with limited room stock. Permanent roof work is underway, and guest room building work is expected to start in September 2018 with the expectation for renovation completion in October 2019 when it will be reopened as the Ritz-Carlton St. Thomas on Marriott's central reservation system. As we continue to conduct insurance funded work and book business interruption claim proceeds, we were also able to successfully obtain benefits from Marriott, including favorable owner priority treatment on our capital expenditures and other operating operational and capital benefits. In addition to the ongoing recovery at the Ritz-Carlton St. Thomas, I'm happy to say that we reported $190,000 in business interruption income to wrap up our Napa Valley wildfire claim for Bardessono and Hotel Yountville.

Sticking with our Napa Valley properties, we're beginning to realize the revenue and expense synergies we underwrote 1 year ago when we acquired Hotel Yountville. Second quarter comparable RevPAR for the hotel grew 5.9% representing increases of 13.5 percentage points and 7.1 percentage point relative to its competitive set and independent Napa Valley hotels, respectively. Hotel EBITDA flow-through was 96%, and hotel EBITDA increased by $225,000 or 14.5%. As Richard mentioned, we are excited to welcome the high-quality Ritz-Carlton Sarasota into our portfolio, which we acquired on April 4. Sarasota is a high-growth market, and the Ritz-Carlton, which is comprised of the resort, beach club and golf club is the only luxury chain scale hotel in the market.

With no luxury chain scale hotels in the market pipeline, we see long-term growth potential. However, in the near-term, a sizeable amount of upper upscale supply has either recently entered the market or is in planning or under construction. While the near-term supply growth will certainly affect RevPAR, we expected this impact and incorporated it into our underwriting and pricing of the hotel. Beyond the expected supply growth impact, May experienced historically high rainfall in conjunction with tropical storm Alberto over Memorial Day weekend. As expected, comparable RevPAR declined during the second quarter, coming in at negative 8.5%. However, hotel EBITDA flow-through was strong at 78%. The hotel was able to drive profitability in a number of ways during the second quarter by increasing golf revenues, by implementing programs to realize utility savings, by reducing administrative costs, as well as by increasing the resort fee, $5 at the beginning of June.

We're also developing plans to increase golf memberships and add additional rooms. In addition, we are pleased to announce the completion of the Sofitel Chicago Magnificent Mile's $13.9 million guestroom and corridor renovation on May 1. All guestrooms soft goods -- select case goods, 55-inch TVs, locally inspired art work and new automated window coverings were included in the renovation. Despite only realizing the benefits of the renovation for a portion of the second quarter, total hotel revenue grew 3.3 %, and hotel EBITDA flow-through was strong at 107%. Hotel EBITDA increased [$362,000] or 11.3%. We're excited for continued strong performance going forward with the new rooms product. I will now turn to capital investment. During 2018, we will continue to invest in our portfolio to maintain competitiveness. In total, we estimate spending approximately $65 million to $85 million in capital expenditures during the year, this will predominantly be comprised of the strategic acceleration of capital projects to limit displacement, specifically at the Courtyard San Francisco while the Moscone Center remains under renovation as well as pulling forward additional amenity enhancements at the Ritz-Carlton St. Thomas while the resort is under renovation. Additionally, this includes 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'll be adding 7 additional rooms in the Park Hyatt Beaver Creek and a 3 key Presidential Villa at 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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We'll take our first question from Bryan Maher with B. Riley FBR.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [2]

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This is actually Matt on for Brian. Just looking at the Key West asset, what was the drop in occupancy primarily attributable to?

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

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Well the market has been a little slow to recover still from the hurricane, and so we've had a decline in some of the small wedding group business, some weekend business as well, as well as, I mentioned on the call -- or in the prepared remarks, the impact to the Ritz-Carlton Sarasota from the tropical storm that was at the end of May. That impacted Key West as well. So during this time of year, during the summer time of year, there is a lot of drive-to business, and so there was quite a bit of cancellations over Memorial Day weekend.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [4]

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Okay, great. And then turning to the 22-acre plot that you guys acquired during the quarter. What's been considered as the long-term plan there? Or it -- is there anything that you can share with us about, what you guys are considering?

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

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Yes, when we acquired that plot, it was in the final stages of being entitled for a residential development that would include approximately 100 condominiums. What we are in the process of figuring out now is the financial feasibility of that plan, but then also looking at other plans that would generally have a residential component to it. So once we are completed with that analysis, we will have much better idea as to the right way to progress that project.

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Matthew David Boone, B. Riley FBR, Inc., Research Division - Associate [6]

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And last one for me is, can you just give some color on the current acquisition environment, and any opportunities that you're currently seeing?

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

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Sure. We're staying actively involved in assessing the market. I think given where we are, capital wise, and we are at our leverage target at the moment, we're more evaluating and seeing what's out in the market versus actively pursuing opportunities. I would say that, if something that comes along that is undeniably a great investment opportunity, we would look at it pretty hard. But at the moment, we're just assessing what's out there.

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Operator [8]

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Our next question will come from Michael Bellisario with Baird.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [9]

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A question for Jeremy on the CapEx side. Kind of high-level and related to Philly and San Francisco, but also just kind of budgeting in the process on CapEx. How much do you guys prepay, pre-fund, and as you guys are thinking about projects? How do you mitigate the risk of labor costs going up, labor shortages and then the material cost increases that we've seen? Just kind of your view around how you budget, and what's at risk for certain projects as you evaluate them?

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

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That's a great question. We have our affiliate project management group that does -- has a tremendous experience, decades of experience of renovation work, which as you know is contemplated to be acquired by Ashford. And so there is a huge benefit to having that strategic relationship. We just have a tremendous amount of construction knowledge and expertise. To your question, whether or not we actually pre-buy FF&E, that is very rare for us to do. And the reason why, is because we go through a full model room process, design process with the brands. And -- but as soon as that process is done, we do buy our FF&E. And we've got a great track record of securing the best pricing. We go through all different types of markets to secure that. And so we've done a good job of mitigating those costs. And I think we've always had really good competitive pricing on our renovations. With the 2 Autographs, what we did is, we built in quite a bit of a contingency in the numbers that we shared with the public markets. And we have price escalations in our budgets. So there is a tightage that you're seeing in some labor in some markets, but we've seen very competitive bidding and have had a lot of interest in our renovations. And so I don't see a huge risk for those 2 renovations. One thing I will note it is on Philadelphia, we had elected to pull forward a little bit of additional CapEx. One of the things we negotiated as part of that renovation is that we would not have to do carpet in the guestrooms and the corridors, with very limited work in the corridors. And the issue with that is that, we would just be back in the rooms a couple of years later, which would cause additional displacement, which I was comfortable to do. But we were able to negotiate some favorable treatment on pulling forward that CapEx, which creates, basically, an ROI component on that renovation. So we'll have a little bit of pull forward CapEx, but we haven't had anything that is really incremental to our capital budgets at this point. And I could tell you that, I'm very excited about those repositionings. It was one of the things that I probably worked the hardest on in my career with Marriott, is to convince them that -- on our plan here. And everything that we're doing from a positioning standpoint, from a branding standpoint, from a design standpoint, from a transitional standpoint, of really moving that asset up -- both assets up, it has well exceeded my expectations. So we're very excited about it, and I'm very confident that we're going to get very competitive pricing on the renovations as well as minimize, as much as we can, the displacement with both hotels.

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Michael Joseph Bellisario, Robert W. Baird & Co. Incorporated, Research Division - VP and Senior Research Analyst [11]

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That's helpful. And then switching gears on the enhanced return funding program that Trust announced a few weeks ago. Particularly, the question is, why haven't you pursued something or announced something similar. And I guess what would get you over the hump to set up a similar arrangement, especially, if you're kind of looking at acquisitions, but you need a kind of a home run or a triple to get across the finish line to push leverage higher. Doesn't that funding program maybe get you there?

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [12]

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It's a great question. It is something that we're certainly open to, we haven't ruled it out. As these things go, the process for implementing the program involves establishing independent committees for both entities for -- and what was already announced in the case of Ashford Inc. and Ashford Hospitality Trust. So that's a little bit of a process. But it is true that that is a very favorable arrangement for the REIT. The market also responded very favorably towards it, and it allows the REIT to generate outsized returns on their investments. So it's something that is worth considering for Braemar as well.

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Operator [13]

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(Operator Instructions) Our next question will come from Chris Woronka with Deutsche Bank.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [14]

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I want to ask you about the 2, in Philly and San Francisco, the 2 Courtyard conversions. At what point do you kind of -- are you able to begin, I guess, selling those, whether it's kind of back channel Marriott or a front facing, to kind of see if that initial response is in the -- for the higher rates is in the range that you're underwriting?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [15]

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We're still working out that full plan with Marriott. But typically, it's a few months before. And we'll announce the full branding and all the upgrades, but we typically wait closer to the opening of the hotel. Now, one of the things that we have as a benefit as it relates to group, we are able to share with them the rooms in San Francisco, which are already -- mostly done and the vision that we have with Philadelphia. So from a group perspective, we're going to be doing that now, essentially, explaining the benefits of the up-branding. But as you know, transient demand is, generally, on average, just 3 weeks out. So it's something that we kind of wait closer to the actual conversion of the hotel. But we'll have a full branding press release, PR campaign around it. And we've done this in the past with other renovations and it's been proven very, very successful for us.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [16]

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And then, Jeremy, a follow-up for you. If we look at the portfolio on the whole, should we be thinking directionally less renovation impact next year on the whole or more. Is it possible to just kind of let us know your thoughts on that.

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [17]

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I think that -- obviously, St. Thomas is going to be under heavy renovation. We kind of exclude that out and then run that through our business interruption. But the major renovations are going to be San Francisco and Philly. And maybe I should just kind of walk you through just so you understand what components of those renovations and how we're phasing that. We have already done rooms at San Francisco, and there is some bathroom work that we need to do as part of that rebranding. But it's very limited bathroom work. So we're going to be in the guestrooms, currently contemplated through September of this year through December of this year. But it's only going to be one floor out is we're looking at, at a time. And the terms are ranging only from 5 days that rooms will be out, to as many as 15 days, and that's only 2 floors that are 15 days. So most of them are going to be out for 5 to 10 days. So we anticipate pretty quick turns in the second quarter and third -- I'm sorry, third quarter and fourth quarter for San Francisco. And then we go into the public space. And the public space is going to be pretty impactful as well as the exterior of the hotel. But we plan to phase that and limit as much from the guest experience as possible, and we've got to get track record of doing that as well. We call them stealth renovations. But the good news is that, it's not going to have any displacement for guestrooms. We'll some limited go-backs into the guestrooms, but that's mainly going to be some pieces of furniture that we'll have to go back and put back into the guestrooms. So not really taking them out of service. So San Francisco should have very limited rooms out. And then Philadelphia, we'll have rooms out, and that basically will be completed in the second quarter of next year. And so from a renovation perspective, I would anticipate that we would actually probably be equal to, maybe a little bit less next year than what we have this year. And we have, obviously, some favorable comparisons in some of the markets where we've had a lot of natural disasters, in Yountville, and Key West and even with the lack of snow in Beavercreek.

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Chris Jon Woronka, Deutsche Bank AG, Research Division - Research Analyst [18]

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That's helpful. Maybe a question for Richard. You mentioned you're kind of at the leverage target. A, are there are any hotels remaining that maybe fall into a noncore position. You've gotten rid of most of the ones that you initially identified. And the second question is just, as it pertains to leverage target, is that based on kind of a current -- a trailing kind of EBITDA number or a forward EBITDA number. Just because you have so many moving pieces, as we look out, the leverage kind naturally declines. How do you guys kind of define it.

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Richard J. Stockton, Braemar Hotels & Resorts, Inc. - President & CEO [19]

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Yes, so I'll take your second question first. We define our leverage target as 45% net-debt-to gross assets. And that was the strategy that we announced, I guess, in January 2017 and have worked to maintain that. So we're right at that target level now. In terms of other recycling of capital, was your question and are there other noncore assets in the portfolio, at the moment, we haven't identified any others as noncore. I think, there would be 2 reasons we would deem something noncore, is if the RevPAR was significantly lower than the portfolio average, and if it was not a luxury asset. We have some upper upscale assets that are relatively high RevPAR for being upper upscale and are contributing a significant amount of EBITDA to the company, namely Marriott Seattle, the Capital Hilton and Hilton Torrey Pines. So despite them being, not technically luxury chain scale, those are assets that we very much have optimism about and are a very big contributor to our financial performance. So that's a long way of saying, we have not identified any other noncore assets at the moment and don't have any plans to sell any of the assets in the portfolio at the moment.

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Operator [20]

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Tyler Batory with Janney Capital Markets has our next question.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [21]

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I've got a few questions here for Jeremy. You called out strong corporates in the quarter. Any general observations on what you're seeing with leisure travel?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [22]

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Yes, I would say that corporate demand was stronger in the quarter than leisure. But we saw growth across all of our segments, all of our channels, with the exception of wholesale and discount, which is great. As well as, we had a slight decline in our group for the quarter as well. But a lot of the group declines, were specific to certain properties. And in most cases, we were able to backfill it with higher rated transient demand. So I think overall, pretty robust for our portfolio. And the weakness were in the channels that we like to see some declines anyway, if we have strength in other channels.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [23]

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Okay, that's helpful. Can you talk about your group pace, especially, for 2019?

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

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Yes, the outlook is -- and the numbers on that quote exclude St. Thomas because there is just so much noise with that hotel being under renovation. But group pace is very healthy for our portfolio, really starting in Q3 of this year continuing on to Q4. So Q3 of this year is up 4.2%, Q4 is up 14%. 2019 is up 8% for the year, but it's predominantly up Q1 through Q3, because Q1 is up 12%, Q2 is up 9% and Q3 is up 18%. And then the fourth quarter is down 8%. A part of that is because we have a very strong Q4 of this year. But the good news is that the further out is generally better for us because we have much more time to address those pace deficits. But overall, 2019 is very, very healthy and it's comprised of the Q1 through Q3.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - VP of Travel, Lodging and Leisure [25]

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Then last question from me. Can you talk a little bit about Chicago. I'm just kind of curious your view on that market long-term. And obviously, you guys completed that renovation here on May 1. How much of a lift do you think you could get in the second half of this year and into next year, just based on that renovation?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [26]

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So I would anticipate that Sofitel is going to outperform Q3 and Q4 this year. We're pretty bullish with tailwinds of that renovation as well as we've changed out with the core management, a lot of the key team members. And we are very, very pleased with our director of sales, and our on-property leadership as well as the General Manager. So I think that hotel is very well positioned. There are some challenges in the market with some new luxury supply in 2019 as well as with the general convention calendar. And so those are things, that we're still addressing from a group pace perspective. And so there are some need time periods that we're working through with the hotel. But, at least, for the balance of this year, I would anticipate it to be a strong performer for us.

Long-term, I think it's a great asset. And we're very pleased that, as part of the integration, that the Fairmont leadership in the U.S. and North America has taken over, because they have been a lot more beneficial to -- they oversaw the property. We really struggled with just the old core corporate leadership, which was not as impressive as Fairmont.

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Operator [27]

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Our next question will come from [Milos Pats] from Edison Investment Research.

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Unidentified Analyst, [28]

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Firstly, would you be able to comment a little bit on your property tax and insurance costs? We've seen some uptick in the second quarter. You already mentioned earlier that you feel -- that you face some pressure on the property tax side and you might see some pickup in insurance costs next year. But just wanted to ask you whether there is any additional points to comment on. And secondly, would you be able to talk us through, maybe, the prospects of incentive fees kicking in on some of your properties. Is there any, let's say, potential impact on coming quarters of 2019 from this point?

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Jeremy J. Welter, Braemar Hotels & Resorts, Inc. - COO [29]

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This is Jeremy. So property taxes were up 16% in the quarter. But what drove that, is not necessarily an increase, a huge increase in property taxes. It's the comparability, because in the second quarter of last year we had some major property tax refunds and adjustments where we had big settlements that ran through the P&L. And so I think it's -- from a comparability statement, it's a little bit out of sync. But it's something we continue to be pretty aggressive on and fight back, and we're seeing some escalation in that area. On insurance, we complete our renewal. I gave a range, and we were on the high end of that range. So I think I said 30% to 50%, we were actually a little bit higher than 50%. So I was very disappointed with the renewal pricing that we have for our portfolio. We're also looking at other -- we're actually contemplating maybe even repricing our portfolio now that the market is starting to see a lot more demand, given that, it's settled down a little bit from the impacts of all the catastrophes last year. But it was a really, really, really tough renewal process for us. But we were able to increase our coverage in certain areas. And so it's something that I would anticipate that over time, our insurance cost will continue to come down. What you typically see is, the industry will have a big -- a bad year and the pricing is very difficult in that first year. But then it generally comes down in years 2, and beyond. So I'd anticipate that could be a savings on a go forward basis after we transition out of that renewal period.

Regarding incentive fees, I would anticipate with San Francisco's performance, for incentive fees to continue to increase for our portfolio, because they were adversely impacted last year with the renovation that we had and the Moscone Center being under renovation as well. And so with the decline in performance of the Courtyard San Francisco last year, we actually had a big decline in incentive fees. Well that's coming back as property performs and outperforms. But one of the things I think is important for analysts and investors to know is, we did negotiate some favorable terms as part of the rebranding on our incentive fees for both Courtyard San Francisco and courtyard Philadelphia, but those won't come into play until after the completion of those renovations. And so on a go-forward basis long-term, I expect it to not to be as much of a factor as what it currently is for both those assets.

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Operator [30]

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At this time, this does concludes our question-and-answer session. And I would like to turn the call back over to management for closing remarks.

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Deric S. Eubanks, Braemar Hotels & Resorts, Inc. - CFO & Treasurer [31]

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Thank you all for joining us on our second quarter earnings Call. Please be on the lookout for our save the date for our Investor Day that we plan to host in New York City in October. And we look forward to speaking with you again on our next call. Thank you.

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Operator [32]

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That does concludes our conference for today. Thank you for your participation.