Braemar Hotels (BHR) Q3 2023: Urban Hotel EBITDA Climbs to $16M as Resort Mix Shifts
Braemar Hotels’ Q3 reveals a decisive urban recovery, with urban hotel EBITDA reaching $16 million, even as resort softness and margin pressures persist. Management is leaning into group demand and brand partnerships to offset normalization at resorts, while maintaining liquidity through strategic refinancing. With group pace up double digits for 2024, the company’s capital allocation and operational focus are set to shape its next phase of performance.
Summary
- Urban Hotel Momentum: Urban segment recovery is now the primary growth lever as group demand accelerates.
- Margin Headwinds: Resort normalization and insurance inflation continue to pressure portfolio-wide profitability.
- Capital Discipline Focus: Liquidity preservation and refinancing remain central to navigating an uncertain rate environment.
Business Overview
Braemar Hotels & Resorts is a publicly traded real estate investment trust (REIT) specializing in owning luxury hotels and resorts in high-barrier-to-entry markets. The company generates revenue primarily from hotel operations, with its portfolio split between urban properties and destination resorts. As of Q3 2023, Braemar’s 16-hotel portfolio comprises 3,957 rooms, with recent acquisitions including the Ritz-Carlton Reserve Dorado Beach and Four Seasons Resort Scottsdale at Troon North, both contributing to the company’s luxury positioning.
Performance Analysis
Braemar’s third quarter results highlight a notable divergence between its urban and resort segments. Urban hotels delivered $16 million in comparable hotel EBITDA, up 3% year-over-year, and are benefiting from a resurgence in corporate and group travel. In contrast, resort properties saw a 13% decline in revenue per available room (REVPAR) compared to the prior year, reflecting post-pandemic normalization and softer leisure demand, though both demand and rates remain well above 2019 levels.
Margin pressures were evident, driven by a combination of lower average daily rates (ADR) across the portfolio, a shift in revenue mix toward lower-margin urban assets, and a sharp increase in property insurance costs—especially at Florida and hurricane-exposed locations. Despite these challenges, Braemar’s overall portfolio REVPAR remains 10% above 2019, and luxury hotel REVPAR is 21% higher than the national luxury average, underscoring the quality of its assets.
- Urban Segment Outperformance: Urban hotel EBITDA up 3% YoY, with group room revenue up 8% and an 87% increase in forward group bookings.
- Resort Segment Normalization: Resort REVPAR fell 13% YoY, but ADR remains 46% above 2019, signaling resilient rate integrity.
- Margin Deterioration: Insurance cost inflation and mix shift toward urban assets contributed to 100 basis points of EBITDA margin erosion.
Recent acquisitions are outperforming underwriting, with the Ritz-Carlton Reserve Dorado Beach posting a 9.3% yield on cost and the Four Seasons Scottsdale at 7.4%—both well above initial expectations. Labor efficiency initiatives and targeted capital expenditures are supporting operational improvements across the portfolio.
Executive Commentary
"We remain very encouraged by the continued momentum for [the urban] segment, which generated $16 million of comparable hotel EBITDA. This return continues to be driven by corporate transient as well as recent strength in corporate group demand that is expected to accelerate during 2024."
Richard Stockton, President and Chief Executive Officer
"During the quarter, we announced a new $200 million corporate financing... The financing is secured by a borrowing base of three hotels... and we use the proceeds from the financing to pay off the existing mortgage loans on those properties."
Derek Eubanks, Chief Financial Officer
Strategic Positioning
1. Urban Portfolio as Growth Engine
Urban hotels are now positioned as Braemar’s primary driver of portfolio growth, with group demand and corporate transient travel rebounding strongly. The company expects urban assets to lead EBITDA gains in coming quarters, leveraging increased group bookings and favorable booking activity for 2024.
2. Resort Asset Optimization
Resort assets are undergoing strategic revenue management, with leadership prioritizing rate integrity over occupancy. The company is leveraging in-house revenue optimization, loyalty programs, and targeted group business to offset leisure softness without sacrificing ADR. Labor flexing and operational efficiencies are being aggressively pursued to protect margins.
3. Capital Allocation and Balance Sheet Flexibility
Braemar’s refinancing activity and liquidity management reflect a cautious approach in a volatile rate environment. The company closed $200 million in new corporate financing, upsized and extended key property loans, and is preserving cash for upcoming debt maturities and high-ROI CapEx projects. Share buybacks are under consideration but remain secondary to liquidity preservation until rate visibility improves.
4. Brand Partnerships and Asset Repositioning
The rebranding of Mr. C. Beverly Hills to Cameo Beverly Hills, with a $25 million renovation and integration into Hilton’s LXR brand, signals a strategic push toward leveraging global reservation systems and loyalty programs for incremental demand and rate power.
5. Operational Efficiency Initiatives
Labor management and productivity gains are central to margin defense, as evidenced by a 30% reduction in contract labor usage and a 4% decrease in total labor hours, despite only a 1% drop in occupancy. Newly acquired hotels are seeing double-digit improvements in labor productivity and GOP margin through targeted management systems and task force utilization.
Key Considerations
This quarter’s dynamics highlight Braemar’s strategic pivot toward urban-led growth, disciplined capital management, and a focus on operational efficiency to offset sector-wide headwinds.
Key Considerations:
- Urban Recovery as Growth Lever: Urban hotels are now the portfolio’s primary EBITDA driver, benefiting from group demand and corporate transient recovery.
- Resort Rate Discipline: Management is prioritizing ADR over occupancy, using group business and loyalty channels to mitigate leisure demand normalization.
- Margin Pressure from Insurance and Mix Shift: Insurance inflation and a higher weighting of urban revenue are compressing portfolio margins despite operational improvements.
- Liquidity and CapEx Prioritization: New financing and loan extensions are designed to preserve flexibility for debt maturities and high-return capital projects, rather than immediate shareholder returns.
Risks
Interest rate volatility and insurance cost inflation remain material risks, especially given the company’s floating rate debt exposure and geographic concentration in weather-prone markets. A prolonged high-rate environment could constrain refinancing options, limit buyback flexibility, and increase interest expense. Resort demand normalization may persist longer than expected, potentially delaying a return to positive growth in that segment. The company’s reliance on group and corporate travel recovery also introduces exposure to macroeconomic and business cycle risks.
Forward Outlook
For Q4 2023, Braemar expects:
- Continued urban segment outperformance, driven by group and corporate demand acceleration.
- Resort segment stabilization with rate integrity maintained, but no immediate return to positive YoY growth.
For full-year 2024, management signaled:
- Group revenue pace up 17% YoY for 2024, with both corporate and social segments contributing.
Management’s outlook is anchored in urban momentum, group pace strength, and solid liquidity, but remains cautious given macroeconomic and geopolitical uncertainties.
- Urban hotels expected to drive portfolio growth.
- Liquidity to be preserved to address debt and CapEx needs.
Takeaways
Braemar’s Q3 marks a turning point, with urban hotels overtaking resorts as the portfolio’s main growth engine. Management’s focus on group demand, operational efficiency, and balance sheet flexibility positions the company for resilience, but margin headwinds and macro risks require ongoing vigilance.
- Urban Outperformance: Urban segment’s EBITDA and group booking surge are offsetting resort softness, reshaping the portfolio’s growth profile.
- Margin and Mix Headwinds: Insurance inflation and a shift toward lower-margin urban revenue are compressing profitability, despite labor gains.
- 2024 Watchpoint: Sustainability of group demand and the pace of resort recovery will be critical for next year’s earnings trajectory.
Conclusion
Braemar’s Q3 underscores a strategic pivot toward urban-led growth, disciplined liquidity management, and operational efficiency as the company navigates a shifting demand landscape. The outlook hinges on sustaining group momentum and managing margin pressures as macro and rate headwinds persist.
Industry Read-Through
Braemar’s results reflect a broader lodging REIT trend: urban recovery is outpacing resort normalization as business and group travel return. Margin pressures from insurance and labor are industry-wide, particularly for portfolios with Florida or weather-exposed assets. The company’s emphasis on brand partnerships and loyalty programs signals an ongoing shift toward leveraging global platforms for incremental rate and occupancy. Investors should monitor group pace and ADR trends across the sector, as well as refinancing and CapEx discipline, as rate and insurance volatility remain key risks for all hotel REITs.