Debt Refinancing And Capital Spending Will Transform Hotel Operations

Key Takeaways

• Return to RevPAR growth and resurgence of group bookings signal potential revenue growth as industry fundamentals improve.
  
• Strategic capital expenditures and asset management practices are expected to drive long-term revenue growth and improve net margins.
  
• Braemar Hotels & Resorts faces multiple financial pressures, including net losses, floating debt vulnerability, loan refinancing uncertainty, environmental risk exposure, and high capital expenditure.

Catalysts

Together with its subsidiaries (“Braemar”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”) luxury hotels and resorts.

• The return to RevPAR growth after a period of decline and the resurgence of group bookings indicate potential revenue growth as industry fundamentals improve.
  
• Active discussions and progress on debt refinancing aim to eliminate significant debt maturities in 2025, potentially lowering interest expenses and improving net margins.
  
• Strategic capital expenditures, such as enhancing guest experiences and venue renovations, are expected to drive long-term revenue growth and improve EBITDA as demand increases.
  
• Strong forward bookings and anticipated growth in resort and urban segments hint at robust future revenue growth, supported by supply constraints in capital markets.
  
• Improved asset management practices, including operational efficiencies and strategic pricing adjustments, are expected to enhance net margins and bolster overall earnings.

Braemar Hotels & Resorts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Braemar Hotels & Resorts's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts are not forecasting that Braemar Hotels & Resorts will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Braemar Hotels & Resorts's profit margin will increase from -7.0% to the average US Hotel and Resort REITs industry of 5.5% in 3 years.
• If Braemar Hotels & Resorts's profit margin were to converge on the industry average, you could expect earnings to reach $40.6 million (and earnings per share of $0.53) by about April 2028, up from $-51.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, up from -2.6x today. This future PE is lower than the current PE for the US Hotel and Resort REITs industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Braemar Hotels & Resorts Future Earnings Per Share Growth

Risks

• The company continues to report net losses, with a net loss attributable to common stockholders of $31.1 million in the fourth quarter and $50.9 million for the full year, which could impact long-term earnings and investor confidence.
  
• A significant portion of Braemar's debt is floating (77%), making it vulnerable to interest rate increases, which could further impact net margins and increase financial risk.
  
• The upcoming refinancing of a $293 million loan introduces uncertainty and potential risk if favorable terms cannot be secured, affecting future revenue and cash flow.
  
• The recent temporary demand fluctuations due to environmental events like the California fires highlight the company's exposure to such risks, leading to potential volatility in revenues.
  
• Heavy investment in capital expenditures ($70 million in 2024, with an increase expected in 2025) may pressure cash flow and limit resources for responding to unexpected financial challenges.

Valuation

• The analysts have a consensus price target of $3.0 for Braemar Hotels & Resorts based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $735.9 million, earnings will come to $40.6 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 11.4%.
• Given the current share price of $1.95, the analyst price target of $3.0 is 35.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.