Executive Summary / Key Takeaways

• Braemar Hotels & Resorts, a REIT focused on high-RevPAR luxury hotels and resorts, is demonstrating a performance inflection, achieving its highest quarterly RevPAR in Q1 2025 and two consecutive quarters of RevPAR growth after a period of decline.
• The company is strategically enhancing its balance sheet and portfolio quality through targeted non-core asset sales, successful debt refinancings extending maturities and lowering costs, and significant redemptions of non-traded preferred stock.
• Urban hotels are currently driving portfolio growth with strong demand across segments, while the resort segment is expected to return to steady growth, supported by favorable supply-demand dynamics in high-barrier-to-entry markets.
• Elevated capital expenditures in 2024 and 2025 are focused on transformative renovations and strategic upgrades aimed at elevating asset positioning, enhancing guest experience, and driving future revenue and value appreciation.
• Key factors to watch include the execution of planned asset sales, continued progress on deleveraging towards the 35% net debt to gross assets target, the impact of ongoing renovations on property performance, and the sustained strength of group bookings and urban demand.

The Pursuit of Luxury: Braemar's Strategic Evolution

Braemar Hotels & Resorts Inc., established in April 2013, carved out its niche in the hospitality real estate sector with a clear mandate: to invest primarily in high revenue per available room (RevPAR) luxury hotels and resorts. Electing REIT status, the company operates through its limited partnership, owning interests in a portfolio strategically located in U.S. urban markets and resort destinations known for multiple demand generators. Unlike traditional operators, Braemar leverages an external advisory structure with Ashford Hospitality Advisors LLC, which also provides asset management, while day-to-day hotel operations are entrusted to third-party management companies, including major brands like Marriott (MAR) and Hilton (HLT), alongside affiliate Remington Hospitality.

The company's journey reflects an adaptation to evolving market cycles. Initially focused on growth through acquisitions, the strategy shifted in response to the "higher for longer" interest rate environment that constrained capital availability. The focus sharpened on fortifying the balance sheet, optimizing the existing portfolio through strategic capital investments, and selectively divesting non-core assets to enhance financial flexibility and align with the core luxury mandate. This strategic pivot is central to understanding Braemar's current trajectory and investment appeal.

In the competitive landscape, Braemar operates alongside major hospitality players like Hilton Worldwide, Marriott International, Hyatt Hotels (H), and Wyndham Hotels & Resorts (WH). While giants like Hilton and Marriott often employ asset-light franchise models, Braemar's direct ownership approach provides greater control over the luxury guest experience, potentially allowing for higher RevPAR in its niche resort properties. However, this model is more capital-intensive and can result in higher operating costs per unit compared to the scalable efficiencies of franchise models. Braemar's focus on high-barrier-to-entry luxury resorts offers a distinct positioning, particularly against competitors with broader portfolios spanning mid-scale segments like Wyndham. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Braemar's performance in its target luxury segment suggests effective positioning. The company's strategic response to competitive forces includes leveraging brand affiliations, enhancing property-level amenities through targeted CapEx, and focusing on high-margin ancillary revenues.

Regarding technological differentiation, the company does not appear to possess proprietary, core technology that provides a distinct competitive advantage in its hotel operations over alternatives. The company does incur expenses related to "Information and telecommunications systems," and has invested in OpenKey, a mobile key platform (though this investment is now impaired). While technology is acknowledged as impacting operations and business strategy, there do not appear to be unique technological moats or quantifiable benefits that differentiate Braemar's operational model from its competitors based on proprietary tech. Strategic initiatives instead focus on physical asset enhancements and brand alignment to drive competitive positioning.

Performance Momentum and Strategic Capital Management

Braemar's recent financial performance signals a notable shift. After six consecutive quarters of comparable RevPAR decline, the portfolio achieved positive growth in Q4 2024 (+1.9%) and accelerated this trend in Q1 2025 (+4.2%), reaching its highest quarterly RevPAR to date. This marks the second consecutive quarter of RevPAR growth, which management views as an important inflection point. Comparable total hotel revenue also saw solid increases, rising 5.3% in Q4 2024 and 4.4% in Q1 2025. This top-line momentum translated into comparable hotel EBITDA growth of 0.7% in Q4 2024 and a stronger 5.3% in Q1 2025, with hotel EBITDA margin improving by 34 basis points in the first quarter, reflecting successful cost containment efforts and enhanced operational efficiency.

Breaking down performance by segment reveals key drivers. Urban hotels have been a significant contributor to recent growth, delivering comparable RevPAR increases of 3.3% in Q4 2024 and an impressive 11.3% in Q1 2025. This strength is attributed to steady demand returning to downtown locations and robust performance across all demand segments, including corporate and group business. Even excluding the impact of the presidential inauguration on the Capital Hilton, the urban portfolio still achieved a solid 8.1% RevPAR growth in Q1 2025.

The resort portfolio, while experiencing some normalization from the elevated post-pandemic highs, continues to deliver strong absolute performance. Comparable RevPAR for resorts increased 1.3% in Q4 2024 and 1.9% in Q1 2025. Management believes the period of decline driven by unsustainable post-COVID factors has ended and anticipates a return to steady growth, supported by continued leisure demand and favorable supply constraints in high-barrier-to-entry resort markets.

Operational efficiency is a clear focus, with management highlighting improvements in productivity (labor hours per occupied room) and reduced reliance on contract labor. Wage growth is also noted as stabilizing, contributing to margin expansion efforts.

On the capital front, Braemar has been actively managing its debt and liquidity. A key achievement was addressing the only remaining final debt maturity for 2025 through a $363 million mortgage loan closed in March 2025. This loan refinanced two prior loans at lower interest rates (SOFR + 2.52% vs. SOFR + 2.66% and SOFR + 4.75%), extended the final maturity to 2030 (with extension options), and was secured by five hotels at an approximate 49% loan-to-value based on recent appraisals. This follows a similar refinancing of five hotels in August 2024 with a $407 million CMBS loan that also lowered costs and extended maturities. As of March 31, 2025, total indebtedness stood at approximately $1.20 billion, with a net debt to gross assets ratio of 42.3%. While a significant portion of the debt is variable rate (approximately 77% effectively floating), the impact of interest rate changes is partially mitigated by interest rate caps.

As part of its Shareholder Value Creation Plan, the company has made significant progress on preferred share redemptions, having redeemed approximately $90 million of non-traded preferred stock as of the Q1 2025 call, representing about 20% of the original capital raised. This initiative aims to deleverage the platform and improve cash flow per share. The company also has a $50 million common share buyback authorization in place, though execution is subject to market conditions and trading windows.

Strategic asset management includes targeted capital expenditures and portfolio adjustments. The sale of the Hilton La Jolla Torrey Pines in July 2024 for $165 million was a key step in divesting a non-core asset at an attractive valuation (7.2% cap rate on TTM NOI) and addressed 2024 debt maturities. Management is evaluating the sale of two additional non-core hotels. Significant CapEx is planned for 2024 ($70M-$90M expected) and 2025 ($75M-$95M anticipated), focused on transformative renovations at properties like Hotel Yountville, Park Hyatt Beaver Creek, Ritz-Carlton St. Thomas, Ritz-Carlton Dorado Beach, and the conversion of Cameo Beverly Hills to Hilton's LXR brand. These investments are designed to enhance asset quality, drive future revenue growth, and increase property values. The recent transition of Sofitel Chicago Magnificent Mile to a franchise structure managed by Remington is expected to provide an immediate uplift in value due to the brand retention and a management agreement terminable on sale.

Outlook and Risks

Management expresses optimism regarding the portfolio's outlook, citing strong booking pace and favorable market dynamics. Group pace is a key indicator, reported up 7% for 2025 and showing continued growth at 10% for 2026 (as of the Q1 2025 call). The expectation is for continued strength in urban markets and a return to steady growth in the resort segment, supported by historically low projected supply growth (0.8% over the next three years compared to a historical mean of 2%), particularly beneficial for high-barrier-to-entry resort locations.

The planned capital expenditures are expected to contribute to future performance by elevating the guest experience and driving incremental revenue. The company's dividend policy for 2025 includes an expected quarterly cash dividend of $0.05 per common share ($0.20 annualized), with the board reviewing the policy quarterly with a view to increasing it as financial performance improves.

However, the investment thesis is subject to several risks. The company's significant variable-rate debt exposes it to interest rate fluctuations, although interest rate caps provide some mitigation. While recent refinancings have improved the maturity schedule, the ability to refinance future maturities on favorable terms depends on capital market conditions. Cash trap provisions in loan agreements could restrict liquidity if hotel performance declines. Market-specific challenges, such as the ongoing softness in San Francisco or potential impacts from events like elections or natural disasters (as seen with hurricanes and wildfires), can affect property performance. Litigation risks, including ongoing class action lawsuits and a cyber incident settlement, represent potential liabilities, although management believes the ultimate resolution will not have a material adverse effect and expects insurance to cover the cyber settlement amount. The success of planned renovations in driving expected returns is also a factor.

Conclusion

Braemar Hotels & Resorts is navigating a pivotal period, marked by a strategic shift towards balance sheet optimization and targeted portfolio enhancement. The recent performance inflection, driven by strong urban hotel results and anticipated steady growth in the luxury resort segment supported by favorable supply dynamics, provides a foundation for the investment thesis. The company's proactive capital management, including successful debt refinancings and significant preferred share redemptions, is strengthening its financial position and improving cash flow metrics. Elevated capital expenditures are poised to unlock further value and enhance the competitive standing of its luxury assets.

While risks related to debt levels, market volatility, and operational execution remain, the company's focused strategy on high-RevPAR luxury properties, coupled with ongoing initiatives to deleverage and reinvest in the portfolio, positions it to potentially capitalize on the positive outlook for the hospitality sector. Investors should monitor the execution of planned asset sales, progress towards the leverage target, and the impact of renovations on property-level performance as key indicators of the company's ability to deliver on its value creation objectives.