Braemar Hotels & Resorts: Dividend Sustainability Under Pressure? A Deep Dive into Cash Flow and Strategy

Braemar Hotels & Resorts (NYSE: BHR), a lodging REIT with a portfolio of upscale and luxury properties, faces a pivotal moment as it navigates financial strain while maintaining dividend obligations on its preferred stocks. With a net loss of $0.47 per share in Q4 2024 and ongoing challenges in revenue growth, investors must assess whether the company's cash flow resilience, asset management initiatives, and preferred stock obligations are sustainable. Below is an analysis of Braemar's position, risks, and potential paths forward.

Cash Flow Resilience: Liquidity Challenges and Hidden Strengths

Braemar's Q4 2024 cash flow metrics reveal a mixed picture. While the company reported a net loss of $31.1 million, its liquidity position remains intact, with $135.5 million in unrestricted cash and an additional $49.6 million in restricted cash as of December 31, 2024. Combined with $22.9 million due from hotel managers, total accessible liquidity reached $208 million. This buffer is critical for meeting near-term obligations, including dividends on its Series B, D, E, and M preferred stocks, which totaled roughly $24.2 million in Q3 2024 alone (calculated using dividend rates and outstanding shares).

However, Braemar's adjusted funds from operations (AFFO) turned negative at -$0.06 per diluted share in Q4, signaling pressure on cash generation. ADR declines and occupancy struggles (despite a 63.5% occupancy rate in Q4) highlight operational inefficiencies. To put this in context:

The company's net debt-to-gross assets ratio of 40.8% as of December 2024 is manageable, but it underscores the need to reduce leverage. Braemar's recent debt repayments—such as the $30 million Cameo Beverly Hills loan—suggest proactive risk management, but further progress hinges on asset sales and cost controls.

Asset Management: A Focus on High-Value Sales and Capital Recycling

Braemar's shareholder value creation plan centers on selling non-core assets to reduce debt and fund dividends. The $165 million sale of the Hilton La Jolla Torrey Pines—expected to close in August 2024—is a cornerstone of this strategy. The property's 7.2% capitalization rate (based on trailing NOI) reflects strong demand for luxury assets, but Braemar must ensure proceeds are allocated wisely.

• Debt Reduction: Proceeds will be used to repay $50 million of preferred stock and address remaining 2024 maturities.
• Buybacks and Dividends: A $50 million common share buyback program aims to boost shareholder returns, while preferred dividends remain sacrosanct.

However, risks persist. The Torrey Pines sale is contingent on closing, and Braemar's ability to sell additional properties at attractive cap rates—especially in a cooling lodging market—remains uncertain. Competing priorities, such as capex for maintenance and renovations, could strain cash flow further.

Preferred Stock Obligations: A Delicate Balancing Act

Braemar's preferred stock structure adds complexity to its dividend sustainability. Key obligations include:
- Series B (5.5%): $0.3438 quarterly per share (outstanding: ~15.2M shares as of Q2 2024).
- Series D (8.25%): $0.5156 quarterly per share (outstanding: ~15.2M shares).
- Series E & M (Redeemable): Monthly dividends ($0.15625 and varying rates) on ~16.1M and ~1.6M shares, respectively.

The total annual dividend payout for preferred stock exceeds $120 million, assuming full participation. Braemar's recent plan to redeem $50 million of preferred stock using Torrey Pines proceeds is a positive step, but it must avoid defaulting on cumulative dividends—a trigger for potential investor backlash.

Investment Thesis and Risks

Bull Case:
- The Torrey Pines sale proceeds and buyback program stabilize liquidity.
- Operational improvements boost RevPAR and AFFO.
- Preferred stock redemptions reduce long-term interest costs.

Bear Case:
- Asset sales stall, leaving Braemar reliant on dwindling cash reserves.
- AFFO remains negative, forcing dividend cuts or equity dilution.
- Rising interest rates increase refinancing costs for its $1.2 billion debt.

Conclusion: Hold for Now, but Monitor Closely

Braemar's dividend sustainability hinges on executing its asset sales and cost-cutting plans. While the company's liquidity and strategic moves suggest it can weather near-term storms, investors should remain cautious. Key metrics to watch:
- Closing of the Torrey Pines sale and its impact on debt reduction.
- Q3 2024 AFFO recovery from operational improvements.
- Preferred stock redemption progress and dividend stability.

For income investors, Braemar's preferred shares (BHR-PB, BHR-PD) offer high yields but come with refinancing and liquidity risks. Common shareholders may see value if Braemar's portfolio rebalancing succeeds, but patience—and a watchful eye on cash flow—is essential.

Final Take: Braemar is a “wait-and-see” play. While its dividend obligations are manageable in the short term, long-term success requires turning operational losses into sustainable cash flow. Hold preferred shares cautiously and monitor equity for signs of recovery.