Braemar Hotels & Resorts: A Strategic Refinancing Play for Credit Upside Amid Sector Headwinds

Braemar Hotels & Resorts (NYSE: BHR) has positioned itself as a potential beneficiary of credit rating upgrades through its recent $363 million refinancing, which reshapes its debt profile while emphasizing the resilience of its luxury asset portfolio. Despite sector-wide challenges such as slowing revenue growth and volatile office markets, Braemar's strategic refinancing, coupled with its high-end property mix, offers a compelling case for credit improvement. This analysis explores how Braemar's moves could catalyze a ratings upgrade—and why investors should consider this REIT as a defensive play in a turbulent hospitality landscape.

The $363M Refinancing: A Lever to Reduce Costs and Extend Maturity

Braemar's March 2025 refinancing of five luxury properties—The Ritz-Carlton Reserve Dorado Beach, The Clancy (San Francisco), Sofitel Chicago Magnificent Mile, Seattle Marriott Waterfront, and The Notary Hotel (Philadelphia)—marks a critical step toward stabilizing its balance sheet. The floating-rate loan (SOFR +2.52%) replaces two higher-cost loans totaling $355 million, reducing annual interest expenses by an estimated $3.2 million. The two-year initial term with three one-year extensions (maturing as late as 2030) extends the weighted average debt maturity, easing near-term refinancing risks.

The refinancing's 48.9% loan-to-value (LTV) ratio, based on appraised values totaling $742 million, reflects conservative leverage. However, Fitch Ratings noted the portfolio's 111.5% LTV pre-renovation costs, signaling a tighter focus on capital preservation. This move aligns with Braemar's shift toward a “debt-light” strategy, prioritizing long-term credit stability over aggressive growth.

Fitch's Stress Tests: Resilience in Luxury Assets, Risks in Urban Markets

Fitch's analysis of Braemar's portfolio reveals a mixed picture of credit resilience:
- Strengths:
- Dorado Beach: The Puerto Rican resort's $78 million renovation since 2016 and its status as a rare Ritz-Carlton Reserve (one of eight globally) underpin its premium appeal. Fitch acknowledges its ability to command high RevPAR despite hurricane risks.
- Urban Hotels: The four business-focused properties in high-demand markets (San Francisco, Chicago, Philadelphia, Seattle) benefit from consistent demand for corporate travel, even as office occupancy remains uneven.

• Weaknesses:
• San Francisco Exposure: The Clancy's reliance on the Bay Area's struggling office sector—where vacancy rates hit 22% in Q1 2025—has led Fitch to apply “heightened stress deductions” to its performance projections.
• Climate Risks: Dorado Beach's coastal location exposes it to hurricane threats, with Puerto Rico's zoning laws limiting expansion potential.

Fitch's stress tests assume stabilized RevPAR growth post-pandemic, with no upside from leisure demand. Under this scenario, Braemar's debt service coverage ratios (DSCR) remain adequate, but Fitch cautions that rising operating costs and uneven market recoveries could strain margins.

Why Braemar's Diversified Portfolio Could Catalyze a Ratings Upgrade

Braemar's blend of premium resort and urban full-service hotels creates a natural hedge against sector volatility:
1. Luxury Assets as Anchor: Dorado Beach and other high-end properties attract discretionary spenders less sensitive to economic cycles, while urban hotels benefit from recurring corporate demand.
2. Renovation-Backed Resilience: $224 million in capital investments since 2016 have upgraded operational efficiency and guest experience, supporting long-term performance.
3. Debt Optimization: The refinancing reduces interest costs and extends maturities, aligning with Fitch's preference for conservative leverage.

While Fitch currently rates Braemar at “BB” (non-investment grade), the refinancing and portfolio's mixed-market exposure could push it closer to an upgrade. A positive catalyst would be consistent RevPAR growth in key urban markets and a further decline in Puerto Rico's hurricane-related insurance costs.

Investment Thesis: Braemar as a Strategic Credit Play

Despite challenges, Braemar presents a compelling investment opportunity for two reasons:
1. Credit Upside: A potential ratings upgrade to “BB+” or “BBB-” could unlock cheaper financing, further reducing interest costs. This is more likely if RevPAR stabilizes above 2024 levels and San Francisco's office market recovers.
2. Dividend Stability: Braemar's dividend (currently yielding 5.8%) has held steady despite sector headwinds, backed by its focus on capital preservation.

Risk Factors to Monitor:
- San Francisco Office Recovery: A prolonged slump in corporate travel demand could pressure The Clancy's occupancy.
- Interest Rate Fluctuations: The SOFR-linked loans expose Braemar to rising rates, though the refinancing's lower spread (vs. prior terms) mitigates this risk.

Conclusion: A Defensive Bet on Luxury Resilience

Braemar's refinancing and diversified luxury portfolio position it to weather sector volatility better than peers. While risks such as San Francisco's office market and Dorado Beach's climate exposure remain, Fitch's cautious optimism and the company's disciplined capital strategy suggest a ratings upgrade is within reach. Investors seeking exposure to the luxury hotel sector—or a defensive REIT with improving credit metrics—should consider Braemar as a strategic long-term holding.

This analysis assumes no insider information and is based on publicly available data as of July 14, 2025.