Who are the likely buyers for Braemar’s portfolio?

INTERNATIONAL REPORT — With Dallas-based REIT Braemar Hotel & Resorts announcing last week that it was putting itself up for sale, there are any number of scenarios that could play out over the next year and maybe only one certainty — it almost certainly won’t be another REIT acquiring Braemar’s portfolio.

“There are a couple of different ways that this could play out. Does the whole company get sold in a matter of a few months? If that’s the case, that’s probably a larger private equity firm,” said Michael Bellisario, an analyst for R.W. Baird. “Or does this get split up to multiple buyers and multiple transactions, which is certainly possible.”

Bellisario said there are a number of ways to slice and dice Braemar’s portfolio of nine resorts and five urban properties.

You definitely have two portfolios with the urban [hotels] and the resorts. But even within the resort, the Caribbean assets might be a different buyer than the U.S. resorts. Then you have the Wine Country assets, which are fully unencumbered. That could be a different buyer.

Michael Bellisario

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“You definitely have two portfolios with the urban [hotels] and the resorts,” he said. “But even within the resort, the Caribbean assets might be a different buyer than the U.S. resorts. Then you have the Wine Country assets, which are fully unencumbered. That could be a different buyer.”

Private equity could be a likely buyer for a lot of these properties, while high-net-worth individuals or groups could be likely buyers for the trophy asset-type of properties, which include the REIT’s California Wine Country assets (like the Bardessono Hotel and Spa or the Hotel Yountville, both in Yountville, California).

“What we’ve historically seen are private equity types of buyers for these [types of assets]. I would be surprised if a full portfolio got sold as one entity,” said analyst Patrick Scholes of Truist Securities. “These are trophy assets and certainly what we’ve seen is that the public markets really don’t give the full value to trophy assets and probably at this moment they would be better privately owned.”

“For the luxury 5-star hotels, that buyer pool is deep, but maybe not as deep as it was 10 years ago or even three years ago, but there’s lots of high-net-worth capital,” Bellisario said. “There are lots of high-net-worth groups that have partnered with private equity firms to do deals. Those groups are probably not writing a billion-dollar equity check to buy the whole company, though.”

There’s a lot of capital on the sideline, Bellisario said. The difference with this transaction is that it involves a willing seller. 

“That’s the big thing. Generally, these assets are better performing, which is why you may not have seen a lot of transactions. There hasn’t been a seller motivation, necessarily. These assets don’t transact very often. So, when they do, you have people that come out and bid on them,” he said. 

A challenge for Braemar is that there’s a lot of leverage for buyers, especially with what the final value for the REIT’s stock price ends up being, Bellisario said.

“It almost feels like it’s a giant game of Tetris because the longer the process takes you would think that means it’s more likely that it’s getting broken up, but also there’s risk to that,” he said.

The Ritz Carlton St. Thomas in the Caribbean is part of Braemar's portfolio.

Value of the assets

After Braemar’s sale announcement, Bellisario posted a note spelling out several different valuation scenarios, one at $3 per share, another at $5 per share and another at $7 per share, which are similar metrics to Strategic Hotels & Resorts’ sale in 2015 (which Braemar mentioned in its news release as a comparison to this sale). He said the $3-5 per share range is what Baird is assuming, which could represent a $300 million change in the portfolio’s real estate value.

Ultimately, there is value for the buyer in buying the portfolio in one transaction, Bellisario said. But there’s also risk.

If someone is buying the portfolio, you would think that some of the value is that they’re paying a little less upfront because they’re the ones that are going to take the risk to sell the assets to someone else.

Michael Bellisario

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“If someone wants to buy the whole thing for $4 a share, and they’re a legitimate buyer and they can finance it, do you say no to that, thinking, maybe we can sell it in pieces over the next year for $5 (a share),” he said. “If someone is buying the portfolio, you would think that some of the value is that they’re paying a little less upfront because they’re the ones that are going to take the risk to sell the assets to someone else.” 

Bellisario also said Braemar, spelling out the $480 million termination fee for its advisor, Dallas-based Ashford Inc., as well as $25 million termination fees for other Ashford-owned subsidiaries, project manager Premier Project Management and management firm Remington Lodging & Hospitality, helps simplify a potential transaction as well.

“There’s no more negotiation to be done because we all know what the price is. It’s a cost,” he said. “It simplifies the negotiation, for sure.”

Braemar set those fees to expire on July 1, 2028, but Bellisario said he doesn’t read too much into that date, almost three years from now.

“I expect Braemar not to be a public company by the end of next year. That’s a long way away from now… They’re giving themselves wiggle room… The closer we get to the outside date, the worse the outcome is, maybe, because then it’s not sold.”