Credit Rating For The Unrated REITs (Part 8): Braemar Hotels & Resorts

Braemar Hotels & Resorts (BHR), a luxury hotel operator, carries a weak financial profile marked by high leverage, low liquidity, and significant operational risk, leading to an analyst-assigned Moody's-based Caa1 credit rating due to poor interest and preferred dividend coverage. Despite high yields, BHR's preferred stocks trade below par, signaling market skepticism regarding creditworthiness. Consequently, the analyst advises avoiding investment in BHR's common or preferred shares given its precarious financial position and sector-specific risks.

Analysis

Braemar Hotels & Resorts (BHR) presents a significant credit risk profile, characterized by high leverage, low liquidity, and substantial operational risk inherent in the luxury hotel sector. An independent Moody's-based credit analysis assigns the company a weak Caa1 rating, primarily due to its poor coverage of interest expenses and preferred dividends, indicating a strained capacity to meet its financial obligations. The market's perception of BHR's creditworthiness appears to align with this assessment, as evidenced by its preferred stocks. Despite offering high yields, both preferred issues trade below their par value, signaling investor skepticism and concern over the company's ability to service its debt and equity obligations. The callable nature of these preferreds further limits potential upside for investors. This combination of a weak fundamental financial profile and negative market sentiment, as reflected in its securities' pricing, suggests a precarious position for the real estate investment trust.

Key Decisions for Investors

• Given the company's weak Caa1 credit rating, high leverage, and poor coverage ratios, investors should consider avoiding new positions in both BHR's common and preferred shares.
• Income-focused investors should be wary of the high yields on BHR's preferred stocks, as their trading below par indicates significant credit risk that may not be adequately compensated by the yield.
• Investors tracking the company for a potential turnaround should closely monitor interest and preferred dividend coverage as the primary metrics signaling any improvement or further deterioration in its financial health.
• The combination of a weak balance sheet and the callable feature on preferred shares suggests a poor risk-reward profile, as potential capital appreciation is capped while downside risk remains substantial.