UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 001-35972

BRAEMAR HOTELS & RESORTS INC.

(Exact name of registrant as specified in its charter)

Maryland
 
46-2488594
(State or other jurisdiction of incorporation or organization)
 
(IRS employer identification number)
 
 
 
14185 Dallas Parkway, Suite 1100
 
 
Dallas, Texas
 
75254
(Address of principal executive offices)
 
(Zip code)

(972) 490-9600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
þ
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock
 
BHR
 
New York Stock Exchange
Preferred Stock, Series B
 
BHR-PB
 
New York Stock Exchange
Preferred Stock, Series D
 
BHR-PD
 
New York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share
 
33,534,996
(Class)
 
Outstanding at May 22, 2020


BRAEMAR HOTELS & RESORTS INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

TABLE OF CONTENTS

 
 
 



PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS (unaudited)

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Investments in hotel properties, gross
$
1,794,504

 
$
1,791,174

Accumulated depreciation
(325,322
)
 
(309,752
)
Investments in hotel properties, net
1,469,182

 
1,481,422

Cash and cash equivalents
141,793

 
71,995

Restricted cash
45,418

 
58,388

Accounts receivable, net of allowance of $220 and $153, respectively
13,834

 
19,053

Inventories
2,718

 
2,794

Prepaid expenses
6,603

 
4,992

Investment in unconsolidated entity
1,885

 
1,899

Derivative assets
650

 
582

Operating lease right-of-use assets
82,255

 
82,596

Other assets
15,446

 
13,018

Intangible assets, net
4,924

 
5,019

Due from related parties, net
854

 
551

Due from third-party hotel managers
16,953

 
16,638

Total assets
$
1,802,515

 
$
1,758,947

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Indebtedness, net
$
1,134,488

 
$
1,058,486

Accounts payable and accrued expenses
87,440

 
94,919

Dividends and distributions payable
3,208

 
9,143

Due to Ashford Inc.
3,248

 
4,344

Due to third-party hotel managers
1,663

 
1,685

Operating lease liabilities
61,064

 
61,118

Other liabilities
17,906

 
17,508

Total liabilities
1,309,017

 
1,247,203

Commitments and contingencies (note 15)

 

5.50% Series B cumulative convertible preferred stock, $0.01 par value, 5,031,473 and 5,008,421 shares issued and outstanding at March 31, 2020 and December 31, 2019
107,352

 
106,920

Redeemable noncontrolling interests in operating partnership
36,786

 
41,570

Equity:
 
 
 
Preferred stock, $0.01 value, 80,000,000 shares authorized:
 
 
 
Series D cumulative preferred stock, 1,600,000 shares issued and outstanding at March 31, 2020 and December 31, 2019
16

 
16

Common stock, $0.01 par value, 250,000,000 shares authorized, 33,510,912 and 32,885,217 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively
335

 
329

Additional paid-in capital
524,341

 
519,551

Accumulated deficit
(166,108
)
 
(150,629
)
Total stockholders’ equity of the Company
358,584

 
369,267

Noncontrolling interest in consolidated entities
(9,224
)
 
(6,013
)
Total equity
349,360

 
363,254

Total liabilities and equity
$
1,802,515

 
$
1,758,947

See Notes to Condensed Consolidated Financial Statements.

2

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2020
 
2019
REVENUE
 
 
 
Rooms
$
70,468

 
$
76,731

Food and beverage
28,803

 
32,114

Other
18,249

 
19,663

Total hotel revenue
117,520

 
128,508

Other
—

 
5

Total revenue
117,520

 
128,513

EXPENSES
 
 
 
Hotel operating expenses:
 
 
 
Rooms
17,880

 
16,982

Food and beverage
23,901

 
22,210

Other expenses
42,090

 
38,895

Management fees
3,877

 
4,416

Total hotel operating expenses
87,748

 
82,503

Property taxes, insurance and other
7,660

 
7,460

Depreciation and amortization
18,338

 
16,686

Advisory services fee
5,069

 
6,024

Transaction costs
—

 
634

Corporate general and administrative
1,932

 
1,126

Total expenses
120,747

 
114,433

OPERATING INCOME (LOSS)
(3,227
)
 
14,080

Equity in earnings (loss) of unconsolidated entity
(40
)
 
(50
)
Interest income
129

 
362

Other income (expense)
(138
)
 
(117
)
Interest expense and amortization of loan costs
(11,897
)
 
(14,193
)
Write-off of loan costs and exit fees
—

 
(312
)
Unrealized gain (loss) on investment in Ashford Inc.
—

 
707

Unrealized gain (loss) on derivatives
1,156

 
(872
)
INCOME (LOSS) BEFORE INCOME TAXES
(14,017
)
 
(395
)
Income tax (expense) benefit
(1,370
)
 
(927
)
NET INCOME (LOSS)
(15,387
)
 
(1,322
)
(Income) loss attributable to noncontrolling interest in consolidated entities
572

 
(99
)
Net (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,885

 
440

NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
(12,930
)
 
(981
)
Preferred dividends
(2,555
)
 
(2,532
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
(15,485
)
 
$
(3,513
)
INCOME (LOSS) PER SHARE - BASIC:
 
 
 
Net income (loss) attributable to common stockholders
$
(0.48
)
 
$
(0.11
)
Weighted average common shares outstanding – basic
32,474

 
32,115

INCOME (LOSS) PER SHARE - DILUTED:
 
 
 
Net income (loss) attributable to common stockholders
$
(0.48
)
 
$
(0.11
)
Weighted average common shares outstanding – diluted
32,474

 
32,115

See Notes to Condensed Consolidated Financial Statements.

3

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
NET INCOME (LOSS)
$
(15,387
)
 
$
(1,322
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
 
 
 
Total other comprehensive income (loss)
—

 
—

TOTAL COMPREHENSIVE INCOME (LOSS)
(15,387
)
 
(1,322
)
Comprehensive (income) loss attributable to noncontrolling interest in consolidated entities
572

 
(99
)
Comprehensive (income) loss attributable to redeemable noncontrolling interests in operating partnership
1,885

 
440

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY
$
(12,930
)
 
$
(981
)
See Notes to Condensed Consolidated Financial Statements.

4

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands except per share amounts)

 
8.25% Series D Cumulative Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Noncontrolling Interest in Consolidated Entities
 
Total
 
5.50% Series B Cumulative Convertible
Preferred Stock
 
Redeemable Noncontrolling Interests in Operating Partnership
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2019
1,600

 
$
16

 
32,885

 
$
329

 
$
519,551

 
$
(150,629
)
 
$
(6,013
)
 
$
363,254

 
5,008

 
$
106,920

 
$
41,570

Purchase of common stock
—

 
—

 
(20
)
 
—

 
(82
)
 
—

 
—

 
(82
)
 
—

 
—

 
—

Equity-based compensation
—

 
—

 
—

 
—

 
1,424

 
—

 
—

 
1,424

 
—

 
—

 
561

Issuance of restricted shares/units
—

 
—

 
311

 
3

 
(3
)
 
—

 
—

 
—

 
—

 
—

 
—

Forfeiture of restricted common shares
—

 
—

 
(4
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
23

 
432

 
—

Dividends declared – preferred stock - Series B ($0.34/share)
—

 
—

 
—

 
—

 
—

 
(1,730
)
 
—

 
(1,730
)
 
—

 
—

 
—

Dividends declared – preferred stock - Series D ($0.52/share)
—

 
—

 
—

 
—

 
—

 
(825
)
 
—

 
(825
)
 
—

 
—

 
—

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(2,639
)
 
(2,639
)
 
—

 
—

 
—

Redemption/conversion of operating partnership units
—

 
—

 
339

 
3

 
3,451

 
—

 
—

 
3,454

 
—

 
—

 
(3,454
)
Net income (loss)
—

 
—

 
—

 
—

 
—

 
(12,930
)
 
(572
)
 
(13,502
)
 
—

 
—

 
(1,885
)
Redemption value adjustment
—

 
—

 
—

 
—

 
—

 
6

 
—

 
6

 
—

 
—

 
(6
)
Balance at March 31, 2020
1,600

 
$
16

 
33,511

 
$
335

 
$
524,341

 
$
(166,108
)
 
$
(9,224
)
 
$
349,360

 
5,031

 
$
107,352

 
$
36,786



5

 
8.25% Series D Cumulative Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Noncontrolling Interest in Consolidated Entities
 
Total
 
5.50% Series B Cumulative Convertible
Preferred Stock
 
Redeemable Noncontrolling Interests in Operating Partnership
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2018
1,600

 
$
16

 
32,512


$
325

 
$
512,545

 
$
(115,410
)
 
$
(5,391
)
 
$
392,085

 
4,966

 
$
106,123

 
$
44,885

Impact of adoption of new accounting standard
—

 
—

 
—

 
—

 
—

 
(103
)
 
—

 
(103
)
 
—

 
—

 
—

Purchase of common stock
—

 
—

 
(17
)
 
—

 
(202
)
 
—

 
—

 
(202
)
 
—

 
—

 
—

Equity-based compensation
—

 
—

 
—


—

 
978

 
—

 
—

 
978

 
—

 
—

 
550

Preferred stock offering costs
 
 
 
 
—


—

 
(13
)
 
—

 
 
 
(13
)
 
—

 
—

 
—

Issuance of restricted shares/units
—

 
—

 
237

 
2

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
7

Forfeiture of restricted common shares
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends declared – common stock ($0.16/share)
—

 
—

 
—


—

 
—

 
(5,329
)
 
—

 
(5,329
)
 
—

 
—

 
—

Dividends declared – preferred stock - Series B ($0.34/share)
—

 
—

 
—

 
—

 
—

 
(1,707
)
 
—

 
(1,707
)
 
—

 
—

 
—

Dividends declared – preferred stock - Series D ($0.52/share)
—

 
—

 
—

 
—

 
—

 
(825
)
 
—

 
(825
)
 
—

 
—

 
—

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(778
)
Redemption/conversion of operating partnership units
—

 
—

 
110

 
1

 
1,433

 
(285
)
 
—

 
1,149

 
—

 
—

 
(1,149
)
Net income (loss)
—

 
—

 
—

 
—

 
—

 
(981
)
 
99

 
(882
)
 
—

 
—

 
(440
)
Redemption value adjustment
—

 
—

 
—

 
—

 
—

 
(7,935
)
 
—

 
(7,935
)
 
—

 
—

 
7,935

Balance at March 31, 2019
1,600

 
$
16

 
32,841

 
$
328

 
$
514,739

 
$
(132,575
)
 
$
(5,292
)
 
$
377,216

 
4,966

 
$
106,123

 
$
51,010

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

6

BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2020

2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(15,387
)
 
$
(1,322
)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:
 
 
 
Depreciation and amortization
18,338

 
16,686

Equity-based compensation
1,985

 
1,528

Bad debt expense
269

 
87

Amortization of loan costs
1,071

 
1,180

Write-off of loan costs and exit fees
—

 
312

Amortization of intangibles
207

 
119

Amortization of non-refundable membership initiation fees
(82
)
 
(27
)
Interest expense accretion on refundable membership club deposits
213

 
225

Unrealized (gain) loss on investment in Ashford Inc.
—

 
(707
)
Realized and unrealized (gain) loss on derivatives
(1,081
)
 
937

Net settlement of trading derivatives
1,330

 
(925
)
Equity in (earnings) loss of unconsolidated entity
40

 
50

Deferred income tax expense (benefit)
(5
)
 
179

Changes in operating assets and liabilities, exclusive of the effect of hotel acquisitions and dispositions:
 
 
 
Accounts receivable and inventories
4,003

 
(9,354
)
Prepaid expenses and other assets
(2,719
)
 
(1,536
)
Accounts payable and accrued expenses
(8,315
)
 
(49
)
Operating lease right-of-use assets
134

 
115

Due to/from related parties, net
(303
)
 
(493
)
Due to/from third-party hotel managers
(337
)
 
(2,518
)
Due to/from Ashford Inc.
(439
)
 
1,113

Operating lease liabilities
(54
)
 
(30
)
Other liabilities
267

 
(6,186
)
Net cash provided by (used in) operating activities
(865
)
 
(616
)
 
 
 


CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Proceeds from property insurance
948

 
—

Acquisition of hotel properties, net of cash and restricted cash acquired
—

 
(112,095
)
Investment in unconsolidated entity
(26
)
 
(156
)
Improvements and additions to hotel properties
(7,509
)
 
(36,644
)
Net cash provided by (used in) investing activities
(6,587
)
 
(148,895
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Borrowings on indebtedness
75,000

 
249,000

Repayments of indebtedness
—

 
(187,086
)
Payments of loan costs and exit fees
—

 
(2,441
)
Payments for derivatives
(37
)
 
(55
)
Purchase of common stock
(28
)
 
(202
)
Payments for dividends and distributions
(8,490
)
 
(7,979
)
Proceeds from issuance of preferred stock
474

 
—

Preferred stock offering costs
—

 
(110
)
Distributions to noncontrolling interest in consolidated entities
(2,639
)
 
—

Other
—

 
7

Net cash provided by (used in) financing activities
64,280

 
51,134

Net change in cash, cash equivalents and restricted cash
56,828

 
(98,377
)
Cash, cash equivalents and restricted cash at beginning of period
130,383

 
258,488

Cash, cash equivalents and restricted cash at end of period
$
187,211

 
$
160,111

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Interest paid
$
10,601

 
$
12,363

Income taxes paid (refunded)
690

 
(1,224
)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Common stock purchases accrued but not paid
$
82

 
$
—

Dividends and distributions declared but not paid
3,208

 
9,174

Capital expenditures accrued but not paid
17,040

 
14,891

Accrued but unpaid financing costs
1,364

 
—

Accrued preferred stock offering expenses
25

 
—


7

 
Three Months Ended March 31,
 
2020

2019
SUPPLEMENTAL DISCLOSURE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
 
 
Cash and cash equivalents at beginning of period
$
71,995

 
$
182,578

Restricted cash at beginning of period
58,388

 
75,910

Cash, cash equivalents and restricted cash at beginning of period
$
130,383

 
$
258,488

 
 
 
 
Cash and cash equivalents at end of period
$
141,793

 
$
73,802

Restricted cash at end of period
45,418

 
86,309

Cash, cash equivalents and restricted cash at end of period
$
187,211

 
$
160,111

See Notes to Condensed Consolidated Financial Statements.

8
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1. Organization and Description of Business
Braemar Hotels & Resorts Inc., together with its subsidiaries (“Braemar”), is a Maryland corporation that invests primarily in high revenue per available room (“RevPAR”) luxury hotels and resorts. High RevPAR, for purposes of our investment strategy, means RevPAR of at least twice the then-current U.S. national average RevPAR for all hotels as determined by Smith Travel Research. Braemar has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Braemar conducts its business and owns substantially all of its assets through its operating partnership, Braemar Hospitality Limited Partnership (“Braemar OP”). In this report, the terms the “Company,” “we,” “us” or “our” refers to Braemar Hotels & Resorts Inc. and, as the context may require, all entities included in its condensed consolidated financial statements.
We are advised by Ashford Hospitality Advisors LLC (“Ashford LLC” or the “Advisor”) through an advisory agreement. Ashford LLC is a subsidiary of Ashford Inc. All of the hotel properties in our portfolio are currently asset-managed by Ashford LLC. We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford LLC.
We do not operate any of our hotel properties directly; instead we employ hotel management companies to operate them for us under management contracts. Remington Hotels, a subsidiary of Ashford Inc. after November 6, 2019, manages three of our thirteen hotel properties. Third-party management companies manage the remaining hotel properties.
Ashford Inc. also provides other products and services to us or our hotel properties through certain entities in which Ashford Inc. has an ownership interest. These products and services include, but are not limited to project management services, debt placement services, audio visual services, real estate advisory services, insurance claims services, hypoallergenic premium rooms, watersport activities, travel/transportation services and mobile key technology.
The accompanying condensed consolidated financial statements include the accounts of wholly-owned and majority-owned subsidiaries of Braemar OP that as of March 31, 2020, own thirteen hotel properties in six states, the District of Columbia and the U.S. Virgin Islands (“USVI”). The portfolio includes eleven wholly-owned hotel properties and two hotel properties that are owned through a partnership in which Braemar OP has a controlling interest. These hotel properties represent 3,722 total rooms, or 3,487 net rooms, excluding those attributable to our partner. As a REIT, Braemar is required to comply with limitations imposed by the Internal Revenue Code related to operating hotels. As of March 31, 2020, twelve of our thirteen hotel properties were leased by wholly-owned or majority-owned subsidiaries that are treated as taxable REIT subsidiaries (“TRS”) for federal income tax purposes (collectively the TRS entities are referred to as “Braemar TRS”). One hotel property, located in the USVI, is owned by our USVI TRS. Braemar TRS then engages third-party or affiliated hotel management companies to operate the hotel properties under management contracts. Hotel operating results related to the hotel properties are included in the condensed consolidated statements of operations.
As of March 31, 2020, ten of the thirteen hotel properties were leased by Braemar’s wholly-owned TRS and the two hotel properties majority-owned through a consolidated partnership were leased to a TRS wholly-owned by such consolidated partnership. Each leased hotel is leased under a percentage lease that provides for each lessee to pay in each calendar month the base rent plus, in each calendar quarter, percentage rent, if any, based on hotel revenues. Lease revenue from Braemar TRS is eliminated in consolidation. The hotel properties are operated under management contracts with Marriott International, Inc. (“Marriott”), Hilton Worldwide (“Hilton”), Accor Management US Inc. (“Accor”), Hyatt Hotels Corporation (“Hyatt”), Ritz-Carlton, Inc., a subsidiary of Marriott (“Ritz-Carlton”) and Remington Hotels, which are eligible independent contractors under the Internal Revenue Code.
COVID-19, Management’s Plans and Liquidity
In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China, which subsequently spread to other regions of the world, and has resulted in significant travel restrictions and extended shutdown of numerous businesses in every state in the United States. In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. Since late February, we have experienced a significant decline in occupancy and RevPAR and we expect the significant occupancy and RevPAR reduction associated with COVID-19 to continue as we are experiencing significant reservation cancellations as well as a significant reduction in new reservations relative to prior expectations. The prolonged presence of the virus has resulted in health or other government authorities imposing widespread restrictions on travel and other businesses. The hotel industry and our portfolio have experienced the postponement or cancellation of a significant number of business conferences and similar events. Following the government mandates and health official orders, the Company temporarily suspended operations at 11 of its 13 hotels and dramatically reduced staffing and expenses at its hotels that remain operational. Operations will remain suspended until state and

9
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


local government restrictions and requirements are lifted and the Company can be confident that reopening the hotels will not jeopardize the health and safety of guests, hotel employees and local communities. COVID-19 has had a significant negative impact on the Company’s operations and financial results to date. The full financial impact of the reduction in hotel demand caused by the pandemic and suspension of operations at the Company’s hotels cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company expects that the COVID-19 pandemic will have a significant negative impact on the Company’s results of operations, financial position and cash flow in 2020. As a result, in March 2020, the Company fully drew down on its $75 million secured revolving credit facility, suspended the quarterly cash dividend on its common shares for the first quarter of 2020 and likely the remainder of 2020, reduced planned capital expenditures and reduced the compensation of its board of directors, and, working closely with its hotel managers, significantly reduced its hotels’ operating expenses. The Company’s advisor adopted a remote-work policy at its corporate office in an effort to protect the health and safety of its employees and does not anticipate these policies to have any adverse impact on its ability to continue to operate its business.
As of March 31, 2020, the Company maintained unrestricted cash of $141.8 million. All of the Company’s property-level debt is non-recourse. Although the Company was in compliance with all its debt covenants as of March 31, 2020, subsequent to March 31, 2020 the Company did not make at least one interest payment on nearly all of its mortgage and mezzanine loans, which constituted an “Event of Default” as such term is defined under the applicable loan documents. Further, the Company triggered an "Event of Default," as defined under the secured revolving credit facility agreement as a result of the Company being in default on mortgage and mezzanine loans with an aggregate principal amount in excess of $200 million. Pursuant to the terms of the applicable mortgage loan, such an Event of Default caused an automatic increase in the interest rate on its outstanding loan balance for the period such Event of Default remains outstanding. Following an Event of Default, the Company’s lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable mortgage loan and foreclose on the applicable hotel properties that are security for such loans. Additionally, subsequent to March 31, 2020, the Company did not make rental payments under two ground leases that are paid monthly. The Company is actively negotiating the terms for forbearance agreements or waivers with its lenders and landlords. Based on these factors, the Company has determined that there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. U.S. generally accepted accounting principles requires that in making this determination, the Company cannot consider any remedies that are outside of the Company’s control and have not been fully implemented. As a result, the Company could not consider future potential fundraising activities, whether through equity or debt offerings, dispositions of hotel properties or the likelihood of obtaining forbearance agreements as we could not conclude they were probable of being effectively implemented. Any forbearance agreement will most likely lead to increased costs, increased interest rates, additional restrictive covenants and other possible lender protections. In addition to or in lieu of obtaining forbearance agreements as described above, the Company could turn over the hotels securing the mortgage loans to the respective lenders.
The consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
2. Significant Accounting Policies
Basis of Presentation and Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These condensed consolidated financial statements include the accounts of Braemar Hotels & Resorts Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these condensed consolidated financial statements. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made herein are adequate to prevent the information presented from being misleading. However, the financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K, as originally filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.
Braemar OP is considered to be a variable interest entity (“VIE”), as defined by authoritative accounting guidance. A VIE must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. All major decisions related to Braemar OP that most significantly impact its economic performance, including but not limited to operating procedures with respect to business affairs and any acquisitions,

10
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


dispositions, financings, restructurings or other transactions with sellers, purchasers, lenders, brokers, agents and other applicable representatives, are subject to the approval of our wholly-owned subsidiary, Braemar OP General Partner LLC, its general partner. As such, we consolidate Braemar OP.
The following items affect reporting comparability of our historical condensed consolidated financial statements:
•
historical seasonality patterns at some of our hotel properties cause fluctuations in our overall operating results. Consequently, operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020; and
•
on January 15, 2019, we acquired the Ritz-Carlton, Lake Tahoe. The operating results of the hotel property have been included in the results of operations as of its acquisition date.
Use of Estimates—The preparation of these condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes—On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law and includes certain income tax provisions relevant to businesses. The Company is required to recognize the effect on the consolidated financial statements in the period the law was enacted, which is the period ended March 31, 2020. For the period ended March 31, 2020, the CARES Act did not have a material impact on the Company’s consolidated financial statements. At this time, the Company does not expect the impact of the CARES Act to have a material impact on the Company’s consolidated financial statements for the year ended December 31, 2020.
Recently Adopted Accounting Standards—In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU sets forth an “expected credit loss” impairment model to replace the current “incurred loss” method of recognizing credit losses. The standard requires measurement and recognition of expected credit losses for most financial assets held. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for periods beginning after December 15, 2018. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2018-19”). ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates (“ASU 2019-10”). ASU 2019-10 updates the effective dates for ASU 2016-13, but there is no change for public companies. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2019-11”). ASU 2019-11, clarifies specific issues within the amendments of ASU 2016-13. We adopted the standard effective January 1, 2020 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards—In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (“ASU 2020-01”), which clarifies the interaction between the accounting for equity securities, equity method investments, and certain derivative instruments. The ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years and should be applied prospectively. Early adoption is permitted. We are currently evaluating the impact that ASU 2020-01 may have on our condensed consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company continues to evaluate the impact of the guidance and may apply the elections as applicable as changes in the market occur.

11
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


3. Revenue
The following tables present our revenue disaggregated by geographical areas (in thousands):
 
 
Three Months Ended March 31, 2020
Primary Geographical Market
 
Number of Hotels
 
Rooms
 
Food and Beverage
 
Other Hotel
 
Other
 
Total
California
 
5
 
$
23,987

 
$
7,771

 
$
4,418

 
$
—

 
$
36,176

Colorado
 
1
 
8,151

 
4,255

 
2,905

 
—

 
15,311

Florida
 
2
 
13,989

 
7,743

 
4,694

 
—

 
26,426

Illinois
 
1
 
2,621

 
852

 
296

 
—

 
3,769

Pennsylvania
 
1
 
4,466

 
1,206

 
236

 
—

 
5,908

Washington
 
1
 
3,698

 
791

 
358

 
—

 
4,847

Washington, D.C.
 
1
 
6,535

 
3,491

 
506

 
—

 
10,532

USVI
 
1
 
7,021

 
2,694

 
4,836

 
—

 
14,551

Total
 
13
 
$
70,468

 
$
28,803

 
$
18,249

 
$
—

 
$
117,520

 
 
Three Months Ended March 31, 2019
Primary Geographical Market
 
Number of Hotels
 
Rooms
 
Food and Beverage
 
Other Hotel
 
Other
 
Total
California
 
5
 
$
29,914

 
$
10,165

 
$
3,926

 
$
—

 
$
44,005

Colorado
 
1
 
9,597

 
4,836

 
3,666

 
—

 
18,099

Florida
 
2
 
14,996

 
8,096

 
4,822

 
—

 
27,914

Illinois
 
1
 
3,323

 
1,138

 
296

 
—

 
4,757

Pennsylvania
 
1
 
4,237

 
808

 
229

 
—

 
5,274

Washington
 
1
 
5,116

 
1,814

 
383

 
—

 
7,313

Washington, D.C.
 
1
 
8,708

 
4,561

 
382

 
—

 
13,651

USVI
 
1
 
840

 
696

 
5,959

 
—

 
7,495

Corporate entities
 
—
 
—

 
—

 
—

 
5

 
5

Total
 
13
 
$
76,731

 
$
32,114

 
$
19,663

 
$
5

 
$
128,513

 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2020 and 2019, the Company recorded revenue from business interruption losses associated with lost profits from Hurricane Irma of $3.6 million and $6.0 million, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
4. Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
 
March 31, 2020
 
December 31, 2019
Land
$
455,298

 
$
455,298

Buildings and improvements
1,185,545

 
1,173,151

Furniture, fixtures and equipment
132,946

 
129,595

Construction in progress
20,715

 
33,130

Total cost
1,794,504

 
1,791,174

Accumulated depreciation
(325,322
)
 
(309,752
)
Investments in hotel properties, net
$
1,469,182

 
$
1,481,422


12
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Impairment Charges and Insurance Recoveries
For the three months ended March 31, 2020 and 2019, the Company recorded revenue from business interruption losses associated with lost profits from Hurricane Irma of $3.6 million and $6.0 million, respectively. These revenues are included in “other” hotel revenue in our condensed consolidated statements of operations. For the three months ended March 31, 2020 and 2019, the Company received proceeds of $2.0 million and $0.0 million, respectively, from our insurance carriers for property damage and business interruption from the hurricanes.
During the three months ended March 31, 2020 and 2019, no impairment charges were recorded. As of March 31, 2020, the Company recorded an insurance receivable of $3.3 million, related to business interruption insurance recoveries that are realizable. The Company also had a liability of $2.2 million, included in “other liabilities” on the condensed consolidated balance sheet, as it has received insurance proceeds in excess of property damage claims that are not yet settled as of March 31, 2020. The Company will not record revenue for business interruption losses associated with lost profits or gains from property damage recoveries until the amount for such recoveries is known and the amount is realizable.
5. Investment in Unconsolidated Entity
OpenKey is a hospitality-focused mobile key platform that provides a universal smart phone app and related hardware and software for keyless entry into hotel guest rooms. In 2018, the Company made an initial $2.0 million investment in OpenKey, which is controlled and consolidated by Ashford Inc., for an initial 8.2% ownership interest. An additional investment of $26,000 was made during the three months ended March 31, 2020. All investments were recommended by our Related Party Transactions Committee and unanimously approved by the independent members of our board of directors. As of March 31, 2020, the Company has made investments in OpenKey totaling $2.4 million.
Our investment is recorded as “investment in unconsolidated entity” in our condensed consolidated balance sheets and is accounted for under the equity method of accounting as we have been deemed to have significant influence over the entity under the applicable accounting guidance. We review our investment in OpenKey for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of the investment. Any impairment is recorded in equity in earnings (loss) of unconsolidated entity. No such impairment was recorded for the three months ended March 31, 2020 and 2019.
The following table summarizes our carrying value and ownership interest in OpenKey:
 
March 31, 2020
 
December 31, 2019
Carrying value of the investment in OpenKey (in thousands)
$
1,885

 
$
1,899

Ownership interest in OpenKey
8.6
%
 
8.6
%
The following table summarizes our equity in earnings (loss) in OpenKey (in thousands):
 
 
Three Months Ended March 31,
Line Item
 
2020
 
2019
Equity in earnings (loss) of unconsolidated entity
 
$
(40
)
 
$
(50
)

13
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


6. Indebtedness, net
Indebtedness, net consisted of the following (in thousands):
Indebtedness
 
Collateral
 
Maturity
 
Interest Rate
 
March 31, 2020
 
December 31, 2019
Secured revolving credit facility (3)
 
Equity
 
October 2022
 
Base Rate (2) + 1.25% to 2.50% or LIBOR (1) + 2.25% to 3.50%
 
$
75,000

 
$
—

Mortgage loan (4)
 
Park Hyatt Beaver Creek
 
April 2020
 
LIBOR (1) + 2.75%
 
67,500

 
67,500

Mortgage loan (5)
 
The Notary Hotel
 
June 2020
 
LIBOR (1) + 2.16%
 
435,000

 
435,000

 
 
Courtyard San Francisco Downtown
 
 
 
 
 
 
 
 
 
 
Sofitel Chicago Magnificent Mile
 
 
 
 
 
 
 
 
 
 
Marriott Seattle Waterfront
 
 
 
 
 
 
 
 
Mortgage loan (6)
 
Ritz-Carlton, St. Thomas
 
August 2021
 
LIBOR (1) + 3.95%
 
42,500

 
42,500

Mortgage loan
 
Hotel Yountville
 
May 2022
 
LIBOR (1) + 2.55%
 
51,000

 
51,000

Mortgage loan
 
Bardessono Hotel
 
August 2022
 
LIBOR (1) + 2.55%
 
40,000

 
40,000

Mortgage loan
 
Ritz-Carlton, Sarasota
 
April 2023
 
LIBOR (1) + 2.65%
 
100,000

 
100,000

Mortgage loan
 
Ritz-Carlton, Lake Tahoe
 
January 2024
 
LIBOR(1) + 2.10%
 
54,000

 
54,000

Mortgage loan
 
Capital Hilton
 
February 2024
 
LIBOR (1) + 1.70%
 
195,000

 
195,000

 
 
Hilton La Jolla Torrey Pines
 
 
 
 
 
 
 
 
Mortgage loan
 
Pier House Resort
 
September 2024
 
LIBOR (1) + 1.85%
 
80,000

 
80,000

 
 
 
 
 
 
 
 
1,140,000

 
1,065,000

Deferred loan costs, net
 
 
 
 
 
 
 
(5,512
)
 
(6,514
)
Indebtedness, net
 
 
 
 
 
 
 
$
1,134,488

 
$
1,058,486

__________________
(1) 
LIBOR rates were 0.993% and 1.763% at March 31, 2020 and December 31, 2019, respectively.
(2) 
Base Rate, as defined in the secured revolving credit facility agreement, is the greater of (i) the prime rate set by Bank of America, or (ii) federal funds rate + 0.5%, or (iii) LIBOR + 1.0%.
(3) 
On March 10, 2020 and March 13, 2020, we drew $25.0 million and $50.0 million, respectively, on our secured revolving credit facility with a borrowing capacity of $75.0 million and there is no additional capacity remaining. The secured revolving credit facility has two one-year extension options, subject to the satisfaction of certain conditions.
(4) 
This mortgage loan has three one-year extension options, subject to satisfaction of certain conditions, of which the second was exercised in April 2020.
(5) 
This mortgage loan has five one-year extension options, subject to satisfaction of certain conditions.
(6) 
The interest rate spread on this mortgage loan changed from 4.95% as of December 31, 2019, to 3.95% as of March 31, 2020, based on an appraisal received in accordance with the August 5, 2019 loan amendment.
We are required to maintain certain financial ratios under our secured revolving credit facility. If we violate covenants in any debt agreement, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in our inability to borrow unused amounts under our line of credit, even if repayment of some or all of our borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of the consolidated group. As of March 31, 2020, we were in compliance in all material respects with all covenants or other requirements set forth in our debt agreements as amended. Subsequent to March 31, 2020 the Company did not make at least one interest payment on nearly all of its mortgage and mezzanine loans, which constituted an “Event of Default” as such term is defined under the applicable loan documents. Further, the Company triggered an "Event of Default," as defined under the secured revolving credit facility agreement as a result of the Company being in default on mortgage and mezzanine loans with an aggregate principal amount in excess of $200 million. See note 1.
7. Derivative Instruments
Interest Rate Derivatives—We are exposed to risks arising from our business operations, economic conditions and financial markets. To manage these risks, we primarily use interest rate derivatives to hedge our debt and our cash flows. The interest rate derivatives include interest rate caps and interest rate floors, which are subject to master netting settlement arrangements. All derivatives are recorded at fair value.

14
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


The following table summarizes the interest rate derivatives we entered into over the applicable periods:
 
Three Months Ended March 31,
Interest rate caps:
2020
 
2019
Notional amount (in thousands)
$
167,500

 
$
177,500

Strike rate low end of range
3.00
%
 
3.00
%
Strike rate high end of range
3.50
%
 
7.80
%
Effective date range
March 2020

 
January 2019 - March 2019

Termination date range
April 2021

 
March 2020 - February 2021

Total cost of interest rate caps (in thousands)
$
38

 
$
55

 
 
 
 
Interest rate floors:
 
 
 
Notional amount (in thousands)
$
—

 
$
2,000,000

Strike rate


 
1.63
%
Effective date
 
 
January 2019

Termination date
 
 
March 2020

Total cost of interest rate floors (in thousands)
$
—

 
$
75

_______________
No instruments were designated as cash flow hedges for during the three months ended March 31, 2020 and 2019.
Interest rate derivatives consisted of the following:
Interest rate caps: (1)
March 31, 2020
 
December 31, 2019
Notional amount (in thousands)
$
1,037,500

 
$
968,000

Strike rate low end of range
3.00
 %
 
3.00
 %
Strike rate high end of range
4.00
 %
 
7.80
 %
Termination date range
April 2020 - October 2021

 
January 2020 - October 2021

Aggregate principal balance on corresponding mortgage loans (in thousands)
$
870,000

 
$
870,000

 
 
 
 
Interest rate floors: (1) (2)
 
 
 
Notional amount (in thousands)
$
3,000,000

 
$
5,000,000

Strike rate low end of range
(0.25
)%
 
(0.25
)%
Strike rate high end of range
(0.25
)%
 
1.63
 %
Termination date range
July 2020

 
March 2020 - July 2020

_______________
(1) 
No instruments were designated as cash flow hedges.
(2) 
Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.
Credit Default Swap Derivatives—We use credit default swaps, tied to the CMBX index, to hedge financial and capital market risk. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation. The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments. If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses. The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity). For all CMBX trades completed to date, we were the buyer of protection. Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. As of March 31, 2020, we held a credit default swap with a notional amount of $50.0 million, an effective date of August 2017 and an expected maturity date of October 2026. Assuming the underlying bonds pay off at par over their remaining average life, our estimated total exposure for these trades was approximately $2.2 million as of March 31, 2020. Cash collateral is posted by us as well as our counterparties. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparties when such change in market value is over $250,000.

15
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


8. Fair Value Measurements
Fair Value Hierarchy—Our financial instruments measured at fair value either on a recurring or a non-recurring basis are classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs in the market place as discussed below:
•
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
The fair value of interest rate caps is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (the Level 2 inputs). We also incorporate credit valuation adjustments (the Level 3 inputs) to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk.
Fair value of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.
The fair value of interest rate floors is calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. These expected future cash flows are probability-weighted projections based on the contract terms, accounting for both the magnitude and likelihood of potential payments, which are both computed using the appropriate LIBOR forward curve and market implied volatilities as of the valuation date (Level 2 inputs).
The fair value of options on futures contracts is determined based on the last reported settlement price as of the measurement date (Level 1 inputs). These exchange-traded options are centrally cleared, and a clearinghouse stands in between all trades to ensure that the obligations involved in the trades are satisfied.
When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when the valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at March 31, 2020, the LIBOR interest rate forward curve (Level 2 inputs) assumed a downtrend from 0.993% to 0.211% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

16
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Counterparty and Cash Collateral Netting(1)
 
Total
 
March 31, 2020
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives - caps
$
—

 
$
19

 
$
—

 
$
—

 
$
19

 
Credit default swaps
—

 
831

 
—

 
(200
)
 
631

 
 
$
—

 
$
850

 
$
—

 
$
(200
)
 
$
650

(2) 
 
Quoted Market Prices (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Counterparty and Cash Collateral Netting(1)
 
Total
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives - floors
$
—

 
$
1

 
$
—

 
$
52

 
$
53

 
Interest rate derivatives - caps
—

 
1

 
—

 
—

 
1

 
Credit default swaps
—

 
(550
)
 
—

 
1,078

 
528

 
 
$
—

 
$
(548
)
 
$
—

 
$
1,130

 
$
582

(2) 
__________________
(1) 
Represents net cash collateral posted between us and our counterparties.
(2) 
Reported as “derivative assets” in our condensed consolidated balance sheets.

17
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


Effect of Fair Value Measured Assets and Liabilities on Condensed Consolidated Statements of Operations
The following table summarizes the effect of fair value measured assets and liabilities on our condensed consolidated statements of operations (in thousands):
 
Gain (Loss) Recognized in Income
 
 
Three Months Ended March 31,
 
 
2020
 
2019
 
Assets
 
 
 
 
Derivative assets:
 
 
 
 
Interest rate derivatives - floors
$
—

 
$
(68
)
 
Interest rate derivatives - caps
(19
)
 
(71
)
 
Credit default swaps
1,100

(1) 
(798
)
(1) 
Total derivative assets
$
1,081

 
$
(937
)
 
 


 


 
Non-derivative assets:
 
 
 
 
Investment in Ashford Inc.
—

 
707

 
Total
$
1,081

 
$
(230
)
 
Total combined
 
 
 
 
Interest rate derivatives - floors
$
75

 
$
(3
)
 
Interest rate derivatives - caps
(19
)
 
(71
)
 
Credit default swaps
1,100

 
(798
)
 
Unrealized gain (loss) on derivatives
1,156

 
(872
)
 
Realized gain (loss) on interest rate floors
(75
)
(2) 
(65
)
(2) 
Unrealized gain (loss) on investment in Ashford Inc.
—

 
707

 
Net
$
1,081

 
$
(230
)
 
_______________
(1) 
Excludes costs associated with credit default swaps of $63 for both the three months ended March 31, 2020 and 2019, respectively, which is included in “other income (expense)” in our condensed consolidated statements of operations.
(2) 
Included in “other income (expense)” in our condensed consolidated statements of operations.

18
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


9. Summary of Fair Value of Financial Instruments
Determining the estimated fair values of certain financial instruments such as indebtedness requires considerable judgment to interpret market data. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold or settled.
The carrying amounts and estimated fair values of financial instruments were as follows (in thousands):
 
 
March 31, 2020
 
December 31, 2019
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial assets and liabilities measured at fair value:
 
 
 
 
 
 
 
 
Derivative assets
 
$
650

 
$
650

 
$
582

 
$
582

Financial assets not measured at fair value:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
141,793

 
$
141,793

 
$
71,995

 
$
71,995

Restricted cash
 
45,418

 
45,418

 
58,388

 
58,388

Accounts receivable, net
 
13,834

 
13,834

 
19,053

 
19,053

Due from related parties, net
 
854

 
854

 
551

 
551

Due from third-party hotel managers
 
16,953

 
16,953

 
16,638

 
16,638

Financial liabilities not measured at fair value:
 
 
 
 
 
 
 
 
Indebtedness, net
 
$
1,140,000

 
$1,035,450 to $1,144,444

 
$
1,065,000

 
$1,003,863 to $1,109,532

Accounts payable and accrued expenses
 
87,440

 
87,440

 
94,919

 
94,919

Dividends and distributions payable
 
3,208

 
3,208

 
9,143

 
9,143

Due to Ashford Inc.
 
3,248

 
3,248

 
4,344

 
4,344

Due to third-party hotel managers
 
1,663

 
1,663

 
1,685

 
1,685

Cash, cash equivalents and restricted cash. These financial assets have maturities of less than 90 days and most bear interest at market rates. The carrying value approximates fair value due to their short-term nature. This is considered a Level 1 valuation technique.
Accounts receivable, net, due to/from related parties, net, accounts payable and accrued expenses, dividends and distributions payable, due to Ashford Inc. and due to/from third-party hotel managers. The carrying values of these financial instruments approximate their fair values due to the short-term nature of these financial instruments. This is considered a Level 1 valuation technique.
Derivative assets. Fair value of interest rate caps is determined using the net present value of expected cash flows of each derivative based on the market-based interest rate curve and adjusted for credit spreads of us and our counterparties. Fair value of credit default swaps are obtained from a third party who publishes the CMBX index composition and price data. Fair values of interest rate floors are calculated using a third-party discounted cash flow model based on future cash flows that are expected to be received over the remaining life of the floor. See notes 7 and 8 for a complete description of the methodology and assumptions utilized in determining fair values.
Indebtedness, net. Fair value of indebtedness is determined using future cash flows discounted at current replacement rates for these instruments. Cash flows are determined using a forward interest rate yield curve. The current replacement rates are determined by using the U.S. Treasury yield curve or the index to which these financial instruments are tied, and adjusted for the credit spreads. Credit spreads take into consideration general market conditions, maturity and collateral. We estimated the fair value of the total indebtedness to be approximately 90.8% to 100.4% of the carrying value of $1.1 billion at March 31, 2020, and approximately 94.3% to 104.2% of the carrying value of $1.1 billion at December 31, 2019. These fair value estimates are considered a Level 2 valuation technique.

19
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


10. Income (Loss) Per Share
The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2020
 
2019
Net income (loss) attributable to common stockholders - basic and diluted:
 
 
 
Net income (loss) attributable to the Company
$
(12,930
)
 
$
(981
)
Less: Dividends on preferred stock
(2,555
)
 
(2,532
)
Less: Dividends on common stock
—

 
(5,158
)
Less: Dividends on unvested performance stock units
—

 
(75
)
Less: Dividends on unvested restricted shares
—

 
(96
)
Undistributed net income (loss) allocated to common stockholders
(15,485
)
 
(8,842
)
Add back: Dividends on common stock
—

 
5,158

Distributed and undistributed net income (loss) - basic and diluted
$
(15,485
)
 
$
(3,684
)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Weighted average common shares outstanding – basic and diluted
32,474

 
32,115

 
 
 
 
Income (loss) per share - basic:
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.48
)
 
$
(0.11
)
Income (loss) per share - diluted:
 
 
 
Net income (loss) allocated to common stockholders per share
$
(0.48
)
 
$
(0.11
)
Due to their anti-dilutive effect, the computation of diluted income (loss) per share does not reflect the adjustments for the following items (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Net income (loss) allocated to common stockholders is not adjusted for:
 
 
 
Income (loss) allocated to unvested restricted shares
$
—

 
$
96

Income (loss) allocated to unvested performance stock units
—

 
75

Income (loss) attributable to redeemable noncontrolling interests in operating partnership
(1,885
)
 
(440
)
Dividends on preferred stock - Series B
1,730

 
1,707

Total
$
(155
)
 
$
1,438

Weighted average diluted shares are not adjusted for:
 
 
 
Effect of unvested restricted shares
76

 
87

Effect of unvested performance stock units
—

 
288

Effect of assumed conversion of operating partnership units
4,112

 
4,342

Effect of assumed conversion of preferred stock - Series B
6,728

 
6,569

Effect of advisory services incentive fee shares
361

 
73

Total
11,277

 
11,359

11. Redeemable Noncontrolling Interests in Operating Partnership
Redeemable noncontrolling interests in the operating partnership represents the limited partners’ proportionate share of equity and their allocable share of equity in earnings/losses of Braemar OP, which is an allocation of net income/loss attributable to the common unitholders based on the weighted average ownership percentage of these limited partners’ common units of limited partnership interest in the operating partnership (the “common units”) and units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested. Each common unit may be redeemed, by the holder, for either cash or, at our sole discretion, up to one share of our REIT common stock, which is either: (i) issued pursuant to an effective registration statement; (ii) included in

20
BRAEMAR HOTELS & RESORTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)


an effective registration statement providing for the resale of such common stock; or (iii) issued subject to a registration rights agreement.
LTIP units, which are issued to certain executives and employees of Ashford LLC as compensation, generally have vesting periods of three years. Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which are fully vested upon grant. Upon reaching economic parity with common units, each vested LTIP unit can be converted by the holder into one common unit which can then be redeemed for cash or, at our election, settled in our common stock. An LTIP unit will achieve parity with the common units upon the sale or deemed sale of all or substantially all of the assets of our operating partnership at a time when our stock is trading at a level in excess of the price it was trading on the date of the LTIP issuance. More specifically, LTIP units will achieve full economic parity with common units in connection with (i) the actual sale of all or substantially all of the assets of our operating partnership or (ii) the hypothetical sale of such assets, which results from a capital account revaluation, as defined in the partnership agreement, for our operating partnership. In March 2020, 83,000 LTIP units with a fair value of approximately $364,000 and a vesting period of three years were granted.
The compensation committee of the board of directors of the Company may authorize the issuance of Performance LTIP units to certain executive officers and directors from time to time. The award agreements provide for the grant of a target number of Performance LTIP units that will be settled in common units of Braemar OP, if, when and to the extent the applicable vesting criteria have been achieved following the end of the performance and service period, which is generally three years from the grant date. The number of Performance LTIP units actually earned may range from 0% to 200% of target based on achievement of a specified relative total stockholder return based on the formula determined by the Company’s compensation committee on the grant date. As of March 31, 2020, there were approximately 431,000 Performance LTIP units, representing 200% of the target, outstanding. The performance criteria for the Performance LTIP units are based on market conditions under the relevant literature, and the Performance LTIP units were granted to non-employees. In March 2020, 160,000 Performance LTIP units with a fair value of approximately $281,000 and a vesting period of three years were granted.
As of March 31, 2020, we have issued a total of 1.3 million LTIP units (including Performance LTIP units), net of cancellations, all of which, other than approximately 183,000 LTIP units and 220,000 Performance LTIP units issued from March 2015 to March 2020, had reached full economic parity with, and are convertible into, common units.
The following table presents the common units redeemed and the fair value at redemption (in thousands):
 
 
Three Months Ended March 31,
 
 
2020
 
2019