Braemar CEO Richard Stockton on Luxury Real Estate Investing

Stockton3.pngRichard Stockton has always had a passion for real estate. After graduating from Cornell, Richard began his career in real estate centric roles at both PwC and Morgan Stanley. After a brief stint working for one of his former clients, he joined Braemar as CEO.

Braemar is one of the market’s leading REITs focused on full-service luxury hotels and resorts. The company currently owns 13 properties around the United States, including the Park Hyatt Beaver Creek, Ritz-Carlton Lake Tahoe, Ritz-Carlton St. Thomas, Hotel Yountville, and Bardessono Hotel and Spa among others. With a keen focus on growth in revenue per available room, Braemar is dedicated to expanding its portfolio of luxury hotels and resorts and delivering strong dividends and equity returns to its shareholders.

(Hear the full conversation with Richard on iTunes or

RJ: Thank you so much for joining us today, Richard. I’m delighted to chat with you. We love having leaders of businesses that we’re big fans of on our podcast. My family and I have gone to your Beaver Creek property and have really enjoyed our stays there. Maybe what we could do to kick off is chat about your background.

Thanks for having me on today, RJ. I’m delighted to speak with you. Braemar is a company that’s focused on luxury hotel investments. Hospitality has been my passion for many years. My initial interest began when working as a dishwasher to make some extra money in high school. From there, I developed a passion for cooking and became a cook in a restaurant which ultimately led me to the Cornell Hotel School.

While at Cornell, I became interested in finance and real estate development. I had some initial experience in management, but I pivoted very quickly to the more analytical side of the real estate business. I continued to develop those skills through career experiences at PwC and Morgan Stanley. I followed up with an MBA to study more about real estate and finance. I had the opportunity to join Braemar Hotels two years ago, which has been the capstone to that career progression.

Braemar presented the opportunity to focus on purely hotels. I had worked a bit with hotels in the past, but also with all other types of real estate. I learned a lot along the way and the Braemar role allowed me to really impact the strategic vision of the company and take it into a direction that I felt would benefit shareholders.

I started a little over two years ago.

Within three months, we had rolled out a refined strategy for the company. The company was spun off from another a few years prior but hadn’t really found its way in terms of strategy. It was a little bit too small for the sector. It had a strategy that was, I would say at that time, overlapping with competitors but in a smaller format. I wanted to differentiate the company from its peers.

The way to do that was ultimately to define a strategy around investing in the luxury hotel and resort segment. There was a void amongst lodging REITs at that time. The lodging REIT sector is about 20 REITs focused on owning hotels, but there were none purely focused on luxury. Upon looking at the portfolio, I concluded that there were changes that I could implement over the period of a couple of years to make a strong push into a new segment. Based on the research I had done, the luxury hotel segment had proven itself to be the fastest growing hotel segment of all the chain scales.

The luxury segment has grown four percent per year in terms of RevPAR (revenue per available room) growth for the last 30 years. That’s about as far back as we have data versus the other segments—upper upscale, upscale, midscale, et cetera—which on average are growing at about three percent. This presented an opportunity to move into a higher growth segment with a defined strategy which would differentiate us and give investors a reason to own the company. In order to do that, we needed to make a few changes to the portfolio.

RJ: I’m not sure if I have my timing correct, but was the Beaver Creek property in the portfolio at the time of you joining? Or was that a new acquisition?

That was a new acquisition. Beginning in 2017, we very quickly identified two new acquisitions, including the Park Hyatt at Beaver Creek which we closed on in March of 2017.

We also closed on the Hotel Yountville, which is a hotel that we own in Napa Valley down the street from another one of our properties called the Bardessono.

Yountville is the culinary capital of Napa Valley. It’s home to a number of Michelin starred restaurants. As a result, it’s a very high-rate market. Those were the first two acquisitions.

We also, at the time of the strategy refinement, identified four hotels that would be deemed non-core and undertook an analysis to determine if we should sell them or somehow reposition them.

We ultimately decided to sell two properties and reposition two properties to be upgraded and upbranded. Subsequent to that, we acquired two other luxury hotels. Within the past year, we bought the Ritz-Carlton in Sarasota which includes a beach club on Lido Key as well as a Tom Fazio golf course. We also acquired the Ritz-Carlton in Lake Tahoe which is mid-mountain at Northstar Resort. It’s the only luxury hotel in the Lake Tahoe market.

RJ: Those are both great properties. Congrats on those recent deals. As you’re evaluating and looking at your portfolio which is spread across the US, it looks like you have a really refined method of picking the assets you’re going to pursue. Is this process of selection similar to what other investors look for? In other words, there’s a fair amount of valuation to determine if the investment will work? What are some of the other characteristics that you look for when identifying a target?

We have a systematic way of evaluating target markets, which is where we start. That determines where we should be spending our time and resources in attempting to uncover opportunities. Some opportunities we are able to generate through off-market discussions with owners. Whereas others come through our broker network, which we spend a lot of time cultivating.

As we look at a market, we look first at its depth. For example, does it have enough luxury hotel rooms for us to be interested? We also look at the fundamentals. What is the outlook for supply and demand which translates into RevPAR growth? What is the outlook for employment generally? Is this a market that is union or non-union, which we’ll have to factor into our margins?

Lastly, what is the prevailing pricing that’s available in that market? Do sellers have reasonable expectations? You’ll tend to find that some markets by virtue of their long-term characteristics—and I’m thinking here of places like New York or Miami—are difficult to acquire in because pricing expectations are so high. You mentioned numbers. Numbers, of course, drive the ultimate decision.

We’re very disciplined, mostly around two things. One is when we acquire a property, we want to acquire a track record of generating income. There has to be income in place that generates an attractive initial yield. The last four luxury hotel acquisitions we’ve made had at least a six percent unlevered initial yield which gives us comfort that this is an acquisition that will immediately start contributing to our cash flow that we use to pay dividends.

Secondly, we look at the long-term prospects of an investment. The last four acquisitions have represented a minimum of ten percent unlevered IRR. That’s based on not only what we think the market will do but what we think we can bring into the property in terms of asset management initiatives or “managing the manager.” Half of our properties are managed by Marriott. We have a fantastic relationship with them and work closely with them on margin enhancement.

We also look at what are other asset management initiatives we can bring to the table. This could be figuring out where to add guest rooms, where we can expand meeting space, where we can bring in a new restaurant concept, a new bar, et cetera. We’ll spend a lot of time prior to acquisition thinking about that too.

In terms of strategic criteria, this is perhaps implied, but it has to be a luxury hotel. There are a defined set of brands that fit that description. Of course, many independent hotels also fit the description. Ultimately, it needs to possess a suitably high RevPAR to allow us to maintain our position as having the highest quality hotel portfolio in the publicly traded sector. Our RevPAR today is over $220, so generally the acquisitions that we’re looking at will have RevPAR of $200 or more. It would, at a minimum, not dilute our RevPAR, but in many cases, we’re looking at acquisitions that are accretive and create more distance between us and everybody else in terms of portfolio quality.

RJ: How is the Saint Thomas property coming along? I believe you’re under renovation there and slated to reopen later this year. How has that process been? What can you share about that? I think you took a little bit of a hit from the storm.

That’s right. In the fall of 2017, Hurricane Irma swept through the Virgin Islands and very tragically impacted Saint Thomas. We were, at that point, viewed as a safe haven on the island. We kept the hotel open to enable people from the local community to seek shelter. When the storm cleared and the clouds broke, we found that there was significant damage to the hotel. This included many parts of the roof structure, which was allowing water to leak in. That resulted in almost a complete loss due to water damage and mold.

Over the past year or so we’ve been engaged in rehabilitating the property. The roof is complete. Many of the guest rooms have already been redesigned and rebuilt. We’re introducing new restaurants and we’re taking the opportunity to add additional amenities.

We’re adding another family pool with a slide and numerous water features. I think we’re going to emerge from the renovation in October of this year with a dramatically improved hotel product that should maintain its position as the nicest hotel in the Virgin Islands.

We’ve had a fantastic experience with our insurance carriers. I think one of the things that people misunderstand about the insurance process is that they only hear the bad news stories. They therefore assume that when something like this happens and you start to work with an insurance carrier, you end up in litigation. That has not been our experience at all. We’ve worked very collaboratively with our carriers. We had a business interruption with recovery proceeds coming 30 days after the event. This is a dramatically short time frame, but it was important to us because we are a public company. We do have to report quarterly earnings.

We didn’t want investors to worry about income streams, so we worked very effectively with our insurance carriers. That great work continues today. They’re providing us with direct loss recovery as well as business interruption recovery. We’ll emerge with a fully renovated hotel without having experienced the downtime that you would normally experience from a major renovation.

From a financial perspective for investors, it’s going to be great. From a guest perspective, they’ll probably miss one vacation while the renovation is ongoing. However, the property will be back online in time for the holidays this year. We hope that they’ll be coming in droves because it’s going to be a great guest experience.

RJ: That’s fantastic. You mentioned when the storm was occurring you kept the property opened to help local residents. We noticed on your website that your company supports a lot of charities. Is that something that’s important to you and the team?

Absolutely. Our philanthropy program is both deep and broad. We provide hundreds of thousands of dollars to various charities over the course of the year. Many of those charities are focused on education and children. We support organizations such as the YMCA. We also support educational systems of higher learning—we contribute to many college programs. That’s something that is engrained in our culture. It’s something that our shareholders and other stakeholders support.

In addition to the financial contribution, we do have a program that’s mandatory for our employees to participate in. They dedicate between six and eight hours a year to various charitable organizations. We’ll run programs with the Salvation Army around the holiday time to package up and distribute gifts for underprivileged families. We have a program with Habitat for Humanity to help build homes in the community. It’s these types of things that we think are important and allow our associates to give back.

RJ: You mentioned earlier that your interest in hospitality started at an early age and therefore you decided to go to Cornell. Both my wife and I went there for business school. The hospitality program is thought of very highly. We actually took our kids to visit this past summer and stayed at the Statler just to show them a bit around the university. This is more on a personal front, but we’d love to hear how the school and the hotel program helped you. I’ve known a lot of very accomplished people who have graduated from that program.

I can’t say enough great things about Cornell. You were there. You got to experience it as well. My experience as an undergraduate was especially impactful because the Cornell campus and Cornell community is very insular. It’s isolated from the distractions that you might find if you were at a university that’s based in a big city. Having that inward focus really allows you to not only concentrate on your academics, but also think about what you want to do with your life and how you want to get there.

I locked onto the hotel industry as my goal a little bit earlier than most. I didn’t know exactly how I would apply it. I thought initially maybe I would go the way of management and become a general manager at a hotel. I did have an interest in resort properties at the time. As I learned and grew as a person, I realized maybe that wasn’t the right thing for me. Instead, I wanted to be more on the finance and analytical side of things.

Many people that go to the hotel school will focus on different silos. There’s management, marketing, food and beverage, information technology, real estate, finance, and accounting among others. I chose real estate and finance. That became my passion and all of my extra curriculars and other activities were focused on that.

I did internships that focused on hotel valuation and then ultimately went to work for an accounting firm in real estate consulting. Then I was able to broaden out my hotel focus to real estate, but I always had a foot in the hotel industry because I was passionate about it. That’s what got me here today. My current role is the culmination of many years of preparation. It also represents something that I’ve always wanted to achieve. It has been a great experience for me.

RJ: Got it. You also spent 15 years at Morgan Stanley?

A little over 15 years. Working for Morgan Stanley provided me a life experience that I don’t think can be replicated. I spent three years in New York City, and I spent ten years in London. While based in London, I had responsibility for Europe, the Middle East and Africa. I was able to travel throughout Europe and the Middle East very extensively.

Then I was asked to move to Asia and was based in Singapore with an office in Hong Kong. I was responsible for the Asia real estate business. I had the opportunity to travel to every other Asian country to learn about our business there, meet the people, and understand the culture. It was all an amazing experience.

I left Morgan Stanley at the end of 2012 to work for one of my Singaporean clients. This took me back to the US. I was running their US business which was focused on real estate and hotels. In that case, we acquired a property in downtown LA (the US Bank Tower) and completed a major repositioning.

I cherished my time at Morgan Stanley. I maintain very close relationships with the Morgan Stanley alumni. We all get together every year and share war stories and catch up. It was an important part of my personal development.

RJ: What’s next for Braemar? Do you have ambitious plans to dramatically scale the business? What does your go-forward strategy look like?

I’m always looking for ways to dramatically scale the business. You’ve hit on precisely the right objective looking forward. The challenge is how to do it accretively for existing shareholders. What is more likely is the slow grind. How do we continue to slowly grow the business over time by following and executing on a consistent strategy, doing what we say we’re going to do, and delivering on the goals that we’ve established for ourselves.

We’ve just achieved a ~$500 million equity market capitalization. We have $1.6 billion in assets. $500 million is an important threshold in the public equity markets. The next important threshold is probably $1 billion.

We’re very focused on figuring out how to achieve the right level of liquidity for shareholders. Part of that is going to come by achieving a better multiple on current shares outstanding driven by delivering better results.

As we look out through 2019, we’ve got a number of projects that should significantly enhance our cash flow. These are starting this year and carrying into next year. This includes the Ritz Carlton in Saint Thomas coming back online. We also have two assets that are currently deemed non-core. These are being converted from Courtyard to Autograph status this year. One is in Philadelphia and one is in San Francisco.

We think that will increase RevPAR at those hotels significantly. In the case of Philadelphia, we are expecting a $25 increase. In the case of San Francisco, we are expecting a $50 increase. That translates into pretty significant EBITDA growth. As investors see those results starting to come through this year and next, that should result in a rerating of our stock. Then we can explore if it’s possible to issue equity in an accretive manner in order to acquire more properties and grow the portfolio.

Right now we have 13 hotels. That provides a decent amount of diversification. No hotel represents more than 12% of our EBITDA contribution. That said, there’s always additional diversification that we can achieve and, more importantly, a greater trading volume and float, which is important to equity investors. That’s what we’re focused on this year. This year we’ll probably be a little bit less active on the acquisitions front. We’ve acquired $250 million per year on average the last two years.

This year we will be focused on our various asset management initiatives. As we look into 2020, we’ll have to see where we stand from an equity pricing perspective and we’ll see where the market stands. Have hotel prices gotten even more competitive? Have cap rates gone even lower? Or will it be a better buying opportunity than it is now? That remains to be seen. But that’s how we’ll be spending the next 12 to 24 months.

RJ: Well you’ve been very generous with your time. I’ve really enjoyed this conversation with you. I wish you the best of luck. We’re huge fans of the properties. I’m glad to see they are in good hands.

Thanks, RJ. I will say that we’ve got an incredible amount of snow at Park Hyatt Beaver Creek and the Ritz-Carlton Lake Tahoe. I would encourage you to get out there at least one more time before the spring comes because the skiing is just unbelievable.

RJ: We love it. It’s always a conversation because my oldest daughter and I love it. We’re huge fans. My youngest daughter gets a little bit of altitude sickness. Nonetheless, we’re going to make it out there.

Great. Please enjoy and let me know when you go.

RJ: Okay, will do. Thanks, Richard.

All right. Thank you.

Hear the full conversation with Richard on iTunes or

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