Braemar Hotels & Resorts Inc. (NYSE: BHR) Q1 2020 Earnings Call Transcript

Braemar Hotels & Resorts Inc. (BHR) Q1 2020 earnings call dated May 22, 2020

Corporate Participants:

Jordan Jennings — Manager, Investor Relations

Richard J. Stockton — Chief Executive Officer and President

Deric S. Eubanks — Chief Financial Officer

Jeremy J. Welter — Chief Operating Officer

Analysts:

Bryan Maher — B. Riley FBR — Analyst

Tyler Batory — Janney Capital Markets — Analyst

Chris Woronka — Deutsche Bank — Analyst

Barry Oxford — D.A. Davidson — Analyst

Amanda Sweitzer — Baird — Analyst

Presentation:

Operator

Greetings, and welcome to Braemar Hotels & Resorts Inc. First Quarter 2020 Results Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Jordan Jennings, Manager, Investor Relations for Braemar Hotels & Resorts. Please go ahead.

Jordan Jennings — Manager, Investor Relations

Good morning, and welcome to today’s call to review results for Braemar Hotels & Resorts for the first quarter of 2020, and to update you on recent developments. On the call today will be Richard Stockton, President and Chief Executive Officer; Deric Eubanks, Chief Financial Officer; and Jeremy Welter, Chief Operating Officer. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet, were distributed yesterday in a press release.

At this time, let me remind you that certain statements and assumptions in this conference call contain or are based upon forward-looking information and are being made pursuant to the Safe Harbor provisions of the federal securities regulations. Such forward-looking statements are subject to numerous assumptions, uncertainties and known or unknown risks, which could cause actual results to differ materially from those anticipated. These factors are more fully discussed in the Company’s filings with the Securities and Exchange Commission.

The forward-looking statements included in this conference call are only made as of the date of this call, and the Company is not obligated to publicly update or revise them. Statements made during this call do not constitute an offer to sell or a solicitation of an offer to buy any securities. Securities will be offered only by means of a registration statement and prospectus, which can be found at www.sec.gov.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the Company’s earnings release and accompanying tables or schedules, which have been filed on Form 8-K with SEC on May 21, 2020, and may also be accessed through the Company’s website at www.bhrreit.com. Each listener is encouraged to review those reconciliations provided in the earnings release together with all other information provided in the release.

I will now turn the call over to Richard Stockton. Please go ahead.

Richard J. Stockton — Chief Executive Officer and President

Good morning. Welcome to our first quarter 2020 [Phonetic] earnings conference call. I will begin by providing an update on our activities in response to the COVID-19 pandemic. After that, Deric will provide a detailed review of our financial results, and then Jeremy will provide an update on our asset management activity. Afterwards, we’ll open up the call for Q&A.

First, this has been an extraordinary period for all of us as this global pandemic has created both social and economic disruption on an unprecedented level. Our thoughts go out to those affected by COVID-19 and to those in the frontlines working to keep us safe. The pandemic has created a volatile landscape throughout the hospitality industry, and our entire leadership team has been steadfast in its commitment to protect all of our stakeholders during this unprecedented time.

A few objectives have guided us. First, the health and safety of our employees, guests and the communities in which we operate is our highest priority. As stay-at-home orders were implemented, we quickly adapted to the restrictions and challenges affecting our guests and hotels. Initially, we took quick and decisive steps to significantly reduce staffing levels and non-essential expenses across all of our hotels. Later, in many cases as a response to a government order, we took steps to temporarily suspend operations at 11 of our properties. For those properties that remain open, we have instituted stringent safety measures consistent with evolving best practice recommendations regarding COVID-19 and are operating those hotels with minimal staffing.

The following are a few of the many steps we have taken to reduce expenses at our closed properties. We have set all thermostats in rooms and public spaces to temperatures that conserve the most energy. We have turned off in-room refrigerators and unplugged kitchen, back of house and office equipment. We have renegotiated pricing on our canceling service contracts. We’re working diligently to collect cancellation fees or partner with group customers to rebook their programs for a later date. For those two hotels that we do have opened, we have reduced staffing to skeleton crews through furloughs and layoffs. We are scheduling partial shifts when full shifts are not necessary. In some cases, we have blocked off and shut down floors and wings of the hotels. Additionally, we have specific plans to contain expenses and generate revenue as the portfolio reopens.

We may eliminate housekeeping service from some properties for stay overs. We will also eliminate van transportation, airport shuttle service, valet parking services, turndown service and all amenities that exceed brand standards. We may suspend some services at concierge lounges, and clubs and all spas and kids clubs. Our asset management efforts have been relentless and have positioned us well for the impending ramp up and operations that we now anticipate.

Although, the vast majority of our hotels are currently closed, we believe that hotel occupancy bottomed in the middle of April. Since then, occupancy continues to increase on a weekly basis. Net new bookings are positive. We’re seeing pickup of room nights on a short-term basis and the pace of that pickup is increasing almost daily. We expect drive-to leisure hotels to be among the first to bounce back, and we’re already seeing this at our Ritz-Carlton Sarasota, which ran 42% occupancy this past Saturday at an average rate of $392.

Seven out of our 13 hotels are well positioned to benefit from drive-to leisure demand. In addition to the Ritz-Carlton Sarasota, these include the Bardessono, Hotel Yountville, Ritz-Carlton Lake Tahoe, Pier House Resort, Park Hyatt Beaver Creek and Hilton La Jolla Torrey Pines. It will similarly benefit from their ability to attract drive-to leisure demands once they resume services. We currently expect to resume services at each of these hotels sometime in June.

Looking ahead a few months, we continue to be excited about the Courtyard San Francisco Downtown and its upcoming conversion to the Autograph Collection under the name The Clancy. The renovation continued during the first quarter with a portion of the lobby opening along with a parquet, an outdoor seating and reception area. Operations at the hotel were temporarily suspended on April 11, with the local shelter-in-place order extended until May 31. However, certain construction projects have been allowed to resume. We have recently restarted construction following a hiatus due to the initial shelter-in-place order. Our current estimate for the hotel’s completion is expected in the mid third quarter of this year. Comparable RevPAR decreased 30% during the first quarter.

We’ve also taken proactive and aggressive actions to protect and enhance our corporate liquidity. This included drawing down over $75 million credit facility in early March, cutting expenses at the corporate level and significantly reducing our planned capex spend for the year. All-in, we estimate that we have reduced our run rate corporate G&A and reimbursable expenses under our advisory agreement by approximately 25%. Additionally, we have been focused on working with our lenders to arrange mutually agreeable forbearance agreements that will provide us with some necessary financial relief during this crisis.

I’d like to close by saying that Braemar framer has a long tenured experienced management team that has successfully managed through prior challenging economic periods. We believe the Company has the right management team in place to protect long-term values and our entire team remains undaunted in managing these near-term challenges, while positioning ourselves for continued long-term success.

I’ll now turn the call over to Deric.

Deric S. Eubanks — Chief Financial Officer

Thanks, Richard. During the first quarter, we recognized $3.6 million of BI income for the Ritz-Carlton St. Thomas, which is reflected in the other hotel revenue line of our income statement. These insurance recoveries related to the month of December 2019 through February 2020. As I mentioned last quarter, we expect these insurance recoveries will taper off going forward.

For the first quarter of 2020, we reported a net loss attributable to common stockholders of $15.5 million or $0.48 per diluted share. For the quarter, we reported AFFO per diluted share of $0.12. Adjusted EBITDAre for the quarter was $18.5 million. At quarter’s end, we had total assets of $1.8 billion. We had $1.1 billion of mortgage loans, of which $49 million related to our joint venture partner share of the loan on the Capitol Hilton and Hilton La Jolla Torrey Pines. Our total combined loans had a blended average interest rate of 3.3%.

Our loans are entirely floating rate and the vast majority of interest rate caps in place. As of the end of the first quarter, we had approximately 50% net debt to gross assets. We ended the quarter with cash and cash equivalents of $142 million and restricted cash of $45 million. The vast majority of that restricted cash is comprised of lender and manager held reserve accounts. We have been and continue to work with our property managers and lenders in order to utilize these lender and manager held reserves to fund operating shortfalls at our hotels. At the end of the quarter, we also had $17 million in due from third-party hotel managers. This represents cash held by one of our property managers, which is also available to fund hotel operating costs.

As Richard mentioned, in response to this pandemic, we have taken decisive measures to reduce our cash utilization. We have reduced corporate G&A and reimbursable expenses under our advisory agreement by approximately 25% on an annual basis. To further preserve our liquidity, our Board of Directors decided to spend our common stock dividend, which will save approximately $6 million on a quarterly basis. We estimate that our current monthly cash utilization of our hotels, given their current state of either having suspended operations or operating in a limited capacity is approximately $10 million per month.

As I mentioned, all of our debt is property level non-recourse debt except for our corporate credit facility, and the monthly interest is currently approximately $3 million per month. Our run rate for corporate G&A and advisory fees is approximately $1.3 million per month. Based on the anticipated reopening dates, and realistic yet conservative assumptions for future hotel operations, we believe that we have sufficient liquidity to return to positive cash flow. As of March 31, 2020, our portfolio consisted of 13 hotels with 3,487 net rooms. Our share count currently stands at 38 million fully diluted shares outstanding, which is comprised of 33.5 million shares of common stock and 4.4 million OP units. In our financial results, we include approximately 6.7 million shares in our fully diluted share count associated with our Series D convertible preferred stock.

This concludes our financial review. I’d now like to turn it over to Jeremy to discuss our asset management activities for the quarter.

Jeremy J. Welter — Chief Operating Officer

Thank you, Deric. Comparable RevPAR for our portfolio decreased 14.8% during the first quarter. This decrease represents an outperformance of 8.5 percentage points and 7.9 percentage points relative to our hotels’ competitive chain scales and the nationwide luxury class respectively. Our portfolio also outperformed our hotels’ competitive set in the total United States market. By all of our commonly used benchmarking metrics, comparable RevPAR performed well relatively speaking despite the ongoing COVID-19 pandemic that has disproportionately impacted the travel and tourism industry.

Prior to the COVID-19 pandemic, our hotels were performing well to start 2020. Year-to-date through February, comparable RevPAR for our portfolio had grown 13.1%, with double-digit growth at over half the hotels in our portfolio. Comparable RevPAR at the recently converted notary hotel grew 47.7% with 16% rate growth. The Ritz-Carlton Sarasota had a very strong start to the year with comparable RevPAR growing 25.9%. Additionally, with the City of Chicago hosting a large Amazon citywide in January and the NBA All Star game in February, comparable RevPAR for the Sofitel Chicago Magnificent Mile grew 11.2%.

Overall, across the portfolio, we began to reap the outsized returns we had been anticipating in 2020 and beyond. In fact, in February, total hotel revenue grew 21.6% across our portfolio. When it became apparent that the COVID-19 pandemic was going to severely impact our hotels’ performance, we took swift action to put ourselves in a position to weather this crisis. In March, we significantly reduced operating expenses by 29.8% or $8.1 million relative to march 2019. These reductions will be even more pronounced in the second quarter numbers. We’ve also temporarily suspend services at 11 hotels.

These are unprecedented and difficult times. Asset management, property management and the brands are all working together. We want to bring back as many associates as we can as soon as we can when demand justifies bringing them back. Our associates have been pushed hard, working through a challenging situation. Folks have risen to the occasion. It makes us proud to see how everyone has pitched in to help or being asked to do more for less pay.

I also want to highlight the extraordinary job Remington is doing in response to the pandemic by minimizing the financial impact to us, while keeping associates and guests safe. During the first quarter, our Remington managed independent hotels were able to more nimbly respond to the crisis. Comparable RevPAR at our three Remington managed hotels decreased 14.1% and hotel EBITDA flow-through was 36%, both numbers outperforming our portfolio totals. March comparable RevPAR decreased 51.6%, 12.6 percentage points or 0.3 percentage points less than the luxury chain scale nationally in the total United States market respectively, quite a remarkable feat given that nationally luxury hotel experience decreased as twice as those experienced by the economy chain scale.

Operating expenses for Remington managed hotels decreased 39.8% in March, again, outpacing our portfolio totals. Remington was also aggressive in cutting the costs of shared services. While its unknown how fast recovery will be, we believe the worst is behind us. It appears the trough occurred in the middle of April. Incredibly, we have two hotels, The Ritz-Carlton Sarasota and the Notary Hotel open and operating with 15.3 and 10.6 FTEs respectively.

As we look at our portfolio, it seems that the fastest segments to rebound will be leisure and other transient business with group, the segment lagging and recovery. We also believe larger box hotels will struggle more than smaller hotels, because it will be difficult to get occupancy for these hotels via large blocks of rooms. In addition to smaller hotels having an advantage, we believe hotels in drive-to markets will experience a quicker recovery as well. In 2019, our portfolio’s group rate and occupancy as a percentage of total occupancy were $252.13 and 27% respectively. The transient segment accounted for over 2.5 times as many room nights as a group segment at $312.75 rate, a 24% premium.

Our average hotel has 286 rooms and many of our hotels are smaller. Almost half the hotels in our portfolio have fewer than 200 rooms, and many of our hotels are in drive-to leisure markets. We anticipate that our portfolio will benefit from having so much higher transient rates, the highest RevPAR of any hospitality REIT and being well-diversified. The Capital Hilton will also benefit from the inauguration next year.

Prior to the pandemic, supply growth in our domestic markets was slowing, and we expect that that tailwind to continue. We expect luxury travels to resume more quickly as well given pent-up demand in the segment. Finally, as previously mentioned, our hotels were only beginning to reap the rewards from the various renovations and repositionings we had recently completed, including The Ritz-Carlton St. Thomas, which is now positioned as one of the finest resorts in the Caribbean.

I’ll now turn to capital investments. Last year, we invested heavily in our portfolio to enhance our competitive positioning. These investments include the conversion of the Courtyard Philadelphia downtown to the Notary and Marriott’s Autograph Collection, the completion of the three suite Presidential Villa at the Bardessono Hotel and value-add projects during the rebuild of The Ritz-Carlton St. Thomas. These initiatives have allowed us to be more judicious with our spending on capital expenditures during the COVID-19 pandemic.

During the year, we anticipate the completion of the Courtyard San Francisco Downtown’s conversion to the Clancy and Marriott’s Autograph Collection, and the guestroom renovation at the Pier House Resort in Key West. In total, we expect to spend approximately $15 million to $25 million on capital expenditures in 2020.

Before we go to Q&A, I would like to turn the call back over to Richard for his final remarks.

Richard J. Stockton — Chief Executive Officer and President

Thank you, Jeremy. We’ve taken decisive actions to navigate the near-term challenges of this crisis. I’m proud of our efforts to protect our assets and maintain financial flexibility to position ourselves for future success post pandemic.

This concludes our prepared remarks, and we will now open up the call for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Bryan Maher with B. Riley FBR. Please proceed with your question.

Bryan Maher — B. Riley FBR — Analyst

Good morning, Richard, and Deric and Jeremy. A couple of questions, specifically let’s start with the reopening of some of the 11 hotels to try and take advantage of the summer drive-to travel as people try and get out of their houses, specifically Key West, La Jolla, Bardessono, Yountville. What are the lead times needed to get those open? And are any of those still state mandated closed?

Richard J. Stockton — Chief Executive Officer and President

Thanks, Bryan, for that question. Those hotels that you just named are all of the hotels we expect to open first. So at the moment they’re expected to be open by early June and so we’re able to already take reservations for those hotels. Now, there are in place government restrictions on hospitality operations for four of our properties, which include the two Napa hotels, the Pier House and the Ritz-Carlton St. Thomas. So, we are expecting those to be listed. As I said, all within the next month and we’ll resume operations thereafter. But you’re right that it is dependent on that happening in order for us to resume operations that in particular in the Napa hotels and Pier House.

Jeremy J. Welter — Chief Operating Officer

In terms of lead times, it’s days not weeks, every one of our hotels has a current date that we expect to reopen or resumed services. And so, we could switch that earlier or later based on demand or other government issues.

Bryan Maher — B. Riley FBR — Analyst

Got it. And then I understand that once you open and start generating revenue, it will slow your cash burn. But at what level of occupancy do you need to kind of get to breakeven on these assets? And I understand a lot of that’s going to have to do with what rate you’re going to be able to charge. But do you have thoughts on a range of occupancy, not at the corporate level but on the asset level?

Richard J. Stockton — Chief Executive Officer and President

Yes, we — you’re right. It does vary pretty dramatically by hotel and it really depends on cost of operating various markets, in particular whether or not we have unionization in the hotel. But our estimate across the entire portfolio is going to be 35% to 40% occupancy at a rate that’s 25% to 30% down in order to achieve breakeven.

Bryan Maher — B. Riley FBR — Analyst

Okay. And then, Richard, how do you weigh eliminating services, housekeeping, etc.? You ran through a list of items to eliminate or considering to eliminate versus the premium pricing you get on a daily rate for many of these assets?

Richard J. Stockton — Chief Executive Officer and President

Yes, it’s a good point. And I think it’s pretty clear that the luxury traveller is going to demand more of the services than perhaps some of our upper upscale hotels. So it is a conversation with our brand managers. I would expect that we would have more of those services, perhaps not even turned down at the luxury service — luxury hotels, but more frequent stay over cleanings than we would at, say, the upper upscale hotels. So, you’re right, that’s something that’s being discussed and planned out with the managers. I think one of the things that you kind of hear in the market is that the management start to charge for cleaning services for stay overs that’s not something that we’re seeing happening. It’s more that stay over cleaning services are optional to the guests. And I think many guests would prefer not to have housekeepers in the room and obviously, we’re willing to abide by that concern. But on the other hand, it is available to those that request it.

Bryan Maher — B. Riley FBR — Analyst

Okay. And then last from me and then I’ll go back into the queue, and maybe best for Deric, I suppose. We weren’t surprised really to see Ashford Trust hold payments on the non-recourse property level debt. But we were a little surprised that Braemar did so since it has less leverage and kind of more of a cash burn run rate than Ashford trusted. What are the thoughts there? And do you run the risk of loan payment acceleration requests from those lenders? And how do you weigh that risk, especially when there’s so much equity in many of these properties?

Deric S. Eubanks — Chief Financial Officer

Thanks, Bryan. I would say this, I would say when our business really started to slow down, it happened very quickly. And there was a lot of uncertainty in terms of what the future was going to look like. And so, we went into cash conservation mode and we drew down on our line. We quickly tried to get our hands on really as much cash as we could from the properties in terms of excess working capital that our managers had. And in some cases, for example, Marriott wasn’t distributing cash to us. So we had situations where the property manager was holding excess working capital as well that wasn’t being distributed or available for debt service. So we had a lot of decisions to make in terms of making debt service payments or not.

We opted to basically not pay interest on the vast majority of our property level loans. These are non-recourse property level loans. And there was not — if there was sufficient cash from the properties to pay it and it was paid, if not, we approached the lenders about a forbearance agreements and we’ve had a lot of success in those discussions so far, and hope to have some more information soon in terms of the progress there. But that’s a little more color in terms of that process.

Richard J. Stockton — Chief Executive Officer and President

And Bryan, I would like to commend our lenders, frankly, for having such patience with us. The conversations that we’ve been having with them have been extraordinarily constructive. And I do expect, we weren’t able to announce that we had forbearance agreements in place by the time of this call. I do expect to announce that in the near future as we have those conversations well-advanced. But as Deric said and we like to say, we panicked early. So that the abundance of caution, we went into cash conservation mode. And I think given the lack of clarity on the duration of this crisis that was absolutely the right thing to do, there’s still more wood to chop. There’s still negative cash flow in the immediate future that we’re managing. But I think our lenders understand that and they’ve been able to work with us very constructively.

Bryan Maher — B. Riley FBR — Analyst

And will you announce those before the next quarterly earnings call if and when they come in?

Richard J. Stockton — Chief Executive Officer and President

That’s our intention.

Bryan Maher — B. Riley FBR — Analyst

Okay. Thank you. I’ll go back into the queue. Thanks.

Operator

Thank you. Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Tyler Batory — Janney Capital Markets — Analyst

Hi, good morning. Thanks for taking my questions. First question, obviously, just on asset sales, that’s something you’re considering right now. Is that something that might make sense? And what are you hearing out there in the market in terms of bid-ask spreads, specifically on luxury and the trophy type assets that you own?

Richard J. Stockton — Chief Executive Officer and President

Yeah. Thanks, Tyler. So, when we first caught sight that this tidal wave was heading towards us, we immediately went into the market to kind of test the appetite. We’ve seen the public equity markets had collapsed very precipitously and we were wondering if the same had been happening within the asset markets. So it turns out that it had and demand for hotel assets collapsed very, very quickly. That said, there are some very well capitalized private equity funds out there still, family offices also that are looking to deploy capital into the hospitality space. But their pricing adjusted to, I’d say, a range of anywhere from a little under 30% to 40% down from pre-COVID-19 values or our estimates of values.

For us, given our strong liquidity position, we felt that it wasn’t necessary to sell assets at that price. Whether there’s a bid-ask spread, I don’t know exactly where we come out on that, but I do know that for that level of pricing, we felt that there are other options available to us to generate liquidity that were more favorable. So, that’s been our experience in the asset sale market.

Tyler Batory — Janney Capital Markets — Analyst

Okay, great. Appreciate that. And just as a follow-up, I understand the world is much different today than it was a few months ago, but it sounds like January and February for the portfolio on a revenue basis were quite strong. So, can you talk a little bit more about first, the flow through that you saw in those two months pre-COVID, and then some of the projects and what not, the renovations at Philadelphia, St. Thomas, I mean, how are things progressing versus your underwriting?

Jeremy J. Welter — Chief Operating Officer

This is Jeremy. I can handle that. Flow through, I don’t have the January and February flow through in front of me, but I can tell you that because of the ramp of St. Thomas, and you just got a lot of aggressive and low margin revenue, I’d anticipate that it wasn’t as strong as what we would have typically had for that level of growth, but there was good growth in overall EBITDA. But as we look forward, I mean, we got incredible portfolio. We’ve got — there’s a lot of pent-up demand in some of these markets. And I think we’re very well positioned for the future.

Tyler Batory — Janney Capital Markets — Analyst

Okay. That’s all from me. Thank you.

Operator

Thank you. Our next question comes from line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka — Deutsche Bank — Analyst

Hey. Good morning, guys. I wanted to ask, as you are beginning to reopen more properties, given that a lot of your hotels do have a pretty big ancillary revenue load. How much of that is realistically kind of possible to do in the current environment? How much of some of the ancillary stuff can be managed to be at least kind of breakeven if you don’t have the revenue coming in?

Richard J. Stockton — Chief Executive Officer and President

I’d say, Chris, thanks for that question. Our single largest contributor of ancillary revenue in the portfolio is the Ritz-Carlton Sarasota membership fees. We haven’t seen significant drop-off in that. I think people that are our members enjoy utilizing those services, particularly now if they have more time, which include as you know, the golf club, the beach club and the spa. And that property remains open. And so that’s about $4 million a year in revenue. Now, there are other ancillary revenue sources throughout the portfolio that will be a little bit slower to come back, but they don’t nearly represent the size and proportion that we have as the membership program in Sarasota.

Jeremy J. Welter — Chief Operating Officer

Yes, I think when you look at some of our other assets like St. Thomas, we’re not going to open, or we’re going to reopen those services on a limited basis when you look in terms of the restaurants. We’re going to have to have dining available, but we’re going to basically shift it to basically one venue and breakfast, lunch and dinner going to be served at that venue. We do not plan to reopen our lounges, even the Ritz club lounges until we get sufficient demand at the properties. And so, Sarasota’s club lounge will be closed indefinitely, may open on an opportunity basis based on the demand on weekends, and the same is going to be for some of the other hotels as well.

We’re just going to have to evaluate it and see how things ramp up. But what I would tell you is that the number one driver in terms of margin in our portfolio is ADR and rooms revenue. And so, we’re not really worried about the ancillary revenue, because this is a short-term situation. I think long-term, we’ll have all our venues open and people will be traveling and they’ll be utilizing our restaurants and our spas and some of the other ancillary services that we provide.

Chris Woronka — Deutsche Bank — Analyst

Okay, great. Appreciate that. And just kind of a follow-up on that. I think you guys gave out the data point of the premium ADR that the transients getting over group for your portfolio. I’m guessing that’s kind of a 2019 number, trailing 12 number. How do you guys see rate kind of playing out if demand is going to be dominated by leisure for a while?

Jeremy J. Welter — Chief Operating Officer

Yeah, I mean, one of the things that we’re going to miss in the short-term is getting some of that base group business, either in our hotels or other hotels in the market, which obviously compressed demand and help you to drive up transient rate. Right now, the only data point we really have that is meaningful for transient is in Sarasota and the rate there is holding up fairly well as demand resumes. And so, I think the property teams done a very, very good job from a revenue management standpoint and having the discipline to hold the rate at that hotel.

I think in other markets, there will be, it’s going to be compressed and it’s going to be challenged. And that’s why I think when we quoted the breakeven, we’ve assumed a 25% reduction in ADRs. It’s difficult to say where we’re going to see that and experience that across the portfolio, but it’s going to be more markets that have either group demand, or markets, or hotels that are in market, where group is contributing to demand within that market. So Key West I think probably is still going to have really strong ADRs. I think that we’ll see that over time with the Yountville assets as well, just because there’s still going to be drive-to leisure demand in those markets.

Richard J. Stockton — Chief Executive Officer and President

And Chris, just to give you some other data points. So our business is about, well, for the first quarter it’s about 27% group, with the balance being transient for the most part, very small proponent of — proportion of contracts. That’s consistent across the portfolio. Over time, it kind of hovers in that kind of mid-20s percent group rate or group segment exposure. And our transient business is sold at around 25% premium to the group rate. So we kind of like, as Jeremy said, we like that proportion, we like building a basic business of group. On the other hand, operationally, I think we do quite well, even without that much group demand as is expected in the next 12 months.

Jeremy J. Welter — Chief Operating Officer

And one other thing, as you look at group, it’s also need-based time periods. And so, typically, a lot of times when we’re layering through with these wins, we have low transient demand periods, because our portfolio is more resort focused, leisure focused. And so in a lot of cases, the lack of group base will not impact certain hotels just because we’re layering in group in markets like Tahoe or Park Hyatt Beaver Creek. We don’t hardly have any growth in December-January time frame just because there’s so much transient demand regardless.

Chris Woronka — Deutsche Bank — Analyst

Okay, great. Appreciate all that color. Maybe just one last one for Richard, I know you guys mentioned you’ve been able to get the advisory fee down a little bit. Is this kind of a situation make you want to potentially re-explore any contract terms on the advisory agreement?

Richard J. Stockton — Chief Executive Officer and President

Yeah, thanks for that. You’re right, the advisory fee has come down a little bit in the first quarter. I think in the second quarter, you’ll see it come down even more, which could be up to 10% as a result of lower market cap. I think we’re not — I don’t think we’ll hit that threshold of the minimum advisory fee. So I think the advisory fee is working well and how it’s established. I think as always having access to such a broad and deep team of expertise for Braemar is something that we just wouldn’t be able to replicate if we weren’t part of this advisory relationship. So I think that’s all served us very well, in particular our ability to manage our way through this crisis and expected to continue that way.

Chris Woronka — Deutsche Bank — Analyst

Okay, great. Thanks, guys.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Barry Oxford with D.A. Davidson. Please proceed with your question.

Barry Oxford — D.A. Davidson — Analyst

Thanks, guys. I guess this is for Deric. To the extent that you can talk about the forbearance, maybe not any one in particular, but maybe help us with kind of some broad strokes of what this terms might be, like three months with a 12-month payback period? From a big picture, I know you can’t comment directly.

Deric S. Eubanks — Chief Financial Officer

Yeah, I mean, I’ll give you a sense of what our request was to lenders. It was basically like look, we’ve got closed properties, in some cases, we’re closed because the government ordered us to close our assets. So there’s no cash flow at the properties. You really just need a period of time where we just don’t have to pay interest and we call that forbearance really. And then that interest would ultimately get paid at some point, whether that’s added on to the principle amount and paid at the maturity or whether it’s paid over time.

The other important factor for us as part of the forbearance discussions is the ability to use reserves that are held either by the managers or by the lenders to fund operating shortfalls, because as you know with all these hotels closed and even the ones that are open, they’re not profitable. And so, we’re having to fund operating shortfalls. And there’s a lot of cash that’s either being held by lenders or it’s held at our managers that we are utilizing and want to be able to access for operating shortfalls that may have been set aside for future capex or brand required capital expenditures that now aren’t required. And so those — that’s kind of the nature of the conversations that we’re having.

Barry Oxford — D.A. Davidson — Analyst

Great. Thanks for that color there. And then, I guess, Deric, one last question from me, I guess it goes to you. What type of insurance recoup can we look for kind of the rest of the year as we’re kind of thinking about our models?

Deric S. Eubanks — Chief Financial Officer

In terms of BI at St Thomas, I wouldn’t model really anything, because we’ve really burned through a lot of that. And the hotel had reopened and was ramping back up nicely. So in terms of your modeling, I don’t think I’ve put anything in your projections. We may be able to negotiate something with the carriers, but it’s a much different negotiation now at this point. So that relates to St Thomas. There’s no BI coverage at the moment for the pandemic. I know there’s some discussion going on with some legislation that may come down and make that an advance that retroactively could be covered through a pandemic policy that may be back stopped by the federal government, but that’s still very preliminary.

Barry Oxford — D.A. Davidson — Analyst

Got it. Appreciate the comments. Thanks, guys.

Richard J. Stockton — Chief Executive Officer and President

Thanks, Barry.

Operator

Thank you. Our next question comes from the line of Amanda Sweitzer with Baird. Please proceed with your question.

Amanda Sweitzer — Baird — Analyst

Good morning, everyone. Thanks for taking the question.

Richard J. Stockton — Chief Executive Officer and President

Hi, Amanda.

Amanda Sweitzer — Baird — Analyst

As we think about your liquidity, can you just give a more granular breakdown of that $45 million restricted cash balance? How much of that is held at lenders versus how much of that third-party managers and maybe a little bit more equally accessible?

Deric S. Eubanks — Chief Financial Officer

Yeah. Amanda, it’s Deric. The vast majority of that is actually held by the managers. But because of the nature of the way that it’s held, even if the — in our loan agreement, even if the manager has said, you can utilize this for operating shortfalls, the lenders still have to approve that. So it’s still a process of getting lender approval, even though it’s held by the managers. So whether it’s held by the managers or held by the lenders, it’s still really the same discussion.

Amanda Sweitzer — Baird — Analyst

That’s helpful. And then another kind of follow-up on liquidity. How are you guys seeing it at the preferred dividend today? Obviously, liquidity is at a premium, but you kind of balance that against the fact that it is a relatively small outflow for you and the preferred market could be a source of funds for you guys in the future.

Deric S. Eubanks — Chief Financial Officer

Yeah, I think, Amanda, you’re spot on. It’s not a big outflow for us. So, we take that into consideration. I think also you’re right, I think the preferred market is something that pre-crisis, we were planning to access certainly in the non-traded space and filed the registration statement to that effect. So that also kind of weighs in our thinking in dealing with the preferred as well. But generally, I think it’s a relatively small cost to the Company and there are lot of benefits to keeping it going.

Amanda Sweitzer — Baird — Analyst

That’s so helpful. That’s it from me. Thanks, guys. Take care.

Deric S. Eubanks — Chief Financial Officer

Thanks.

Operator

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I’ll now turn the floor back to management for any final comments.

Richard J. Stockton — Chief Executive Officer and President

Great. Well, thanks to everybody for joining the call. I look forward to speaking to you all again next quarter. Thank you.

Operator

[Operator Closing Remarks]