Braemar Hotels & Resorts: HST Four Seasons Sale, Updated Thoughts

This week, Host Hotels & Resorts (HST) (the grand daddy of lodging REITs) announced the sale of two luxury properties, the Four Seasons Resort Orlando and the Four Seasons Jackson Hole for a total of $1.1B ($1.9MM/key):

The multiples provide a pretty good comp for Braemar Hotels & Resorts (BHR):

HST management was almost glowing at the current depth of buyers in the luxury market:

Michael Joseph Bellisario Robert W. Baird & Co. Incorporated, Research Division – Director and Senior Research Analyst

Jim, on the Four Seasons sales, certainly great execution there and you're proving out value. So of two parts here. One, how deep is that buyer pool today? And then two, can you, and next maybe, would you sell more of your top assets? Or what's the outlook and thinking around more high-value dispositions going forward?

 James F. Risoleo Host Hotels & Resorts, Inc. – President, CEO & Director

So are there other opportunities to maximize value within the portfolio? I think there is, we'll be opportunistic. The buyer pool for these types of assets is, I think, a lot deeper than people realize. There are a lot of sovereigns out there who are very interested in luxury hotels. There are high net worth individuals who are interested in luxury properties as well. And there are a couple of big private equity firms that have a lot of capital that have been sitting on the sidelines waiting to -- waiting for the inflection point to jump back into the market. And we're hopeful that this is the inflection point that we can prove out that there is value here, value to be created, and we're certainly hopeful that we're going to get the read through and see some multiple expansion as a result of not only this decision, but all the capital allocation decisions that we've made over the last 9 years.

Updating my math from September, and removing the Cameo Beverly Hills as it has undergone an extensive renovation/re-branding which has caused it to be NOI/EBITDA negative over the last twelve months: 

Not all of BHR's properties are luxury, about 25% of the portfolio is urban, so a full 15x hotel level EBITDA takeout is unlikely, but given how levered the capital structure with the termination fee is to the equity stub, there's a lot of potential upside here if BHR can get a similar transaction execution.  HST also called out the two sold hotels will need significant capex in the next few years, potentially suppressing the transaction multiple.  An advantage of the external management structure at BHR is Ashford gets paid as the project manager for any construction projects and the last twelve months of construction management fees are capitalized in the termination payment.  Ashford is incentivized to do renovation projects and following the completion of 3 hotel refurbishments in 2025, the portfolio should be pretty clean for a new owner, maybe getting us closer to 15x?

Another note of interest, BHR changed how they're handling preferred dividends to prepare for a sale, seems like they should be pretty close to wrapping this thing up.  I exercised my $2.50 call options that expired in January and have added to my position since.  I'm also up for any comments or thoughts on AHT, which recently announced a similar strategic alternatives process (is that different than BHR's "sale process"?) although they haven't announced a termination payment agreement with Ashford as BHR did.

Disclosure: I own shares of BHR and April $2.50 call options

Green Dot: Creating a Standalone BaaS Bank

Green Dot Corporation (GDOT) (~$715MM market capitalization) is one of the original fintech firms targeting the underbanked population in the United States who primarily live paycheck-to-paycheck.  They provide accessible financial products like prepaid debit cards, secured credit cards, money processing services, tax refund processing services both under their own name and white labeled with partners (Walmart, Apple, Amazon, Intuit, Jackson Hewitt, PLS, Uber, etc).  The end consumer can access their money in the increasingly non-cash world without a traditional bank account.  Green Dot provides back-office banking services for their own consumer services and via third party partners through their bank, Green Dot Bank.

Green Dot's history has a lot of twists and turns I'm going to gloss over (it has been a poor investment since its 2011 IPO), however back in November, Green Dot announced they were entering into a transaction where they are separating the fintech business from the bank:

The fintech business that consumers are familiar with is going to a firm called Smith Ventures.  Bill Smith, founder of Smith Ventures, is a serial entrepreneur who had previously founded Insight Card Services, which he sold to GDOT in 2014 and Shipt which he sold to Target (TGT) in 2017 for $500MM.  After those transactions, in 2017 he helped fund/found CommerceOne (currently privately held), a de novo bank based in Alabama, whose leadership team came from First Partners Bank after it was acquired by Progress Bank (which merged with UCBI in 2023) that same year.  Smith is on the board of CommerceOne and presumably the architect behind this whole transaction, there are few articles floating around about him, he's a bit of a rags-to-riches story and seems to have a successful track record at a relatively young age of 40.

Pre-GDOT merger, CommerceOne appears to be a well run, albeit small, C&I focused community bank with an admirable efficiency ratio in the low 40s (question will be how well that scales).  Credit issues have been minimal since the bank started operations, ROE is ~14%, ROA is 1.4%, cost of funds is a little high at 2.99%, but the GDOT acquisition will help drive that number down considerably.

The M&A deck lays out the bull case pretty nicely, the proforma GDOT/CommerceOne's peer group trades at pretty heady multiples as the Bank-as-a-Service ("BaaS") business model provides the dual advantage of cheap deposits and significant non-interest (fee) income.  Peers like Pathward Financial (CASH) (Upstart and MoneyLion are partners) and The Bancorp (TBBK) (Chime is a partner) trade for 3.0x and 4.0x tangible book value respectively, including a wider peer set, CommerceOne outlines the potential TBV multiples the new bank could trade for:

With GDOT trading at $12.28/share, I have the stub value to the BankCo trading just under 70% of tangible book value, well below where similar (but more established) peers trade.

Bank mergers can be challenging, I imagine this one will be particularly so since pre-GDOT CommerceOne is acquiring a bank several times its size, has mostly a remote workforce no where near Birmingham and features integrating a completely new business model.  Other risks associated with proforma CommerceOne include exposure to Green Dot (7-year initial deal), Apple and WalMart concentration risk at the fintech level and regulatory risks associated with serving this customer base (although the CPFB has been significantly neutered).  I find this to be an attractive setup, the deal is expected to close mid-2026, it'll likely take another year or two for the bank to trade more inline with peers but has significant upside.

Disclosure: I own shares of GDOT