What are the potential risks or downsides associated with the divestiture?

Potential Risks / Downsides of the Divestiture

1. Reduced Revenue Base and Earnings Power – The Marriott Seattle Waterfront contributed a stable, high‑margin cash‑flow to Braemar’s portfolio. Stripping a 369‑room, $145 MM asset (≈ $393k per key) removes a proven source of RevPAR growth and franchise‑fee income. Even if the proceeds are redeployed, the near‑term earnings per share (EPS) will likely dip until a comparable‑size replacement is identified, pressuring the top‑line and potentially widening the company’s valuation multiple relative to peers.

2. Capital‑allocation and Execution Risk – The proceeds must be reinvested in assets that can generate a similar or higher return on invested capital (ROIC). The market is still pricing in a modest premium for premium‑location hotels, but any mis‑step—overpaying for a new property, delayed closing, or acquisition of a lower‑quality asset—could erode the expected internal rate of return (IRR). This execution risk is amplified by the current macro‑environment: higher financing rates (Fed funds at ~5.5%), tightening credit spreads, and a softening leisure‑travel demand in the Pacific‑Northwest, all of which could increase the cost of capital and compress yields on new investments.

3. Liquidity and Balance‑Sheet Impact – While the cash inflow improves short‑term liquidity, the transaction also reduces the asset‑base that underpins Braemar’s debt covenants. A lower net‑asset value may trigger covenant‑re‑testing, especially if the company relies on a leverage ratio tied to property‑value. Moreover, the market may view the sale as a “fire‑sale” signal, prompting a short‑term price correction. Technical charts show the stock hovering near a recent resistance at $28, with a bearish divergence on the 4‑week MACD; a failure to quickly replace the lost earnings could see the price test the $24‑$25 support zone.

Trading Implications

• Short‑Term: Anticipate a modest downside pressure as analysts adjust earnings forecasts. Consider a short‑position or a protective put if the stock is trading above $28, targeting the $24‑$25 support as a downside stop.
• Medium‑Term: If Braemar announces a credible reinvestment plan (e.g., a high‑quality asset in a growth market) and the market digests the liquidity boost, the stock could rebound. A long‑position on a breakout above $30 with strong volume could capture upside once the replacement risk is mitigated. Keep a close eye on upcoming 10‑Q filings for capital‑allocation guidance and covenant‑coverage ratios.