Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time I would like to welcome everyone to FibraHotel's 2018 First Quarter Earnings Conference Call. FibraHotel issued its quarterly report on Wednesday. If you did not receive a copy via e-mail, you can find it on the website at www.fibrahotel.com or you may e-mail, [e-mail].

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties.

All figures included herein were prepared in accordance with International Financial Reporting Standards and are stated in nominal Mexican pesos, unless otherwise noted. I would also like to remind you that -- about the upcoming shareholder assembly, which will be held on April 23. For more information, please visit www.fibrahotel.com or e-mail [e-mail].

Joining us from FibraHotel are Mr. Simon Galante, CEO; Mr. Eduardo Lopez, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, Head of Development and Investor Relations.

And now, I will turn the call over to Mr. Simon Galante. Sir, please begin.

[Simón Zaga, executive]

Thank you, operator. I'm going to begin today's call by providing an overview of the first quarter of 2018 results, including the incorporation of the Fiesta Americana Cancun resorts hotel as well as our current situation in the strategic direction. And we will then turn over the call to Edouard Boudrant, our CFO, who will discuss our financial results in more detail, and we then will open the call for questions and answers.

I am pleased to announce record results for FibraHotel for the first quarter of 2018, which reflect our best-in-class business hotel portfolio, complemented by the addition and strong performance of the Fiesta Americana Condesa Cancun hotel.

These results show a solid step by FibraHotel in the execution of the business plan we clearly laid out during the 2017 capitalization. I would like to highlight the importance of the closing and successful integration of the Fiesta Americana Condesa Cancun hotel, a unique 507-room all-inclusive resort in a prime beach location in Cancun and which is our largest acquisition to date.

That transaction closed on February 20 and we agreed that it would be economically retroactive to January 1, 2018. As such, the hotel is now fully incorporated into our portfolio. During the quarter, the hotel reported solid results with an occupancy rate of 88% and over MXN 100 million in lease income. Overall, in line with our expectations.

The hotel is a good complement to our business hotel portfolio as tourism, leisure and these resorts provide FibraHotel access to new geographies and increasing dollar-denominated revenue. Different demand generators include seasonality as we saw for this quarter, which is the best for this property, exposure to fast-growing segment with positive secular trend.

We are excited about the potential from this hotel going forward as we continue to see solid performance from tourism in Mexico, in general, and positive trends from Cancún specifically.

For the company as a whole, during the quarter, revenue surpassed MXN 1 billion for the first time ever with year-over-year growth of 33%. Operationally, our portfolio continues to perform well with the 74 stabilized hotels posting RevPAR growth of 9.6%, driven by a 3% increase in ADR and 392 basis points increase in occupancy. Even after the seasonal effects from Holy Week and Easter falling on the first quarter of this year.

For the total portfolio, excluding Cancun, RevPAR increased 11%. We saw average reported margin in general with important increases in occupancy across our portfolio. For a quarter on which our -- for business hotel is seasonally the weakest, our 74 stabilized hotel portfolio had an occupancy of 64.4%, which means we are full at all of our hotels 4.5 days of each week.

We continue to see strong momentum from large series led by Monterrey as well as from recently developed properties, including the 5 full service hotel portfolio opened in 2016.

The incorporation of the Cancun hotel as well as the solid operational results helped EBITDA growth 69% year-over-year and specifically, EBITDA margin to reach 31.1%, representing an increase of 650 basis points year-over-year.

Year-on-year we doubled AFFO. On a per-share basis, AFFO grow 21%, leading to a distribution of MXN 0.2954 per certificate for the quarter and representing an annualized dividend yield of 10%. There is a lot of upside and further earnings potential within our portfolio with a combination of organic growth in the mid high-single digits and improvements in recently developed properties, including 8 hotels in the stabilization period.

As an example, in the fourth quarter of 2017, we have opened 3 hotels with 797 rooms. The AC by Marriott Veracruz, the Fiesta Inn Buenavista and the Courtyard by Marriott Toreo.

Regarding our pipeline, we continue to be very happy with the projects currently ongoing as they are -- as these are high value-added properties in mixed-use projects and they demonstrate the asset we have been focusing for the past few years. We continue advancing well on the projects with significant progress on the Fiesta Americana Tlalnepantla and the iconic Live Aqua San Miguel de Allende hotel, which will open by the end of 2018.

We also have an active quarter from the asset management perspective as in addition to opening the Courtyard by Marriott Toreo hotel and incorporating the Fiesta Americana Condesa Cancun hotel, we also rebranded the Real Inn Morelia into a Fiesta Inn Morelia hotel, which will now be operated by Grupo Posadas.

As you know, we have been very active with our CBFI repurchase program since we obtained authorization in December of 2017. We continue to view this as an attractive investment alternative as we can acquire the best hotel assets in the market for MXN 0.60 on each dollar for the historic costs. Today, we have repurchased over 12 million CBFI and expect to continue taking advantage of this great opportunity.

I want to close out by saying that these results demonstrate the value of the strategic transaction FibraHotel went through in 2017, which improved our portfolio. It strengthened our balance sheet, increased our cash flow, generating potential and created value as per CBFI basis. After properly executing that decision, we are a better company with a lower risk profile and more income in dollars. We are in a very interesting point as we now have over MXN 17 billion in assets, posting record operating figures with less than MXN 1 billion or 6% invested in development projects.

The first quarter of 2018 was another positive step in the execution of our business plan and we believe there is still a lot of embedded growth and potential for FibraHotel to continue to grow AFFO per services per certificate in the medium and long term.

With that, I will now pass the call over to Edouard Boudrant, the CFO of FibraHotel, to disclose in more detail the financial and operating results of the fourth quarter and year-end.

[Edouard Boudrant, executive]

Thank you, Simon, and good morning, everyone. As you know, FibraHotel started the first quarter with 81 hotels in operation and closed it with 83. Please note that the stabilized portfolio increased from 64 hotels last year to 74 hotels now and does not include the Fiesta Americana Condesa Cancun that will be reported separately.

On a comparable property basis of 74 hotels for the 2018 stabilized portfolio, which was fully operational during the first quarter of last year, ADR increased by 3% at MXN 1,161 and occupancy rate increased by 392 basis points at 64.4%.

Overall, RevPAR increased 9.6% at MXN 747. The Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 5,010, occupancy was 88% and net package RevPAR was MXN 4,408, representing a 32.5% increase against the first quarter of 2017 when the hotel was undergoing a full room refurbishment. Please note that net package ADR and RevPAR are commonly used performance measure in the all-inclusive industry.

The ramp-up portfolio comprised with 8 hotels show occupancy rate of 48.3% during the quarter, ADR of MXN 1,396 and RevPAR of MXN 674. Total revenues for the quarter were MXN 1,009,000,000, of which 71% was room revenues, 60% was food and beverage revenues and 13% was lease and other revenues. Lease revenues strongly increased thanks to the rent of Fiesta Americana Condesa Cancun that stood at MXN 103 million for the quarter. Compared with the same quarter last year, revenues increased by 33%, thanks to an external growth acquisition on openings and internal growth including RevPAR. Indeed, during the fourth quarter, we received the lease for the recently acquired Fiesta Americana Condesa Cancun accounting for 41% of the revenue growth.

Lodging contribution for the quarter stood at approximately MXN 383 million and EBITDA reached MXN 340 million, increasing respectively by 61% and 69% versus last year. The lodging contribution margin for managed hotels reached 28.8% versus 28.9% the same quarter last year. The contribution margin for stabilized hotels stood at 29.1%. The contribution margin for non-stabilized properties stood at 26.1%.

Please note that 5 were full service hotels as the result of the satisfactory ramp-up period and the strong cost control, sharp occupancy rate of 66% and a contribution of MXN 37 million, representing a 30.7% margin.

The EBITDA margin reached 31.1%, increasing 654 basis point versus the first quarter of last year. This strong increase is mainly due to the additional lease revenue obtained from the Fiesta Americana Condesa Cancun. Please note that within the P&L we have some extraordinary items or nonoperating expenses corresponding mainly to one-time expenses related to hotel acquisition, development and preoperating expenses. This quarter, such expenses amounted to MXN 10 million, including MXN 4 million of preoperating expenses. It is important to mention that the expenses are nonrecurring and that they are funded with budgeted cash available for development and not from operation and others adjusted from EBITDA and AFFO.

We close the quarter with a net debt of MXN 1.7 billion, including a recoverable VAT. Gross debt amounted to MXN 3.1 billion. We finished the quarter with a very conservative LTV ratio of 18% and please note that at the end of the quarter, all our indebtedness was covered with derivative instruments.

During the quarter, the debt position generated a financing cost of MXN 73 million. In accordance with IFRS, financing cost related to development project are capitalized as part of the investment in each project. During the quarter, approximately 36% of the indebtedness was linked with development project. Therefore, MXN 19 million of interest was capitalized. The actual interest payment was met with the cash available for development.

Once each development is open, its interest expense will not be capitalized anymore and the expense will be part of the P&L statement in accordance with the IFRS.

During the quarter, we continued the development of cash position with MXN 3.3 billion invested. Almost MXN 3 billion for the acquisition of the Fiesta Americana Condesa Cancun, the development portfolio was MXN 240 million and MXN 60 million for repositioning and maintenance CapEx.

In order to give more details on the portfolio, 67% of our assets were destabilized, MXN 11 billion and contributing 67% of the total lodging contribution, almost MXN 256 million. Fiesta Americana Condesa Cancun represented 18% of our assets, MXN 3 billion and contributed 27% of the total lodging contribution, MXN 103 million. 15% of our assets were in the ramp-up or development MXN 2.5 billion and contributed only 6% of the quarterly lodging contribution, MXN 23 million.

That said, when ramp-up hotel service stabilized and hotel in development open, the lodging contribution should strongly increase and this additional result will increase in the same extent the EBITDA, then strongly improve EBITDA margin and then will help to enhance AFFO on distribution to shareholders. In line with our results and as part of our commitment to deliver value to our certificate holders, I'm pleased to inform that FibraHotel will pay a distribution of MXN 241 million, equivalent to MXN 0.2953 per CBFI increasing 21% versus the first quarter of last year. Please note also that our first quarter distribution is higher than the first quarter distribution of last year, for the first time, fully benefiting from the Fiesta Americana Condesa Cancun, the fully stabilized hotels that will help us to further stabilize our cash flow generation seasonality

Additionally, we continue to repurchase share on CBFI. As of today, we already repurchased 12.3 million CBFI, representing more than 1.5% of the outstanding CBFI at MXN 11.20 average price. Net effect on the distribution of the quarter is a 1% increase.

At this point, I would like to open the floor for the Q&A session. Operator, we are ready to take any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

I was wondering if you could give us insights on how the acquisition of the Condesa Cancun went versus your original expectations and forecast. And if you could give us an update on your planned lobby renovation, the timing of that and how that might impact results this year?

[Guillermo Escobosa, executive]

Hi, Sheila. Good morning. This is Guillermo, and thank you for your questions. We are extremely pleased with the Cancun acquisition, with the process and with the ability we have to integrate such a large asset into our portfolio. As you know, we have announced that we have signed a binding agreement with Posadas late last year. And we have agreed that since the beginning of this quarter, the hotel would be incorporated into our portfolio, that was done successfully during the quarter. And economically, it was agreed too that since the 1st of January, the hotel would be part of our portfolio. So we are very happy with the first step, which was incorporating such a large and important asset in our portfolio and comply with everything that we have said and promised during the equity rate last year. And we are extremely happy with the asset, the performance and the potential that it has. As you know, Cancun continues to be solid, looking at Asur's numbers we saw during the first quarter, traffic for passengers increased around 15%. So numbers and visitation continues to be very solid. Even with a little bit of a weaker effect from the dollar, which was a little bit weaker this year than last year, we continue to see very good results and a contribution in line with what we have expected. So overall I think we are very pleased. This is just a first step. We started to see the benefits of an asset like this during the quarter, but we believe we still have opportunity in increasing rates, in finding synergies of affiliate incorporated into our portfolio, and again, we are just very pleased to be able to fully integrated and now have it as part of our portfolio. Regarding your second question, I think it's also a very good point. There is a process of -- in which we are continuing to improve the assets. We are renovating and we are including several areas, which we think will be able to have a more upsells or additional sales to people that paid are already inclusive. We already saw an important increase during the quarter and so we are doing some work in the public areas, I mean, in the spa and other areas as well. So that will be in parts without really affecting the results of the hotel because we will have not one area closed. If we have 10 restaurants, we will close 1 of them. And so that renovation will be in phases during the year, but we don't think it should impact the results of the hotel. And we think it will improve the experience of the guests and even add a little bit of additional revenue from this investment.

[Sheila McGrath, analyst]

Okay, and if I could ask one follow-up. On -- the EBITDA margin was up significantly year-over-year, and I think some of that was probably driven by the Cancun acquisition. I'm just wondering how we should think about the EBITDA margin as we look throughout the rest of the year?

[Edouard Boudrant, executive]

So basically, Sheila, that's why we've had a very strong increase in EBITDA margin, more than 600 basis points. We have some improvements in terms of the EBITDA margin in the rest of the hotels. If you see the KPIs, we saw that during the first quarter, we have a very strong increase in occupancy rate, much more than anticipated by us. It put a little bit pressure on margin, but at the end of the day, it's more cash flow so then more EBITDA margin. What we see integrating on a full year basis the Fiesta Americana Condesa Cancun is that we should have the same trend for the 3 next quarters, a strong increase in EBITDA margin and an EBITDA margin that should be above 30%, 31% on a yearly basis.

[Operator]

The next question comes from the line of Pablo Ordóñez with Itau.

[Pablo Ordóñez, analyst]

Also a question on the recently acquired resort. Very interesting performance in the lease revenues. Can you remind us the breakdown between the fixed and the variable component? And what should we expect ahead for each of these components of the lease revenues and the outlook for the KPI metrics of the resort?

[Guillermo Escobosa, executive]

Pablo, thank you for your question. I'll let Edouard answer specifically about the line items and how it is shown in the P&L. I'll just jump in to remind you a little bit of the structure of the agreement. As you know, the transaction for the Cancun acquisition was a sale and leaseback transaction with Grupo Posadas in which it has a fixed component, which is basically should be thought of as a minimum rent and that minimum rent is 6% in dollars. It's around $9.5 million guaranteed a year. But over and above that, it is a variable component of the rent, which is based on a chart in terms of the occupancy of the hotel and how much the hotel receives as a percentage of those revenues. So in the end, it should be aligned at really the minimum rent, it's just that it's a minimum component. What we should see every quarter is a line item for the total rent amount and that total rent amount should be something that is equivalent or very similar to what the hotel is generating during the period.

[Edouard Boudrant, executive]

Regarding the question about the Fiesta Americana Condesa Cancun, so what we do and what we will do in order for you to understand the dynamics and the trend of the hotel, we decided to give some KPIs on a separate basis with the initial portfolio, the portfolio we had until last year. And this one, Fiesta Americana Condesa Cancun, will be reported separately. And we will use specific operating indicator that are commonly used in the all-inclusive industry. Because as you know, when you go to Fiesta Americana Condesa Cancun, you're not paying first the room and then food and beverage, but you are paying a stay, a daily stay that give you the rooms both and the food and beverage all-inclusive. So basically, it's what we call the net package revenue, which is in other terms, the total revenue of the hotel divide by the total occupancy -- occupied room and that include the food and beverage component. And for this, the first quarter, it was around MXN 5,000. And just to -- after that, in the statistic, we saw that per occupant room, we have between 2 and 2.2 guests in the room. So basically, that's why we will divide the communication and the disclosure on a separate basis in order for you to understand and to kind of analyze separately Fiesta Americana Condesa Cancun.

In terms of consolidation in the financial statement, we would receive the rent. So basically, it's only a lease. For the quarter, the first quarter, we received MXN 103 million lease. We have some cost. It's not operating cost, but only real estate cost, which is like real estate expenses, properties and the insurance. And at the end of the day, the EBITDA margin of this hotel, it's about 85%. That explain the strong increase in EBITDA margin this quarter by more than 600 basis points because we added a hotel that give you almost 20% of the EBITDA at the 85% EBITDA margin. So basically, that's -- it's the explanation of what has been the impact of Fiesta Americana Condesa Cancun. Also, which is very helpful for us is that the first quarter of the year is commonly the most important quarter for the all-inclusive in Cancun. It represents almost 35% of the cash flow generation of the year. And so basically it helps us to increase the cash flow generation during the first year -- or this year. It also help us to have a better seasonality on the cash flow generation. And what was the result is that for the first time in FibraHotel history, this first quarter distribution of cash flow generation is higher than the first quarter of the previous year. So basically, I think it's a very good acquisition, a very good integration in order to have a better cash flow generation profile.

[Operator]

The next question comes from the line of Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is regarding the strategic position of FibraHotel. Now that you have integrated the Fiesta Americana Cancun acquisition and with a development component which is now under control, what can we expect from you regarding inorganic growth in coming months? If you can give us an idea of the pipeline that you are studying right now in case of stabilized hotels that you may acquire or do you plan to continue growing with development?

[Guillermo Escobosa, executive]

Thank you very much for your question. And I think I'll use that to highlight what we also think is an important thing of what has happened with the company. As Simon mentioned in his remarks and as you mentioned, including these assets into our portfolio puts us in a very strong position where we now have MXN 17 billion in assets and only MXN 1 billion of that is currently in development. So we now have less than 5% or around 5% or 6% of our portfolio in development projects and that is something that we've been working to get to for the last few years. And as you know, we have a development drive within the company, which now we should not see going forward, we should see the opposite, we should see a headwind from the positive results of all the hotels that we have developed and invested in for the past few years. And so where we stand today is at a attractive point where we have a very healthy balance sheet. We're extremely happy with the net debt situation where we stand right now at our loan to value of around 10% on a net basis. We still have a very clearly laid out pipeline for this year. We continue to believe that we want to be strategically in this full service asset mixed-use component. And we also want to continue growing our presence in resorts and beach hotels. We announce projects whenever we have more certainty. So what you see in the pipeline is where we stand today and where we would be happy to stand probably in the short term. We continue working at several other alternatives. We continue to be actively looking at different opportunities for M&A. And also in what is the best way and the best product to continue our addition into resort properties. We are looking into Vallarta, Los Cabos in Cancun. Specifically in Vallarta we've seen a couple of projects. Pricing, that is more a medium term than short term. So what you should continue to see for the next few months is that we will continue executing these hotels. We have 2 for this year, which we are very happy. You can see some pictures in the report that we believe they're going to be phenomenally successful hotels, 1 in Mexico City and 1 landmark property in San Miguel de Allende. So I think right now where we stand strategically is, we are very happy. We are extremely comfortable in the position we're in, both in that, in the stabilized quarter portfolio and where we see the pipeline going forward and you should continue to see more of where we go through the year, but we believe we are on the right path where we are right now.

[Operator]

[Operator Instructions] The next question is from the line of Froylan Mendez with JPMorgan.

[Froylan Mendez, analyst]

So regarding the previous comment, would you say you're reaching a different stage for the company where you could see -- where could start focusing more into asset management also, including the renovations of hotels like the one that you just did? And secondly, what has changed in the business hotel segment for you to start focusing more into the resort business -- the resort hotels going forward instead of the business segment?

[Guillermo Escobosa, executive]

Froy, thank you for your questions. So I think, in the first component, I would say that every day in what we do is focused on asset management. You saw a couple of moves this quarter other than the reopening, we rebranded that hotel. We changed the operator, that proves our open architecture and it proves that we really are working every day to make the best of the assets we have. And we have a large and highly qualified operations in that every day focuses on maximizing the value of all of these assets, maximizing the results. And you can see the pretty good results from what we are doing in that category in terms of how the results are for the hotels.

I think that is something that is a core component of our strategy. It's not something that has changed or that will change. We have the size and the scope to be able to attack and take care of our entire portfolio of over 80 hotels and also to continue growing inorganically by both developing and adding assets. So I think, the asset management part is a key component of who we are. It has been in the past and it will continue to be. But I do think that an important part is that even where we are today, there is still a lot of value other than the MXN 1 billion in assets we have in development, our portfolio is not fully stabilized. It really is very attractive to see a portfolio of over 80 hotels that has over 60% occupancy. And when you look at the number of hotels we have opened in the past 3 years, there is still a lot of potential inside of that 62%. And now we will also like to highlight the performance of the 5 full service hotels we opened in 2016. They've had phenomenal results. You can see in the report of both in Monterrey, Guadalajara and Queretaro large series in their hotels that now have occupancy above the rest of the portfolio, rate above the rest of the portfolio and margins above the rest of the portfolio. So we will continue focusing on those assets even when they now technically pass into the stabilized portfolio, we still have a lot of juice inside them which we are focusing on extracting and that's what we focus on an asset management basis on our day-to-day. On your second question, I think nothing has changed and we really are not letting down focus on the business hotel segment. As you can see from our pipeline, we are still -- the hotels we're working on continue to be business hotels and that continues to be the core of the business. If you look at how the company breaks down, we still have a large component of hotels around 70% of our assets are in cities and 30% are in beaches and only around -- with the Cancun assets, around 20% are resorts. What we do see however is that we expand into the other resorts area. And as you know, resort properties are larger properties. So it's not that we're not focusing one over the other. But we do want to grow our presence specifically in Vallarta and Cabos, and so that is a focus. But I hope that you also understand that we are also focusing on other business destinations. We have other projects in Mexico City, we have projects in Monterrey. So we have other things that we continue looking at which are not exclusive between resorts and city. However, with where our portfolio is positioned, we do have a little bit more leeway in growth in resorts because as you can imagine, being present in 26 states, we are highly, highly selective of the opportunities we see in business because we have now a very large presence across the country.

[Froylan Mendez, analyst]

If I could follow-up very quickly, how many other hotels are you targeting for renovation? And in the case of the one that you just did, what was the amount of CapEx required to do this?

[Guillermo Escobosa, executive]

Yes, thanks. First, so as you know, we have a large CapEx reserve amount, which we reserve each year for the renovation of hotels. At this point, we are doing 2 major renovations, which is the Hacienda Galindo hotel which should finish around July. And we are also adding something that we already mentioned in the Condesa Cancun hotel. It's important to mention that as you said, this CapEx reserve just for where we stand today as of the end of the quarter, it's something around MXN 70 million. So it's a significant amount that we will be investing in our hotels in this year. We have -- we are focusing at this point that money in more soft goods renovations. And we have a variable different hotels, which we are focusing on. We have one hotel in Tijuana we are focusing on. We have a couple of hotels in Puebla. So we are working as part of our day-to-day in investing that maintenance CapEx to keep our hotels to the standard where we want. And any additional renovations, which are -- which will be more capital-intensive renovations need to be in the right projects and need to provide us the right returns. So at this point, what we're focusing on is using correctly the maintenance CapEx amount. It's a substantial amount, as I mentioned, and so we are happy that we are able to focus that into the correct hotel, but that's what we do as part of the day-to-day. And as we grow larger, that pool continues to be larger and allows us to do a few more interesting things and additions at hotels. But I think for the year, in terms of soft good renovations, we should probably do between 3 and 5 hotels, but it depends in terms of the scope in each of the assets, what we are doing to improve the assets.

[Operator]

There are no further questions at this time. Thank you for participating in FibraHotel's 2018 First Quarter Results Conference Call. If you have any further questions, please do not hesitate to contact FibraHotel's Investor Relations department. This concludes today's call. Thank you, and have a good day.