Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Hector, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2022 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 at www.fibrahotel.com or 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. Unless noted, all figures included herein were prepared in accordance with international financial reporting standards and are stated in nominal Mexican pesos.

Joining us from FibraHotel are Mr. Simón Galante, CEO; Mr. Eduardo López, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO.

With that, I will turn the call over to Mr. Simón Galante. Sir, please begin.

[Simón Zaga, executive]

Thank you, operator, and good morning, everyone. I am going to begin today's call by providing an overview of the first quarter of 2022 and year-end results, the current situation, and will then turn this call over to Edouard Boudrant, our CFO, who will discuss our financial results in more detail. And we will then open the call for questions and answers.

The results of the first quarter of 2022 continued to demonstrate the solid recovery trend in the hotel sector and the benefits of our portfolio quality and diversification. For the quarter, our total portfolio had an efficiency of 51.7%, which is 15.3 percentage points above the first quarter of 2021. In January, the portfolio had an occupancy of 41%, impacted by the Omicron variant. As the quarter progressed, we saw a quick recovery, achieving occupancies of 52.9% in February and 61.4% in March.

We continue to be encouraged by the rate environment overall, and we're also able to optimize rates achieving a year-on-year ADR increase of almost 12%. Overall, March had the best monthly results since the pandemic began and was almost in line with March 2019 results, and we continue to see a similar positive trend in April to date.

Total revenues for the quarter increased 71% versus the first quarter of 2021. We continue to see good numbers from leisure and tourism hotels. During the quarter, the Fiesta Americana Condesa Cancun Hotel had an outstanding performance, delivering a MXN 96 million rent, of which MXN 5 million were related to postponed rents from the pandemic.

We are also encouraged by the quarterly result in several large cities such as Mexico City, Guadalajara and Monterrey, including the reactivation of certain large events such as the Pa'l Norte festival and the Vive Latino festive.

We are also starting to see a phased return to office by most larger companies. From a region perspective, we saw year-on-year RevPAR growth of 72% in the Northeast, including Monterrey; 83% in the West, including Guadalajara; and 106% in Mexico City.

Operationally, we continue to see the benefits of efficiencies we implemented during the pandemic, achieving an EBITDA of almost MXN 250 million with a 26.1% margin, the highest we have seen in the pandemic. AFFO for the quarter was MXN 100 million.

Regarding our balance sheet, we continue looking for alternatives to optimize our capital structure, such as converting a portion of our peso bank debt to dollars. We ended the quarter with an LTV below 30%.

I would like to spend a couple of minutes to speak about our priorities on capital allocation. I am happy to discuss this since it means we are starting to achieve significant cash flows from the hotel. I also must caution that we are still on a path to full recovery and that we don't control external events such as geopolitical issues or a new COVID wave. We need to weigh several initiatives at the same time to make the best use of the available funds in this part of the cycle. We will continue analyzing and discussing this item with our Technical Committee and our investors and expect to expand on the priorities later in this year.

There are several things we aim to achieve: continuing to reduce debt to the levels we had before the pandemic; invest in our hotels, we have several in process, high rates of return projects to rebrand and expand our existing hotels. We are also working to improve our food and beverage offerings and investments in relevant ESG components such as solar panels and HVAC systems.

Distributions. We believe that Fibra should be a dividend paying vehicle. At this point, we do not expect to have distribution for 2022, and we do not expect to go back to a 100% AFFO pay out in the future. We will determine the appropriate policy in discussions with all the stakeholders during the year. We can also look at the FIBRAPL buyback program.

Inorganic growth. We see a lot of opportunities in hotels that improve and diversify our portfolio. In this sense, among other things, we are working on a possible fund to invest in hotels in Mexico, targeting leisure travelers in the main beach and tourism destinations in Mexico. We continue to see an opportunity in the Mexican tourism market.

FibraHotel can invest with a minority position with additional partners in the fund, while co-managing in which we can maximize our use of capital and have access to a potential pipeline of properties in the future while doing the asset management of the property.

Continue to pay our scheduled amortizations to reduce debt.

Asset recycling. We will continue to work on asset sales to fund initiatives. We have been slow on this item as there is still a lot of supply in the market, but we will continue to focus on this core part of our strategy.

Before I finish, I would like to highlight our progress on ESG. We are proud to announce that FibraHotel was officially recognized by the Science Based Target Initiative as a company committed to set goal based on science. We are one of only 19 publicly recognized companies in Mexico by the international initiatives by United Nations Global Compact and the We Mean Business as a business committed to setting goals in order to make change possible.

We also proposed to the CBFI Holders Assembly certain changes regarding FibraHotel's Technical Committee, which will improve our diversity. We want to publicly recognize and thank Manuel Zepeda for his support during the past 10 years as a founding Independent Technical Committee Member of FibraHotel. We also propose Maria Mar Torreblanca as an Independent Member of the Technical Committee. Maria Mar brings a deep experience in REIT sector in Mexico as well as in ESG, best practices, and we are happy with the prospect to have her to be part of the Committee.

I would like to end by thanking our partners and team for their efforts, hard work and commitment to achieve these positive results.

With that, I will now pass the call over to Edouard Boudrant, the CFO of FibraHotel, to discuss the financial and operating results of the second quarter.

[Edouard Boudrant, executive]

Thank you, Simón, and good morning, everyone. During the first quarter of 2022, thanks to the strong operating performance of our hotels, our financial result formed the trend observed during the first quarter of 2021, despite a weak month of January.

The performance of our portfolio represent properly the seasonality we usually see in our portfolio for our first quarter, a very strong performance of our results and the weakest quarter for business in hotels. The occupancy rate of the quarter was 52% for managed hotels versus 56% for the first quarter of 2021. On a monthly basis, occupancy rate was 41% in January, below our initial expectations due to the impact of the Omicron variant, 82% in February and 61% in March, above our initial expectations.

The month of March has been the best in terms of occupancy and rate since the pandemic began. Revenues and results were in line versus the revenues and results of March of 2019. We closed the first quarter with 84 hotels opened.

Average daily rate was MXN 1,244, in line versus the first quarter of 2021 and a 20% increase versus the first quarter of 2021. Quarterly RevPAR was MXN 642, representing respectively an 8% decrease versus the first quarter of 2021 and a 70% increase versus the first quarter of 2021.

The Fiesta Americana Condesa Cancun Hotel had a net package ADR of MXN 6,356. Occupancy was 77% and net package RevPAR was MXN 4,888, representing, respectively, a 12% increase versus the first quarter of 2021 and a 94% increase versus the first quarter of 2021.

Total revenues for the quarter was MXN 951 million versus MXN 998 million for the first quarter of last year, decreasing 5%. Lodging contribution for the quarter was MXN 328 million versus MXN 331 million for the first quarter of last year, decreasing 1%. The rent collected by the hotel Fiesta Americana Condesa Cancun represented MXN 96 million or 10% of total revenues versus MXN 50 million, representing 5% of the total revenues during the first quarter of last year.

We continued with our position of being highly cost control at hotel's level. The margin of lodging contribution for the managed hotel was 25% versus 30% for the first quarter of last year. EBITDA for the quarter was MXN 248 million versus MXN 249 million for the first quarter of last year. In terms of EBITDA margin, we improved from 25% in the first quarter of last year to 26.1% in the first quarter of 2020.

Real estate expenses were MXN 20 million versus MXN 21 million during the first quarter of last year, and corporate expenses was MXN 60 million, in line.

We closed the quarter with a net debt of MXN 4.6 billion, increasing MXN 78 million versus the end of last year. Gross debt amounted to MXN 5 billion. We finished the quarter with a conservative LTV ratio of 29%, unchanged versus last year.

During the quarter, the debt position generated a financing cost of MXN 101 million. The net financial income was negative MXN 94 million.

As of today, our debt structure is extremely healthy. Only MXN 88 million of amortization for 2022. Only 2% is maturing during the next 12 months. Average cost of debt is 8.19%. And we have only 5% of our debt in USD, MXN 11 million.

We closed the quarter with MXN 394 million cash position compared with MXN 486 million at the end of last year. During the quarter, we amortized MXN 8 million. We also deployed MXN 54 million of maintenance and repositioning in CapEx: MXN 22 million for maintenance CapEx, MXN 11 million in improvement in the hotel Fiesta Americana Condesa Cancun, MXN 11 million in improvement in the hotel Live AquaSan Miguel de Allende and MXN 10 million in improvements in other hotels of the portfolio.

For the quarter, our funds from operation and adjusted funds from operation were positive MXN 153 million and MXN 100 million.

Please note that for the first quarter of 2022, we will not pay distribution.

At this point, I would like to open the floor for the Q&A session.

[Operator]

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

[Sheila McGrath, analyst]

It's very encouraging on the March occupancy trends that I think we're trending over 60%. I was wondering if you could give us some insight on how the occupancy is trending into April.

[Edouard Boudrant, executive]

We had a very interesting month of March. It has been a very good surprise for us at the beginning of the month with -- you remember that in Mexico a lot of restrictions has been released at the beginning of March, and we saw a direct impact in terms of occupancy in our portfolio. And for example, Mexico City and the metropolitan zone that has been severely impacted by the COVID-19 is getting back at a very good pace.

And that's what we saw for the month of April, is that the trend is continuing. We're in line with the occupancy that we had in 2019. And also, we are above expectations that we had at the beginning of this year and at the end of last year when we worked with the operator for the budget.

So basically, what we see, it's a very good trend and much more interesting than we initially anticipated. And we are very confident over the next few months. And the discussion that we have with the operator, the booking pace is extremely interesting, both in terms of the -- in the business segment. And we can see that in the business segment, we are at a level of ADR that we didn't have in the past.

And so in Fiesta Americana Condesa Cancun, just a number: we are almost in books -- in -- we have almost fulfilled all the budget that we have, and there is a lot of room to maneuver to improve that. And if you see the rate in Cancun, as of today we are above USD 300. It's something that we didn't have in the past. It's something that we didn't have in the budget when we bought the hotel 4 years ago.

So basically, the trend is very positive. And also, you can see in terms of margin, as of today we were controlling the cost. Obviously, inflation, we have to be very carefully on the inflation of cost. But all the measures that we took 2 years ago in order to improve the productivity of the hotel is going very, very well. So it's very good. We have very good prospect for the forthcoming months.

[Sheila McGrath, analyst]

Okay. I just have 2 other quick questions. With market conditions rebounding, can you comment if the potential asset disposition market is improving? And your thoughts on selling some assets to fund debt repayments?

[Guillermo Escobosa, executive]

Sheila, this is Guillermo. We do see that, but we do not see it in the short term. Even with the conditions improving, Sheila, we haven't seen as many transactions closed for other properties that are in the market as we would like.

So there is still a lot of supply for -- mainly for business hotels in the pipeline. And so we need to see that pipeline clean up a little. We need to see more transactions in the market before we are able to price the hotels at the right time.

We have started seeing some people inquire a little bit more in places closer in the [indiscernible] spread, but there is still a lot of supply. So we don't see this moving as quickly as we would like.

[Sheila McGrath, analyst]

Okay. My final question is, you did buy a lot of shares, not the company, the management and Members of the Technical Committee. Can you remind -- during the downturn, can you remind us what percent of CBFIs are owned by management and insiders?

[Simón Zaga, executive]

Sheila, this is Simón. As we made public through -- every time we bought shares, we made a relevant announcement each time. The management and the control group bought about 100 million shares through the pandemic. And with that, we are close to -- a little bit over 30% between the control group and early investors of us, particularly, and all of that. But we did expand our position and we bought about 12% to 13% of the company in that time.

[Operator]

Our next question comes from Paulina Moreira with Compass Group.

[Unknown]

I have 2. First is regarding dividends. I know you said that we shouldn't expect dividends through this year, but we should expect them in 2023. And also you said that it won't be 100% of the AFFO. So how much approximate would it be? That's the first one.

[Guillermo Escobosa, executive]

And we just wanted to be very upfront with everybody, and that's why we spent a few minutes talking about it. It's something that where we are analyzing all of the different alternatives and weighing all of the different things that we can do.

We do expect the dividend to come back. It will probably be in 2023, as you mentioned. It is a decision that will be made by the Technical Committee in the end. We are discussing all of the probabilities.

And in terms of the payout, we do have several things that we need to also weigh, as you heard in the comments. And so in that sense, we do not believe that it's 100% of the payout. But we are not even certain that using a percentage of payout is the right way to go. We are considering different alternatives such as having a specific number that can grow over time or having a payout. So we are right now analyzing the different alternatives and talking to the different interested parties to see where everybody's views are on this item. And we will decide later on this year. But we did want to be very upfront that it's something that ourselves as management team and the Board have top of mind, and we will be discussing.

[Unknown]

Okay. Very clear. And my other question, you mentioned something about inflation. I want to know what are you doing to mitigate this high inflation, because I know it irritates.

[Edouard Boudrant, executive]

So basically, in terms of inflation and if you analyze the cost structure of the hotels, the 2 main elements of cost in -- of operating cost is the staffing and it's the energetics. If we see energetics, we saw an increase in freight, but not such dramatic as we saw, for example, 4 years ago and even inflation. The increase is below inflation. So basically, as of today, it has been quite controlled. And also, we are putting a lot of measure in order to be very efficient in terms of electricity consumption, in terms of water consumption. For example, we changed all the lights in the hotel in order -- towards 100% LED light in the hotel. So basically, as of today, we succeeded in controlling that cost.

And the second one is the staffing. And basically, we are increasing according to the market what is it for the staffing. But at the end of the day, the best measure to protect against inflation in terms of cost is to increase the rates. And you can see that the increase in rates has been quite positive. And for example, in March, we closed the administry -- the managed hotels with an ADR of MXN 1,300. It's 30% more than the year that we started in 2021. It's the highest ADR that we've seen in the portfolio ever.

So basically, it's -- there is a good reaction of the market in order to accept the price that we are putting with the operators. So I think inflation is here. We cannot avoid inflation. We have to control costs. That we are doing. And so we have to increase the rates.

And it has been a good surprise because in the budget we had a lower rate than in reality. And so in terms of results, you can see the rates that we have in Cancun. We are above USD 300. Inflation is -- or increase in rate is very interesting, 20% year-over-year. So basically, I think we are quite in good shape in order to control the inflation of the cost by increasing rates.

[Eduardo García, executive]

The other thing I just want to add what Edouard said is that the hotel business has -- every day the hotel fills up and empties out. So that gives you a chance to reprice and going into an inflation mode in a better way than maybe an industrial facility that has a 10-year lease with inflation.

So I believe that in a high inflation time, as we are seeing today, having the opportunity to reprice your property every day is an advantage, as it was maybe a disadvantage beforehand. So we are going to be very active in being with the operators to fully go through the inflation in the top line. And as Edouard said, being very watchful on the bottom on the expenses throughout the cycle. So we will be very active in pricing and in having that.

As I said, we are not seeing a price war with other competitors, and the operators have been doing a good job in pushing the rates. But we still have a long and good place to go in city hotels. And we have seen, as Edouard mentioned, how in the resort area we have already higher the rate. But I believe we still have chance and space on the resort. But full and big opportunity on cities as we have more than 2,000 rooms in Mexico City, and it's the latest city that will have the recuperation after COVID. So I just wanted to add that to your question.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Edison R. Magia Velasco ] with Suma Cap.

[Unknown Analyst]

I have 2 of them. The first one, could you give us a little bit of color or an update from Fiesta Americana Satelite and Viaducto? How the ramp-up process is going and probably if you have an occupancy rate of those properties specifically? The second one is regarding on what Simón said at the beginning of his remarks about investing in new hotels and in the properties. So could you give us a little bit more color about investing in your expanding properties? Or what is it specifically investing in and your hotels' names?

[Edouard Boudrant, executive]

So [ Edison ], regarding the performance of Fiesta Americana Satelite and Viaducto. So basically, what we saw in Satelite, there is a recovery. As I mentioned, since the beginning of March, we saw a positive impact on Mexico City. So the hotel is ramping up. The situation -- the market is not as favorable as other zones in Mexico City, but it's quite favorable.

And regarding Fiesta Americana Viaducto, it's doing amazingly well. We have a lot of activity in the hotel. It's very near to the airport. We have a lot of guests coming from the airport. And also, there is a lot of events at proximity of the hotel. For example, you can see that we had a lot of concerts in the past few weeks. And in the forthcoming months also, there is a lot of events that are booked. So basically, in Fiesta Americana Viaducto, it's a very good surprise and it's one of the top performer of the portfolio.

And globally, Mexico City is doing very well. The recovery of Mexico City is nice. But we have a lot of opportunities still because it's not the best performing zone of the portfolio. So basically, we have a lot of room to improve. We had a 61% occupancy in March. It has been a good occupancy, but we want to recover the 6 to 7 percentage point that we had in global 2 years ago.

[Guillermo Escobosa, executive]

Regarding the second question, [ Edison ], we have a lot of initiatives to improve the hotels and areas within the hotels that will improve the profitability. And so that includes, in some cases -- for instance, we have added suites in the Live Aqua San Miguel de Allende hotel. We added -- we took regular rooms and we expanded with a terrace a private pool. We've done the same thing in Fiesta Americana Condesa Cancun, where in the -- the rooms that are in the ground floor, we added a private pool. Those are 2 examples of things we have already done.

But as I mentioned, we have several projects where, for instance, we can change the chillers and the air conditioning system at certain hotels, and that will make them more efficient and it will also reduce emission. So that has a good return on investment.

And we are also -- we revamped after the pandemic all of our food and beverage offerings, and we are adding a lot of franchise restaurants within the hotels. So in order to get those running, we need to invest in the restaurant and the decoration of the restaurants. We already have the kitchen and a lot of the investment. But we still need to make some investments to get these areas up and running.

So those are several examples that we're looking at. We're also looking at rebranding a couple of hotels, and we'll have more color on that in the future. But there are many things that we see within our portfolio that we have very low variability in what we expect in results, and that they will provide us very good returns on those investments. So that is what we're looking to do within our portfolio as our asset management capabilities.

[Unknown Analyst]

Okay. It's really clear. Maybe I'll follow-up regarding on this investing. So are we expecting to have a large CapEx for the rest of 2022? Or it's going to be in the same levels that you have, 5% of the total revenue of the REIT?

[Guillermo Escobosa, executive]

Overall, it's not a large amount. And what we are expecting is to use some of the AFFO we are generating to invest in those projects. So it will be in addition to maintenance CapEx. But in the overall sense, it will not be a very large -- a significant amount if you take into account the value of our assets.

[Operator]

Our next question comes from Francis Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

Also congratulations on the strong results. My question is regarding the Fiesta Americana Condesa Cancun. Is the amount that -- leasing amount that you received this quarter sustainable? If not, what is the number that we should expect for the next coming quarter?

[Edouard Boudrant, executive]

So basically, in order to be very, very clear and to understand the rent that we received in the first quarter. The hotel gave us a rent of MXN 96 million. If we come back to the situation of last year, we agreed with Posadas to collect 85% of the fixed rent and to delay the payment of the 15 remaining. At the end of last year, this 15% amounted to roughly USD 1.5 million. And basically, this account collectible is paid on a monthly basis and corresponding to 5% of the EBITDA of the hotel.

And during the first quarter, we collected 15% of this debt of MXN 5 million. So basically, if we see the operating performance of the Fiesta Americana Condesa Cancun for the quarter of 2022, we are roughly about MXN 90 million.

Obviously, the first quarter of the year is the best quarter for Fiesta Americana Condesa Cancun. So we will not have 4 quarter at MXN 90 million. But what we anticipated that it will decrease a little bit, but it will be still higher than the rent that we collected in 2019 and 2018. And for example, as of today, we still have occupancy between 75% and 80% occupancy rate.

So basically, it will decrease, but it will remain very, very high. And what we will see is that on the other hand, the business hotel will go higher in terms of contribution to the result that it was during the first quarter. So it will be well balanced and it should increase and we should have a positive trend quarter-over-quarter in terms of revenue, EBITDA and AFFO.

[Operator]

There are no further questions at this time. Thank you for participating in FibraHotel's 2022 First Quarter Results Conference Call. If you have any further questions, do not hesitate to visit www.fibrahotel.com or contact FibraHotel's Investor Relations department. This concludes today's call. Thank you, and have a good day.