Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Doug, and I'll be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2018 Second Quarter Earnings Conference Call. FibraHotel issued its quarterly report on Monday. If you did not receive a copy via e-mail, you can find it on the www.fibrahotel.com website 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. 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. Joining us from FibraHotel are Mr. Simón Galante, CEO; Mr. Eduardo Lopez, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, Head of Development and Investor Relations.

I would now like to turn the conference over to Mr. Simón Galante. Sir, please begin.

[Simón Zaga, executive]

Thank you, and good morning, everyone. I'm going to begin today's call by providing an overview of the second quarter of 2018 results as well as our current situation. And we'll then turn over the call 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 second quarter 2018 was another step in our business plan execution, and we continue to consolidate our portfolio and strengthen our balance sheet. Operationally, same-store hotels RevPAR grew 5.5% year-on-year with a 6.5% increase in ADR and a 64 basis point decrease in occupancy. For the full portfolio related to hotels, excluding the Fiesta Americana Condesa Cancun, RevPAR grew 6.3% year-on-year. Overall, the results are solid, but we are a little bit lower than expected, especially as we saw weak business hotel demand in the second half of June.

This was partially the result of the general elections in Mexico as well as the soccer World Cup. Overall, we continue to see a solid hotel sector as demonstrated by the 65% occupancy during the second quarter for our total portfolio of 82 hotels as well as airline traffic trends. At the same time, we also expect to see more volatility in business hotel demand during the second half of the year until there is more clarity around NAFTA as well as the different policies and plans of the upcoming government.

And how those items impact the investment in the past of the economist -- economy and travel demand overall. We believe in the quality of resiliency of our portfolio and continue focusing on achieving a leading penetration in each city and competitive set to outperform the market.

Within these numbers, there are different trends across the country and category. Our full service hotels in the northeast part of the country continue to outperform the market. Some specific areas of stimulus have come down for historical high numbers seen recently, such as the [ la hija ] region, Puebla and select service hotels but overall their number continues to be healthy.

We have a strong year-on-year growth in revenue, EBITDA and AFFO of 20%, 24% and 37%, respectively.

Thanks to the incorporation of the Fiesta Americana Condesa Cancun hotel and the continued stabilization in our recently developed hotels. The Cancun hotels continued to perform well and is a solid pillar in our portfolio.

Even with supply increasing in Cancun, the hotel reported strong results during the quarter with an occupancy rate of almost 80% and almost MXN 65 million in lease income.

Margins for the quarter decrease versus last year mainly due to the weaker top line growth and utilities cost significantly increasing above inflation. Public price for electricity increased over 20% in some cities versus last year.

As we continue to consolidate our portfolio, we are focusing on improving profitability at each hotel by looking at each line item, benchmarking and finding potential savings.

We are also reviewing efficiency projects that can reduce our utility consumption and make it cleaner and greener going forward.

The ramp-up portfolio continues to perform well, which is a good sign for the 2 hotels we will open later this year. We are advancing very well on the projects and expect to open the Fiesta Americana Satelite hotel by October, and the Live Aqua San Miguel hotel in November.

After these openings, we will only have 2 hotels under development. And quarter-by-quarter, we will continue to cover larger portion of our portfolio, fully contributing to results.

From the asset management perspective, we have had an active quarter as we continue to reposition of the Fiesta Americana Hacienda Galindo hotel and the renovation of the public areas of the Fiesta Americana Condesa Cancun hotel. We also rebranded the Real Inn Guadalajara hotel into the Gamma Guadalajara Centro hotel, which is at July 1 is operated by Grupo Posadas.

We continue to be active with our CBFI repurchase program, since we continue to view this an attractive investment alternative as we can acquire the best hotel assets in the market at a substantial discount. Today, we have reported over MXN 17.5 million CBFI and expect to continue taking advantage of this opportunity.

We also continue focusing on strengthening our balance sheet. During the quarter, we recovered the VAT from the Fiesta Americana Cancun hotel acquisition, which was done in record time for FibraHotel.

In the quarter, we also grew our financial flexibility, debt structure and firepower an we signed new credit agreement with Banorte and executed the disbursements for our credit line with Bancomer. Regarding Banorte, we added a new MXN 1 billion credit line with attractive terms. That new credit line can be disbursed over the next 2 years, and we have a 10-year amortization period with a spread increasing over time from 130 basis points to 250 basis points.

Additionally, we signed an option that allows us to refinance an existing credit line of approximately MXN 1 billion into dollars, while maintaining the same terms in amortization schedule, but on a more favorable spread.

Moving from TIIE 90 days plus 200 basis points to LIBOR 90 days plus 180 basis points. We have not yet defined the timing to execute the refinancing and have this option available for 1 more year.

Finally, we announced a distribution of MXN 29.01 per CBFI for the quarter, representing an annualized dividend yield of almost 10%. With that, I will now pass the call over to Edouard Boudrant, the CFO of FibraHotel to discuss in more details 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 and close the second quarter with 83 hotels in operation. On a comparable property basis of 74 hotels for the 2018 stabilized portfolio, which was fully operational during the second quarter of last year, ADR increased by 6.5% at MXN 1,186 and occupancy rate decreased by 64 basis points at 66.3%.

Overall, RevPAR increased 5.5% at MXN 787. The Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 4,525, occupancy was 79.2% and net package RevPAR was MXN 3,581, representing a 9.7% increase against the second quarter of last year. 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 shows occupancy rate of 51.3% during the quarter, ADR of MXN 1,346 and RevPAR of MXN 690. Total revenues for the quarter were MXN 1,042 million, of which 74% was room revenues, 17% was food and beverage revenues and 9% was leases and other revenues. Leases revenues strongly increased thanks to the rent of Fiesta Americana Condesa Cancun that stood at MXN 64 million for the quarter. Compared with the same quarter last year, revenues increased by 20% thanks to an external growth, acquisition on openings and internal growth, increasing in RevPAR. Indeed, during the full quarter, we received the lease for the recently acquired Fiesta Americana Condesa Cancun accounting for 36% of the revenue growth.

Lodging contribution for the quarter stood at approximately MXN 379 million, and EBITDA reached MXN 310 million, increasing, respectively, by 26% and 24% versus last year. The lodging contribution margin for managed hotels reached 30.4% versus 33.1% the same quarter last year. The contribution margin from stabilized hotels stood at 32.4%, the contribution margin for nonstabilized properties stood at 30%.

Please note that with 5 recent full service hotels as the result of the satisfactory ramp-up period and the strong cost control showed occupancy rate of 67% and a contribution of MXN 41 million, representing a 32% margin.

The EBITDA margin reached 29.8%, decreasing 78 basis points versus the second quarter of last year. This decrease is mainly due to slow demand during the month of June and some pressure on costs.

We closed the quarter with a net debt of MXN 2.1 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%. Please note that at the end of the quarter, all the indebtedness is covered with derivative instruments.

During the quarter, as mentioned by Simón, we recovered in a record time, less than 2 months, the VAT from the Fiesta Americana Condesa Cancun. No recoverable VAT is done at only MXN 26 million, the lowest amount in history.

Regarding our indebtedness position, we are also improving our debt profile with the possibility during the next 12 months to switch MXN 1 billion from Mexican pesos to U.S. dollar, the amortization schedule remain unchanged, but the financing cost will be LIBOR plus 180 basis points instead of TIIE plus 200 basis points, and we signed the new MXN 1 billion credit facility.

We now have MXN 1.5 billion available in credit lines. This agreement improved FibraHotel with further flexibility to execute its growth plans, while maintaining a comparative capital structure.

During the quarter, the debt position generated a financing cost of MXN 55 million. In accordance with the IFRS, financing cost related to development project are capitalized as part of the investments in this project. During the quarter, approximately 33% of the indebtedness was linked with development project.

Therefore, MXN 25 million of interest were capitalized. Once each development is open, its interest expense will not be capitalized anymore and the expense will be part of the profit and loss statement in accordance with the IFRS.

During the quarter, we continue the development of cash position with MXN 330 million invested. In the development portfolio with MXN 255 million and MXN 76 million for the repositioning and maintenance CapEx.

In order to give more details on the portfolio, 66% of our assets were stabilized, MXN 11 billion, and contributed 75% of the total lodging contribution. Fiesta Americana Condesa Cancun represented 18% of the assets, MXN 3 billion, and contributed 17% of the total lodging contribution. 17% of our assets were in ramp-up or development, MXN 2.8 billion, and contributed only 8% of the total lodging contribution.

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, will strongly improve EBITDA margin and will help to enhance AFFO and distribution to shareholders.

In line with our results and as part of our commitment to deliver value to our certificate holders, I am pleased to inform that FibraHotel will pay a distribution of MXN 235 million, equivalent to MXN 29.01 per CBFI. Additionally, we'll continue to restructure our foreign certificate. As of today, we already repurchased MXN 17.5 million CBFI, representing more than 2.2% of the outstanding CBFI at the MXN 11.31 average price.

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 Pablo Ordóñez with Itau BBA.

[Pablo Ordóñez, analyst]

Simon, Eduardo and Guillermo, I have 2 questions. First, regarding your full service hotel portfolio. The operating metrics that you report for the illustrative portfolio have performed very good. Do you think that these hotels have already reached maturity? Or do you think that they could have further upside potential? And my second question is regarding your balance sheet. What would be the use of the proceeds from the new credit line? And what do you have in mind in terms of M&A, new developments and buybacks?

[Edouard Boudrant, executive]

Many thanks, Pablo. So basically for the full service portfolio, we are talking about 3 hotels in Monterrey and the 2 AC by Marriott in Queretaro and in Guadalajara. And to be honest, we are very satisfactory -- we are very satisfied with the performance of this hotel. And we feel comfortable that it should further increase, because first of all, we have very strategic location in these 3 cities. We see good demand in terms of business hotels on full service hotel in the city. So we feel very comfortable that we should increase a little bit occupancy rate. And also, if you the see ADR of this hotel, it increased some [ hotelier ] right. So we can expect a further increase in terms of revenue generation. And at the end of the day, the hotel are quite new, so quite efficient. So the operating leverage is strong and we feel comfortable also that we should increase a little bit the profitability of this hotel. So basically, the ramp-up period is very good, very interesting. But we feel very comfortable that we could further increase the metrics of this hotel and the cash flow generation. Regarding the second question, so yes, we secured a new credit line of MXN 1 billion. As of today, in terms of commitment, we are committed to finish the 2 hotels that we will open in the next few months, which is Live Aqua in San Miguel and the Fiesta Americana in Satelite. Also, we have 2 hotels in Fiesta Americana in Viaducto in Mexico City near the airport and the Fiesta Americana in Veracruz. With this credit line and the remaining credit line will be BBVA and Sabadell. We're very comfortable to finish this hotel and have the further cash in order to face any acquisition that may happen.

[Operator]

Our next question comes from the line of Marimar Torreblanca with UBS.

[Marimar Torreblanca, analyst]

My question is, if you could give us a little bit of color of how you're thinking that your dividend per share is going to grow, especially considering your pre -- last offering levels of $0.35 per share or even the $0.30 per share you had on 1Q '17. How do you think other than organic growth that you mentioned on occupancy and [ probably ] rates, how do you think you're going to bridge that difference?

[Eduardo García, executive]

Marimar, good morning. Thank you for your question. I think there are several things going on in the company at the time. As you mentioned, clearly, one of them is to have the natural organic growth that the company is going to have. But I think and as Edouard mentioned to Pablo, I think that the component that we also still have a lot of embedded growth by not doing more additional things is important. Remember that in the past few years, we came out of a large inorganic growth base, and that's what we still have many hotels, not only the 5 full service hotels, but we have 8 hotels that are not ramped up. And we're also having these 2 hotels by the end of this year. So I think, with the portfolio that we have, this organic growth will be the first compounding effect that will help, but just the natural ramp-up period of these hotels and the addition of the 2 new hotels should help continue to support a dividend per share growth. We do expect for the year, for the first 3 quarters, to have similar levels in terms of distribution per share. And we should see a larger impact as we go forward. And as you know, the other component is that as we have a very clean balance sheet at that time, as we continue to expand our asset base, that should also continue to support that leverage, the returns on that dividend per share. So I think that one of the key things is just operation efficiency, but just the natural effect of the investments we've made over the past 2 years should start yielding a or should continue yielding results in the following quarters. The other thing that is important to addition is that if we decide to take the U.S. dollar-based debt, we could lower our financing cost in some -- in our total amount that we're paying today. So I think, that's a great opportunity. And I just want to press on what Guillermo said, at one point, we had almost 20 hotels under development. Today, we only have 2. The company is obviously changing in that regard and the development risk is away at this point. And we think that this growth on both the already opened in ramp-up hotels plus the 2 we have going to be opening in the last quarter of the year are going to greatly contribute. So we believe that those 2 issues plus that the quarter was eclipsed by the issue that a lot of the companies cancels their travel arrangement almost for the whole month of June and we saw that hurt in our business hotel portfolio very strongly in -- at least in the month of June. So we hope for a better third and fourth quarter as this is not going to be an issue and the World Cup as well had some days that people didn't want to travel because of the Mexico games that happened. But I believe that even with that, we had good growth on the quarter. And hope that we can further expand the margin by what Edouard explained and I did myself about lowering cost and lowering utility cost. So I think, there is a combination of many variables that we will continue seeing growth in the CBFI distribution through the next quarters and the next years.

[Operator]

Our next question comes from the line of Francisco Chávez from BBVA.

[Francisco Chávez Martínez, analyst]

My first question is regarding the increase in costs, in utilities costs. Can you give us an idea of how important are the utilities in the total cost? And how do you plan to offset this erosion in margins going forward? And the second question is regarding the medium-term outlook after the federal and local elections, just a few weeks ago. Have you had any approach with the transition team? And what do you expect for this sector? Any color will be useful.

[Edouard Boudrant, executive]

[ Paco ], thank you very much for the question.

I will answer the first question regarding the increasing cost. So basically, it's the effect in the quarter was not only the increasing cost, it was also the -- at the middle of the month of July, we have some disappointing demand. And it was a little bit late to adjust the cost that -- at the hotels leisure for the end of the month. And this is the first effect on the cost. And the second one, yes, it was the increase in utilities. We saw that in some part of the country we have a stronger increase in utilities. For example, in Cancún, it increased a lot. And what we -- in terms of the total cost, a part of your question, is that it's between 5% and 7% of the total revenue that is the cost related. So basically, between cost and the staffing cost is the 2 main items in the P&L of the hotel. And what we are working on with the operators, with Marriott and with Posadas is to be efficient -- cost efficient in term of utilities. We feel very comfortable that we are in the new hotels that we developed thanks to the new efficiency facility that we put in work. And the -- what we are doing as of today, it's in the legacy portfolio to see what kind of action we can take in order to minimize the -- this impact of increasing the utility cost in Mexico.

[Simón Zaga, executive]

And then for the second part of your question, [ Paco ], obviously, we are not very political -- politically knowledgeable. But I will tell you what is important for FibraHotel, we did have some talks with the transition team. And we believe that the first speech of the President-elect was very conciliatory, and that was very good, I think, for the market and everybody to react. We've seen it with the exchange rate and all of those issues of that 10,000 feet comment. In our position, we believe that there is going to be 2 very important things going forward other than NAFTA that will be a big issue for our business hotels. The other one will be the Mexico airport to continue its construction. We've heard in official and in some meetings as well that they will see different options of financing and ownership, but they -- it seems like it's going to be a project that have a good possibility to continue. That's very important for it -- to Mexico to be an international hub. And it will be a complete hub for all the destinies in Mexico, both business and leisure visitors. So that is going to be very, very important. And the third one that, I believe, is the most important one is security and the criminality and going down on all -- obviously, all Mexico, but mainly in all our resort areas and where international travelers come in. So we voiced our opinion. We believe that they are focused and they have heard the issues, not only from us, but from many, many other people. And I hope and we believe that they will continue strongly doing that. So we already had that and we believe and we hope more than believe and we believe and hope that this new government has all the opportunity. And we are, obviously, with good spirits and we want it to work and we will work hard in order for it to pass.

[Operator]

Our next question comes from the line of Froylan Mendez with JPMorgan.

[Froylan Mendez, analyst]

It's very, very punctual for maintenance CapEx. So I was wondering if you're including any extraordinary item on the maintenance CapEx coming from the rebranding of the couple of hotels that you mentioned. And what's the level of maintenance CapEx we should expect going forward?

[Edouard Boudrant, executive]

Froylan, so basically regarding the new branding of the hotel, which is the Real Inn in Guadalajara that has been changed to Gamma by Fiesta Inn operated by Grupo Posadas, the rebranding CapEx has been very, very limited so far. I think we're talking about MXN 1.5 million to MXN 2 million. And we will use the CapEx reserve that we have with Posadas. And basically to answer your question regarding the maintenance CapEx, the policy is 5% of the revenues of the hotels and the idea is to maintain and to use and to deploy all the -- this maintenance CapEx on a yearly basis. So I think, that for this year, we should have MXN 200 million CapEx reserve in order to deploy in the whole portfolio. But to answer your question, we're talking between Real Inn and Gamma or Real Inn and Fiesta Inn, it's quite similar kind of hotel. So basically, the rebranding is not very capital-intensive.

[Froylan Mendez, analyst]

And do you see any other couple of hotels that could go under these same rebranding process that might take a little bit more CapEx?

[Eduardo García, executive]

We have several different options for that. The maintenance CapEx is a pool we have to generally continue to maintain the standards of our hotels, and as Edouard Mentioned, it should continue to grow with sales. And we use that pool for different type of hotels. So we will continue to do a minor repositionings or changes in FF&E and things like that, that's the normal course of business. And in terms of agreement, we have some agreements that continue to run out in the next few years and will continue to see option on those. A couple of those are the ones with [ Bra Turismo ], so the Real Inn Mexicali and the Camino Real Puebla hotel. And we continue to believe on a day-to-day basis. So nothing in the short-term that is material, but it's something that we always look at in the portfolio.

[Operator]

Our next question comes from the line of Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

I just have a question related to the occupancy levels of the Fiesta Americana Condesa Cancun that saw a stronger occupancy in the previous quarter compared to the second quarter of this year. And my question is, if you can give us a little bit more color about the expected performance of these hotels in second half of the year in terms of occupancy or ADR?

[Guillermo Escobosa, executive]

Armando, thank you for your question. I think -- so going to the specific details on the hotel, I think it is important to mention as you say in your question, that the beach hotels in Cancún, specifically in this hotel those have some cyclicality in the sense that the first quarter is the best quarter for the hotel. It represents around 33% of the total contribution for the year. And that is mainly because this is the high season for international tourists. So generally when it's the cold weather in Canada and the U.S., that's when we get more international travelers coming down. And generally, the rate and the demand for hotels in Cancún as a whole is the highest during that period. During the remaining part of the year, it's a different mix of drivers. But the results are very similar. So we should continue to see a lease contribution of between MXN 60 million and MXN 65 million for the second, third and fourth quarters of the year. That's what we generally expect. And regarding occupancy, I think 80% is a healthy level. And all of that is dependent on the mix of customers that you get. As you know, this hotel was fully refurbished last year. So you see an important increase year-on-year. But the most important thing is that we continue focusing on maximizing RevPAR. And we do think that the hotels do have a very interesting potential in the future to increase rate as the hotel and the public areas are fully refurbished. So I think in terms of the performance, the first quarter will be the highest. The second, third and fourth quarter should be very similar. The hotel has performed well and on budget to what we expected. And I think for the remaining of the year, we should expect something similar.

[Operator]

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

[Simón Zaga, executive]

Thank you for participating in FibraHotel's 2018 Second Quarter Results Conference Call. If you have any further questions, please do not hesitate to contact FibraHotel Investor Relations department. This concluded today's call, and thank you very much, and have a wonderful day.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.