Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2021-Q2

[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 2021 Second 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. Simon Galante, CEO; Mr. Eduardo Lopez, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO.

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

[Simón Zaga, executive]

Thank you, operator, and good morning, everyone. I'm going to begin today's call by providing an overview of the second quarter of 2021 results, the current situation, and then I will turn the call over to Edouard Boudrant, our CFO, who will discuss our financial results in more detail. And finally, we will open the call for questions and answers.

The results of the second quarter of 2021 continue to demonstrate the resilience of our portfolio, the progress in recovering from the impact of the COVID-19 pandemic and the benefit of our portfolio diversification. For the quarter, our total portfolio had an occupancy of 47.7%, we achieved 11 percentage points above the first quarter of the year. As the quarter progressed, we also saw an improvement in occupancy each month. April has a 45.5% occupancy, May has a 47.7% occupancy and June had a 49.8% occupancy. In July, up to date, we continue to see an improvement in occupancy. As conditions improve, we were also able to increase rates.

During the quarter, ADR grew by 5% versus the first quarter of 2021. Overall, revenues increased 33% against the first quarter of 2021, but remained 34% below the pre-pandemic level as compared to the same quarter in 2019. In terms of segment recovery, we continue to see similar trends as in the past few quarters. Manufacturing and leisure travel has recovered faster than business travel from suites, services and large groups. The [ backward ] region continues to be Mexico City, where there was a slight recovery during the quarter, but our hotel occupancy was still below 35%. We believe that in order for the region and the segments to recover, more offices need to reopen for business, which now seems a bit further away as contagions from the delta variant have increased.

I have mentioned this before that we are very comfortable with our exposure to this market. We have strategic locations in a city of over 20 million people and we believe that the short-term pain will continue to be a strategic advantage in the future. On the other hand, I would like to highlight the benefits we have seen from our exposure to leisure hotels and the rapid recovery in this segment as the hotels have managed to surpass pre-pandemic rates and profitability levels.

In the second quarter of 2021, the Fiesta Americana Condesa Cancun had an ADR 15% above the second quarter of 2019 and the Live Aqua San Miguel de Allende hotel had a RevPar of 6% above the second quarter of 2019. We also have solid numbers on the books for July and August at these resources. The availability to continue -- the ability to continue to drive rate on these hotels and other where demand has picked up will be an important component of profitability going forward.

On the operating front, we continue to focus on cost control and benefit from operating leverage. EBITDA for the quarter was MXN 145 million, which was 76% above the first quarter of 2021 and with a 19.3% margin. During the quarter, we achieved positive AFFO for the first time since the beginning of the pandemic. This is including a normal CapEx reserve for the quarter that represented over MXN 41 million. Even with the satisfactory recovery progress to date, we remain vigilant to the current situation and the new wave of infections in Mexico. We will continue to implement strict self-prevention measures to protect our team and guests.

Regarding our balance sheet, we continue to work on improving our liquidity and financial position. As of June 30th, we have an LTV of 30% and MXN 470 million in cash. We will be more comfortable at a lower leverage level and even though it's still early in the process, we are evaluating different asset sales and alternative hotel uses. We will expand on this point in the future as we continue our progress.

On the debt side, we are focused on improving our amortization schedule. During the quarter, we signed agreements with BBVA and Sabadell that allows us to reduce our amortization for the next 18 months to only MXN 200 million. We also voluntarily amortized MXN 70 million of Sabadell's revolving credit line, which will still be available, if required.

Before I finish, I would like to highlight the progress we have made on ESG issues. We recently published our first integrated annual report where we describe our practices and progress in ESG topics that lead us to continuous improvement as the companies and as a participant in the sector. During the quarter, we signed our first sustainability-linked credit agreement with BBVA. The agreement has a component linked to reducing the energy intensity per room by 1% in certain hotels. This initiative shows our focus on efficient use of resources and on improving our sustainability performance. Additionally, for the second consecutive year, we participated in the GRESB and CXA surveys, which measure our current situation and progress in ESG issues, demonstrating our commitment and efforts of our leadership in our sector. All of our ESG information is available on our website, and I encourage you to benefit from it, and we will welcome feedback to improve.

I would like to thank our team members and partners for their dedication and effort to achieve these results. Before I pass the call to Edouard, I would like to highlight that even with the positive results, we continue to be very vigilant of the current situation with 0 control over any further impact from the health conditions and vaccination programs. We will continue managing the company over the cycle and in a conservative manner to maintain its strong position.

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

[Edouard Boudrant, executive]

Thank you, Simon, and good morning, everyone. During the second quarter of 2021, our financial results substantially improved versus the first quarter. We closed the second quarter with 82 hotels opened. The occupancy rate of the quarter was 48% for managed hotels versus 37% for the first quarter. On a monthly basis, occupancy rate was 46% in April; 48% in May and 50% in June. Average daily rate was MXN 1,095, representing a 5% increase versus the first quarter. Quarterly RevPAR was MXN 522, representing a 38% increase versus the first quarter. The Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 5,013, occupancy was 66.7% and net package RevPAR was MXN 3,345, representing a 33% increase versus the first quarter.

Total revenues for the quarter was MXN 743 million versus MXN 557 million for the first quarter, increasing 33%. Lodging contribution for the quarter was MXN 220 million versus MXN 154 million for the first quarter, increasing 42%. We continue to be highly cost control our internal hotel result. The margin of lodging contribution for the [indiscernible] hotels was 24% versus 15% for the first quarter.

Our EBITDA for the quarter was MXN 144 million versus EUR 81 million for the first quarter, increasing 76%. Real estate expenses were MXN 18 million versus MXN 19 million during the first quarter. Corporate expenses were MXN 58 million versus MXN 53 million during the first quarter. Please note that the payment of the advisory fees for the year will not be postponed as it was last year and it will be paid as agreed in the advisory agreement.

Additionally, as proposed by the Practice Committee, we expect that the accounts payable to operator related to 2020 will be paid beginning in the second half of this year based on the EBITDA generation of the company. We closed the quarter with a net debt of MXN 4.6 billion, decreasing MXN 80 million versus the last quarter. Gross debt amounted to MXN 5.1 billion. We finished the quarter with a conservative LTV ratio of 30%. During the quarter, the debt position generated a financing growth of MXN 93 million. The net financial income was negative EUR 86 million.

In April, we signed a credit management with Sabadell in order to extend the current EUR 200 million credit line from May '21 to May '23. Thanks to a satisfactory cash position, we decided to reimburse MXN 70 million. Therefore, outstanding indebtedness with Sabadell MXN 130 million. The remaining MXN 70 million are still available, if needed. In June, we signed an amendment with BBVA regarding 2 credit lines. The amortization for '22 are reduced by EUR 177 million and for '23 by MXN 44 million. The maturity of the loan is extended to 2024.

A sustainable KPI was included with a commitment to reduce energy intensity per occupied room by 1% versus budget for a portfolio of selected hotels. This represents FibraHotel's first green credit line. As of today, and thanks to the credit amendment we've made, our debt structure is extremely healthy, only MXN 127 million of amortization for 2021. Only 4% is maturing during the next 18 months. Average cost of debt is 7.28% and we only have 5% of this debt in USD 13 million.

We closed the quarter with MXN 470 million cash position, almost the same level as the first quarter, taking into account for [indiscernible] MXN 76 million of debt. During the second quarter, we deployed MXN 45 million of maintenance and repositioning CapEx. For the quarter, our FFO and AFFO were positive MXN 53 million and MXN 11 million. And please note that for the second quarter of 2021, we will not pay a distribution.

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

[Operator]

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

[Sheila McGrath, analyst]

I was wondering if, Simon, you could describe geographically the recovery of the portfolio, which markets have rebounded the strongest and which are the weakest, and how things are trending in July so far?

[Guillermo Escobosa, executive]

Thank you for your question. I think that the trend continues to be the same as we discussed in the past, which is basically we divided more in the type of traveler of manufacturing versus service and sales and whatnot. But just to give you an idea geographically, we see a very, very -- a very good recovery in the northern region, so border towns like Ciudad Juarez, Mexicali, Tijuana, Nogales, those places have performed well. We've also seen good performance in the Pacific corridor in places like [indiscernible] and in also in places where there is a high manufacturing activity like Aguascalientes and Santillo have also done good.

On the second part, if you think about the principally the larger cities, Guadalajara and Monterrey, we saw a good recovery this quarter versus last quarter and we have started seeing a very positive pickup. That has continued through the quarter and the weakest regions will continue to be, on the one hand, the [ Brazil ] region and [indiscernible], which are basically around Mexico City and even though they are also more of manufacturing driver, they continue to be weaker than what we see in the north. And weakened part continues to be Mexico City.

Mexico City, as Simon mentioned, is still below 35% for the quarter. We have seen a very positive increase month-on-month each part of the second quarter. So we have seen a lot better occupancy in June than what we have seen in April. But this also slowed down our activity plateau now that we have more places in Mexico City. Finally, the growth region was coming off of a low base, but it has done relatively well versus the rest of the portfolio, and it's basically back at 2019 levels. So geographically, the north of the country is outperforming. The center of the country is basically doing a little bit weaker.

[Edouard Boudrant, executive]

Regarding your question about the trend in the month of July. So as of today, we've seen a very positive trend in July. So basically both occupancy and both rates are increasing. And of course, with the new delta variant, we are monitoring the situation, but we anticipate that the closing of July will be very, very good and in the same trend that we've seen since last June.

[Sheila McGrath, analyst]

That's very helpful. And can you remind us which hotels besides Condesa Cancun are leased? And are all those hotels now paying the minimum rent at this time?

[Simón Zaga, executive]

So basically, Sheila, we only have one lease left which is Condesa Cancun. All of the others, their leases basically changed contract or expired, which is very crude and the hotel employer retirement. On the other hand, we do have current hotels that whenever they do not reach the minimum guarantee, we receive an income payment which is in the form of lease that will basically be included in the other part of the leases. Big hotels, let's say, 4 hotels that have -- the 3 hotels that have a minimum return components are Live Aqua San Miguel de Allende, which we did not receive this component in the second quarter as the revenue from the hotel were higher than the minimum guaranteed. And the hotel that we did receive are part of their revenue or lease revenue are 2 hotels, the 2 Fiesta Americanas in Mexico City: the Fiesta Americana Satellite and the Fiesta Americana Viaducto Aeropuerto hotel. So basically these do not have a formal lease, but they have a minimum return component and whenever the revenue from the hotel are lower than the minimum rent, part of that you will see it in the lease line.

[Operator]

Your next question comes from the line of Andrew Cummins with Explorador Capital.

[Andrew Cummins, analyst]

Simon and Edouard, this is Andrew Cummins from Explorador Capital. You mentioned that you may see asset sales or you may do some asset sales. And I wondered what is the private real estate market looking like in terms of comps in terms of price per room at which you can sell hotels today of what you're seeing? I imagine there haven't been a lot of transactions, but just a sense.

[Guillermo Escobosa, executive]

Andy, this is Guillermo. And thank you for participating and for your question. Basically, what we have seen in the private market is a little bit mixed in terms of the type of hotel and the location of the hotel. We have seen a very strong leisure market. As you can imagine, the hotels are performing better in 2019 -- better in 2021 than in 2019 and with very positive drivers that have already passed the crisis. We are seeing very strong lease and very little hotels available in that sector.

On the business hotel sector, it is a very laser-focused approach who is buying the hotels. In general, we can tell you that the institutional buyers and even a lot of the banks are forming for these types of hotels. If you want to be opportunistic in the sector right now, there are not a lot of buyers doing transactions in the market. But we have seen some transactions in a lot of places where the market prices are still at good levels versus what it cost in terms of the replacement value of hotels. You also have to remember that a lot of the construction costs have gone up for the past year and so this is also helping that aspect. But I don't have a specific number of transactions. I know a couple of our competitors have already started this process. But what I can tell you is there are some willing buyers. We just have to be very focused on specifically finding them because it's not a market where somebody will come in and buy a large number of hotels where you are getting unsolicitedly.

[Simón Zaga, executive]

The other thing really quick it includes the decision one just to complement what Guillermo just explained. We will look at the timing of the sales regarding that. Fortunately we do not have any financial pressure to sell the hotels at a lower price. We have the time for this hotel to recuperate, to bring back good numbers in order to sell them at a good price. So we believe that we are going to be in the market, both for selling hotels or to selling to developers that want to change the use of that hotel into other things. As Guillermo correctly pointed, the price of construction only still is almost up 50% and it's going -- and the cost of all construction with inflation, it's going up. So the cost of preparation, it's really...

[Andrew Cummins, analyst]

Where would you say -- with the change in the cost of -- thanks Guillermo and Simon, with the rise in the cost of materials, what would you say in dollars today at a MXN 20 exchange rate, what's the dollar cost of replacement cost for a limited service hotel in Mexico per room? What would it cost there?

[Simón Zaga, executive]

Between 15% and 20% -- between 15%, 1-5 and 20% the costs have gone up to build the same thing that we were building maybe 2 years ago.

[Andrew Cummins, analyst]

And what is that whole dollar number today or 2 years ago and I can add 15% to 20%?

[Simón Zaga, executive]

It's different between each hotel plan, but it typically used to cost us for a...

[Andrew Cummins, analyst]

Basic budget hotel?

[Simón Zaga, executive]

For a budget hotel, USD 60,000 to build, now it's going to be about USD 72,000 to USD 75,000 to build.

[Andrew Cummins, analyst]

Okay. And that's [indiscernible] right?

[Simón Zaga, executive]

No less.

[Operator]

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

[Fernando Froylan Mendez Solther, analyst]

So I saw that you are planning to reopen a property at Coatzacoalcos. I would have thought that that would be a market that you would be looking to reduce exposure based on the oil dynamics there, et cetera. And in that sense then, what additional color can you give us, Simon, on the rationale for your asset sales strategy and a rough estimate of the size would be very, very useful?

[Simón Zaga, executive]

Froy, thank you very much for your question. The first answer, I'll say that the 2 openings of the hotels are a little bit opportunistic. We do not believe that they'll be highly profitable or we do not believe that they will meaningfully contribute to the budget for this year. But we believe that it's important that the hotels do not lose their positioning and penetration that they have. And even for -- to be able to cover some of the maintenance expenses that the hotel is having with having air conditioning and whatnot. So we believe those hotels have a brighter future than the 2 others that we have closed. And that's why with the proper brand, we believe that, again, they're not going to make a lot of money, but they will continue to be valuable in the future.

In terms of your second question, I think for us, that is where we're trying to focus the most and it's the strategic components of where we stand. And first of all, I would like to highlight that we are very proud that we're having this conversation. We're not having a conversation of the financial distress or having to do something where we don't want to do it. We're having a conversation now of thinking of the company in the next 3 to 5 years. And so for us, we do want to reshape the portfolio. We don't want to continue to grow for the sake of growth or have more hotels. We want to have more profitable hotels. And so in this sense, we have a strategy and addition of FibraHotel where we want to recycle some assets and we believe that it's also an important component of that is also reducing the leverage of the company so that we can continue to be healthier going forward.

So at this stage, as you and Andy properly mentioned, it's not the easiest or the best to be selling hotels. So we're trying to be laser focused on finding the opportunities and where we can actually get the value. And the second point is just either changing the use or adding things to places where we have idle capital. So basically that's -- the strategy we have is very clear. Now we need to execute it and that's why we don't want to provide you as much color in terms of what we're going to be able to achieve because we're starting to move on this and be prepared to give it to you when we have more color.

[Fernando Froylan Mendez Solther, analyst]

And if I can do another question. In a scenario where an operator goes out of business, what would be the implication for you, as a landlord, in terms of CapEx, maybe fees or expenses to rebrand some of the assets?

[Simón Zaga, executive]

Yes. Thank you. So I think it's a very good question. And as you know, we have done this in the past. This is not new. We actually just changed a few months ago. You know the hotel in Playa del Carmen from [indiscernible] Hotel to Hilton-managed by Playa Hotel. And on the other hand, one of the hotels that we are reopening, it used to be a Marriott-managed hotel and now it's changing to a Posadas-managed hotel. So first and foremost, our hotels are institutional quality hotels. And so, if you're talking about fire safety, quality of the materials and things like that, we do not need to have larger investments. This does not mean that we would not be impacted by a change in operator.

Clearly there's a ton of processes, branding and even systems that we need to take into account. And so, we believe that in this scenario, which just to be very clear, we do not see it close or we do not see it as a relatively important risk, we believe that the market is sufficiently mature but we could find professional, either operators or brands for all of our hotels. And we would definitely see an impact, but we believe it's a short-term impact that will not impair the company financially too much, if that were to happen.

[Operator]

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

[Armando Rodriguez, analyst]

Simon, Guillermo and Edouard, congratulations for this recovery. So my question here is about your agreement with Grupo Posadas, considering these results. So if you are expecting maybe minor or major changes on this agreement, particularly on the next quarters, considering this occupancy and maybe this recovery on the rents in the further quarters? That's my only question.

[Guillermo Escobosa, executive]

Armando, thank you very much for participating and for your question. Let me start by saying that we have a long-term beneficial relationship with Posada. They've been the partners since we started this company 10 years ago, and we believe they are a viable and strong company in the future. We believe in their model. They have -- they clearly have some financial issues and we understand where your questions are coming from. But we believe and we do think that they continue to be a very viable player in the things that they do the best, which is operating and in many cases, franchising these hotels.

The first point is we do not expect a change in our agreements. Our agreements are perm and are long-term agreements and from their side in terms of the minimum rent where they're having to invest on capital in the short term or from our side where we have some hotels. We believe that overall that the relationship will continue to be strong. As with any relationship, there will be some changes on the margin. As I mentioned, we rebranded one hotel from them and we rebranded a new hotel from them. We expect this types of things to continue around the ages of our portfolio. And we believe that they continue to be a very solid player. We are seeing today the results that you'll see from us.

I would like to highlight that you can go out and compare versus other public companies, and our occupancy and our numbers are better. A lot of this is due to our assets, but a lot of this is due to the work that they're doing on the ground to bring clients that many of the other players have focused just on the international travelers are not able to achieve. So they have done a good job for us. And we are seeing part of their strength in many of the hotels right now. We do not believe this will change and we do believe that where they can add value, they will be our best partners. And wherever they cannot, that's why we have an open architecture and we will work to improve on those properties.

[Operator]

[Operator Instructions] Your next question comes from the line of [ Edson Murkya ] with Suma Cap.

[Unknown Analyst]

I have 2 questions. The first one is regarding to not only the credit line or let's say, this new green type of financing from EA. And specifically, they're establishing that you have to reduce your energy intensity by 1% by room, if I understood correctly. But the question is how are you going to achieve that? Because I was reading the emission report of 2020 and it got my attention that, at least from the emission part, it was higher at less what the consultant that made a report said that in the conclusion part that it was higher than other dues. I need something additional information to address that meaning. So that's the first question.

The second one is regarding the administrative expenses. If we compare to the first quarter '21, the second quarter, it's an increase of almost like 28%. So my question is could you give us a little bit more color about this? It's because you are hiring more people or it's because you are getting back to fully operational status in the property or it's something more specific because it got our attention?

[Simón Zaga, executive]

Thank you for your question. Let me answer the first part and I hope I don't expand too much because energetics is also one of the things that we are focusing a lot of our time on. As you know, the costs having gone up significantly and what we are really focusing internal consumption to be able to really execute on the cost control that we mentioned. And so the first part is even without the sustainability-linked loan, we were able to receive and with the financial benefits that we will receive from it, it is a compromise that we have taken as a company to improve in consumption of electricity in our hotels. That and all of utilities, including water and gas, those are the things that we work through every day as hotel managers to improve. And let me give you some examples for what we're doing.

As you know, for the past few years, we have already done a lot of the apples that were falling from the tree and that includes switching all of our lighting to LED lighting and putting water savers in all of the showers and all of the restrooms of our hotels. And now we're moving to a second stage where we're actually going to invest some capital to get some additional improvements. Some of the projects that we're working at today currently include adding some places where we could have a solar electricity generation where we could have batteries that we could charge the electricity at a lower rate in the night and then use them when the clients are in the hotel.

So we're working through these and different measurements and saving program that we are certain that it will improve our -- and realize these commitments that we have on reducing energy consumption. So on that front, we'll continue to do work, but it's one of the key components, and it's not only electricity. That was the easiest measure because as you can imagine that the occupancy plays a role in how much electricity you consume. But we're also working on different programs in gas consumption and in water consumption.

[Edouard Boudrant, executive]

Edson, regarding the second part -- the second question, the increase in terms of administrative expenses, basically what happened during the last quarter, we were very, very taken into -- we were very -- sorry, expense-efficiency oriented. So we delayed some projects that we've had. And we decided once we saw that in March we had, on the first side, a positive AFFO, we decided to initiate some programs to be more travel-oriented to travel a little bit more in the property, and that is not to finish with all the efforts that we've done at the corporate group has done in terms of salaries. So basically it's not because we decided to hire to -- more people. We were in a quarter where we felt very comfortable in term of occupancy, in term of financing and operating performance.

So basically it was time to come back to normality and to a level of expense more related to what we had through COVID and because we -- as I mentioned, Guillermo, the crisis for us is behind us. We are focused on the future and we are focused on the well administration of the portfolio. And just an important fact for you to understand, we have only 26 people in the company. One year ago it was 26 people, 2 years ago it was 24. We didn't make a big hire ultimately and we feel comfortable that we have the best team in the country to manage such a portfolio, very efficient. And as of today, we are focused on the future. We are focused on improving the cash flow of the hotels and we have to adjust the expenses and consequence. But there is nothing in our manner. It just during the last quarter, we constrained a little bit the expenses and now it's time to come back to reality and to normality.

[Operator]

Ladies and gentlemen, there are no further questions at this time. Thank you for participating in FibraHotel's 2021 Second Quarter Results Conference Call. If you have any further questions, please 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.