Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Paul, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2022 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, and good morning, everyone. I'm going to begin today's call by providing an overview of the positive second quarter of 2022 results, the current situation, and then we'll turn the call over to Edouard Boudrant, our CFO, who will discuss our financial results in more detail, and we will open the call for questions and answers.

I am happy to announce the positive results of the second quarter of 2022. The results continue to demonstrate the solid recovery trend and potential in the hotel sector. They also demonstrate the quality, diversification and resilience of our portfolio.

For the quarter, our portfolio had an occupancy of 62.5%, which is 14.8 percentage points above the second quarter of 2021. We have been able to optimize rate as occupancy has recovered. ADR reached MXN 1,303 and had a year-on-year growth of over 19%. Total portfolio RevPAR grew 56% and reached MXN 815.

We continue to see solid numbers and momentum from leisure and tourism hotels. During the quarter, the Fiesta Americana Condesa Cancun hotel had an outstanding performance, delivering MXN 101 million rent, of which MXN 5 million were related to postponed rents from the pandemic. We also see a positive rate environment in the hotel. ADR increased almost 25% year-on-year, and we are encouraged by the following bookings for the rest of the summer. Overall, revenues from leisure hotels in our portfolio are 34% above the same quarter of 2019.

Business hotels also continued their recovery, even though not all demand has fully returned. For example, hotels in Mexico City had a RevPAR growth of 100% versus the first quarter of 2022, but remain 23% below the second quarter of 2019.

In addition to leisure in Mexico City hotels, we see the following trends as we segment our portfolio. Monterrey and Guadalajara hotels are 62% above the first quarter of 2022, but 10% below the same quarter in 2019. Northern Border hotels are 35% above the first quarter of 2022 and 10% above the same quarter of 2019. Bajio hotels are 87% above the first quarter of 2022 but 21% below the same quarter of 2019. Southern hotels are 47% above the first quarter of 2022 and 22% above the same quarter in 2019. Pacific and West Hotels are 36% above the first quarter of 2022 and 5% above the same quarter of 2019.

I would also like to highlight our progress on Food and Beverage revenue, which has been an area of focus for the company. For the quarter, we have F&B revenue of over MXN 200 million even as many groups and events have not fully returned. This figure is 5% above the second quarter of 2019. We have also invested in making Food and Beverage more cost efficient, and I believe that there is a further room for improvement going forward in this line item.

Total revenues for the quarter were MXN 1.2 billion, representing a growth of 62% year-on-year. This is the highest quarterly revenue for -- on FibraHotel's history to date. Operationally, we continue to see the benefits of the efficiencies implemented during the pandemic, achieving an EBITDA of MXN 345 million. This is also -- which is also the highest quarterly number for FibraHotel. NOI margin of 34.8% and EBITDA margin of 28.8% show our focus on these cost initiatives and the operating leverage of the portfolio. AFFO for the quarter was MXN 185 million.

Even with these strong results, we are in an uncertain environment with issues such as macroeconomic policies, including inflation and interest rates, slowing economic growth, geopolitical problems and a health situation with new infections. We will continue to focus on executing our business plan and obtaining the highest possible return for each asset.

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 voluntarily paid the revolving credit line with Sabadell and ended the quarter with an 28.4% LTV, which is the lowest level post-pandemic.

Strategically, I want to describe our views on capital allocation. We continue to weigh the benefits of several alternatives to make the best use of available funds in this part of the cycle. We want to achieve a combination of the following 5 items: continue to reduce debt to the level we had before the pandemic. We also intend to pay our scheduled capital amortization to reduce debt. Invest in our hotels. We are executing high rate of return projects in our hotels, focusing on making our stronger hotels even stronger. We are also investing in improving our Food and Beverage offering and projects in line with our ESG goals.

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 100% AFFO payout. We will determine the appropriate policy in discussion with all the stakeholders during the year. We can also look at CBFI buyback program.

In organic growth, we see opportunities in hotels that can improve and diversify our portfolio. Among other things, we are working on a possible fund to invest in leisure and beach hotels. FibraHotel can invest with a minority position with additional partners in the front while co-managing it, which can maximize our use of capital and have an access to a potential pipeline of properties in the future while doing the asset management of the properties.

Asset recycling. We will continue to look for asset sales to fund these 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 as core part of our strategy going forward.

Finally, I would like to highlight FibraHotel's substantial achievements on the ESG front. After having put down the foundation of our ESG program during the quarter, we published and participated in several initiatives, including -- we published FibraHotel integrated annual report. We are proud of the content and encourage all stakeholders to review the document in debt and send us any comments. We issued the 2021 Emission Inventory Report. We detailed the greenhouse gas emissions associated with our activity in 2021. We also released the second-party opinion for the compliance of the green credit issues issued in June 2021. We defined and published our short end-term ESG objectives. These are based on our sustainability strategy and the 25 objective coverage items, including corporate governance, environmental, social and economic impact as well as the company's work environment.

FibraHotel participated in the early adopter program of the United Nations Global Compact Communication of Progress. We participated in it aggressively quite sooner.

We understand ESG as a core component of our strategy. All these achievements will not be possible with the effort, hard work and commitment from the partners, stakeholders and team members of FibraHotel.

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, Simon, and good morning, everyone. During the second quarter of 2022, thanks to the very strong operating performance of FibraHotel, our financial results accelerated the trend observed during the last 2 quarters. Tourism hotels continued to show positive trend, and business hotels also continued their recovery. For example, hotels in Mexico City has had RevPAR growth of 100% versus the second quarter of 2021. The occupancy rate of the quarter were 63% from managed hotels versus 52% for the first quarter of 2022. On a monthly basis, the occupancy rate has been quite stable over the quarter.

We closed the second quarter with 84 hotels open. Average daily rate was MXN 1,303, representing a 5% increase versus the first quarter of 2022, and a 19% increase versus the second quarter of 2021. Quarterly RevPAR was MXN 815, representing, respectively, 27% increase versus the first quarter of 2022 and a 56% increase versus the second quarter of 2021. The Fiesta Americana Condesa Cancun Hotel had a net package ADR of MXN 6,262. Occupancy was 81% and net package RevPAR was MXN 5,068, representing, respectively, a 4% increase versus the first quarter of 2022 and a 52% increase versus the second quarter of 2021.

Total revenues for the quarter was MXN 1,200 million versus MXN 951 million for the first quarter of 2022, increasing 26%. It's the highest level of leverage in terms of revenues for FibraHotel. The lodging contribution for the quarter was MXN 440 million versus MXN 328 million for the first quarter of the year, increasing 34%. The rent collected by this hotel, Fiesta Americana Condesa Cancun, represented MXN 101 million or 8% of total revenues versus MXN 96 million during the first quarter of 2022.

We continued with our position of being highly cost control at hotel's level. The margin of lodging contribution for the managed process was 30% versus 25% for the first quarter of 2022.

Our EBITDA for the quarter was MXN 345 million versus MXN 248 million for the first quarter of 2022. It's the highest level average in terms of EBITDA for FibraHotel. In terms of EBITDA margin, we improved from 26.1% in the first quarter of 2022 to 28.8% in the second quarter of 2022. Real estate expenses were MXN 22 million versus MXN 20 million during the first quarter of 2022. Corporate expenses were MXN 70 million versus MXN 60 million during the first quarter of 2022.

FibraHotel is in the process of implementing employee substitution program in a gradual manner between the specialized service companies that previously provided service to Fibra Hotelera, S.C, a subsidiary of FibraHotel. We expect this process to conclude in July 2022 and during the second quarter. And during the second quarter, we had several expenses associated with this process, explaining the increase in corporate expenses. For example, we recognized a MXN 3 million employee profit sharing expense.

We closed the quarter with a net debt of MXN 4.4 billion, decreasing MXN 208 million versus the last quarter. Gross debt amounted to MXN 4.8 billion. Please note that during the quarter, we decided to voluntarily amortize MXN 130 million of Sabadell's revolving credit facilities, leaving an available amount of MXN 200 million. We finished the quarter with a conservative LTV of 28%.

During the quarter, the debt position generated a financing cost of MXN 107 million. The net financial income was negative MXN 106 million. As of today, the debt structure is extremely healthy. Only MXN 79 million of amortization for 2022, only 3.5% is maturing during the next 12 months. Average cost of debt is 8.61%, and we have less than 5% of our debt in USD, $11 million.

We closed the quarter with a MXN 466 million cash position compared with the MXN 394 million at the end of the last quarter. During the quarter, we amortized MXN 139 million. We also deployed MXN 98 million of maintenance and repositioning CapEx, MXN 51 million for maintenance CapEx, MXN 16 million on improvement in the hotel Fiesta Americana Condesa Cancun, MXN 7 million on improvement in the hotel Live Aqua San Miguel de Allende, MXN 22 billion on improvement in other hotels of the portfolio. For the quarter, FFO and AFFO were positive MXN 251 million and MXN 185 million. Please note that for the second quarter of 2022, we will not pay distribution.

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

[Operator]

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

[Sheila McGrath, analyst]

Congratulations on the strong results. I was wondering if you could explain if there are any one-time items in the quarter that may have impacted and that wouldn't be recurring?

[Edouard Boudrant, executive]

Sheila, so basically, in terms of -- if we analyze -- thank you very much for the questions. Basically, if we analyze the revenues that we have in Condesa in the MXN 101 million, we basically received the rent of the Q1 quarter. And also, we received the delayed payment that we grant to Posadas on last year. If you remember, last year, they paid to us 85% of the rent, and we agreed to delay the payment of the 15% remaining rent. And basically, they are paying on a monthly basis 5% of the GOP of the hotel as the delayed payment. And for this quarter, we received around MXN 5 million on this current debt that they have to pay.

So basically, in terms in revenues, this is non-recurring. We will have this until the end of the year, but we feel comfortable that for the whole year, all the 15% should be paid. And also in terms of expenses, we have also some non-recurring items which are related to the employee substitution, and we are talking about MXN 2 million to MXN 3 million that we had, and that it will not be recurring.

[Sheila McGrath, analyst]

Okay. And can you explain what the labor reform and employee substitution, what that exactly means and how that will impact expenses going forward?

[Edouard Boudrant, executive]

So basically, what it means is that all the employees that we had in service companies outside of the perimeter of FibraHotel, we're in the process since a few months ago to integrate it in the subsidiary, that is to say, in the SSA. This is the company that is receiving the revenues for Food and Beverage.

And basically, in terms of additional cost, we will just have to recognize the profit sharing, which represents 10% of the financial results or taxable results. As of today, we put a provision of MXN 3 million on the -- we think that it should be between MXN 5 billion and MXN 10 million of incremental cost. Also, we have some additional costs because in terms of systems, in terms of human resource team that we are setting up in FibraHotel. But also, if you remember, in FibraHotel, it was paying to the service company 5% of the staff cost. And this -- we are not paying any more to this company, this cost.

So basically, we have some efficiencies. And in terms of net results, excluding the profit sharing, there will be no material effect for FibraHotel.

[Unknown Executive]

Sheila, if I may just complement, we're basically bringing the employees in-house. And financially, the only difference that you're going to see is that the 5% of these service companies received for their work, it was paid as part of the cost of the hotel. So it was in cost, and that will move into the SG&A of the Fibra. On a net basis, it will be marginally positive for the Fibra, but what you will see going forward is that there's going to be a little bit less cost in the cost and a little bit more in SG&A for the Fibra.

Since we don't still have the employees and we only started making the process and the impact was very small this quarter, we haven't -- we didn't make a large disclosure around it. But for the next quarter, when we see the full impact, we intend to make pro forma so that U.S. can understand, making the adjustments how we would look before and after, and it can be comparable.

Basically, again, on a net basis, the important thing is that it's going to be almost neutral to FibraHotel. And what you will see is a little bit higher NOI margin and lower EBITDA margin. But from a cash flow perspective, it's going to be neutral.

[Sheila McGrath, analyst]

Okay. That was very helpful. One last question. I think you mentioned converting some debt from pesos to dollars. I was just wondering if you could give us a rough idea of what the different interest costs would be that I would assume that you would save some on interest? Just curious what coupon or interest rate you could achieve on both right now.

[Edouard Boudrant, executive]

Okay. So basically, Sheila, what we've analyzed, analyzing the prospective yield curve both in USD and in Mexican pesos, we see there is a spread on a medium-term basis of roughly 500 basis points. So as of today, if you see, it makes sense if you generate USD and if you have a natural coverage in USD to move a little bit of your debt in dollars.

And as of today, FibraHotel for example, for the first semester of the year, we generated 35% of our EBITDA in USD. Yes, it's a half currency. And just for you to know is that the rent that Posadas is paying for FibraHotel, it's about the fixed rent. It's about USD 10 million. It's paid in USD. And also on a monthly basis, in the other hotels, we are collecting USD 1 million in average of USD in our account.

So basically, as of today, it makes sense. If we compared the EBITDA generation in USD, that correspond to 35%. On the other hand, we have only 5% of the debt in USD, and so we want to take the opportunity to improve or to lower the cost interest by converting some Mexican pesos debt in USD.

[Unknown Executive]

And Sheila, let me just put that in numbers. We're -- in general, the difference between the rate [indiscernible] is around 8%, and we have a spread of around a little bit over 200 basis points, so let's call it, 10% interest rate for the existing loans. And we're looking at a fixed rate in dollars of around [ 5 35 ] or somewhere around that. So basically, just in rough numbers, we could be saving around 5% on a debt of $15 million or $50 million, 5-0. So those growth numbers, depending on what the actual end amount and what the actual end rate is, could be a yearly saving of around $2.5 million in interest a year.

[Operator]

[Operator Instructions] Our next question comes from Paulina Moreira with Compass Group.

[Paulina Moreira Obregón, analyst]

My question is regarding occupancy. You mentioned positive bookings for the rest of the summer, but I don't know if you could give us some color. Do you think that in terms of occupancy, you will reach pre-pandemic levels in the next quarters? I know this quarter, you were really, really close to those levels. So are you going to be there anytime soon?

[Unknown Executive]

So I think -- Pauline, thanks for your question. Your question is very deep because we need to talk -- we are speaking about the portfolio being 62.5% when we generally expect it to be above 65% on a stabilized basis. After that point, we expect to increase rates more than occupancy. But there are certain areas of opportunity. As Simon mentioned, when you segment, there are still hotels like Mexico City, which is roughly 20-something percent below 2019. We also have Guadalajara and Monterrey that are below 2019, and we also have the Bajio region, which is below 2019.

The positive thing that we have seen in the numbers is that these hotels that are a bit lagging in our more business hotel-oriented, we have seen them increase faster than the other hotels in the portfolio. So their recovery or their going back to normal is stronger than what we're seeing in the rest of the portfolio. So we don't have as much visibility in terms of forward bookings for business hotels because those are probably a month out in what we can see. But we do not see anything that will signal that, that recovery will not continue. So we expect that to continue. We expect to continue gaining back occupancy in these hotels for the rest of the year. And so by having that in the -- and not weakening from the leisure hotels, which we also expect, yes, we do expect to have occupancy higher for the rest of the year.

[Paulina Moreira Obregón, analyst]

Okay. Very clear.

[Operator]

Our next question is from [ Edson Morgera Velasco ] with [ Suma Cap ].

[Unknown Analyst]

Congrats on the results. I have a couple of them.

The first one is regarding on the co-investments that you expressed in the press release and even on [ action ] on comments. Do you have any specific target on specific properties or type of investments in the specific region in Mexico despite the fact that we are looking for beach properties? And what level of amount of investments are you planning to do? That will be my first one.

The second one is regarding on the advisory fee. You mentioned that the MXN 45 million from 2020 will pay in the third quarter. But I was wondering why in the third quarter rather than paying in the second quarter or in the fourth quarter? So I was trying to understand the rationale of paying in the 2 quarter.

[Unknown Executive]

Edson, let me answer the first question. Regarding the first question, it's something that strategic that we have been looking at. As you mentioned, minority investments, we presented to the assembly making those sort of co-investments earlier in the year. And it's a project that we're working so that we can make our use of capital more efficient. We're looking at a fund, and we don't have all the details yet. It's still in the planning phases.

What we would be looking to do is to partner with other investors to create a fund to invest in non-inclusive beach hotels in Mexico. So we believe we have an interesting competitive advantage that we can use if we have the proper capital, and so we are looking at that as an option. We don't see it in the very short term, but we are advancing in terms of that vehicle. So we will have more information regarding that once and if it materializes.

But generally, it's a view of FibraHotel that we can also do different type of investments which, not in all cases, will need to be fully owning the hotel.

And your second question, could you repeat it because I did not fully understand it?

[Unknown Analyst]

Yes. I was trying to understand the main reason of paying the MXN 45 million on the advisory fee that is less from 2020 in the third quarter? Why don't they pay in the second quarter?

[Unknown Executive]

Yes. So it's regarding the second quarter results, but we need to have the financial documents finished and closed before it gets paid, so it should get paid in the next couple of weeks.

As you know, we had an agreement that was publicly announced where the adviser was going to receive 15% of the EBITDA until that debt was liquidated. It's basically referring to the second quarter. But from a cash flow basis, it's going to be paid in the third quarter because we need to have the financial statements before we make the payment. But it's basically a cash flow issue, a timing issue, and that should be fully done for the next quarter.

[Unknown Analyst]

Okay. Last, regarding on the dividends, I know that you mentioned that it's going to be difficult to pay dividends maybe in 2022. But at some point, are you going to assume the distributions, or it's going to be the new policy from FibraHotel?

[Unknown Executive]

No. We expect to have distribution. We will have more color around that closer to year-end when we have a better view on next year's budget and the priorities that Simon mentioned. We do have to look at managing all of the 5 strategic items as we mentioned, but we do expect to continue to have a dividend at the period.

The only thing we want to finish before restarting the dividend is that we came into the pandemic with lower LTV. And at least before year's end, we want to have a close to the LTV we had before the pandemic start. That means that we will pay all the money that we took in order to go through the pandemic docket. And next year, we will have -- for next year, we will have all the budgets by the end of the year from the different operators, and then we can work through all the stakeholders and comments and go through it and see what's the best for everybody. That's it.

[Operator]

[Operator Instructions] Our next question comes from [ Victor Aragon ] with [indiscernible] Azteca.

[Unknown Analyst]

My only question that is regarding cancellations, have you seen any cancellations at the beginning of July or end of June that may be linked to this fifth wave COVID?

[Simón Zaga, executive]

Victor, thank you. No, we have not seen any cancellations or any trend indicating negative results or results that are not as positive as we have seen. We do want to make clear that we remain cautious. We understand that there are several things going on macroeconomically. We do not control what happens with -- if there's high inflation and the U.S. raises rates and that makes the economy goes lower than what we would like. It's something that we don't control. Right now, we have done the research with the hotels at the hotel level, and they are not seeing an imminent slowdown or anything like that. But we still want to be very front of that.

We are cautious around that. We're not seeing it in the numbers. I think at least for the resorts, and especially for Condesa, the summer is looking very strong, and I don't think that will change in this short period of time because if anything, these cancellations are being rebooked at higher rates. So it's not negative, and we will have more color if anything like that changes. But at this point, we are cautious, but we are not seeing anything in the numbers that would have us more worried.

[Operator]

Our next question is from Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

You had a number of cost savings initiatives during the pandemic with, I think, Food and Beverage. And I'm just wondering if you think that as you reach stabilization, if the operating margin should be better than it was pre-pandemic?

[Edouard Boudrant, executive]

Sheila, thank you for the questions. So basically, what we've done and what we've explained on the -- each call that we have on the past few quarters is that we made a deep analysis in all the cost of the hotel, both in terms of F&B, in terms of room department and also other costs like advertising and maintenance. And what we've done, we've done a strong reengineering in order to have a more flexible cost structure.

And basically, if we analyze and if we compare the second quarter of 2022 with the second quarter of 2019 on the cost, fixed and variable structure, 3 years ago, we have 52% on fixed cost and 48% on variable cost. And as of today, we inverted the number, and the fixed cost lower to 48% and the variable costs increased to 52%. So basically, it gives us much more flexibility, and it gives us much more profitability in an environment where we are increasing occupancy and increasing rates.

And just to give you an example of some initiatives that we've done in the past, we realized that a lot of cost, the operator put it like fixed. For example, each period of months, you have to change the, how should we say [Foreign Language]?

[Unknown Executive]

The linens.

[Edouard Boudrant, executive]

The linens. You have to change the linens, you have to change the operating -- some operating in -- towels, pillows. And what we've done, we changed the policy. Below certain occupancy, we do not change that. So basically, it was to change some fixed costs that were defined in the 2, 3 years ago to something more variable. And that's why as of today, we changed the structure, and we have some high margin.

And in terms of a stabilized portfolio of more than 40 hotels, we have the same margin that we had 3 years ago, but we are still below in occupancy, high per person. So basically, we can tell you that we achieve to be much more efficient in terms of cost structure, and it gives us a strong room to manage in order to improve the margin on the forward basis if we succeed to increase the occupancy rate and if we succeed to increase furthermore the rates of the hotel.

[Operator]

Thank you. There are no further questions at this time.

Thank you for participating in FibraHotel's 2022 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.