Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2022-Q3

[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 Third Quarter Earnings Conference Call.

FibraHotel issued its quarterly report on Wednesday. If you did not receive the 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, and good morning, everyone. I am going to begin today's call by providing an overview of the strong third quarter of 2022 results, the current situation, and then we will turn the 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. I am pleased to announce our results for another solid quarter. The third quarter results continue to demonstrate the positive trends in the hotel sector together with the quality and diversification of our portfolio. For the third quarter, our portfolio had an occupancy of 61.8%, which is 13.3 percentage points above the third quarter of 2021. These occupancy levels allow us to focus on driving rate. ADR reached MXN 1,301 and had a year-on-year growth of 11.5%. Total portfolio RevPAR grew 42%. We continue to see solid numbers from the tourism hotels during the quarter.

The Fiesta Americana Condesa Cancun have MXN 100 million rent, of which MXN 6 million were related to postponed rents from the pandemic. In July, the hotel reported its highest monthly revenue in its history, and we are encouraged by the positive forward booking numbers for the winter season and have not seen a slowdown in demand or sensitivity to higher rates. In addition to the leisure hotels, we see the following trends as we segment our portfolio. Mexico hotels are 77% above the second quarter of 2022 but 11% below the same quarter in 2019. The bookings in Mexico City for the fourth quarter of 2022 look positive as restrictions are eliminated and certain actives like the Formula Uno or Formula 1 returns. Monterrey and Guadalajara hotels are 43% above the second quarter of 2022 but 6% below the same quarter in 2019. Northern Border hotels are 29% above the second quarter of 2022 and 19% above the same quarter in 2019.

Bajio hotels have been the slowest to recover and are 46% above the second quarter of 2022 but 17% below the same quarter of 2019. Southern hotels are 43% above the second quarter of 2022 and 25% above the same quarter of 2019. Pacific and West hotels are 36% above the first quarter of 2022 and 8% above the same quarter 2019. We have made strong progress on our food and beverage initiatives. Food and beverage revenue of MXN 209 million is 12% above the same quarter of 2019. We opened 3 franchise restaurants in our hotels and expect to add new franchises in our future. EBITDA margin was 28.9%, and we are focused on efficiencies and cost control. We have seen some cost inflation pressures and we will work on every line item to achieve the best margin possible. EBITDA was MXN 349 million, and that is a quarterly record. AFFO for the quarter was MXN 177.6 million. We are mindful of the complicated macroeconomic environment.

There is a mix of high direct inflation, rising interest rates, geopolitical tensions and the possible economic slowdown for this combination. Having a strong balance sheet will continue to be the core strategy objective of FibraHotel. In 2022, we have amortized MXN 266 million of debt and closed the quarter with the lowest debt and LTV levels since 2020. We also continue to evaluate the alternative of converting a portion of our set of debt to dollars. We estimate that 36% of our EBITDA in 2022 has been received in dollars. In July, Fitch Ratings upgraded the perspective of FibraHotel and its FIHO 19 debt from negative to stable perspective and ratifies a main plus mix rating in October. HR rating upgraded its rating from AA- with negative perspective to AA with stable perspective.

Our capital allocation strategy seeks to achieve 5 components, reduce debt at least to levels we have before the pandemic, invest in our hotels, including ESG and food and beverage initiatives, shareholder distributions, inorganic growth, portfolio diversification through repositioning and asset sales. Regarding shareholder distributions, we expect the technical committee to define the policy and publicly communicate it in early 2023. Finally, I would like to highlight our progress in ESG initiatives during the quarter including. We published our sustainable finance and investment framework to incorporate sustainable financing. We issued climate change risk and opportunity analysis according to TCFD to identify and understand the implications of climate change on our operations. We thank all of our partners and teams for their effort, hard work and commitment to FibraHotel.

With that, I will now pass the call over to Edouard Boudrant, our CFO, to discuss the financial and operating results of the third quarter. Thank you.

[Edouard Boudrant, executive]

Thank you, Simon, and good morning, everyone. During the third quarter of 2022, thanks to a strong operating performance of the hotels, our financial results followed the trend of observed during the last quarter. Tourism and business hotels continued to show positive trends as observed during the second quarter of the year, and our operating performance was quite similar from the second to the third quarter. The occupancy rate of the quarter was 62% for managed hotels versus 63% for the second quarter of 2022. We closed the third quarter with 84 hotels opened. Average daily rate was MXN 1,301 in line versus the second quarter of 2022 and 12% increase versus the third quarter of 2021. Quarterly RevPAR was MXN 805, representing a 1% decrease versus the second quarter of 2022 and a 42% increase versus the third quarter of 2021.

The Fiesta Americana Condesa Cancun Hotel had a net package ADR of Ps 6,217, occupancy was 81% and net package RevPAR was MXN 5,012 , representing a 1% decrease versus the second quarter of 2022 and a 41% increase versus the third quarter of 2021. Total revenues for the quarter were MXN 1,210 million versus MXN 1,200 million for the second quarter of 2022. It's the highest level ever reached in terms of revenues for FibraHotel. The rent collected by the Hotel Fiesta Americana Condesa Cancun represented MXN 100 million or 8% of total revenues. Our lodging contribution for the quarter was MXN 438 million versus MXN 440 million for the second quarter of the year 2022. We continued with the position of being highly cost-control at hotels level. The margin of lodging contribution for the managed hotels was 30%. It remained unchanged versus the second quarter of 2022.

Our real estate expenses were MXN 20 million versus MXN 22 million during the second quarter of 2022. Corporate expenses were MXN 68 million versus MXN 73 million during the second quarter of 2022. Our EBITDA for the quarter was MXN 349 million versus MXN 345 million for the second quarter of 2022. It is the highest level ever reached in terms of EBITDA for FibraHotel. In terms of EBITDA margin, it remained unchanged at 28% versus the second quarter of 2022. During the quarter, FibraHotel concluded the process of implementing employer substitution between the specialized service company that previously provided service to Fibra Hotelera Limited, the subsidiary of FibraHotel. We closed the quarter with net debt of MXN 4.3 billion, decreasing MXN 74 million versus the second quarter. Gross debt amounted to MXN 4.7 billion.

Please note that during the quarter, we decided to voluntarily amortize MXN 50 million of the MXN 250 million facility we have with Banorte and withdraw done in March of 2021. With that anticipated amortization, we already prepaid MXN 180 million so far in 2022. We finished the quarter with a conservative LTV ratio of 28%. During the quarter, the debt position generated a financing cost of MXN 130 million. The net financial income was negative MXN 107 million. As of today, the debt structure is extremely healthy. Only MXN 10 million of amortization for 2022, only 7% is maturing during the next 12 months. Average cost of debt is 9.30%, and we have less than 5% of our debt in USD, USD 10 million. Please note that at the beginning of October and recognizing the operating and finance performance of the company, HR Ratings upgraded the rating from AA- to AA and changed the negative perspective to stable.

We closed the quarter with MXN 422 million cash position compared with MXN 466 million at the end of last quarter. During the quarter, we amortized MXN 120 million. We also deployed MXN 128 million of maintenance and repositioning CapEx, MXN 54 million for maintenance CapEx, MXN 22 million from improvement in the hotel Fiesta Americana Condesa Cancun, MXN 17 million for a new franchise restaurant in Fiesta Americana Hermosillo, MXN 12 million on improvement in the hotel Live Aqua and Grand Fiesta Americana Monterrey and MXN 23 million of improvement in other hotels of the portfolio. For the quarter, our FFO and/or AFFO were MXN 243 million from MXN 178 million. Please note that for the third quarter of 2022, we would not pay distribution. 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 is from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

Congratulations on results. I have 2 questions. The first one is, can you give us more color on occupancy level on a monthly basis during the quarter? And also, you can comment on what are the occupancy levels you are seeing during October?

[Simón Zaga, executive]

Paco, thank you very much for that question. So basically, on a monthly basis, what we've shown, it's a very, very strong summer, which is 62%, 63% between July and August. And so it has been very, very good. Also in Fiesta Americana Condesa Cancun, we have a very good summer. And for the month of September, it has been a little bit disappointing for us because we end with a 60% occupancy rate. And basically, the main reason of that is the first week or the second week has been very weak because of the holiday, the 15th of September, the National Day in Mexico. And basically, we have one of the weakest week since many, many months. So it cost us a little bit like MXN 10 million in terms of revenues.

But so far, we have seen a very good response of the hotels and that, at the end of the month, has been very, very good. And the trend that we are observing for the month of October is very, very good. And we are very, very confident that we will close the year with a very strong last quarter.

[Francisco Chávez Martínez, analyst]

Great. And the second question will be on the ADR. You mentioned that with this occupancy level, the focus will be in renting the tariffs. What can we expect for the next few months in terms of ADR?

[Simón Zaga, executive]

So basically, if you remember in the second and in the third quarter, we have an idea, excluding Fiesta Americana Condesa Cancun of about MXN 1,300. What we anticipated for October and November is to have a slight increase in this area because usually, we have the best month of the year in terms of business hotel for October and November. And also, we are showing some very, very good events in the portfolio. For example, the Formula 1, which will have a very good impact on all the hotels that we have, both in Mexico City and in the metropolitan and so on. And also, we have some event in Monterrey, Guadalajara that should enhance a higher level of EBITDA for this quarter.

And what we are seeing for next year, we are in the process of working in the budget with the operator for next year and the objective for FibraHotel is to maximize the ADR and maybe not to maximize the occupancy of the hotel. So we are looking for a budget in terms of going through maximization of the ADR and not the occupancy. And it generally produces into better margin for the hotel on the less use of the hotel, on less CapEx for the hotel. So this is the strategy that we see for next year. And so far, we have very good feedback from the operator that we see that the market will be able to receive a higher rate for the portfolio.

[Operator]

Our next question is from Andrew Cummins with Explorador.

[Andrew Cummins, analyst]

I have 2 questions. One relates to the announcement by Hotel City Express of the partnership with Marriott and whether that changes the competitive landscape for your limited service hotels? And the second question relates to expectations on dividends this year and next year?

[Simón Zaga, executive]

We see as a positive that Marriott close would see the acquisition of the brand and the incorporation of that brand into the family of brands. Obviously, Marriott has over 31 brands, so this will be a good addition. We compete in some markets with City with our One hotels and some City [indiscernible] with some of our Fiesta Inns in some cities. So we welcome this announcement of revenue management in Marriott can be beneficial to the market as raising rate opportunity for us. The other thing we view as a positive, and I want to outline is that Mexico is a priority for our global company, that Mexico is the transaction that they are willing to pursue with all the options they have in the world. So that's how attractive and how other global players are seeing Mexico as a whole.

[Andrew Cummins, analyst]

It's a validation of the space?

[Simón Zaga, executive]

Yes, you put it better than me. It's a validation of the space. It's a validation of FibraHotel's view and long-term view of more than 30 years in the market, 10 years public and now, in November, 30, so we're happy with that achievement of that milestone. So it's been 10 years as a public company and another 20 of that validation of the space and the validation of the business hotels that we haven't been talking much about but the resiliency and the get back of occupancies that we have seen in all those hotels, it's a validation of that. I think you put it perfectly. So we welcome this and we welcome all professional diversification to the market in order to be a more institutional and mature market for all of us.

On the second question, that is truly the most important strategical discussion we will have for this month and until the first month of 2023 is the priorities of FibraHotel with the fortunate results that we had on the 2022 and the great results that we think we're going to have in 2023, with a big caveat that we cannot control what's going to happen on the 2023 future looking as the U.S. ARPU is coming into a recession, we don't know how much or how it's going to affect what we see as very solid bookings in the winter for our resorts. And we do not see either geopolitical or macroeconomical issues in the ingredients of what I'm saying. So with that caveat, I will go to the priorities as I see them. And obviously, I have to work with the technical committee into getting into a structured and smart plan on what are we going to do. One of the biggest or the biggest priority is to amortize our plans of debt that we already have in place for the amortizations of our debt that are already programmed, and even some more.

We have about MXN 350 million to MXN 400 million for next year, so that's going to be one of our priorities. Another priority, obviously, will be repositioning of assets to get more value as we have been doing with the suites that we're adding to our hotels, leisure restaurants, food and beverage opportunities, the outlets that we are adding. And obviously, the reason of all this being [indiscernible] for Fibra that is giving a yield to investors. We will put all these priorities in place as we've got some sales of assets that we're still looking at, new opportunities, consolidation opportunities, et cetera, et cetera, et cetera. But we are going to be very smart in using this money in the right way. We are not getting back to a 100% AFFO scheme because we need to use the money wisely, and to add the most amount of value to our shareholders, that's the ultimate fiduciary task that is in cash.

I'm sorry if I went a little long but I wanted to give you the full script of what we're thinking about the strategic.

[Andrew Cummins, analyst]

There's no loss carryforwards, that would inhibit you from paying a pretty large amount of your net income next year?

[Edouard Boudrant, executive]

Yes. We currently do have a no carryforward and it's a substantial amount. So we don't expect to have any dividend that we would need to pay because of the 95% of fiscal income growth. So that is not where we are basing our decision from the regulatory perspective, but we do believe that, as Simón mentioned, that dividend is important and that there will be distribution, it will just not be guided by the fiscal results as we do have losses that will probably go into next year and probably even more. And in that sense, just for your view, we do expect these distributions to be a return on capital at least for next year and not fiscal income because of these loss carryforwards.

[Andrew Cummins, analyst]

Okay. I was just going to switch gears and ask about inorganic growth possibilities.

[Edouard Boudrant, executive]

We believe that we are in great shape. As we described, we are less than 28% LTV. We have a lot of space. We look at opportunistic inorganic consolidation but we are very patient in that. And with the rise of rate, it has to be accretive in order for us to put any attention on any acquisition. So we feel rise of rates is going to be difficult to accommodate and accretive deals but we will be very patient but very active with looking for different opportunities. And please, and I want to make this remark before the call is over.

Obviously, we will have all the questions needed answered but next Wednesday, there's going to be a meeting in the Sand regions in New York, where the AMEFIBRA, that is the association of FIBRA, so REITs, are going to New York to present the FIBRA universe and the AMEFIBRA compromise with Mexico in New York, and it's going to be a great opportunity for anybody that can attend. Guillermo, obviously, will send again the agenda. It's a very interesting agenda filled with interesting topics, experts, and we're very proud of doing this meeting in New York. So we, more than welcome anybody that's interested to sign up and we will see you there personally next week if you are available. Thank you.

[Operator]

Our next question is from [ Edson Velasco ] with SummaCap.

[Unknown Analyst]

I have 2 of them. Simón mentioned at the beginning of his remarks, the possibility of type of U.S. denominated debt. So I was wondering if you can give us a little bit more color about that? And the second one is if you can give us an update about the relative strategy that you used to have or you have currently on the debt structure that you have on the denominators in US dollars amount that have? Thank you.

[Edouard Boudrant, executive]

Edson, thank you very much for your questions. So basically, as Simón mentioned, we already generate 36% of EBITDA in USD. And on the other hand, we only have 5% of the debt in USD. So it makes a lot of sense to convert part of the debt we have Mexican peso denominated into USD. And as of today, we are in the late stage of finalizing a conversion of more than MXN 900 million tranche into USD, roughly USD 45 million. And basically, we have the natural hedge by collecting a lot of USD in terms of the fixed rent in Fiesta Americana Condesa Cancun, which is $1 million a month, and that's a $1 million a month in all the order of hotels that we have. And basically, if you see the difference of the spread between the 10-year and the [indiscernible] you can see that it's between 4% and 5% and on a yearly basis. we should be able to earn roughly MXN 45 million, which will turn into AFFO.

So it makes a lot of sense. And once we compared this debt, the total debt in USD should be roughly around 25%. So it's very comfortable for us to have 35% of the debt in USD covered by the 36% of the EBITDA that we generated in USD. So this is the strategy that we are working on, on the debt structure of the company. And also the other strategy that mentioned Simón is that we want to accelerate as far as this is possible the amortization of some debt. And for example, earlier this year, we amortized MXN 130 million of [indiscernible] 1 month ago, we prepaid MXN 50 million of COVID-19 debt that we took from Banorte. And so far, the cash flow generation is good and we want to deleverage the company because it makes a lot of sense for us.

[Unknown Analyst]

And last, could you give us a little bit more color about this, the restaurants initiative that you have? Looking forward, do you have specific properties that you might do in order to increase that large revenue?

[Edouard Boudrant, executive]

Can you repeat the question? I didn't understand.

[Unknown Analyst]

Yes, of course. I was wondering if you can give us a little bit more color about the restaurants initiative that you have mentioned in your remarks? Do you have a specific type of property that you're willing to put the restaurant looking forward for that?

[Guillermo Escobosa, executive]

Thanks, Edson. This is Guillermo. This has been a focus for us for the past few years, the food and beverage part of the portfolio and if you realize it, we have almost 70 restaurants within our portfolio. Most of our hotels, except for the limited services ones, have their own F&B outlets, and they serve everything from breakfast to banquet to high-end dining experience in several hotels like the Live Aqua San Miguel. So we have a good bit of a focus to maximize the revenue. And one of the options we found was not having the same branded hotel restaurant producing the kitchens that we have to add external franchises so that people would, not only the guests of hotel, but so that we attract outside people to come into the different hotels and to eat at the restaurants. And so this will increase the revenue that we see from this. It's a long-term strategy.

As Simón mentioned, we opened 3 franchise restaurants already and we will continue working. We already have several franchises in Jalisco, in San Miguel and in a couple of other places but we'll continue opening up additional franchise restaurants and we'll continue to focus on an F&B strategy to maximize the potential of our assets.

[Operator]

Thank you. There are no further questions at this time. Thank you for participating in FibraHotel's 2022 Third 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.