Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. My name is Diego, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2019 Fourth Quarter and Year-end Earnings Conference Call. FibraHotel issued its quarterly report on Wednesday, February 19. If you did not receive a copy via e-mail, you can find it on the 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. Símon Galante, CEO; Mr. Eduardo López, General Manager; and Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO. With that, I will turn the call over to Mr. Símon Galante. Sir, please begin.

[Simón Galante Zaga;CEO, executive]

Thank you, and good morning, everyone. I'm going to begin today's call by providing an overview of the fourth quarter and year-end 2019 results. And then we'll turn over the call to Edouard Boudrant, our CFO, who will discuss our financial results in more detail. And then we will open up the call for questions and answers.

In the fourth quarter through 2019, we faced a complicated market environment of slow economic growth, coupled with a decrease in hotel room demand, in part due to less investment by companies, higher uncertainty and a focus on reducing discretionary spending. Given these conditions, for the quarter of 2019, the RevPAR of our stabilized same-store portfolio decreased 1.8% year-over-year, driven by a decrease in ADR of 0.5% and a decrease of 88 basis points occupancy. The total portfolio, excluding Cancun, for the quarter increased RevPAR by 2.1% year-on-year, driven by an increase in ADR of 2.5% and a marginal decrease in occupancy of 23 basis points. For the full year 2019, RevPAR of the same portfolio was basically flat at 0.1% year-over-year driven by an increase in ADR of 0.7% and a decrease of 52 basis points in occupancy. While RevPAR of the total portfolio, excluding Cancun, 2.5%, driven by an increase of ADR of 3.8% and a decrease in occupancy of 170 basis points.

Even though these results are below our expectations, we continue to gain market share in a difficult environment. As an example, the increase in our total portfolio RevPAR in 2019 of 2.1% compared favorably to an average RevPAR decrease of 5.1% for hotels in Mexico, sampled by FCR in 2019.

In 2020, we expect to see RevPAR growth a little above inflation for our stabilized portfolio, excluding Cancun, driven by a very different market regional dynamics across the country as well as across segments. We expect additional growth from our recently developed hotels led by the Live Aqua San Miguel de Allende Hotel, which is having a good ramp-up period and from the addition of the recently opened Fiesta Americana Viaducto Aeropuerto Hotel.

In Cancun, the market continues to be highly competitive as we go through absorption of recently introduced supply into the market, which have pressured rates. We have also seen marginally lower peso rates as the peso has appreciated versus the U.S. dollar. For the quarter, the net package RevPAR of the Fiesta Americana Condesa Cancun increased 0.8% year-on-year, but we were able to achieve a 17% growth on the lease income, thanks to better cost management. On the positive side, we see better conditions in general as the market has stabilized, and we expect a slightly better winter season versus last year, and we have a solid group base and an improving booking base.

Financially, in the fourth quarter and through the year, we suffered from an operational deleveraging as we saw marginal increases in RevPAR coupled with a continued cost pressure from certain line items, such as labor costs, energetics and current distribution commission, which grew faster than revenues. For the total year, our revenues were MXN 4,371 million or a 6.4% increase versus 2018, and EBITDA was MXN 1,156 million, flat versus 2018 due to a lower margin.

I would like to highlight that even though we are performing better than the competition, we are not satisfied and will not be complacent to just write out the cycle. We are sure that we are -- be assured that we are working very hard on different cities that are less visible from the outside but which will have an important impact in the company's future.

I would like to spend a few minutes to go over several of these initiatives and priority projects that we are working on. First of all, we finished our development cycle in November with the opening of the Fiesta Americana Viaducto Aeropuerto Hotel. The hotel in Mexico City inside the Via 515 mixed-use project has 260 full-service rooms with a modern public areas, including the Los Canarios restaurant and bar as well as meeting room and conference and event space of 550 square meters. The building has been EDGE certified, and the hotel is exactly the latest technology, including full automatization in rooms, public areas, back-of-the-house machine rooms. Additionally, the hotel has modern co-working space for hotel guests and external clients. The hotel is starting its ramp-up period, would have been well received by the market.

Second, we continue working on the stabilization of the recently opened hotels. The Live Aqua San Miguel de Allende has been on solid operational trends for several months and the forward bookings look encouraging. We are also happy that the hotel continues to be recognized by third parties. On top of the UNESCO Prix Versailles 2019 award previously announced, the hotel received the 4-star recognition by Forbes Travel Guide after only 1 year in operation. We continue to work on the hotel offering toward best spa -- and which has named the World's Best Spa Brand in 2019, Natura Bissé. We are also looking to add additional food and beverage branded outlets.

Third, we are continuously working on portfolio enhancements. During 2019, we invested over [ MXN 42 million ] on our maintenance CapEx in soft refurbishments at 6 hotels: the Fiesta Americana Aguascalientes; Sheraton Monterrey; Fiesta Inn Hermosillo -- excuse me, Villahermosa; Fiesta Inn Torreon; the Fiesta Inn Aguascalientes; and the Fiesta Inn San Luis Potosi Hotel. Additionally, in the Fiesta Americana Hacienda Galindo Hotel, we partnered with a Mexican wine producer to add a vineyard and winery inside the hotel, taking advantage of varietal's growing presence in the Mexican wine market. The vines were planted in the fourth quarter of 2019, and even though we don't expect wine production to begin for the few years, we expect the experience to be a good driver for events and group travel in the hotel future.

In January, we closed the acquisition of the Fiesta Americana Hermosillo Hotel, 220 full-service rooms. The total price for the hotel was MXN 194 million, which is very attractive for a recently remodeled full-service hotel.

Finally, on this point, we continue looking at potential sales or acquisition of a handful of nonstrategic hotels.

Fourth, we have been focused on as more control through better asset management as well as efficiency projects. Utilities have been a key focus of the company in the past year. We have signed legacy electricity distribution agreement, which has been delayed in approval process at the CRE, which is a local regulator. But we expect to benefit by the end of the year, which could potentially save more than 50% of the current electricity deal.

Other utility projects executed in 2019 includes changing all our lighting to LED and transitioning hotels that have access to natural gas. We continue working on other projects, including heat recovery, solar panels and the automatization of our machine rooms. Other cost initiatives include changing all our bath amenities for single-use bottles into dispensers. Efficiency program at food and beverage outlets will focus on profitability and potential franchise options. Purchase agreements would relate to FibraHotel for items such as crystal dinnerware, cleaning supplies, TV, Internet and computer systems, among others. A plan to eliminate single-use plastic water bottles. Even though we expect to continue to have cost pressures from labor costs, such as the recent minimum wage increase, we believe we can cover margins through these initiatives.

Fifth, we continue to focus on the strength of our balance sheet. As you know, 2019, we placed our first long-term public bond for MXN 2,500 million at a fixed rate of 8.83% to refinance existing liabilities. The issuance approved average life of debt from 5 years to 8 years. We will continue doing liability management in order to improve existing conditions and are very comfortable with our current levels at 26% LTV. Even though we did not actively repurchase sales in 2019, we started buying back shares in February of 2020 and expect to be active on this front if we continue to see an attractive opportunity.

Finally, we continue to improve the long-term long -- improve the company's long-term viability by implementing leading ESG practices. We started an ESG program in 2019 and expect to publish our first report in 2020. We are working on different alternatives to improve corporate governance and ESG.

To summarize, we are working very hard to improve the company every day and expect the initiatives to bear fruit in the future. Even under the current market conditions, we continue to firmly believe in the quality of our assets and the experience and ability of our team to perform well across the cycles and then deliver the best possible results for our shareholders.

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 third quarter.

[Edouard Boudrant, executive]

Thank you, Símon, and good morning, everyone. As you know, FibraHotel started the fourth quarter with 85 hotels in operation and closed it with 86 hotels in operation with the opening of the Fiesta Americana Viaducto Aeropuerto Hotel. On a comparable property basis of 81 hotels for the 2019 stabilized portfolio, which was fully operational during the fourth quarter of last year, ADR decreased by 0.5% at MXN 1,198 and occupancy rate decreased by 88 basis points at 64.6%. Overall, RevPAR decreased 1.8% at MXN 774. The Fiesta Americana Condesa Cancun Hotel had a net package ADR of MXN 4,169. Occupancy was 75.9% and net package RevPAR was MXN 3,166, representing a 0.8% increase against the fourth quarter of 2018. The ramp-up portfolio comprised with 4 hotels shows occupancy rate of 36.7% during the quarter, ADR of MXN 2,907 and RevPAR of MXN 1,066.

Total revenues for the quarter were MXN 1,131 million, of which 73% was room revenues, 18% was food and beverage revenues and 8% was lease and other revenues. During the quarter, the rent of Fiesta Americana Condesa Cancun stood at MXN 52 million. Compared with the same quarter of last year, our total revenues increased by 5%. The lodging contribution for the quarter stood at approximately MXN 369 million and our EBITDA reached MXN 296 million, increasing respectively by 1% and 6% versus last year. The lodging contribution margin for managed hotels reached 27.4% versus 28.9% versus same quarter of last year. The EBITDA margin reached 26.2% versus 26% the same quarter last year.

Regarding our leased properties, since 2018, we registered all these properties under the fair value method. At the end of the year of 2019, the new fair value of these properties was MXN 3,966 million versus MXN 4,013 million before the fair value update. Therefore, during the fourth quarter of the year, we registered a MXN 47 million charge in the P&L statement, with no impact on the cash flow generation.

We closed the quarter with a net debt of MXN 3.7 billion. Gross debt amounted to MXN 4.6 billion. We finished the quarter with a very conservative LTV of 26%. Please note that at the end of the quarter, all of indebtedness is covered with delevered instrument.

During the quarter, the debt position generated a financing cost of MXN 103 million. In accordance with the IFRS, financing costs related to deferment projects are capitalized as part of the investment in each project, only MXN 12 million of interest were capitalized.

The net financial income was minus MXN 66 million. During the fourth quarter, we continued the development of our cash position with MXN 205 million in [ December ]. The development portfolio was MXN 66 million, mainly in the Fiesta Americana Viaducto Aeropuerto Hotel that opened during the quarter and MXN 139 million for repositioning and maintenance CapEx. Maintenance CapEx reserve for the quarter amounted to MXN 58 million, representing approximately 5% of the total revenues. Same quarter last year, it amounted to MXN 54 million.

In order to get more stakes from the portfolio, 71% of our assets were stabilized, MXN 13 billion, and contributed 80% of the total lodging contribution, MXN 297 million. Fiesta Americana Condesa Cancun represented 17% of our assets, MXN 3.1 billion and contributed 14% of the total lodging contribution, MXN 52 million. And 13% of our assets were in ramp-up or development, MXN 2.3 billion and contributed only 6% of the total lodging contribution, MXN 20 million. Please note that FibraHotel will pay distribution of MXN 158 million, equivalent to 20.12% of CBFI.

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

[Operator]

[Operator Instructions] Our first question comes from Alan Macias with Bank of America.

[Alan Macias, analyst]

Just 2 questions on hotel room demand dynamics, have you seen an improvement during January and February? Have you seen an improvement and in which regions? And regarding the Cancun hotel, have you seen a pickup in U.S. hotel demand there?

[Guillermo Escobosa, executive]

Alan, this is Guillermo. Thank you very much for your questions. On the first part of the question regarding hotel room demand, what we have seen is that the market has stabilized. We still don't see strong improvements or strong growth versus what we have been seeing in the second half of the year.

What we do see is that we are looking at more stability. And it is important to mention, as you said, that the dynamics across the country have been very different. For instance, we have continued to see weakness or it is even weaker in the Bajio region, specifically in some cities such as Aguascalientes, where some car manufacturing plants have reduced production. But we have seen some other regions which have performed better. And so what we see right now is more stability in general, in numbers that are more similar to the second half of the year. In January, it's a little bit better than last year. And as Símon mentioned, we do expect to continue to see some growth for the entire portfolio, just not growth that we have seen 3 or 4 years ago, more growth modestly above inflation.

On the second part of your question, in Cancun, we have seen better dynamics. One of the larger issues we have last year was the decrease in group business, where in the first quarter and especially in the winter season, which is the most important, we have seen a lot less business than we have seen in the prior years. This year, we have seen a better booking pace and we do think that the hotel will perform marginally better. We still see some pressures in ADR and we're also facing a little bit of a pressure from the appreciation of the peso as we have mentioned. But in terms of general dynamics, we also see that the hotel is doing better. We don't expect right now as much impact from sargassum, even though that is not certain yet. But we have seen better dynamics and especially from U.S. travelers and from group travel.

[Operator]

Our next question comes from Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

Could you remind us of the annual minimum rent for Condesa Cancun? And is that what you think we should model for 2022, conservative? And also related to that, is there any signs of the government recognizing tourism as an important part of the economy and trying to help the leisure and tourism industry?

[Guillermo Escobosa, executive]

Sheila, thank you again. On the first part of your question, the minimum rent is $9.5 million, which is adjusted for inflation. So after a couple of years, it's a little bit above that. We don't think that -- we still think we'll -- we're comfortably above this minimum rent. So we expect to see a growth from what we have last year in terms of the total contribution for the year. We're still not seeing numbers similar to what we have seen in 2007 and 2008 but we are seeing continuous improvement in Condesa Cancun and we have been very focused on certain items and cost management to improve these results. So we don't expect a minimum rent. We expect to have a better year than we had last year for the hotel as a whole.

In terms of your second question, I think there's been somewhat contradicting signals. I think a lot of people within the government have recognized the value of tourism and recognize the importance that it has on the economy. Unfortunately, we also see what we perceive as policies that don't match with this. For instance, the cancellation of the marketing and credit promotion that the country used to have. So we think it's a little bit mixed because I do think that especially in the local and regional governments, they do see and understand the importance and the value of tourism. But we need to continue to see more strict actions and more reality regarding the 2 most important things which we perceive, which is the continued noise around security, partly in terms of the communication that that has on the outside.

And secondly, just the promotion of Mexico in general. We think we have, as a country, all of the benefits that we could wish for. We have the best client base within 5 hours of our tourism destinations. But as you said, I do think we need more support from governmental authorities and we believe better projects to promote the country.

[Sheila McGrath, analyst]

Okay. And 2 more quick questions. What was the driver of switching from a lease at the Fiesta Inn to a managed property? And then the next question is, you were active on the CBFI repurchase in February, what are your thoughts about repurchase -- additional CBFIs in 2020?

[Edouard Boudrant, executive]

So basically, Sheila -- Edouard speaking, I presume that you're talking about for you the third question about Fiesta Inn Cuautitlan. Basically, Fiesta Inn Cuautitlan, as Fiesta Inn Perisur, is a legacy lease contract that we had with Posadas the prior -- that GDI has prior the inception of the Fibra. And that this year in 2019, it -- the rent -- the lease contract expired. And what we are doing since the beginning, since the inception of the Fibra is that following the expiration of the lease contract, we will turn into a management contract. So basically, it's something that has been planned since many, many years.

And the second -- your first question regarding the repurchase program, so basically, we will look at -- after the CBFI. We will see the liquidity. As of today, we feel that the current price level, it's a very attractive price in terms of investment from our side. I think -- we think that is the best to use of proceeds that we could do. So basically, we want to reactivate the repurchase program as such level of MXN 8 but it will depend, obviously, on the liquidity of the certificate.

[Operator]

Our next question comes from Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

I have 2 questions. The first one is regarding the -- your comments on the RevPAR growth for this year. Can you repeat your estimates for RevPAR growth? And also the -- what will be the drivers for this growth? Is it occupancy? Or is average rate?

And the second question is, are you planning to divest some of your hotels? We have seen one of your competitors quite active in divesting some hotels lately. So are you planning to divest any asset?

[Guillermo Escobosa, executive]

Paco, I'm going to start with the second part of your question, and then I'm going to let Edouard complement what we have said in the remarks. Regarding sales of hotels, as we mentioned, one of the focuses we are having this year is the rebalancing of our portfolio. And this means several things. This means both refurbishment of existing hotels. This means the improvements at the different hotels. But it also means a little bit of what you mentioned, which is the possibility to either sell some hotels or to rebrand or reposition the hotels. We are actively looking at the different markets and the different alternatives. We do have some hotels where we are exploring sales. These are a handful of hotels, and they are nonstrategic hotels. But it's a process that takes time, and you also have to understand that with the difficult market conditions, they are not -- it's not always the best time to be a seller of hotels.

So we are looking at some alternatives, and those alternatives are not only focused on selling some or several of our hotels, but we are also looking to do a global process where we can either have that option or have another option of changing the business plan and the brand or the operator of the hotels.

[Edouard Boudrant, executive]

Paco, Edouard speaking, regarding the -- your first question on the RevPAR growth for this year. What we see is that on the first step, it's the stabilized portfolio, we anticipate to have a quite stabilized occupancy rate, and then the plan is to increase the ADR through a weaker inflation. So basically, we plan to pass the inflation in the RevPAR growth. And after -- speaking of on the stabilized hotels, we have 3 hotels that are not totally stabilized. That's the biggest of hotel in the portfolio. We are talking about Live Aqua San Miguel de Allende, Fiesta Americana Satelite and Fiesta Americana Viaducto Aeropuerto. And what we plan is to have a strong increase in occupancy and slight increase in ADR. So basically, the RevPAR growth of the 3 properties should be very, very interesting and that could enhance the total RevPAR growth of the total portfolio, which should be in the mid-, high single-digit growth.

[Operator]

[Operator Instructions] Our next question comes from Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Well, as you have increased your full-service portfolio lastly, for example, Fiesta Americana Viaducto, and considering that those hotels reflect food and beverage expense as more than the other hotels, my question here is if you're trying to target maybe some NOI margins as these portfolio changes. That's my only question.

[Edouard Boudrant, executive]

Armando, thank you very much for your question. Yes, that's a very good point. Understand the strategy that we implemented since a few quarters has been to put some revenue on the brand in the restaurant. And for example, if we are talking about San Miguel de Allende, we have the Zibu and we have the Spice Market. In the Fiesta Americana Viaducto, we put Los Canarios, which is very famous in Mexico City. And basically, that helps us to attract a lot of people that are not guests of the hotel to have breakfast and to have lunch and dinner in the hotel. So basically, the first result are very positive. And we saw that the ramp-up of this -- of the food and beverage of this new full-service hotel is very, very strong.

And so the price -- the average check price is higher. So basically, it gives us a better margin on the F&B. But at the end of the day, it will not be the game changer to improve dramatically the NOI margin of the portfolio. It's one step alongside with other steps, which are better efficiency in the select service, the F&B strategy, better efficiency in utilities and all these kind of actions that we're driving as asset manager and very hands-on on the operation of the hotel should help us to improve the global margin of FibraHotel.

So basically, it's not only on the F&B of the full-service, it's a whole story on the how is focused FibraHotel to deliver more value and more margin on the total portfolio.

[Guillermo Escobosa, executive]

And just to complement Edouard's point, Armando, I think we're extremely happy with the full-service hotels we have recently developed. We believe that they have drivers to be a lot more efficient than other full-service hotels. They are larger hotels between 200 and 260 rooms. They have more automation in the way they were built, and they were built with a very attractive or a very good number of public areas versus room area. So we do think that these recently developed full-service hotels are going to be more efficient than other full-service hotels. And so that will also -- is why we see similar margins even if they have more food and beverage at these hotels.

[Simón Galante Zaga;CEO, executive]

It would be -- this is Símon, just to make a point. It is a game changer, the Viaducto Fiesta Americana Aeropuerto Hotel. It is the most modern hotel in Mexico and maybe of the world. It makes all the sense that whoever wants to come and visit it, please contact Guillermo Bravo or myself or Edouard, and we will be happy to go with you and -- for you go and see if it's worth your while. And it's on the way to Mexico City Airport. So everybody who got flights out or in have the opportunity to go through it. And it's really a technological leap for FibraHotel, and it's going to be an example going forward for the hotel industry. It's a very interesting project that you should all touch and feel as soon as you can. You're all invited.

[Operator]

Our next question comes from Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

Yes. I was wondering if you could give us a little bit more color how the Live Aqua in San Miguel de -- is performing. Has the group bookings picked up? I know the weekends were very strong at first opening. I'm just wondering how that's tracking.

[Guillermo Escobosa, executive]

Sheila, thank you very much for your question. The hotel has actually done very, very well. We have -- it's still a very aggressive growth trajectory that we have for the hotel that we are very happy on where it stands. To give you an idea, the second half of last year, the hotel was performing already above the minimum return guarantee we have. And also to give you an example, this January versus January of last year when it had opened, we are doing almost 4x the revenue at the hotel and even more times at the EBITDA level. So the hotel has done very well.

In terms of the group business, it's a -- it does take more ramp-up than any other hotel. We do see good numbers going forward. We already saw a January and a February and a March in terms of confirmed bookings that are not only way above last year but that are above the budget that we have for the hotel this year. So we continue seeing that business growing. We're still at very reasonable occupancy level. So overall, the budget that we have for the hotel this year is still below 40% occupancy but that will already give us a return on what we have expected in the hotel because what we have seen is that with the rates that we have been able to develop at hotel and with the performance that we have seen from the ancillary items such as the branded restaurants, Zibu and Spice Market, we have seen a very profitable model overall.

So we still have a long way to go. We still have a budget for the year that is conservative. And we think that in the following years, once that group business consolidates itself, it will probably be one of the -- or derisk investment for the Fibra. So we're working on it. The hotel looks good, and we'll continue working on it.

[Sheila McGrath, analyst]

Okay. Great. And if you could just provide a little bit more detail on the cost savings initiatives. The LED rollout of the lighting, is that going to be across the portfolio? How far along are you on that? And then on -- I think you mentioned moving away from water bottles. What will you do in place of that?

[Guillermo Escobosa, executive]

Thanks, Sheila. Yes, no. Those are -- thank you for bringing those up because those are important and those are what we are focusing right now as a company. In terms of the LED lighting, we changed all of the light bulbs at 100% of our hotels last year. So it was a project that started last year, and we already finished that. So all of the lighting have already been changed. And we are doing different and smaller types of projects like waterless toilets, more sensors to eliminate the lightning use whenever people are not available.

And in terms of the water bottle consumption, we're still looking at the different alternatives. We have 2 options. The first option which we are already implementing a pilot at a couple of hotels is basically doing refillable filtered water bottles. So we are working to have the cleanest possible drinkable water at all of the floors and then giving the customers glass water bottles at their room so that they can refill and that they can have the water without having to have all the plastic bottle use. And we're also looking at different alternatives, such as water in tetra pack or things like that, which are -- which have less impact on the environment. So we are still looking into those, and that's a project that we have for this year.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

[Guillermo Escobosa, executive]

Thank you very much for joining us in our fourth quarter and year-end 2019 call. If you have any questions or would like to visit the Viaducto Hotel that Símon has invited you, please contact me directly, and have a great day.

[Operator]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.