Administradora de Activos Fibra Inn SC

BMV:FINN13

Earnings Call Transcript 2019-Q1

[Operator]

Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fibra Inn conference call. [Operator Instructions]

I will turn the call over to Ms. Lizette Chang, Investor Relations Officer, for opening remarks. Please go ahead.

[Lizette García, executive]

Hello, and welcome to the Fibra Inn First Quarter 2019 Conference Call. The earnings report that was issued yesterday as well as the accompanying PowerPoint presentation are both available in the company's Investor Relations section of the website. Please follow along for a clear understanding of our results. Also note that forward-looking statements may be made during this conference call. These statements are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results.

Let's turn to Slide 2 for a brief review of the topic that we'll be discussing in today's call starting with the distribution for this quarter, followed by an update of the approvals reached at yesterday shareholders' meeting. We will also discuss Fibra Inn's investments in the Hotel Factory Model, and we will finalize with the operational and the financial review prior to the Q&A session. Taking us through these topics will be our presenters: Mr. Óscar Calvillo, Chief Executive Officer; and Mr. Miguel Aliaga, our Financial Officer. I appreciate your attention.

At this point, I will turn the call over Mr. Óscar for his remarks.

[Óscar Calvillo Amaya, executive]

Thank you, Lizette, and good morning, everyone. As we're all aware, the current macro situation has been challenging. The economic slowdown both in Mexico as well as globally has created external factors that influenced local business environment, [indiscernible] volatility and uncertainty in the markets. All of these factors impact Fibra Inn directly and indirectly. For one, investment decisions with regards to major investment projects in the manufacturing for export market segments are put on hold as we wait for final ratification of the new United States, Mexico, Canada Free Trade Agreement by the 3 governments.

Knowing that the situation has been the main reason for the revenue deceleration among our hotel properties and the main reason why during this quarter we registered an occupancy decrease of 4.5 percentage points. However, there are other factors that also influenced the results.

First, was the increase in hotel supply in the Bajio region, mainly in Querétaro as well as other cities like Coatzacoalcos and Chihuahua. Secondly, there were also numerous security issues throughout various Mexican states that effected overall perceptions of the country. And thirdly, we are witnessing lower levels government contracts due to delays in the federal government expense.

On the whole, I will say that the overall Mexican hotel industry is very aware of various factors effecting the industry. Additionally, we are all in agreement that the Hotel Factory vision is long term. For this reason, Fibra Inn has now suspended Hotel Factory benefits.

Given this market environment and despite the decline in revenues, the company has done a good job controlling operating expenses, mainly in terms of lodging expenses, administration and sales. Additionally, in terms of corporate administrative and organizational expenses, we have been able to maintain this in terms of absolute value, even though as a percentage of revenues, they may appear higher due to the lower prevalent levels.

The cost control were part of the company's permanent commitment to lower expenses as asset managers of the hotel operators. We understand that with every economic cycle, there are blips. This is certainly a situation that we have experienced in the past and one we will continue to experience in the future. We believe that we have prepared for this.

Let's turn to Slide 4 to discuss the distributions for first quarter '19 where Fibra Inn reached a total distribution of MXN 81 million for the period, a 25.6% decrease when compared to the same part of last year. However, beginning this quarter, Fibra Inn has begun receiving revenues generated from the Hotel Factory fees. This revenue amounted to MXN 10.6 million and is derived from strategic partners who paid structure and development fees. This represents an ambition contribution of MXN 6.3 million to help NOI level. The distribution per certificate was MXN 0.1565, paying the equivalent to adjusted FFO for this quarter. The trailing 12-month dividend yield was 9.3%.

Annual Shareholders' Meeting. Yesterday, the Annual Ordinary Shareholders' Meeting took place. At this meeting, the 2018 audited financial results were approved as well as the annual report by the external auditor and each of the corporate governance committees. The result, the Technical Committee will be comprised as follows: Mr. Victor Zorrilla and Mr. Joel Zorrilla, as the members representing the Founders' Trust; as well as their respective alternates, Mr. José Francisco Clariond Castañeda and Mr. Adrian Jasso, respectively. Mr. Óscar Calvillo Amaya retains the management of the trust with alternate Mr. Miguel Aliaga Gargollo. And 5 independent members: Mr. Adrián Garza de la Garza; Mr. Rafael Gómez Eng; Mr. Héctor Medina Aguiar; Mr. Marcelo Zambrano Lozano; and Mr. Santiago Pinson Correa. Fees for the independent members were also approved at MXN 37,000 for each Technical Committee session and MXN 30,900 for each session pertaining to the other committees.

The Shareholders' Meeting was informed of the cancellation of the Share Repurchase Fund, which was not exercised to date for the amount of MXN 133 million that were originally approved at the Ordinary General Shareholders' meeting a year ago in the amount of MXN 250 million. The creation of new Repurchase Fund was approved up to MXN 250 million for the 12-month period following April 30, 2019, not exceeding 5% of the total certificates issued by the trust.

Therefore, in May, we will begin the steps for the cancellation of 10.4 million certificates that have been in the fund for no more than a year. That is, those certificates that have been acquired between May 2, 2018 and March 29, 2019. These certificates represent approximately MXN 116.6 million. In accordance with the update figures at the end of March 2019, Fibra Inn has an outstanding float of 85.2%.

We remain committed to our capital recycling strategy with a sale of certain properties. In the future, we will be announcing the sale of several hotels that will take place in the second quarter, and the [indiscernible] can represent approximately MXN 240 million. We also have important progress to announce regarding the commercialization process of other properties in the portfolio that are corporate governance body has authorized for promotion.

It is important to highlight that we will remain very active in the repurchase of certificates, specially at current prices as we consider this to be an attractive investment for Fibra Inn. A portion of the proceeds from the sale of the hotels will be used for the purchase of these certificates.

Hotel Factory investments. With regards to the JW Marriott and the Westin Monterrey Valle, as we have mentioned in the past, both have been -- have a previously agreed upon structure as follows: capital contribution of 30% for Fibra Inn and 30% for the strategic partner and project-level debt of 40% remaining, half in pesos and half in U.S. dollars. In terms of the JW Marriott Monterrey Valle, total investments will be MXN 1,317 million and Fibra Inn's contribution will be MXN 395.1 million. As such, as March 31, 2019, Fibra Inn has contributed MXN 370.1 million or 28% of the agreed upon 30%. The partner has contributed MXN 324 million, representing 25%. The remaining MXN 527 million will be financed with debt. The project has a tentative opening date of July 2020.

The Westin Monterrey Valle, on the other hand, will be a total investment of MXN 773 million. The strategic partner contributed MXN 140 million plus value-added tax after the closing of the quarter on April 11 and Fibra Inn has contributed MXN 630 million, thus, exceeding the agreed upon 30% fee. As a result, Fibra Inn will execute a corresponding cash out to maintain the 30% equity contribution. The project has an operating time frame during second half of 2019, and that means till July as long as the developer is able to meet proposed delivery times. It's important to clarify that in the above-mentioned amount, we are not including notary and financial expenses, which will be used to [indiscernible] in order to maintain the proportion at 60% equity and 40% debt.

Moving on to the Marriott Monterrey Airport. This project remains under negotiation with involved investors in order to establish effective participation structure. However, total investments for this project could be in the range of MXN 600 million. As negotiation with the strategic partners move forward and upon authorization by the international hotel chain related to the project and the construction, we can update the market for regarding this property.

Finally, in terms of the Playa del Carmen project, it went through a beauty contest for the selection of the brand. Six brands and 4 hotel companies participated. The selection process came down to 2 finalists. This will be analyzed shortly in order to make the final selection. The project includes a hotel that would be between 220 to 230 rooms to be built within a period of 24 months, expecting to reach stabilization in 3 years. It will be a European plan hotel with rates of over $300 per night. The investment in the land was $17 million, of which Fibra Inn contributed $5 million and the remaining $12 million was contributed by another strategic partner based in New York.

In terms of profitability, we expect over 14% stabilized NOI cap rate in the fourth year of operation based on the estimated investment of $200,000 per room and stabilized occupancy that would be over 65%, and an average daily rate over USD 300.

Fibra Inn's acquisition and development teams is consistently reviewing other upcoming opportunities, participating in selection process and analyzing value structures with interesting parts. While we know that the challenge lies in the terms of investment return, Fibra Inn is confident that we have a very valuable market niche, a luxury hotel market on which the Hotel Factory Model has based all these developments.

Please turn to the Page or Slide 7 (sic) [ Slide 9 ]. The group portfolio has remained relatively unchanged. When we compare it to the same quarter of the previous year, we have 6,785 rooms. The Hotel Factory department has 3 hotels, thanks to the Playa del Carmen landbank. Thank you for your attention.

And at this point, I will turn the call over to Miguel Aliaga, our CFO, who will remain the company's operations and financials for the quarter.

[Miguel Aliaga Gargollo, executive]

Thank you, Óscar, and good morning to everyone. Please turn to Slide 9 (sic) [ Slide 11 ]. In terms of same-store sales, this quarter, we registered a 5% decrease in revenue per available room based on 2 drivers: One was the lower occupancy of 58.9%, 4.5 percentage points lower than first quarter 2018. And the second was a 2.2% increase in the average daily rates. The drop of occupancy role was mainly due to the factors that Óscar previously explained. This is with regards to the low level of economic activity, mainly in the industrial markets caused by the latest decisions by the new Mexican government, economic deceleration due to postponement of the trade agreement as well as security issues in some of the markets.

Let's turn to Page 10 (sic) [ Page 12 ], where we start with a discussion of revenues. Lodging revenues decreased 4.7% year-over-year to MXN 456.4 million for first quarter '19. And rental revenues increased 7.7% to reach MXN 23.7 million. Consequently, the company experienced a 4.2% decrease in total revenues for the quarter to reach MXN 480.1 million.

In terms of a breakdown by type of hotel, the proportions were consistent, with the majority of revenues stemming from the select service segment at 51.8% and full service segment at 34.3%.

Let's turn to the review of the income statement on Slide 11 (sic) [ Slide 13 ]. As Óscar mentioned, the company has experienced strong cost controls at the operating level and has been able to reign in corporate expenses even though margins appear to have weakened. This is due to an augmenting effect of lower income.

Beginning the first quarter of 2018, we began reporting hotel NOI, which pertains to the operation of the properties and NOI from other businesses. As such, this item will also include revenues and costs from the strategic hotel pipeline.

During first quarter '19, Fibra Inn began to receive revenues from the fees charged to the strategic partners from the Hotel Factory for MXN 10.6 million. This resulted in a total NOI of MXN 166.7 million, which represented a 34% margin versus a 35.3% margin in first quarter 2018.

Adjusted EBITDA as a result was MXN 143 million, representing a 29.8% margin versus the 30.9% of first quarter 2018. And finally, FFO was MXN 97.9 million, at 20.4% of margin when compared to the 23.5% in first quarter 2018.

Turning to Slide 12 (sic) [ Slide 14 ] for the balance sheet discussion. As of March 31, 2019, Fibra Inn had cash and cash equivalents of MXN 532.4 million, which reflects the cash contribution of the strategic partners of the Hotel Factory. Additionally, there were MXN 146.6 million of VAT tax recoverable coming from an increasing value-added taxes base related to the job progress at the JW Marriott and The Westin Monterrey Valle hotels. At March 31, 2019, long-term debt reached MXN 3,218.7 million, corresponding to the net balance of FINN15 and FINN18. Total equity is valued at MXN 8.8 billion.

If you follow me on Slide 13 (sic) [ Slide 15 ], we can take a look at the overall current financial situation of the Fibra Inn. The FINN18 and FINN15 long-term debt obligations was 66.7% (sic) [ 60.6% ] at a fixed rate of 9.93% and 33.3% (sic) [ 30.3 % ] at the variable rate completely hedged with weighted fixed rate swaps of 7.1% plus a 1.1% spread. Additionally, there was a long-term disposition of MXN 200 million from the revolving line with the BBVA Bancomer at TIIE 1.5% spread and a short-term MXN 100 million from the revolving line with Actinver at TIIE plus at 2% spread. The total weighted debt cost reached 8.98%.

At the conclusion of March 31, 2019, Fibra Inn has a ratio of loan-to-value that is 26.7% and a conservative debt service coverage of 2.3x. That is all for me. Thank you for your attention.

At this time, we are ready for your questions. Operator?

[Operator]

[Operator Instructions] We'll take our first question from Marimar Torreblanca.

[Marimar Torreblanca, analyst]

My question has to do with occupancy for the rest of the year. What are you expecting for these metrics? Looking forward, clearly, this quarter had some very unique issues. But what trends are you seeing in the months since then? And what were you -- what do you feel is achievable for the portfolio for the next few quarters?

[Miguel Aliaga Gargollo, executive]

Marimar, this is Miguel Aliaga. Yes. As you mention, this was a very challenging quarter. And maybe second quarter, we expect some challenging figures because as you may be aware, Holy Week and Easter appears in second quarter of this year, no? But we expect and, of course, will depend on to make all these negotiations. What we expect that things will get normalized by, let's say, by the end of the second quarter of 2019. And then we will come back to the usual scenarios of occupancy rates of mid-60s, for example, no? And as you mentioned, yes, this is a short-term issue that we expect to get normalized as we all know what is happening, no, and we explain it pretty clear on the press release. I don't know if that answers your question.

[Marimar Torreblanca, analyst]

Yes.

[Operator]

[Operator Instructions] We'll take our next question from [ Andrea Lara ].

[Unknown Analyst]

I have 2 questions. The first one is, in which regions can we expect an early recovery? And my second question is, what are your breakeven -- operating breakeven? And how has these measures changed with your expansion plan?

[Miguel Aliaga Gargollo, executive]

Well, yes. Of course, as you -- I would like to understand your question. So the northern part of the country has been extremely good, no? We believe that this will continue. And again, depending on the trilateral agreement, as soon as we get an approval from the U.S., we believe that this region will continue growing. And that's why our bet is mainly in large cities like Monterrey. We have these 2 large projects, The Westin Monterrey Valle and of course, the JW Marriott. And just to mention that the Westin will open to operations on the second half of this year, and JW Marriott on the end of last year, no?

So of course, one of our bets is, as we mentioned, large cities because we believe it's -- there will be opportunities. But of course, when you see numbers in the first quarter of 2019 and even in the last quarter of 2018, the central part of the country, Puebla, Mexico City specially, we believe that there should be an important recovery in the following quarters, for example, no?

We still have certain doubts on the Bajio region, because as we mentioned, there is an increase in supply and demand is not growing as we see, for example, no? So that's why we believe that in northern part of the country, we'll have an increase in occupancy, as I also -- as part of the question that also Marimar was asking, no? In northern part, will -- we believe that would continue growing and it's where we see the potential.

On your second question, as you mentioned about the breakeven on hotels, will depend of course in the type of hotel we have. But just to mention, for example, limited service and maybe select service, a breakeven -- the operational breakeven should be on occupancy rates of about 35%. On full service hotels, it's about 40 -- 42%, for example, no, operational breakeven. So we have not seen in general in the portfolio this occupancy. Of course, if we go hotel by hotel, we may see certain issues on certain specific hotels. But also, yes, it's important to mention some of those hotels that are not strategic for Fibra Inn are part of the portfolio that we are looking to sell, no? And we are going on our way to sell these type of hotels and then to concentrate in what we believe it's important strategy to follow and continue growing the full service segment, which we believe is higher in value and with higher barriers of entry, for example, no? And I don't know that answers your questions.

[Unknown Analyst]

You have.

[Operator]

We'll take our next question from Pablo Duarte.

[Pablo Enrique Duarte de León, analyst]

Could you please give us an update on your asset recycling strategy as well as on your share repurchase program?

[Miguel Aliaga Gargollo, executive]

Yes, Pablo. Yes, on the selling of assets, we are on our way. To be honest, usually the red paper, no? We are -- what happened really is Holy Week and Easter went by and, of course, people went on vacations and it happens like in December, no? People go for vacations. But we are now restarting, and we believe that in -- to be more conservative, in this month of May, we are quite sure that we will announce a package of hotels we sold to different buyers. Let's say the hotel that we have in the very, very most advanced stages, no? And that will add up about -- added value of about around MXN 240 million, MXN 250 million -- between MXN 230 million and MXN 250 million. And we will continue on this process. There are some more hotels in earlier stages, but we are confident that for this year, we will see most of these hotels to be sold.

And as I mentioned in previous quarters, yes, it was supposed to be easier to sell these hotels if we were not looking for a specific price, no? So that's a complication, to find a buyer that seems comfortable with the price we're looking for. And in the end, a fair price for everybody, no, for us as sellers and for the buyers. But we are on our way, so we are quite sure that during this month of May, we will have positive announcements on this selling of assets.

On the buyback share front. Well, yesterday, we had the Shareholders' Meeting. As usual on a year-to-year basis because of loss, we need to cancel the current available funds and then we reestablish a new buyback share fund. We have approved that just MXN 250 million, and we will continue to be -- to buy maybe a little more aggressive than in the past to buy back this stock, no. But just to mention, today, as blackout period has ended for us, today, we are buying shares, no, and we are continuing doing so.

And also, we will cancel the available balance of about 10 million certificates that we have in order to clean the 5% limitation we have. Because on the side of the dividend payment, those certificates don't receive a dividend. So in the end, the effect is only on the certificates that are in the market. But these have cost to clean and to have the full 5% available number of certificates to be acquired, no. So we are going on that strategy also, to continue buying, but to be a little more aggressive than in the past.

[Operator]

[Operator Instructions] We'll take our next question from Martín Lara.

[Martin Lara, analyst]

I only have one question. Can please talk a little bit about the outlook for Hotel Factory units? How much do you expect to generate during the next 2 quarters? And what's the EBITDA margin on those revenues?

[Miguel Aliaga Gargollo, executive]

This is again Miguel Aliaga. Yes, in terms of -- for us, as I mentioned before, of course, second quarter is a little bit challenging, not too challenging as the first quarter of 2019. We believe that EBITDA margin, NOI margin will improve, especially in the second half of the year. And this is important to mention because then is where we will start to see the Westin Hotel ready for operations in the second half of the year. And of course, even when it will not be stabilized at that moment, at least it will start to generate some additional revenues on one side.

On the other side, we may, as I mentioned also to Pablo, we may see some of these selling off of assets that will then will not add or reduce revenues to the portfolio for example. So that will add a little value on EBITDA, for example. And again, no, we are still estimating that there will be an important business recovery in general in the country because of the certain stabilization process during the second half of the year, no. So we may be seeing an improvement -- an important improvement in the second half of the year for Fibra Inn, no?

And specifically in margins, we don't give now a guidance on EBITDA, but we are quite sure that we'll see an improvement -- an important improvement because of most of the reasons.

[Martin Lara, analyst]

Okay. But in terms of commissions from the Hotel Factory, how much do you plan to generate in the second...

[Miguel Aliaga Gargollo, executive]

Yes. I believe that the most important ones happened last quarter and this quarter. Why is that? Because we usually generate the initial commission when we closed the business. But then as each one or each quarter, we will generate 0.75% of overall commission for the asset based in these -- in those hotels that we have Hotel Factory. So just to give you an idea, maybe for this year, we will see around 25 to -- full year MXN 25 million to MXN 30 million on commissions from the -- coming from the Hotel Factory which is important in the end.

It's not really that the mainstream of the income, but it's important to mention because since the beginning of last year, we were announcing these commissions or these additional fees to come. And for certain delays on the projects, we didn't see them, no? So important to mention, and maybe it's a good question. Important to mention, we will start to see these commissions going across. So we have the setup fee, the initial setup fee, but also the asset management fee. That's positive for Fibra Inn, because we are internal line, the Fibra. You will see the 0.75% of the total value of each one of these projects coming to the Fibra as income. So that's important to mention.

And as soon as we close, for example, the deal with Marriott Aeropuerto, meaning to add on to that project our shareholder in this venture will see also some commissions that maybe will happen in the end in the second half of the year, for example. But from now on, you will start to -- you will continue seeing income generated from these Hotel Factory projects.

[Martin Lara, analyst]

Okay. The MXN 20 million to MXN 25 million is only related to the Westin?

[Miguel Aliaga Gargollo, executive]

No. In general, overall figures. We have Westin. We have JW Marriott. We will see something from Marriott Aeropuerto. Let's say, the 3 most recent projects, no? So from those 3, that's it. The overall figure that we will see for the year.

[Martin Lara, analyst]

Okay. And another question. Are you going to consolidate the Westin Hotel? Or how are you going to account for that property?

[Miguel Aliaga Gargollo, executive]

No. It's -- we have -- and you can see, for example, in the balance those are minority participation and of course -- for accounting purposes. We have what we call, control on the project but that does not mean that some of the projects we have 50%, and we may have less than that, for example. But there is no consolidation on those projects.

[Operator]

[Operator Instructions] And there are no further questions on the line at this time. I'll turn the program back to Mr. Aliaga.

[Miguel Aliaga Gargollo, executive]

Well, we appreciate your confidence and your continued interest in our company. We look forward to speaking with you again soon. Have a good day.

[Operator]

This does conclude today's program. Thank you for your participation, and you may now disconnect.