Administradora de Activos Fibra Inn SC

BMV:FINN13

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Erica, 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 now turn the call over to Ms. Lizette Chang, Investor Relations Officer, for opening remarks. Please go ahead, ma'am.

[Lizette García, executive]

Hello, and welcome to the Fibra Inn Fourth Quarter 2018 Results Conference Call. Before we begin, I want to mention that the earnings report that was issued yesterday and the PowerPoint presentation are both available in the Investor Relations section of our website. Please follow the information in these documents 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 of -- for a brief review of the topics that we will be discussing in today's call. Starting with the distribution for this quarter, followed by the cancellation of the review as well as an update on the factory -- Hotel Factory projects, and then we will finalize with the operational and the financial review.

Taking us through these topics will be our presenters: Mr. Óscar Calvillo, our Chief Executive Officer; and Mr. Miguel Aliaga, our Chief Financial Officer. I appreciate your attention at this point, and I will turn the call over to Mr. Óscar for his remarks.

[Óscar Calvillo Amaya, executive]

Thank you, Lizette, and good morning to everyone. Good morning, and thank you for all joining us today.

Let us turn to Slide 4, where we can see that the fourth quarter of '18 Fibra Inn have total distribution of MXN 93.7 million compared to MXN 110 million in the same quarter last year, a decrease of 14.8%. Basically, this was due to 2 factors: First, Fibra is not paying in excess the adjusted FFO during this quarter-end of MXN 0.1805 per certificate distribution include the dilution effect after July capital subscriptions, which reflects the 18.8% increase in the CBFIs outstanding when compared to fourth quarter of '17.

The trailing 12-month dividend yield was 7.3%. However, we want to mention that we do expect the distribution to increase in the future. First of all, the products in the Hotel Factory have higher stabilized NOI cap rate than the -- Fibra's implied one, which would strengthen the dividend yield and, second, because Fibra Inn will be boosting revenues coming from the Hotel Factory fees with inclusion of strategic partners into the prospect of becoming a factory the first quarter of 2019.

Let's move to Slide 6, where we review the cancellation of certificates. In November of last year, Fibra Inn canceled MXN 5.44 million certificates. According to the capital market subscription in Mexico, the company's obligated to cancel those securities that have been in the repurchase fund for over a year. In this case, canceled certificates correspond to September 2017 to April 2018 period. As a result, this cancellation was authorized by Fibra's Technical Committee on June 28, 2018.

As you can see in the slide, the securities represent a value of approximately MXN 64.3 million, which left the company a remaining balance of MXN 146.7 million that is available for additional repurchases. So the maximum authorized at the meeting for repurchases of 5% of total outstanding CBFIs.

In the quarter, we give updated figures in our release of total of 592 million CBFIs issued last year's subscription with 85.4% float as of December 31, 2018. As we are all aware, in this market environment, characterized by an economic slowdown, both in our continent globally, we are dealing with external factors that not only influence the business environment but also generate volatility and uncertainty. This eventually results in the postponement of investment decisions, particularly as it pertains to investments in Mexico, which affects the flow of passengers in to our hotels.

Nevertheless, major investment projects in manufacturing goods for export markets are just waiting for the final approval of a new United States, Mexico and Canada free trade agreement by the Congress in Mexico and United States as well as the parliament in Canada.

There are 2 lodging segments that Fibra Inn is currently active in. First, the business segment obtained by Fibra Inn, which is our main strength and stems from the fact that we are present in the most dynamic business corridors of this nation, Fibra Inn hotels covered in northern border with the U.S. and NAFTA corridor that goes from the city of Querétaro all the way up to [ Marrero ]. We're also in the corridor between our third major city Guadalajara and our capital, the Metropolitan area of Mexico City, [indiscernible] area and the Gulf Coast. Beyond this area, we are considering more presences within the Mexico City area. This business segment we obtained will be greatly benefited by the new U.S., Mexico, Canada agreement final approval that I just mentioned before.

On the other hand, the luxury hotel segment is where we believe there's a growth opportunity for the Fibra and where we're putting a lot of our investment efforts. These are properties that benefit from dollarized revenues and are looking at beach destinations are all-inclusive. The unique value proposition of these luxury [ destinations ] is that the beach hotel generate its own demand, thereby, strengthening the best destinations as a whole.

Specifically, we considered that the Mexican hotel industry impact by a very robust market that is very receptive to international lodging brands. The long-term view of the sector is positive overall. So in Mexico, we are fortunate to have destination series that have high services activities and are supported by other factors, such as natural resources, astronomy, hit rate, culture and demand.

In this long-term vision, Fibra Inn brands participate in this very followed market niche, the luxury hotel market. We have a Hotel Factory model you have been hearing so much about from us.

Our challenge lies in the trends of investment returns. We all know and in some locations like [indiscernible], we're offering hotel rates part of the demand or rooms in the area. However, we can see that it is a temporary situation.

In the Hotel Factory, yesterday, we announced the formalization of our alliance with one of the largest structured equity securities, or CKDs, in the country. This alliance between Fibra Inn and the CKDs was created for the construction of the JW Marriott Monterrey Valle Hotel with a 50% share on the equity. This is in accordance with the peak mission with Towers and announced in the second quarter of 2018, on upon which herein the growth is based.

As per the press release, the first contribution of MXN 247 million, which corresponds fortunately with the capital accrued for a -- at the end of the year. This contribution will be made in equal payments and will be financed by debt by percentage -- and the structure of 60% equity and 40% debt to reach a total of about MXN 1.3 billion.

But first, the company will generate fees from structuring, development and management the parts that will be reflected in result of Fibra coming first quarter of 2019. As we mentioned, the JW Marriott Valle will be locating above 4 levels of parking and 2 levels of retail. This place is expected to open by mid-2020. We are currently in various active stages of construction.

In terms of the Westin Monterrey Valle Hotel that purchase in scale and will be delivered turn-key during the second quarter of 2019. After the closing of the 4-K of 2018, we finalized the purchase of this hotel.

LANDBANK in Playa del Carmen. As per our press release on October 11, Fibra Inn announced a purchase of the land property in Playa del Carmen via LANDBANK modality co-investment with a New York-based fund. This was for a total of USD 17 million, including transaction closing costs as well as related municipality construction permits under this license, which Fibra Inn initiated upon the signing of a purchase option. Fibra Inn participated with 29.4% of the total invest.

We are very excited about this -- acquisition of this property for a couple reasons: the land property is in a prime and unique location, which is a great opportunity for Fibra Inn only steps from the beach and over 5,000 square meters in size. At this time, it's the only beachfront property of this kind that is available -- and [indiscernible] commercial mixed-use property, and compared with lodging activity, it is highly desirable for developers.

Construction is expected to begin the next 12 months. We're ambitioning a range 250 to 270 rooms with an average daily rate that could surpass USD 300. The hotel will be a lifestyle hotel under the brand for widely recognized international hotel chain in North America.

In terms of profitability, we expect over -- 14% of stabilized NOI cap rate in the 4 year of operation, based on [ productivity may invest ] of between $275,000 and $325,000 per room. The stylized occupancy, that could be over 65%, and average daily rate over USD 300.

The current portfolio, it has remained relatively unchanged since fourth quarter '17. When we compared to the same quarter of the previous year, we have 37 added rooms mainly due to the reopening of the Holiday Inn Ciudad Juarez. The Hotel Factory segment has 3 hotels priced, Playa del Carmen in LANDBANK that we reviewed earlier.

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

[Miguel Aliaga Gargollo, executive]

Thank you, Oscar, and good morning to everyone. In terms of same-store sales, this quarter, we achieved 3.8% increase in revenue per available room, which was due to 2 drivers: relatively stable occupancy compared to fourth quarter 2017 of 62.2% and an increase of 3.7% in the average daily rate.

This lack of occupancy growth was due to the low level of economic activity mainly in industrial cities, caused by 2 principal factors: economic uncertainty following the new Mexican government [ that is ], the other lack of clarity related to decisions and the direction the federal government will take because of typical slowdown in the economy the first year of the new administration; and international issues, that impacted the flow of guests to our hotels. These are economic deceleration of the global economy and the uncertainty that relied on whether or not the USMCA will be signed, which, at the end, was executed on November 30, 2018, and the volatility generated by the trade war between China and the U.S. The hotel market behavior stabilized to an extent, thus, we took measures to strengthen our commercial efforts by attracting guests through the online travel agencies.

Let's turn to Page 14, where we start with a discussion of revenues. Lodging revenues grew by 3.6% year-over-year to MXN 485.8 million for fourth quarter 2018. And rental revenues increased 22.1% to reach MXN 28 million. Consequently, the company experienced a 4.4% increase in total revenues for the quarter to reach MXN 513.8 million.

In terms of a breakdown by type of hotel, the proportions were consistent with the majority of revenues extending from the select service segment at 50.7% in this quarter versus 48% in fourth quarter 2017.

Let's turn to the review of the income statement on Slide 15. Beginning the first quarter of 2018, we're going to report hotel NOI, which pertains to the operation of the properties and NOI from other businesses. As such, this line item will also include revenues and costs from the strategic hotel pipeline.

During fourth quarter 2018, our revenue provision was registered of MXN 19.6 million, derived from the binding agreement with the strategic partner of the JW Marriott Monterrey Valle Hotel that Óscar mentioned before, which was formalized on February 26, 2019. Expenses corresponding to the structure in the JW Marriott Monterrey Valle Hotel project totaled MXN 21.2 million for the hotel construction team and other expenses associated with the hotel construction team's search for new businesses.

For the quarter in discussion, total NOI was MXN 164.8 million, which are presented at 30.9% margin versus the 35.1% in fourth quarter 2017. Adjusted EBITDA as a result was MXN 141.4 million, representing a 27.5% margin versus the 33.2% of fourth quarter 2017. And finally, FFO was MXN 109.1 million, a 21.2% of margin when compared to the 24.8% in fourth quarter 2017.

Turn to Slide 16 for the balance sheet discussion. As of December 31, 2018, Fibra Inn had cash and cash equivalents of MXN 658.1 million, which reflects part of the resources obtained from the capital subscription. Additionally, there were MXN 42.9 million of VAT tax recoverable coming from an increasing VAT tariff related to the advances involved at the JW Marriott Monterrey Valle Hotel. Fibra Inn, last quarter, paid off its short-term bank loans related to the revolving credit line with Actinver, and short-term bank loans liabilities ended the year at MXN 79.6 million related to accrued interests. At December 31, 2018, long-term debt reached MXN 2 billion -- MXN 2.9 billion corresponding to a net balance of FINN15 and FINN18. Total equity is valued at MXN 8.6 billion.

If you follow me in Slide 17, we can take a look at the overall current financial situation of the Fibra. The FINN18 and FINN15 long-term debt obligations was 66.7% at the fixed rate of 9.93% and 33.3% at the variable rate completely hedged with weighted fixed rate swaps of 5.6% loss, a 1.1 percentage spread. The total weighted debt costs reached 8.49%. We have 2 bank credit lines available at MXN 200 million revolving credit line with Actinver, and another one with Bancomer for MXN 300 million, which can be even increased to MXN 450 million if needed at the TIIE plus 150 basis points.

At the completion of December 31, 2018, Fibra Inn has a ratio of loan-to-value that is 25.2%, and a conservative debt service coverage of 3x.

That is all for me. Thank you for your attention. And at this time, we are ready for your questions. Operator?

[Operator]

[Operator Instructions] And we'll go first to the line of Marimar Torreblanca from UBS.

[Marimar Torreblanca, analyst]

My question is regarding your buyback program for the year. Do you expect to continue to be active on buybacks? And if so, giving your CapEx needs in your Hotel Factory, how would you plan to fund this buyback program?

[Miguel Aliaga Gargollo, executive]

Marimar, this is Miguel Aliaga. Yes, we have been pretty good and very active. Just to mention, for example, last year, we participated about 1/4 of the total volume of the company. So -- and I can tell you that, yes, we will continue. Part of the idea is also as we didn't mention before, but as you know, we have also there selling of some of the assets that's -- and we are, let's say, going on our way, maybe we will release some information by the end of the quarter, and also, part of those inflows will continue supporting the buyback share program. And of course, you know that, in April, we need to renew the buyback program, but we are very active. No, I know if that's the word...

[Óscar Calvillo Amaya, executive]

No, basically, in the sale of those assets, we will have a good average price because our relation done will be in parallel because we send those, we have a lower cap rate of the inside cap rate that we have, and that will generate value to our shareholders.

[Operator]

[Operator Instructions] And it appears we have no further questions at this time. I would like to turn the call back over to Mr. Calvillo, please go ahead.

[Óscar Calvillo Amaya, executive]

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

[Operator]

Thank you. We'd like to thank everybody for their participation. Please feel free to disconnect your line at any time.