Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Hoteles City Express' First Quarter 2022 Earnings Conference Call. Thank you for joining us today. For opening remarks and introductions, I would like to turn the call over to Hector Vazquez, Investor Relations Director from Hoteles City Express. Please go ahead.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express First Quarter 2022 results were released yesterday after the market close. They are available on Hoteles City Express Investor Relations website. We want to remind you that during this call, management comments may include forward-looking statements. We ask that you please refer to the legal disclaimer in the quarterly reports for guidance on this matter. Joining us on today's call are Mr. Luis Barrios, our CEO; Mr. Santiago Parra, our CFO. Luis will begin with some opening remarks followed by Santiago, who will present the company financial results.

We will then open the floor for questions. Now it's my pleasure to turn the call over to Luis.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Hector. Good morning, everyone, and thanks for joining us today to the presentation of City Express' first quarter results for 2022. We hope you and your families are safe. [indiscernible] I would like to say that we are pleased with our results for the quarter and the actions taken to guide the company through this bumpy recovery period. Our portfolio has continued to prove its resilience and recognition of the traveler.

In January, we faced the fourth wave of the COVID-19 infection triggered by the Omicron variant, which impacted mobility. Since then, supply chain resorptions have been heightened by the Russia-Ukraine crisis and related inflationary pressures became more acute as the quarter progressed. Despite these headwinds, the improvement in vaccination coupled with best hospitalization, less concern over infections and/or people getting used to live with COVID led to higher mobility with occupancy rates improving, especially during February and March.

Our increasing focus on leisure [indiscernible] very well, increasing occupancy rates not only on Fridays and weekends, but also during local holidays, diversifying our client base. While we continue to carry out in-depth mobility analysis by regions, always looking to understand and adapt to the evolving trends in the market segments and guess the preferences. As a result, we witnessed weekday -- weekend and holiday occupancy rates reaching up to 68% for some days during this period. The opportunity to capitalize on the leisure travel market was confirmed in a market survey that we conducted at most of our locations. The survey consisted in asking guests about the purpose of their future Hoteles City visits.

From this survey, we observed strong demand for travel to small colonial towns as a road trip pit stop and in general, family tourism. We believe that the market is increasingly inclined to see our brands for business and leisure as a result of our product offerings, location, successful marketing strategies, and advertising, consistent quality and upgrades to the food and beverage offerings. Our clients are becoming aware that they have better value during their stay and still enjoy the experiences in the destination, making the best of their holiday.

Talking about the regions. We continue to see strong demand generated by the large manufacturing and export players in the northern corridor of the country, boosted by a strong recovery in the U.S. and geopolitical trends favoring near shoring. We also saw a reactivation on our key accounts, local business traveler and group trips. In contrast, the Bajio continues to lack the rest affected in part by the auto industry and supply chain disruptions. We expect this region to stabilize in the second half of this year as the automobile sector recovers and supply chain resumptions are fixed.

We have identified around 25 hotels around the Bajio region that should benefit from the recovery of this sector, which would add some 3 percentage points to the overall occupancy of the portfolio once stabilized. All of this was reflected in the significant improvement of our operating and financial results. Although in January, we see a drop in occupancy from the typical slow start of the year coupled with Omicron wave. The recovery in February and March was pronounced, reaching occupancy level of 52.6% in March, leading to an average quarter occupancy slightly above 45%.

As occupancy increased, we were able to raise rates with the average daily rate increasing reaching MXN 1,064 close to 11% above the same quarter of the previous year. RevPAR reached MXN 481, 67% year-over-year growth that translates into an 89% recovery versus the first quarter of 2019.

As room rates and occupancy rates rose, margin expanded. Adjusted EBITDA increased by 12x over a year ago, reaching MXN 138.7 million with a margin of 22.2%. We were particularly encouraged by the improvement in month-to-month profitability with the EBITDA margin posted in February and March.

Just in March, EBITDA margin reached 28% compared to the 22% of average for the quarter. Along with these, we continue to strengthen our financial position through deleveraging our balance sheet. Our asset recycling activity, including the sale of our minority equity stake in a portfolio of 3 hotels located in Tijuana and Ensenada and the City Express in Chihuahua. All 4 hotels remain under a franchise and management contract.

In addition, we completed the sale of a plot of plant in Reynosa, Tamaulipas. This brings the cumulative asset sale amount during the last 12 months to MXN 782 million. To date, all assets have been sold above their book value and with reasonable cap rates. With the cash obtained, we were able to make amortization payments of MXN 176 million to our syndicated loan that were applied in direct order of maturity, relieving obligations to amortize until the last quarter of 2023.

In addition, the sale of these properties, an amount of MXN 165 million of debt was removed from our balance sheet, which corresponded to individual debt at the subsidiary level. Given the improvement in our cash flows and ongoing recovery, we have seen in discussions with our bank creditors, to analyze the possibility of having a more flexible coverage ratios in subsequent years as well as a modification reduction in the interest rate.

Whether this will translate into debt refinancing, term restructuring or other amortizations will become clearer at a later date. We currently have a little over MXN [ 670 ] million within the construction in progress account, corresponding to 3 hotels located in strategic locations in Guadalajara, Monterrey and Merida, that are almost finished.

As the company's occupancy and cash flows improve, we will turn these currently unproductive assets into new hotels with an expected minimum investment of approximately MXN 70 million. This will add more than 400 rooms to the current hotel portfolio. And as I've mentioned during our previous calls, liquidity remains first priority, and we would open such properties as we foresee market opportunities with a short-term ramp-up.

Lastly, I'm glad to say that Hoteles City Express is celebrating our 20th anniversary this coming May. And City has evolved from being a one brand company in the business segment for domestic traveler to our family of 5 brands, well recognized in the business and leisure market, leader in the economy segment with 17,300 rooms, 152 hotels, presence in 4 countries and 74 destinations.

As we move on into full recovery, we will continue to grow and differentiate our brands as well as expand the reach to new markets and distribution with a continuous investment in technology.

Now I would like to hand the call over to our CFO, Santiago Parra, who will provide you with further details on our financial and operational performance. Santiago, please proceed.

[Santiago Parra, executive]

Thank you, Luis. My following remarks are based on Hoteles City Express' First Quarter 2022 financial results, which were prepared under IFRS. Our portfolio closed the year with 152 total properties. This represents a decrease of 0.7% to the same quarter of last year.

Of the 152 hotels in operation at the end of the quarter, 143 were considered established properties, 10 more than in the first quarter of 2021. We closed the quarter with 17,311 rooms, a 0.5% decrease year-on-year. At the chain level, our ADR increased 10.5% year-on-year to MXN 1,064 and the occupancy rate increased 15.3 percentage points to 45.3% over the same period. With both impacts combined, RevPAR increased 66.6% year-on-year, closing the quarter at MXN 481.

Revenues totaled MXN 624.1 million for the quarter. This implies a 59.7% year-on-year increase. All in all, the positive trend in the recovery of occupancy and rate levels continue. As of March, occupancy at the chain level was 14.5 percentage points above January occupancy, reaching a level of 52.6%. This represents a recovery of 89.7% compared to the same period of 2019.

The company expects to maintain its growth trend as additional sectors of the economy reactivate. Along with this, the average daily rate during March was MXN 1,077, an all-time high. The latter led to a RevPAR of MXN 566.5 for the month of March, which was translated into a 94% recovery compared to 2019.

Total cost for the quarter increased 22.6% year-on-year to MXN 613.1 million, mainly due to the increase in occupancy. However, as we continue with our cost and expense containment efforts working closely with suppliers and collaborators to counteract adverse economic effects and optimize our cost and expense structure, we will be able to continue delivering higher operating leverage. That brings us to our first quarter adjusted EBITDA to MXN 138.7 million.

This represented an increase of 12x compared to last year with a margin of 22.2% for the quarter, 19.5 percentage points above the same quarter of last year. It should be noted that the EBITDA for the month of March reached 28% margin when compared to the 22.2% for the quarter. Comprehensive financing costs increased 43.3% year-on-year during the quarter to MXN 124.9 million compared to the MXN 87.2 million reported in the first quarter 2021.

The financing cost increased by 2 main factors: one, the spread of the syndicated loan increased by roughly 200 basis points versus the previous rate; and two, the increase of 243 basis points in the base rate year-over-year. At the end of the quarter, we have 72.3% of our total debt covered with a derivative instrument, capping the base rate for each of our loans to a weighted average of 6.8%.

Our financial liabilities decreased 10.6% from MXN 6,315.9 million at the end of first quarter '21 to MXN 5,646.1 million in first quarter 2022. Cash and cash equivalents increased to MXN 1,007.1 million bringing net debt to MXN 4,638.9 million. This represented a 5.7% quarter-on-quarter decrease in our net debt.

As Luis mentioned before, we continue with our deleveraging strategy and announced additional asset sales totaling MXN 782 million over the last 12 months. With the consolidation of these properties, MXN 165 million of debt was no longer considered in the company's balance sheet and MXN 176 million was used to prepay the syndicated loan debt. Our net loss for the quarter was MXN 29.2 million compared to the loss of MXN 199.2 million reported for the same period of last year.

This recovery was due to a combination of all the previously mentioned trends. In summary, the improvement in hotel demand and reopening of economic activities combined with our cost and expense containment efforts, refinancing strategies and asset sales has bring us to a recovery period in reasonably good shape. We look forward to continue delivering on this front in 2022. Thank you for your attention. Operator, please begin the Q&A portion of our call.

[Operator]

[Operator Instructions]

Our first question comes from Adolfo Margain with Signum Research.

[Adolfo Margain, analyst]

My question is regarding your expected occupancy for the rest of the year. Can you give us more color in this area? That will be my question.

[Santiago Parra, executive]

Yes, Adolfo. We are expecting to reach roughly 90% of 2019 figures by the end of the year. As mentioned, we have been seeing the recovery. We have reported, for the first time, the monthly occupancies and rates so that the recovery is more visible and that you can see how the trend is going. So hopefully, this will be helpful.

[Operator]

[Operator Instructions] Our next question comes from [ Elena Marella ] with Compass Group.

[Unknown Analyst]

Yes, related with the last question. I want to know if the 90% that you talked about is incorporating the [indiscernible] from Guadalajara, Monterrey and Merida as you mentioned.

[Santiago Parra, executive]

Yes, [ Elena ]. Thank you for your question. This is Santiago Parra. We would be opening these properties as the cash flow goes in a better position, and we feel that the markets are there. So this 90% is considering the current portfolio and eventually open these properties in the third and fourth quarter of this year. So just remembering that when properties start operations, they start with a very low occupancy. So yes, I mean, we would be considering the 90%, including eventual openings of these 3 properties.

[Unknown Analyst]

Okay. And one last question about occupancy in April, that we have like holy week and well last week, do you see -- well, did you see great increases in occupancy like people are not afraid of COVID anymore?

[Santiago Parra, executive]

Well, as Luis mentioned before, we are seeing that leisure travelers are attracted to our brands in order to spend less in their accommodation and use that -- the savings they're having to have experiences at the destinations. We have been working for more than 18 months in appealing for leisure travelers. And as we mentioned before, we have seen occupancies above 65% in some local holidays and weekends. So I would say that, yes, people are starting to travel. The Semana Santa is a very popular holiday in Mexico. And yes.

[Operator]

Our next question comes from Brad Lindenbaum with Stone Forest.

[Brad Lindenbaum, analyst]

Can you give us an update on progress with the potential capital raise -- and also is it more broad-based outline what you -- how you expect to continue the deleveraging process?

[Santiago Parra, executive]

Brad, thank you for your question. This is Santiago Parra again. As we have been seeing the year going by, we have continued to do our efforts in the capital raise. We are looking at different options, as we have mentioned. And we will be, I mean, just working and making our decisions based on the best and what makes our shareholders value higher. So we don't have -- we expect to close something by next quarter, but we don't have -- unfortunately, we don't control dates and how the process is going. But yes, we're still continuing in this process.

[Héctor Montoya, executive]

Brad, this is Hector Vazquez. For the meantime, we're going to continue with our asset sales strategy so that would lead us to more liquidity for the upcoming quarters.

[Brad Lindenbaum, analyst]

And can you give us an update on the status of the asset sales. What can we expect and when has management changed its target for the ideal leverage when it will be able to achieve it?

[Santiago Parra, executive]

Okay. During the pandemic, we had a loss of around MXN 1 billion in free cash flow, so the target that we're looking for should be that MXN 1 billion as of today. And as Santiago and Luis mentioned during the call, we have sold around MXN [ 760 ] million. And also, we write around MXN 300 million in first phase of the capital increase. So we are almost there.

[Brad Lindenbaum, analyst]

And how about going forward? Will you be increasing the amount of assets that you want to sell? Or do you think that EBITDA will come up quickly enough? [indiscernible]

[Luis Eduardo Barrios Sánchez, executive]

Thank you for your question. This is Luis. Yes, definitely, the long-term shot for City Express is to go back to the closer to 3.5 to 4x EBITDA and -- EBITDA and debt balance. Based on that, what we are doing, obviously, the recovery is a function of liquidity. And at the time we are reaching these occupancy levels and the recovery starts to kick in, we feel more [Technical Difficulty] cash flow generation.

So this is a tricky question because on one side, yes, we would like to reach that level very soon. But on the other side, we don't want to fire sell assets or do placement of our shares at unreasonable price -- value. So we will have those two; We have the assets on one side and the shares that we have issued but not placed, a contingency -- as contingencies to poor liquidity situation.

Fortunately, as you see this quarter, the EBITDA got stronger and [Technical Difficulty] collection on certain assets. So we will handle that as it best fits the value generation for the shareholders and saying not trying to do forced sales [Technical Difficulty] as well as the values were [Technical Difficulty] and better cap rates than they were before, I mean last year.

So the precise number, we cannot state it, but we are aware of it, and we are playing it by -- as the recovery comes by and the offers also present. What we can tell, we have offers for some of our assets right now. We have about MXN 1,600 million [Technical Difficulty]. So as we mentioned, close to 700 are hotels finished or ready to go to streamline, what will be the investment that we have [Technical Difficulty] those 1,600, and that's something that we are also putting [Technical Difficulty] Because what we have assets, we have invested already in them, and they are very close to be deployed and start operating. I don't know if I confuse you more, or I give you some clarity.

[Operator]

[Operator Instructions]

This concludes our question-and-answer session. I would now like to turn the conference back over to Luis Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Well, thank you, everyone, again for attending today's call. I am confident of the future of our company, we're in a position to optimize the strategic decisions in the coming quarters. I want to reiterate how grateful I am to [Technical Difficulty] trust on us. We look forward to continue generating value for all our stakeholders. I will talk to you soon in our next earnings call. But in the meantime, please feel free to reach out if you have any questions or comments. We're always happy to talk to you. And thank you again.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.