Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2018-Q2

[Operator]

Good day, and welcome to the Hoteles City Express Second Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference call over to Ms. Michelle Loh from InspIR Group, Investor Relations. Ms. Loh, the floor is yours ma'am.

[Michelle Loh, executive]

Thank you, and good morning, everyone. Hoteles City Express second quarter 2018 results were released yesterday after the market closed. The company's earnings release can be found on the Hoteles website at www.cityexpress.com.

During this call, management's comments may include forward-looking statements, and 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, CEO of Hoteles City Express; Mr. Paul Smith, CFO; and Mr. Santiago Mayoral, Corporate Finance and Investor Relations Vice President. Mr. Barrios will now begin with some opening remarks, after which, Mr. Smith will present the company's financial results. We will then open for questions.

It's my pleasure now to turn the call over to Mr. Barrios.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Michelle. Good morning to everyone, and thank you for joining us today to discuss Hoteles City Express second quarter results.

We reported our performance indicators for the portfolio of hotels that benefits from an appropriate mix of geographic, industrial and market diversification, allowing us to continue to show results along the different economic corridors where we are present.

Mexico's economy continues to grow at a steady pace, with solid economic fundamentals, as attested by unemployment at a 12-year low, exports with record high numbers and inflation trending towards -- trending downwards. As such, we expect the country's positive economic outlook to remain on course and demand for high-quality rooms throughout the country to remain strong and thriving.

On the macro side, we remain confident that NAFTA negotiations will prove to be constructive for the region. The economic dynamics between Canada, Mexico and the U.S. remain importantly interlinked, and we do not anticipate the NAFTA deals being canceled.

Against this backdrop, Hoteles City Express had a solid second quarter, with revenue growing by more than 16% and adjusted EBITDA close to 17%.

Profitability also remained solid, with an adjusted EBITDA margin of 33.2%.

The growth in RevPAR was on top of the past 2 years' strong cumulative growth of 15%. We continue to see healthy and strong markets, mostly in all regions in Mexico and rest of LatAm.

Demand for rooms continues to drive RevPAR increases in practically all corridors, with the center part of Mexico, metropolitan markets and now international business leading the way. As a balance, performance on the small parts of our portfolio marginally softened during June, coming down from all-time record highs to more moderate levels, particularly in 6 established hotels located in the central-east part of the country.

Based on our commercial eagerness and our capacity to compete furiously in complex markets, we have already started to see a trend reversal and are confident we can see RevPAR growth of 100 to 200 basis points above inflation for the year. Regarding our development pipeline, we keep the pace to complete the remaining 14 new hotels planned for the year. With sufficient funding guaranteeing our growth, we remain on track to have more than 150 properties in operation by the end of 2018.

Finally, as you know, we decided in June of this year to reschedule the Fibra STAY IPO based on the macroeconomic and geopolitical environment. In hindsight, we believe that our decision to execute our strategy via leverage was the right one in terms of value to our shareholders. As we have expressed to the market, based on our new communication model, in which FSTAY figures will continue to be published quarterly. We can execute FSTAY transaction in a very agile way in case a window opens.

I would like now to hand the call to our CFO, Paul Smith, who will provide you with further details on our financial and operational performance. Paul?

[Paul Márquez, executive]

Thank you, Luis. Hello, everyone. My comments are based on our second quarter 2018 results, which were prepared under IFRS.

At the end of the second quarter, Hoteles City Express had a 139 hotels in operation, with close to 15,700 rooms across its portfolio, a 12% growth from the year before. Occupied room nights increased by 10.3% year-on-year to 841,000, while installed room nights rose by 11.9% year-on-year to slightly over 1.4 million. Our chain-wide occupancy rate registered a 59.5%, and ADR increased to 3.2%, which resulted in the quarter's RevPAR mix rising to MXN 576 or almost 2% year-on-year.

As Luis already mentioned, RevPAR growth moderation comes from the temporary effect of the also moderate occupancy levels of a small portion of the portfolio, particularly properties in the state of Puebla and properties in the Los Cabos and La Paz area. It is important to say that even though these properties are balancing our portfolio downwards, those were [ the old ones ]and are close to 50% occupancy level. If we were to exclude these properties, chain-wide RevPAR would have been almost to 5%, in line with our growth of RevPAR increases linked to inflation. That said, we anticipate a trend reversal in the portfolio as we advance through the second semester of the year. So far, we have not seen a deceleration in the RevPAR portfolio, given the broad geographic, industrial and business diversification we maintain.

In terms of our newest properties, we continue to see strong demand for our nonestablished hotels, with a 321-basis point increase in occupancy, which when paired with our 4.3% increase in ADR, resulted in a 10.8% increase in quarterly RevPAR. This bodes well for our plans to continue to ramp up inventory over the next 18 to 36 months.

A note on the result of our business segments. Both Hotel Operations and revenues from hotel administration continues to increase during the quarter, driven by increase in occupied room nights and ADR as well as our ongoing development activities. Additionally, as we have said previously, we will continue to disclose operating and financial results for the FSTAY portfolio of 42 hotels, all of which began operating before December 31, 2015, and demonstrate the characteristics of established properties.

FSTAY occupancy was 63.7% compared to the 55% of the non-FSTAY portfolio, which includes primarily in ramp-up, while ADR was 5.5%, and RevPAR was 22.4% higher than the non-FSTAY portfolio. Adjusted EBITDA also reflected strengthening at a 36.7% margin, which is significantly higher than that of the company.

ROIC of this portfolio posted a 12.3% on the second quarter of the year. These metrics continue to be a testament of the full potential of the company once hotels are stabilized.

With regards to our IFRS results. Our quarterly consolidated revenues came in at MXN 708 million, a 16.3% increase over the year before, reflecting our expanding portfolio. Notably, our administration and sales costs grew at a significantly lower rate as compared to revenues from hotel administrations and reinforcing the overall operating leverage we are achieving.

Operating income grew by 28.6% to MXN 142.8 million, while adjusted EBITDA rose by 16.6% to MXN 235.5 million. Both operating income and adjusted EBITDA continue to outpace revenue growth. EBITDA and adjusted EBITDA margins came in at 33.3% and 33.2%, respectively. Net income, meanwhile, rose to 56.3% to MXN 69 million at an income margin of 9.7%.

Turning to our balance sheet. We have just over MXN 1.5 billion in cash and equivalents at the end of the quarter. Based on the execution of our credit lines, securing the 2018 to 2020 pipeline, financial debt net interest payable increased 35.6% as compared to the end of 2017, and it was MXN 3.7 million (sic) [ MXN 3.7 billion ] at the end of the quarter. Most of this amount is long-term and in Mexican pesos, with MXN 108 million due within the next 12 months and less than MXN 250 million in other currencies.

With this said, our balance sheet remains strong, with a total debt-to-assets metric of less than 30%, a very conservative metric, especially considering that assets on the balance sheet are stayed at the investment cost.

Finally, regarding the FSTAY transaction, we are diligently moving forward with our plans to make the vehicle have a larger scale. And as Luis mentioned, we are ready to execute the transaction at the moment the market window opens.

Thank you for your attention. Operator, we can start Q&A.

[Operator]

[Operator Instructions] The first question we have will come from Marimar Torreblanca of UBS.

[Marimar Torreblanca, analyst]

My question is if you could give us a bit more color on what's happened in the 6 hotels that's suffered a bit on occupancy during the quarter? And if these factors that's caused that decline or pressure, are very unique to the quarter? Or is it something that we could see happening again over the coming quarters?

[Paul Márquez, executive]

Marimar, this is Paul. Thank you very much for your question. We believe that the effect is temporary. Let me explain you why. The first thing to remember is that City Express is a portfolio of economic corridors. These economic corridors correlate within each other and basically reflect a percentage of activities that grow faster than the economy. When one of these corridors slow down, typically, what we have is that another corridor picks up and the net balance is positive. What's particularly temporary about the second quarter is that mostly in the last 2 weeks of June, we saw a slowdown of business travel, primarily derived from the Mexican election occurring on the first days of July and supported also by the World Cup. What we're seeing is that we had a strong pickup on the days after the election, and we have a very strong closing of the month of July. This is why we believe the effects will be temporary. Now to address more in particular what happened. Remember that the hotels that were in the Baja California peninsula were impacted by last year's -- by the effects of last year's Lidia storm, and we basically had to remodel the Los Cabos property. As a result of that particular climate event, there was a slowdown in the airline traffic going to Los Cabos and going to the peninsula, derived from that. But again, we're seeing a pickup of strong numbers going forward. And in the case of Puebla, what's happening in Puebla is that given the total model, in particular of that governor's state election, and also some softness on the demand side, we also saw a decline from record levels in occupancy. But again, the occupancy was trending at almost 60%, which is still comparatively really good metrics.

[Marimar Torreblanca, analyst]

Okay. And so just a pretty quick follow up. What would you think is a fair level of RevPAR growth to assume for the rest of the year?

[Paul Márquez, executive]

What we're looking is at increases of RevPAR between 100 to 200 basis points above inflation.

[Operator]

And next we have Luis Adaime of Newfoundland Capital Management.

[Luis Felipe Adaime, analyst]

I was wondering concerning the established hotels difference to the less mature, more recent hotels, the improvement in margin, it's happening, but maybe it's slightly lower. Was it due to these nonrecurring impacts that you mentioned? And if you could also comment please on what are you seeing -- or an update on more current figures in terms of CapEx per room. I know you guys don't like the metric that much, but just so that we can compare with peers. And maybe some idea of operational leverage that you're having. Now you have -- now you're going to get close to 150 hotels pretty soon. What sort of margin should we expect going forward as you reap these operational leverage advantages?

[Paul Márquez, executive]

Thank you very much, Luis, for your question. This, again, is Paul Smith. On the first part of your question, if you look at the performance metric for the FSTAY portfolio, which typically resembles an established portfolio. Bear in mind 2 things, this portfolio was comprised of hotels that opened -- that were open at least by December 31, 2015. This means that they will be fully matured by December 31, 2018. If you look already, we are 200 basis points above where we were at the close of last year's reported numbers. This being said, what we're aiming with that portfolio is that it will reach 40% EBITDA margins by the end of the year, when it will be fully stabilized. So this is basically trending accordingly to everything we have said about the performance of the established portfolio. Actually, the FSTAY portfolio, which as you can remember, there was no cherry picking when we formed it, it was basically every single property that was open by December 31, 2015. That portfolio is actually [ turning ] exactly like we would expect and we have disclosed that an established portfolio should behave. And a 37% EBITDA margin, I see no problem in reaching the 40% by the end of the year. On the second part of the question, we have also disclosed that our key is basically costing around 900k. And bear in mind that this 900k is being heavily influenced by our new pipeline, which is mostly focused on more denser market areas which typically come at a higher cost of land. But then we also get higher ADRs because of the location and the density. And this is also comprised mostly of the City Express Plus format, which also has more amenities than the typical City Express hotel room.

[Luis Felipe Adaime, analyst]

Makes sense. And out of the MXN 839 million that you had of CapEx so far this year and the MXN 477 million last quarter, how much of that would be expansion? Is it almost all expansion? Or just an idea of -- or maybe a better question. What would be -- if you stopped growing altogether this year or right now, what would be sort of the maintenance CapEx level that you see nowadays?

[Paul Márquez, executive]

So the component is about 93% is expansion and the remaining is renovation CapEx. Bear in mind that we have 2 metrics for that. We have the ordinary maintenance expense that goes through the numbers, which is basically [ up ] 4% on the sales, and that's already in expenses. And then we also have a CapEx reserve that we also remove from our AFFO. And that CapEx reserve is worth 4.5% on average for a property.

[Operator]

[Operator Instructions] Next we have Froylan Mendez of JPMorgan.

[Froylan Mendez, analyst]

Regarding your 2020 goal, what's the mix between owned, co-owned and franchise hotels that you're expecting?

[Paul Márquez, executive]

Thank you very much for your question, Froylan. It's basically trending similar to what we have in the current portfolio. So 25% would be franchise and management contracts, then another 25% will be co-investors and the remaining is owned hotel.

[Froylan Mendez, analyst]

And a little bit more...

[Paul Márquez, executive]

And by the way, Froylan, it's fully disclosed on the pipeline.

[Froylan Mendez, analyst]

Great, great. Sorry, if I missed that. A little bit more longer-term question. Could you be looking to diversify into another asset classes? I mean, we have seen peers -- your peers going to more resort, more higher or more tourism-driven assets. Is that part of your mind right now?

[Paul Márquez, executive]

Well, first of all, we don't regard the Fibra as peers to us. We have a very strong operating company, and it's a different model. But then to answer your question more precisely, no, we're solely focused on the largest component of the travel GDP, which is basically the domestic traveler. And within that, the main reason for travel is business. And that's our core segment and we attack it relentlessly.

[Luis Eduardo Barrios Sánchez, executive]

This is Luis, Froylan. We have -- even though -- and the portfolio is the City Express Plus, the City Express Junior and the City Express traditional geared -- and City Express Suites, geared mostly for the business traveler, which is the mass market in Mexico. Yes, we have -- with City Centro, there is a opportunity there to go into the business-leisure type of customer that comes to -- for business purposes, but as well takes the chance to spend a couple of days leisure in the country. City Centro is geared towards that. And the 2 properties that we have, we're looking that the percentage of foreign visitors into our hotels climbs all the way to 50% of it. In the state of Oaxaca, it's 55%, and in the Mexico City area, it's about 45% to 50%. So in essence, yes, there is an inclination, a natural inclination, as to capture more leisure traveler into it. Obviously, in the overall mix, it's still small. And -- however, you will get to see the growth of the City Express -- City Centro chain in the next couple of months. We have -- we are in the process of finishing the City Centro San Luis Potosí. And next year, you'll get -- we just purchased that property in this downtown Puebla for -- mostly for -- with that effort -- with that view in mind. So it's a small effort into the leisure traveler. But yes, there is some efforts coming into that space.

[Froylan Mendez, analyst]

Is there a sense of the size of City Centro share within your growth plans in this 2020 plan?

[Paul Márquez, executive]

Well, let me tell you, it's -- I would say that this is a lifestyle chain and we have -- currently, we have 40 rooms -- 44 rooms in Mexico City. We are -- we have 50 rooms operating in Oaxaca, by the end of the year, it will be 100. So now you have 150 rooms. The San Luis Potosí property, it's in the range of 100 and 100 more for Puebla. So you are talking about really close to 400 rooms -- 400 to 500 rooms in the coming year. So it's still a small share of the 17,000 rooms that we'll be operating by the end of the year. We will continue to grow that at the certain pace. And remember that getting properties in crowded areas, historic locations and special metropolitan areas like the Condesa or the Roma are quite difficult. But that is an effort that we have embarked in, and we will continue to pursue. This will definitely provide us the experience even though we have it from our previous lives of operating huge resort hotels in the resort areas. So we are -- what we are really doing is using all that experience to focus on the City Centro properties. But again, everything in due proportion of the size of the market and the concentration of the chain into more -- into the business and mass market.

[Operator]

[Operator Instructions] Next we have Armando Rodriguez of Signum Research.

[Armando Rodriguez, analyst]

Two questions. And the first one, you mentioned that your RevPAR increase is maybe in the range between 100 and 200 basis points above inflation. My question here is if you have a number -- inflation number in mind or a range where you can achieve this goal? This is my first question. And my second question, it's related to the adjusted EBITDA. I think it's the first time that the adjusted EBITDA, it's a little bit lower than normal EBITDA. And my question here is, is it explained mainly due by a reimbursement, for example, of nonrecurring expenses or something? That's my questions.

[Paul Márquez, executive]

Thank you very much for your questions, Armando. On the first one, we basically abide by the market consensus information on inflation. So that's the same -- those are the same numbers we have forecasted. On the second question, the adjusted EBITDA, and you're absolutely right, there was a reimbursement, a nonrecurring reimbursement. Basically, what we had was money coming from the openings of last year being reimbursed and basically, reversing the number temporarily only for the quarter. But this was a onetime event. We don't expect to see that going forward.

[Operator]

And next we have a follow-up from Luis Adaime of Newfoundland Capital Management.

[Luis Felipe Adaime, analyst]

Yes, just another question. I know we've discussed this in the past, but about the potential market size. When you guys IPO-ed, you were at around 9,000 rooms, you are now at 15,700. What's a reasonable number do you think for 2020, '21, maybe in the next 3 or 4 years, especially considering all the financing line that you got? That's my first question. And then I have another one.

[Paul Márquez, executive]

Sure. The -- what we have -- and just to remember, about 75% of the installed hotel room nights within our segment are basically independent hotels, not chain hotels. Secondly, what we have is about a 2% of the entire market and about 5% of market share of our segment. What we see is that we have a very strong opportunity. We continue capturing that opportunity and basically, attacking the market with a standardized, consistent, experience-driven product that's basically really appreciated, again, by the most significant component of the travel GDP in the country, which is basically business travel. With that in mind, we are still expecting to maintain our pipeline. So going forward, we are still looking to having between 18 to 24 properties in the next 2 years.

[Luis Felipe Adaime, analyst]

18 to 22 (sic) [ 24 ] properties. And in terms of room equivalents, I know -- maybe an idea in that sense? Are these going to be smaller hotels, bigger hotels?

[Paul Márquez, executive]

No, no, no. So the average room size will be 120, more or less.

[Luis Felipe Adaime, analyst]

That's my question. Okay, perfect. And then the second question I had is, considering the spin-off of the -- potential spin-off of FIBRA STAY. Let's say you spun off the whole real estate area, what would the operator -- considering that it owns the brand, look like as a company in terms of EBITDA margins or return on invested capital, because it will be completely asset-light, maybe an idea of those numbers. I'm sure you have them. I don't know if you can share with us, but...

[Paul Márquez, executive]

No, absolutely. 2 things to consider. When we published the restructuring memorandum on January 22, we included a section on the opco. And we basically mentioned 2 things. Our opco will be very similar to other opcos in the market, which typically have margins of around 40% to 44%. I guess, with that respect, we will be very similar to that. Bear in mind that currently, the platform in opco can run up to 220 properties. We only have a 139. So there's still a huge SG&A leverage that we can take advantage from, providing new properties there. The only difference that you will see vis-a-vis other pure opcos is that we will have a developing company within that opco. That development company has been very successful at securing very low cost per key ratios and very successful at training a concept. To give you an idea, when you review the first hotel we opened in terms of energy efficiency, it turns out that the hotel was certified with a Gold LEED like 15 years after it was opened, when there wasn't even those certifications available. So that value that is being embedded to the asset, it's some of the attributes that our dev co bring to the table. With that in mind, the dev co will also have a transparent development profit once that development profit is not eliminated from our numbers. And you will see it captured also at the opco level.

[Luis Felipe Adaime, analyst]

And the opco-level EBITDA -- I'll have a look at the document, but if you could share with us. I don't know if you have that number ready?

[Paul Márquez, executive]

Absolutely. Actually, if you look at Page 7 from the results report, we have the margin published at 27.8%. Again bear in mind -- I'm sorry the, 25.9%. Bear in mind that this is a platform that can run up to 220 hotels. So expect the EBITDA leverage. The other issue to also acknowledge is that we have about 30% of that portfolio is [ unestablished ]. If this is a fee-based business, once you establish a property, basically, the ADR and the revenues grow, and so does the fee grow as well.

[Operator]

We're showing no further questions at this time. We will conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Luis Eduardo Barrios for any closing remarks. Sir?

[Luis Eduardo Barrios Sánchez, executive]

Thank you very much for spending this time with us today. As you know, we have all the information already in our website. And all the Financial and Investor Relations team is willing to answer and receive any questions in the days to come. Thank you so much, and have a good day.

[Operator]

And we thank you, sir, and to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time, we -- you may disconnect your lines. Again, we thank you all for joining today's presentation. Take care, and have a great day.