Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, and welcome to the Hoteles City Express' Second Quarter 2021 Earnings Conference Call. Thank you for joining us today. Please note today's event is being recorded.

For opening remarks and introductions, I would like to turn the call over to Héctor Vazquez, Investor Relations Director from Hoteles City Express. Please go ahead.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express second quarter 2021 results were released yesterday after market closed. They are available on Hoteles City Express Investor Relations website. We want to remind you that during this call, the management's comments may include forward-looking statements. We ask that you please refer to the legal disclaimer in the quarterly report for guidance on this matter.

Joining us on today's call are Mr. Luis Barrios, our CEO; Mr. Paul Smith, our CFO; and Mr. Santiago Parra, our Corporate Finance Director. Luis will begin with some opening remarks, followed by Paul, who will present the company's financial results. We'll 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, Héctor. Good morning, everyone, and thank you for joining us today to discuss Hoteles City Express' second quarter results for 2021. We hope you and your families are healthy and safe.

As the year has progressed, we have witnessed our portfolio's resilience. Results continue to gradually improve only on a sequential basis, but also even compared to 2019 on certain metrics. The recovery of the hotel industry can be attributed to the elimination of both most activity restrictions from the authorities and resorting greater mobility indices. This is also supported by improvements in vaccination rates and lower hospitalization levels. All of this combined gives us a reasonable certainty on where we stand.

We will continue analyzing the property's market needs, industry by industry and segment by segment, as we have been doing until we have more certainty of the COVID-19 evolution. As a result of this recovery so far, we saw improving trends on the occupancy rate, which increased from 35.4% in April to 40.1% in June, with some days registering rates above 50% occupancy.

We are also seeing hotel activity in holiday periods and weekends picking up, in part, thanks to the strength of our direct distribution channels and the recently launched advertising campaigns, such as Descubre City and City Expressions, where we have been able to showcase the attributes of the different locations where we operate and the convenience for family travel.

On pricing, we continue to generate client loyalty to position our brand as the best value for price brand in each location where we operate. Because of it, the company has been able to operate with similar ADRs to 2019 and even seeing a 1% higher ADR in June 2021 versus June 2019.

Additionally, on the profitability front, I am happy to say that flexibility of our business model structure, coupled with the commercial efforts achieved during the last year, has led us to deliver a high operating leverage, where the 8% improvement in occupancy, coupled with our pricing strategy, allowed us to post an EBITDA that is 9.2x higher than the previous quarter. We expect that as we continue to bounce back from the pandemic-led drop, we should see this operating leverage at work.

Talking about regions. During the second quarter, the Northeast region continued to be very strong due to the reactivation of key corporate accounts in the mass consumer and the construction industry. The markets in this region, where the positive trends are most visible are Tijuana, Mexicali, Ensenada and Rosarito. The mining and agricultural sectors are starting to come back as well.

While in the Southeast region, we are also seeing strong demand indicators surpassing our internal budgets and operating with occupancy near 90% of the 2019 levels. This has been driven by the reactivation of the energy, financial and logistics sectors.

We continue to focus on preserving cash and protecting our balance sheet as we have throughout the past 18 months. As we continue to navigate these uncertain times, our focus is on having enough flexibility to react should another negative shock arise. Here, I would like to emphasize that thanks to the refinancing of 3 credit lines, which amounted to MXN 3.8 billion, as we recently announced, we were able to replaced MXN 1.4 billion of short-term debt with a long-term facility, extending principal payments until 2026. We also negotiated an additional 12-month grace period and aligned the credit conditions with our current budget and expected recovery path.

Furthermore, after exploring all possible alternatives included -- including private debt facilities and accelerated asset sales, we announced our intention to raise capital through a share subscription program of up to MXN 1.3 billion. We strongly believe this avenue will give our current investors the higher return on investments over time. With this program, we are positioning our company to withstand whatever comes throughout the recovery phase, while at the same time, preparing it to capture other opportunities throughout our asset-light strategy in the future.

We believe that the latter should give us stronger levels of liquidity to avoid unexpected situations and will change our short-term mindset to a long-term view. It is worth mentioning that we already have 4 properties ready to open during the next quarters if the market bursts. Even with these developments, improving our balance sheet, we remain open to the possibility of an IPO of the Fibra STAY vehicle. We should also be able to offer investors a larger vehicle with a stronger balance sheet, which should allow us to realize the true value of our assets.

We will continue to work on asset sales and focus our capital allocation efforts on deleveraging the balance sheet in an orderly fashion. This effectively means delaying our growth pipeline under the company net debt-to-EBITDA leverage ratio falls below 3.5x. We are convinced that by achieving our deleveraging goals first, we will be able to accelerate our growth plans later on.

Before I turn the call to Paul, I would like to turn the focus towards our continuous commitment with sustainability. We recently published our annual sustainability report, which includes SASB's indicators for the second year in a row and our first TCFD assessment ever. I encourage to review it as it describes how we think about ESG and why we think it matters. And as a testament of it during 2020, which was arguably one of the most difficult years in our history, we made our biggest donation in kind by offering room nights to the incredible doctors and nurses that have been in the front line of the COVID-19 pandemic. We will continue to remain sustainability at the core of our business because we truly believe it makes us a better and more resilient company.

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

Paul, please proceed.

[Paul Márquez, executive]

Thank you, Luis. My remarks here are based on Hoteles City Express' second quarter 2021 financial results, which were prepared under IFRS.

Our portfolio closed the quarter with 153 properties in total. This compares to 152 hotels as of the second quarter of 2020. Of the 153 hotels in operation at the end of the quarter, 134 were considered established properties, 12 more than the second quarter of 2020. We closed the quarter with 17,442 rooms, a 0.9% increase year-on-year.

At the Chain level, our ADR increased 11.5% year-on-year to MXN 999 and the occupancy rate increased 26 percentage points to 38% over the same period. With both impacts combined, RevPAR increased 254.3% year-on-year, closing the quarter at MXN 380. On a sequential basis, ADR increased 3.8% and RevPAR increased 31.4%. These numbers continue to be encouraging and representative of the continued sequential improvement in our portfolio and the market.

Revenues totaled MXN 519 million for the quarter. This implies a 252.3% year-on-year increase and a 32.8% quarter-on-quarter increase. Total cost for the quarter increased 30.1% year-on-year to MXN 539.1 million. The increase is mainly due to the increase in occupancy. However, costs increased less than revenues, thanks to savings from the negotiations with our employees and suppliers, and the continued work on cost containment and non-priority expenses control.

That brings us to our second quarter adjusted EBITDA, which was MXN 98.5 million. This is 9.2x the adjusted EBITDA we delivered in the first quarter, showing how relevant our operating leverage will be over the coming quarters.

Comprehensive financing costs decreased 55.5% year-on-year during the quarter to MXN 112.7 million. Our financial liabilities decreased 3.2% quarter-on-quarter to MXN 6.2 billion.

Cash and cash equivalents also decreased to MXN 763.3 million, keeping net debt near last quarter's level at MXN [ 5.24 ] billion. Our net loss for the quarter was MXN 135 million, a significant improvement compared to the MXN 522.7 million quarter net loss from the second quarter of 2020, and MXN 199 million loss in the first quarter of '21.

In summary, this quarter showed, again, an important sequential improvement in our operations, which now starts to show the potential of our operating leverage as occupancy ramps up. We continue to be optimistic about 2021 as we expect further demand improvements in the coming quarters. We will remain very disciplined with our balance sheet and capital allocation strategies.

Thank you for your attention. Operator, please begin the Q&A portion of our call.

[Operator]

[Operator Instructions] And the first question comes from Javier Gayol with GBM.

[Javier Gayol Zabalgoitia, analyst]

Congratulations to all of you on improving the capital structure of the company. I have a quick question, and it's -- you mentioned that the capital allocation would be to prioritize the deleveraging of the company, and that makes sense.

But I wanted to understand if you could give us some color in terms of potential growth from noncapital-intensive markets like the operating side of the business? Are you seeing opportunities in the current environment? Is that something that we could expect going forward?

[Paul Márquez, executive]

Thank you very much for your question, Javier. This is Paul Smith. First of all, one of the things that were highlighted by the current situation and the current environment is the importance of distribution. In that sense, we are seeing significant opportunities within our business segment, to add on more properties to our portfolio in an asset-light manner.

Most of these opportunities come, Javier, both from the recognition of our brand in the market and also from the power of our distribution network. As we have announced in the past, we have seen an increase in our direct channels, which turned out to be a highly efficient way to reach customers. Secondly, our biosafety standards are widely recognized by the industry as one of the best. And also, more importantly, recognized by the guests as something very relevant. In that sense, we are seeing some opportunities to add on, as I said before, more properties into our portfolio, particularly within our segment.

[Operator]

The next question comes from Jorel Guilloty with Morgan Stanley.

Pardon me, Jorel. This is the operator. It looks like your line is cutting in and out there. I'm not sure if it's a connection issue.

[Paul Márquez, executive]

I think Jorel is having some issues with communication. Why don't we jump over the next -- to the next in the queue, and then we can return to Jorel.

[Operator]

Sounds good. The next question comes from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

So a follow up on the previous question. Is there a clear timing and size of these asset-light opportunity, Paul, that you can share with us? And then could you expand on how the potential capital raising helps the issuance of Fibra STAY? And finally, my third question is, can you explain how evolved in the process of land sales? And which operating assets are you considering selling? Or maybe the size of the operating assets that you could be considering selling?

[Paul Márquez, executive]

Perfect. So on the first question, we have elaborated a list of about 60 properties. One of the operators within our segment has announced that they're not going to focus their energy within our particular segment of business, and a lot of those properties that I just mentioned are within that brand, in particular. So we will be looking at that and ramping up the efforts.

As I said, we believe that we can add on a significant value to those properties and we'll be aggressively pursuing those opportunities as they arise. So as I said, I wish I could give you more color. We're just starting with those negotiations. And hopefully, we can bring some objectives by the end of the third quarter.

Now on the asset sales, the -- I'm sorry, before I jump to the third question, let me answer the second one. Obviously, one of the things that we wanted to ensure with the refinancing was that we leveraged on the structure of that vehicle that we use to synthetically replicate Fibra structure. So in that sense, the only thing we did is we actually added more properties into that 42-hotel initial portfolio.

We've replicated a lot of the clauses that we already had embedded within that financing vehicle. And more importantly, we retained the option to launch the REIT to the market. We believe, Froylan, that given the current, I would say, situation with liquidity within the segment, that there should be some consolidation opportunities arising. And we also believe that our vehicle will be the primary vehicle to do so. And the main reason for that is that there's no misalignment between the objectives of our vehicle and the shareholders that would join it. And in that sense, it's a very transparent vehicle. It has no fees. There will be no troubles with the shareholders coming from asymmetric return and so on and so forth. And a lot of the complaints that we have heard from the market could be fixed with this vehicle. So as soon as -- obviously, as soon as we have something to report, we will very happily communicate that to the market.

And on the third question, we are currently negotiating -- it hasn't been signed, but we have an advanced negotiation with an operating asset. The transaction should be in the amount of about MXN 240 million. And hopefully, we will conclude that before the end of the current quarter, third quarter. And so we're working on that. That's on the operating asset front.

On the asset-light front, we are continuing negotiations. We're trying -- as we mentioned in the report, we're trying to do a turnkey solution, given that it's not only land that we're selling, we already have all the permits and we have all the projects fully authorized to start groundbreaking so we can do this very efficiently. And we believe there's value added in not just selling the land, but actually selling the land with all the permit requirements for the development. We are negotiating -- this one is a little bit behind, I would say, in terms of the negotiation, how it's going, but we're optimistic that we'll be able to close it, hopefully, before the end of the year.

Maybe we can return to Jorel. I don't know if he's still on the line?

[Operator]

He is still on the line. Just give me one moment. I will open up his line.

[Paul Márquez, executive]

Looks like you're breaking up again, Jorel.

[Wilfredo Guilloty, analyst]

Is that better?

[Paul Márquez, executive]

Yes.

[Wilfredo Guilloty, analyst]

Is that better?

[Paul Márquez, executive]

Yes. Yes, Jorel.

[Wilfredo Guilloty, analyst]

okay. So 2 quick questions. One -- cost reductions. Congratulations on...

[Paul Márquez, executive]

I'm sorry, Jorel. You need to break up. I think we lost him operator.

[Operator]

[Operator Instructions] It looks like we have a question from Mario Epelbaum with First New York.

[Unknown Analyst]

Hello, gentlemen. I was wondering if you could give us more color on the occupancy trends that you expect over the -- whatever you can over this quarter and next quarter in the last call or the last meeting that we had were -- I guess, you did talk a little bit about how the occupancy improved through the quarter? But are we -- are you expecting new restrictions or not? Are some of the main cities like Mexico City have lower occupancies are changing. If you could just give us more color or what your expectations are on that is?

[Paul Márquez, executive]

Absolutely, Mario. This is Paul Smith again. Thank you very much for your questions. So obviously, we are tracking mobility very closely, and we're looking at the current situation also very closely.

The portfolio -- so if you were to compare, I would say, the portfolios that are further advanced in terms of mobility. You would see that in the second quarter, those portfolios or those regions, in particular, I would say, the Northwest and the Southeast, were trending at near 50% occupancy. So that shows you the advancement of occupancy in those portfolios.

The urban portfolios were more closely to 30% occupancy rate. So they were lagging about 20 percentage points from, I would say, the best or the most advanced in terms of restrictions to the most restricted ones. We have -- what we have seen though, even though in the urban portfolios is that even though they're lagging the speed of recovery is faster than the one we observed before.

So I would say that the only concern we have is whether or not there's going to be new restrictions coming from the third wave. Our expectation and what we have seen is that probably those restrictions won't be as aggressive as the ones we saw probably in the first quarter of the year, mainly given that it's not necessarily -- even though there's an increase in cases for contagion, there's not necessarily a correlation with hospitalizations or with cases being aggravated and resulting in death. So we believe that the government will take, I would say, a more conservative stance. Probably what they will focus on is accelerating the vaccination of the population so that we can get quicker to a situation that is going to be more manageable.

If we were -- absent from -- I would say, absent from, obviously, the volatility in the current environment, we continue to see trending lines of improvement in occupancy. If that line was supposed to be a straight line, we should be nearing 50% occupancies by the third quarter and probably reaching some more normalization by the end of the year. Obviously, that's subject to whether or not, as I said before, nothing else happened. So that's how we view the performance of the portfolio, Mario. I don't know if I answered your question.

[Unknown Analyst]

I have a second question and then if you could. So I didn't fully understand -- can you hear me?

[Paul Márquez, executive]

Perfect. Perfectly. Yes.

[Unknown Analyst]

I didn't fully understand rationale for why doing the equity offering now helps you play the Fibra. If you could elaborate that -- on that? But together with that, I understand that you're almost close to breakeven now. You renegotiated your debt so that you don't have payments. Why do the equity offering now at this price is the likelihood of normalization over the next 3 to 6 months is very high and likely to have a better stock price into it? So as you said, and I heard carefully what you said, and I believe that you believe it, is that you think it's the best return to shareholders to do it now? So if you could just elaborate a little more on what your thinking on that?

[Paul Márquez, executive]

Yes. Thank you for that second follow-up. So first on the Fibra. The Fibra is not a new strategy. We have that since, I would say, February of 2018. We haven't found the capital markets to execute on the strategy. So that -- it remains a focus. We believe that in order to unlock the value that is currently trapped in the structure we currently have, you need to do that transaction. That will essentially revalue our assets at market value on one hand and on the second one, it will allow the market to value us not only, I would say, an asset-heavy player, but also consider the value that we have with our operator, which is the asset-light portion of the business currently are not valued by the market.

So that remains a strategic objective. As I said, we're committed to pursuing alternatives. We restructured the vehicles so that we could incorporate that into our thinking and that's with that. Now moving to the second part of your question.

[Unknown Analyst]

No, Paul. One second. But you said the question was why does doing the equity offerings help you execute Fibra, which is what I believe you said? And correct me if I misunderstood you.

[Paul Márquez, executive]

Yes, you misunderstood me then.

[Unknown Analyst]

Okay. Okay. Apologies for that. Okay. So on to the second part.

[Paul Márquez, executive]

Okay. Now the second part, the -- even though we did refinance the debt and we see an improving trend line with the operations, given the size of the debt and given the commitments that we have, even with that vehicle, the coverage for the performance of the payment of that debt is still very tight. If something else happens, we would not have the flexibility to respond to that, and we didn't want to, I would say, jeopardize the future of the enterprise by having a thin illiquid position at that moment.

Now we have been pursuing other alternatives, and we have been pursuing those alternatives, I would say, for more than a year. Unfortunately, those other alternatives are mostly focused on asset recycling. And the markets for asset recycling in Mexico, the real estate, is simply not there. The spreads we have seen in the market between the bid and the ask are still very wide. Actually, there was a transaction during the quarter that we -- in my sector that we saw being published, and the discount offered was very significant.

We, obviously, tried to do something of the like, but we definitely believe that we would destroy more value than not by simply selling assets at a fire sale price and not necessarily considering the long-term implications of that. So to avoid that, what we did, Mario, is if we were going to do a structure that involves an equity right, we wanted to ensure that our current shareholders got the best deal that we could offer. And we wanted to give them -- put in right in front in center of offering that opportunity first to them and then if we're not able to execute them with them, then move to third-party interest and again, preserve the long-term interest of the company, not just, I would say, for the quarter, but actually ensure that we will recover and that we will recover in a position of strength not one in which we would be, I would say, very stressed by the daily occupancies and the daily ADRs and whether or not the third wave stopped or not the recovery of the country.

[Operator]

[Operator Instructions] I saw Jorel disconnect and reconnect, so we're going to see if he has his connection down. Jorel, your line is now open.

[Wilfredo Guilloty, analyst]

Can you hear me? Yes, third time's a charm. Thanks for being here. So look 2 quick questions. I just want to touch a bit upon the leveraging strategy. And I just wanted to get a sense -- you mentioned that the gas spreads are pretty wide. But if you can provide some color, that gave us an idea of when or what would it take, you think, for -- we're hopeful for the bid spread to be within a space that you think is attractive to you? So like what do you see at the ? What do you see in terms of timing? Do you think that this is something that could happen closer to the second half of the year?

Just to get a sense of what we should expect or what you're sort of expecting there? And then the second question is around the cost. So you did pretty -- we saw strength in margins delivered by a good cost control. But I was just wondering how sticky is that cost control? I mean is there an expectation that the deals that you got with your suppliers and the deals that you got with your workers those are going to burn off, and then we'll see another margin decline? Or is this going to be sticky and we can expect to see even better margins going forward when things normalize? Those are my 2 questions.

[Paul Márquez, executive]

Thank you very much for your questions, Jorel. Very glad that you were able to place it.

So on the first one, to give you some color. We got offers ranging from, I would say, 50% to 60% discount over investment costs. Those ranges were obviously -- as I said, we use those assets as collateral for the refinancing. And when you use them for that, we actually value them at market value. You typically get about a 40% revaluation from investment cost.

So if you can compare the 2 of them, you will see the huge gap and the utility of using them as collateral as opposed to simply selling them and not necessarily fixing the situation. We didn't get an offer for our portfolio. It was more about pick and choose, which would also not necessarily solve our situation if we were only, I would say, selling the jewels of the crown. And then after you did that, you wind up just with a lesser asset and not necessarily solving your situation either.

The asset that I mentioned that were closed or that we're almost into a binding type of letter signing situation is actually a co-investment. And the parties on the other side actually are somewhat related to the asset owner. And because of that, we are nearing to a price that actually makes more sense. So that's why we're -- actually, I believe that's why we're able to materialize the transaction without having to resort to a significant discount.

Now to the second part of your question. If you remember during the first quarter call, I mentioned that we did a significant improvement in the processes of the company, and that allowed us to reduce our headcount or to refocus that headcount into more value-added activities.

So regarding stickiness and cost control, one of the things that we actually look favorably from the situation is that it made us rethink the way we do business, and it made us rethink what we could optimize and what we could improve and what we would more efficiently. And most of the advantages in the margins you saw are actually permanent coming from mostly this product improvement and this I would say, reenergized focus on productivity, asset by asset. So my expectation is that we will continue to see that. Just as I announced in the first quarter call, this was not done simply by negotiating better with suppliers, it has to do more with the core processes of the company.

[Wilfredo Guilloty, analyst]

And on a normalized basis, how many more basis points or percentage points do you think that can add to margins going forward?

[Paul Márquez, executive]

Well, if you remember, we said that over the -- cost structure actually had suffered about a 10% decrease from what it was before. So if my stabilized EBITDA margin for our property was around 40% on average, you should expect to see that 4% increase in the margins at that level. So it will grow from 40% to 44%. Obviously, you have to measure this on an asset-by-asset basis, but that's how I would view it.

[Operator]

We have no further questions. So 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]

Thank you. I am optimistic about what lies ahead for us in the recovery -- of the recovery in the hotel industry continues and mobility increases. I am convinced that by strengthening our capital structure today, we will be able to generate more value for all our stakeholders in the coming years. This will be done by having liquidity and assuring the solvency of the company and be able to implement all the operating and marketing opportunities as well we will have time not to rush and time our sale of assets in a better real estate market.

The second half of the year is sure to bring new -- about new challenges, but I feel confident that our corporate culture and business model will allow us to swiftly deal with them. Once again, I'm grateful to all our stakeholders who have supported us throughout a long and complicated period.

We look forward to working alongside all of you and deliver the value only City can offer. We look forward to talking to you in our next earnings call, and thanks for your interest in our company. As usual, please free to reach out if you have any questions or comments. We are always happy to hear from you. Thank you.

[Operator]

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