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Edited Transcript of FIHO12.MX earnings conference call or presentation 25-Oct-19 5:00pm GMT

Q3 2019 Concentradora Fibra Hotelera Mexicana SA de CV Earnings Call

Cuajimalpa Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Concentradora Fibra Hotelera Mexicana SA de CV earnings conference call or presentation Friday, October 25, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edouard Boudrant

FibraHotel - CFO of Fibrahotelera S.C.

* Eduardo López;General Manager

* Simón Galante Zaga;Chief Executive Officer

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Conference Call Participants

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* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Andrea Lara Cid Antúnez

Signum Research - Junior Stock Market Analyst

* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division - Analyst

* Francisco Chávez Martínez

BBVA Research SA - Research Analyst

* Sheila Kathleen McGrath

Evercore ISI Institutional Equities, Research Division - Senior MD

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Presentation

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Operator [1]

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Good morning. My name is Hector, and I will be your conference operator today. At this time, I would like to welcome everyone to the FibraHotel's 2019 Third Quarter Earnings Conference Call. FibraHotel issued its quarterly report on Thursday. If you did not receive a copy via email, you can find it on the company's website at www.fibrahotel.com or e-mail gbravo@fibrahotel.com.

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. All figures included herein were prepared in accordance with International Financial Reporting Standards and are stated in nominal Mexican pesos, unless otherwise noted.

Joining us from FibraHotel are Mr. Simón Galante, CEO; Mr. Eduardo López, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO.

With that, I will turn the call over to Mr. Simón Galante. Sir, please begin.

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Simón Galante Zaga;Chief Executive Officer, [2]

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Thank you, and good morning, everyone. I am going to begin today's call by providing an overview of the third quarter of 2019 results, and we will then turn over the call to Edouard Boudrant, our CFO, who will discuss our financial results in more detail, and we will then open the call for questions and answers.

I will like to start by stating that the results and distribution for this quarter were below what we expected of our portfolio. We will do our best effort to consistently improve these results in context of a difficult market.

In the third quarter of 2019, and as we have throughout 2019, hotel demand continues to be weak and the market continues to be highly competitive to maintain market shares. On the business side, RevPAR of the comparable portfolio of 81 hotels decreased 0.5% year-on-year driven by an increase in ADR of 1% and an increase in occupancy of 98 basis points. Even as hotel demand has decreased, our portfolio has been able to maintain a relatively flat RevPAR during the year versus 2018.

According to STR, overall, the hotel market in Mexico had a RevPAR decrease of 5.6% for the first 9 months of 2019 versus the same period of 2018. There are a few bright spots, such as the Hermosa and (inaudible) corridor of the north, and the full-service segment in Monterrey. Though most of the regions have suffered important year-on-year decreases, such as Mexico City down 4.6%, Guadalajara 7.4% and the (inaudible) region overall. This decrease in RevPAR has been driven, in large part, by a decline in room demand, which continues to be impacted by several things, including slow economic growth in Mexico, the reduction in government spending, both in direct government travel and in direct government travel from service provided to the government, weak corporate investment in new projects, including the delay of certain investments as the Pemex has not yet been ratified, weak corporate results will -- have made companies to tighten their budgets on business travel, including the postponement or cancellation of certain conference, trainings and group events.

Even under the current market conditions, we were able to maintain KPIs and market share. The average penetration of our hotel portfolio during the third quarter of 2019 was 110% of their fair shares, which is higher than the 105% for the year 2018.

On the big side, we saw a relatively better September in Cancun by historical standards with more group-assembled events as the frequency continues to be solid, but with pressure in the ADR, which has impacted margins and returns. Overall, RevPAR revenue was almost MXN 60 million, an increase versus last year, but there is still room to grow in future as the destination of absorbs the effectively all the supply and demand picks up.

These results have been further impacted at the margin level as we have seen negative operating leverage. And we have seen certain cost pressures such as more guests per room and a certain expenses to retain the account such as free breakfast or included transportation.

Additionally, we have high financial expenses than last year from the Fiesta Americana Satelite and Live Aqua San Miguel de Allende hotels, which are not yet stabilized but continue the ramp-up process.

Regarding the development pipeline, we are proud to announce that the Fiesta Americana Viaducto Aeropuerto hotel is currently preoperation. That hotel with 255 full-service rooms will be increased to 260 rooms and is expected to open in November. And with its opening, we will have finished the development phase in time and on budget with a total of over 30 new hotels in the past few years.

We are managing our portfolio for the long run. During the quarter, we invested in several hotel renovations with the maintenance CapEx fully growing public areas of the Fiesta Americana Aguascalientes hotel, public areas of the Fiesta Inn Torreón hotel, public areas and rooms of the Fiesta Inn Villahermosa Cencali hotel. We also invested some of the time expense across the Fiesta Inn brand to be more competitive by improving life cycles and connectivity, having new linens and as well as large TV and ability to cast or stream directly from our home. We continue to explore alternatives to certain noncore assets, and we are putting a couple of properties such as the Live Aqua Playa del Carmen hotels in the market.

We believe that one of the FibraHotel's main strength is our solid balance sheet position, and we are able to strengthen it during the quarter. In September, we issued a long-term bond for MXN 2,500 million at a fixed rate of 8.83% direct finance exceeding availability. FibraHotel inaugural bond was well received with over 30 investors after an extensive roadshow. The company was able to achieve a spread of 199 basis points, above the reference rate, with an oversubscribed book of 1.5x. The bond with equal amortization in September of 2027, 2028 and 2029, improves the average life of FibraHotel debt from 5 to 8 years and frees up mortgaged assets as now almost 87% of our real estate assets are incumbent. We have a comfortable loan to value of 26%, net LTV of 21%. And we believe that this structure provides us with good optionality going forward. We also received our first credit ratings of AA by Fitch Ratings and AA+ by HR Ratings.

We thank the support of our investors, employees and partners. We continue to firmly believe in the fundamental value of our portfolio. And we have the correct business plan to perform over the cycle. We will continue working hard to improve on these results.

With that, I will now pass the call over to Edouard Boudrant, our CFO, to discuss the financial and operating results of the third quarter.

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [3]

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Thank you, Simón, and good morning, everyone. As you know, FibraHotel started and closed the third quarter with 85 hotels in operation. On a comparable property basis of 81 hotels for the 2019 stabilized portfolio, which were fully operational during the third quarter of last year, ADR increased by 1% at MXN 1,155 and occupancy rate decreased by 98 basis points at 64.3%. Overall, RevPAR decreased 0.5% at MXN 743.

The Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 4,143. Occupancy was 79.7% and net package RevPAR was MXN 3,300 representing a 5.3% increase against the third quarter of 2018.

The ramp-up portfolio, comprised with 3 hotels, shows occupancy rate of 38.4% during the quarter, ADR of MXN 3,034 and a RevPAR of MXN 1,165. Total revenues for the quarter was -- were MXN 1,074 million, of which 74% was room revenues, 17% was food and beverage revenues and 9% was leasing and other revenues.

During the quarter, the rent of Fiesta Americana Condesa Cancun stood at MXN 50 million. Compared with the same quarter last year, revenues increased by 9.4%. Our lodging contribution for the quarter stood at approximately MXN 340 million, and adjusted EBITDA reached MXN 266 million, increasing, respectively, by 6.2% and 5.7% versus the same quarter last year. The lodging contribution margin from managed hotels reached 26.1% versus 28.1% the same quarter of last year. The EBITDA margin reached 24.7% versus 25.6% the same quarter last year.

We closed the quarter with net debt of MXN 3.6 billion. Gross debt amounted to MXN 4.6 billion. We finished the quarter with a very conservative LTV ratio of 26%. Please note that at the end of the quarter, all our indebtedness is covered with derivative instruments.

During the quarter, the debt position generated a financing cost of MXN 103 million. In accordance with the IFRS, financing costs related to development projects are capitalized as part of the investment in each project. Only MXN 10 million of interest was capitalized. The net financial income was minus MXN 81 million.

At the end of September, we successfully raised MXN 2.5 billion with our first insurance in the local debt market. The proceed of the bonds have been used for repayment of approximately MXN 2.1 billion of debt on (inaudible). And to the issuance, the 10-year bond with equal amortization in year 8, 9 and 10, has improved substantially the maturity profile of debt from 5 to 8 years. The bond is bearing a fixed 8.83% rate paid every 6 months, allowing us to readjust the total cost of project.

During the third quarter, we continued the development of our cash position with MXN 210 million invested in the development portfolio with MXN 94 million mainly in the Fiesta Americana Viaducto to be obtained in the forthcoming weeks and MXN 116 million for repositioning and maintenance CapEx. Maintenance CapEx reserve for the quarter amounted to MXN 55 million, representing approximately 5% of total revenues. Same quarter last year, it amounted to MXN 50 million.

In order to give more details on the portfolios, 70% of our assets were stabilized, MXN 12.9 billion, and contributed 79% of the total lodging contribution, MXN 258 million. Fiesta Americana Condesa Cancun represented 17% of our assets, MXN 3.1 billion, and contributed 15% of the total lodging contribution, MXN 50 million. And 13% of our assets were in ramp-up or development, MXN 2.3 billion, and contributed only 6% of the total lodging contribution, MXN 22 million. Please note that FibraHotel will pay a distribution of MXN 134 million, equivalent to MXN 0.1711 per certificate.

At this point, I would like to open the floor for the Q&A session. Operator, we are ready to take any question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Sheila McGrath with Evercore.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Yes. I had a question on the Cancun hotel. The occupancy was higher in fourth quarter, the rate was lower but the lease payments to FIHO were much better. Can you comment how the hotel is performing versus your recent expectations? And any visibility on how fourth quarter is tracking so far?

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [3]

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Sheila, thank you very much for you questions. So yes, basically, what we saw in Cancun and since the beginning of the year, the occupancy, of course very, very good, on the historic high levels, but unfortunately, we still have some hard times in terms of ADR because what we saw during the year, there has been a switch in terms of demand. We saw more local and less international travelers and so we saw less groups. And basically, the groups on international travelers are paying higher ADR versus the local travelers. So basically, even if we saw strong occupancy rates, we still saw the less ADR and, at the end of the day, less RevPAR.

In term of cost, so we -- between this quarter and last quarter, the positive note was that energy cost didn't increase, even it decreased a little bit. So we have some positive in terms of cost of energy in the hotel of Cancun. But what we -- what impacted negatively is that the cost of receiving a guest is equal, even a little bit higher versus last year and also (inaudible) of guest-occupied rooms improved a little bit. And this is what impacted us a little bit in term of profitability of the hotel. But at the end of the day, this quarter, the third quarter for Fiesta Americana Condesa Cancun has been better than the same quarter last year in terms of results. And for example, we can tell you that the sargassum issue that has been very big last year has not been so strong this year for us in Cancun. And for the next quarter, so we see the same trend, strong occupancy rate, level of demand that is quite interesting. But the level of rate is not at the level that we want it to be that we used to have few years ago. So the trend that we have been seeing during the 9 first month of the generally Fiesta Americana Condesa Cancun should continue for the third quarter of this year.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Okay. And another question on the Live Aqua San Miguel de Allende, how is that asset maturing? And is there any increased interest in group bookings?

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Simón Galante Zaga;Chief Executive Officer, [5]

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Sheila, thank you for your question. We're very happy with how that hotel is progressing. As you know, it's a luxury asset that takes some time to stabilize and really get known in the market. And what we have seen in terms of positive news is very good reflection in terms of reviews, comments, social media and all of that. And we also have had a positive trend. As you know, the hotel is currently receiving the -- a minimum guaranteed rent. But what we saw in the last 2 months of the quarter, which was August and September is that the results of the hotel were above the minimum guarantee. So that means the hotel is trending well. We still need to maintain that trend and continue to get, as we mentioned, more groups into the hotel, but we have more weddings, more events and more guests coming into the hotel. So where we are right now is that the hotel has improved in its performance. It still has a long way to go, but it's doing good progress.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [6]

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Okay. Last question for me. Any thoughts on property sales or joint ventures to raise capital to repurchase shares as the shares are at such a big discount to even the undepreciated book value of the equity that you reported this quarter. Just your thoughts on that.

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Eduardo López;General Manager, [7]

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Yes. No, thank you for that question, Sheila. And I think we completely agree with your theory that it makes sense to raise some cash through some of those opportunities. We are looking at those. As Simón briefly mentioned that we did put a couple of properties up for sale. One of them is already in the market, which is the Live Aqua Playa del Carmen hotel. And we have several others, either in more selected properties or in more broad properties. But we're just starting that process with a handful of hotels. We'll see where that goes. But it's something we're definitely exploring, and which we have been advancing slowly but surely towards that path here recently. And hopefully, when we get to the next year, we'll have more news on that.

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Operator [8]

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Your next question comes from line of Alan Macias with Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [9]

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Just a question on -- have you seen any entry -- higher spending by the government or more bookings? Any indications that the federal government might be spending more in travel? Have you seen that yet?

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Eduardo López;General Manager, [10]

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Alan, thank you for your question. We really haven't seen any indication specifically in government travel. But we've seen very, very good progress in just the government starting to change a little bit of what they've been. As you saw yesterday, for instance, some infrastructure projects were moved up from next year to this year for billings. And I know they are working hard to try to untangle some of the investments that they wanted to get going this year, which they haven't been able to do. So there are some cases, for instance, Simón also mentioned the Hermosa as a good performer in the quarter. The investment there in the refinery has brought some business. And I think the government has taken some steps and recognized that they need to reactivate spending. We haven't seen that yet in the numbers and in the day-to-day, but we have seen good headline news in terms of the government recognizing that it's been an issue for the economy overall. It impacted us more than some other companies, but we've seen good news. We haven't seen it yet in the results, but hopefully, once that normalizes a little that will help us.

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Operator [11]

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Your next question comes from the line of Francisco Chávez with BBVA.

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Francisco Chávez Martínez, BBVA Research SA - Research Analyst [12]

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I have 2 questions. The first one is kind of a follow-up of the previous one. Have you seen any recovery on controlled activity or something that may lead us to see that the industry is opening up? And the second question is regarding the sargassum environmental issue. Now that the sargassum issue is over, did we start seeing some statements by the government officials that the problem is controlled and that some initiatives have been taken? And what do you -- I would like to know your opinion on this, what do you expect for next year on this sargassum issue?

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Simón Galante Zaga;Chief Executive Officer, [13]

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Paco, thank you for your 2 questions. I'm going to try to tackle them both. On the first part, we'll continue to get mixed messages in terms of where market has been recently. As you can see from the results, September was a bad month, and there was very weak demand across all categories in most hotels. In October, we have seen that a little bit better. It's too early to talk how the fourth quarter is going to unfold but we have seen a little bit of improving, but it's on a very hotel-by-hotel basis. We continue to see weakness in the (inaudible) area. And -- so we don't have a lot of color or visibility right now to make us comfortable to really tell you where that is going. We do know that at least the 25 days we carry in October have been a little bit better. But we haven't really seen a lot of catalysts that have really made companies change how their investment philosophy has been in the last few months. So hopefully, we will be able to stabilize a little bit the demand and then pick up from there.

As you know, we also have a lot of supply coming into the market the last few years. And for the next few years, we don't expect a lot of supply specifically in business hotels. So hopefully, this is just a period where we have a lot of bad things complementing with each other and won't be there in the future, but the market continues to be weak overall.

Regarding your second question, in terms of sargassum, it's really difficult for us. As you know, the sargassum has left, and it's a weather-related issue and it's a weather-related issue by the season. And so once the temperature of the water reach a certain level, the sargassum may either less or disappear and it goes back to the coasts off of (inaudible) in the winter and then comes back to Mexico in the summer. There is a lot of things that have been going on by different groups, hotels and the government to try to improve the situation and stop it. So there's a lot of interest in that and there's some areas and some (inaudible) where they've started to try to put their net or something to catch it but it's really difficult for us to predict what the natural phenomenon is going to be. So we really don't know how it's going to change. There seems to be still a lot of sargassum out there and it will probably still arrive next year. But it's too early for us to really know how next year in terms of sargassum is going to play out.

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Operator [14]

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Your next question comes from Andrea Lara with Signum Research.

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Andrea Lara Cid Antúnez, Signum Research - Junior Stock Market Analyst [15]

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I have 2 questions. First, what can we expect in terms of distributions? And what are your perspectives for occupancy? And what's daily rate for the full quarter 2019? And second, I believe that recently you have received more guests per room. Do we expect this to become a tendency or is this is a temporary situation?

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Eduardo López;General Manager, [16]

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Andrea, thank you very much for your questions. So basically, regarding the distribution, we do not give any guidance. Traditionally, we do not use to give any guidance. But we can tell you, it's a kind of cyclicity and basically, the third quarter historically is the second weakest quarter of the year for FibraHotel and the fourth quarter is -- it's a better quarter for the whole region. October and November, traditionally, are the best years -- best months for the lodging industry and business travelers traveling more. So we see higher occupancy rate during those few months. And as for December, it's a very good month for Fiesta Americana Condesa Cancun. So basically, we cannot give you any guidance in terms of occupancy and distribution but we anticipate to have a better full quarter than the third quarter that we just published yesterday.

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [17]

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And then just regarding your second question and in terms of the guests per room, I think it's something that we have seen in the past in weak market cycles. A little bit of what happened is that companies sometimes try to postpone nondiscretionary travel or try to postpone some types of travel. And what ends up happening in some cases is that instead of sending 1 employee per room, they send 2 employees per room or instead of sending 2, they send 4 employees per room. So they try to contain their expenses that way and it's something where -- it affects the hotel because we have a similar rate and you get more cost for the employee. But it's something that we don't expect across the cycle. It's something that is normal when the market is complicated or when they're reducing expenses. But then it also goes back to normal when the market picks up again and the economy is better. So it's something that we should continue to expect in the short term where the market is very competitive. But in the medium to long term, that should normalize again.

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Operator [18]

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Your next question comes from the line of Froylan Mendez with JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [19]

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First one on -- just a follow-up on asset sales and the allocation of those potential resources into buybacks. I remember that one of the key, let's say, pushbacks or things that you would be watching closely for -- when doing buybacks was share liquidity. Do you have these view change? Would you we willing to make more aggressive buybacks given the discounted price at these levels despite what these do to liquidity? That's my first question. And secondly, given the new government and the allocation of the project, et cetera, what has been the impact from the budget proposal into touristic activities? Has the government changed the budget from previous years to now? Is this part of the impact that we have been seeing on weakness in the touristic side? And if there is any change in the short term that you guys are seeing in terms of what the government is doing to promote tourism?

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Simón Galante Zaga;Chief Executive Officer, [20]

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Froylan, I'll try to get your first question regarding the share buybacks. First of all, we will need to define what the best use of profits at the time is. We think at this time, there are 2 options, which is either paying down some -- a small amortizations of capital that we would have in the next few years. We also have a couple of payments that we need to make from a couple of hotels, which we will close next year. So that's where we have a little bit of extra cash on the balance sheet right now. That's why you see the loan to value is 26%, but really the net loan to value, including a larger-than-average cash position, is actually 21%. So we would first need to define what the use of profit is. We do agree with you and Sheila that it's a good opportunity and an effective rate to buy back shares. And we could be more aggressive than we have been in the past. For else, I don't think -- we tried very hard to try to increase liquidity. But unfortunately, average has gone down. But we continue to be able to see that, in general, people trying to get large positions or trying to enter or exit the stuff they've been able to do so. So it wouldn't be a big concern for us in terms of being able to buy back profit levels the solution we have. We do think that is one of the options, and we could do it more aggressively.

Regarding the second question, I'll let my colleagues complement in this one. But I think in terms of the government, I think what we have seen the election but good intentions. At least I do think personally that they've started to recognize and they've started to do some things both in tourism and in reactivating investments, but have not yet been done, but they at least try to head towards the right way in what we need. We really need for the economy to grow stronger. We'll really need to -- for that to be more confident for the company level and from those general enterprises making investments in their own companies. And all across the country as the economy moves, we know that we're very exposed to the business cycle. So once companies continue to invest, once foreign direct investment comes back to the level that we've had in the past, we should see an acceleration. I don't think we're there yet, but I think at least there's good intentions.

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Eduardo López;General Manager, [21]

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Just to complement and give a final thought. We, as FibraHotel, have been very decent with the team on exactly what we can control. What we can control is keeping expenses as lower as possible, managing the strength of our brands and distribution in order to have a larger penetration than the rest of the hotel brands and the rest of the hotels in the competitive set. So we're focusing on what we can control, being very strong and very disciplined on every single expense and every single investment. And we will continue doing that. It's a great time for FibraHotel as we have finished these large development cycles. The hotel in Viaducto looks fantastic. It would be a great opening. We invite all of you to come along and look at it and see it. And I believe the portfolio that's still in ramp-up is a great opportunity as Edouard explained in the contribution of that portfolio will be very satisfactory in the medium and long term. So we believe we have a fantastic business plan. We will continue executing the same business plan. We have a top quarter, and we will get -- we will be very focused on getting better results throughout. But we believe that FibraHotel is well positioned to be the leader in every single market and every single competitive set. And that's what we can ask our operators to do and that's what I can ask my team to do. So we're going to be focused on that in operations and results.

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Operator [22]

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There are no further questions at this time. Thank you for participating in FibraHotel's 2019 Third Quarter Results Conference Call. If you have any further questions, please do not hesitate to contact FibraHotel's Investor Relations department. This concludes today's call. Thank you, and have a good day.