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Edited Transcript of FIHO12.MX earnings conference call or presentation 16-Jul-19 4:00pm GMT

Q2 2019 Concentradora Fibra Hotelera Mexicana SA de CV Earnings Call

Cuajimalpa Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Concentradora Fibra Hotelera Mexicana SA de CV earnings conference call or presentation Tuesday, July 16, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edouard Boudrant

FibraHotel - CFO of Fibrahotelera S.C.

* Simón Galante Zaga

FibraHotel - Technical Committee Member

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Conference Call Participants

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* Adrian E. Huerta

JP Morgan Chase & Co, Research Division - Senior Analyst

* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Daniel McGoey

Citigroup Inc, Research Division - Former MD and Head of Research of Brazil

* 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 Brenda, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel 2019 Second Quarter Earnings Conference Call. FibraHotel issued its quarterly report on Monday. If you did not receive a copy via email, you can find it on the website, 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 are 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 Lopez, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO.

With that, I would like to turn the call over to Mr. Simon Galante. Sir, please go ahead.

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Simón Galante Zaga, FibraHotel - Technical Committee Member [2]

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Thank you, and good morning, everyone. I'm going to begin today's call by providing an overview of the second quarter of 2019 results and 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.

In the second quarter of 2019, market conditions continued to be difficult as soft economic activity and weak corporate investments led to slow hotel demand growth for business hotels. In general, conditions have been volatile with the weak numbers in the months of April and June and relatively positive numbers in May. During the quarter, we have a calendar effect from the Easter holiday that was marginally negative overall for the portfolio as it impacted business hotels and benefited resort and leisure hotels.

On the business side, RevPAR of the comparable portfolio of 81 hotels increased 1.4% year-on-year, driven by an increase in ADR of 0.6% and an increase of 51 basis points in occupancy. Overall, RevPAR growth continues to be lower than what we have seen in previous years as hotel demand has slowed, while RevPAR have been stable or likely on course with last year and previous quarters.

We continue to face headwinds from government and government-related travel, which has especially impacted the Mexico City market, which, according to STR, had a supply-demand decrease of 382 basis points during the first 5 months of 2019 versus the same period in 2018. We also continue to see solid numbers from the north regions, especially related to manufacturing in the near -- and near the U.S. border and continue to see a recovery in the goals in all regions, especially in the Hermosa.

According to STR, overall, the hotel market in Mexico have a RevPAR decrease of 5.7% for the 5 months of 2019, which is the same period in 2018, mainly due to a change in supply and demand of negative 320 basis points. For urban hotels, STR reports a 3.3% year-on-year drop in RevPAR with negative 320 basis points in change in supply and demand.

It is worth mentioning that even on the recurrent adverse market conditions in the STR numbers, our hotel portfolio continues to perform relatively well as we were able to grow KPIs and market share. The average penetration of our hotel portfolio during the second quarter of 2019 was 111% of their fair share of the market, which was similar to 112% in the first quarter of 2019 and higher than 105% for the year 2018.

Regarding the ramp-up portfolio, we are proud to highlight that the Live Aqua San Miguel de Allende hotel recently received UNESCO Prix Versailles 2019 Award for hotel in the North America. This international recognized award is for extraordinary architecture and design, and it has provided positive news and interest in the recently opened hotel. This prize highlights FibraHotel ability to develop hotels not only on time and budget, but also unique and award-winning quality from the ground up. The hotel has had very positive customer reviews and encouraging results from the on-property Spice Market and Zibu restaurants. The hotel, as well as the Fiesta Americana Hotel, continues to receive the currency minimum rent, which we expect will continue during 2019.

On the beach side, we also see difficult market conditions in Cancun with fewer U.S. traveler [output], with an increase in hotel supply and the arrival of sargassum. Even though sargassum has not impacted the Fiesta Americana Hotel as much this year as other parts of Cancun, its massive arrival to the Quintana Roo shores have posed negative press to the destination. For the second quarter, the Fiesta Americana Condesa Cancun hotel have very strong occupancy of almost 85%, but room rates continue to be pressured due to the highly competitive market in Cancun and the Riviera Maya. Overall, the hotel RevPAR grew 3.1% year-on-year. We expect further headwinds in the short term from additional supply coming in line in Cancun but have seen some positive signs and the hotel also has weaker comparable figures from the second half of the year versus 2018.

Regarding the development pipeline, we have made good progress toward completing the Fiesta Americana Viaducto Aeropuerto hotel with 255 full-service rooms. The hotel is already in the equipment and finishing phase and will begin reoperations in the next few months. We have set to open the hotel by the end of this year and believe that this will cap with a relatively quick wrap-up period. This opening will mark another important milestone. It is our last hotel on the recurrent development pipeline.

We believe that one of FibraHotel's main strength is our solid balance sheet position. We have a comfortable loan to value of 23% and believe that this provide us with good optionality going forward. We are also exploring different financing alternatives to improve our current conditions, structure and cost [advanced] and create markets to continue to be supportive. We will continue to work through the current market conditions to be the leader in each hotel market and to provide the best possible results.

Finally, we announced a distribution of MXN 0.2264 per CBTI (sic) [CBFI].

With that, I will now pass the call over to Edouard Boudrant, the CFO of FibraHotel, to discuss the financial and operating results of the 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 second quarter with 85 hotels in operation. On the comparable property basis of 81 hotels for the 2019 stabilized portfolio which were fully operational during the second quarter of last year, ADR increased by 0.6% at MXN 1,202 and occupancy rate increased by 51 basis points at 65.6%. Overall, RevPAR increased 1.4% at MXN 788.

The Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 4,366. Occupancy was 84.6% and net package RevPAR was MXN 3,692 representing a 3.1% increase against the second quarter of 2018.

The ramp-up portfolio, comprised with 3 hotels, showed occupancy rate of 34.9% during the quarter, ADR of MXN 2,745 and RevPAR of MXN 957. Total revenues for the quarter were MXN 1,126 million, of which 73% was room revenue, 17% was food and beverage revenues and 10% was lease and other revenues.

During the quarter, the rent of Fiesta Americana Condesa Cancun stood at MXN 61 million. Compared with the same quarter last year, revenues increased by 8%, while lodging contribution for the quarter stood at approximately MXN 385 million, and our EBITDA reached MXN 310 million, decreasing, respectively, by 2 and flat versus the same quarter last year.

The lodging contribution margin for managed hotels reached 27.8% versus 30.4% the same quarter last year. The EBITDA margin reached 27.5% versus 29.8% the same quarter last year.

We closed the quarter with a net debt of MXN 3.4 billion. Gross debt amounted MXN 4.1 billion. We finished the quarter with a very conservative LTV ratio of 23%. Please note that at the end of the quarter, almost all indebtedness is covered with derivative instruments.

During the quarter, the debt position generated a financing cost of MXN 99 million. In accordance with the IFRS, financing costs related to the development projects are capitalized as part of the investment in each project. Only MXN 9 million of interest were capitalized. The net financial income was minus MXN 76 million.

During the second quarter, we continued the deployment of cash position with MXN 210 million invested. The development portfolio was MXN 152 million and MXN 58 million for the repositioning and maintenance CapEx. Maintenance CapEx reserve amounted to MXN 57 million, representing approximately 5% of the total revenues. Same quarter last year, it amounted to MXN 52 million.

In order to give more details on the portfolio, 71% of our assets were stabilized, MXN 12.8 billion, and contributed 78% of the total lodging contribution, MXN 202 million. Fiesta Americana Condesa Cancun represented 17% of our assets, MXN 3.1 billion, and contributed 16% of the total lodging contribution, MXN 61 million. And 12% of our assets will ramp up our development, MXN 2.2 billion, and contributed only 6% of the total lodging contribution, MXN 22 million.

Please note that FibraHotel will pay a distribution of MXN 178 million, equivalent to MXN 0.2264 per CBFI.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Alan Macias with Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [2]

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Just a question on your table of quarterly operating portfolio highlights. Excluding leased hotels, I noticed that total available rooms decreased 7% year-on-year and 5% quarter-over-quarter. Can you just give us some color on the reasons on the lower number of available rooms in the second quarter?

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

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Alan, just I think you are talking about the table, which is in BMX, so unfortunately, we have a slight mistake in this table. We realized that after posting the document. So we will send you the updated figures.

But at the end of the day, in terms of operating rooms, it increased a little bit versus last year because, as you know, at the end of last year, we opened the Fiesta Americana Satelite and Live Aqua San Miguel de Allende. So basically, it's not really comparable because we are talking about 2 additional hotels. So it -- the current number of that available rooms increased versus last year.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [4]

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Just a clarification. Is the San Miguel leased hotel or...

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [5]

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No. San Miguel is not a leased hotel and Satelite is not at a leased hotel. It's an operated hotel. The only difference with that hotel is that in the operating agreement, we negotiate and we signed with Posadas. We had a minimum growing fee on this hotel. But at the end of the day, this hotel is fully considered as a managed hotel.

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Operator [6]

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Our next 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 [7]

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On the Cancun property, I was wondering if you could talk about the lower demand from U.S. travelers, if you think it's safety concerns or the algae issues. And are there any cooperative efforts from either the hotel companies or the Mexican government focused on tourism to assist in efforts to reinvigorate U.S. traveler demand?

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Simón Galante Zaga, FibraHotel - Technical Committee Member [8]

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Thank you, Sheila, for the question. Cancun has been hit by groups that are corporate groups or U.S. or -- and Canadian groups that used to do a very nice base of high average rate in occupancy before we could start selling to individuals or transient groups. So the issue is that we are not as strong this year with those groups. We believe that next year is going to be a little better.

And it's a little bit of everything unfortunately, Sheila. The -- one of the issues is the security issues that we are having in Cancun, in the whole country that we believe that they're trying and they're going to keep on pushing to get this better. The issue from sargassum, as I mentioned, is not been as strong in the property as last year or the other properties that are around, but as a destination, everybody's talking about the issue of sargassum. And the third issue is the promotion fund that we used to have that the new government basically stopped that was almost USD 350 million in promotion worldwide of the Mexico destination. So we are pushing as private to the organizations that represent us to talk to the government about rethinking a different fund or something to promote Mexico, but obviously things are moving slowly in the issue of answering that there is something that's going on that will help us.

What I do believe is that even that things have gotten very slow in Cancun, we have been able, through the Posadas brand, to bring high occupancy from nationals, and we have been doing well in occupancy and not as well as rate retained. But we believe we are going to have a -- at summer, that we're going to have high occupancy and not such good rate, but at least we are turning out the hotel and we are moving the hotel. So we will continue trying to push in the direction of the organizations in order to have these 3 issues better. And we're pushing our operator as strong as we can in order to launch promotions and roadshows of the properties in order to bring U.S. and international visitors back.

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Sheila Kathleen McGrath, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

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Okay. That's very helpful. And just one follow-up. Your shares continued to trade at a deep discount to net asset value. I'm just wondering your thoughts on either potentially selling an asset or an interest in an asset like in a joint venture structure and executing on a bigger share buyback or a tender of shares. I'm just wondering if what your thoughts are on that.

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Simón Galante Zaga, FibraHotel - Technical Committee Member [10]

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Obviously, we continue to see the certificate price going down. We believe we are almost at a 12% yield at this point. I think that's very high. We don't -- or we haven't acted on our repurchase program because we want to be very careful on debt at this point, but we are open to revisit our issues with getting into the market if the certificate continues to be pressured.

We are actively seeing and looking at opportunities of selling assets. The answer is yes, we want to see if we can sell nonstrategical assets that don't have a strategical purpose going down the road. I think that gives us 2 offer -- 2 great things, that is lowering debt and looking at the big discount that we're trading at and how much the assets are worth. And reminding the market that we have almost $1 million of costs on these assets and today the company's at more than 50% discount, and we believe that's not going to hold for a long time. And we believe that even that the results are not what we want or what we have budgeted, we believe that the portfolio, with the situation that we have seen, has been performing well. And I believe that it's going to have a very positive effect going forward as we continue to asset management -- correct the properties and be focused on our asset management.

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Operator [11]

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Our next questions are 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, can you give us some color on the trend for corporate activity? Have you seen any recovery recently in business travelers of both companies and the federal government?

And the second question is regarding the tariffs. Did you see a risk of more aggressive competition? In which regions do you see this risk?

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Simón Galante Zaga, FibraHotel - Technical Committee Member [13]

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We have seen a very soft government travel. Some groups have returned to Mexico in the last 2 to 3 months, but it's not on the same quantity or quality or grade that we've seen the last years. Obviously, government cannot stop forever traveling around the country. They need to travel both to Mexico City and to other places of the country, but we still see a very weak government travel program.

On the rate risk that, as people get desperate with lower occupancy, it has happened all year round. We have seen other hotels be very aggressive on rate. That's the way that they have defended themselves. We have been very aggressive on rates as well. That's why we have not shown the growth we originally proposed or budgeted, but we believe that it's a temporary thing. It's going to last through the years, but we're going to continue working on our marketing programs and selling the properties right. And again, the quality of our assets, with 80% of our assets in regional shopping centers or mixed use projects, will prevail as the quality portfolio on the long term. And that's what we have been working of -- all these years in making these quality portfolios. Unfortunately, on these difficult times, but we will show that this portfolio will have the resiliency going forward in the future.

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [14]

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And second, to complement this point from Simon, I think we have been very proactive in order to protect the occupancy rate of the portfolio and then maybe we have to make some sacrifice in terms of 8-year increase, and we want to take that opportunity to pass through the inflation. But at the end of the day, what we saw is that, the first-ever, that we succeed in putting the occupancy level, which is still very quite interesting at 66% overall in the quarter. And then so if we see the relative part of the market that we have as of today in the 8-year data that we have from January to May, we have relative stock market out of the 115% as Simon mentioned in the speech on here, which is 10% increase with the data that we had last year.

So basically, it's quite helps on the [long run]. It's difficult for the whole industry, but I think we have been very responsive with the operator that we have. We've shown the asset quality that we have in order to protect the customer base and the occupancy of the portfolio.

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Operator [15]

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(Operator Instructions) Our next questions are from the line of Adrian Huerta with JPMorgan.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Simón, 2 questions, one on asset sales. If you can just elaborate the current interest from investors to purchase assets and what potential caps can you get?

And the second one is regarding the potential liability management that you mentioned. What is it -- what are you aiming for, in case of new debt, to increase the maturity of the debt, lower the cost, fixed rates? What are you looking at liability management?

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Simón Galante Zaga, FibraHotel - Technical Committee Member [17]

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Thank you, Adrian. The asset sales, obviously we have seen a disconnect for many months or almost years. We, the private markets and the public markets, we have seen transactions about 7% to 10% cap rates in the private market. We are thinking of looking at properties that we have added value on, but markets been soft at this point because public companies are not interested at this point on combining assets as we are now in the scenario that we are very cautious on our acquisitions and our growth to maintain financial strength.

So we will look at it. We are currently talking to professionals that are very focused on bringing on both national and international private groups to see some property. And as I said, we are not looking on selling a lot of properties. We're looking at selling nonstrategical properties that will not put in jeopardy our future as the leading and strongest and largest owner of hotels in the region. So we are going to look at it and we're going to be very, very alert and very engaged in the market to see different opportunities.

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Edouard Boudrant, FibraHotel - CFO of Fibrahotelera S.C. [18]

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And Adrian, answering the second question that you have regarding the liability management, so basically, as of today, if we see the debt that we have, the MXN 4.2 billion that we have at the end of the quarter, we have a total interest cost, including spread and the caps and derivative instrument of 8.52%. It compares with a 20-day TIIE of 8.51%. So basically, we still have interesting derivative protection in the money.

And if we see the amortization schedule, we see that 62% of the amortization is during the next 5 years. So basically, we are currently analyzing a structure of debt which could allow us to lower the cost of debt because what we saw in the last days is that market condition of long-term interest debt has lowered. And then so what we would like to do is to optimize the amortization schedule in order to delay most of the amortization post-2024. So basically, we are working on that. We feel that there is an opportunity both on the market debt side and on the banking debt side and driving to work on a package that could give us a lot of confidence to be comfortable in a tougher market condition if there is during the following new year.

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Adrian E. Huerta, JP Morgan Chase & Co, Research Division - Senior Analyst [19]

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And if I can just add, considering that Cancun represent a lot of (inaudible) assets and given that you may not be active in the next few years buying or building other assets to dilute the exposure to Cancun, is selling a minority stake in Cancun also a possibility, Simón?

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Simón Galante Zaga, FibraHotel - Technical Committee Member [20]

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Absolutely. We are going to study all possibilities, Adrian, but we believe the point of that asset now is not where it should be. You need to remember, we finished remodeling this hotel last year, and we were spiking up rates very well until the second semester of 2018. So I believe we need to work on getting the asset stabilized and stronger in order for us to get the best price possible. We believe that with a 23% debt LTV, we should not rush into spending or doing anything that's not strategical in getting the most value for our CBTI holders at this point. So we will be very strategical, very calm. And we will study all possibilities with great detail, but we are not going to take decisions that will jeopardize our position going through the future. And we believe that us being resilient and strong at this point will bring us a lot of opportunity moving forward with the great portfolio that we hold at this point.

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Operator [21]

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Your next questions are from the line of Dan McGoey with Citi.

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Daniel McGoey, Citigroup Inc, Research Division - Former MD and Head of Research of Brazil [22]

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A question on occupancy. You mentioned that some of the softness was from reduced government spending with the disruption of the transition, but you don't really see, let's say, the occupancy rates in the sort of select and limited services were all above 65%. They look relatively healthy. So I'm wondering whether or not some of that weakness is that -- do you see it showing up more in the average daily rate?

And then second and related question to that is whether -- the occupancies do look below average or in the full service and the extended stay. I'm sure some of that is related to San Miguel, but I'm wondering if you could talk about -- a little bit about prospects for improvement going forward on full service and extended stay.

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Simón Galante Zaga, FibraHotel - Technical Committee Member [23]

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Sure. Thank you for the question. On government spending and the ADR, it is the occupancy. We have been very accretive on winning market share. As I said and Edouard explained as well, we have been picking up occupancy from our competitors due to our quality portfolio and being with a -- and being in the market winning some space. So ADR, we have been sacrificing ADR in order to keep the occupancy. So what we are going to be better in the next maybe the end of the year or next year is that working again on getting our ADR higher as we budgeted for the year. And we have not been able to do. We have been fighting with people lowering rates, so we have been gaining market share and that's why occupancy looks the same or looks at the same level, but we have been lowering ADR. Even though we are higher than last year obviously nominally, but we are growing even with all these issues through the market.

And the occupancy in the full service portfolio, you're completely right. It's the 2 hotels in ramp-up. That is the Fiesta Americana Satelite, that's been open for 8 months or 9 months at this point; and San Miguel, that has been open for 7 months at this point. And we are building occupancy. Both hotels are under 30% at this point and growing every month. The good news is that we see every trimester this hotel growing. Our food and beverage offer in San Miguel has been very successful. And we will continue working on this ramp-up of these 2 hotels, but that's the number that you're looking at with a full service hotel.

You are going to see improvement as these hotels get their fair share on the market and go out of the ramp-up. I need to remind you that these quality properties with these rates take more time for the ramp-up period than select or limited service property. So we have to be patient and we have to position the hotel in the right rate. Even though we want to grow faster and we want a shorter ramp-up, we need to be responsible for positioning the property, where it has to be on the long run.

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Operator [24]

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Thank you. There are no further questions at this time. Thank you for participating in FibraHotel's 2019 Second 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.