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Edited Transcript of FINN13.MX earnings conference call or presentation 25-Jul-19 3:00pm GMT

Q2 2019 Administradora de Activos Fibra Inn SC Earnings Call

SAN PEDRO GARZA GARCIA Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Administradora de Activos Fibra Inn SC earnings conference call or presentation Thursday, July 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lizette Chang y García

Fibra Inn - Director of Relationship & Investors

* Miguel Gargollo Aliaga

Fibra Inn - Director of Administration & Finance

* Óscar Eduardo Calvillo Amaya

Fibra Inn - CEO, GM & Proprietary Member of Technical Committee

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Conference Call Participants

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* Andrea Lara Cid Antúnez

Signum Research - Stock Analyst

* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

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Presentation

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Operator [1]

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Good morning. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fibra Inn conference call. (Operator Instructions).

I will now turn the call over to Ms. Lizette Chang, Investor Relations Officer, for opening remarks. Please go ahead.

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Lizette Chang y García, Fibra Inn - Director of Relationship & Investors [2]

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Hello, and welcome to the Fibra Inn Second Quarter 2019 Conference Call. The earnings report that was issued yesterday as well as the accompanying PowerPoint presentation are both available in the company Investor Relations section of the website.

Please follow along for a clear understanding of our results. Also note that forward-looking statements may be made during this conference call. These statements are based on management's current view and estimates of future economic circumstances, industry conditions, company performance and financial results.

Let's turn to Slide 2 for a brief review of the topic that we will be discussing in today's call. We will start with the distribution and cancellation of certificates, followed by the highlights of the quarter. We will also update Fibra Inn's Hotel Factory projects, and at the end, we will finalize with the operational and the financial review prior to the Q&A. Taking us through these topics will be here our presenters: Mr. ÓScar Calvillo, Chief Executive Officer; and Mr. Miguel Aliaga, our Chief Financial Officer.

I appreciate your attention at this point, and I will turn the call over to Mr. Óscar for his remarks.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [3]

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Thank you, Lizette, and good morning, everyone. As we know, the current macro situation in the region is affecting all of us in Mexico, and our sector is not the exception. Economists are already discussing the fact that Mexico could be entering in a technical recession. Additionally, in terms of manufacturing for export market, recessions with regards to major investment projects continue to be on hold, and we believe they will remain on hold until the ratification of the United States, Mexico, Canada Free Trade Agreement takes place. However, this is not likely to happen soon. Given these circumstances, the company is seeking ways in which to remain proactive in addressing the economic factors that are affecting us.

On July 23, our Technical Committee approved a management initiative to reinvest a portion of the adjusted FFO that previously was allocated in total as a quality distribution. This approval was also recommended by the auditing committee on July 19.

Today, the price of Fibra Inn certificate reflects an important discount compared to the current value of the company's assets. As a result of this, the company's implied cap rate is now 15.5%, continuing the last 12 months of NOI at current certificate prices.

The predominant economic environment points to '19 marginal growth, which makes the repurchase of shares more attractive (inaudible) currently by its cancellation. We believe that this achieves an additional implied value for our current holders. This is why, in order to generate value, Fibra Inn proposed that 50% out of the adjusted FFO be paid in cash as an ordinary quarterly distribution, and the other 50% will be used to repurchase that equivalent amount in additional certificates. That should be canceled during the quarter that is underway.

The proposed repurchase initiative is based on the fundamental principle for aligning all of the company's investors to strengthen the capital structure of Fibra Inn via the reinvestment that is highly convenient for one specific portion of the certificate flows during at least 2019 for a determined period of time. This mechanism can be continued during subsequent quarters after full year evaluation.

The 50% adjusted FFO repurchase fund will maximize the use of the company's resources, which are already designed towards hotel renovation projects to comply with international hotel chain standards as well as to invest in projects underway that will generate short- and medium-term benefits. This initiative follows the series of strategic actions that have been executed by Fibra Inn's management and that aim to consistently seek value generation for investors, as well as to reach the highest level of corporate structure in the sector. Following are some of the most important strategic actions by Fibra Inn represented chronologically.

Elimination of property acquisition fees in 2014. In 2017, the internalization of the adviser and the agreement to pay the adviser shareholders after 3 years of operations as an internalized Fibra, that is on December 9, 2019. The aforementioned has a limit on the number of certificates established by the Holders' meeting that took place in November 2016. Control clauses were also eliminated. In 2018, the Holders’ meeting has approved a new Technical Committee structure. Today, the Technical Committee requires an independent member majority.

During 2018, the company initiated the asset recycling program, an intense task that has, to date, achieved the sale of 3 nonstrategic assets and this number is expected to increase towards the end of 2019 with additional assets that are in various negotiation stages for their sale.

Since 2017, the company has actively participated in the repurchase of its certificates and has canceled almost 10% of the total number of certificates issued since then.

A portion of Fibra Inn’s management team’s compensation is fixed and the other

Portion is variable; both are included in administration expenses. The latter represents nearly 30% of the total and is aligned to value generation. Additionally, half of the variable compensation is paid in certificates that are calculated at the initiation of the evaluation period and are acquired in the capital market granted with a 2-year lockup.

The founding partners have always expressed their alignment of interest with the rest of the market and are, at this moment, analyzing alternatives to capitalize their investments with further Fibra Inn certificates.

Management is always seeking ways to make the corporate structure more active and expects to achieve substantial improvements for the remainder of the year.

The funding mechanism is as follows: Funding will be created with 50% of the AFFO that has not been distributed for that particular quarter. The remaining 50% of the AFFO will be distributed as a regular quarterly cash payment. There will be checkpoints in place to ensure that the funds will be used exclusively for this purpose. As such, detailed reports will be provided to the respective intermediary committees at Fibra Inn and details will be provided each quarter as to exact use of those funds. This means that the use of these funds for repurchase will be obligatory for Fibra Inn and therefore, there will be no discretion as how to use these resources.

At the same time, Fibra Inn will be obligated to proceed with the cancellation of these securities at the end of the period, in which these have been acquired in the market. If for any reason, all of the reserved funds are not used during the quarter, these will be added as a cash distribution payment additional to the 50% of the AFFO to be paid as distribution during the following quarter. While the register of repurchase is the same for Fibra Inn, this program is completely independent of the regular repurchase program. Thus, the funds stemming from the sales of assets could continue to be used for repurchase of certificates among others.

In order to better identify the co-existence of the 2 repurchase strategies, the new proposed mechanism will have priority during the period of the certificate repurchase; meaning that first, the proceeds of the AFFO not paid in cash will be used for repurchase, and once those are depleted, then the Fibra Inn's additional cash will be used.

With these additional resources aimed at repurchase, the company will continue to actively participate during business days of the quarter with exception of the blackout periods, in which the company is aware of periodic or extraordinary information that has not yet been announced to the market, or in the event that the funds for repurchase have been depleted.

The operation rules will also be subject to the rules under the Securities Market Law

And the Official Publication for Issuers. These will take effect as of tomorrow, July 25, 2019.

We currently remain very active in terms of the asset recycling program. While this has been a very intensive task, it has allowed us to divest 3 nonstrategic assets. We expect this number to increase by the end of the year.

Let's turn to Slide 5. Therefore, for the second quarter, Fibra Inn reached a total distribution of MXN 37.9 million, which will be paid in cash at that time. The total amount shows 65.5% decrease when compared to last year's. The distribution per certificate was MXN 0.0736, equivalent to the 50% of adjusted FFO for the quarter. The trailing 12-month dividend yield was 8.3%.

On Page 7, you will see that during this quarter, Fibra Inn canceled 10.5 million certificates, which were acquired through the repurchase program between May 2, 2018, and March 29, 2019. The aforementioned certificates represent approximately MXN 86.3 million. Exchange of the corresponding title that backs the certificate is still in the process with authorities, which should be shortly. The regular repurchase program reached a total balance of 13.5 million certificates at June 30, 2019, and the total amount of resource available for repurchase is MXN 230.4 million.

After the close of the second quarter, 254,000 certificates -- additional certificates were repurchased.

Annual Shareholders' Meeting. As previously announced, the Annual Ordinary Shareholders' Meeting took place at the end of April where our shareholders approved the 2018 audited financial results, the external auditor's annual report and activities of each of the corporate governance committees. The Technical Committee was ratified as follows: 5 independent members; Mr. Adrián Garza de la Garza, Mr. Rafael Gómez Eng, Mr. Héctor Medina Aguiar, Mr. Marcelo Zambrano Lozano, and Mr. Santiago Pinson Correa. Mr. Victor Zorrilla and Mr. Joel Zorrilla as members representing the Founders' Trust; as well as their respective alternates, Mr. José Francisco Clariond Castañeda and Mr. Adrian Jasso, respectively. Mr. Óscar Calvillo Amaya represents the management of the trust with his alternate, Mr. Miguel Aliaga Gargollo. And fees for independent members were also approved at MXN 37,000 for each Technical Committee session and MXN 30,900 for each session pertaining to the other committees.

Following on Slide 9. During this quarter, we announced the signing of 2 binding agreements for the sale of 2 hotels; one in Guadalajara and the other in Chihuahua. The first was priced at MXN 99 million with 8.4% NOI cap rate and the latter was priced at MXN 95 million with a 9.4% NOI cap rate. The sale transaction of City Express Chihuahua was just completed last Monday upon receiving the agreement payment.

We remain committed to our capital recycle strategy and continue to promote sale of nonstrategic assets. The sale of additional property is expected towards the second half of this year.

Hotel Factory investments. The updated amounts of the Hotel Factory investments can be seen on Slide 11. In the second quarter of '19, the partner contribution as well as that of Fibra Inn for the JW Marriott Monterrey Valle project had reached 30% in capital contributions for each one of us as previously agreed. We have already arranged the terms of the debt for this project, and we'll proceed to the contracting and disbursal of the loan. Development continues as planned, and we expect that this project will open in the third quarter of 2020.

In terms of The Westin Monterrey Valle, this past April, our partner contributed MXN 140 million to this project. Fibra Inn will execute the responding cash out to maintain the 30% equity contribution. The project has an opening time frame during the second half of 2019, tentatively for November, as long as the developer is able to meet proposed delivery times according to Marriott International Final Authorization.

The Marriott Monterrey Aeropuerto remains unchanged, expecting the involved investors to establish a definite participation structure. However, total investments for this project could be in the range of MXN 600 million. As negotiation with the strategic partners move forward and upon authorization by the international hotel chain related to the project and construction, we can discuss further with the market regarding this property.

Finally, an update on the Playa del Carmen project. The selection process for the 2 final brands concluded. We expect to make the brand selection public as soon as we have signed the corresponding term sheet. For the time being, the amount on the table includes the investment in the land only.

Fibra Inn's acquisition and development team is consistently reviewing other upcoming opportunities, participating in selecting -- selection process and analyzing investment structures with interested partners. But we know that the challenge lies in the terms of investment returns. Fibra Inn is confident that we have -- what we have is a very valuable market niche, a luxury hotel market, on which the Hotel Factory Model has based all these developments.

Please turn to Slide 12. The current portfolio includes 42 hotels, as we sold a hotel in Culiacan last August. For the closing of the quarter, we are still including the 2 hotels, which we signed binding agreements for sale, although we just received the payment for the one in Chihuahua this last Monday. As such, Fibra Inn has a total of 6,785 rooms as of June 30. The Hotel Factory pipeline has 3 hotels ready plus the Playa del Carmen landbank.

Thank you for your attention. And at this point, I will turn the call over to Miguel Aliaga, our CFO, who will review the company's operations and financials for the quarter.

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [4]

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Thank you, Óscar, and good morning to everyone. With regards to the same-store sale indicators, we registered our decreasing occupancy this time of 5.9 percentage points. As we previously commented, some of the main factors that are affecting us specifically this quarter are: the generalized slowdown of the automotive sector that has mostly impacted the Bajio region and Puebla; the economic deceleration that has caused lower hotel revenues from all business segments at our properties. That includes travel agencies, corporate clients, groups, individual guests and online travel agencies; restrictions in government public spending at the federal and state levels; the termination of business projects; and lastly, the security issue that is present in many Mexican states.

Hotels in market with a solid performance, but nevertheless with lower revenues in [lodger], Monterrey and Saltillo. In terms of same-store sales this quarter, we registered a 7.9% decrease in revenue per available room and an increase in the average daily rate of 1.2%.

Let's turn to Page 15 where we start with discussion of revenues. Lodging revenues decreased by 7.1% year-over-year to MXN 459.6 million for second quarter 2019, and rental venues decreased 8% to register MXN 24.7 million.

Consequently, the company experienced a 7.2% decrease in total revenues for the quarter, which was MXN 484.3 million.

In terms of the breakdown by type of hotel, the proportions were consistent with the majority of revenues stemming from the select service segment at 52.1%, and the full service segment at 33.9%.

Let's turn to the review of the income statement on Slide 16. As Óscar mentioned, the company had experienced cost controls at the operating level and has been able to rein in corporate expenses, even though margins appeared to have weakened. This is due to an arithmetic effect of lower revenue.

Beginning the first quarter of 2018, we have been reporting hotel NOI, which pertains to the operation of the properties and NOI from other businesses.

As such, this line item will also include revenues and costs from the strategic hotel pipeline.

Fibra Inn began to receive revenues from fees charged to the strategic partners from the Hotel Factory. The second quarter, the income was for MXN 2.7 million. This resulted in a total NOI of MXN 150.1 million, which represented a 30.8% margin versus a 34.5% in second quarter 2018.

Adjusted EBITDA as a result was MXN 131.3 million, representing a 27.1% margin versus a 30.6% of second quarter 2018.

And finally, FFO was MXN 92.8 million and 19.2% margin when compared to the 19.4% in second quarter 2018.

Turning to Slide 17 for the balance sheet discussion. As of June 2019, Fibra Inn had cash and cash equivalents of MXN 424.1 million, which reflects the cash contribution of strategic partners of the Hotel Factory.

Additionally, there were MXN 160.3 million of VAT tax recoverable coming from an increase in value-added taxes paid related to progress at the JW Marriott Monterrey and the Westin Monterrey Valle hotels. We will begin the corresponding procedure with the tax authority during the third quarter.

At June 30, 2019, long-term debt reached MXN 2,970.1 million corresponding to a net balance of FINN15 and FINN18. Total equity is valued at MXN 8.8 billion.

If you follow me in Slide 18, we can take a look at the overall current financial situation of the Fibra Inn. The FINN18 and FINN15 long-term debt obligations was 60.6% at a fixed rate of 9.93%, and 30.3% at the variable rate completely hedged with weighted fixed rate swaps of 7.1%, plus a 1.10% spread.

On the first quarter of 2019, there was a long-term disposition of MXN 200 million from the revolving line with BBVA at TIIE plus 1.50% spread. And a short-term MXN 100 million from the revolving line with Actinver at TIIE plus 200 basis points. The total weighted debt cost reached 8.68%.

At the conclusion of June 30, 2019, Fibra Inn has a ratio of loan-to-value that is 26.5% and a conservative debt service coverage of 1.9x, and available resources of MXN 950 million. That is all for me. Thank you for your attention. At this time, we are ready for your -- for questions. Operator?

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Questions and Answers

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Operator [1]

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At this time, we will open the floor for your questions. First, we will take the questions from the conference call and then the webcast questions.

(Operator Instructions). We'll take our first question from Armando Rodriguez of Signum Research.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [2]

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My question to you is about your strategy. Considering that, CNBV or Comisión Nacional Bancaria y de Valores as reflecting some lax regarding the canceling CBFIs. And considering this scenario will remain, if we should expect that your further repurchases will be excluded from distribution rights, in considering this scenario for those CBFIs will not be canceling immediately?

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [3]

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Armando, this is Miguel Aliaga, CFO of the company. Yes, we all know that there are some delays on the process on CNBV, but that doesn't affect what we will be doing because as soon as we repurchase shares, and -- the first time we started repurchasing shares, those shares have not economic rights. So the end of the process, we'll be canceling those shares, those certificates.

First moment we buy them, they are not taken into account for data and distribution as well. So that's, let's say, that gives any shareholder the benefit of concentrating the dividends in less certificates.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [4]

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The only thing we need to plan is formalizing the cancellation, but that will happen, as you know, later.

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Operator [5]

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(Operator Instructions) We'll move next to Andrea Lara with Signum Research.

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Andrea Lara Cid Antúnez, Signum Research - Stock Analyst [6]

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I have 2 questions. The first one is, what percentage of your total portfolio is susceptible of being recycled? And my second question is related to the new strategy of reinvesting in certificates. Can you tell me what is the relation between this strategy and the maximization of the use of cash flows?

(foreign language)

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [7]

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Andrea, yes, we have about potential for recycle, it's about 10% of the number of hotels and 5% of the total value -- sorry, 20% of hotels, 10% value, sorry, that's the real one. So it means that we are looking to recycle the smaller hotels in different locations, in secondary markets. So I don't know if that answers the first question.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [8]

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And the second one, yes, what we're intending is, finally buybacks are taking us into account. And again, the theory says that buybacks are a just a way of returning back to shareholders. The only thing is that this happens in a longer term. It's not for a short-term benefit, but for the long-term benefit. And as soon as we -- as we said that our -- (inaudible) implied cap rate is 15.5%, the best investment in the company.

(technical difficulty)

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [9]

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(technical difficulty)

did you see on the recycling that we've done so far, the average compounded cap rate of those sales is around 8% or even less. I'm not sure if that -- right now, our valuation is about 16% in cap rate. So you can imagine that if we're able to sell nonstrategic hotels with lowest cap rate and if we can see that, that will be the market value of the assets, then the estimated value of our share will be around 12%. If we are buying it at 6% or whatever the amount is that we are doing a lot of value generation to our remaining shareholders. So yes, the strategy is, it's in arbitration, which is now we're taking the other step. We sell hotels and then we write certificates. We take advantage of that, and we're creating value to our shareholders. When the other -- cycle is the other way, you have a good valuation, okay? Then you buy hotels with a higher cap rate and good valuation and then there's no arbitration. You're doing that and giving value to your shareholders. So this is a strategy aimed to the situation in which we are currently.

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Operator [10]

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(Operator Instructions) And there are no further questions on the phone.

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Unidentified Company Representative, [11]

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I think we have -- I'm sorry, this is Maria. We have a couple of questions from the webcast. Jason (inaudible) and Martin Lara are both asking, where do you see the occupancy rate and the average daily rate during the next few quarters? And then what can we expect going forward?

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [12]

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Yes. Okay. Answering the question for Martin Lara. Yes, the second half of the year, we -- of course, we expect that this should improve better than we -- what we saw in the first half of the year. Still, it's the environment and economic, and environment is still so difficult because it will depend on the final signing of the (inaudible). For example, that -- if that happens, this will be very positive for the company.

So let's say that's at least what we expect and as we mentioned

(technical difficulty)

the second half of the year, no? Because also, and I see a second question of Martin. We are expecting, for example, the opening of our hotel -- The Westin Hotel that should happen in the second half of the year. And again, as we are selling more

(technical difficulty)

also, we are clearing what we also answered in

(technical difficulty)

The -- this type of coverage and investing in higher

(technical difficulty)

the second half of the year will improve over the first half of the year. And are those the only questions?

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Unidentified Company Representative, [13]

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Yes. We have another question and the second question is coming from Martin Lara also, and he's asking, could you give us an update on the Hotel Factory and the hotel sales that you are planning during the rest of the year?

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [14]

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Yes, we will continue selling -- looking for opportunities to sell assets, of course. We will not be announcing what assets that we are selling and at what prices because then we are not going to sell any asset. So that's important to mention. And also it will depend -- we don't have a specific pipeline because that will depend on the development of additional

(technical difficulty)

at least we know that the assets that may be potential for sale are nonstrategic assets with no barriers of entry, medium to small assets, for example, and then, of course, if we have an opportunity or an acquisition opportunity and looks attractive for us, then we will sell it. But as we mentioned before, we have about 25% of the portfolio, representing not more than 10% of the total value of the portfolio. That's important to mention.

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Operator [15]

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(Operator Instructions) We have a follow-up question from Armando Rodriguez of Signum Research.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [16]

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Just a follow-up regarding your OTA expenses, what we should expect in this matter through this quarter and the following quarters? That's my last question.

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [17]

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Yes. Well, basically, with -- regarding the OTAs, we have 2 trends. One runs in one direction and the other goes in the other direction. We need to sell to different channels because the margin is softening, then we need to use more OTAs in the -- which have a higher expense compared to BTAs. So these trial agencies are direct sales from either the brand.com or telephone reservation or our workforce. But -- and then, of course, that will increase the cost for us. It has been growing, and 3 years ago, about 6% of our sales went through OTAs. Right now we are a little bit over high 10%. And the other way is -- which these expenses are going down is because, I don't know you've been aware that there have been negotiations between the major chains, which most of them we are franchisees of those chains, in which they make agreements with -- like the one that Marriott did with Expedia into the -- Expedia is now charging 10% for Marriott branded hotels, that it's a tremendous advantage because independent hotels pay as much as 25%, and 10% is the same amount that is paid to the BTA. So actually it is coming back to market conditions, and that's a 17% of where it's shortly, just a few years ago. The chains, they have ranges in the low teens, between 10% to 13%, 14%, the major chains, which now we are -- the ones that we are paying for -- with the OTAs. And there are the different OTAs. If one of them is with a higher rate, of course, you use the other ones, which all of them have a real good potential of distributing your needs of customers.

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Operator [18]

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And it appears that we -- and it appears there are no further questions at this time. I'd be happy to return the call to Mr. Calvillo for any concluding remarks.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [19]

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Well, there was another question in the webcast that are asking about (inaudible). We didn't have any comments on that.

Well, we appreciate your confidence and your continued interest in our company. We look forward to speaking with you again soon. Thank you. Have a good day. Thank you very much.

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Operator [20]

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This does conclude today's Fibra Inn 2Q '19 Conference Call. You may now disconnect your lines, and everyone, have a great day.