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Edited Transcript of FINN13.MX earnings conference call or presentation 28-Oct-19 3:00pm GMT

Q3 2019 Administradora de Activos Fibra Inn SC Earnings Call

SAN PEDRO GARZA GARCIA Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Administradora de Activos Fibra Inn SC earnings conference call or presentation Monday, October 28, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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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Presentation

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Operator [1]

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(technical difficulty)

third quarter 2019 conference call. The earnings report that was issued last week 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 the future economic circumstances, industry conditions, company performance and financial results.

Let's turn to Slide 2 for a brief review of the topics that we will be discussing in today's call. We will start with the distribution and cancellation of certificates, followed by the sale of nonstrategic properties. We will also update Fibra Inn 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 our presenters, Mr. Óscar Calvillo, Chief Executive Officer; and Mr. Miguel Aliaga, Chief Financial Officer. I appreciate your attention.

At this point, 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 [2]

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Thank you, Sergio, and good morning, everyone. As we have mentioned in prior conference calls, Mexico's economic situation is not in good shape. In an environment of uncertainty and overbearing volatility, economic growth for 2019 has reached levels of near 0. USMCA, which is the name for the US-Mexican-Canada Free Trade Agreement plays a very important role for our country. The fact that it has been not resolved as of yet for various reasons has affected the country's main economic sectors. The hotel industry for business travelers and Fibra Inn have not been exceptions.

During the last 4 quarters, there has been a clear and steep decline of direct foreign investment in Mexico, with no significant spending in industrial, automobile and manufacturing sector. The flow of hotel guests levels off and business panels reflected in the hotels observed the business travel. As such, Fibra Inn has experienced various deceleration during this year to reach a significant varying loss of an accumulate 5.9% for the first 9 months of 2019.

During this quarter specifically, the remaining loss for -- was MXN 33 million, representing 6.3% less revenue than the third quarter of 2019. Basically, this can be explained mainly from the following properties: The Holiday Inn Mexico Coyoacan hotel, which has experienced a significant decrease in the number of events that it previously contracted with the government. Revenue at this hotel has been impacted by the certain measures of the new administrative of our current government. La Camino Real Guanajuato hotel, which ended its operating contract with Grupo Real Turismo in which we are doing analysis to convert it to an international brand with us just temporarily operating under a local brand, La Mina, Guanajuato. The Wyndham Garden in Playa del Carmen has had a low guest turnout in the area of Cancún and the Maya Riviera have been recently affected by security issues and seaweed in the ocean waters.

Our hotels in Saltillo, the Holiday Inn Express, the Hampton Inn by Hilton and the Courtyard by Marriott have also experienced a varying impact as a result of the aforementioned delay of the (inaudible) negotiations and the subsequent decline in foreign investment. This city was also recently affected by the General Motors strike. As a result, we are taking advantage of this temporary lull to initiate the remodeling process of the Holiday Inn and the Hampton Inn hotels.

In response, the company has taken the following measures: In terms of operating expenses, we have worked with the 3 hotel operators of our properties to prioritize the cost control. In absolute numbers, operating expenses declined by MXN 10.8 million, noting also that a significant part of those are fixed costs.

In terms of corporate expenses in 2019, the company opted for a more efficient and less costly organizational structure. As such, several directional positions were cut and personal severance were paid up to MXN 9.7 million. We also took measures to improve our financial liabilities. Therefore, we reopened debt with additions of MXN 1.2 billion of FINN18 securities, for which, MXN 1 billion was allocated toward the liquidation of FINN15. With this measure, the weighted cost of debt will decrease from 9.85% at a variable rate to 9.68% at a fixed rate. We have principal payment at February 2028.

We can say that the conditions are of a very competitive level and they offer us the opportunity to have good financial management, while maintaining the long-term objective around the 30%. The remaining balance of MXN 274.6 million will be used for remodeling of existing properties. Fibra Inn continues to prioritize shareholders value via the sale of nonstrategic assets, and we will also continue the rest of the year with the repurchase certificates.

Please turn to Slide 5. On July 23, our Technical Committee approved the initiative to invest a portion of Adjusted FFO, that bill was allocated in total as a quarterly distribution. Same as last quarter, Fibra Inn will pay 50% out of the Adjusted FFO in cash as a quarterly distribution, and the other 50% will be used to repurchase that equivalent amount in additional certificates. That should be canceled during the quarter underway and will generate value unless those triggers will be available.

It is important to mention that AFFO levels of our 3 quarter '19 of MXN 62.4 million were lower to those of the second quarter of '19. AFFO for the third quarter would have been MXN 75.1 million, excluding the effect of extraordinary and onetime expenses that took place during the quarter. First, there was severance payment from changing our organizational structure of MXN 9.7 million; and second, a lower interest income of MXN 3.6 million through till maturity of interest-rate swaps.

As such, Fibra Inn will pay a cash dividend of 12 -- MXN 21.2 million (sic) [MXN 31.2 million] this quarter, including MXN 0.0627 per certificate. MXN 31.2 million will be allocated towards the continuation of repurchase of -- this quarter -- the fourth quarter of '19. On October 7, 10.5 million certificates were canceled. These securities were acquired, with a buyback fund between the date of May 2, 2018, and March 29, 2019. The aforementioned certificates represented approximately MXN 86.6 million. The fund has continued to be active, and during the fourth quarter period, another 20.5 million certificates will be canceled coming from buybacks done in the quarter.

Looking at Slide 6 (sic) [5]. Coming in the fourth quarter of '19, the company will apply MXN 31.2 million for a continual repurchase of certificates. That is the total manager resource available for repurchase activities is MXN 111.1 million or until the fund accumulates 5% of the outstanding certificates. The regular repurchase program reached a total balance of 30.9 million certificates at September 30, 2019. After the close of the third quarter and prior to the third quarter '19 report, 3.6 million additional certificates were repurchased. We believe that this is an immediate action that will benefit investors and adds value, keeping in mind the current price level of the certificate and reducing the number of certificates available in the market.

Turning to Slide 7 (sic) [6]. You will see our records of dividend payments and the trailing 12 months dividend yield was 6.2% considering 6.6% per certificate.

Following Slide 9 (sic) [8], during this quarter, we sold 2 hotels and then a third one after the conclusion of the quarter. One was in Guadalajara and the other 2 in Chihuahua. The first was of MXN 99 million with an 8.1% NOI cap rate. The second of MXN 95 million with an 8.7% NOI cap rate, and the third one recently sold was of MXN 40 million with a 4.3% cap rate. We remain committed to our capital recycling strategy and continue to promote the sale of nonstrategic assets. The resources obtained from the sale of properties will be used towards repurchase of certificates and remodeling properties. We expect the sale of additional properties during the second half of the year.

Hotel Factory investments. The updated amounts of the Hotel Factory business can be seen in Slide #10. In third quarter of '19, for the JW Marriott Monterrey Valle project, the project contribution as well as those of Fibra Inn are getting closer to 30% in capital (inaudible) each.

The terms of the debt are set for this project and will proceed to the contracting of these bonds shortly. Development continues as planned, and we expect that this project will open during the third quarter of 2020. In terms of The Westin Monterrey Valle, Fibra Inn will execute the corresponding cash out from its institutional parent to maintain a 30% equity contribution. The opening of the price is paid toward the beginning of 2020. This depends on the development appeal to meet proposal times in accordance with the final authorization by the Marriott International. The Marriott Monterrey Aeropuerto by their current price remain unchanged.

Please turn to the page -- to Slide 12 (sic) [11]. The current portfolio includes 40 hotels following the sale of 2 hotels we just mentioned, the Holiday Inn & Suites in Guadalajara and the City Express in Chihuahua. The hotels sold but the Tecnológico Norte Hotel was completed after the quarter close. As such, Fibra Inn has a total of 6,591 rooms as of September 30. The Hotel Factory [apartment] has 3 hotels project towards at Playa del Carmen Landbank. Thank you for your attention.

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 [3]

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Thank you, Óscar, and good morning to everyone. The 2 factors explained previously by Óscar, when we take a look at same-store sales indicators, we registered an occupancy decrease of 5 percentage points mainly from lower room decrease 6.9% (sic) [5.9%] and an increase in the average daily rate of 1%.

Let's turn to Page 15 (sic) [14] to review revenues. Lodging revenues decreased by 6.4% year-over-year to MXN 462.2 million for third quarter '19 and rental revenues decreased by 5.2% to reach MXN 25.1 million. Consequently, the company experienced a 6.3% decrease in total revenues for the quarter, which was MXN 487.3 million. In terms of a breakdown by type of hotel, the proportions were consistent, with the majority of revenues stemming from the select service segment at 50.3% and the full service segment at 37.4%.

Let's turn to the review of the income statement on Slide 16 (sic) [15]. As Óscar mentioned, the company has engaged in suite cost control measures at operating and corporate levels even though margins appear to have weakened. This was due to an enigmatic effect of the lower revenue. Fibra Inn has received revenues from fees charged to the strategic partners from the Hotel Factory. For the period, this figure reached MXN 15.2 million. This resulted in a total NOI of MXN 154.3 million, which represented a 30.7% margin versus a 35.4% margin in third quarter '19 (sic) ['18]. As a result, adjusted EBITDA reached MXN 123.9 million, representing a 25.4% margin versus a 30.4% margin reported in third quarter 2018. Finally, FFO was MXN 79.5 million, a 16.3% of margin when compared to the 21.1% in third quarter 2018.

Turning to Slide 17 (sic) [16] for the balance sheet discussion. As of September 30, 2019, Fibra Inn had cash and cash equivalents of MXN 304.1 million, which reflected investment in the more liquid properties. Additionally, there were MXN 169.4 million of recoverable VAT tax related to the job progress at the JW Marriott Monterrey and the Westin Monterrey Valle hotels. We filed for the tax recovery with the Federal Tax Authority on October 18, 2019. At September 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 million.

If you follow me in Slide 18 (sic) [17], on October 9, 2019, Fibra Inn carried out the reopening of debt tender offer for FINN18 for MXN 1.2 million at a fixed rate of 8.87%. That will pay interest semiannually for our term of 8 years and 4 months. The payment of the principal will mature in February 2028. The remaining balance of MXN 274.6 million, which includes the additional funds received from the final price of the issuance above the nominal value of MXN 93.3 million and includes (sic) [excludes] the issuance costs of MXN 18.7 million, will be used for improving existing hotels. As with prior issuances, Fitch Ratings maintained the AA-(mex) in Mexico local rating and HR Ratings maintained the HR AA+ local rating.

On October 14, Fibra Inn carried out the early payment of MXN 1 billion corresponding to a principle of FINN15, plus MXN 4.4 million in accrued ordinary interest to date. The resources came from the FINN18 debt tender offer, and the remaining MXN 274.6 million will be used for remodeling existing properties. The weighted average cost of debts will increase from 9.51%, with interest swaps on FINN15 issuance, to 9.68% at a fixed rate without swaps and this -- in the FINN18 issuance.

We can take a look at the overall current financial situation of Fibra Inn on Page 19 (sic) [18]. The FINN18 and FINN15 long-term debt obligations were as follows. 5 -- 58.8% at a fixed rate of 9.93% and 29.4% of available rates completely hedged with weighted fixed rate swaps of 7.1% plus a 1.1% spread, which we'll pay at the moment of the early payments. The company has long-term disposition of MXN 197.6 million from the revolving line with BBVA Bancomer at TIIE plus a 1.5% spread and a short-term MXN 200 million from the revolving line with Actinver at TIIE plus 200 basis points. The total weighted debt cost reached 9.69%. At September 30, 2019, Fibra Inn has a ratio of loan-to-value that is 27.6% and a conservative debt service coverage of 1.6x. I appreciate your attention.

At this point, we will move on to the question-and-answer session. Operator, can we begin, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from [Eduardo Alvizeri].

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Unidentified Analyst, [2]

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My question is regarding the portfolio. Can we expect more asset recycling of the limited service hotels or is it going to stay like this in the future?

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

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Can you please repeat the question please?

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Unidentified Analyst, [4]

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Yes, of course. Can we expect more asset recycling regarding the limited service hotels? And we've seen 2 so far and 1 of the -- and the one at Guadalajara, which is a full-service hotel.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [5]

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Yes, Eduardo. As you may know, since maybe 3 years ago, we decided to change a little bit of strategy, and we decided even we -- we will send a person who will at least explain a little bit what's supposed to be the [indiscernible years. We are entering into the full-service luxury segment in both only in very specific series with big markets and, of course, the low key very specific opportunity in the area. So we believe that there is really continued selling nonstrategic assets and some of those assets are limited service -- service hotels. As you mentioned, yes, we have sold, by now, about [12] hotels, and we are still in the process of selling some of those nonstrategic assets. So you will see maybe at the end of the year, maybe 1 or 2 opportunities to be sold or in the beginning of 2020 depending on the speed of the process, not that we are keen on doing that.

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Operator [6]

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(Operator Instructions) It does appear that there are no questions at this time. I will turn the call back over to the management team for any closing remarks.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [7]

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Yes. We appreciate your confidence and the continued interest in our company. We look forward to speaking with you again soon. Have a good day.

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Operator [8]

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This does conclude today's program. Thank you for your participation. You may now disconnect.