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Edited Transcript of FINN13.MX earnings conference call or presentation 27-Feb-20 4:00pm GMT

Q4 2019 Administradora de Activos Fibra Inn SC Earnings Call

SAN PEDRO GARZA GARCIA Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Administradora de Activos Fibra Inn SC earnings conference call or presentation Thursday, February 27, 2020 at 4:00:00pm 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

* Sergio Martínez

Fibra Inn - IR

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Conference Call Participants

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* Martín Lara

Miranda Global Research - CEO & Founding Partner

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Presentation

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Operator [1]

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Good morning. My name is David, 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 Mr. Sergio Martinez, Investor Relations Manager, for opening remarks.

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Sergio Martínez, Fibra Inn - IR [2]

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Hello, and welcome to the Fibra Inn Fourth Quarter 2019 Conference Call. The earnings report that was issued yesterday as well as the accompanying PowerPoint presentation are both available in the company's 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 [3]

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Thank you, Sergio, and good morning, everyone. As we have seen, Mexico has been facing a hard economic situation. The Mexican National Institute of Statistics and Geography, INEGI, announced Tuesday morning Mexico's economic contraction for the fourth quarter of 2019, which was minus 0.4% when compared to same quarter last year. And only the contraction was minus 2.1%, which brings 3 consecutive quarters of negative GDP growth and the first negative annual growth in the last 10 years. (inaudible) GDP growth of 0.1% and 0.3% for the first and second half of 2020, respectively. The [first government] spend is still quite low and prime investments in many new products are [on hold] waiting [to feel more in control].

The country's main economic sectors have been affected throughout the year as has the business channel for the hotel industry. Effectively, the great impacts are: the [industrial], the construction due to delay of the construction permit and low investment coming from government showing 10 consecutive months of negative growth, the automobile sectors that have been affected by the strikes in Mexico and the U.S. as well as lower exports and Panama manufacturing industry that shows an annual contraction of 4.2%. Although [domestic] will be very positive for Mexico, it's still early to see any benefit.

During this fourth quarter, the cities and properties that are showing more impact in [Hotel Factory] are as follows: following Camino Real Guanajuato hotel that changed name temporarily to a local brand Ex-Hacienda San Xavier due to termination of the hotel operational contract with Grupo Real Turismo, Fibra Inn will be converting the property into an international brand, which will be disclosed as soon as the franchise agreement is signed. Our 6 hotels in Saltillo and Toluca are facing a lodging revenue impact as a result of General Motors strike that recently affected the city that relate in the [connect] agreement and the lower foreign investments. Finally, although our 5 properties in Monterrey have shown moderate growth, they are in terms of sustained deceleration during 2019.

STR reports [commencing marking] of our hotel [interest state] that our sector in Mexico had a negative RevPAR of 5.8% in 2019, followed by 12.4% increase in hotel supply. According to data tool, the [emerging] seasonal hotel industry states that the re-occupancy contraction in 2019 is due to a higher growth hotel supply versus hotel demand. As such, Fibra Inn has experienced revenue deceleration during this year to reach a significant revenue loss of an estimated 6.6% for 2019. During this quarter, similarly, the revenue loss was MXN 45 million, representing an 8.8% lower revenue than the fourth quarter of 2018, 2.9% excluding the 3 hotels in the company sold during the last quarter of 2019.

In response, the company keeps working with the following measures: in terms of operating expenses, we keep tightening cost controls with the 3 hotel operators of our properties. In absolute numbers, operating expenses declined by MXN 9.3 million, noting also the significant part of those are fixed costs. In terms of corporate expenses, the company is showing a less costly and more efficient organizational structure. As we announced previously, financial liabilities improved by 210 basis points, decreasing the average cost of debt from 9.85% to 9.64% at a fixed rate, reopening debt with the issuance of 12 -- of MXN 1.2 billion of FINN18 -- reopening debt with the issuance of MXN 1.2 billion of FINN18 securities towards a liquidation of FINN15, keeping the loan-to-value at 30.2%. Fibra Inn continues to prioritize shareholder value via the sale of nonstrategic assets, and we will also continue 2020 with a repurchase of certificates as one of the highest yield investments for the company with an implied cap rate higher than 11%.

For this fourth quarter 2020 (sic) [fourth quarter 2019], Fibra Inn will be paid 100% of the adjusted AFFO in cash as an ordinary quarterly distribution. As such, Fibra Inn will pay a cash dividend of MXN 63.6 million this quarter, MXN 0.1288 per certificate. On October 7, 10.5 million certificates were canceled. The securities were acquired with a buyback fund between the date of May 2, 2018, and March 29, 2019. The aforementioned certificates represent approximately MXN 86.6 million. Following the conclusion of the quarter, on January 17, 20.5 million certificates were canceled, and the Technical Committee authorized on last Tuesday's session another cancellation for an additional 5.2 million. As such, Fibra Inn has decreased the number of outstanding certificates in the market by approximately 8.2%, thereby directly benefiting the investors.

Turning to Slide 6. You will see our track record of dividend payments and the dividend yield for the quarter of 7%, considering MXN 7.26 per certificate at the closing price on December 2019.

Following on Slide 8. We remain committed to our capital recycling strategy and continue to promote the sale of nonstrategic assets. We will keep our [payment sources] obtained from the sale of properties towards the repurchase of certificate, remodeling properties and investing in quality assets. During this quarter, we received a payment of MXN 40 million coming from the sale of a Tecnológico Norte hotel, commonly operating in Fibra Inn's portfolio as a City Express Junior in Chihuahua. After the closing of the quarter, Fibra Inn signed 2 binding agreement to sell: first, the Wyndham Garden León Centro Max for MXN 140 million plus value-added tax with a 6.4% NOI cap rate; and second, the Aloft Guadalajara for MXN 258 million plus value-added tax with 6.6% of NOI cap rate. After sale of these properties, Fibra Inn will have 38 properties in its portfolio, including the recently opened Westin hotel and effectively divesting nonstrategic assets in 2020.

Hotel Factory investments. The updated amount of Hotel Factory investments can be seen on Slide 10. On January 8, we announced the signing of an operating contract and brand-use agreement for W Hotels with Marriott International, Inc. for developing in Playa Del Carmen. The property is a 218-room hotel and we estimate its opening in 2023. A reason in selecting W Hotels brand is that it focuses on a unique luxury market segment, which we believe is highly entitled to the leisure and energetic traveler of this trendy Mexican beach destination. We want to remind you that Fibra Inn acquired this land bank in co-investment with a temporary strategic partner and has -- whose exit is expected during 2020 and will allow the inclusion of new co-investor partners during the development and construction of the hotel project. The investment in this property has been unchanged since last quarter.

Last week, we announced that the Westin Monterrey Valle hotel began operations. This property is a top-rated hotel in the luxury segment. Fibra Inn invested MXN 240 million plus value-added tax expenses, totaling MXN 773 million in co-investment with an institutional investor through its Hotel Factory model. It generates approximately 160 new jobs. Fibra Inn estimates an 18- to 24-month stabilization period and we estimate an average daily rate in the range of 220 to 240 for this year. Fibra Inn expects to arrange the long-term financing for this hotel during the month of March of 2020. The fourth quarter of '19, the JW Marriott Monterrey Valle partner contribution as well as those in Fibra Inn are 30% in equity contribution each, as previously agreed.

Potential net debt at credit level were as follows: a preferred credit of MXN 112 million at TIIE plus 200 basis points due to January 23 financing project, out of which 2 positions have been exercised, MXN 187.5 million on January 27, 2020 and MXN 77.3 million disposed on February 24, 2020; secondary price of MXN 140 million at TIIE plus 200 basis points due on 3 years to finance the value-added tax of the property, out of which MXN 85.1 million has been disposed [as in the case today]. There are continuous plan, and we expect that this project will be opened during the second half of 2020. [Demands effort] as project remains unchanged.

Please turn to page -- to Slide 11. The current portfolio as of December 31, 2019, includes 39 hotels following the sale of Tecnológico Norte hotel that we mentioned before. As such, Fibra Inn has total rooms of 6,485 rooms. The Hotel Factory at present has 4 hotel properties, including 850 rooms.

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 this 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. Please turn to Slide 13. Due to the factors explained previously by Óscar, when we take a look at same-store sales in papers, we registered an occupancy increase of 2.8 percentage points, revenue per available room decreased 5.4%, and minus 1.0% in the average daily rates.

Let's turn to Page 14 to review revenues. Lodging revenues decreased by 8.6% year-over-year to MXN 444.1 million for fourth quarter '19, and rental revenue decreased by 12.9% to reach MXN 24.4 million. Consequently, the company experienced an 8.8% decrease in total revenues for the quarter, which was MXN 468.5 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 51.1% and the full-service segment at 36.6%.

Let's turn to the review of the income statement on Slide 15. As Óscar mentioned, the company has engaged in strict cost control measures at the operating and corporate levels as well as the sale of nonstrategic properties. Even though margins appear to have weakened, this was due to [a dramatic] effect of lower revenue. Fibra Inn received revenues from fees charges from its partners from the Hotel Factory. For the period, this figure reached 30 -- MXN 3.1 million. This resulted in a total NOI of MXN 146.2 million, which represented a 31% margin versus a 30.9% margin in fourth quarter '18. As a result, adjusted EBITDA reached MXN 121 million, representing a 25.8% margin versus a 27.5% margin reported in fourth quarter '18. Finally, FFO was MXN 80 million or 17.1% of margin when compared to the 21.2% in fourth quarter '18.

Turning to Slide 16 for the balance sheet discussion. As of December 31, 2019, Fibra Inn had cash and cash equivalents of MXN 563.6 million, which reflected the investment in remodeling current properties. Additionally, there were MXN 194.7 million cost recoverable VAT tax related to accumulated investments at the JW Marriott Monterrey and at the Westin Monterrey Valle hotels. We filed for a tax recovery with the federal tax authority for MXN 184.3 million during the fourth quarter. At December 31, 2019, short-term bank debt of MXN 200 million related to the Actinver credit line as well as long-term bank debt of MXN 197.9 million refers to BBVA. Both credit lines are dispositions towards the temporary financial investment of the Westin Monterrey Valle and the value-added tax paid in acquisition of this property. As of today, these credit lines have been fully paid. The long-term debt reached MXN 3.2 billion corresponding to a net balance of FINN18 after the liquidation of FINN15 debt issuance. Total equity is valued at MXN 7.8 billion.

In the following slide, 17. On October 9, 2019, Fibra Inn carried out the reopening of a FINN18 debt issuance for MXN 1.2 billion at a fixed rate of 8.87% that will pay interest semiannually for a 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 additional funds received from the final price of the issuance above the nominal value of MXN 93.3 million and includes the issuance costs of MXN 18.7 million, will be used for improving existing hotels. As with prior issuances, Fitch Ratings maintained the AA- 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 the principal of FINN15 plus MXN 4.4 million in accrued ordinary interest to date. The resources came from FINN18 debt issuance reopening, and the remaining MXN 274.6 million will be used for remodeling existing properties. The weighted average cost of debt decreased to 9.64% at a fixed rate.

Let us see the overall current financial situation of Fibra Inn on Page 17. The FINN18 long-term debt obligations was as follows: 88.2% of long-term debt in FINN18 at a fixed rate of 9.93%, and 5.9% of long-term bank debt with a BBVA credit line at a variable TIIE rate plus 1.5% spread, and 5.9% of short-term bank debt with Actinver credit line at a variable TIIE rate plus 2.0% spread. The total weighted debt cost reached 9.69%. At December 31, 2019, Fibra Inn has a ratio of loan-to-value that is 30.2% and a conservative debt service coverage of 1.8x.

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 Martin Lara with Miranda Global.

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Martín Lara, Miranda Global Research - CEO & Founding Partner [2]

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I have 2 questions. The first one is what do you expect in terms of occupancy rates and average daily tariffs in 2020? And the second is if you could please give us an update on the JW Marriott.

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

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Martin, this is Miguel Aliaga. On the -- for 2020, we don't see at this point in time that -- nothing will change dramatically and positively from the economic environment. So we believe that average daily rates should be slightly higher than the ones that we had in 2019. Maybe we can see average daily rates a little higher because of the participation of Westin and by the end, the participation of JW Marriott, but still it's too early to see or to expect important changes in those end.

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Martín Lara, Miranda Global Research - CEO & Founding Partner [4]

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Marriott daily rates?

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Miguel Gargollo Aliaga, Fibra Inn - Director of Administration & Finance [5]

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In terms of the JW Marriott hotel, fortunately...

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Martín Lara, Miranda Global Research - CEO & Founding Partner [6]

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On time?

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

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The project is on time, different from the other one that we received the hotel from a third party. We believe that this hotel will open in the second half of 2020, maybe July, August, September. But it's -- right now, it's I think on time because there are always daily issues but we can solve those. And the budget of this project is fully in our control. So we don't see major delays on that project.

But fortunately also, what we can see from the Westin hotel, just to give you a brief idea of what happened, this week, we had a full occupancy in that hotel. Of course, corporate rates should be always a little lower than what we expect, but it's very important to mention or to see that what we are expecting in this type of hotels in Monterrey, now we have the best hotel in Monterrey, the Westin hotel. And the best hotel in the end of the year will be the JW Marriott hotels both owned by Fibra Inn. And that's, for sure, a positive news for the company.

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Operator [8]

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(Operator Instructions) And at this time, there are no further questions. I'll turn the call back over to Mr. Calvillo for his closing remarks.

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Óscar Eduardo Calvillo Amaya, Fibra Inn - CEO, GM & Proprietary Member of Technical Committee [9]

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Thank you very much for your attention, and we look forward speaking to you again, and have a good day.

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Operator [10]

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