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Edited Transcript of HCITY*.MX earnings conference call or presentation 13-Feb-20 4:00pm GMT

Q4 2019 Hoteles City Express SAB de CV Earnings Call

CUAJIMALPA DE MOREL Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Hoteles City Express SAB de CV earnings conference call or presentation Thursday, February 13, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Héctor Vázquez Montoya

Hoteles City Express, S.A.B. de C.V. - Deputy Director of IR

* James Paul Smith Marquez

Hoteles City Express, S.A.B. de C.V. - CFO & Administration

* Luis Eduardo Barrios Sánchez

Hoteles City Express, S.A.B. de C.V. - Chairman and CEO

* Santiago Parra

Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director

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Conference Call Participants

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* Alan Macias

BofA Merrill Lynch, Research Division - Analyst

* Armando Rodriguez

Signum Research - Stock Market Analysis Manager

* Eduardo Alvizouri Alvarez

GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst

* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division - Analyst

* Santiago De Leon

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Presentation

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Operator [1]

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Good morning, and welcome to Hoteles City Express Fourth Quarter 2019 Earnings Conference Call. Thank you for joining us today.

For opening remarks and introductions, I would like to turn the call over to Héctor Vázquez, Investor Relations Director from Hoteles City Express. Please go ahead.

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Héctor Vázquez Montoya, Hoteles City Express, S.A.B. de C.V. - Deputy Director of IR [2]

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Thank you, and good morning, everyone. Hoteles City Express fourth quarter 2019 results were released yesterday after the market closed. They can be found on Hoteles City Express Investor Relations website.

We would like to remind you that during this call, management's comments may include forward-looking statements. We ask that you please refer to the legal disclaimer in the quarterly report for guidance on this matter.

Joining us today's call are Mr. Luis Barrios, our CEO; Mr. Paul Smith, our CFO; and Mr. Santiago Parra, Corporate Finance Director. We will begin with some opening remarks followed by Paul, who will present the company's financial results. We will open then the floor for questions.

Now it's my pleasure to turn the call over to Luis.

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. - Chairman and CEO [3]

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Thank you, Enrique -- Héctor, I mean. Good morning everybody, and thank you for joining us today to discuss Hoteles City Express 4Q for 2019. Our results this quarter continue to be -- to show the effectiveness of our [mark present] model. As notwithstanding a difficult macroeconomic environment, we were able to grow and maintain our leadership position within the collective boutique hotel industry.

Since our last earnings call, economic growth in Mexico remains disappointing. Recently released preliminary data suggests that GDP contracted in 2019, making it the first annual decline in a decade. Gross fixed investment declined in 11 out of the past 12 reported months. Analysts' growth expectations in the latest Banco de Mexico call for the current and following year are down. Having said that, the USMCA was finally signed in late January. The government remains committed to fiscal prudence, inflation is within Banco de Mexico's target, interest rates are falling and the Mexican peso is stable. We believe, over time, this should help rebuild investors' confidence and trust. Furthermore, we saw some signs of an uptick, mainly in the energy, petrochemical and export corridor. This, together with the positive impact from the holiday season in this solid region, allowed us to offset the negative impact of property renovations in the north and delivered a 9% year-on-year line top growth.

In addition, our unique yield management model continues to pay off. During the quarter, we were able to both deliver a better occupancy and improved rate penetration in the market where we operate. Additionally, at a corridor level, we were able to deliver better RevPAR trends than our peers in most cases. This favorable outcome follows a cultural transformation towards empowerment at a local level and a gradual adoption of our invented pyramid strategy -- inverted pyramid strategy with the final decision for room grade [designs in our] local fees. We will continue to leverage our proprietary data-driven IT platforms to be the first and best to respond to unexpected property level trends.

From a financial perspective, while top line grew nearly double-digit levels as I said before, adjusted EBITDA grew 4.1% year-on-year. The decline in margin is mainly attributed to an increased density per occupied room night, which hiked by 6% in a year-over-year basis; our program to improve our breakfast menus; and increased advertising expenses focused on increasing demand from leisure travelers. Nevertheless, adjusted EBITDA margins remained at a healthy 34%. Also worth noting, when our Clean Energy Supply and Acquisition Agreement is already delivering savings of nearly 18% in our energy cost, we expect that savings will increase in coming months to more than 25%, which should expand margins.

We continue to see some licensing and permitting delays as described in previous quarter [profits], but we still think that it's a matter of time before decisions are resolved. With this in mind, some hotel openings, particularly in Guadalajara, have been kicked back to next year. Therefore, for this year, we are guiding for 13 new hotel openings, most of them on the franchise and management contracts.

In the last, we will continue to evaluate investment opportunities with a strict financial discipline and without losing sight of our ROIC target of 12% to 14% cash to cost. We remain confident in our ability to effectively penetrate Mexico demographically dense markets such as Mexico City, Monterrey and Guadalajara with our City Express Plus brand. We still believe the greatest potential for long-term value creation resides in this core market.

Furthermore, we reiterate our conviction that [previous pay] is the appropriate strategic alternative for the future funding of our pipeline. We believe it is the best way to create value for our investors and build a self-sustainable business model that can continue to take advantage of the growth opportunities that exist in the different geographies where we operate.

Finally, in order to enforce our sustainability strategy, I am pleased to report that we are launching Impacto City, a platform aligned with the UN Sustainable Development Goal guidelines. This is a testament of our commitment to provide a better best-in-class disclosure to the market regarding our environmental, social and government strategies, goals and progress towards them. We understand the relevance of aligning our business with sustainability goals and look forward to taking more progress on this throughout the year.

Now, I would like to hand the call over to our CFO, Paul Smith, who will provide you with further details on our financial and operational performance. Paul, please proceed with your remarks.

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [4]

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Thank you, Luis. My remarks here are based on Hoteles City Express fourth quarter and full year 2019 financial results, which was per under IFRS.

During the fourth quarter, we added one hotel to our portfolio. We will close 4 more properties than last year's comparable quarter. Of the 152 hotels in operation at the end of the quarter, 121 were established properties, 15 more than the fourth quarter of 2018. Our number of installed room nights during the quarter was 1.6 million and 6.2 million for the year, which represented a 7% and 9.2% increase compared to last year's comparable periods, respectively. This partly accounted for the decline in the consolidated occupancy level. As in previous quarters, our ability to absorb new properties have been impacted by adverse market conditions.

At the chain level, our ADR rose 4% to MXN 1,038, while RevPAR was 10 basis points above last year's quarter at MXN 596. Sales totaled MXN 817 million at the end of the quarter, an 8.7% increase. Total sales for 2019 amounted to $3.2 billion, which is a 9% increase compared to last year.

Hoteles City Express inflation income for the quarter decreased 18.1% to MXN 45 million despite some opening delays as well as lower incentive fees in this category. This translates to a 4.4% decrease for the year to MXN 184 million.

Total costs were up 17.8% during the quarter, mainly the new hotel openings provisions, which should be normalized over the coming quarters as the hotels start operations. 2019 total costs rose slightly less at 15.4%.

Lastly, on costs, our sales and administration expenses were 9.5% in the quarter and 11.4% for the year. That brings us to our fourth quarter adjusted EBITDA, which increased 4.1% year-over-year, with the corresponding margin contracting by 149 basis points. Adjusted EBITDA for 2019 increased 4 -- 0.5%, decreasing the margin by 206 basis points.

Comprehensive financing costs decreased 71.7% year-on-year to MXN 150 million. This was due to disbursement from bank financing lines over the last 12 months for constructing new hotels and the associated cost of our recent finance.

Our financial liabilities net of interest increased 34% over the year to MXN 5.3 billion. Cash and cash equivalents decreased 12.8% to MXN 952 million, bringing net debt to MXN 4.4 billion, up 37% year-on-year. That puts the net-to-debt-EBITDA at 4.4x. We expect this metric to decline as new hotels ramp up, but more importantly, loan-to-value remains at 34% at the end of the year.

The combination of a 21% decline in operating income and an increase in our net financing costs led to the 78% decrease in our net income, which came to MXN 22.5 million. Operating income for the full year declined 17.5% while financial expenses increased 42%. This resulted in a 77% decrease in net income, ending at MXN 65 million.

In summary, as Luis emphasized, we will remain disciplined with our investments and continue to evaluate new projects against strict financial criteria. Achieving attractive spreads between our cost of capital and investment returns continue to be our focus. If necessary, we will adjust the portfolio pipeline in favor of cash generation.

Thank you for your attention. And operator, please begin the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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

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

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Just one question on the hotel renovations that you made during the quarter, if you can provide a little more color on the number of hotels and the number of rooms that were under renovation? And if all these renovations have been completed during the quarter or should we see more during this -- first quarter?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [3]

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Alan, this is Paul Smith. Thank you very much for your question. During the quarter, we've completed with a -- or basically, we started with -- let me begin back by the first part. We have 8 hotels under renovation during the quarter in different stages. The one in Mexicali is almost done. It should be done by this month actually. Then the one in Ciudad Juarez, we should be done by the month of April. At City Express in Los Mochis, we should be done by the first quarter of 2020. And then the remaining portion will be ready in phases during 2020, all of them.

Now bear in mind that because of the remodeling -- how the remodeling process work, it takes into account occupancy and the improvement of ADR and so on, so we tend to phase them out according to demand as well. That's why it takes us a long period to complete the renovation.

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. - Chairman and CEO [4]

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Yes. This is Luis. Just to make a remark on how -- with the philosophy behind remodeling properties. I mean the criteria is very clear that sometimes they need with the money because of market consequences or just usage and time -- lifetime of the different materials and the different furniture that we use. However, when we get into a renovation, we plan for how that -- the outcome of that renovation is helping to increase in rate is going to be for that property, especially as the margins are going to improve and the competitive performance within the market that they are located.

But -- and also, what we try to do is during the period of renovation is how to minimize the room nights which are up -- out of the inventory for the -- and that is where the time frame in which each renovation is carried on. It varies from property to property. What we're trying here is to minimize the impact on revenue by having the least number of room nights or group of rooms out of the inventory and be able to sell.

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Héctor Vázquez Montoya, Hoteles City Express, S.A.B. de C.V. - Deputy Director of IR [5]

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Hi, Alan. Just to conclude with this question, this is Héctor Vázquez, within the northeast region, we saw a 20% increase year-over-year in hotel renovation. At a chain level, the increase of the hotel renovation was 30%, also on a year-over-year basis. And these renovations are being carried out to the end of maximizing the profitability of this hotel and preserving the guest experience.

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Operator [6]

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Our next question comes from the line of Eduardo Alvizouri with GBM.

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Eduardo Alvizouri Alvarez, GBM Grupo Bursátil Mexicano, S.A. de C.V. Casa de Bolsa, Research Division - Research Analyst [7]

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My question is regarding the operating metrics. We saw a negative performance on occupancy throughout 2019, which dragged RevPAR down. To what extent do you think this can be a long-term tendency? Or do you believe this is purely attributable to a shock as a response on economic slowdown?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [8]

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Hi, Eduardo. This is Paul Smith. We believe that most of the decline in occupancy for the year was derived from short-term effects, and they vary throughout the quarters. So during the first quarter, we were impacted, as we mentioned in the call of that quarter, mostly by the impact of the government's initiative to fight the effect of gasoline and then the restocking gasoline supply crisis that we had in the midpart of the country.

And then obviously, some of the occupancy also is derived from economic activity and, in particular, from projects. Some of those projects were delayed to 2020 and onwards. So we didn't see that occupancy for those projects at the time we expected it, but we believe that those projects will continue ongoing. I guess, a testament of that is what we're currently seeing in the energy corridor where we've seen very strong activity derived from investments, both in exploration and both related to the construction of the new refinery.

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Operator [9]

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

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [10]

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So we saw a very nice recovery in EBITDA margins in the quarter. Could you tell me what's your expectations for margins in 2020 with the current pace of openings that you have in mind? That's my first question.

And secondly, you said that you would be willing to slow down on the CapEx and willing to maybe focus your allocation to other sources. Would that include buybacks or even a dividend at some point?

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Héctor Vázquez Montoya, Hoteles City Express, S.A.B. de C.V. - Deputy Director of IR [11]

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Thank you, Froylan, for your question. This is Héctor Vázquez. Answering your first question, we do not provide any guidance in terms of operating metrics. What we need -- the guidance that we provided in terms of opening, that we will be taking for the next year. And Paul, do you want to?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [12]

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Yes. Obviously, Froylan, thank you very much for your question. Some of the openings that we have last year had a delay in the maturing process for the issues that were described in the previous question. So we will continue to expect to stabilize those properties and as those properties stabilize, that portion of the portfolio will drive the margins upwards. So you should expect a better margin comparison for 2020 compared to 2019, that's our expectation.

And on the second question, what we said is that we will be very strict in analyzing the opportunities where we invest the resources, and we will continue to be so with strict financial discipline. With that regard, we still see that there's significant opportunity in the market and we would like to capture that opportunity as well. We will be very conscious not to increase the net debt-to-EBITDA leverage we have currently and to return to a more 3.5, plus minus 0.3 percentage points or multiple points below or above that.

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Operator [13]

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Our next question comes from the line of Santiago De Leon with GBM.

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Santiago De Leon, [14]

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Congratulations on the results. I was wondering about Fibra STAY. What's the timetable there? And if you are going to be able to do the IPO this year? And at what CapEx would you expect to do it?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [15]

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Thank you very much for your question, Santiago. This is Paul Smith again. Two things, the consensus of the market is that the discovering rate will be reduced probably within the range of 600 to 650 basis points by the end of the year. Given that perception and given that we have a vehicle that will be best-in-class in terms of both performance and governance, we believe that basically a window -- obviously, the market windows come and go, as you probably know, but I -- at least in principle, the conditions should be there for the launch of the vehicle at that time, that's our expectation. Obviously, we are constrained by the, as you probably know, by the events that guide -- that trouble in bond rates up and down. But as long as we will have those conditions, we should be trying to launch the vehicle at that time.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Armando Rodriguez with Signum Research.

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Armando Rodriguez, Signum Research - Stock Market Analysis Manager [17]

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Paul, my first question is about your views on the leisure and business tourist during this year compared to 2019, if we should expect some seasonally changes compared to the last year -- previous year? Sorry.

And my second question is about also Fibra STAY. What's the size of this vehicle you are targeting? And what we should expect should be owned by Hoteles City? That's my only 2 questions.

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. - Chairman and CEO [18]

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This is Luis. Thank you for your question. In regards to the foreign market, what we've been able to -- the strategy that we have now is one in which -- since we have properties in certain corridors which cater to the foreign leisure traveler, not only domestic but international, what we are trying to concentrate is to launch a product that -- and therefore, promotional efforts to the trade in the U.S., that means we would not go to the open public. It will be too expensive then for such a -- for the market we're really aiming at. So what we're doing is we're utilizing and spreading out with medium-sized retail travel agents in the U.S. mainly to promote our product. So we have launched -- we're going to be launching now in the trade fair called (inaudible) in March, a concept in which involves trade relationships with travel agents as well as digital advertising supported by our digital media and traditional also sources.

We will put together certain packages and because our properties are in certain destinations, let's say, Cancun, Vallarta, Mazatlan, Cabos and Ensenada, and probably one in (inaudible), there are a lot of activities outside the hotels. So what we're trying to put together certain packages in which we include the hotel, the launching, plus the organized activities. And I think that there is -- because of the price point in which we are located, I think we would provide a very attractive product in destinations like Cabos, Cancun and even Vallarta where the prices of the hotels and the all-inclusive concepts are very expensive. So there -- I think there is a price point in the range of USD 100 and USD 120 of rate -- at a rate. And we will be enticing -- it would be very enticing for a market at that price point to get to know these destinations that doesn't have the purchasing power to stay on the higher end product. So that's how we -- that's how we're thinking about promoting the leisure traveler in the U.S. and also in certain locations and for the domestic traveler. Not only resorts. We have this new City Centro brand where it is located in downtown areas of the important cities -- colonial city, which have proven to be also very attractive for this type of consumer. So that's what we're aiming.

It takes time. We started last year and we will get to -- we will begin to see the product of -- the benefit of the efforts during the year. And it's not an overnight increase in volume, but it would be a good constant source of new business that we have not paid attention in the past.

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [19]

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And Armando, I'll take your -- the second part of your question. We have published that. Currently, we have a structure that has 42 properties and that have an asset valuation of about MXN 5.7 billion. This -- with this structure, this will give us a float of about MXN 1.9 billion. And we will be moving that to a -- or we can add another right now, another 28 properties, which would probably add -- basically, it's a transaction that would have an asset value of approximately MXN 9 billion with a free float of about MXN 3 billion in total.

Bear in mind that this we have not published. Obviously, every quarter, we will intend to -- we will try to update this number, given that every quarter, we have new hotels stabilizing and thus being able to participate in the FSTAY relaunch, so -- but these are the numbers that we have disclosed up to date.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Froylan Mendez with JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [21]

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Just regarding the renovations that you currently have, can you remind me how many hotels did you renovate per year? How many do you expect to renovate this year? And how much is the average CapEx per hotel for each renovation?

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [22]

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Froylan, this is Santiago Parra. This year, we have 8 properties and this -- we don't have like a number of hotels per year. We do this as every hotel is needed. So we go -- we have a refurbishment committee, which involves people from different areas. It's -- I mean, people from development, people from construction, also operations, finance, and we go and visit the property and we decide how -- and the scope of the renovation based on the returns. So we do this from the -- from a financial perspective, and then as the asset managers, we keep track of these properties so that they rate the yields that we need to be there. So I mean, I think, last year, it was around 6 to 7 properties, but we are in the process.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [23]

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How much is the total required CapEx for these 8 hotels? And how much is that in average per hotel?

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [24]

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In average, it's around MXN 12,500 per room, but I mean, this varies, as I said, because the scope for each property is different, just to give you an average is around there.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [25]

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And is this coming from the regular maintenance CapEx? Or this is something outside of that allowance that you make every quarter, let's say?

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [26]

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No, it's there.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [27]

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It's what? Sorry.

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [28]

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It's there. It comes from the regular CapEx budget.

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. - CFO & Administration [29]

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From the reserve.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [30]

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And lastly, if I may, can you repeat just the valuation that you would expect on Fibra STAY, including those additional 28 properties that I couldn't hear?

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [31]

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Yes. It is -- the asset valuation is around MXN 8.8 billion with the added 28 properties.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division - Analyst [32]

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And the float, that would be?

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Santiago Parra, Hoteles City Express, S.A.B. de C.V. - Corporate Finance Director [33]

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MXN 2.9 billion, MXN 3 billion.

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Operator [34]

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Our next question is a follow-up from the line of Alan Macias with Bank of America.

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Alan Macias, BofA Merrill Lynch, Research Division - Analyst [35]

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Yes. Just a question on the President's proposal to eliminate long holidays. What is your thoughts on the impact for Hoteles City? Is this positive or slightly negative?

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. - Chairman and CEO [36]

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Hello, Alan. We look that this impact will be neutral. The benefit of having long weekends in a specific week will be less than 4% in (inaudible). So the impact will be neutral (inaudible).

The thing is, let me explain why it comes out. In essence, you have -- to the hotels that are located in the different regions where most of the business traveler -- the traveler is foreign, you go to Cancun, Cabos, Vallarta, the 4 major destinations are -- in that order for receivers of foreign travelers is Cancun, Mexico City, Cabos and Vallarta. That takes 80% of the total traveler. Of those at 20 plus billion U.S. dollars that we generate in the balance of trade and tourism, it comes from those destinations. And mostly, it's foreign people, foreign visitor. So foreign visitors don't pay attention to the Mexican holiday. They pay attention to the local holidays. So what we can say is that foreign tourism is almost negligible, the change. It's not like a wash, nothing happened.

Now what had to worry the most is -- where the impact is when you move those Mondays back to a Wednesday, Thursday and Tuesday, what happens is the manufacturing and the productivity of retail, commercial and manufacturing concerns are the ones that have an impact in efficiency. For us, what we have figured it out in the loss of revenue for moving those days from Mondays to some of the day versus the increase in rates all along, it becomes almost an impact of 2% in that week. So we do have a 2% impact in occupancy in a week or 7-day week because you move from a Monday to a Thursday. What will happen is 2% in how many weekends, in coming weeks that have a really an impact on the new change of Monday to somewhere, I guess, they are not more than 3. So you will find in 2 to 3 weeks over the year, an impact of a reduction of 2 to 3 percentage points during that week. So it's really, on a year-round impact, it's really very small.

Now what they are thinking of is just the important national holidays will be celebrated in their true date. And then with what -- it's being -- it's going to -- what the Secretary of Tourism is working with Minister of Education and Labor, we are trying to generate another couple of long weekends in order to compensate for the impact. So in the end, it's a lot of noise with a very limited impact.

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Operator [37]

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Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Barrios for any final comments.

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. - Chairman and CEO [38]

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Okay. Thank you. Well, we remain confident that our growth to penetrate the largest markets in Mexico and improving our key metrics will guide us to the strong financial results. We still believe that our strategy will continue to generate value for our stakeholders.

Thank you, again, for joining us today -- today's earnings call. As you know, all the information concerning our fourth quarter earnings results have been posted on our website and our financial and investor relations teams are available to answer any additional questions you might have. We wish you a good day. Thank you.

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Operator [39]

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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.