2014 MANAGEMENT DISCUSSION AND ANALYSIS
The financial information presented in this section derived from the Consolidated Audited Financial Statements and accompanying notes, included in this Annual Report, was audited by KPMG Cárdenas Dosal, S.C., Independent Auditor.
Following, we present the Management Discussion and Analysis of the results of the operation. For the analysis of these financial statements it should be taken into account that, due to the change in the revenue structure that was carried out in December 2013, 2014 results are not comparable compared to the results reported for 2013.
REVENUE
The sales mix at the end of 2014 is comprised of 31 hotels under operation: 9 Limited Service hotels, 12 Select Service hotels and 10 Full Service hotels.
On December 31, 2014, Fibra Inn’s revenue reached Ps. 884.3 million, which represented an increase of 335.8% compared with the figure reported in the previous year. Fibra Inn’s revenue per hotel segment is as follows: Ps. 325.2 million, or 36.8%, corresponds to Full Service hotels; Ps. 467.1 million, or 52.8%, corresponds to Select Service hotels and Ps.92.0 million, or 10.4%, corresponds to Limited Service hotels.
| REVENUES PER SERVICE SEGMENT | 2014 | 2013 | ||
|---|---|---|---|---|
| Ps. (millions) | % | Ps. (millions) | % | |
| Limited Service | 92.0 | 10.4% | 7.9 | 3.9% |
| Select Service | 467.1 | 52.8% | 144.4 | 71.1% |
| Full Service | 325.2 | 36.8% | 50.7 | 25.0% |
| Total Revenues | 884.3 | 100.0% | 202.9 | 100.0% |
Total 2014 Fibra revenue was Ps.884.3 million, of which:
- Ps. 832.2 million, or 94.1%, was room revenue, which is derived from the 31 properties in the portfolio at the end of 2014, and which reflected the change in the revenue structure.
- Ps. 52.1 million, or 5.9% was the lease of services other than lodging, such as the rent of meeting rooms, coffee breaks, conference rooms and restaurants, as well as the rental of some commercial retail spaces.
The revenue variations from room revenue and revenue from the lease of other services reflected the change in the revenue structure that took place in December 2013; when previously was registered as rental income and with the change of structure room revenue is coming from the rental of rooms and the rental revenue corresponds to the leasing of public areas.
OPERATING EXPENSES
Operating expenses totaled Ps.562.7 million, or 63.6% of the total revenue, compared to the amounts up to December 31, 2013. This variation in the operating expenses was mainly due to the greater number of hotels in the portfolio during 2014. The variation of Ps.535.2 million was the net effect of greater operating expenses due to an increase in the number of hotels acquired; that is:
- An increase of Ps.212.9 million, or 22.4 percentage points corresponding to lodging expenses.
- An increase of Ps.124.3 million, or 10.0 percentage points corresponding to administrative expenses.
- An increase of Ps.59.2 million, or 6.4 percentage points corresponding to a greater energy expenses.
- An increase of Ps.56.0 million, or 6.2 percentage points corresponding to a greater royalty expenses.
- An increase of Ps.40.7 million, or 4.5 percentage points corresponding to greater advertising and marketing.
NET OPERATING INCOME (NOI)
The NOI reached Ps.321.6 million in 2014, representing an annual increase of 83.4%, compared to Ps.175.4 million in 2013. NOI margin for 2014 was 36.4%. The margin reflected greater revenues from the hotels acquired, based on operating efficiency.
INDIRECT EXPENSES
During 2014, expenses incurred for the acquisition of hotels during 2014 reached at total of Ps.64.3 million, which represented 7.3% of total revenue. This expense reflected the accounting treatment in accordance with the application of IFRS 3 Combination of Businesses accounting rule beginning in the fourth quarter of 2014.
In reference to the IFRS 3 Combination of Businesses standard, the acquisition of hotels qualifies as the acquisition of a business, since an operation is purchased. Therefore, costs related to the transaction are acknowledged in the Income Statement as they are incurred, these include: costs for notaries, legal and appraisals, among others. This applies to the acquisition of hotels realized in 2014.
Excluding the expenses from the acquisition of the hotels incorporated during 2014, the administrative expenses totaled Ps.52.7 million and represented 6.0% of total revenue. This represented a decline of indirect expenses as a percentage of the revenue for 6.8 percentage points compared to 2013.
Total expenses related to Fibra Inn’s administrative expenses were Ps.117.0 million for 2014 and represented 13.2% of total revenue, which increased by 40 basis points compared to Ps.26.1 million in 2013, which represented 12.8%. This variation was mainly due to:
- A decrease of 2.7 percentage points corresponding to the advisory fees
- A decrease of 4.8 percentage points in corporate & administrative expenses
- An increase of 7.3 percentage points in acquisition expenses
- UAn increase of 0.7 percentage points in other expenses
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA)
As a consequence of the increase in the operating expenses mentioned above, EBITDA was Ps.204.6 million in 2014, which equals a margin of 23.1% on Fibra Inn’s revenue.
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (ADJUSTED EBITDA)
Excluding the expenses related to the acquisition of hotels in 2014, Adjusted EBITDA was Ps.268.9 million, equivalent to a growth of 80.1%, compared to the Adjusted EBITDA for 2013. The adjusted EBITDA margin was 30.4%.
OTHER NON-CASH ITEMS
Executive compensation based on equity instruments was Ps.18.5 million in 2014. This amount corresponded to the portion earned from the value of the 3 million CBFIs that was delivered to the former Chief Financial Officer after the Initial Public Offering was carried out, at the end of a 3-year period, as has been discussed previously. This is a non-cash item, whose monetary effect will be a dilution of 0.7% beginning March 2016.
During 2014, an accounting depreciation of Ps.108.3 million was registered, derived from the change in the revenue structure. At the beginning of the fourth quarter of 2013, the calculated depreciation of the fixed assets – properties, furnishings and equipment – was incorporated into the results, based on the residual value of the estimated useful life of the net assets, beginning from the time the asset is available to be utilized. In the present analysis, the depreciation corresponding to 2013, which was Ps.50.6 million, is incorporated for comparison purposes.
OPERATING INCOME (EBIT)
Therefore, Operating Income decreased by 7.2% at December 31, 2014, with the recording of Ps.77.8 million, or 8.8%, as a percentage of the total revenue, compared to Ps.83.9 million for 2013.
FINANCIAL INCOME
Net interest expense in the amount of Ps.10.8 million was recorded, mainly derived from temporary credits with Actinver and Banorte, as well as a negative foreign exchange rate fluctuation of Ps.0.7 million. The net financial result represented an expense of Ps.11.4 million in 2014, compared to the net financial income of Ps.58.1 million in 2013, which was derived from the cash position from the Initial Public Offering in 2013 and the absence of financial liabilities in 2013.
NET INCOME
As a result, the Net Profit for 2014 was Ps.66.7 million. If the expenses from the acquisition of 11 hotels acquired during 2014 were excluded, net income would have been Ps.131.0 million, or 14.8% of the total revenue.
CASH FLOW FROM OPERATIONS (FFO)
Cash flow from operations (“FFO”) was Ps.257.5 million in 2014, which represented 29.1% of the total revenue, an increase of 24.2% compared to 2013, in which Ps.207.4 million was recorded.
DISTRIBUTION
With regards to distributions, Fibra Inn declared dividends in the amount of Ps.237.1 million, corresponding to the distributions for the first through fourth quarter of 2014, which represented an increase of 29.8% compared to the Ps.182.6 million declared in 2013.
During 2014, expenditures for reimbursements and distributions to the holders of certificates reached Ps.224.1 million. This included the payment of distributions for the fourth quarter of 2013 and for the first through third quarters of 2014.
This represented Ps.0.7996 cents per CBFI in 2014, which is equivalent to a 13.1% increase compared to the Ps.0.7067 cents per CBFI in 2013. The calculation of the distribution per CBFI in the first through third quarter of 2014 was based on 258,334,218 outstanding CBFIs. Please note that at the end of 2014, the distribution was based on over 437,019,542 CBFIs after the subscription for the equity increase, and that this was the amount utilized for the calculation of the fourth quarter 2014 distribution.
Finally, the annual dividend yield for 2014 was 4.9%, based on a closing price of Ps.16.40 per CBFI, which compares favorably to the dividend yield rate of 4.1% for the previous year.
FINANCIAL SITUATION, LIQUIDITY AND CAPITAL RESOURCES
On December 31, 2014, Fibra Inn had Ps.1,106.7 million in cash position. On this date, the total of its bank obligations was Ps.66.0 million, at a TIIE interest rate plus 2.5%. The initial disbursement of Ps.100.0 million was made on December 17, 2014, to comply with the terms of the contract established with the banks. On December 26, 100% of the credit amount was covered by contracting an interest rate swap with the banks participating in the credit, both with expiration dates in March 2019.
With regards to the bank credit, the Trust Guarantee was signed on October 1, 2014, whereby the initial down payment of 16 hotels, with an appraised value of Ps.3,216.7 million, was made with a fiduciary and collateral (but not mortgage) guarantee. On October 3, 2014, the Pledge Contract was signed, in which the accounts of the 16 hotels that were pledged as a guarantee were incorporated.
The financial covenants agreed with the financial institutions with whom the bank credit was contracted, and which are being fully complied with, are shown below:
| FINANCIAL LIMITATIONS | ||
|---|---|---|
|
AS OF DECEMBER 31, 2014 |
||
| Credit / Value 1 | Equal to or Less than 50% | 3.1% |
| Debt Service 2 | Equal to or Greater than 1.60 | 20.5 |
| NOI / Debt 3 | Equal to or Greater than 13% | 243.6% |
| Minimum Coverage 4 | Equal to or Greater than 1.20 | 20.7 |
| Net Tangible Value 5 | Greater than 60% | 98.7% |
| Total Value of Assets Leverage 6 | Less than or Equal to 55% | 1.3% |
1) Outstanding Balance of the Credit in the total value of the hotels pledged in guarantee.
2) NOI of the hotels pledged in guarantee in the Servicing of the Debt, including the simulation of increased amortization for 15 years.
3) NOI of the hotels pledged in Guarantee in the Outstanding Balance of the Credit.
4) NOI of the hotels pledged in Guarantee of the debt plus Obligatory Distributions (Fiscal Results).
5) Total Value of the Assets minus the Outstanding Balance of the Credit in the value of the Assets.
6) Outstanding Balance of the Credit in the Total Value of the Assets.
Fibra Inn had a loan-to-value ratio of 1.3% as of December 31, 2014, which will increase until it reaches a level of 33% once the total amount of the bank credit is contracted and made available. This level of indebtedness fully meets the recent provisions of the CNBV (Mexico’s Securities and Exchange Commission), to regulate the maximum limit of indebtedness of REITs by up to 50%. The coverage index for servicing the debt on December 31, 2014 was 20.7 times.
The leverage indices established by the CNBV and the itemization of the components that were utilized for the calculation of these financial considerations are shown below:
| REVIEW OF CNBV STATUS INDICES | AS OF DECEMBER 31, 2014 |
|---|---|
| Level of Indebtedness | |
| Financing | 100.0 |
| Debt Securities | – |
| Total Assets | 7,560.5 |
| Debt Index | 1.3% |
| Debt Servicing Coverage Index | |
| Liquid Assets | 1,106.7 |
| Recoverable Value Added Tax | 247.5 |
| Operating Income | 660.0 |
| Lines of Credit | 2,300.0 |
| Sub-Total Numerator | 4,314.2 |
| Amortization of Interest | 11.8 |
| Amortization of Principal | 100.0 |
| Capital Expenditures | 40.7 |
| Development Expenses | 390.0 |
| Sub-Total Denominator | 542.5 |
| Debt Servicing Coverage Index | 8.0 |
OPERATING RESULTS
The same-store sales parameters include the following:
- It includes hotels owned by the F/1616 Trust and its operations, excluding hotels that are in negotiation by a binding agreement in a phase prior to acquisition, and which will not be included until the time their operation is initiated.
- Therefore, the same-store sales indicator for 2014 comprises 22 hotels in the present portfolio as if they had been in Fibra Inn's portfolio for the complete periods during of both years.
- The hotels that have been in the Fibra Inn portfolio for less than 45 days are excluded. These are: México Plaza Guadalajara Andares, Crowne Plaza Monterrey Aeropuerto, Casa Grande Chihuahua and Delicias, the four Microtel Inn & Suites by Wyndham in Chihuahua, Culiacan, Toluca and Ciudad Juarez. Also excluded is the Aloft Guadalajara, which is a recently-built hotel and therefore has no operating history.
Our most significant operating indicators in terms of comparable properties are the following:
| ANNUAL SAME STORE (22 HOTELS) | |||
|---|---|---|---|
| 2014 | 2013 | VARIATION | |
| Revenue from lodging | 800.5 | 752.1 | 6.4% |
| Occupancy | 59.6% | 61.3% | -1.7 p.p |
| Average Daily Rate | 1,016.5 | 945.6 | 7.5% |
| RevPar | 605.9 | 579.4 | 4.6% |
The revenue from lodging in terms of 22 comparable properties was Ps.800.5 million. This represents a 6.4% increase compared to Ps.752.1 million in the prior year. This significant increase in revenue from lodging is a result of the following:
- The hotels acquired operated with greater efficiency under Fibra Inn than they did when they were operated by their previous owners; and,
- A better performance from the implementation of a strategy aimed at maximizing revenue beginning during the second half of the year. This has been the result of rate increases.
The revenue per available room (RevPar) in terms of the 22 comparable properties rose 4.6%, reaching Ps.605.9 in 2014. This was the result of a decrease of 1.7 percentage point in the occupancy rate, which reached 59.6%, offset by an increase in the average daily rate of 7.5%, or about Ps.1,016.5 in 2014.
The increase in the revenue per available room (RevPar) of 4.6% was explained as follows:
A lower occupancy, which shows:
- A 4.2% increase in the number of available rooms in 2014, due to the rooms that were added from the following hotels: Holiday Inn Express of Guadalajara, Holiday Inn Express in Playa del Carmen, Camino Real Guanajuato and Marriott Puebla. Excluding the addition of rooms, the occupancy rate remained practically the same, with a slight variation of 10 basis points.
The increase of 7.5% in the average rate compared to 2013 is owed to:
- The benefit from the brand name reconversion of the Mexico Plaza hotels, which operated under the Wyndham Garden brand in the Irapuato, Celaya, León and Silao hotels. Additionally, the rebranding of the Holiday Inn Monterrey Valle, which previously operated under the name of Wyndham Casa Grande.
- A better management in the administration of rates of all our hotels during the year, mainly in the Holiday Inn Monterrey Aeropuerto, Hampton Inn by Hilton in Reynosa, Marriott Puebla, and Camino Real Guanajuato.
As a result, the revenue per available room (RevPAR) reached Ps.605.9, which means a growth of 4.6%, compared to 2013. If the addition of rooms during 2014 were excluded, the RevPar would have been Ps.619.7, equivalent to a growth of 6.9%.
REVENUES PER REGION
As for the revenues per region: Ps.48.6 million, or 5%, was revenue from the hotels located in the northern region of Mexico; Ps.305.4 million, or 35% is revenue from the northeast region, Ps.450.4 million, or 51%, corresponds to the properties in the central and southern regions of the country and Ps.80.0 million, or 9%, corresponds to the western region of Mexico.
| REVENUES PER REGION | 2014 | 2013 | ||
|---|---|---|---|---|
| Ps. (millions) | % | Ps. (millions) | % | |
| North | 48.6 | 5% | 11.6 | 6% |
| Northeast | 305.4 | 35% | 93.3 | 46% |
| Central and Southern | 450.4 | 51% | 83.5 | 41% |
| Western | 80.0 | 9% | 14.5 | 7% |
| Total Revenues | 884.4 | 100.0% | 202.9 | 100.0% |
Northern Zone.- Chihuahua and Sinaloa
Northeast Zone.- Nuevo León, Coahuila and Tamaulipas
Central-Southern Zone.- Querétaro, State of Mexico, Puebla, Guanajuato, Quintana Roo, Federal District, Veracruz and Campeche
Western Zone.- Jalisco