Mexico’s Lodging Moment Equity Research / Real Estate February 16, 2015
Reinitiation Of Coverage By Pablo Duarte Hoteles City Express (HCITY) Real Estate FIBRA Inn (FINN) [email protected] This page intentionally left blank
Equity Research MEXICAN LODGING SECTOR Lodging Sector February 16, 2015
Mexico’s Lodging Moment Reinitiation Of Coverage HCITY And FINN
Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other FINN Buy Local Ticker FINN.13 ■ We are reinitiating coverage on FIBRA Inn (FINN) and Hoteles City Express (HCITY), two well positioned lodging players with aggressive long-term growth strategies. Price Target 2015 (MX$) 19.5 Last Price (MX$) 16.3 ■ We like HCITY on: i) its unique, profitable and scalable fully-integrated hotel Expected Return 19.6% business model, ii) its solid growth track record, reputation and position, iii) its Dividend Yield 2015 5.8% highly recognized brands, iv) its experienced mgmt., and v) its large diversification. Total Return 25.4% Market Cap (MX$ MM): 7,123 ■ FINN is now better positioned to capture a stronger growth from the consolidation Firm Value (MX$ MM): 7,747 of the local lodging industry, through: i) its diversified portfolio, ii) sound operating LTM Price Range (MX$): (13.30 - 17.96) capabilities, iii) tangible pipeline, and iv) enhanced organizational structure. Free Float: 83% ■ In this report we present a deep insight into the local lodging industry, including Avg. Daily Trade (MX$ MM): 9.7 among other topics: i) general overview on the sector, ii) analysis on historical investments from listed hotel companies and FIBRAs, iii) long-term growth drivers HCITY Buy of demand for lodging services, iv) growth plans of global hotel companies in the country, and v) Mexico’s 15 main lodging markets and submarkets. Local Ticker HCITY.* Price Target 2015 (MX$) 26.9
Attractive Lodging Industry Fundamentals. Mexico’s evolution over the last 30 years Last Price (MX$) 23.7 towards a more mature (service-oriented) economy, along with its achievement of a certain Expected Return 13.5% level of economic and political stability, is indicative that the country has reached an Dividend Yield 2015 0.0% inflection point for its lodging industry, the point at which a market evidences a boost in travel Total Return 13.5% and lodging. Mexico is poised to experience the faster, internally-driven economic growth Market Cap (MX$ MM): 9,120 experienced by the U.S. in the 1960s, when it reached maturity with an economy driven by Firm Value (MX$ MM): 10,002 tertiary activities (advanced personal and professional services, as well as experience-based LTM Price Range (MX$): (20.02 - 27.20) businesses). Free Float: 57% Avg. Daily Trade (MX$ MM): 10.1 The Mexican hotel industry, comprised by 510,296 rooms is characterized by being highly fragmented and by having low penetration levels. Independent (mom & pop) hotels represent 69% of the system-wide room supply, or ~80% leaving aside from the equation the markets of Monterrey and Mexico City, where the presence of chained hotels is stronger. The expected consolidation of the industry in the coming years represents attractive long-term growth opportunities for well positioned local lodging institutional players.
Based on an analysis of infrastructure investments, expected population growth, and the application of a 4.7% CAGR to quality lodging supply for the period 2014-2022 (slightly above projected GDP growth), Jones Lang LaSalle estimates 155,256 net new quality hotel rooms in the country, from its current 350,744 rooms. Chained hotels are expected to present the highest growth rate, at 8.1%, particularly in regional markets (driven by the energy reform and the auto sector). The share of independent quality hotels will decrease from 55% to 42%.
Outlook For 2015-2016 Remains Intact. Amidst lower oil prices and FX volatility, lodging companies have ratified their 2015-2016 expansion plans, including FINN and HCITY, supported by the solid momentum of the manufacturing sector and the positive longer term prospects from the energy reform in the country. Regarding the latter, hotel investments with exposure to this sector are not expected to be delayed due to their long-term view. Expected investments from the first round (first auction projects) of the energy reform in 2015 will not Pablo E. Duarte de León stop. However, we do believe that current oil prices will derive in a delay in other oil Real Estate production projects (CapEx reduction) due to the tighter short-term cash flow generation [email protected] from global oil companies. FINN’s growth plan considers an 88% growth in total hotels in +52 (55) 1103 6600 x4334 operation, reaching 64 by year-end 2016. HCITY will open 42 new construction hotels by 2016 according to its guidance, representing a 44% increase against the 96 hotels Actinver comprised in its portfolio. Guillermo Gonzalez Camarena 1200 Santa Fe, Mexico City, 01210
Actinver’s Equity Research
Contents
4 Table of Contents
The Lodging Industry ……..…………………………………. 7
Cyclicity, A Look At Its Inherent Risk And Opportunity 8-9 The Low Part Of The Cycle …...………………………………….. 8 Recovery, With A More Promissory Outlook …...…………….. 8-9
An Introduction …………….…………….………...…..………….. 10-18 Current Lodging Supply ………………...………….…………….. 10-11 Hotel Segments And Types ………………………..…………….. 11-12 Mexico’s Leading Hotel Chains …………………..….………..... 13-14 Top Industry Players: HCITY, FIHO, FINN And GHSF……….. 15-16 Historical Investments Of Listed Hotel Companies …...…….. 17-18
Mexico’s Hotel Industry, At Its Inflection Point …….…….. 19-44
Pablo Duarte Macro Outlook For 2015 ……..………………………….…..……. 19-20
Lodging Industry: Mexico’s Moment Has Arrived …...………. 21-44 The U.S. 1960s’ And U.K. 1980s’ Lodging Evolution Experience ………………………………………………………..... 21-22 Demographic Trend To Boost Demand For Hotel Services …... 23 Growing Middle-Income Class In Mexico …………………..…... 23-24 New Incentives For Home Ownership …………………………... 24 Mexico, A Magnet Of Foreign Direct Investment …………..…... 25-27 Competitive Labor Costs, Looking South To Mexico …...…. 25-26 Mexico Has Become A Clear Manufacturing Winner …...…. 27 A Stronger Investment In Infrastructure Is Coming ………..…... 27-38 Main Infrastructure Projects In Mexico …………...…………. 28-32 Improving The Mexican Rail Industry ….……………………. 32 The Energy Reform Will Bring Additional Investments In The Long Term ………………...………………………………. 33 The Mexican Auto Industry, Another Key Driver Of Growth 34-36 The Strategic Aerospace Industry ……...……………………. 37-38
5 The Bottom Line: Mexico’s Lodging Industry Growth Potential 39-44 Growth Plans Of Global Hotel Companies In Mexico …..…. 40 Location Of Investments / Market Opportunities …...………. 40-42 PAX Traffic Performance, Evinces The Greater Growth Prospect Markets ……………...………………………………. 43 Appreciation Potential In Local ADRs ….……………………. 44
Mexico’s Main Lodging Markets And Submarkets …...… 45-69 Nuevo Leon (North Region) .....………………………………….. 46-47 Mexico City (Central Region) ……...…………………………….. 48 Jalisco (Bajio Region) ………....………………………………….. 49 San Luis Potosi (North Region) ..……………………………….. 50-51 Guanajuato (Bajio Region) …...………………………………….. 52-53 State Of Mexico (Central Region) ……………………………….. 54-55 Queretaro (Bajio Region) …...... ………………………………….. 56 Tamaulipas (North Region) ...... ………………………………….. 57-58 Veracruz (Southeast Region) …...……………………………….. 59-60 Campeche (Southeast Region) ………………………………….. 61 Baja California Norte (B.C.) (North Region) .………………….. 62 Chihuahua (North Region) …...………………………………….. 63-64 Coahuila (North Region) ……...………………………………….. 65-66 Sonora (North Region) ………...………………………………….. 67-68 Puebla (Central Region) ……....………………………………….. 69 FINN: Booking At Attractive Low Fares Report …………. 70-107
HCITY: Hotel Engineering Report …………………………. 108-140 Corporate Directory ……………………………….…………. 141 Disclaimer ………………………………...……………...……. 142
6 The Lodging Industry
Similar to other property-type sectors, lodging / hotel properties and the REITs or FIBRAs that invest in this property type are heavily dependent on the overall strength of the country’s economy and economic growth. However, the hotel sector is more cyclical because it is not secured by long-term leasing contracts and is thus exposed to short-term changes in national, regional and international business and leisure travel. As we will cover in this report, exposure to travel disruptions, such as the one originated by the swine flu outbreak in 2009 in Mexico (occupancy reached levels of 10% in the north and 30% in the central region), also increases hotels’ revenue volatility.
Factors Affecting Economic Value For Different Property Types Ne w S pa c e Job Retail Sales Population Supply vs. Asse t Type GDP Growth Cre a tion Growth Growth De ma nd Retail 1 3 2 4 4 Office 1 2 5 4 3 Industrial 1 5 2 3 4 Multi- Family 1 2 5 2 4 Hote ls 1 2 5 4 3 Note: 1 = most important, 5 = least important Source: CFA Institute.
Given the more cyclical nature of the hotel business, a deeper analysis on the sector’s fundamentals (including: trends in occupancies, average daily rates (ADRs), RevPARs, air passenger (PAX) traffic growth, regional performance, etc.) and the overall economic performance, becomes crucial for investors in determining their investment decision (entering in the right part of the cycle).
Said that, for a better understanding and flow of this report, we are first presenting: i) a quick look on the cyclicity of the hospitality real estate (RE) sector, ii) the particular characteristics of the Mexican lodging industry; iii) a brief explanation of the different hotel segments and types; and iv) an introduction of the sector’s listed hotel companies (/FIBRAs), with an analysis of their historical acquisitions. The latter becomes the introduction for the next section of the report (‘Mexico’s Hotel Industry, At Its Inflection Point’), as we will show there an analysis on the industry’s long-term growth expectations from national and regional standpoints.
The ‘Mexico’s Hotel Industry, At Its Inflection Point’ section begins with the general outlook for the Mexican economy (GDP growth, interest rates, inflation and FX). Then, it goes deeper into the fundamentals of the lodging sector, covering the main drivers of hotel rooms’ demand (FDI, infrastructure investment, demographics, middle class growth, job creation, among others), its growth opportunities and long- term expectations. Here we include a section on the Mexican hotel Real Estate (RE) market which covers Mexico’s main business corridors (Energy, Petrochemical and Exports / Industrial, Manufacture, Logistics and Exports NAFTA / Maquila Exports and Logistics / Mining / Agriculture Exports NAFTA) and their relevance for the investment strategies of hotel companies.
Finally, we present the characteristics and outlook of the main lodging markets in which our covered companies (/FIBRAs) are exposed to, or have investment projects in (Campeche, Chihuahua, Coahila, D.F., State of Mexico, Guanajuato, Jalisco, Nuevo Leon, Puebla, Queretaro, Quintana Roo, Sinaloa, Tamaulipas, Veracruz).
7 Cyclicity, A Look At Its Inherent Risk And Opportunity
Before turning the page to the fundamentals of the hotel industry, would will to delve a little more about the greater cyclicality it has unlike other Real Estate sectors (industrial, office, retail and multi-family). The lodging RE industry is more dependent on the country’s economy, thus, an economic slowdown has a direct and immediate impact on average daily rates and occupancy levels, while other RE industries are more defensive on their long-term leasing contracts.
The Low Part Of The Cycle
This should not be overlooked by investors, as the hotel business cycle becomes the most important factor in taking the investment decision in the sector, in our view. In relation to the risk that represents the sector’s exposure to the economic cycle, lets recall the most recent crisis of 2009.
During that year, the Mexican lodging industry experienced one of the most difficult times in its history, facing the global financial crisis and the H1N1-flu outbreak in the country. At their lowest point, occupancy levels dropped to an average of 30% in the central region and of 10% in the north region, with the economy falling 6.0% and air passenger traffic -13.8%. Note that break-even points fall between an occupancy range of 30% and 35% in the sector. It took until 2013 to reach pre-crisis levels of ADRs in real terms.
Recovery, With A More Promissory Outlook
Investor confidence in the lodging sector is supported by four consecutive years of improving hotel performance. Since 2010, Mexico has registered upward movements in the performance of occupancy, ADR and RevPAR, following the aforementioned recession and the H1N1 virus.
Hotel Occupancy Rates In Mexico And The U.S. Hotel Performance In Mexico 64.4% 65% 57% 62.8% $140 55% 60% 62.2% 53% 49% 50% $120 46% 50% 60% $100 57.2% 40% 54.6% $80 54.8% 54.5% 55% 30%
$60
ADR (USD) ADR
$122
$122
Occupancy Rate Occupancy
$105
$104 $104 Occupancy Rate Occupancy 20% $40 $97
50%
$ $ 70 $ $ 66
$ $ 56 10%
46.3% $ 52
$20 $ 51 $ $ 45
$0 0% 45% 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Mexico United States ADR RevPAR Occupancy
Source: Ministry of Tourism, PwC, Actinver. Source: Smith Travel Research, JLL, Actinver.
Regarding total consumer spending, Mexico’s lodging sector has experienced consistent growth in spending on hotel services since its lowest point in 2009, increasing by a CAGR of 6% from 2010 to 2013. According to Oxford Economics, consumer spending at hotels in Mexico is expected to grow at an 8% annual rate, well above growth rates of mature economies.
8 A much stronger recovery has been observed in hotel investments in Mexico. From a low USD100 million level of transactions in 2009, capital flow has increased in the sector, reaching USD600 million in 2013. The introduction of FIBRAs and entities like CKDs have also motivated such an expansion, on the back of the liquidity they have introduced into the market. These vehicles represented 25% of the total hotel transactions in 2012 and 50% in 2013. Partnerships between hotel chains and FIBRAs will boost growth during the next years. According to JLL, deal flow will rise 15% in 2014, to ~USD715 million in hotel operations, reaching a record-high level.
Consumer Spending On Hotel Services In Mexico Hotel Volume Transaction In Mexico
$ 25,000 25% $ 800 6,000
20% $ 700 5,000 $ 20,000 15% $ 600 10% 4,000 $ 15,000 5% $ 500
0% $ 400 3,000
$ 10,000 -5% Change YoY Rooms Sold Rooms Investments MM) (USD Investments $ 300 -10% 2,000 $ 200
Consumer MM) (USD Spending Consumer $ 5,000 -15% 1,000 -20% $ 100
$ 0 -25% $ 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2007 2008 2009 2010 2011 2012 2013 2014
Consumer Spending YoY Change Investments Number Of Rooms Sold
Source: Oxford Economics, JLL, Actinver. Source: JLL, Actinver.
Disappointing growth rates in the local economy during 2013 and 2014 did not slow down growth of the hospitality sector, for which we anticipate stronger growth prospects in the next years, supported by its attractive fundamentals, as well as by an expected improvement in the overall economy, of 3.0% in 2015 and with growth rates above 3.5% in the next years.
Along the section ‘Mexico’s Hotel Industry, At Its Inflection Point’ of this report, we show precisely why we believe that this is Mexico’s lodging moment (the basis of our investment thesis), the right part of the cycle to be long in the sector.
It is important to highlight that for the business lodging segments attended by FIBRA Inn (FINN) and Hoteles City Express (HCITY), peaks in demand concentrate within weekdays (Monday through Thursday), resulting in significant vacancy during the weekends.
9 An Introduction
The Mexican hotel industry, comprised by 510,296 rooms (350,744 quality lodging rooms [3-5 stars], or 68.7%), is characterized by being highly fragmented and by having low penetration levels. Independent (mom & pop) hotels represent 69.0% of the system-wide room supply, or ~80% leaving aside from the equation the markets of Monterrey and Mexico City, where the presence of chained hotels is stronger.
The evolution towards a more sophisticated market, which has already commenced in the country, will close the gap against the U.S. industry, a mature one with a 69.0% representation of chain-affiliated hotels.
Lodging industry penetration is often measured As we will go through at detail in the “Mexico’s Hotel Industry, At Its Inflection Point” by its hotel supply ratio (HSR). It is calculated by section of this report, this sound growth potential for institutional players is coming dividing the total estimated number of relevant along a significant room supply demanded. Our expectation (based on industry (quality) hotel rooms in a country by each 1,000 experts like JLL, HVS, HCITY) is that Mexico’s current low penetration level of 2.9 (hotel supply ratio, or HSR) will improve to 3.9 by 2022, through the addition of inhabitants . 155,256 net new quality hotel rooms. This estimation would still compare below that of the U.K. of 8.6 and the U.S. of 15.5, which have the most sophisticated lodging industries in the world.
Current Lodging Supply
Historically, the local lodging industry has had As of December 2014, the market was comprised by 350,744 quality lodging rooms international presence, motivated by the tourism (according to Sectur), from which 158,113 (45%) were affiliated to global or regional industry (8.5% of GDP). More recently, growth in hotel chains and the rest were independent quality hotels (192,631 rooms; 54.9%). commercial and industrial activities has led to an According to a study by HVS, Mexico’s main markets (40 selected cities) have a total increase in business-class travel demand, which inventory of 1,496 hotels and 210,141 rooms (59.9% of the total quality lodging room supply), considering leisure and business-class quality hotels. The low-quality supply has not being catched-up by lodging supply. (half star to 2 stars) is represented by 2,270 hotels with 159,522 rooms (31.3% of the total supply).
The urban business-class inventory (the most relevant for our companies under coverage) consists of 1,154 hotels and 126,927 rooms (60.4% of the total urban quality lodging supply), from which 44,511 rooms are affiliated to international brands, 28,285 rooms are affiliated to national brands, and 54,131 hotel rooms are independent.
Mexico’s Total Lodging Supply Mexico’s Urban Quality Lodging Supply (40 Selected Cities)
Mexico’s Lodging Supply Urban Quality Lodging Supply Number of Hotels
5,750 510,296 Number of Rooms 1,496 210,141
31.3% 68.7% 39.6% 60.4% Low-Quality Lodging Supply Quality Lodging Supply Main Markets MTY, MEX, GDL Leisure Business-Class 30.6%
2,270 159,552 3,480 350,744 825 107,162 341 83,214 1,154 126,927
54.9% 45.1% 42.6% 57.4%
Independent Chain Affiliation Independent Chain Affiliation
2,460 192,631 1,020 158,113 690 54,131 464 72,796
Source: JLL, HVS, Sectur, Actinver. Source: JLL, HVS, Sectur, Actinver.
10 The following exhibit shows the segmentation of Mexico’s 40 urban markets, the most representative according to HVS. It includes chains and independent hotels.
Mexican Hotel Segmentation (Independent, Local-Chained, International-Chained) By State
91.5%
90.0%
86.0%
80.0%
79.0%
78.0%
75.0%
74.0%
73.5% 73.5%
73.0%
71.5%
68.5%
68.0%
67.0%
66.5% 66.5%
63.5% 63.5% 63.5%
60.0% 60.0%
59.0%
57.5% 57.5%
52.0%
50.0% 50.0% 50.0%
49.5%
48.0% 48.0%
42.0% 42.0% 42.0%
40.0%
36.0%
33.0%
21.5%
30.0%
León
Tepic
Saltillo
Toluca
Merida
Puebla
Morelia
Tijuana
Oaxaca
Torreon
Cancun
Mexicalli
Reynosa
Veracruz
Mazatlan
Acapulco Durango Cuiliacán
Monterrey
Queretaro
PozaRica
Hermosillo
LosCabos
Chihuahua
MexicoCity
Cuernavaca
Guadalajara
Villahermosa
RivieraMaya
NuevoLaredo
CiudadJuarez
Coatzacoalcos
PuertoVallarta
SanLuis Potosí
Aguascalientes
TuxtlaGutierrez
Lazaro Cardenas
Tampico/Altamira
Playadel Carmen Ciudaddel Carmen Independent International Regional/National Source: FIHO, Actinver.
Hotel Segments And Types
We find also relevant for the purpose of this report to briefly go through the different hotel segments in the Mexican market (limited-service, select-service and full- service), given the particular growth prospects each of them has.
Categorization Of The Hotel Industry The hotel industry can be categorized using 2 different methods, both industry-wide accepted. The first categorizations is known as ‘Chain Scales’, based on the current By Chain Scale By Asset Class system-wide average daily room rates of the major chains in a country and consists of 6 categories: Luxury, Upper-upscale, Upscale, Midscale (with food and beverage Luxury Full-Service services), Midscale (without F&B), and Economy. Upper-Upscale
Upscale The second system, the most commonly used by industry players given its simplicity Select-Service and the one we will be focusing on, divides the industry by asset classes. The asset Midscale (with F&B) class method is comprised by 3 categories: limited-service, select-service, and full- Midscale (without F&B) service. These categories can be further subdivided by chain-scales (midscale Limited-Service limited-service, economy limited-service, and so on). Economy
Source: US Hotels Appraisals, Actinver. In the limited-service segment, HCE is the leading hotel chain with 72 hotels of two of its brands which are amongst the top 7 brands in the category. One hotels follows with 36 hotels and Mision hotels with 33. FIHO has exposure in this segment mainly through One-brand hotels, which represent 21% of its total rooms in operation. FIBRA Inn has been recently expanding its exposure to this segment through the Wyndham Garden (5 hotels), Fairfield Inn & Suites (2 under development) and Microtel Inn & Suites (4 hotels) brands. As we will mention later, Wyndham has still a short experience in the country, today it has 8 hotels in operations, however, among the LatAm region, Mexico has become its top priority for expanding its operations. The franchise agreement FINN has with Wyndham to operate its global brands in the country opens another large long-term (LT) growth channel to the trust.
The limited-service segment offers the largest LT We believe that this limited-service segment offers the greatest long-term growth growth potential in the country. To the extent of opportunities in the local lodging market given the business segment it attends (the their possibilities, listed hotel companies are largest and fastest growing) as well as its short ‘action range’. Its compact market taking advantage of this, expanding their covers a radius of just 1 kilometer, giving it a stronger growth potential. For instance, Hoteles City Express has 2 hotels (HCE Plus and HCE) in the Paseo de la Reforma operations in new markets within the segment. Corridor with a 4 blocks (0.5 km) distance between them, both with occupancy levels Hoteles City currently has 5 hotels in Puebla, with above 65%. The company estimates potential for 35 hotels in the Mexico City room to open more. market. It currently has 10 hotels in this market.
11 Number Of Hotels By Brand And Segment In Mexico
72 Limited-Service Select-Service Full-Service 64
52 52 51
36 33
21 16 17 16 13 12 11 11 12 10 10 9 7 7
Source: Companies' information, HCITY, Actinver.
The select-service segment also offers an interesting growth potential given the low penetration of chain hotels in the country, as well as the positive prospects of business lodging demand in the local global and regional markets with exposure to high-growth sectors, such as the automotive, energy, aerospace, medical and electronics. FIHO has exposure to this segment through Posadas brand Fiesta Inn, and more recently through Marriott. Since its IPO, FINN has had a greater exposure to IHG’s brands Holiday Inn, Holiday Inn Express, as well as Hampton Inn by Hilton, and has been more recently exploring the Aloft (by Starwood) and Courtyard (by Marriott) global brands.
Hotel Segments
Limited-Service Select-Service Full-Service
Characteristics. These hotels lack foodservice Characteristics. Select-Service is a hybrid Characteristics. This segment characterizes by a facilities and the amenities offered to guests are segment between limited and full-service hotels, complete food and beverage services. On-site typically simple, but might vary within the brands. which offer the fundamentals of limited-service restaurants, lounges, and group meeting spaces properties but larger rooms and additional with banquet facilities are the cornerstones of the . Economy limited-service hotels offer no-frills amenities. Some of these increased amenities are full-service offering. Selective amenities such as rooms at modest prices. certain restaurant and banquet facilities but on a spas, banquet rooms, doormen, valet parking, less elaborate scale than one would find at full- extended room service, concierge services, and . Midscale limited-service hotels offer increased service hotels. high-end restaurants and boutiques characterize services and amenities which might include a many full-service properties. business center, small meeting rooms a fitness Size. Average number of rooms in select-service room, a guest laundry facility, a market pantry, properties can vary, but typically these properties The multiple services and amenities offered by an indoor and/or outdoor pool and whirlpool. won’t be larger than 180 rooms, nevertheless the full-service hotels come at a higher operational “express” formats are smaller, in a range from 90 cost, but they also help capture more selective Many limited-service brands are also designed to to 110 rooms. demand. Groups requiring meeting space are a cater to extended-stay travelers. These “home- significant source of business for these properties, away-from-home” hotels offer rooms with kitchen Average Rates. The ADR are generally within a as well as top management business travelers facilities and a small dining table, and may offer range of $1,000 - $1,800. Select-service hotels willing to pay higher room rates. Leisure and discounted weekly and monthly rates. keep operating costs down by offering services vacation travelers, especially at the upscale and and amenities in moderation. Such properties luxury levels, are also a significant market for Size. Limited-service hotels are usually small with usually do not feature multiple restaurants, and many full-service hotels. In all cases, full-service no more than 150 rooms. their restaurants are likely to offer a limited menu. hotel guests seek the extra amenities and service levels found only at these properties. Average Rates. Room rates are typically on the lower end of the scale because demand for Size. Full-service hotels are usually larger than limited-service properties generally comes from other categories, especially leisure full-service price-sensitive business and leisure traveler hotels; while a full-service hotel that targets looking for specific locations. The majority of business travelers has in average 230 rooms, a limited-service brands target an ADR range of leisure full service hotel can reach up to 450 MX$700 to MX$1,200; however, the higher quality rooms. of certain brands’ product offering and finish-out can command a premium. It’s worth noting that Average Rates. This segment room rates are limited-service hotels have the lowest operating typically on the higher end of the scale, with costs of the three segments because they don't average daily rates of MX$1,500 and above. offer catering services or multiple restaurants.
Source: US Hotel Appraisals, Actinver.
12 Mexico’s Leading Hotel Chains Leading Hotel Chains In Mexico Urban lodging industry in Mexico is comprised by 30 hotel chains (e.g. Camino Real, Other Fiesta Americana, Quinta Real, Fiesta Inn, One Hotels, Real Inn) and more than 60 14.2% 9.0% local and international brands (e.g. Marriott, Hilton, Holiday Inn, Ibis, Courtyard). The largest hotel chain in the country is InterContinental Hotels Group (IHG) with 25% of 6.0% the urban quality lodging market followed by 2 Mexican chains, Grupo Posadas (23%) and Hoteles City Express (14%). 5.0% 21.9% 4.9% Besides their contribution for the development of the local lodging industry, most of these hotel chains also become quite relevant on: i) the access they provide to the 4.1% FIBRAs for the use of their recognized brands (obviously at a cost) through agreements, and ii) the potential pipeline of additional investments they could 3.9% generate to the FIBRAs. Recently, HCITY executed a LOI with FIBRA Inn for it to 3.0% develop 10 City Express hotels in several locations within the country over the next 2.9% two years.
25.1% Here’s a brief description of the top 4 hotel chains:
Source: FIHO, Actinver. ■ InterContinental Hotels (IHG) is a British multinational hotel company with over 670,000 rooms and 4,602 hotels across over 100 countries (85% operating under franchise agreements). In Mexico, IHG is the largest hotel chain, with 133 franchised hotels operating under 6 different brands in select and full service segments (Holiday Inn, Holiday Inn Express, Crowne Plaza, Intercontinental, Staybridge Suites and Hotel Indigo) and more than 22,000 rooms, which represent 14% of the country’s quality lodging supply market share. Additionally, the group plans to invest ~US$677 MM in the development of 28 hotels by 2017, some of which may be developed with Fibra Inn.
■ Grupo Posadas is a Mexican hotel company with over 20,000 rooms and 128 hotels in 45 cities of Mexico as well as in Texas, U.S. (the only destination outside Mexico). Posadas owns leases, operates and manages hotels, resorts and villas in its 7 different brands that cover Limited, Select and Full service segments (Live Aqua; Fiesta Americana; Fiesta Americana Grand; Fiesta Inn; Gamma; One; and The Explorean). Grupo Posadas is the second largest hotel chain in the country; its total hotel rooms represent 12.8% of the total quality market share of the country.
■ Hoteles City Express is a limited-service hotel chain operating as an integrated hospitality business platform developing, acquiring, managing and franchising hotels in the economy and budget segments, primarily in Mexico and expanding into selected markets in Latin America including Costa Rica, Colombia and Chile. HCITY currently operates 96 properties under 4 brands (City Express, City Jr., City Suites and City Express Plus) with a total of 10,907 rooms, of which 94 hotels are located in Mexico, representing 6.4% of Mexico’s quality lodging supply market share. In relation to growth plans, HCITY expects to have 118 hotels by year-end 2015.
■ Grupo Real Turismo (GRT), was acquired by Grupo Empresarial Angeles in 2000, it owns and operates the Brands Camino Real (30 hotels), Quinta Real (9 hotels) and Real Inn (6 hotels). The latter, was created during 2012 as a business hotel chain.
In the following page we present the 13 most important hotel chains with operations in the country, as well as their brands’ portfolio and the relation they have with the FIBRAs and other listed hotel companies (Hoteles City Express and Grupo Hotelero Santa Fe).
13
Brand Relation With FIBRAs / Hotel Chain Brands In Mexico Listed Hotel Companies
InterContinental Hotels
Grupo Posadas
Hoteles City Express
Grupo Real Turismo
Hoteles Mision None
Starwood H&R
Wyndham Hotel Group
Hilton
Marriott
AM Resorts None
Choice Hotels None
Accor None
NH Hotels None
Source: Companies information, Actinver.
14 Top Industry Players: HCITY, FIHO, FINN And GHSF
There are 4 hotel companies listed in the Mexican stock market: Hoteles City Express (HCITY), Grupo Hotelero Santa Fe (HOTEL), Grupo Posadas (POSADAS) and Real Turismo (REALTUR), the last two with minimum liquidity; and 2 FIBRAs: FINN and FIHO. As an introduction, we present here a brief description on the top 4, as well as a detailed comparable table including their main operating metrics. As the operations of each of them differ due to their hotel brand exposure, geographical footprint, and hotel segmentation, they are not 100% comparable on this information. For this reason we are including EBITDA margins as well. The table in the following page is intended basically to provide a more clear picture of the sector.
Top Listed Lodging Players
FIBRAs S.A.B.
■ FIBRA Inn (FINN) is an Equity REIT / FIBRA created to build, acquire, develop and lease hotel properties throughout Mexico under 3 different segments: full, limited and select service. It currently has 34 hotels (3 under development) with 5,716 rooms, which represent 1.6% of the quality lodging supply share of the country. FINN’s properties are located in 14 states of Mexico. The company has franchise agreements with IHG, Wyndham, Hilton, Starwood and Marriott to operate their global recognized hotel brands (Holiday Inn, Holiday Inn Express, Holiday Inn Express & Suites, Wyndham Garden, Microtel Inn & Suites, Hampton Inn, Aloft, Marriott, Courtyard, Fairfield Inn & Suites). The company also operates the Crowne Plaza and Casa Grande hotel brands and recently signed a LOI with HCITY to develop 10 properties under any of its 4 brands.
■ FIBRA Hotel (FIHO) is a an Equity REIT / FIBRA created to develop, acquire and own urban business class limited-service, selected-service, full-service and extended-stay hotels in Mexico. Currently Fibra Hotel’s portfolio consists of 7,684 rooms and 57 hotels in operation, which represents 2.1% of the quality lodging supply share of the country. Besides, FIHO has 14 hotels with 2,031 rooms in different stages of development. The FIBRA’s hotels in operation are associated with 6 local brands: Fiesta Inn, Fiesta Americana, Gamma, One Hotels, Camino Real and Real Inn, the first 4 owned by Posadas and the last two by Grupo Real Turismo, both quality local chains; and 1 international: Fairfield Inn & Suites. Recent announced investments contemplate new brands to be added to FIHO’s portfolio, such as: Live Aqua (Posadas), Courtyard (Marriott), AC Hotels (Marriott), Aloft (Starwood), and Sheraton (Starwood).
■ Grupo Hotelero Santa Fe (GHSF) is a company (S.A.B.) created to manage, acquire and develop hotels in Mexico. Currently GHSF operates 10 hotels and 3,296 rooms which represent 2.1% of the quality lodging supply share of the country. GHSF’s portfolio is comprised by 1,880 (57%) beach hotel rooms and 1416 (43%) urban cities hotel rooms operating under 4 owned sub-brand (Krystal) and 3 international brands (Hilton, Hilton Garden Inn y Hampton Inn).
15 FINN FIHO HCITY GHSF
IPO Date 13-Mar-13 30-Nov-12 14-Jun-13 12-Sep-14 Type Of Entity FIBRA FIBRA S.A.B. S.A.B. Market Capitalization (USD MM) $ 478 $ 680 $ 612 $ 142
Operating Highlights: Total Hotels (Operation + Development) 34 70 114 14 Total Hotels In Operation 31 55 92 11 Owned (Co-Owned) Hotels 31 51 56 7 Managed 3rd Party Hotels 0 0 20 4 Franchised Hotels 0 0 4 0 Leased Hotels 0 4 12 0
Rooms In Operation 4,914 7,684 10,401 3,508 Avg. Rooms /Hotel 159 140 113 319 Hotel Segments 3 3 1 2 Full Service / All Inclusive 24% 10% 0% 96% Select Service 46% 56% 0% 4% Limited Service 30% 35% 100% 0%
Hotel Types (In Operation) 1 2 1 2 Business-Class 100% 99% 100% 66% Leisure / Resort 0% 1% 0% 34%
Hotel Brands (In Operation) 11 7 4 6 National Brands (As % Of Total Rooms) 3.9% 98.3% 100.0% 75.5%
National Brands
International Brands (As % Of Total Rooms) 96.1% 1.7% 0.0% 24.5%
International Brands None
Hotels Under Development 3 13 22 3 Developments As % Of Total Portfolio 12% 20% 19% 11% Rooms Under Development 645 1,897 2,487 443
Performs Hotel Operation? YES NO YES YES Hotel Operators 6 4 1 1
+1 Costa Rica +1 Colombia
Geographical Footprint In Mexico
North Region 48% 43% 36% 8% Bajio Region 29% 23% 17% 32% Central Region 20% 27% 20% 33% Southeast Region 4% 7% 24% 27%
Key Performance Indicators (KPIs): Occupancy (LTM) 60.3% 63.9% 58.0% 65.4% Average Daily Rate (ADR) (LTM) - MX$ $ 1,002 $ 899 $ 727 $ 1,122 Avg. LTM YoY Change 5.4% 4.5% 0.8% 10.2% RevPAR (LTM) - MX$ $ 603 $ 574 $ 422 $ 734 Avg. LTM YoY Change 3.8% 2.8% 5.8% 18.2%
EBITDA Per Room (LTM) - MX$ $ 17,854 $ 12,879 $ 11,494 $ 17,023 EBITDA Margin (%) 30.6% 23.5% 33.9% 29.7% Information as of YE2014. Key performance indicators as of 3Q2014.
16 Historical Investments Of Listed Hotel Companies
Considering all historical announced investments from Hoteles City Express, FIBRA Inn and FIBRA Hotel (since their respective IPOs: 2012-2013 period), we can note that they have been more concentrated in the markets of Mexico City (Central), Nuevo Leon (North), Guanajuato (Bajio), Puebla (Central) and Campeche (Southeast), with more than 5 hotels in each of them. In the following exhibit we show graphically the concentration of these investments by state.
Concentration Of Announced Investments From Listed Companies Since IPOs The investment strategies from these market participants will focus on markets with exposure Higher Concentration Lower Concentration to those sectors with the most attractive growth prospects: automotive, aerospace, energy, gas, +5 4 3 2 oil, among others. Number of Hotels
Source: Companies’ information, Actinver.
Through their expansion processes, FINN and FIHO have been able to diversify their brands’ and markets’ exposure. In November 2012, FIHO only had 2 operators and 3 hotel brands: One, Fiesta Inn and Camino Real. Today, the company operates with 14 different hotel brands, from which 7 are not yet in operation, and 4 operators: Grupo Posadas, GRT, Marriott, and Starwood. With its recent partnerships with Marriott and Starwood, FIHO plans to increase its exposure to international brands, which currently represent just 1.8% of its operating portfolio of hotels. On the other hand, FINN has expanded its operations from 14 hotels to 31 in operations (3 under development), increasing their brands from 3 to 11 (96% global recognized brands) and its hotel operators from 4 to 6. Additionally, with its announced developments it already has agreements to include 2 additional international brands: Courtyard and Fairfield Inn & Suites (Marriott brands).
Accodring to our estimates, FIBRA Inn’s 2014 Regarding profitability of these historical acquisitions, is hard to tell exactly how much acquisitions have averaged an accretive 9.3% value has been brought to the table, given the limited information lodging companies average net NOI cap rate. We find positive that at release to the market, in general (on the sector’s strong competition). On the next page we enlist all the announced investments of HCITY, FINN and FIHO, from which least this company has been recently disclosing we have determined the cost per key, metric used by some lodging companies. historical operating information on their acquisi- However, this metric can not be used to compare the profitability of investments, as tions (such as occupancy, ADR, RevPAR), as it the cost /key varies depending on the specific characteristics of the hotel’s market, its improves FINN’s market valuation towards its fair segment and brand, among other factors. What is known is that FINN and FIHO have value (currently undervalued), in our view. similar investments strategies that consider target acquisition cap rates of 10.0% for stabilized properties and of 11.0% - 12.0% for developments. In the case of HCITY, profitability levels are higher due to the economies of scale it is able to reach as an integrated developer. In 2014, the company reached ROIC levels of 13.4% for its established (mature) hotels.
17 Historical Announced Investments From Main Lodging Companies (2013-2014)
T ype Of N umber Of Investment C o st P er Key C o mpany H o tel N ame Contribution Period Hotel Segment Lo catio n Investment R o o ms (M X$ M M ) (M X$ '000) FIHO Fiesta Americana Aguascalientes Acquisition 192 1Q2014 Full Service Aguascalientes $ 227 $ 1,184 FIHO Real Inn M exicali Acquisition 158 3Q2013 Limited Service B.C. Norte $ 125 $ 791 FIHO Gamma Lausana Tijuana Acquisition 140 3Q2014 Select Service B.C. Norte $ 120 $ 857 FIHO Fairfield Inn Los Cabos Acquisition 128 2Q2014 Limited Service B.C. Sur $ 110 $ 859 FIHO Courtyard Ciudad del Carmen Development 130 M id-2015E Select Service Campeche $ 255 $ 1,962 FIHO Fiesta Inn Lofts Ciudad del Carmen Development 124 M id-2015E Select Service Campeche $ 255 $ 2,056 FIHO Fiesta Inn Lofts / One M onclova Development 103 4Q2014 Select Service Coahuila $ 80 $ 777 FIHO M icrotel Inn Saltillo Development 139 1H2015E Limited Service Coahuila $ 112 $ 806 FIHO Gamma Fussion 5 Leon Acquisition 165 2Q2014 Select Service Guanajuato $ 120 $ 727 FIHO Torre Americas 1500 Development 189 4Q2015E Select Service Jalisco $ 246 $ 1,302 FIHO Real Inn Guadalajara Acquisition 197 3Q2013 Limited Service Jalisco $ 132 $ 671 FIHO One Perisur Development 144 3Q2015E Limited Service M exico City $ 285 $ 1,979 FIHO Hotel Toreo Servicio Selecto Development 130 4Q2015E Select Service M exico City TBD TBD FIHO Courtyard Vallejo Development 121 1Q2016E Select Service M exico City $ 230 $ 1,901 FIHO Fairfield Inn & Suites Vallejo Development 124 1Q2016E Limited Service M exico City TBD TBD FIHO Sheraton Ambassador M onterrey Acquisition 229 4Q2014 Full Service Nuevo Leon $ 182 $ 796 FIHO Fiesta Americana Grand M onterrey Trebol Development 180 4Q2015E Full Service Nuevo Leon $ 600 $ 3,333 FIHO Live Aqua M onterrey Trebol Development 46 4Q2015E Full Service Nuevo Leon TBD TBD FIHO Fiesta Inn Oaxaca Acquisition 145 3Q2013 Select Service Oaxaca $ 170 $ 1,172 FIHO One Puebla FINSA Acquisition 126 3Q2013 Limited Service Puebla $ 90 $ 714 FIHO Fiesta Inn Puebla FINSA Acquisition 123 3Q2013 Select Service Puebla $ 130 $ 1,057 FIHO Fiesta Inn Lofts Queretaro Development 50 4Q2014 Select Service Queretaro $ 45 $ 900 FIHO AC Antea Queretaro Development 175 4Q2015E Select Service Queretaro $ 212 $ 1,211 FIHO Fiesta Inn San Luis Potosi Oriente Acquisition 140 3Q2014 Select Service San Luis Potosi $ 126 $ 900 FIHO Fiesta Inn Los M ochis Development 125 4Q2015E Select Service Sinaloa $ 113 $ 900 FIHO Fiesta Inn Ciudad Obregon Acquisition 135 2Q2014 Select Service Sonora $ 110 $ 815 FIHO Fiesta Inn Tlalnepantla Acquisition 131 2Q2013 Select Service State of M exico $ 88 $ 669 FIHO Fiesta Inn Toluca Acquisition 144 2Q2013 Select Service State of M exico $ 143 $ 991 FIHO Fairfield Inn & Suites Villahermosa Development 134 3Q2015E Limited Service Tabasco $ 110 $ 821 FIHO Fiesta Inn Xalapa Acquisition 119 1Q2014 Select Service Veracruz $ 141 $ 1,184 FIHO One Xalapa Acquisition 126 1Q2014 Limited Service Veracruz $ 80 $ 635 FIHO Fiesta Inn / One Cuernavaca Acquisition 280 4Q2014 Select & Limited M orelos $ 268 $ 957 FIHO T o tal 33 4,592 $ 4,905 $ 1,068 FINN Fairfield Inn & Suites Ciudad del Carmen Development 108 3Q2015E Limited Service Campeche $ 189 $ 1,749 FINN M icrotel Inn & Suites Chihuahua Acquisition 113 4Q2014 Limited Service Chihuahua $ 79 $ 702 FINN M icrotel Inn & Suites Ciudad Juarez Acquisition 186 4Q2014 Limited Service Chihuahua $ 66 $ 356 FINN Wyndham Garden Chihuahua Acquisition 115 4Q2014 Full Service Chihuahua $ 125 $ 1,084 FINN Casa Grande Delicias Acquisition 89 4Q2014 Full Service Chihuahua $ 78 $ 880 FINN Courtyard Saltillo Development 180 3Q2015E Select Service Coahuila $ 190 $ 1,056 FINN Wyndham Garden Irapuato Acquisition 102 3Q2013 Limited Service Guanajuato $ 98 $ 957 FINN Wyndham Garden Celaya Acquisition 150 1Q2014 Limited Service Guanajuato $ 156 $ 1,039 FINN Wyndham Garden Leon Acquisition 126 1Q2014 Limited Service Guanajuato $ 166 $ 1,319 FINN Wyndham Garden Silao Acquisition 143 2Q2014 Limited Service Guanajuato $ 91 $ 638 FINN Camino Real Guanajuato Acquisition 105 3Q2013 Full Service Guanajuato $ 242 $ 2,300 FINN Wyndham Garden Guadalajara Acquisition 186 4Q2014 Limited Service Jalisco $ 208 $ 1,117 FINN Aloft Guadalajara Acquisition 142 2Q2014 Select Service Jalisco $ 240 $ 1,692 FINN Holiday Inn M exico City Acquisition 214 4Q2013 Full Service M exico City $ 400 $ 1,869 FINN Crowne Plaza M onterrey Acquisition 219 4Q2014 Full Service Nuevo Leon $ 385 $ 1,757 FINN M arriott Puebla Acquisition 192 3Q2013 Full Service Puebla $ 389 $ 2,025 FINN M icrotel Inn & Suites Culiacan Acquisition 129 4Q2014 Limited Service Sinaloa $ 60 $ 467 FINN M icrotel Inn & Suites Toluca Acquisition 113 4Q2014 Limited Service State of M exico $ 72 $ 635 FINN Holiday Inn Altamira Acquisition 98 2Q2014 Full Service Tamaulipas $ 109 $ 1,108 FINN Fairfield Inn & Suites Coatzacoalcos Development 180 3Q2015E Limited Service Veracruz $ 163 $ 904 FINN T o tal 20 2,890 $ 3,505 $ 1,213 HCITY City Express La Paz Development 124 4Q2013 Limited Service B.C. Sur $ 89 $ 717 HCITY City Express Cabo San Lucas Development 136 4Q2014 Limited Service B.C. Sur $ 97 $ 717 HCITY City Suites Cabo San Lucas Development 28 4Q2014 Limited Service B.C. Sur $ 21 $ 763 HCITY City Junior Ciudad del Carmen Development 109 1Q2014 Limited Service Campeche $ 66 $ 610 HCITY City Junior Ciudad del Carmen Development 124 1Q2014 Limited Service Campeche $ 76 $ 610 HCITY City Express Irapuato Development 122 4Q2013 Limited Service Guanajuato $ 87 $ 717 HCITY City Express Salamanca Development 119 4Q2014 Limited Service Guanajuato $ 85 $ 717 HCITY City Express Plus M exico City Development 159 2Q2013 Limited Service M exico City $ 170 $ 1,068 HCITY City Suites M exico City Development 39 3Q2013 Limited Service M exico City $ 30 $ 763 HCITY City Express Plus M exico City Development 124 4Q2013 Limited Service M exico City $ 58 $ 470 HCITY City Express M exico City Development 135 3Q2014 Limited Service M exico City $ 97 $ 717 HCITY City Express Plus M exico City Development 89 4Q2014 Limited Service M exico City $ 95 $ 1,068 HCITY City Express M onterrey Development 115 3Q2014 Limited Service Nuevo Leon $ 82 $ 717 HCITY City Express Plus M TY Nuevo Sur Development 138 4Q2014 Limited Service Nuevo León $ 147 $ 1,068 HCITY City Express Oaxaca Development 103 4Q2013 Limited Service Oaxaca $ 48 $ 470 HCITY City Express Salina Cruz Development 116 4Q2013 Limited Service Oaxaca $ 55 $ 470 HCITY City Junior Puebla Development 113 4Q2013 Limited Service Puebla $ 69 $ 610 HCITY City Express Tehuacan Development 108 1Q2014 Limited Service Puebla $ 77 $ 717 HCITY City Suites Puebla Development 72 3Q2014 Limited Service Puebla $ 55 $ 763 HCITY City Express Cananea Development 98 4Q2013 Limited Service Sonora $ 70 $ 717 HCITY City Junior Toluca Development 102 4Q2014 Limited Service State of M exico $ 62 $ 610 HCITY City Express Bocas Tabasco Development 108 2Q2014 Limited Service Tabasco $ 77 $ 717 HCITY City Junior Villahermosa Development 136 4Q2014 Limited Service Tabasco $ 83 $ 610 HCITY City Express Ciudad Victoria Development 108 4Q2014 Limited Service Tamaulipas $ 77 $ 717 HCITY City Express M atamoros Development 113 4Q2014 Limited Service Tamaulipas $ 81 $ 717 HCITY City Express Apizaco Development 104 3Q2014 Limited Service Tlaxcala $ 75 $ 717 HCITY City Express Tuxpan Development 108 4Q2014 Limited Service Veracruz $ 77 $ 717 HCITY T o tal 27 2,950 $ 2,109 $ 715 18 Mexico’s Hotel Industry, At Its Inflection Point
Our investment thesis relies strongly on the long-term attractive fundamentals of the Mexican lodging industry, sustained by the more positive outlook of the overall economic performance for the years to come (GDP growth rates above 2.7%). It goes without saying that despite the recent announced cuts in public infrastructure investments in 2015, Mexico’s economy will show an improvement as compared to the two preceding years.
For the longer term, we see a much stronger economic growth on the back of the implementation of its approved economic reforms. We find the energy one as particularly beneficial for the RE industrial, office and lodging sectors, as it will detonate new additional demand for these type of spaces and hotel rooms in the north, gulf and southeast regions of the country, from the national and foreign investments it will be attracting to these markets. As we will go through in this report, we believe that despite the sharp decline in oil prices, the positive longer term prospects from the energy reform in the country remain. Expected investments from the first round (first auction projects) of the energy reform in 2015 will not stop. However, we do believe that current oil prices will result in a delay in other oil production projects (reduction of capital expenditures) due to the tighter short-term cash flow generation from global firms.
As a recap, the following are the topics covered in this section, beginning with the macroeconomic part followed by the fundamentals of the lodging RE sector:
■ Macro Outlook For 2015 i) Key Assumptions Is For Oil Prices To Bottom In 1Q2015 ii) GDP To Increase Between 2.7%- 3.0% In 2015, USD @MX$13.85 At YE.
■ Lodging Industry: Mexico’s Moment Has Arrived i) The U.S. 1960s’ And U.K. 1980s’ Lodging Evolution Experience ii) Transformational Drivers Of The Mexican Lodging Industry iii) Main Infrastructure Projects In Mexico iv) Improving The Mexican Rail Industry v) The Energy Reform Will Bring Additional Investments In The LT vi) The Mexican Auto Industry, Another Key Driver Of Growth vii) The Strategic Aerospace Industry viii) The Bottom Line: Mexico’s Lodging Industry Growth Potential
Macro Outlook For 2015
Key Assumption Is For Oil Prices To Bottom In 1Q2015
According to Gustavo Teran, Actinver’s Head of Research, “Our most important assumption is that oil prices touch bottom in 1Q2015 but rebound at a very slow pace with WTI ending the year at USD68 and the Mexican blend at USD62 (averaging only USD60 / USD53 in the year). However, notwithstanding the potential 50% fall in oil export revenues in 2015, oil accounts for only 6% of Mexican GDP, while manufactured product exports, which represent a near 20% of GDP, expand at an estimated 8% clip benefiting largely from a faster-paced US economy and a devalued currency”.
GDP To Increase Between 2.7%- 3.0% In 2015, USD @MX$14.30 At Year-End
“Our Mexico 2015 GDP projection from our economic team is a range of 2.7% - 3.0% with the USD ending the year at MX$14.30 and averaging MX$14.60. Though the oil slide has impacted the peso and the prospect of fed funds increases in 2015 will further pressure the currency, our view is that the strong long term fundamentals of the Mexican economy, grounded on structural reforms, fiscal discipline, solid central bank stewardship and reserves, will provide ample support to the currency. We project inflation will reach 3.1% in 2015” (Gustavo Teran).
19 Regarding interest rates in Mexico, our economics team anticipates a +50bps increase in the lending rate by YE2015. As previously mentioned, under this macro environment, the lodging industry’s outlook is positive. Regarding the potential negative impact from the expected increase in interest rates we think it would have a limited effect on lodging RE players.
In terms of the impact of a 50 bps increase in interest rates on the valuation of RE assets, we believe it will be compensated by additional organic growth coming from the implied improvement in the economy (higher RevPARs). Furthermore, the negative historical correlation of interest rates vs. U.S. REITs’ share prices should not be the same for REITs in emerging markets like Mexico, with stronger growth prospects in the RE industry. In other words, FIBRAs with a sound growth component and value creation potential (reflected in dividend /CBFI growth) should be less correlated to interest rates, following more their equity component. At the end, the expected rise in interest rates is not material for FIBRAs. This is the case of FIBRA Inn.
Mexico's GDP Growth Forecasts USD-MX$ Forecasts
4.5% $ 15.0 14.7 3.9% 3.9% 3.9% 4.0% 3.8% $ 14.5 14.3 3.4% 3.5% 14.2 $ 14.0 3.0% 2.8% 2.5% $ 13.5 2.0% 13.0 2.0% $ 13.0 1.5% 1.2% $ 12.5 12.9 1.0% $ 12.0 0.5% 0.0% $ 11.5 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Source: Actinver. Source: Actinver.
Interest Rate Forecasts Mexico's CPI Forecasts
9.0% 4.5% 7.5% 7.7% 8.0% 7.0% 4.1% 6.6% 7.0% 5.8% 4.0% 6.0% 5.0% 5.0% 5.0% 4.3% 3.5% 3.5% 4.0% 3.0% 4.4% 3.0% 4.1% 3.5% 3.1% 2.0% 3.0% 3.0% 2.2% 1.0% 0.0% 2.5% 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Source: Actinver. Source: Actinver.
20 Lodging Industry: Mexico’s Moment Has Arrived
Mexico’s evolution over the last 30 years towards a more mature (service-oriented) economy, along with its achievement of a certain level of economic and political stability, is indicative that the country has reached an inflection point for its lodging industry, the point at which a market evidences a boost in travel and lodging. Mexico is poised to experience the faster, internally-driven economic growth experienced by the U.S. in the 1960s, when it reached maturity with an economy driven by tertiary activities (advanced personal and professional services, as well as experience-based businesses).
In order to achieve that, Mexico still needs to accomplish a higher dynamism through the implementation of its structural reforms and stronger investments in infrastructure (as delineated in the Government’s National Infrastructure Plan). This will sustain the country’s expanding middle class, economic growth, foreign direct investment, and consequently, this economic progression, will derive in a spike in lodging growth.
“Business travelers and tourists are increasingly We are basing this thesis on a paper developed by the RE industry expert Jones seeking standards and consistency while owners Lang LaSalle (‘Economic transformation drives Latin America’s lodging industry’), as want access to larger reservation systems to it provides a complete analysis of the LatAm’s lodging industry, with a view that we boost occupancy” (Jones Lang LaSalle). share. We are using Mexico’s case, thus we have intensified its particular analysis.
The U.S. 1960s’ And U.K. 1980s’ Lodging Evolution Experience
To begin with, we use the historical experience of the U.S. and U.K. economies as it is a clear example and indicative of the evolution of travel and leisure development in other countries, such as Mexico. According to JLL, the size, nature and sophistication of a country’s hotel industry is directly related to the structure of that country’s economy, which at the end represents the relative level of economic ascent.
The progression at which economies tend to advance towards maturation can be categorized into 3 steps: 1) primary activities (agriculture), 2) industrial, and 3) tertiary (personal, professional services and experience businesses). Tertiary activities, particularly the ones generated by the private sector, have the greatest impact on demand for travel, lodging and leisure. One of the fundamental reasons behind this is that the evolution from agricultural to tertiary activities goes accompanied by an increase in white collar professionals (implying superior GDP per capita), who travel more for business and leisure, and in turn demand more hotel rooms.
Economies’ Progression
Source: JLL.
As it is being observed in Mexico nowadays, the larger and more diversified sources of lodging demand (types of clients and geographical dispersion), the higher the growth potential and value creation hotel companies (/FIBRAs) can experience. Such is the case of Hoteles City Express, benefitting through the development and delivery of homogeneous hotel products across clearly identified price segments (brands and markets), centralized sales and marketing offices, and reservation systems.
21 According to an analysis by Paul Slattery (book: ‘The Economic Ascent of the Hotel U.S. Employment By Segment Business, Second Edition’), a lodging inflection point emerged as a trend in the U.S. in the 1960s, and in the U.K. during the 1980’s, when both economies reached a 100% 3% 2% ~60.0% composition of service-oriented (tertiary) activities. From that point, lodging 10% 8% 18% demand began to increase at a stronger pace in both countries as a whole. During 27% 80% the period from 1960 to 1980, the United States experienced a continued increase in 32% 35% tertiary activities, from a 60% to an 80% weight of employment (mainly driven by 28% private services), with a pronounced decline in agriculture and industrial activities. As 60% 24% a result, lodging demand increased significantly, leading to a 220% increment in the 20% 18% number of hotel rooms supplied in the country, from 1,500 to 4,800. 40% 80% The economic transformation of the U.S. has relevance for Mexico given the 55% 52% 46% 20% 37% 40% importance of the political, economic and cultural relationship between both coun- tries. In the case of the U.K., the relation with Mexico deals more with the dramatic 0% economic reforms Margaret Thatcher implemented in the country in 1979. The 1950 1960 1980 2010 implementation of these reforms had a clear impact on specific sectors in the U.K., Source: JLL, The Economic Ascent of the which contributed to the evolution towards a more robust service-oriented economy. Hotel Business, Actinver. Similar to other LatAm countries like Brazil, the Mexican economy has reached the Mexico's Employment By Segment 2014 economic inflection point, with a 61% composition of tertiary activities (INEGI’s statistics). Nonetheless, it is not sufficient by itself to continue with the country’s 80% transformation that ultimately boosts lodging demand. Several key drivers of the 61% economic transformation need also to be executed, such as: i) infrastructure 60% development, ii) implementation of structural reforms, and iii) access to higher 40% education. In conjunction with these drivers, which ultimately stimulate white collar 24% workforce and middle class growth, Mexico will also benefit from additional lodging 20% 14% growth triggers such as: a) foreign direct investment (from its solid manufacturing 1% competitiveness and strategic location); and b) its demographics (growing working 0% population). Not Primary Secondary Tertiary Specified In the following pages we are going through the key transformational drivers of the Source: INEGI, Actinver. Mexican economy, some of which have already been put in place:
Transformational Driver Mexico's Case The Central Banks is independent. Policies have maintained Macroeconomic Policy stability in inflation and long- term interest rates. Macroeconomic stability. The country has a young population (46% below the age of 24); Demographics stable and low population growth rates; and a growing middle class.
Mexico has i) subsidized housing / lending programs, ii) lender Home Ownership protection, and iii) increasing home ownership.
Mexico has become a magnet of FDI from its attractive business environment, large network of free trade agreements (world's Global Trade largest), developed economic sectors, and its highly competitive cost profile.
The country has ~USD440 billion of published infrastructure Infrastructure Investment investment projects (562) in the transportation, energy, gas, oil, and tourism sectors over the next 3 years.
Mexico did progress on equal opportunity and employment through the implementation of its Labor Reform in late 2012, which Civil And Social mainly aims at increasing formalization. Mexico offers minimum wages, and public and private healthcare and education.
Since the 1980s, the Mexican economy has decentralized Economic Decentralization gradually. There are state and local governments, targeted infrastructure and development programs/projects.
22 Demographic Trend To Boost Demand For Hotel Services
The future of an economy is heavily determined Demographics is an important contributor to Mexico’s economic growth, so important by its evolving demographics. It plays a key role that it prevented the country from registering a zero GDP growth last year, we in the local lodging industry’s long-term growth. believe. Mexico’s population (second largest in LatAm) is expected to reach an estimated ~138 million by 2030, representing a 21% increase from 2010.
A relevant positive characteristic in Mexico is its higher proportion of youth compared to developed countries. With an estimated 46% of the population under the age of 24, Mexico’s economy will benefit from a growing working population, rising consumption levels and increased tax revenues.
According to the “Consejo Nacional de Poblacion”, or CONAPO, the youngest age group (0-14 years old) will decrease at a CAGR of 1.0% from 2010 to 2050. People with ages between 15 and 24 years will also represent a minor portion of the total population (decreasing at a CAGR of 0.9% from 2010 to 2050). In contrast, the two oldest age groups (25-64 years old and 64+ years old) will grow at a CAGR of 0.5% and 3.8%, respectively, during the same projected period. The latter will become the largest economic driver in the country as 75 million people are expected to be economically active by this time. This age bracket should drive demand of hotel services from business and leisure travelers.
Population Forecasts 2015-2035 Mexican Population Pyramid 2020E
160 91 - 95 137.5 141.8 Today 132.6 140 127.1 81 - 85 2020E 121.0 114.3 120 71 - 75 61 - 65 Men Women 100 51 - 55 80
41 - 45 Age range Age
60 31 - 35 Million inhabitants Million 40 21 - 25 11 - 15 20 0 - 5 0 -6 -4 -2 0 2 4 6 2010 2015 2020 2025 2030 2035 Inhabitants (MM) Source: CONAPO, Actinver. Source: INEGI, Actinver.
Growing Middle-Income Class In Mexico
One of the main transformational drivers for the local lodging industry is the growth of the middle-income class (MC) as it derives into a greater mass of potential users of hotel services.
Mexico’s GDP per capita of USD15,930, which is only ~30% of that of the U.S., has maintained a steady growth since the North American Free Trade Agreement (NAFTA) in 1994. We strongly believe that Mexico will strengthen its position as a key manufacturing hub in North America through major investments in infrastructure (transportation, energy, communications, housing), education and health. This will provide new employment opportunities (job creation) for its growing labor force.
Furthermore, as Mexico is able to capitalize the benefits from the energy reform, promoting both on-shore shale oil and gas projects, as well as off-shore conventional oil and gas projects, it will accelerate its economic growth. Without accounting for the potential impact of the energy reform, the International Monetary Fund (IMF) already expects Mexico’s GDP per capita to reach USD18,130 by 2016, representing a CAGR of 4.4%
23 Mexico's GDP per capita PPP (USD) 20 18.13 17.36 18 16.63 15.93 15.31 16 14.62 13.97 14.22 13.95 14 13.27
12
10 Thousand US dollars US Thousand
8 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IMF, Actinver.
According to the AMAI (Mexican Market Research Agency), the local middle-income class (from low MC [D+] to high MC [C+]) has increased steadily since 2000, from a total of 60% to 70%E (current) of the Mexican population (considering cities with more than 50k inhabitants). We highlight several factors behind this development, same which should continue driving Mexico’s progress in the years to come:
According to an analysis by the Mexican ■ Economic growth and stability. Mexican GDP per capita has consistently Economist Luis De La Calle, the reduction in the grown over the last ten years, from an annual income of USD11.9k to USD15.9k. fertility rate and the economic stability have been ■ Controlled inflation levels. key factors in the development of the middle- ■ Reduction in the size of the families. Local families have become more income class in Mexico. conscious about the implications of having many children: less resources for their education, health and professional development. Mexican families now have an average of 2.0 children, significantly below the 7.3 mean of the 60’s. ■ Stronger participation of women in the labor force. The rate of women in the labor force (15 to 64 years) has risen from 37.5% in 1980 to 44.5%. This has been a strong driver of the MC expansion as joint revenues accumulated per family are the country’s main MC originators, different from what is observed in other countries, where the individual contribution represents a higher proportion.
New Incentives For Home Ownership
Mexico’s Financial Reform brought new incentives to homeownership. For starters, it allows the transfer of mortgages from one bank to another with low transfer costs and fees. Before the reform, for a mortgage transfer, the borrower had to pay an opening commission (1.5% - 2.5% of the mortgage) and notary fees which range from 2.5% to 9.0% of the property’s appraisal value (according to Condusef), making it nearly impossible for a borrower to transfer its mortgage.
Secondly, mortgage issuers are no longer able to condition a mortgage loan to other services, which is commonly known as tied-sells. Lastly, the reform includes lender protection laws, making easier for them to demand guarantees. Altogether, these changes will catalyze the competitiveness in the country, increasing homeownership, in our view.
24 Mexico, A Magnet Of Foreign Direct Investment Manufacturing Labor Costs (USD/hour) In 2013, Mexico took the second position as receiver of foreign direct investment Norway (FDI) in LatAm, after Brazil, reaching USD38 billion (boosted by the $13 billion Switzerland Belgium purchase of the rest of Modelo by Anheuser-Busch InBev). Up to September 2014, Sweden Mexico received another ~USD15.3 billion, according to the Economy Ministry. Denmark Manufacturing, accounted for 60% of the total FDI, but in 2013 it reached 74%. The Australia auto sector has been a relevant driver of manufacturing activity, representing one Germany Finland fifth of all manufacturing in the country and ~4% of its GDP. By country, the U.S. has Austria been by far the largest investor in Mexico, representing 47% of the total FDI. France Netherlands Ireland This is widely explained by the fact that Mexico has become a global manufacturing Canada hub for many international companies. And this has not been driven only by its U.S proximity to the largest consumption market, but also by the following aspects that Japan have improved the country’s global competitiveness and attractiveness: 1) labor Italy U.K costs; 2) manufacturing (utilities) costs; 3) facility of operation; 4) operation (tax) Spain costs; 5) accessibility to a wide number of markets (through its free trade New Zeland agreements); 6) low transportation costs; 7) infrastructure; and 8) macroeconomic Singapore stability. We believe that Mexico is currently in an unsurpassable global position to Rep. of Korea Israel benefit from its manufacturing activity. All of this means business, and business Greece drives lodging demand. Argentina Portugal Competitive Labor Costs, Looking South To Mexico Czech Rep. Slovakia Brazil Mexico has become one of the most competitive manufacturing countries worldwide Estonia due to the significant savings in labor costs its offers. According to a research by Taiwan Hungary KMPG (Competitive Alternatives 2014), Mexico is the lowest-cost country from the Poland study (the only emerging country considered). Mexico offers a 18.7% cost advantage Mexico over the U.S., higher than the 7.2% offered by its other NAFTA partner, Canada. Philippines 0 20 40 60 As part of its study, KPMG examined the significance of the cost factors for the Source: U.S. BLS (2012), Actinver services and manufacturing sectors. According to its results, the most sensitive cost factor that a company considers when deciding the location of a project’s investment is by far labor costs, representing a relative significance of 44% to 66% against other key-location sensitive cost factors, such as facility costs, transportation costs, utility costs, cost of capital, and taxes. Labor costs include wages and salaries, employer- paid statutory plans, and other employee benefits. It is worth noting that the study ranges 12 manufacturing sector operations: aerospace, agri-food, automotive, chemicals, electronics, green energy, medical devices, metal components, plastics, precision manufacturing, pharmaceuticals, and telecommunications.
Relative Significance of Key Location- Sensitive Cost Factors Labor Cost Comparison, Per Employee
Services M anufacturing Salaries & Wages Total Labor Labor costs 74% - 90% 44% - 60% Average per Average per Salaries and Wages 52% - 64% 31% - 42% Employee (USD) Rank Employee (USD) Rank Statutory Plans 9% - 11% 5% - 7% North America Ohter benefits 13% - 16% 7% - 10% C anada $65,504 6 $89,038 3 M exico $29,105 1 $40,648 1 F acility co sts (office, factory, leasing) 4% - 16% 2% - 6% United States $70,125 7 $102,249 9 Transportation costs (road, sea, air) N.A. 7% - 24% Euro pe Utility co sts (electricity, natural gas) 1% - 1% 2% - 8% F rance $56,126 2 $93,450 6 Cost of capital (depreciation, financing) 0% - 7% 9% - 21% Germany $75,715 10 $104,440 10 Italy $60,848 4 $92,287 4 T axes 2% - 10% 6% - 14% Netherlands $64,433 5 $93,074 5 Inco me taxes 0% - 11% 4% - 11% United Kingdom $58,925 3 $82,930 2 Property taxes 0% - 0% 1% - 3% Asia Pacific Other taxes 0% - 1% 0% - 1% A ustralia $73,210 9 $99,093 8 Japan $71,607 8 $94,067 7 Source: KPM G Competitive Alternatives 2014, Actinver. Source: KPM G Competitive Alternatives 2014, Actinver.
25 Even when compared to China, Mexico has become much more attractive as a manufacturing hub. Years ago, China’s low-cost labor force wages, a weak yuan, and high investment, made it a very attractive manufacturing location. Many U.S. companies headed there. However, over time, the yuan appreciated, wage inflation picked up, and supply chains turned more complicated, which together made transportation costs less affordable. For example, the number of days required to transport a container by sea from China and from Mexico to important distribution and consumer centers such as New York, Los Angeles, Hamburg, and Cape City, differ significantly between the two. It takes 6 days to transport merchandise from Mexico to New York, while it takes 31 days when parting from China. This translates into a higher total cost that is not longer sustainable for manufacturing companies in the U.S. and other countries.
Comparison Of Transportation Routes Between Mexico And China
Source: PRO Mexico, Secretaria de Economia, Actinver.
According to our forecast (based on recent years trend) labor costs in China are now 29% higher than those in Mexico. This reflects the magnitude of the rising trend China has presented since 2005, when their costs were 66% lower.
Mexico vs. China's Manufacturing Wages (USD/hour)
$3.50 50%
$3.00 29% 40%
$2.50 30%
$2.00 20%
$1.50 10%
-66% YoY Change YoY
$1.00 0% Wages (USD/Hour) Wages
$0.50 -10%
$0.00 -20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E China Mexico China's YoY Change Mexico's YoY Change Source: WSJ, TACNA Services, Actinver.
26 Mexico Has Become A Clear Manufacturing Winner
This has resulted in many U.S. companies searching for new alternatives to offshore their operations, with Mexico being the most competitive place to manufacture goods (probably the most cost-competitive place to manufacture certain goods for all over the globe). Some of these companies include Caterpillar, Chrysler, Stanley Black & Decker and Callaway Golf, which have expanded their operations in Mexico.
This has supported a growth of ~30% since 2010 of trade between U.S. and Mexico, to USD507 billion annually. Please recall that foreign direct investment (FDI) in Mexico last year reached a record USD35 bn. Over the past few years, manufactured goods from Mexico have represented a larger share of the U.S. import market, with roughly 14% of its total, according to the International Monetary Fund, while China’s share has declined.
Geographical Distribution Of Trade Mexico is also benefited from the North America Free Trade Agreement (NAFTA) and other international free trade agreements, which together add 12 (with 44 countries), making Mexico the most open country to international trade in the world. This gives it preferential access to more than 1.2 billion potential customers and add up to 60% of the world’s GDP.
Also, Mexico has a better manufacturing cost profile than many countries, including Russia, India and China. Average electricity costs are ~4% lower in Mexico vs. China, and the average price of industrial natural gas is ~63% lower, according to a study by the Boston Consulting Group.
Moreover, the facility of operation, as measured by the procedures and time required to open or close a business, or to obtain a construction permit (critical to success in international business) is more attractive in Mexico than other manufacturing countries. In Mexico, investors require only 6 procedures and 9 days to open a business, and 10 procedures and 69 days to obtain a construction permit. These numbers are noticeably lower than Brazil (119 days to open), India (27 days to open) or China (33 days), according to PRO Mexico (Secretary of Economy).
All together, these factors, along with the country’s infrastructure and macroeconomic Source: Terrafina, Actinver. stability (previously covered) makes Mexico a clear global winner for manufacturing operations and investments, in our view.
A Stronger Investment In Infrastructure Is Coming
Infrastructure developments are key drivers of economic growth as they provide higher communication, transportation / connectivity, as well as cheaper electricity. They also help make possible new business and commerce requiring more business travel. At the time an investment project takes place in a specific location, its lodging occupancy reaches a maximum level, as available rooms are demanded by workers and executives of the project. As the project reaches completion, hotel supply demanded tends to increase.
Mexico currently has ~USD440 billion of published infrastructure investments, within 562 projects in the transportation, energy, gas and oil sectors (main drivers of lodging demand). The majority of these investments form part of the country’s National Infrastructure Program (NIP) for the 2014-2018 period, which also aims at other sectors such as Water, Health and Housing. The total program represents a total investment of MX$7.7 trillion (USD$587 billion). Mexico’s Minister of Finance and Public Credit, Luis Videgaray, mentioned that the NIP will have an impact on economic growth and will contribute with between 1.8 to 2.0 percentage points to the GDP by the end of the current administration (2018) and is expected to generate 350,000 new jobs to the Mexican economy. It is worth noting that recently, Mexico’s government announced cuts to some of 2015 infrastructure investments, such as fast-train projects Mexico-Queretaro and in Yucatan. However, current ongoing projects such as Mexico City’s new airport, will derive into higher lodging demand in the long-term.
27 Investment highlights from the Mexican PNI are the following:
■ 262 oil, energy and gas projects totaling USD300.0 billion; ■ 217 transportation investments totaling USD49.5 billion; including 2 bullet trains that will connect Mexico City with the cities of Toluca and Queretaro; and ■ 83 tourism related projects amounting to USD13.9 billion.
Main Infrastructure Projects In Mexico
From the aforementioned investments, we highlight 4 of the most relevant projects in Mexico for the following years: 1) ‘Mexico Conectado’ / USD270.0 million; 2) New Mexico City International Airport (NAICM) / USD13.0 billion; 3) Lazaro Cardenas Port expansion / USD300.0 million; and 4) Passenger (PAX) bullet trains Mexico City - Queretaro and Mexico City - Toluca / USD6.2 billion.
1) ‘Mexico Conectado’ (Connected Mexico) / USD270.0 million investment. This project was launched by Mexico’s Ministry of Communications and Transport (SCT) in 2013 seeking to boost broadband, free Internet access across the country. It covers the deployment of broadband lines in over 250,000 public spaces, including schools, government institutions, public plazas and hospitals by 2018. By July 2014, officials said they have covered 40,000 sites and that the number will rise to 65,000 by the end of the year. Through this project, the governments aims at expanding internet penetration to 60% of the population, currently at 36.5%, according to INEGI.
Mexico Conectado’s Broadband Coverage
Source: SCT, Actinver.
The development of the ‘Mexico Conectado’ project comprises 5 phases:
■ Installation of State Coordination Committees. For each of the 32 federal entities, these committees define the universe of sites and public spaces to be covered, as well as their available assets and specific needs. ■ Planning. The inventory of sites and public spaces to be connected is conformed, the minimum floor of required broadband is defined, and the information on the field is validated. ■ Tender. Design and execution of the tender process. ■ Implementation. Network deployment to offer connectivity. ■ Operation. Administrative, operational and technical monitoring.
28 2) New Mexico City International Airport (NAICM) / USD13.0 billion investment. New Mexico City International Airport (NAICM) The NAICM is another project launched by the SCT intended to replace Mexico City’s current airport due to its saturation and capacity limits to remain competitive at an international level. It is worth noting that it is one of the 3 largest airport infrastructure projects in the world.
Mexico City’s airport plays a key role for the country’s economy, as it attends 1/3 of the total passengers in Mexico, and 56% of the goods traded by air with the rest of the world. The current AICM will not be able to attend new demand coming from new investments and would limit Mexico’s economic growth expected for the years to come on its capacity constraints.
The NAICM will have 6 runways with capacity of triple simultaneous operations (1 million /year) and 120 million PAX annually (vs. current AICM’s capacity of 32 million PAX). It is expected to become the 3rd largest in terms of capacity, after London- Britain airports (172 million PAX) and the new airport of Istanbul (150 million PAX).
Source: T21mx, Actinver. The total estimated investment for the NAICM is USD13.0 billion (MX$169,000 Bn), from which 58% will be financed through public funds and 42% trough the private sector (banking credits and bonds). The resources will be mainly used for the The New AICM will have a LEED platinum development of the airport’s infrastructure, which includes a terminal, the airport certification. The project has been designed to traffic control tower, runways and auxiliary facilities. use clean local energy among other factors required to obtain such certification. The project comprises 2 phases:
■ Phase 1: Consists of 3 simultaneous runways with a capacity of 550k operations and 50 million PAX per year, 94 contact gates, and 42 remote positions. This phase is expected to be completed in 5 years. The NAICM will have 24 new water treatment ■ Phase 2: In this phase the NAICM will reach its maximum capacity of 120 million plants, access to drinking water, a 25 km sewer PAX per year with 6 runways and 1 million operations. system, waste disposal control, green areas (including a new 670-hectare new metropolitan As shown in the exhibit below, the NAICM will be located at a 10km distance from the forest). Given its location, it will also reduce noise current airport, in the municipality of San Salvador Atenco. The NAICM is expected to levels in the city. have a 300 sqkm of impact zone, covering 14 municipalities within MCMA.
Location For New Mexico City International Airport (NAICM)
NAICM
Source: Google Earth, Actinver.
29 3) Lazaro Cardenas Port expansion / USD300.0 million investment. This project Connectivity Of Lazaro Cardenas Port by SCT was granted to APM Terminals, an international container operating company from the Netherlands (part of Maersk Group), with a 32-year concession. It includes the design, construction and operation of a new terminal at Lazaro Cardenas port, representing a USD300.0 million investment. This new terminal is part of the Mexican government’s plan to double port capacity over the next 6 years to meet estimated growth coming mainly on the Trans-Pacific trade corridor.
The 1st phase of the construction of this Terminal 2 (TEC2) will include 750 meters of quay, 5 ship-to-shore cranes, 22 automatic stacking cranes and two railway cranes. It will be able to accommodate large container vessels. According to APM Terminals, the first 300 meters of quay will be ready in 1Q2015, followed by the installation of the container-handling equipment. The completed terminal is expected to add 4.0 MM TEUs of annual throughput capacity, scheduled to open in the first half of 2016. The port’s actual container movement is 1.3 MM TEUs per year.
The project also considers an intermodal transport corridor linking Lazaro Cardenas’ marine terminal with APM Terminal’s intermodal facility in Mexico City, facilitating trade with the central region. Source: Handbook Puerto Lazaro Cardenas, Actinver. New terminal to boost long-term growth. Kansas City (KCS), exclusive provider of Mexico's Commercial Cargo Participation rail service in Lazaro Cardenas, expects to observe sustainable double-digit revenue growth at the port with the new APM Terminals’ facility. KSC registered a 19% year- over-year increase in intermodal traffic from Lazaro Cardenas in 3Q2014, mainly on the back of inputs into Mexico’s automotive and white goods manufacturing sectors. Altamira 14% Lazaro Cardenas Other players such as SSA Marine (company in which Fernando Chico Pardo has a 24% 49% stake) and Hutchinson Port Holding (marine terminal operators) are also expanding operations at the port. On September, 2014, Hutchinson Port finished the Veracruz 2nd phase of a USD193 MM investment in a container terminal upgrade. It included a 18% new dock and yard, as well as the instasllation of 7 super-post-Panamax cranes and 18 yard cranes, according to BNamericas. On October 4, 2013, SSA Mexico commenced vehicle processing operations. Vehicles manufactured in the country Others 23% were loaded for export to Latin American destinations aboard the NYK Line vessel, Manzanillo and MV TALIA. SSA Marine is also involved in the construction and operation of a 21% major RoRo (Roll-on/Roll-off) facility. It will offer 600 meters of waterfront, 2 berthing positions dedicated to RoRo vessels, 42 hectares of storage yard, and an array of vehicle services. When all of the ongoing projects at Lazaro Cardenas port are built Source: Handbook Puerto Lazaro Cardenas, Actinver. out, its capacity will reach 6 to 6.5 million TEUs, making it a global competitive port.
Lazaro Cardenas Port’s Map
1. Specialized Container Terminal 2. Multipurpose Terminal I 3. Multipurpose Terminal II 4. Bulk Grain Terminal 5. Dismantling Ship Terminal 6. Bulk Mineral Terminal 7. Coal Terminal 8. Metal & Mining Terminal 9. Fertilizers Terminal 10. Fluids Terminal 11. Health Inspection Checkpoint 12. Yard for Storage 13. Vegetable Oil Terminal 14. Specialized Container Terminal II (Under Construction) 15. Specialized Automotive Terminal (Under Development) 16. Multipurpose Terminal III 17. Strategic Bonded Warehouse (Under Development) 18. Transport Logistics Activities Centre 19. Port Parking 20. Local Maritime Custom 21. Natural Liquefied Gas Terminal (Project) 22. Coal Terminal II (Project) 23. Shipyard (Project) Source: Handbook Puerto Lazaro Cardenas, Actinver.
30 4) Passenger (PAX) bullet trains Mexico City - Queretaro and Mexico City - To- Mexico City – Queretaro Train Project Map luca / USD6.2 billion investments. The Mexican government, through the SCT, has in stand-by three passenger train projects worth MX$97.0 billion (USD7.4 billion), two of which will connect Mexico City with the cities of Toluca and Queretaro, and one that will traverse tourist destinations along the Yucatan peninsula in the southeast region of Mexico. Both public and private funds will be used to build the projects, according to the SCT.
The Mexico City - Queretaro train will cost ~USD3.3 billion. Its route will consist of 237 kilometers (147 miles). Before the government postponed indefinitely this project, CAF and Bombardier were two of the companies that reiterated their interests in participating, subject to the final bases of the second tender. This project was expected to conclude by 2H2017 and will be the first of its kind in LatAm. We expect to hear news of this project during 2016.
Recap on Queretaro’s industrial market: It is one of the key transportation centers in Mexico, located in an equidistant distance from Monterrey, Guadalajara, and Mexico City. It has good access to some of the main commercial ports (Manzanillo and Tampico) and has a well educated labor force. QRO’s market is experiencing a solid economic growth, driven by investments from companies dedicated to high- tech, mainly from the aerospace sector. Queretaro’s industrial landscape has also Source: SCT, NIP, Notimex, Actinver. been expanded by other sectors, including home appliances, auto parts, food & beverage, ITC’s, and agro industries. Some companies representing these sectors The Mexico City - Queretaro bullet train’s travel include GE, Samsung, Kellogg’s, Siemens, Bel-corp, and Mitsubishi Electric. time will be of 1hr and 2 minutes, 2 hours less as compared to the current travel time spent by car. The Mexico City - Toluca train will cost ~USD2.9 billion. The electric train will travel at speed of up to 160kph along its 57.7km route between Observatorio in Mexico City and Zinacantepec in the State of Mexico. The line will have four stations (Bus Terminal, Metepec / Toluca Airport, Lerma, Santa Fe) and 2 terminals (Observatorio and Zinacantepec). Pre-operation testing is expected to start in 4Q2017.
Recap on Toluca’s industrial market: It is located 30 minutes from MCMA, is an interesting option for companies aiming to move and seeking an alternative in the central region. This reason, along with the car manufacturing demand for space, has led to steady growth in this market in recent years.
Mexico City – Toluca Train Project Map
The Mexico City - Toluca train travel time will take 39 minutes and is expected to transport 270,000 PAX a day, cutting journey times by 90 minutes and potentially reducing the flow of vehicles by more than 200,000 a day.
Source: SCT, Actinver.
31 The Yucatan Transpeninsular fast train project will cost ~USD1.2 billion. This project was announced since 2011 and it was initially expected to be executed in 2012. However, its execution an development plans were delayed on the project’s size-related complications and characteristics. Same as with the other projects, this was postponed indefinitely as part of the recent cuts of the government to its expending. Once reactivated, this project is expected to represent a USD1.2 billion investment in which, since the beginning, ASUR (Mexican airports’ operator) has being interested in participating.
The project consists of the necessary works to implement a fast train with an average speed of 120 kilometers per hour in a route of 336 kilometers between Merida, Yucatan, and Punta Venado, Quintana Roo. It is estimated that at least one million passengers per year travel through this train (400 passengers daily). In addition, it is expected thousands of tons of cargo to be transported by the railroads. According to the SCT, cargo transportation costs would be reduced by 55%.
In its first stage, the route will start in Merida, Yucatan Transpeninsular Train Project Yucatán up to Punta Venado, Quintana Roo, going through Tixkokob, Tekantó, Tunkás, Dzitás and Chemax. The stations will be located strate- gically in Izamal, Chichén Itzá, Valladoid and Cobá, highly frequented places by foreign visi- tors. In its second stage, the project plans to join Progreso and extend the route to Uxmal and Campeche. On the other hand, Quintana Roo’s states will be connected to Cancun.
Transpeninsular Train Highway
Source: LMB, SCT, Actinver.
Improving The Mexican Rail Industry
Apart from the PAX fast trains under way, the Mexican government also plans to extend its rail services to improve connectivity with the U.S.. As aforementioned, Mexico is driving U.S. corporations to build factories in the country and then ship their goods back to the north. With an improved railroad infrastructure, raw materials and goods will be shipped south from the U.S. and finished products will be transported north from Mexico. This service will turn more reliable and shippers will shift their operations to trains, especially intermodal, on its cost advantage.
According to the media, the government has been working on projects that will support the rail industry’s growth. For instance, the recent proposal for amending the Customs Law includes a provision that enables railroad as a vehicle for importing and exporting merchandise. A second one is the freight project for the Honda plant in Guanajuato (Bajio), which operations were initially intended for transporting out of factory, delivering to trailers for crossing the NAFTA road to export. And lastly, as we have already mentioned for the case of the port of Lazaro Cardenas, upcoming expansions for the ports of Veracruz, Guaymas and Manzanillo will be also inter- modal friendly, which increases possibilities for railway connection at some point.
32 The Energy Reform Will Bring Additional Investments In The Long Term Location Of Oil Investment Projects In Mexico We would like to highlight the importance of the energy reform on LT economic growth, as it will have a clear impact in the hotel sector. Mexico’s oil and gas industries will create 0.5 million jobs by 2018 and 2.5 million new jobs by 2025, many of which will be along the Texas-Mexico border. Foreign and local participants of the petrochemical, oil and natural gas industries will invest near USD100 billion over the next years.
Despite the sharp decline in oil prices, the positive longer term prospects from the energy reform in the country remain. Expected investments from the first round (first auction projects) of the energy reform in 2015 will not stop. However, we do believe that current oil prices will derive in a delay in other oil production projects (CapEx reduction) due to the tighter short-term cash flow generation from global firms.
The first phase which contemplates conventional projects (excluding shale gas and Area Volume Blocks / oil) are already attracting global companies (including from the U.S. and Canada), (MMBOE) Fields given the long-term nature of the investments and their higher profitability (break- Deep Waters 1,591 11 even in the range of USD20-30 /bbl). We also think that given the tighter economics of oil production from shale resources in the U.S. (particularly in Texas) companies Area Perdido Project 3,222 17 will turn the look to Mexico’s energy reform projects. Deep Waters 2,678 28 South 8,927 62 With the benefits of the energy reform, namely lower energy costs, Mexico’s
Chicontepec & Non-Conventional 1,204 32 manufacturing position will improve even further. Apart from Pemex investments and co-investments with private companies in the oil sector, long-term investments in Land, shallow waters and extra- 724 11 heavy oils shale gas could become quite relevant as Mexico has one of the world’s largest resource bases (17 trillion cubic feet of proved natural gas reserves), which could Non-Conventional 142 8 support increased natural gas reserves and production. While the southern region Source: SENER, Actinver. contains the largest share of proved reserves, the northern region has the potential to be the center of growth in future reserves, as it contains almost 10 times as much probable and possible natural gas reserves.
Mexico’s Shale Gas Reserves Most of Mexico’s shale gas reserves are located in the northeast and east-central regions, as observed in the following exhibit (Mexico’s Shale Gas Reserves). The Burgos Basin, which accounts for the majority of Mexico’s technically recoverable shale gas resources, begins in Eagle Ford in Texas. It is considered by EIA to be Mexico’s most promising prospect and a prolific source of natural gas production. According to the U.S. Energy Information Administration's (EIA) assessment of world shale gas resources, Mexico has an estimated 545 Tcf of technically recoverable shale gas resources (6th largest in the world).
Chihuahua is one of the states with the largest gas pipeline network in the country, which go to main cities (Cd. Juarez, Delicias, Cuahutemoc and Parral). Five additional pipelines are cunder construction with an investment of MX$29 billion, intended to reach Sinaloa and the port of Lazaro Cardenas. The energy reform will detonate the exploitation of energy deposits in the region.
We believe that Monterrey (north region), along with the gulf and southeast regions of the country, will be one of the main beneficiaries from this reform. As the most important industrial center in Mexico, Monterrey is poised to receive significant inflows from FDI that will be originated by this reform. The expected growth in the energy sector will also have indirect effects on manufacturing and services. All of this means business, and business means lodging demand.
Source: EIA.
33 The Mexican Auto Industry, Another Key Driver Of Growth
Mexico’s auto industry has been the main driver of the economy during the last quarters, contributing with over 20% of the total manufacturing activity and with ~4% of the country’s total gross domestic product (GDP). It is quite remarkable that Mexico has become the 8th largest light vehicle manufacturer in the world, with a 3.6% share of its output. Furthermore, it is also the 4th largest exporter of light vehicles, just below Germany, Japan, and South Korea, which are home countries of some of the largest OEM manufacturers. This has also translated in job creations, higher wages, and a boost to middle-class growth.
According to the Mexican Automotive Industry Association (AMIA), Mexico produced 2.9 million light vehicles in 2013 (+1.7% vs. 2012), reaching a record level. In its last publication, AMIA announced that Mexico’s output increased 9.8% YoY in 2014 to 3.2 million units. Exports represented 82% from the total, rising 9% YoY to 2.6 MM units. In the last month of 2014, light commercial vehicle production totaled 208.5 thousand units, which was a record-high number, increasing 27% YoY.
Light vehicle production in the last 12 months has This remarkable performance is expected to continue during the following years. already surpassed the 3.10 million expectation for According to forecasts from IHS Automotive, AMIA, and Mexico’s Auto Parts National 2014 from the industry experts. Industry Association, and MexicoNOW, light vehicle production in Mexico will reach 3.5 million in 2015 (+9% YoY), to therefore increase at a 7% CAGR until 2020.
Mexican Total Light Vehicle Production (Annual) U.S. Light Vehicle Sales (SAAR)
5.0 18.0 5.0 4.6 16.8 4.3 17.0 4.5 4.0 3.7 16.0 15.2 15.3 4.0 3.5 3.5 3.2 15.0 2.9 13.5 2.9 14.0 3.0 2.6 12.4 2.5 13.0
12.0 11.1 Million units Million Million units Million 2.0 1.5 11.0 10.2 1.0 10.0 0.5 9.0 0.0 8.0 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg, Amia, Actinver. Source: Bloomberg, Actinver.
It is worth saying that this has been mostly driven by the U.S. market. In that country, sales based on a seasonally adjusted annualized rate (SAAR) increased to 16.8 MM in 2014 from the previous year level of 15.3 MM units (+10% YoY), maintaining its strong momentum.
This strong U.S. auto sales observed during 2014 is expected to continue in 2015. Some of the factors behind this positive behavior are: i) high incentives by auto- makers, ii) low interest rates, iii) increasing employment rate, iv) improving consumer confidence, v) recovery of the U.S. housing market, and vi) lower oil prices. Also, the improvement in the overall U.S. economy is leading banks and sellers to offer more car loans at lower interest rates and longer maturities, causing a higher replacement demand for new cars (from older used cars) and auto parts. More recently, the rapid decline in gasoline prices has also added to this behavior.
However, Mexican auto industry outstanding growth has also been explained by the large investments made by original equipment manufacturers (OEMs) during the last four years. According to MexicoNOW, this investment totaled USD12 billion, from which USD6.45 billion were for new plants from GM, Daimler, Nissan, VW, Mazda, Honda, Audi, Chrysler, and Ford.
34 With the investment from new OEMs, establishing production facilities in the country, Mexico’s auto industry is becoming a more diversified place in terms of OEMs. The local market has production facilities of 9 OEMs (Nissan, Toyota, Ford, Chrysler, GM, Fiat, Honda, Mazda and VW), and already expecting investments (already announced) from 4 additional auto makers (BMW, Audi, Hyundai and Kia).
We highlight the latest OEM investment announcements: BMW and Hyundai-Kia. On July 2, 2014, Germany-based BMW said it plans to invest USD1 billion in a new factory in Mexico. This would be the company’s second plaint in North America, and is expected to produce 150,000 cars per year (1 and 3 model series). The facility will be located in San Luis Potosi, employing 1,500 people, according to Bloomberg.
On the other hand, Hyundai and Kia have plans to enter the Mexican market with a production plant. Their new manufacturing facility would require a total investment of USD1 billion and would deliver 300,000 vehicles a year. It is expected to be located in Monterrey, Nuevo Leon.
Light Vehicle Manufacturers In Mexico
Tijuana
Hermosillo Chihuahua Saltillo Ramos Arizpe 63,000 u/yr
378,000 u/yr 610,000 u/yr 320,000 u/yr 400,000 u/yr 190,000 u/yr 302,400 u/yr
Monterrey
300,000 u/yr
San Luis Potosi
360,000 u/yr 100,000 u/yr Aguascalientes
550,000 u/yr
El Salto
60,000 u/yr
Silao Salamanca Celaya
360,000 u/yr 330,000 u/yr 230,000 u/yr 200,000 u/yr Puebla
Toluca Cuautitlan Morelos
500,000 u/yr 150,000 u/yr
100,000 u/yr 140,000 u/yr 562,000 u/yr 324,000 u/yr 300,000 u/yr
Source: Companies’ data, Reuters, Bloomberg, press articles, Actinver.
We already mentioned the main magnets for foreign direct investment in Mexico, however, OEMs also find particularly attractive its large and qualified auto parts supplier base. As an example is Nemak (subsidiary of ALFA Corp), a local auto parts producer with annual sales of over USD4.8 billion, which is ranked among the top 100 global auto parts supplier, as the #52 according to Automotive News.
35 Investments for the auto sector are expected to continue. We have identified investments and projects made during 2014 (some of which have not been complet- ed so far) from auto part suppliers, OEMs, and other auto-industry related companies for a total of USD9.15 billion, including those of Hyundai-Kia and BMW.
In the following exhibit, we present the breakdown by markets of the aforementioned investments. Please note that we are using different colors to identify the different industrial regions of Mexico: blue for the north region, green for Bajio, purple for the central region, and orange for the southeast region. We use this as reference in all the maps shown in this report.
Mexican Auto Industry: Main Projects / Investments In 2014
Coahuila
Chrysler (auto OEM): USD164 MM, expansion for Tigershark Chihuahua engines ISE Metal (metal stamping): USD12 MM Bosch (high tech auto products): Sumitomo (electric wiring systems): USD19 MM, distribution Baja California USD240 MM center Delphi (auto harnesses): USD109 MM, W.E.T. Sistemas Automotrices: USD6 MM, second plant Katzkin (auto seats): USD12 MM new engineering projects construction Paccar (truck assembly, OEM): USD400 MM, Electrical Wring System: USD10 MM new truck models assembly Federal Mogul (machining and Nuevo Leon Santek (auto screens and electronic parts): stamping): USD29 MM USD5 MM Yazaki (harnesses and assemblies): Accuride Corp (break systems for trucks): USD40 MM, new plant USD12 MM Daimler (truck assembly, OEM): USD19 MM, bus-assembly plant Sonora expansion Mercedes-Benz (buses assembler): USD20 MM, expansion, new TE Connectivity (cables and assembly line components): USD54 MM Ternium (steel): USD1,000 MM, 2 new plants
Aguascalientes Tamaulipas
Beyonz (engine, transmission, and suspension Toyoda Gosei (auto parts): USD8 MM components): USD38 MM TRW (seatbelts division): USD6 MM, expansion Eagle Industry (air conditioning system Alcom (radios and electrical wiring): USD18.5 MM, components): USD24 MM expansion Howa Textile Industry (auto interiors): USD20 KSM (electric harnesses): USD1.5 MM MM, new plant Posco (steel): USD23 MM Jatco (auto transmissions): USD220 MM, 2nd plant construction San Luis Potosi Nissan (auto OEM): USD14 MM, diesel engines Vesta (RE developer): USD57 MM, Nissan A2 GM (auto OEM): USD131 MM, transmissions complex suppliers park plant expansion BMW (auto OEM): USD1,000 MM, new plant Jalisco JTEKT Corp (electric power steering components): USD28 MM Continental (R&D center): USD29 MM Midori Anzen (steel): USD38 MM, expansion Daido Metal Co (electro-mechanic components and Ronal Group (aluminum wheels): USD125 MM bearings): USD46 MM, new plant Honda (auto OEM): USD7 MM, CR-V plant expansion Bosch (high-tech products): USD460 MM, services Veracruz and R&D center Continental (auto tires): USD3.9 MM
Guanajuato Hidalgo
Denso (auto alternators): USD51.4 MM, expansion Queretaro Dina (bus assembler, OEM): USD14 MM Eagle Ottawa (auto leather products): USD40 MM State of Mexico GM (auto OEM): USD349 MM, new transmissions plant BRP (recreational vehicles): Puebla GKN Driveline (powertrain shafts): USD40 MM USD100 MM Bosch (high tech auto Hanwa Steel (prints sheets for vehicles): USD40 MM products): USD300 MM Mitchell Plastics (plastic Alstom (electric power gen.): USD9.7 MM Hella (auto lighting): USD100 MM Daimler Trucks (truck injection): USD20 MM Audi (auto OEM): USD1,300 MM, Q5 Hirotec Tooling de Mexico (tools / doors): USD59 MM, assembly, OEM): USD45 Mitsubishi Electric model expansion MM, expansion, equipment Automotive (auto Concours Mold Mexicana (mold Mazda (auto OEM): USD770 MM, Mazda 3 sedan and modernization components): USD70 MM manufacturing): USD6.5 MM, plant engines GM (auto OEM): USD211 Trope Autoparts (metal expansion NSK (engine components): USD70 MM stampings): USD65 MM MM, Toluca’s expansion Pirelli (tires): USD200 MM complex Posco MPPC (steel): USD25.4 MM Showa Corp.(electric steering systems): USD50 MM T-Stech (transmission and suspension parts): USD47 MM VW (auto OEM): USD118 MM, new engines configuration
Source: Companies’ data, Reuters, Bloomberg, press articles, Actinver.
36 The Strategic Aerospace Industry
The aerospace industry is becoming another key long-term growth driver for the Mexican economy. It is a strategic sector for the development of the country on its competitive manufacturing advantages and its relevant potential impact on the Mexican GDP. Nowadays Mexico is the 6th provider of the U.S. aerospace industry and one of the main players in the world (number 15).
The industry has also led to an increase in demand for industrial RE space and lodging on its sound growth rates. It has registered a CAGR of 19% during the last 7 years. The main beneficiaries are definitely the industrial FIBRAs and lodging companies with exposure to the sector in the markets of Queretaro, Baja California Norte, Sonora, Chihuahua and Nuevo Leon.
The local sector comprises 270 companies (79% MNF, 11% MRO and 10% D&I) and support entities (the majority being certified by global NADCAP and AS9100), which employ more than 34,000 high-level professionals in 18 states. It is worth noting that Mexico’s highly-qualified and competitive labor force has become another competitive advantage. As a matter of fact, the advanced reengineering center of GE in Queretaro designs the jet Genx turbine, used in the Boeing 787 fleet. There are currently ~745,000 university students in the careers of Engineering and Technology, which represents the largest source of engineering talent of America.
Additional job creation from this sector has a greater impact on the economy on its higher remuneration and growth record. According to FEMIA (Mexican Federation of the Aerospace Industry), salaries in the aerospace industry are equivalent to 1.4 times the salaries of other manufacturing sectors.
According to the last published data on the sector, in 2012 exports reached USD5,040 million (87% to the U.S.) and the foreign direct investment (FDI) was USD1,300 million, accumulating USD4,200 million in the last 4 years. Local and foreign investments amounted to USD15,000 million in that year.
Strong momentum expected to remain in the long-term. Mexico’s aerospace industry will maintain its solid double-digit growth rates for the years to come, sustained by its positive momentum and through the implementation of a national strategic program developed by the Secretary of Economy and FEMIA.
The National Strategic Program of the Aerospace Industry is based in 5 strategies: 1) promotion and development of the internal and external markets, 2) strengthening and development of the industry’s capacities, 3) development of the necessary work- force, 4) technology development, and 5) development of transversal factors such as an institutional framework, a specific support program for the sector, financing, among others.
Aerospace Companies In Mexico Employment - Professionals Accumulated FDI (USD million)
500 450 120,000 110,000 $ 60,000 450 $ 48,000 100,000 $ 50,000 400 350 350 80,000 $ 40,000 300 238 $ 27,500 250 60,000 $ 30,000 200 38,000 $ 19,300 31,000 150 40,000 $ 20,000 100 65 20,000 10,500 $ 10,000 $ 4,300 50 0 0 $ 0 2004 2011 2015 2020 2004 2011 2015 2020 2004 2011 2015 2020 Source: Vesta, FEMIA, Actinver. Source: Vesta, FEMIA, Actinver. Source: Vesta, FEMIA, Actinver.
37 The program’s objectives are the following: i) to place Mexico among the 10 top Mexico’s Key Aerospace Locations global aerospace players (from its current 15th position), ii) to have annual exports of USD12.0 billion, iii) to employ 110,000 people, and 4) to make it represent 50% of the national industrial manufacturing. According to Vesta, more than 20k commercial aircraft will be placed in the next 8 years in the country.
Design & Engineering In addition to the National Strategic Program of the Aerospace Industry, strategies are being developed in order to define the specialization that each of the federal entities will maintain in the industry, given their capacities and industrial niches. This specialization comprises the following divisions:
Recycling & Components Reconversion Manufacturing 1) design and engineering, 2) recycling and reconversion, 3) aircraft assembly, 4) maintenance, and 5) manufacturing of components
We highlight the characteristics on the main markets of the Mexican aerospace industry (based on information from the Secretary of Economy, FEMIA and Pro-
Aircraft Mexico) as follows: Maintenance Assembly Source: ProMexico, FEMIA, Actinver. Chihuahua. The maturity reached by the aerospace industry in this market has enable it to attract strategic projects from leading companies on high-tech, and dual goods & restricted use. The specialization of this market has been identified as precision manufacturing.
Industry experts expect this market to become the most important in high-tech, dual goods and precision manufacturing in LatAm by 2016. For that same year, they anticipate Chihuahua to reach USD1.3 billion of exports, with a 30% surplus, representing a 20% growth per year and a 100% surplus increment. By year 2021, it will reduce its dependence on imported molds, tools and specialized services by 50% from its actual level.
Baja California. The strategy of this market is focused on providing services based on high-value knowledge (KPO) for the aerospace and defense aerospace industries (A+D). It presents the potential to develop fuselage systems and power plants, as well as to become an important manufacturing provider with integrated value chains.
Sonora. This market is based on the development of the supply chain with a focus on innovation, particularly in turbines manufacturing, as well as the generation of specialized labor force for the specific needs of the industry. Sonora will follow medium- and long- term strategies that will place it as a global leader in the manufacture of turbines.
Queretaro. Given the characteristics of the market, Queretaro has the potential of specializing in the design of turbines and in advanced MRO. It is also concentrated in the manufacturing and assembly of complex fuselage parts and the engineering for the design of turbines.
Other markets with capacities established in the aerospace sector are Nuevo Leon, Jalisco, Tamaulipas and Coahuila (please refer to the exhibit on the left).
A Glimpse To The Global Aerospace Market
The global aerospace market has a value of ~USD450 billion, from which the United States has a 45% share. Countries that follow are France, England, Germany and Canada. Worldwide, the countries that are presenting the higher growth rates besides the top 5 are: China, Brazil, India, Singapore and Mexico. This countries account together for 7% of the industry’s global sales.
38 The Bottom Line: Mexico’s Lodging Industry Growth Potential
The evidence that the key transformational drivers of the lodging industry (economic stability, growing middle income class, investments in infrastructure, FDI, structural reforms, etc.) are taking place in the country, justifies the idea that Mexico’s lodging industry moment has arrived.
“Business travelers and tourists are increasingly Based on the analysis of infrastructure investments, expected population growth, and seeking standards and consistency while owners the application of a 4.7% CAGR to quality lodging supply for the period 2014-2022 want access to larger reservation systems to (slightly above projected GDP growth), JLL estimates 155,256 net new quality hotel boost occupancy” (Jones Lang LaSalle). rooms in the country, from its current 350,744 rooms. Chained hotels are expected to present the highest growth rate, at 8.1%, particularly in regional markets (driven by the energy reform and the auto sector). The share of independent quality hotels will decrease from 54.9% to 41.7%.
It is also worth recalling that the expectation is that the presence of FIBRAs and CKDs will continue boosting market liquidity, which will give hotel developers more favorable exit strategies and lead to more new development projects. Additionally, FIBRAs and CKDs will maintain a development strategy to achieve yield (with a target limit of developments as a percentage of their portfolios).
According to the hotel supply ratio (HSR), Mexico’s lodging penetration will improve from 2.9 to 3.9, which would still compare below that of the U.K. of 8.6. It is worth noting that from the sample of 4 LatAm countries (Brazil, Colombia, Peru and Mexico), Mexico has the highest HSR (2.7 in 2012), presenting the most developed hotel market in the region. This is partially explained by its proximity to the U.S. and to being in the top 10 tourist destinations worldwide.
Hotel Room Supply In LatAm
Source: JLL, The Economic Ascent of the Hotel Business, IHS Global Insight.
39 Growth Plans Of Global Hotel Companies In Mexico
Global hotel companies, along with other sector participants such as Hoteles City Express, Fibra Inn, Fibra Hotel, Grupo Hotelero Santa Fe, are set to benefit from the strong growth potential of the Mexican lodging industry.
Global hotel firms see Mexico as the most attractive lodging market in Latin America, reason why the country is their main focus to expand their operations. They also find listed FIBRAs as attractive vehicles to support their growth due to the good commercialization muscle they represent to introduce new hotel brands into the market. The growth plans of the main global hotel companies in the country are the following:
■ Hilton plans to incorporate 33 new hotels in Mexico by 2016, reaching a total of 64 hotels in the country, an interesting growth as compared to the 9 hotels it opened between 2012 and 2013. The 33 new hotels represent an investment of USD340 MM – USD360 MM.
■ JW Marriot expects to open 34 new hotels in Mexico by 2017, adding up 60 hotels. According to Craig Smith, LatAm and Caribbean president for JW Marriot, such growth will be done through FIBRAs. FIBRA Inn has already signed a contract with Marriott to develop 15 hotels under its brands during the next 4 years, while FIHO has signed an agreement with it to open 20 hotels by 2017.
■ IHG expects to invest USD677 MM in the development of 28 hotels in the next 3 years. From these 28 hotels, some could be linked or developed through FIBRA Inn. HCITY has a pipeline to open 31 hotels by 2015, from which 8 will be opened by year end.
■ Starwood currently has 26 hotels with 9 global brands in Mexico, and has LOIs for 14 additional hotels (7 already in construction). Mexico is a focus point for Starwood’s growth strategy in LatAm.
■ Wyndham has a shorter history operating in Mexico, however, it mentioned that Mexico has become its top priority for expanding its operations based on the country’s higher growth prospects as compared to Brasil, Colombia and Peru. From the 114 hotels Wyndham expects to open in LatAm, 30% will be built in Mexico. FINN has franchise agreement with Wyndham to operate its global brands.
■ Currently Accor has 11 hotels in Mexico, their growth plans for the next 5 years include 49 new hotels of their brands Ibis and Sofitel in the country. The chain considers to grow through FIBRAs.
Location Of Investments / Market Opportunities
Lodging players are targeting their investments in the markets that present the most attractive growth opportunities, mainly on their industrial sectors’ expectations. Specifically, there are 4 industrial sectors that are experiencing a growth phase: Automotive, electronics, aerospace and medical equipment; and there are 3 other sectors that present a relevant growth potential on the back of the energy reform: energy, oil and natural gas. For simplicity we are putting together these 3 sectors in the petrochemical sector henceforth. The regional lodging markets will present the highest supply-demanded growth rate (CAGR 2014-2022 of 8.8%) as they will benefit the most by the expected performance of these industrial sectors, in our view.
Growing Industrial Sectors Sectors With Attractive Growth Potential
. Automotive . Electronics . Energy . Natural Gas
. Aerospace . Medical Eqpt. . Oil
40 We have performed an analysis in order to identify the specific markets (cities) that will benefit by the aforementioned industrial sectors. This analysis includes the sectors’ exposure of the main industrial markets of Mexico as well as the country’s main business corridors. It explains more clearly how hotel companies have chosen the markets where they have made their historical investments, and gives us a better idea of where they would be targeting their new investments.
For instance, it shows that the north (Tijuana, Nogales, Chihuahua, Saltillo, Nuevo Laredo, MTY, Matamoros, San Luis) and the Bajio regions (GDL, Guanajuato, Queretaro, Hidalgo, Aguascalientes) have the highest exposure to the auto sector. The markets of Mexicali, Nogales, Juarez, Monterrey, Reynosa, San Luis, Durango, GDL, Aguascalientes, Queretaro and Toluca are set to receive the benefits from the aerospace sector’s growth. While most of the markets located in the Gulf basin, as well as MTY, will experience stronger growth rates driven by the energy reform.
Main Business Corridors And The Sectors’ Exposure Of The Main Industrial Markets Of Mexico
Chihuahua Nuevo Laredo Main Business Corridors Mexicali • Automotive • Logistics Energy, Petrochemical and Exports Machinery & Eqpt. • Precision & • Automotive • Industrial, Manufacture, Logistics and Aerospace Advanced Manuf. • Electronics • Exports NAFTA • Metal Mechanic • Aerospace • Plastics Nogales Maquila Exports and Logistics • Precision & Advanced • Processed Food • Medical • Aerospace Tijuana Manuf. • Metal Mechanic • Food / Beverage Mining • Automotive • Metal Mechanic • Electronics • Machinery & Eqpt. • Textile Agriculture Exports NAFTA • Metal Mechanic • Textile • Plastics • KPO Saltillo Monterrey • Electronics Ciudad Juarez • Furniture • Medical Products • Automotive • Automotive • Medical Eqpt. • Aerospace Industrial Regions • Electronics Logistics • Cement & Const. I.T. • Electronics • • Mining • Metallurgical • Automotive • Appliances North Region • Metal Mechanic • Appliances • Medical Eqpt. • Medical Eqpt. Bajio Region • Electronics • Processed Food • Industrial Design Central Region • Machinery & Eqpt. • Chemical Reynosa • Precision & • Aerospace • Electronics Southeast Region Durango Advanced Manuf. • Medical Eqpt. • Chemical • Agroindustry • Electronics • Logistics • Textile • Machinery & Eqpt. • Plastics San Luis Potosi • Mining • Precision & • Medical • Automotive • Metal Mechanic Advanced Manuf. • Food / Beverage • Agroindustry • Aerospace • Software Design • Metal Mechanic • Chemical • Processed Food • Renewal Energy • Textile • Appliances • Wood • KPO & BPO • Aerospace • Cement • Precision & • Plastics Advanced Manuf. Matamoros • Precision & Advanced • Renewal Energy Manuf. • KPO • Metallurgical • Electronics • Machinery & Eqpt. • Automotive • Metallurgical Sinaloa • Precision & • Electronics Yucatan • Agroindustry Advanced Manuf. • Textile • Agroindustry • Processed Food • Medical • Food / Beverage • Processed Food • Metal Mechanic Zacatecas • Renewal Energy • Aerospace • Petrochemical • Renewal Energy • Agroindustry • Biotech • Textile • Naval Eqpt. • Processed Food • KPO & BPO • Aerospace • BPO • Mining Hidalgo • Automotive • Tourism • Metal Mechanic • Textile • Medical • Autoparts • Mining • Tourism Campeche • Renewal Energy • Automotive • Petrochemical Aguascalientes • Tourism • Processed Food • Agroindustry • Agroindustry • Metal Mechanic • Textile • Textile • Petrochemical • Processed Food • Metal Mechanic • ITs Guadalajara Tabasco • Chemical • Precision & • BPO • Agroindustry Guanajuato (Bajio) • Petrochemical • BPO Advanced Manuf. • Electronics • Automotive • Food / Beverage • Electronics • Software / Tech. • Agroindustry • Agroindustry • Autoparts Metallurgical • Textile • Metal Mechanic • Aerospace • Textile • Electronics Michoacan • Autoparts • Machinery & Eqpt. • Automotive • Precision & • Agroindustry • Steel • Software Design • Food / Beverage Advanced Manuf. • Processed Food Queretaro Mexico City • Industrial Design Logistics • Chemical • Steel Chiapas • Aerospace • Logistics • KPO • Aerospace • Pharmaceutical • Plastics • Agroindustry • Textile • Biotech • Food / Beverage • Processed Food • Renewal Energy • Processed Food Oaxaca • Chemical • BPO & KPO • Automotive Puebla Veracruz • Renewal Energy • Biotech • KPO • Agroindustry • Metal Mechanic • Software Design • Textile • Agroindustry • Tourism • Pharmaceutical • Processed Food • Precision & • KPO • Automotive • Petrochemical • BPO Toluca • Petrochemical Advanced Manuf. • Metal Mechanic • Pharmaceutical • Logistics • BPO • Plastics • Plastics • Metallurgical Industrial Sector Type • Automotive • Tourism • Electronics • Food / Beverage • Tourism • Aerospace Mature Sector • Biotech • Aerospace • Naval Eqpt. • Software Design • Software Design Emerging Sector • Processed Food • Precision & • Processed Food • Automotive Advanced Manuf. • KPO Service Sector • Textile • ITs • Petrochemical • Chemical • KPO & BPO • Machinery & Eqpt. • Medical Products • ITs • BPO Source: SE, HCITY, Actinver. • BPO
41 We have also analyzed 2014 investments of FINN, HCITY and FIHO according to Sectors' Exposure Of Lodging Investments 2014 their locations and industrial sector(s) exposure. From 53 announced investments by these companies, 20 are exposed to the auto sector, 14 to the petrochemical, 10 to electronics, 9 to medical equipment, and 6 to aerospace. We believe that new 2015 Automotive 20 investments will be more concentrated in markets exposed to main manufacturing sectors, while for the longer term we anticipate a higher concentration in the energy, Others 18 oil and natural gas (petrochemical) sectors given their LT growth prospects.
Petrochemical 14 C o mpany C ity State Secto r(s) Expo sure # Of Hotels FINN Chihuahua Chihuahua Aerospace 2 Agroindustry 12 FIHO Queretaro Queretaro Aerospace / Automotive 2 FINN Ciudad Juarez Chihuahua Aerospace / M aquila 1 Electronics 10 FIHO Ciudad Obregon Sonora Agroindustry 2 HCITY Tehuacan Puebla Agroindustry 1 Medical Eqpt. 9 FINN Culiacan Sinaloa Agroindustry / Food 1 HCITY Apizaco Tlaxcala Agroindustry / Food 1 Aerospace 9 FIHO Los M ochis Sinaloa Agroindustry / Others 1 FIHO Xalapa Veracruz Agroindustry / Petrochemical 2 Logistics 8 FIHO / FINN Leon Guanajuato Automotive 2 FIHO San Luis San Luis Potosi Automotive 1 Textile 5 FIHO / FINN Saltillo Coahuila Automotive 2 FINN Silao Guanajuato Automotive 1 FIHO Aguascalientes Aguascalientes Automotive / Others 1 Pharmaceutical 5 FINN Celaya Guanajuato Automotive / Others 1 HCITY Puebla Puebla Automotive / Others 1 0 5 10 15 20 25 HCITY M atamoros Tamaulipas Automotive / Others 1 Note: Others refer to Steel, TIs, Chemical, Software Design, HCITY M exico City Distrito Federal Logistics / Others 2 Maquila FIHO Tijuana Baja California Norte M aquila / Automotive 1 Source: Actinver. FIHO / HCITY Villahermosa Tabasco Petrochemical 2 FINN Coatzacoalcos Veracruz Petrochemical 1 FINN Altamira Tamaulipas Petrochemical 1 FINN / HCITY Ciudad del Carmen Campeche Petrochemical 3 HCITY Dos Bocas Tabasco Petrochemical 1 HCITY Ciudad Victoria Tamaulipas Petrochemical 1 HCITY Tuxpan Veracruz Petrochemical 1 HCITY Salamanca Guanajuato Petrochemical 1 HCITY Paraiso Tabasco Petrochemical 1 FINN Delicias Chihuahua Pharmaceutical / Textile 1 FIHO / FINN / HCITY M onterrey Nuevo Leon Several 4 FIHO / FINN Guadalajara Jalisco Several 2 FINN / HCITY Toluca State of M exico Several 2 FIHO M onclova Coahuila Steel / Automotive 2 T o tal 53
Overall, this is how FINN and HCITY have delineated their investment strategies. As shown below, they have expanded their presence in key industrial markets.
FINN’s Geographical Presence HCITY’s Geographical Presence
Source: FINN, Actinver. Source: HCITY, Actinver.
42 PAX Traffic Performance, Evinces The Greater Growth Prospect Markets
Passenger (PAX) traffic performance becomes another key point we are using to support the idea on the most attractive markets for lodging investments (focus of hotel companies), as it shows where business are being conducted in Mexico and where new investments are taking place. Recall that the higher investments and development of a market, the higher its lodging demand, reflected in higher hotel occupancy levels. It is true that apart from this, each market has its particularities that affect differently its lodging performance and evolution from other markets, however the central idea generally works. Anyhow we have designated the next section of this report for a more complete analysis on each of the major local lodging markets, as to better understand their specific characteristics.
For the analysis on PAX traffic performance we have used historical statistics from the Mexican airport operators AICM, ASA, OMA, ASUR, GAP, and other entities (such as the one operating Toluca’s airport) for the 2010-2014 period (post-crisis). CAGR of total traffic is compared against average GDP growth for the same period, in times. As can be observed in the exhibit below, PAX traffic performance has been stronger in markets with exposure to the aerospace, automotive, oil, energy, and/or natural gas sectors (navy blue color). System-wide PAX traffic growth generally trends around ~1.5x GDP growth. Markets above this level present the most attractive growth prospects for the lodging industry, according to this analysis.
It is worth noting that Tepic’s PAX traffic, the one posting the second highest growth from the sample, is still below pre-crisis levels, differently from the rest of the airports. The same case applies to Colima’s airport, also operated by ASA. The markets with growth rates above 4.0x GDP growth are: Reynosa (Aerospace, Electronics, Medical Eqpt.), Campeche (Petrochemical), Minatitlan (Petrochemical), Aguascalientes (Auto, Aerospace, Electronics), San Luis Potosi (Auto, Electronics, Aerospace), Matamoros (Electronics, Automotive, Medical Eqpt.) and Villahermosa (Pertochemical, Auto).
We also highlight Monterrey’s market, which has been more recently experiencing a PAX traffic growth of 3.1x GDP growth. This market will be one of the most beneficiaries of the energy reform given its unique position in the north region (exposure to the natural gas sector) and the sophistication of its industrial market. So far, it is already expected that foreign an local participants of the petrochemical, oil and natural gas industries will invest ~USD2,500 MM in the next 3 years. This effect will not be limited to the lodging sector, but also to the office and industrial ones.
Total Passenger Traffic CAGR 2010-2014 (In Times GDP Growth)
12.0x Exposed To Aerospace, Automotive And/Or Petrochemical Sectors
Other Airports 10.0x
8.0x
6.0x
4.0x Total Airports Growth
2.0x
0.0x
Bajio
Tepic
Merida
Colima
Loreto LaPaz
Tijuana
Tamuin
Cancun Oaxaca
Torreon
Tampico
Durango
Reynosa Huatulco Cozumel
Veracruz
Cuiliacan
Palenque
Chetumal Minatitlan
Monterrey Queretaro
CdJúarez
Hermosillo
Manzanillo
Campeche Chihuahua
Matamoros
MexicoCity
Cd.Victoria
Guadalajara
Villahermosa
PtoEscondido
PuertoVallarta
Aguascalientes
SanLuis Potosí
TuxtlaGutierrez
Cd.Del Carmen SanJosé del Cabo Source: SCT, Airport Operators, Actinver.
43 Appreciation Potential In Local ADRs ADRs Of Quality Hotels As mentioned in the first section, average daily rates (ADRs) in Mexico reached pre- Brazil $ 259 crisis levels in real terms in 2013, after registering a consistent improvement in performance (CAGR of 4.4% in peso terms) following the recession and the H1N1 Peru $ 211 virus in 2009. Since 2H2013, ADRs have moderated their performance as a consequence of the weaker than anticipated economic environment. During 2014, Colombia $ 183 hotel companies were more cautious in raising rates, averaging a 2.3% year-over- year increment to MX$1,586 as of 3Q2014 (avg. ADR for quality lodging supply in the C&S America $ 171 country). FINN and FIHO have registered below-inflation increases of 1.9% and 3.0% Canada $ 169 in their LTM same-store ADRs, respectively. As HCITY was more aggressive increasing its rates during 2013, this year it has achieved a lower 0.8% growth to U.S. $ 160 MX$720, but with a stronger +6.1% YoY rise in RevPAR.
Mexico $ 122 Higher lodging supply demanded will result in a LT appreciation in local ADRs. We believe that RevPAR performance goes beyond GDP performance given stronger Ecuador $ 108 (USD) structural and fundamental factors that are moving demand in the evolving local industry. However, there’s a historical correlation between ADRs and GDP that can $ 0 $ 100 $ 200 $ 300 not be overlooked, as it finally dictates the short-term rates’ trend in the market. Source: JLL, FINN, Actinver. Some market participants believe that Mexican ADRs have a strong growth potential given their significant discount as compared to other LatAm markets. According to information from Jones Lang LaSalle, local ADRs (for quality lodging supply) are below those of Colombia (-33.6%), Peru (-42.4%) and Brazil (-53.1%). As compared to the U.S., Mexico has a 24.1% discount, and of 29.0% as compared to the average of Central and South America’s countries. In our view, it would be incorrect to believe The Brazilian lodging industry is similar to the that Mexico has the potential to reach Brazilian levels of ADR, as rates are Mexican regarding its transformational phase. determined according to the specific characteristics of each market. As we go in the following section, even in the same country, each submarket (city) has quite different Nonetheless, it would be wrong to compare its ADRs across hotel segments. However, we do think that, as the local lodging ADRs against Mexico given the differences both industry evolves and becomes more sophisticated, there would certainly be a catch- hotels’ markets have. up in ADRs to those of mature countries, such as the U.S.
FINN's Historical KPIs (As Of 3Q2014) HCITY's Historical KPIs (As Of 3Q2014) 64% 62% 62% 61% $ 1,000 $ 750 62% 61% 60% 60% $ 800 $ 600 60% 60% 59% 60% $ 600 $ 450 58% 59% 58%
56%
$ $ 720
$ $ 983
$ $ 714
$ $ 971 $ $ 691
$ $ 948 $ 300
$ $ 682 ADR (MX$) ADR (MX$) ADR
$ 400 $ 1,002 56% 58%
Occupancy Rate Occupancy Rate Occupancy
$ $ 609
$ $ 440
$ $ 603
$ $ 583
$ $ 414 $ $ 413 $ 150 $ 405 $ 200 $ 531 54% 57%
$ 0 52% $ 0 56% 2011 2012 2013 2014 (LTM) 2011 2012 2013 2014 (LTM) ADR RevPAR Occupancy ADR RevPAR Occupancy Source: FINN, Actinver. Source: HCITY, Actinver.
FIHO's Historical KPIs (As Of 3Q2014) Mexico's Historical KPIs (As Of 3Q2014) $ 1,000 66% 64% 66% $ 120 62% 62% 62% $ 800 65% $ 100 65% 60% $ 600 $ 80 58% 58%
64% $ 60 57% $ $ 122
$ 400 64% $ 122
$ $ 900
$ $ 874
ADR (MX$) ADR
ADR (USD) ADR
$ $ 835
$ $ 820 $ $ 105
64% $ 40 $ 104 56%
Occupancy Rate Occupancy
Occupancy Rate Occupancy
$ $ 75
$ $ 75
$ $ 576
$ $ 568
$ $ 547 $ $ 525
$ 200 $ 61 $ 20 $ 59 54%
$ 0 63% $ 0 52% 2011 2012 2013 2014 (LTM) 2011 2012 2013 2014 (LTM) ADR RevPAR Occupancy ADR RevPAR Occupancy Source: FIHO, Actinver. Source: Smith Travel Research, JLL, Actinver.
44 Mexico’s Main Lodging Markets And Submarkets Lodging markets covered in this section: We have identified 15 main lodging markets in Mexico, according to their growth 1) Nuevo Leon (Monterrey) prospects and relevance for the investment strategies of the hotel companies and 2) Mexico City FIBRAs. By regions, 7 of these markets are located in the North (Nuevo Leon, B.C. 3) Jalisco (Guadalajara) Norte, Chihuahua, Coahuila, Sonora, Tamaulipas and San Luis Potosi), 3 in the 4) San Luis Potosi Central (Mexico City, State of Mexico and Puebla), 3 in the Bajio (Guanajuato, 5) Guanajuato Jalisco and Queretaro) and 2 in the Southeast (Campeche and Veracruz).
6) State of Mexico Each market has its own characteristics, with particular demand and supply drivers. 7) Queretaro Even some of the submarkets contained in each market have their differences. Most 8) Tamaulipas of that deals with their structural situations, sectors attended, location, access to 9) Veracruz other markets, security-related issues. Thus, we find relevant to present a general 10) Campeche overview, as well as the outlook for each of the 16 main lodging markets and their 11) B.C. Norte main submarkets. At the end, this gives us a much greater sense of the direction that 12) Chihuahua the operations of the listed lodging companies and FIBRAs will take, as well as a better understanding of their investment strategies, we think. These overviews and 13) Coahuila outlooks are based on information from the industry expert HVS. Key drivers for the 14) Sonora lodging industry to keep in mind are: demographics, FDI, industrial activity, PAX 15) Puebla traffic performance, access and transportation, competition, occupancies, ADRs.
We begin by introducing 7 of the 8 hotel markets located in Mexico’s Golden Triangle (GT), a 495,000 sqkm area (25% of the country’s territorial extension) between MTY, GDL and Mexico City that concentrates 80% of the country’s GDP generation. The largest hotel activity is concentrated here given its elevated activity in the automotive, aerospace, manufacturing, commerce, logistics, agricultural, and other industries, as well as its high transportation connectivity. Its high terrestrial and air connectivity is key to the importance of the area, with 4 of the 10 most important highways crossing through it, including the “Industrial, Manufacture, Logistics and Exports NAFTA” corridor as well as the “Mining” corridor. Furthermore, 3 of the 5 most important airports are located within the GT, moving ~50% of Mexico’s total passenger traffic. The GT is comprised by 8 markets: Nuevo Leon, San Luis Potosi, Aguascalientes, Jalisco, Guanajuato, State of Mexico, Queretaro, and Mexico City. It concentrates 46% of the country’s population (60% of the economically active). Additionally, 70% of international trade occurs here and 80% of the auto industry is located within it.
Mexico’s “Golden Triangle”
Source: Actinver.
Then, the markets belonging to the “Energy, Petrochemical and Exports” corridor are covered: Tamaulipas, Veracruz and Campeche; followed by other North markets with exposure to the auto, aerospace, electronics and medical eqpt. sectors: B.C. Norte, Chihuahua, Coahuila, Sonora and San Luis. Finally is Puebla’s market, also relevant given its exposure to the auto sector and increasing participation in aerospace.
45 Nuevo Leon (North Region) Nuevo Leon Market Overview: Nuevo Leon is the third-largest economy in the country, representing 7.1% of Mexico’s GDP, with a population of 4.9 million (4.2% of Mexico’s total population), the state ranks 3rd in GDP per capita (MX$221,790). Currently the state has the 5th largest working age group on the country with 66.4% of the total population between 15 and 65, the demographic bonus is positive for the next 5 years, in which the state could reach a 67.8%.
Nuevo Leon is a frontier state that has the ideal logistics location for doing business in the North American market. Its dynamism, labor productivity and industrial diversity have attracted more than 2,200 foreign firms to the following sectors: metal mechanic, home appliances, automotive, information technologies and aerospace, among others. During 2013 Nuevo Leon had a total FDI of USD420.3 MM, equivalent to 1.1% of Mexico’s total FDI. Most of the FDI was directed toward the manufacturing industry, followed by the construction and electrical industries. Nuevo Leon: FDI $ 6,000 350% Nuevo Leon is a key point in the North American Free Trade Agreement (NAFTA), 300% being the connecting point to the U.S. with the highway Mexico – Nuevo Laredo, $ 5,000 250% additionally 2 other important highways cross by the state (Veracruz – Monterrey and $ 4,000 200% Mazatlan Matamoros). The main airport is located in Monterrey; it is the fourth largest 150% in the country, with an average daily traffic of 18,500 passengers. From the years $ 3,000 100% 2009 – 2014 the airport grew at a CAGR of 5.4%, and it registered a relevant growth of 11.1% receiving 7,129 thousand passengers, of which almost 85% were domestic.
USD USD (Million) $ 2,000 50%
0% $ 1,000 As aforementioned we believe that Monterrey, along with the gulf and southeast -50% regions of the country, will be one of the main beneficiaries from the energy reform. $ 0 -100% 2008 2010 2012 1H2014 As the most important industrial center in Mexico, Monterrey is poised to receive significant inflows from FDI that will be originated by this reform. The expected FDI Change YoY growth in the energy sector will also have indirect effects on manufacturing and Source: INEGI, Actinver. services. Furthermore, the announcement of the construction of KIA Motors assembly plant in Pesqueria, N.L., which will require and investment of USD$1,000 MTY: PAX Traffic Performance million and will have the capacity to build 300 thousand vehicles, will generate an 8,000 15% additional investment of USD500 million from the suppliers of the company. All of this CAGR: 6% 7,000 10% means business, and business means lodging demand.
6,000 5% Main Markets: 5,000 0% 4,000 -5% ■ Monterrey’s metropolitan area. It occupies the 2nd place in terms of industrial 3,000 -10%
PAX (000's)PAX activity. It is the city with the highest income per capita in Mexico, with a modern 2,000 -15% infrastructure and a highly-educated labor force. The city has long been 1,000 -20% considered an industrial powerhouse within Mexico, as a result of a strong steel 0 -25% industry. Recent investment announcements by KIA Motors have strengthened '09 '10 '11 '12 '13 '14 the automotive and auto parts production industries in the state, complementing PAX YoY Change the presence of Nemak (subsidiary of ALFA corp), a local auto parts producer with annual sales of over USD4.8 billion, which is ranked among the top 100 Source: SCT, Actinver. global auto parts supplier as the #52 according to Automotive News; Daimler’s truck assembly plant; and Mercedes-Benz buses assembly plant. Additionally, Nuevo Leon: Inventory & Occupancy Monterrey has long been home to world-class manufacturers of diverse products 6.0 60% as home appliances, glass products and cement. Recently the city has become a key location for investments from international corporations such as Sony, 5.0 55% Toyota, Whirpool, Heiniken, Navistar, Dell, Boeing, and G.E. partly due to the 4.0 50% ratification of NAFTA in 1994. MTY’s economy is driven by: i) manufacturing exports to the U.S., given its proximity; as well as by ii) the local demand of 3.0 45% goods and services, which makes it an important site for logistics. Ten of the 2.0 40% twenty leading companies in Mexico are headquartered in Monterrey (Cemex,
Occupancy Rate Occupancy Banorte, Gruma, FEMSA, Alfa, Soriana, among others), as well as three of the
1.0 35% most renowned universities in Latin America. Installed Room Nights(Millions) Room Installed 0.0 30% '05 '06 '07 '08 '09 '10 '11 '12 '13 Unoccupied Rooms Occupied Rooms Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
46 Lodging Characteristics & Outlook: Nuevo Leon’s lodging supply is still relatively small compared to the business market size; it represents 2.6% of the countries lodging supply. Thus, it still presents significant growth opportunities for lodging companies. Monterrey is one of the least fragmented markets, with a low presence of independent hotel owners (36%), while 55% and 9% are owned by international and regional chains, respectively. Some of the hotel brands with presence in the city are Quinta Real, Safi, Holiday Inn, Hampton Inn, Best Western, Wyndham Garden, Comfort Inn, Novotel, Camino Real, Crowne Plaza, Holiday Inn Express, City Express Hotel, among others.
Occupancy rates in the state have had a difficult time recovering to pre-crisis levels. Lowest levels of 41.2% were seen in 2011. It is worth noting that, in addition to the economic crisis and the H1N1 outbreak, Monterrey suffered a material wave of violence, the worst part being observed between 2011 and 2012. In 2013, rates reached 52.5% which is still far below maximum levels of 58.0%. Monterrey’s lodging market is mainly comprised by business-class hotels, but with an ample supply in limited-service, select-service and full-service. The low fragmentation existent is a positive factor for ADRs, which currently are within a range of MX$1,250 – MX$2,900.
We believe that new investments in the state will generate additional lodging demand, expecting occupancy rates to rise during 2015 and 2016. Additionally, due to the high ownership of international chains in the country, ADRs determined in USD might be already reflecting the appreciation in the USD, raising the market average rates. As a key market, all hotel operators have presence here, including FINN, FIHO, HCITY, and GHSF. Monterrey was one of the 5 entities with the highest concentration of investments within the lodging sector. We expect this trend to continue giving the market’s strong dynamics, evinced in its PAX traffic performance.
47 Mexico City (Central Region) Mexico City Market Overview: Mexico City’s is the largest contributor of the country’s GDP, with 16.4% of the total. It has a population of 8.9 million (7.6% of Mexico’s total) and of ~22.5 million taking into account its metropolitan area. Mexico City ranks 2nd in GDP per capita with MX$277,433. Currently it has the largest working age group of the country with 69.2% of the population between the ages of 15 - 65. It is worth noting that this entity is currently enjoying its demographic peak, being the only city in the country with a negative demographic bonus for the next 15 years, dropping to an estimated 68.7% in 2020 and to 66.5% in 2030. Mexico City has also been for long the city with the highest FDI in the country. In 2013 the FDI amounted USD24.8 billion, which represented 63.3% of the county’s FDI and a +253% YOY growth.
Due to its economic relevance, Mexico City is the starting and ending point of several important highways, such as Mexico–Nogales (“NAFTA Agricultural Export” corridor), Mexico–Nuevo Laredo, Mexico–Tuxpan and Mexico–Veracruz. At the same time, Mexico City: FDI Mexico City’s airport is the country’s busiest and Latin America's second largest $ 250 300% airport in terms of PAX traffic, with a daily average of 90,000 passengers. This airport 250% currently generates 35,000 direct jobs and ~15,000 indirect jobs in the area. From $ 200 2009 to 2014 it presented a CAGR of 7.2% and grew 8.6% YoY in 2014. 200%
$ 150 150% Main Markets: 100%
$ 100 50% ■ Mexico City: It is one of the most dynamic cities of the global economy. It is USD (Billion) USD 0% LatAm’s financial center and Mexico’s political, economic and cultural capital. $ 50 -50% Furthermore, it is home to several important national office headquarters and both national and international corporations. Its economic activity is highly $ 0 -100% 2008 2009 2010 2011 2012 2013 1H14 diverse, with a variety of industries, such as business services, technology, government, automotive, retail, professional services, logistics, and financial and FDI Change YoY insurance institutions. GE, Mazda, Danone, Microsoft, Nestlé, KPMG, BCG, Source: INEGI, Actinver. Delloite, DHL, Pfizer, Barclays, among others are just a sample of companies based in the city. Mexico City: PAX Traffic Performance 14% Lodging Characteristics & Outlook: Mexico City’s lodging supply is the second 30,000 CAGR: 7% largest in the country, representing 9.0% of Mexico’s total. Although the market has 25,000 9% maintained its dynamism, increasing occupancy, its inventory has grown at a slower pace than the country’s average due to the maturity of the market. In the past years, 20,000 4% the city’s lodging market has grown at a 0.8% CAGR. 15,000 -1% Lodging supply in the city is still highly fragmented, especially considering the size PAX PAX (000's) 10,000 and economic implications of the city. Nearly 48% of the hotel supply is owned by -6% 5,000 independents, 33.5% by international and 18.5% by national chains. The market’s size and low penetration levels represent an opportunity for institutional lodging 0 -11% '09 '10 '11 '12 '13 '14 companies and FIBRAs. On the back of that, and given its relevance for the industry, hotel companies will continue expanding their operations in this market. PAX YoY Change Source: SCT, Actinver. Practically, all of the hotel-chained local and international brands have presence in the city, including: Camino Real, Sheraton, Marriot, City Express, Live Aqua, Holiday Mexico City: Inventory & Occupancy Inn, NH, Novotel, Presidente Intercontinental, W, Krystal Grand, etc.. 70% Mexico City is one of the few markets in which occupancy rates reached pre-crisis 15.0 65% levels since 2011. The lowest levels were registered during 2009, falling more than 60% 10 percentage points to 45.7%. Nevertheless, during 2013 occupancy rates reached 10.0 55% 64.8%, the highest levels from the last decade. The city has one of the most mixed 50% and varied lodging markets, with high participation of both, business and leisure demand. The supply in the city is highly diversified with an ample number of 5.0 45% Occupancy Rate segments (limited, select and full service) and brands (national, international and 40% independent). Said this, ADRs can vary in a range from MX$1,000 up to MX$3,500.
Installed Room Nights(Millions) Room Installed 0.0 35% The expected rise in quality lodging demand should drive ADRs’ performance in the '05 '06 '07 '08 '09 '10 '11 '12 '13 following years. Unoccupied Rooms Occupied Rooms Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
48 Jalisco (Bajio Region) Jalisco Market Overview: Jalisco is the 4th largest economy in the country, representing 6.3% of the GDP, with a population of 7.6 MM (6.5% of Mexico’s total), and a GDP /capita of MX$123.7 k. It has a working age group of 64% of its population, and a positive demographic bonus for the next 15 years, reaching 66.0% in 2030E. In 2013 Jalisco had a total FDI of USD957 MM (+10.7% YoY), 2.4% of Mexico’s total. Most of the FDI was directed to manufacturing, followed by accommodation and commerce. It is worth mentioning that Guadalajara’s metropolitan area is considered to have the highest investment attraction potential in Mexico.
Jalisco is highly integrated with the U.S. and Canada through the NAFTA, as 3 important highways cross by Jalisco: i) The Pacific corridor; ii) Mexico–Nogales (NAFTA Agricultural Export corridor); and iii) Manzanillo–Tampico. It also has 2 international maritime ports and 2 international airports. The main airport is located in Guadalajara, and it is the 3rd largest in the country, after Mexico City and Cancun Jalisco: FDI airports, with an average daily traffic of 23,500 PAX. This airport had a CAGR of $ 20 250% 6.2% 2009-2014 and increased 7.3% in 2014. Today it transports 8,695 annual PAX, $ 18 of which 34% are international. 200% $ 16 $ 14 150% Main Markets: $ 12 100% $ 10 ■ Guadalajara: 2nd largest city in Mexico and one of the ten largest in LatAm 50%
$ 8 (GDP terms). It’s one of Mexico’s strategic markets, with a highly trained and USD (Billion) USD $ 6 0% capable labor force, a solid transportation network, a highly diversified economy $ 4 -50% and access to suppliers. GDL’s market (also known as Mexico’s “Silicon Valley”) $ 2 is focused on the production of high-technology assets, which has caused it to $ 0 -100% 2008 2009 2010 2011 2012 2013 1H14 consolidate as the largest in the country. Furthermore, this market has started to grow as a result of the boom of the automotive industry in the Bajio region, and it FDI Change YoY has become an auto parts supplier for different auto-related companies and Source: Actinver. OEMs. Guadalajara continues being target for new investments from the auto, food, logistics, metallurgical, textile, electronics, and software sectors. GDL: PAX Traffic Performance 10,000 15% GDL is one of the most important and fastest growing economies of the country, 9,000 CAGR: 6% and is one of the most attractive for FDI, which boosts economic activity, travel, 8,000 10% and consequently, lodging demand. Hotel demand in the area comes mainly 7,000 5% from two sources i) GDL’s Expo for meeting and conventions; and ii) ‘Ciudad 6,000 Creativa Digital’ project, which is focused on creating and strengthening the 5,000 0% digital design, software, and the film & video games industries. This project is 4,000
PAX PAX (000's) expected to drive new foreign investments and incentivize job creation. 3,000 -5%
2,000 -10% 1,000 Lodging Characteristics & Outlook: Jalisco’s lodging supply is the 3rd largest of 0 -15% the country (7.9% of the total). Its inventory has shown a 2.9% CAGR (2008-2013), '09 '10 '11 '12 '13 '14 similar to the country’s 2.1%, but significantly better than the growth pace of Mexico PAX YoY Change City (+0.8%), which has a similar number of rooms. It covers all the hotel market segments. GDL is one of the most fragmented markets, with a high presence of Source: SCT, Actinver. independent hotel owners (68.0%), while 19% and 13% are owned by international and regional chains, respectively. This fragmentation is not typical for a developed Jalisco: Inventory & Occupancy market, which represents investment opportunities in the city. Fiesta Americana, Riu, 20.0 54% Quinta Real, Real Inn, Camino Real, Crowne Plaza, Starybridge, Holiday Inn Express, City Express and Aloft are a sample of hotel within the market. 52%
15.0 50% Jalisco has had a difficulties in recovering to pre-crisis occupancy levels. Lowest 48% levels of 44.0% were seen in 2009, currently at 47.5% (vs. pre-crisis of 49.0%). 10.0 46% Nevertheless, GDL has higher rates than Jalisco’s average, with levels of 58.0%. It is mainly a business-class destination, with a high fragmentation adding a series of low
5.0 44% Rate Occupancy price competitors to the market with lower ADRs. GDL’s current average is 42% ~MX$900, which we considered low given the market’s characteristics. There is also
Installed Room Nights(Millions) Room Installed 0.0 40% a high-end business market in the city, attended by the full-service hotel supply, with '05 '06 '07 '08 '09 '10 '11 '12 '13 average ADRs of MX$1,650. Along the positive prospects for its main industries, the Unoccupied Rooms Occupied Rooms fragmentation in the market shows and investment hotel opportunity in the city. We Occupancy Rate Occupancy Rate Mx expect ADRs to increase as the share of independent hotels starts to decrease. Source: HVS, Actinver.
49 San Luis Potosi (North Region) San Luis Potosi Market Overview: San Luis Potosi is located within the Golden Triangle in northern Mexico. It is bordered by 9 states, making it the state with the most neighboring states (Nuevo León, Coahuila, Tamaulipas, Veracruz, Hidalgo, Querétaro, Jalisco, Guanajuato and Zacatecas). SLP’s GDP represents 2.0% of Mexico’s total GDP, with a population of 2.7 million (2.3% of Mexico’s total population) and a GDP per capita of MX$110,355, lower than the country’s average of MX$129,055. Additionally the state has a productive age group of 61.7%, with a positive demographic bonus for the next 15 years reaching 65.1% in 2030.
Because of its geographic location, San Luis Potosi offers easy and quick access to investors, consumers and suppliers that allow companies to operate with low costs and competitive profitability levels. These advantages are sustained by the state’s natural wealth and infrastructure as well as its continuous progress in technological integration of their industrial, commercial, mining, craft and services activities. During San Luis Potosi: FDI 2013 the state had a total FDI of USD509 million, equivalent to 1.3% of Mexico’s total $ 600 2500% FDI and nearly 4 times the FDI received by the state during 2012. Most of the FDI was directed toward the manufacturing industry. $ 500 2000% $ 400 1500% San Luis Potosi has a high national and international connectivity, being crossroads to several economic corridors such as the NAFTA Industrial, Manufacturing, Logistics $ 300 1000% and Export Corridor (México - Nuevo Laredo) and the Energy, Petrochemical and Exporting Corridor through the branch road of the Veracruz – Monterrey Highway.
USD (Million) USD $ 200 500% Furthermore, SLP’s airport had an outstanding growth in 2014 (+42.9% YoY), with an $ 100 0% average CAGR 2008-2014 of 12.6%.
$ 0 -500% 2008 2010 2012 1H2014 Main Markets:
FDI Change YoY ■ San Luis Potosi. Capital city of the state with a strategic location for trade, half- Source: INEGI, Actinver. way between Mexico City and the United States border, directly linked to Mexico City and the border cities of Brownsville, McAllen and Laredo in Texas, where a SLP: PAX Traffic Performance high rate of foreign commerce is carried out. Moreover it has easy access to the 400 50% ports of Tampico and Altamira on the Gulf of Mexico, as well as the Lazaro CAGR: 13% 350 40% Cardenas and Manzanillo ports on the Pacific coast. This location has made the state the largest logistics hub in the country and one of the main industrial and 300 30% trade centers, with a prolific manufacturing industry. Some of the companies 250 20% located in SLP include L’Oreal, Caterpillar’s distribution center, Mabe, ABB, 200 10% Estafeta, FedEx, Link, DHL, Ryder, and UPS. WTC Industrial San Luis Potosi is 150 0%
PAX PAX (000's) a world class industrial & logistic development unique in its type, offering a rail 100 -10% road terminal, customs office on site, Free Trade Zone (RFE), and the most 50 -20% complete real estate services in the market. It is located near the most important 0 -30% highway and rail road in Mexico (the NAFTA Highway and the NAFTA Railroad). '09 '10 '11 '12 '13 '14 This free trade zone in San Luis Potosi was the first in Mexico to explore the PAX YoY Change global trend toward efficient logistical and commercial benefits, allowing the temporary introduction of foreign, national or nationalized goods to the zone, for Source: SCT, Actinver. manufacturing and assembly (to be processed and/or repaired), storage, distribution (custody and management), and exhibition or sale. SLP: Inventory & Occupancy 3.5 54% Lodging Characteristics & Outlook: This lodging supply represents 1.5% of the country’s total lodging supply. During the last 5 years the SLP’s supply has grown at 3.0 52% a faster pace than the country’s average, with a CAGR (08’ – 13’) of 3.1%. 2.5 50% Additionally, it has one of the less fragmented industries, with nearly 42% of 2.0 48% independent hotels. International chains own ~26.0% of the market, while national and regional chains own 32.0%.Holiday Inn Express, La Quinta Inn, Real Inn, Ibis, 1.5 46% City Express, One, Courtyard, are some of the brands with presence in the market. 1.0 44%
Occupancy Rate Occupancy 0.5 42% Occupancy Rates have had a hard time recovering since the crisis, where rates fell
Installed Room Nights(Millions) Room Installed 0.0 40% to 45.3% from 53.1%, nevertheless lowest levels of 43.8% were seen until 2012, '05 '06 '07 '08 '09 '10 '11 '12 '13 recovering significantly to 47.8% during 2013 as a result of government efforts in Unoccupied Rooms Occupied Rooms leisure lodging demand. Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
50 Nevertheless the state’s supply is still dominated by business-class hotels, particularly from the limited-service and select-service segments, which currently have an average ADR of MX$1,200. The key location and recent investments in the state will keep strengthening the demand in the state, which thanks to efforts of the local government will be complemented by leisure demand. We believe airport activity is already reflecting an increase in visitation. We expect occupancy rates to rise to levels of a mixed leisure market in the midterm, which are in a range between 55% and 65%.
51 Guanajuato (Bajio Region) Guanajuato Market Overview: Guanajuato is bordered by the states of Jalisco, Zacatecas, San Luis Potosi, Queretaro, and Michoacan, in the region known as Bajio. Guanajuato is the 7th largest economy in the country, representing 3.9% of Mexico’s GDP, with a population of 5.7 million (4.8% of Mexico’s total). Guanajuato ranks 22nd in GDP per Capita (MX$103,290). It has a positive demographic bonus for the next 20 years. Its productive age group currently represents 62.4% of the population, but expectations aim higher for the next two years, reaching 65.2% and 65.4% in 2020 and 2030, respectively, according to CONAPO.
During 2013, Guanajuato was the most attractive state within the Bajio region for foreign direct investment (FDI), and the 7th in the country, capturing US$884 million (2.3% of total FDI) in 2013, an increase of 17.6% vs. 2012, according to INEGI. It is worth mentioning that 54% of the total FDI perceived in Guanajuato was directed to the automotive industry. Guanajuato: FDI $ 900 This state in general, has important economic implications, as 3 of Mexico's 10 major $ 800 140% highways pass through (Mexico City-Nuevo Laredo, Queretaro-Ciudad Juarez and $ 700 Manzanillo-Tampico). Manufacturing, commerce and agricultural activities represent $ 600 90% more than 50% of the states GDP and total employment. $ 500 $ 400 40% Guanajuato’s international airport is relatively small, serving less than 10 airlines. Traveling to the state is mostly done overland. However, the airport is growing at a
USD USD (Million) $ 300 fast phase, driven by the market’s industrial expansion. It grew at a CAGR of 18.3% $ 200 -10% in the period 2009-2014, +22.4% in 2014. The airport currently receives 1.2 million $ 100 passengers per year (40.4% international) with expectations to increase. Celaya’s $ 0 -60% 2008 2009 2010 2011 2012 2013 1014 airport is also relevant, but only serves local destinations.
FDI Change YoY As we have mentioned, Guanajuato’s economy is highly dependent on the industrial, Source: INEGI, Actinver. food, textile and automotive industry, in the proportion that these industries grow and as the interest of foreign and local enterprises is focused on Guanajuato and the GTO: PAX Traffic Performance Bajio region the need of business-class lodging will keep growing. 1,400 70% CAGR: 18% 60% 1,200 Main Markets: 50% 1,000 40% ■ Guanajuato: Capital city of Guanajuato, which combines significant industrial 800 30% activity with an agricultural base, as well as a major commercial sector. The auto, 20% textile and chemical industries have remained cornerstones of the market. In 600 10%
PAX PAX (000's) addition, the agricultural, and food industries also account for an important part of 0% 400 Guanajuato's economy. Guanajuato’s hotel demand also relies on the city’s -10% 200 -20% cultural attractiveness for local and international travelers. 0 -30% '09 '10 '11 '12 '13 '14 ■ Leon: The largest city in Guanajuato. Its main industry is leather, producing and PAX YoY Change offering shoes, boots, belts, jackets, and other leather accessories to both national and international markets. Its first-class services and hotel industry Source: SCT, Actinver. make it one of the most important centers in Mexico. Leon has a deep hotel demand as it is the city from the Bajio region with the highest occupancy Guanajuato: Inventory & Occupancy (according to SecTur) and is the most important market due to its economic 55% activity. This city is also one of the most benefited by Bajio’s growth, capturing 6.0 more demand for hotel services as compared to other cities in the region. Its 5.0 50% lodging supply is the most complete in terms of services and facilities, which makes it the most attractive. 4.0 45% 3.0 ■ Silao: An agricultural, industrial and logistics center, with a wide variety of farm 40%
2.0 crops, dairy production plants, as well as automotive plants, such as General Occupancy Rate Occupancy 35% Motors’ truck and SUV assembly plant. Additionally, Guanajuato Puerto Interior, 1.0 a logistics complex comprised by 4 industrial parks, has attracted several firms to
0.0 30% establish within this Silao’s complex. Some of these are Pirelli, Volkswagen, Installed Room Nights(Millions) Room Installed '05 '06 '07 '08 '09 '10 '11 '12 '13 Nestle, Hiroshima Aluminuim, among others. Silao is a small market with just 3 Unoccupied Rooms Occupied Rooms chain-hotels: Holiday Inn Express, Wyndham Garden (FINN) and City Express. Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
52 ■ Irapuato: Second-largest city in the state, with agriculture as its main industry, but the textile and automotive ones becoming more relevant. Some of the companies established in Irapuato are: Ford Motors, Nestlé-Purina, Lala, Danone, Nike, Adidads, Reebok, among others. The leading hotel in the city is FINN’s Wyndham Garden, located in the main avenue in front of FSHOP’s Plaza Cibeles super regional shopping center, the city’s most important.
■ Celaya: One of the most important industrial and car manufacturing centers of Guanajuato and Bajio, with several industrial parks and assembly plants, as well as a growing food industry. Some of the main companies with presence in Celaya are: Honda, Mazda, Mabe, Whirpool, De Acero, Sigma Alimentos (ALFA), Gamesa and distribution centers of Coca Cola FEMSA, PepsiCo, Bimbo and Lala, among others.
Lodging Characteristics & Outlook: Guanajuato’s lodging supply has maintained its dynamism, with increasing inventory due to the growth in commercial and industrial activities in the state. During the last 5 years the growth in Guanajuato’s lodging supply has outpaced the country’s, with a CAGR (2008–2013) of 3.9%. Currently the state’s supply represents 3.5% of the county’s total supply. Lodging in Guanajuato is still highly fragmented, with ~45% of independent hotels. However, presence of national and international chains is starting to increase, with a stronger recognized-brands’ presence that include: Camino Real, Holiday Inn, Hotel Mision, One, among others.
Occupancy rates have had a significant recovery since its lowest level of 34.9% observed in 2009, with an increase of more than 10 percentage points in 4 years, reaching 46.6% in 2013. It is relevant to note that in the same period room supply had an increase of 18.2% which makes the recovery seem stronger (new rooms were not fully absorbed by demand). Performing a theoretical exercise in which we assumed that lodging supply (room nights available) would have been maintained unchanged since 2008, the occupancy rate (occupied room nights 2013 / room nights available 2008) would have reached 55.1% by 2013.
Guanajuato’s market is dominated by business-class hotels mainly from the limited- service and select-service segments, which currently have an average ADR of MX$1,100. However, due to the high visitation of several national and international companies based in the state, ADRs can go as down as MX$800, as most chained hotels have volume agreements with them. The state has also strong leisure markets such as San Miguel de Allende which is highly popular among international travelers. In these markets ADRs can reach MX$2,300 due to the presence of full-service chains. Several hotel chains are including the Bajio as a key region for their investment strategies, given its attractive growth prospects for its industries. On the back of that, occupancy and ADRs are expected to grow as demand expands and the market’s fragmentation is reduced.
53 State Of Mexico (Central Region) State Of Mexico Market Overview: The State of Mexico is the second-largest economy and has the largest population in the country, representing 9.2% and 13.8% of the country’s total GDP and population, respectively. Nevertheless it has one of the lowest GDPs per capita, with MX$86,312, ranking 25th in the country. The state has a productive age group of 66.5% and a positive demographic bonus for 2020.
For the last 3 years the state has been on the top five states with more foreign direct investment. During 2013 it amounted to USD1,187 million, representing 3.0% of the country’s total FDI. The State of Mexico has a strategic geographical location, a high level of infrastructure and an excellent logistics’ development rate. Most of the FDI in the state is directed to the manufacturing industry, commerce, and Real Estate.
The State of Mexico has a high land connectivity due to its closeness to Mexico City and the Bajio region. Three of the country’s main highways cross through the state State Of Mexico: FDI (Mexico–Nogales, Mexico–Nuevo Laredo, Mexico–Tuxpan and Mexico–Veracruz), $ 1,800 150% being the connection point between Mexico City, the North and Bajio regions. $ 1,600 $ 1,400 100% Main Markets: $ 1,200 50% $ 1,000 ■ Toluca: The capital of State of Mexico, is one of country’s largest industrial $ 800 centers. Industrial activities in Toluca employ almost 40% of the total working 0% force. The recent opening of roads and highways make the city an important USD (Million) USD $ 600 logistical center due to its connections with the México–Queretaro and Occidente $ 400 -50% highways. The logistics and automotive industries complemented by other $ 200 industrial activities such as food and beverage production and distribution, textile, $ 0 -100% 2008 2009 2010 2011 2012 2013 1H14 electronics and pharmaceutical are the city’s main activities.
FDI Change YoY The city has several industrial parks with presence of foreign and domestic Source: INEGI, Actinver. companies. Some of the most important located in the area are: Exportec I, Exportec II, Parque Industrial Lerma, Parque Industrial Cerrillo I, Parque Toluca: PAX Traffic Performance Industrial Cerrillo II, Parque Industrial El Coecillo, and Parque Industrial Toluca 3,000 30% 2000, while some of the companies present in the parks are General Motors, CAGR: -19% 20% Chrysler, Daimler-Freightliner, BMW, Nissan, Autos Mastretta, Italika, Peugeot 2,500 and Volvo. Developers that have significant activity here are Vesta, Frisa, 10% 2,000 E-Group and Prologis. 0% 1,500 -10% Previous to the fall of the local carrier Mexicana in 2010, Toluca’s airport had -20% PAX PAX (000's) 1,000 become an alternative for airlines that didn’t have enough slots in Mexico City’s -30% airport, which was at its maximum capacity. After Mexicana’s suspension of 500 -40% operations, the industry suffered and adjustment that caused airlines that 0 -50% operated in Toluca to shift to Mexicana’s left slots. As a consequence, Toluca’s '09 '10 '11 '12 '13 '14 PAX traffic decreased drastically (-19% CAGR from 2009 to 2014) and has not PAX YoY Change been able to recover. It currently serves nearly half of the passengers it had in 2010. This had a negative impact in its lodging industry. Toluca government’s Source: SCT, Actinver. efforts are focused on reactivating the airport. As of January 2015, it is expected that Aeromexico will restart operations at Toluca’s airport, with 2 connecting State Of Mexico: Inventory & Occupancy flights to Tokyo, with intermediate stops in Monterrey and Guadalajara. Foreign 6.0 55% carriers TAR and Spirit are already operating 1 route each, with expectations to open additional routes in the short term. The airport is also in negotiations with 5.0 50% Southwest airlines to introduce new operations at the airport. 4.0 45% Lodging Characteristics & Outlook: State of Mexico’s lodging supply has not been 3.0 40% able to recover to 2009 pre-crisis levels, which is also a consequence of the low 2.0 35% performance of the airport. During the last 5 years the state’s lodging supply has Occupancy Rate Occupancy grown at a 0.7% CAGR. Currently its hotel room supply represents 2.9% of the 1.0 30% county’s total. Toluca has one of the less fragmented lodging supply markets in the Installed Room Nights(Millions) Room Installed 0.0 25% country, with 44.0% of the share owned by international chains, 26.0% by regional '05 '06 '07 '08 '09 '10 '11 '12 '13 chains and only 30.0%% owned by independents. Some of the brands present here Unoccupied Rooms Occupied Rooms are Camino Real, Holiday Inn, One, Courtyard, City Express, Microtel Inn & Suites, Occupancy Rate Occupancy Rate Mx Del Rey Inn, among others. Source: HVS, Actinver.
54 During 2013 occupancy rates fell to 34.6%, the lowest levels of the past decade. It is worth noting that occupancy levels in the State of Mexico have never been over 41.0%. Business traveling in the area relies on Toluca’s market, which is the strong industrial arm of the state. Occupancy rates in this city are above the state’s average, reaching levels of 50.0%. Both HCITY and FIBRA Inn have presence in the Toluca’s airport area, with 2 hotels each. In the case of FINN, the recently acquired Microtel Inn & Suites has an occupancy of 60%, which high given the market’s standard. For the case of its Holiday Inn Express & Suites, occupancy is lower, at an estimated ~45% (select segment). According to HCITY’s management, both of its hotels in the area (City Express Junior and City Express) have mature-level occupancies, above competition.
Hotels In The Toluca’s Airport Area
Airport
City Express City Express Jr. Independent Holiday Inn Express & Suites Independent
One Courtyard Microtel Inn & Suites
Independent
Source: Google Earth, Actinver.
The market is dominated by limited-service hotels, which fit the nature of the city’s industry. ADRs are in average around MX$870.
For the next years we do not expect lodging supply in this market to grow at a faster pace, but we do expect the measures taken in the airport to rise passenger traffic, visitation, and occupancy levels. Once these rates reach more mature levels (above 50%), we could expect new hotel investments in the market.
55 Queretaro (Bajio Region) Queretaro Market Overview: Queretaro, part of the Bajio region, has a GDP that represents 2.0% of Mexico’s total. It has a population of 1.9 million (1.6% of Mexico’s total population), and ranks 7th in GDP per capita (MX$159,613). Queretaro has a working age group of 64.4% and a positive demographic bonus for the next 15 years. During 2013 Queretaro had a FDI of USD558 million, (1.4% of Mexico’s total FDI. Most of the FDI) targeted mostly toward the manufacturing and commerce industry.
Queretaro has a great location, equidistant from Mexico, Monterrey and Guadalajara, reason why it is a key point for industrial and logistics’ operations. It also has good access to some of the main commercial ports (Manzanillo, Tampico and Veracruz), which makes it one of the country’s key transportation centers. Two of Mexico’s 10 main highways cross by the state, one of which is an important piece of the NAFTA corridors (Queretaro – Cd. Juarez and Mexico - Nuevo Laredo). The main airport is located in Queretaro the fastest growing passenger traffic in the country, growing at a Queretaro: FDI CAGR of 30.0% during the last 5 years, and growing 32.5% in 2014. We believe $ 800 100% Queretaro will keep being one of the favorite states for FDI, strengthening and $ 700 80% diversifying its economic activities.
$ 600 60% 40% Main Markets: $ 500 20% $ 400 0% ■ Queretaro. One of the fastest growing and most dynamic cities in the country, $ 300 with diverse industries attracting new developments and business. During the
USD (Million) USD -20% past years, Queretaro’s economic growth has been driven by investments from $ 200 -40% companies dedicated to high-tech, mainly from the aerospace sector. Its $ 100 -60% aerospace industry is currently worth ~USD1.2 billion, and represents 36% of $ 0 -80% 2008 2010 2012 1H2014 Mexico’s production. Bombardier was the first, arriving to the city in 2005. Since then, it has registered a double digit annual growth. This growth has also FDI Change YoY extended to other aerospace industry services like: Aerotech’s industrial park Source: INEGI, Actinver. (located next to the city’s airport), Queretaro’s Aerospace Park, and Aeromexico- Delta’s aircraft maintenance hub (largest repair and overhaul facility in LatAm). Queretaro: PAX Traffic Performance Queretaro’s industrial landscape has also been expanded by other sectors, 450 CAGR: 30% 60% including home appliances, auto parts, food & beverage, ITC’s, and agro 400 industries. Some companies representing these sectors include GE, Samsung, 40% 350 Kellogg’s, Siemens, Bel-corp, and Mitsubishi Electric . 300 20% 250 Lodging Characteristics & Outlook: For the last 6 years Queretaro’s lodging 0% 200 market has been the 3th fastest growing, just behind Nayarit and Quintana Roo, with
PAX PAX (000's) 150 -20% a CAGR (08 – 13’) of 5.4% vs. 2.1% of Mexico. currently the state’s hotel room 100 supply represents 1.8% of the county’s total supply. The lodging supply in Queretaro -40% 50 is still highly fragmented, with nearly 60.0% of independent hotels, 20.0% owned by 0 -60% international chains and 20.0% by regional chains. Some of the brands present are '09 '10 '11 '12 '13 '14 City Express, City Express Jr. Casa Inn, Double Tree, Encore, Holiday Inn, Fiesta PAX YoY Change Americana, amongst others.
Source: SCT, Actinver. Occupancy rates here are still recovering pre-crisis levels. Lowest levels of 41.2% were seen in 2009, ever since, they have been registering an upward trend, reaching Queretaro: Inventory & Occupancy 54.4% in 2013, but still behind maximum levels of 56.3% (2007). Queretaro’s lodging 4.0 60% market is mainly comprised by business-class hotels. Nevertheless it also has an 3.5 important leisure market, due to its wine route. Limited and select service hotels are 55% predominant in the state, currently average ADRs are within a range of MX$1,000 – 3.0 MX$1,500. 2.5 50% 2.0 Queretaro’s lodging market has been highly dynamic even through the crisis, with 1.5 45% both inventory and occupancy rates growing YoY. We believe Queretaro will keep 1.0 Occupancy Rate Occupancy being spotlight for new investments, which generates lodging demand. We expect 40% 0.5 occupancy levels to reach pre-crisis levels in the short term. InstalledRoom Nights (Millions) 0.0 35% '05 '06 '07 '08 '09 '10 '11 '12 '13 Unoccupied Rooms Occupied Rooms Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
56 Tamaulipas (North Region) Tamaulipas Market Overview: Tamaulipas’ GDP represents 3.0% of the country’s total GDP, has a population of 3.4 MM and has a GDP /capita of MX$131,923 is similar to the countries average of MX$129,055. The state has the 8th largest working age group (65.5%) and a positive demographic bonus for the next 5 years.
Tamaulipas offers investors very competitive conditions, highly qualified and specialized human capital in its main clusters: electrical-electronic, auto parts, chemical and petrochemical, information technologies, metal-mechanic, aerospace and medical industries. During 2013 Tamaulipas was the 9th state with most FDI investment, with a total investment of USD735 million which represents 1.9% of Mexico’s total FDI, and an increase of 92% vs the investment made in the state during 2012. It is worth noting that this state still presents some concerns related to insecurity, particularly in Matamoros, Reynosa and Nuevo Laredo, where recent news talk about the presence of drug cartels. Hopefully this this situation is solved Tamaulipas: FDI soon. $ 800 120% $ 700 100% Tamaulipas is an international key trade location, due to its border with the U.S. and 80% its sea ports. It has 7 sea ports, from which 2 are international maritime ports and 5 $ 600 60% are coastal shipping ports. Two main highways cross through the state, the $ 500 40% Matamoros’s branch road to the Veracruz – Monterrey highway, also known as the $ 400 20% Energy, Petrochemical and Exporting Corridor, and the transversal highway Mazatlan $ 300 0% - Matamoros. During the past 5 years, Reynosa’s airport has grown at outstanding USD USD (Million) -20% $ 200 rates, with a CAGR of 17.0%. Despite insecurity, this airport registered an increase of -40% $ 100 20.4% in 2014. -60% $ 0 -80% 2008 2010 2012 1H2014 Main Markets:
FDI Change YoY ■ Reynosa. Located in the border with the U.S., is connected to McAllen, Texas by Source: INEGI, Actinver. three international bridges: McAllen-Hidalgo-Reynosa Intl. Bridge, Pharr- Reynosa Intl. Bridge, and Anzalduas Intl. Bridge. Through these bridges, interna- Reynosa: PAX Traffic Performance tional trade between Mexico and the U.S. is facilitated. Reynosa’s industrial 500 50% Market (~29.3 million sqf of space, with 10 industrial parks) attracts companies in 450 CAGR: 17% the electronics, logistics and automotive sectors. International corporations such 40% 400 as Panasonic, R. R. Donelley, LG, Steelcase, Motorola, Bissel, Home Depot, 350 30% H.E.B. and Lowe’s have presence in the market. Reynosa also has an important 300 20% Pemex gas pipeline distribution center. 250 200 10%
PAX PAX (000's) ■ Nuevo Laredo. Another border city with high level of manufacturing activity. 150 0% Nuevo Laredo is a key logistics hub, with a complex infrastructure to expedite 100 -10% merchandise flow between Mexico and the U.S. It offers trade services by land or 50 0 -20% railroad, merchandise distribution, and consulting services. Logistic companies '09 '10 '11 '12 '13 '14 are also attracted to this market because of its easy access and infrastructure for PAX YoY Change international crossing.
Source: SCT, Actinver. ■ Matamoros. Its economy is mostly represented by U.S. exports from approximately 140 maquiladoras. Low lease rates have prevailed in Matamoros Tamaulipas: Inventory & Occupancy during the last years, which have caused companies to expand and install their 7.0 55% operations within market.
6.0 50% ■ Altamira. A port city on the Gulf of Mexico. Its port business is mostly 5.0 45% containerized cargo for ocean-going ships. The ports strategic locations allows 4.0 40% for speedy access to any market in the world, located only 500 km from the US 3.0 35% border, and near the main economic centers in Mexico. The strategic planning of the Port Industrial Complex allows importing raw goods on a large scale to 2.0 30%
Occupancy Rate Occupancy service the local industry, as well as national and international distribution of 1.0 25% finished goods with attractive logistical costs. This market is considered to form part of a corridor that is comprised of cities with important oil activity, which is Installed Room Nights(Millions) Room Installed 0.0 20% '08 '09 '10 '11 '12 '13 expected to increase as a result of the Energy Reform. Altamira hosts companies Unoccupied Rooms Occupied Rooms with activity in the port, such as Weatherford, Halliburton, Vopat, Dupont, Occupancy Rate Series4 Nhumo, Dyanosol, ICA, Pemex, KOF Femsa, Mexichem, Iberdrola and Posco. Source: HVS, Actinver.
57 Lodging Characteristics & Outlook: Tamaulipas’ lodging supply suffered a decrease in the past years, during 2013 it decreased almost 20%, while in average the past 5 years the supply has decreased 5.8% per year. The fall in supply can be explained by the closing of approximately 14 hotels, mostly from the leisure segment. Some of them have closed only temporarily due to the low visitation, which was caused by a wave of violence and extremely cold weather. These properties plan to reopen when tourism is reactivated. While Reynosa has a highly fragmented market (66.5% independents, 15.0% international, 18.5% national), Nuevo Laredo is one of the 3 less fragmented markets (33.0% independents, 35.0% international, 32.0% national). Due to its closeness to the U.S., Nuevo Laredo’s market has been forced to offer higher quality lodging, decreasing the independent and low quality hotels. One, Fiesta Inn, Holiday Inn, Hampton Inn, City Express and Real Inn are some of the brands present in the market.
The negotiation between the government of Tamaulipas and the company Keppel Offshore and Marine resulted in an investment for the construction of the first primer offshore drilling shipyard to build jackup drilling rigs in the area for a total value of USD 400 million, which will generate approximately 4,000 direct jobs. Currently, there is a lack of hotel offerings and most of the hotels are either local or independent hotels.
Occupancy rates have increased significantly, since their lowest levels of 28.9% observed during 2010. In 2013 occupancy rates reached 53.0%, the highest levels of the last decade. It is worth noting that most of the increase in occupancy is due to the decrease in demanded hotel supply, which reflects a more mature and healthy market. Previously the state had a mixed composition, with both business and leisure lodging demand. During the past years, however, the leisure market has deteriorated due to security and climate concerns but the business segment is gaining importance. The market is dominated by limited and select service hotels, with average ADRs of MX$980. We believe business-class lodging will increase notably in the short term due to energy reform projects in the area. In fact, Reynosa’s airport is showing a strong increase in visitation which is immediately reflected in lodging supply.
58 Veracruz (Southeast Region) Veracruz Market Overview: Veracruz is located in eastern Mexico, bordered by the states of Tamaulipas, San Luis Potosí, Hidalgo, Puebla, Oaxaca, Chiapas, Tabasco, as well as a significant share of the coastline of the Gulf of Mexico. Veracruz’s GDP is the 5th largest economy of the country, representing 5.4% of the total GDP. It also has the third largest population, with nearly 7.9 million citizens, representing 7.9% of the country’s total population. Its GDP /capita of MX$103,091 is far below the country’s average, ranking 21st. Veracruz has a working age group of 64.1%, and a positive demographic bonus for the next 5 years.
Veracruz has more than 700 kilometers of coast and ten sea ports, which are the gateway to the Atlantic Ocean and provide endless foreign trade possibilities. Veracruz offers investors high competitive advantages because of its climate diversity, land relief, geographic location and proven energy potential. The main sectors in the state are: energy, industrial, commerce services, trade, tourism and Veracruz: FDI agribusiness. During 2013, the state received a net FDI of USD452 million which was $ 500 1400% more than 10 times the investment received during 2012, and represented 1.9% of 1200% the country’s total investment. $ 400 1000% $ 300 800% Veracruz has a key trade location and will be largely benefited from the energy $ 200 600% reform. Veracruz is where the Energy, Petrochemical and Exporting Corridor is 400% originated (Veracruz – Monterrey), it has 10 sea ports, from which 5 are international $ 100 200% maritime ports and 5 are coastal shipping ports. These ports are responsible for most USD USD (Million) $ 0 0% of the imports and exports of the country including that of the automotive industry. -200% -$ 100 The state also has 3 airports, the largest located in Veracruz, followed by the one in -400% Minatitlan and the smallest in Poza Rica. During the last 5 years Veracruz’s and -$ 200 -600% 2008 2010 2012 1H2014 Minatitlan’s airport have had a solid performance with a CAGR of 6.3% and 10.0% respectively. In 2014, Minatitlan’s airport continued outpacing the main airport, FDI Change YoY growing 34.2% YoY vs. Veracruz’s 14.5%. Source: INEGI, Actinver. Main Markets: Veracruz: PAX Traffic Performance ■ Veracruz. A major port city located in the Gulf of Mexico. The port is the main 1,400 CAGR: 6% 20% economic engine of the state and the principal port for most of Mexico’s imports 1,200 15% and exports, especially for the automotive industry. In 2015, Friopuerto Veracruz, 1,000 10% the first temperature controlled facility located within Puerto Gulf of Mexico, will 800 5% open its doors. In its first phase it will have more than 2,500 sqm covered and a storage capacity for 3,500 tons (22,000 cubic meters). Friopuerto has invested 600 0%
PAX PAX (000's) MX$85 million in this facility. The new facilities at Friopuerto Veracruz will allow 400 -5% importers and exporters to move larger volumes through the Port of Veracruz, 200 -10% which will also benefit the transport sector for there will be greater demand for 0 -15% refrigerated transport. '09 '10 '11 '12 '13 '14 PAX YoY Change ■ Minatitlan. Home to the oldest refinery and third largest in Mexico, Lazaro Cardenas. Currently this refinery produces 160,000 barrels per day. Never- Source: SCT, Actinver. theless, the refinery underwent an expansion that started in 2003 to bring the capacity of the plant up to 240,000 barrels per day, which according to Pemex Veracruz: Inventory & Occupancy should be reachable in the short-term. 14.0 55% ■ Coatzacoalcos. Also a port city, dominated by the oil and petrochemical 12.0 industries. Four big industrial petrochemical complexes are located near the city 50% 10.0 (Pajaritos, Cosoleacaque, Morelos and Cangrejera) making it one of the most 8.0 important concentrations in the world. Pemex Petroquimica subsidiary is head- 45% quartered in Coatzacoalcos and 85% of its production is concentrated there. 6.0 PEMEX’s Ethylene 21 plant is currently under construction here. The city
4.0 40% Rate Occupancy includes the following major companies: Weatherford, Haliburton, Dowell 2.0 Schlumberger, Comesa, Cotemar, Grupo Idesa, Pemex, Cydsa and Mexichem.
Installed Room Nights (Millions) (Millions) Nights Room Installed 0.0 35% '05 '06 '07 '08 '09 '10 '11 '12 '13 Unoccupied Rooms Occupied Rooms Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
59 Lodging Characteristics & Outlook: During the last 5 years the growth in Veracruz’s lodging supply has outpaced the country’s, with a CAGR (08’ – 13’) of 3.2% vs. 2.1% of Mexico. The state’s hotel room supply is the 4th largest in Mexico representing 6.0% of the total country’s supply. Nevertheless lodging in the state is still highly fragmented, with nearly 70% of independent hotels, 14.5% of international chains and 15.5% of national chains. Camino Real, Howard Johnson, Comfort Inn, Fiesta Inn, Fiesta Americana are some of the brand present in the market.
Occupancy rates have had a rough time recovering pre-crisis levels, falling consecutively YoY from 2006 (highest levels 51.2%) up to 2012. During 2013 occupancy levels reaches 47.4%, being the highest occupancy in the last 7 years. It is word mentioning that as room supply grows, it is harder to increase or even maintain occupancy levels, new hotels usually reach mature hotels occupancy after 3 years. Coatzacoalcos currently has an average overall occupancy rate of 66% with demand growth potential. Due to the LT benefits from the Mexican Energy Reform, there is an expected positive impact on Veracruz, which will benefit the performance of its lodging market.
Veracruz’s market is dominated by business-class hotels mainly from limited-service and select-service, which currently have an average ADR of MX$1,000, nevertheless the state has also strong leisure attraction such as Los Rapidos. We expect occupancy and ADRs to increase in the next years, anticipating a major business class demand due to energy investment projects.
60 Campeche (Southeast Region) Campeche Market Overview: Campeche is the 6th largest economy in the country, representing 5.0% Mexico’s GDP, with a population of less than a million (0.7% of Mexico’s total population). However, Campeche has the highest GDP per capita of MX$878 k. The state has a productive age group of 65.2% of the population, and a positive demographic bonus reaching 67.0% in 2020. In 2013 Campeche registered negative flows of USD$136 MM in FDI (stronger local investments). Nevertheless, it is one of the main spotlights of Mexico’s energy reform. It is worth mentioning that the NIP 2014-2018 considers 4 Pemex energy projects in Campeche with a total investment of MX$562 billion (17.0% of Pemex energy projects).
Two of the 10 main highways of the county pass through Campeche, conforming what is known as the “Energy-Petrochemical” corridor. The state also has 14 sea ports (8 international) as well as 2 international airports one located in Ciudad del Carmen and the other in Campeche. The airport located in Ciudad del Carmen is Campeche: FDI substantially bigger than Campeche’s, but during the past years the latter has shown $ 150 300% an important growth, with a CAGR of 16.3% from 2009 to 2014 (+14.6% in 2014).
200% $ 100 As aforementioned, Campeche’s economy is highly dependent on the petrochemical 100% $ 50 sector. Thus, the implementation of the energy reform should encourage local and 0% foreign investments which will catalyze lodging demand. $ 0 -100% Main Markets:
USD (Million) USD -$ 50 -200% -$ 100 -300% ■ Ciudad del Carmen and Campeche are two of the most important operation centers of Pemex. The most productive oil field in Mexico, Ku-Maloob-Zaap, is -$ 150 -400% 2008 2009 2010 2011 2012 2013 1H14 located offshore in the bay of Campeche, as well as one of the largest oil fields Canterell. The first is in its maximum level of production since 2010, while FDI Change YoY Cantrell’s production has fallen drastically, producing only 10% of its maximum Source: INEGI, Actinver. production. Since 1979, 15,000 MM barrels have been extracted in Cantarell.
Campeche: PAX Traffic Performance Recently, Pemex informed that for 2015 they expect a daily crude oil production 250 35% of 2.4 million barrels, from which 850,000 barrels will be produced in Ku- CAGR:16% 30% Maloob-Zapp and 272 thousand in Cantarell. The fields will be productive at least 200 25% until 2030, which maintains favorable conditions for the petrochemical industry in 20% Campeche. Due to its high levels of oil production, Campeche is one of the most 150 15% important economies of the country. 10% 100 5%
PAX PAX (000's) Ciudad del Carmen hosts front-offices of firms such as Weatherford, Haliburton, 0% Dowell Schlumberger, Comesa, Cotemar, Grupo Carso, Compañia Perforadora 50 -5% Mexico and Pemex. -10% 0 -15% '09 '10 '11 '12 '13 '14 Lodging Characteristics & Outlook: During the past years Campeche’s lodging PAX YoY Change supply has grown almost 3 times faster than the county’s average. In the same period, its lodging supply (1.3% of the county’s total) has shown a CAGR of 5.9% vs. Source: SCT, Actinver. 2.1% of Mexico. The hotel industry is highly fragmented here, with 66.5% of the share owned by independents, 14.0% by regional chains, and 19.5% by international Campeche: Inventory & Occupancy chains. Some of the brands with presence in the market are Best Western, City Express, Hotel Plaza, City Express Jr., Holiday Inn and Fiesta Inn. FIBRA Inn is 2.5 56% currently developing a Fairfield Inn & Suites in Ciudad del Carmen. 54% 2.0 52% Occupancy rates have been more defensive than other markets, above 50% over the 1.5 50% last 10 years (currently at 65% in Cd. Del Carmen) which reflects a strong and stable 48% demand in the state. In 2009, average occupancy felt just 51.3%. For the next years 1.0 we expect an increase in demand, as a result of a rise in business travels.
46% Occupancy Rate Occupancy 0.5 44% Campeche has a mixed lodging market; while its business-class has a high and Installed Room Nights(Millions) Room Installed 0.0 42% stable demand due to the low seasonality of the petrochemical industry, its leisure '05 '06 '07 '08 '09 '10 '11 '12 '13 lodging complements with high weekend occupancy rates. The business-class hotels Unoccupied Rooms Occupied Rooms are mainly limited-service hotels which currently have an average ADR of MX$1,000. Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
61 Baja California Norte (B.C.) (North Region) Baja California Norte Market Overview: B.C.’s GDP represents 2.8% of Mexico’s GDP, with a population of 3.3 MM (2.8% of Mexico’s total) and a GDP /capita of MX$128.5 k (vs. Mexico’s avg. of MX$129.1 k). Currently it has the 4th largest productive age group with 66.5% of the population between 15 and 65 years old. In 2013, B.C. was the 8th largest receiver of FDI with a net influx of USD$802 MM, +47.6% YoY (2.0% of Mexico’s total FDI). Most of the investment were directed to secondary activities, such as mining, oil & gas extraction, construction and advanced manufacturing. It is highly benefited by the NAFTA, with 2 of the 3 most transited frontiers of the world (Tijuana –San Diego and Mexicali–Calexico), with an avg. daily traffic of 60,000 people.
B.C. has 2 of the country’s 10 main highways (Mexico–Nogales, also known as “NAFTA Agricultural Export” corridor and the Transpeninsular B.C. highway). It also has 8 sea ports (6 international) and 4 international airports, being Tijuana’s airport the most important followed by Mexicali’s. From 2009 to 2014 Tijuana’s airport grew Baja California: FDI at a CAGR of 5.2% and grew 2.8% in 2014, receiving 4,373 thousand annual PAX. $ 900 100% B.C.’s economy is highly dependent on the electronics and medical industries, and $ 800 80% has been for several years in the eye of foreign investors. Its exposure to the auto $ 700 60% and aerospace sectors has also expanded in the last years. $ 600 40% $ 500 20% Main Markets: $ 400 0% ■ Tijuana: located 17 miles south of San Diego, has access to 2 of the most
USD (Million) USD $ 300 -20% important ports in Mexico. Much of the growth of its manufacturing sector has $ 200 -40% been in medical products (with over 31,000 jobs), where new firms like Surgical $ 100 -60% Specialties and CE Medical are establishing facilities to join Wilson Greatbatch, $ 0 -80% 2008 2009 2010 2011 2012 2013 1H14 Medtronics and Welsh Allyn. Tijuana has become one of America’s largest clusters of electronics, due to its key location for Japanese and Korean firms FDI Change YoY dedicated to the electronics industry. Its proximity to Southern California and its Source: INEGI, Actinver. large, skilled, diverse, and relatively cheap workforce, makes it an attractive city for foreign companies looking to establish extensive industrial parks composed of Tijuana: PAX Traffic Performance assembly plants (maquiladoras). Companies that have set up maquiladoras in 5,000 15% Tijuana include Hyundai, Sony, BMW, Toyota, Dell, Samsung, Kodak, Bimbo, CAGR: 5% 4,500 10% GE, Nabisco, Ford, Microsoft, Cemex, Philips, Jaguar, Sanyo and Volkswagen. 4,000 3,500 5% ■ Mexicali: border city located south of Calexico, CA. It has a strong agricultural 3,000 0% base; years ago Mexicali was an important center for cotton production for 2,500 export, until synthetic fabrics reduced the worldwide demand for the fiber. 2,000 -5% Currently, horticulture is the most successful agricultural activity. Nevertheless, PAX PAX (000's) 1,500 -10% 1,000 as of the last decade its economy relies in assembly plants including companies -15% 500 like, Selther, Daewoo, Mitsubishi, Honeywell, Paccar, Vitro, and Bosch. 0 -20% '09 '10 '11 '12 '13 '14 Lodging Characteristics & Outlook: B.C.’s lodging supply has grown at a slower PAX YoY Change pace than Mexico’s avg. due to its proximity to the U.S., considering than the driving time its main cities to the U.S. is less than 45 min. With similar ADRs in limited Source: SCT, Actinver. service hotels across the border, international business travelers may rather stay in San Diego or Calexico, especially for insecurity concerns. During the last 5 years its B.C.: Inventory & Occupancy lodging supply has shown a CAGR 2008-2013 of 1.8% vs. Mexico’s 2.1%. Currently, 55% B.C.’s room supply represents 3.0% of the county’s total. Lodging here is still highly 6.0 fragmented, specially in Tijuana, were 63.5% of the hotels are independent and 5.0 50% might not have the quality that business travelers look for. Mexicali has a less fragmented market with only 21.5% of independents; nevertheless, this is due to the 4.0 45% presence of leisure hotel chains. Some brands present in these markets are City 3.0 40% Express, Fiesta Inn, City Express Jr. and Holiday Inn Express. 2.0
35% Rate Occupancy Occupancy rates have had a slow recovery since its lowest levels of 34.7% in 2010, 1.0 increasing up to 40.7% in 2013, but still below previous levels of 49.1% (2006). 0.0 30% B.C.’s lodging market is comprised by both business and leisure properties. To the Installed RoomNights (Millions) '05 '06 '07 '08 '09 '10 '11 '12 '13 extent that B.C.’s main industries grow and more companies settle their assembly Unoccupied Rooms Occupied Rooms plants here, the demand of business-class lodging will keep growing. Average ADR Occupancy Rate Occupancy Rate Mx for business-class hotels is ~MX$1,250 while leisure hotels reach up to $2,800. Source: HVS, Actinver.
62 Chihuahua (North Region) Chihuahua Market Overview: Chihuahua’s GDP represents 2.8% of Mexico’s total GDP, with a population of 3.6 million (3.1% of Mexico’s total population) and a GDP per capita of MX$115,926, which is similar to the country’s average of MX$129,055. Additionally the state has a productive age group of 64.5%, with a positive demographic bonus for the next 5 years reaching 65.3% in 2020E.
In 2013 Chihuahua was the 2nd most attractive state for foreign direct investment, after Distrito Federal, with a net influx of USD$1,900 million (4.9% of Mexico’s total FDI), and more than twice of the FDI it had in 2012 (USD $745 million). Additionally, Chihuahua has been within the top 6 states with most FDI since 2011. It is worth mentioning that more than half of the total investment was targeted to Ciudad Juarez. Chihuahua is one of the states with the largest gas pipelines’ infrastructure in the country, which is mainly located in Delicias, Ciudad Juarez and Parral.
Chihuahua: FDI About 55% of the MX$228.5 billion total national gas pipeline investment projects for $ 20 200% the next 3 years (including 7 of the 8 main gas projects; and about 4,000 km of the $ 18 total 8,000 km of gas pipelines to be constructed in the country) will be located in $ 16 150% Chihuahua, making it the main development pole of the energy industry. For the $ 14 100% coming years, we expect Chihuahua to have an increase in business activity and $ 12 business travel driven by its gas pipelines’ projects. $ 10 50% $ 8 0% This state, as other border states is highly benefited by the NAFTA. It possess the USD (Billion) USD $ 6 most transited border of the world (Ciudad Juarez–El Paso), with daily avg. traffic of $ 4 -50% 75,000 people. The Queretaro–Ciudad Juarez highway, also known as the “Mining” $ 2 Corridor, is one of the most important corridors in Mexico, starting in Queretaro and $ 0 -100% 2008 2009 2010 2011 2012 2013 1H14 crossing all the way up to the U.S.. Additionally, Chihuahua has 2 international airports, one located in Ciudad Juarez and the other in Chihuahua. From 2009 to FDI Change YoY 2014 Chihuahua’s airport grew at a CAGR of 5.2%, and +8.6% in 2014, receiving Source: INEGI, Actinver. 962 thousand PAX. Ciudad Juarez’s airport (~750,000 PAX /year) showed a 4.0% CAGR for the same period, and a stronger 9.4% growth in 2014. Chihuahua: PAX Traffic Performance 1,200 CAGR: +5% 15% Main Markets:
1,000 10% ■ Ciudad Juarez: Located 25 km south from El Paso, Texas, with a driving time 800 5% from one city to another of less than 30 min, is the largest border in terms of commercial and passenger traffic worldwide. The city is one of the largest 600 0% manufacturing markets in Mexico, one of the most dynamic border cities and the largest industrial real estate market. Ciudad Juarez has a strong presence of the PAX (000's)PAX 400 -5% automotive, medical, home appliances, and electronics sectors, with more than 200 -10% 300 assembly plants located in the city. DHL, Ultimex, Rogers Foam, Delphi, Electrolux, A.O. Smith, Foxconn, Wistron, and Johnson and Johnson, are some 0 -15% '09 '10 '11 '12 '13 '14 of the companies based in the market. There is also a strong presence of the PAX YoY Change maquila industry as a result of its proximity to the U.S. border.
Source: SCT, Actinver. ■ Chihuahua: Located 372 km away from the U.S. border, this is a consolidated market with a dynamic and diverse industry and one of the most relevant cities in Chihuahua : Inventory & Occupancy the country from an economic viewpoint. It is an important industrial center for the aerospace sector in Mexico as well, concentrating over 30 companies, 8.0 60% including OEMs such as Cessna, Textron, Hawker Beechcraft, and Honeywell. 55% This market is also driven by the automotive sector with the presence of Ford, 6.0 50% and other autoparts’ companies; construction-related firms such as Cementos Chihuahua and Interceramic; and the processed food sector with companies like 4.0 45% Grupo Bafar. 40% 2.0 Rate Occupancy ■ Delicias: This smaller market, where FIBRA Inn recently acquired a Casa 35% Grande Hotel (the most recognized hotel in the city), has a strong presence of Installed Room Nights (Millions) (Millions) Nights Room Installed 0.0 30% the pharmaceutical, medical, rubber and textile industries. The demand of this '05 '06 '07 '08 '09 '10 '11 '12 '13 location is mainly driven by pharmaceutical firms like Bayer, Rimsa and Sanofi. Unoccupied Rooms Occupied Rooms Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
63 Lodging Characteristics & Outlook: In 2013 Chihuahua reached a total lodging supply of 21,479 rooms, being the 6th largest supply in the country and representing 4.1% of Mexico’s total supply. During the last 5 years Chihuahua’s supply has grown twice as fast as the country’s average, at a CAGR of 4.4%. The market is dominated by independent hotel owners, who have 50.0% of the supply, while 35.3% is owned by regional chains and 14.7% by international chains. City Express, City Express Jr., Microtel, Quality Inn, Real Inn, Comfort Inn, Best Western, Casa Grande and Fiesta Inn are some of the brands present in the market. Chihuahua’s lodging market is comprised mainly by limited service business class hotels, which currently have an average ADR of MX$950.
Chihuahua’s occupancy rates peaked during 2008 to levels of 58.2%. Ever since, a series of factors have made occupancy rates fall, including: the global financial crisis in 2009, the ‘influenza’ outbreak in the country in that same year, and violence and insecurity concerns. The combination of these 3 factors has delayed Chihuahua’s overall occupancy recovery. During 2012 levels dropped down to 40.1% and slightly recovered in 2013 to 42.0%. This market will continue presenting a recovery path, led by the improving U.S. economy, the general recovery in external demand and lower insecurity concerns. The automotive and aerospace sectors will continue boosting industrial activity in the market and we find upside potential on new investments related to the energy reform. This is already being reflected in increases in air PAX traffic.
64 Coahuila (North Region) Coahuila Market Overview: Coahuila is the 9th largest economy in the country, representing 3.4% the GDP. It has a population of 2.9 million inhabitants, which represent 2.4% of Mexico’s total. The state ranks 5th in GDP /capita with MX$179,468 per year. It has a productive age group of 64.7%, with positive prospects for 2020, when it could reach 66.7%.
In 2013 Coahuila was the 4th receiver of FDI in Mexico, with a total investment of USD$1,294 MM (3.3% of Mexico’s total FDI), quadrupling the FDI received in 2012. For the coming years Coahuila will maintain significant local and foreign investments. For 2015, Peñoles will investment USD$230 MM in the state to expand its chemical plant. Furthermore, it is expected that in March 2015, the mining cluster Petroleo de Coahuila will publish the shale gas exploration map for the entity. Companies interested in the extraction or processing of the hydrocarbon will be able to present their investment projects. Coahuila: FDI $ 1,400 700% The Mexico–Piedras Negras highway is one of the most important highways in Mexico (part of the “Industrial, Manufacture, Logistics and Exports NAFTA” corridor), $ 1,200 600% 500% starting in Mexico City and crossing by Coahuila all the way up to the border with the $ 1,000 400% U.S.. Additionally Coahuila has 5 international airports which are relatively small; the $ 800 300% most important being located in Torreon. From 2009 to 2014 this airport recorded a CAGR of 5.8%. Nevertheless since 2011 it has grown at double digits. In 2014 it $ 600 200% registered a 12.1% YoY growth. As we have mentioned, Coahuila’s economy is
USD (Million) USD 100% $ 400 highly dependent on the gas, metal, food, and automotive industries. We believe that 0% PAX traffic is already reflecting an important growth in Coahuila’s industrial activity, $ 200 -100% which should translate in an increase in its lodging demand. $ 0 -200% 2008 2010 2012 1H2014 Main Markets: FDI Change YoY Source: Actinver. ■ Saltillo and Ramos Arizpe: Both enjoy proximity to Monterrey and a more stable labor force as compared to the border markets. With Monterrey’s long Torreon: PAX Traffic Performance established steel industry, Saltillo and Ramos Arizpe have developed through the 600 15% years complementary industrial lines, most notably in auto manufacturing. As a CAGR: 6% result, both cities have become a key center for the global automotive industry, 10% 500 producing ~10% of the total petro-engines in N.A.. They have a highly trained 5% 400 labor force, existent production infrastructure, access to large demographic 0% markets, and an ample base of suppliers. The light and heavy weight vehicle 300 manufacturing is represented by Chrysler, GM, Freightliner, John Deere, and -5%
PAX PAX (000's) 200 FIAT. Companies related to the automotive sector based in these markets -10% include Faurecia, Magna and Matcor. These sectors have driven the markets’ 100 -15% growth. Logistic companies have also an important presence in Saltillo. 0 -20% '09 '10 '11 '12 '13 '14 ■ Torreon: Along other 3 cities (Gomez Palacio, Matamoros and Ciudad Lerdo) PAX YoY Change comprise what is known as La Comarca Lagunera, the 9th largest metropolitan area in the country and one of Mexico’s most important economic and industrial Source: SCT, Actinver. centers. Currently, the metal industry is one of the most important in Torreon due to the presence of Industrias Peñoles, who has established the most important Coahuila: Inventory & Occupancy lead smelter, silver refinery, and electrolytic zinc refinery facilities of Mexico and 3.5 55% LatAm in the city, in which precious and semi-precious metals such as silver, gold, lead, zinc, cadmium and other chemical byproducts are produced. 3.0
50% 2.5 The dairy industry and farming-related activities are the second most important 2.0 industries in Torreon’s metro area, due to the presence of Grupo Lala, which was 45% 1.5 born in La Comarca Lagunera and is today the leading company of the industry in Mexico. Lastly, industrial activities such as the textile, electronics, automotive 1.0 40% Occupancy Rate assembly plants, and other light manufacturing facilities also account for an 0.5 important part of Torreon’s economy. Delphi, John Deere, Metzler, Johnson
Installed Room Nights (Millions) (Millions) Nights Room Installed 0.0 35% Controls, Takata, Caterpillar, Wrangler and Hanes are some of the companies '08 '09 '10 '11 '12 '13 with presence in the city. Unoccupied Rooms Occupied Rooms Occupancy Rate Series4 Source: HVS, Actinver.
65 Lodging Characteristics & Outlook: During the last 5 years Coahuila’s lodging supply has grown at a 2.5% CAGR, which is similar at the average country lodging supply growth (2.1%). Currently the state’s hotel room supply represents 1.8% of the county’s total supply. Coahuila’s lodging market is within the less fragmented markets in the country, with nearly 45.0% owned by independents, 29.7% by international chains and 25.3% by national chains. It important to note that 45.0% is still a high independent hotels ratio compared to more developed markets such as US, in which less than 20% are independent. Quality Inn, Camino Real, Holiday Inn, One, Quinta Real, Fiesta Inn, Marriot and Hampton Inn are some of the brands present in the state.
Up to 2013, occupancy rates in Coahuila have not been able to recover from 2008 levels of 52.9%, the highest rates observed before the crisis. In 2012 there was an improvement towards 47.0% levels, nevertheless it felt to 45.1% during 2013, mainly due to an increase of 11.0% on the state’s lodging supply. As we mentioned before, the increase in airport activity is a positive signal for an immediate rise in occupancy rate, which should be reflected during the following years.
Coahuila in general has a low tourism activity, which makes the lodging market highly dependent on business-class hotels, which in part justifies lower occupancy rates, due to the lack of weekend visitation. Coahuila’s supply is mainly concentrated in limited-service and select-service hotels, which currently have an average ADR of MX$1,000.
66 Sonora (North Region) Sonora Market Overview: Sonora is located in northwest Mexico, bordered by the states of Chihuahua, Baja California, Sinaloa, U.S. states of Arizona and New Mexico and it’s also adjacent to the Gulf of California. Sonora’s GDP represents 2.9% of the country’s total GDP; its population of 2.8 million represents 2.4% of Mexico’s total population and it’s GDP per capita of MX$158,587 ranks 8th in the country. Sonora has a working age group of 64.8%, and a positive demographic bonus for the next 5 years.
Sonora offers first-class infrastructure and provides efficient relationships between high-level research centers and a dynamic business environment supported by the state. During 2013 Sonora had a FDI of USD134 million (0.3% of Mexico’s FDI), duplicating the FDI received in 2012. Most of the investment was directed toward the manufacturing sector.
Sonora: FDI Sonora is a key trade location, with the NAFTA agricultural corridor (Mexico - $ 1,400 300% Nogales) crossing through the state to United States. It has 7 sea ports, from which 2 250% are international maritime ports and 5 are coastal shipping ports. The state has $ 1,200 several small international airports; the largest and most important is located in $ 1,000 200% Hermosillo followed by Ciudad Obregon’s airport. Hermosillo’s airport is 6 times 150% $ 800 larger than Cd. Obregon’s, with an average daily traffic of 3.5 thousand passengers. 100% During the last 6 years, Hermosillo’s airport has had a CAGR of 3.0% and marginally $ 600
50% grew 0.1% in 2014. USD (Million) USD $ 400 0% $ 200 -50% Main Markets:
$ 0 -100% 2008 2010 2012 1H2014 ■ Hermosillo. Is the capital and main economic center of the state. It contains almost all of the state's manufacturing activity, which is predominated by FDI Change YoY automobile manufacture. For the last decades industrial and manufacturing Source: Actinver. sector have been the most dynamic in the city, currently the state has about 30 manufacturing plants and more than 10 industrial parks in which over 100 Hermosillo: PAX Traffic Performance smaller manufacturing enterprises have settled employing about 30% of the city’s 1,300 8% population and nearly 20% of the state’s population. Other than cars, these CAGR: 2% manufacturing enterprises products include: televisions, computers, textiles, food 1,250 6% 4% processing, mobile phones, printing, chemicals, petroleum products and plastics. 1,200 2% Some of the most important enterprises in the sector are Ford and Lanix 1,150 0% electronics. Additionally the aerospace industry has been growing during the last decade, during June 2014 TE connectivity opened a new plant which required an 1,100 -2%
PAX (000's)PAX -4% investment of USD20 million, being the 64th company of the aerospace industry 1,050 -6% located in the state.
1,000 -8% ■ Ciudad Obregon. Second largest city in the state; its primary economic activities 950 -10% '09 '10 '11 '12 '13 '14 are agriculture, industry, cattle farming, fishing commerce and aquaculture. Agriculture is still the primary economic activity, with one of the most important PAX YoY Change irrigation systems in the country. Source: SCT, Actinver. ■ Cananea. Has a mining based economy, with nearly 80% of the population’s Sonora: Inventory & Occupancy economy directly or indirectly supported by the industry. The largest mining 6.0 60% companies are Buenavista del Cobre (co-owned by Southern Copper Corp. and Grupo Mexico) and Minera Maria (owned by Minera Frisco). Industry is the 5.0 55% second most important activity in the local economy, with several maquiladoras 4.0 located in the city with diverse mining side business activities such as cable 50% assembly and steel production. Stewart Connector Systems de México, S.A.; 3.0 Fundidora de Cananea, S.A. and Road Machinery Company de México, S.A. are 45% 2.0 some of the most important, providing together 600 jobs in diverse activities,
Occupancy Rate Occupancy from cable assembly to production of steel. 40% 1.0 InstalledRoom Nights (Millions) 0.0 35% Lodging Characteristics & Outlook: Sonora’s lodging supply represents 2.5% of '05 '06 '07 '08 '09 '10 '11 '12 '13 the country’s total lodging supply. During the last 5 years its supply has grown at a Unoccupied Rooms Occupied Rooms slightly faster pace than the country’s average, with a CAGR (08’ – 13’) of 2.8% vs. Occupancy Rate Occupancy Rate Mx 2.1% of Mexico. Source: HVS, Actinver.
67 Additionally, Hermosillo has a highly fragmented industry, with nearly 63.5% of the supply owned by independent hotels, only 10.5% by international chains and 26.0% by national and regional chains. Ibis, City Express, Fiesta Americana, Holiday Inn Express and Fiesta Inn are some of the hotels present in the market.
Occupancy rates are still recovering pre-crisis levels, lowest levels were seen until 2010 (45.7%), ever since occupancy has been increasing YoY, reaching 52.1% during 2013, which is close to 55.5% maximum levels. The state has a mixed leisure market, while during the week business visitation is high, it also has several beaches such as, San Carlos, Guaymas, Puerto Peñasco, among others visitation in these beaches is mostly national. The business-class hotels are mainly limited-service with a current average ADR of MX$950. While leisure’s ADRs are near MX$1,900.The growth of the aerospace industry and the establishment of new companies of the industry as well as a strengthening automotive industry are one of the strongest drivers of the state, which in the short term may reflect in lodging supply demand increase.
68 Puebla (Central Region) Puebla Market Overview: Puebla is located in central Mexico, bordered by the states of Veracruz Hidalgo, México, Tlaxcala, Morelos Guerrero and Oaxaca. The state is the tenth-largest economy in the country, representing 3.2% of Mexico’s GDP, with a population of 6.0 million (5.1% of Mexico’s total population), and a GDP per capita of MX$80,690, which is lower than the country’s average of MX$129,055. Currently Puebla has one of the smallest working age groups with 61.8% of the population, notwithstanding the demographic bonus is positive for the next 15 years reaching up to 65.4% by 2030.
The state of Puebla has a strategic location, 120 kilometers from Mexico City and 300 kilometers from the international port of Veracruz. The state’s most important sectors include the following: automotive and auto parts, metal mechanic, chemicals, plastics, apparel, furniture, fresh and processed foods, mining and information technologies. During 2013 the state was the 3rd with most FDI in the country, with a Puebla: FDI net influx of USD1,321 million, equivalent to 2.4% of Mexico’s total FDI and more $ 1,400 500% than 2 times the FDI received by the country during 2012. Most of the FDI was directed toward the manufacturing industry. $ 1,200 400% $ 1,000 300% Puebla is an important connecting point between central Mexico and the Yucatan $ 800 Peninsula. Important economic corridors pass through the state, the highway Mexico 200% – Puebla – Progreso, which is part of the Energy, Petrochemical and Exporting $ 600 Corridor is one of the most important, as well as the highway Puebla – Oaxaca – Cd.
USD (Million) USD 100% $ 400 Hidalgo. The main airport is located in Puebla but it is relatively small, considering its $ 200 0% location, specially the closeness with Mexico City, and the high connectivity, most of the visitation is done overland. From the years 2009 – 2013 PAX traffic suffered an $ 0 -100% 2008 2010 2012 1H2014 average decrease of -4.5% per year. In 2014 it recorded a 2.4% YoY decline.
FDI Change YoY Main Markets: Source: INEGI, Actinver. ■ Puebla. The main economic engine in the market is the Volkswagen plant. This Puebla: PAX Traffic Performance automobile plant and the numerous auxiliary plants and businesses that support 400 30% it represent the city’s larger employers. Puebla will continue strengthening within CAGR: -4% the automobile industry with the opening of the Audi manufacturing plant, which 350 20% is scheduled to produce its first fleet of vehicles in 2016. By 2016, Altom’s 300 10% geothermal power plant “Los Humeros III – Phase A” will start operations as well, 250 0% the investment required for this project will be USD43 million. FINSA’s industrial 200 park is another important economic center, where companies such as DHL and -10% 150
PAX PAX (000's) Oxxo have settled their local operations. Additionally, professional service 100 -20% companies, such as Deloitte and KPMG support the overall strength of the area. 50 -30% 0 -40% Lodging Characteristics & Outlook: Puebla’s lodging market is one of the few '09 '10 '11 '12 '13 '14 markets that maintained inventory growth and occupancy rates through the crisis. PAX YoY Change During the last 5 years the growth its lodging supply has outpaced the country’s, with a CAGR (08’ – 13’) of 4.1% vs. 2.1% of Mexico, currently the state’s hotel room Source: SCT, Actinver. supply represents 2.5% of the county’s total supply. The lodging in Puebla is highly fragmented, with nearly 68.5% of independent hotels, nevertheless presence of Puebla: Inventory & Occupancy national and international chain is starting to grow. La Quinta Inn, Presidente 5.0 65% Intercontinental, Holiday Inn, Best Western, City Express, NH, One, amongst others.
60% 4.0 Occupancy rates resisted to the crisis, increasing constantly YoY, even through 55% 2009. During 2013, Puebla reached occupancy of 60.8%, the highest level from the 3.0 50% past decade. This occupancy levels reflect a mixed market, with important business and leisure demand. Said this, Puebla’s supply is very diverse, catering for different 45% 2.0 markets and different travel occasions, offering limited, select and full-service supply. 40%
Occupancy Rate Occupancy As aforementioned, highly fragmented markets usually have lower ADRs due to the 1.0 35% high supply of low-priced rooms. Currently, limited and select service hotels in
Installed Room Nights(Millions) Room Installed 0.0 30% Puebla have an ADR range that goes in average from MX$850 to MX$1,100, while '05 '06 '07 '08 '09 '10 '11 '12 '13 full-service hotels have an average ADR of $1,400. As a relevant market, FINN, Unoccupied Rooms Occupied Rooms HCITY and FIHO have presence here. Occupancy Rate Occupancy Rate Mx Source: HVS, Actinver.
69
Equity Research FIBRA INN FIBRA / Lodging February 16, 2015
Booking At Attractive Low Fares Reinitiation Of Coverage Buy
Local Ticker: FINN14 Last Price: MX$ 16.30 Dividend Yield 2015: 5.8% Liquidity: Low Price Target 2015: MX$ 19.50 19.6% E. Return Total Return: 25.4% Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other Stock performance
■ We are reinitiating coverage on FIBRA Inn with a year-end 2015 target price (TP) of 110 MX$19.50 per CBFI (+19.6% capital appreciation) and a BUY recommendation. 105 ■ FINN is now better positioned to capture a stronger growth from the consolidation of the local lodging industry, through: i) its diversified portfolio, ii) sound operating 100 capabilities, iii) tangible pipeline, and iv) enhanced organizational structure. 95
■ In this report we are introducing a new earnings model. We have dedicated sections Return Return Index on: i) FINN’s sound capabilities as hotel operator, ii) an analysis of historical 90 investments, iii) a portfolio that would make sense to acquire in the market. 85 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Sound Track Record Of Investments, More Is About To Come. Since its IPO, FINN has FINN13 IPC announced MX$4,884 million (~USD 330 MM) worth of investments, including the acquisition of 23 hotels (4,512 rooms), 3 developments (540 rooms), and room expansions at 5 of the Market Data: properties (+409 rooms). As compared to its initial portfolio comprised by 8 properties, these investments represent a 158% increase in properties’ value, or of +26% if we consider the Market Cap (MX$ MM): 7,123 acquisition IPO portfolio (6 hotels) as part of the initial portfolio. Different from the market’s belief, acquisitions have been accretive as they have been closed at an entry NOI cap rate of Firm Value (MX$ MM): 7,747 8.6% (according to our estimates). Considering only 2014 acquisitions, the NOI cap rate has LTM Price Range (MX$): (13.30 - 17.96) been even higher at 9.3%. Following its recent subscription offer, FIBRA Inn reached a total Free Float: 83% fire-power of MX$4,375 MM, which will be deployed during the next 6 quarters in the trust’s identified pipeline of 43 hotels worth M$8,644 MM, including both acquisitions (27 hotels) Avg. Daily Trade (MX$ MM): 9.7 and developments (16).
Better Positioned With An Enhanced Organizational Structure To Address LT Growth. FINN’s recent changes to its organizational structure should not be overlooked as they are material changes from which the trust will largely benefit in the following years. We find two key implications: 1) Accelerated growth; and 2) the recruitment of an experienced COO from Grupo Posadas, the hotel operator of its closest competitor FIBRA Hotel.
Reinitiating Coverage With A YE2015 TP Of MX$19.50 /CBFI And A BUY Rating. This fair value implies a 19.6% potential capital appreciation over FINN’s current trading price of MX$16.30, and a total expected return of 24.8% taking into account our 5.8% estimated dividend yield. We have determined our target price through a DDM valuation model, which is based on a 10-year explicit holding period. To discount our dividend forecasts, we have calculated FIBRA Inn’s discount rate assuming a 5.0% adjusted RFR (using a prospective 3.5% base 10-year U.S. Treasury [Rf] plus a country risk premium [CRP] of 1.5%), a Real Estate risk premium of 5.5%, and a 1st year levered beta of 0.696. Also, we are assuming a terminal growth rate of 2.59%, which is the mid-cycle Mexico’s GDP growth in Mexico. It implies a FWD NOI cap rate of 7.7%. FINN currently trades at 0.92x price to NAV.
2014 2015 2016 2017 Financials (MX$ MM) FIBRA Revenues 861 1,635 2,354 2,557 Pablo E. Duarte de León Net Operating Income (NOI) 319 616 909 1,000 Real Estate EBITDA 268 522 784 867 [email protected] Funds From Operations (FFO) 252 476 572 616 +52 (55) 1103 6600 x4334 FFO/CBFI (MX$) 0.86 1.09 1.30 1.40 CAD/CBFI (MX$) [Cash Available for Distibution] 0.81 0.99 1.17 1.24 Valuation Actinver NOI Cap Rate (%) 6.7% 7.9% 8.8% 9.6% Guillermo Gonzalez Camarena 1200 EBITDA Cap Rate (%) 5.7% 6.7% 7.6% 8.3% Santa Fe, Mexico City, 01210 FFO Yield (%) 5.3% 6.7% 8.0% 8.6% Dividend Yield (%) 4.8% 5.8% 6.9% 7.5% Actinver’s Equity Research
Contents
71 Table of Contents
Executive Summary……..……………………………………. 74-75 Investment Positives ………………………………………………. 74 Investment Risk Factors ………………………………………….. 75
Sound Track Record Of Accretive Acquisitions …………...….. 76
Sound Capabilities As Hotel Operator …………...…..………….. 77-79 Analysis TripAdvisor Reviews Of FINN’s Sample Of Hotels ….. 79
Changes To Organizational Structure, To Address LT Growth 80-81
FINN’s Latest Acquisitions …………………..…………………….. 81-85 6-Hotel Portfolio: Microtel Inn & Suites And Casa Grande Hotels …………………………………………………………….…. 82-83 Crowne Plaza MTY Airport Hotel ……………..…………………. 83-84 Limited-Service Hotel In Guadalajara, Re-Branded To Wyndham ………………………………………………………...… 84-85
Changes To FINN’s Structure Of Fees ……...…………..……….. 85-86 Fees’ Structures Of Mexican FIBRAs (REITs) ……………..…... 86
Pipeline Of Investments …………………………………...……….. 87 FIBRA Inn’s LOI With HCITY …………………………………...... 87
A Portfolio That Would Make Sense To Acquire ……...……….. 88
FIBRA Inn’s Fire-Power ……………………………….…...……….. 89 Guidance For 2015-2016 ……………………………………….... 89 Assumptions For The Use Of Fire-Power ……………...……..... 89
FIBRA Inn’s Financial Forecasts ……...…………….…...……….. 90-91 FINN’s 2015-2016 Revenues …………………………………….. 90 2015-2016 NOI & EBITDA …….………………………………….. 90 2015-2016 FFO, CAD & Distributions …………………………... 90-91
Dividend Discount Model (DDM) Valuation ……….…...……….. 92-93
Net Asset Value (NAV) Valuation Approach ……...…...……….. 93-94
Our FINN’s Earnings Model ……………………..…...…...……….. 95-99 Rental Revenues From Select And Limited Service Hotels ….. 95 Rental Revenues From Full Service Hotels …………………..... 96
72 Fees / Expenses Paid To Related Parties …………………….... 96-97 Operating And Revenues Model …………...………………….... 97-98
Operating Model’s Property Book As Of 4Q2014 ….....……….. 100-101
Forecasted Operating Metrics By Segments ……..…...……….. 102
Forecasted Income Statement / Valuation Metrics …...……….. 103
Forecasted Balance Sheet / Leverage Ratios …….…...……….. 104
Forecasted Cash Flow Statement …………….…….…...……….. 105
Forecasted Distributions / Dividends ………..…….…...……….. 106
Company Profile ……………………………………….…...……….. 107
73 Executive Summary
FINN is a Mexican Real Estate Investment Trust (REIT) created to build, acquire, develop and lease hotel properties throughout Mexico under 3 different segments: Full, Limited and Select Service. It has 34 hotels with 5,716 rooms located in 14 states of Mexico (3 properties under development). FINN has franchise agreements with IHG, Wyndham, Hilton, Starwood and Marriott to operate their global brands (10 in total). The company also operates the Crowne Plaza and Casa Grande hotel brands.
Investment Thesis: Positives
Diversified Portfolio Of 12 Hotel Brands (10 International), In 14 States Of Mexico, And Within 3 Segments (Limited, Select And Full Service). We like FINN’s high exposure to recognized global hotel brands, representing 96% of its total hotels. Furthermore, it has been diversifying it through its 3 different hotel segments, with a more balanced portfolio, with 23% of limited-service, 45% of select, and 32% of full service, from its initial portfolio which was 100% select.
Sound Hotel Operating Capabilities Of Its Management Reflected On Top- Notch Profitability Levels. Messrs. Victor and Joel Zorrilla have been in the industry all their adult life, belonging to a family dedicated to the lodging business for over 50 years. Their deep experience is reflected in the significant improvements they have achieved in several of FINN’s acquired hotels. We believe that through the recent incorporation of Mr. Rafael de la Mora Ceja as the new Director of Hotel Operations of FINN, this could be further enhanced.
Increased Competitive Advantages Through Recent Changes In Corporate Structure. Recent changes on FINN’s organizational structure should not be overlooked as they are material changes from which the trust will largely benefit in the coming years. We find two key implications: accelerated growth, and the recruitment of experienced COO from Gpo. Posadas, FIHO’s hotel operator.
Relevant Growth Potential Through Visible Pipeline Worth MX$8.6 Billion. FIBRA Inn has an identified pipeline of investments of 43 hotels, including both acquisitions (27 hotels) and developments (16), worth M$8,644 MM (MX$5,763 MM / 61% of acquisitions, and MX$2,881 MM / 39% of developments). This pipeline is located in 18 states of Mexico, representing a total 6,918 rooms, and 1.4 times FINN’s properties’ value as of YE2014. By region, most of the hotels are located in the central and south regions (63% / 27 hotels), followed by the west (19% / 8 hotels).
Sound And Accretive Track Record Of Investments (3,304 Rooms Acquired + 540 Under Development, +138% Vs. Initial Portfolio). According to an analysis we performed for each of FINN’s acquired hotels, leaving apart the 3 hotels currently under development, the entry NOI cap rate has been 8.6% (weighted average for all acquisitions), representing a +138bps spread against FINN’s historical implied NOI forward cap rate (cap rate arbitrage). Thus, value has been generated so far, different from what might be the market’s perception, given FINN’s current market value discount to its net asset value.
Committed, Experienced And Highly Institutional Management Team. Apart from their experience and high institutional standards, FINN’s sponsors (Hoteles Prisma mainly) maintains a relevant skin in the game, with a 17% stake.
Attractive Growth Prospects Of The Mexican Lodging Industry. We expect FINN to continue benefiting from the consolidation of the local lodging industry. High quality lodging supply will increase at a 4.7% CAGR 2014-2022, as per our estimates. Chained hotels are expected to present the highest growth rate, at 8.1%. The share of independent quality hotels will decrease from 55% to 42%.
74 Investment Thesis: Risk Factors
Small Cap FIBRA With Low Liquidity In The Market. With a market value of USD480 million, FIBRA Inn is still an small cap FIBRA, with an average daily trade of ~USD700 thousand. This could become one of our main risk factors that could prevent it to reach our 2015 fair value.
Lower Than Expected Economic Growth In Mexico. The lodging industry is highly cyclical and dependent on the overall strength of the country’s economic activity. Thus, a slowdown in Mexico’s economic activity will have a direct and immediate impact on average daily rates (ADRs) and occupancy levels, affecting FINN’s hotel operations.
High Exposure To Travel Disruptions. Including those related to: i) domestic and international political and geopolitical instability that could adversely affect travel conditions; ii) security issues and criminality activity, which has been recently making noise in the states of Tamaulipas (Nuevo Laredo, Reynosa, Matamoros) Zacatecas, Guerrero and Michoacan; iii) natural disasters such as hurricanes, tsunamis, earthquakes, or other unusual weather patterns; iv) health concerns including pandemics and epidemics, such as the HINI flu, avian flu, SARS, or Ebola; v) terrorist attacks; vi) financial situation of domestic or international airlines or land transportation companies that could negatively impact the lodging industry and tourism in general.
Difficulty To Deploy Its Fire-Power (~MX$4.3 Bn) Through New Accretive Acquisitions. Particularly considering competition in the market from other institutional players, as well as FINN’s target acquisition cap rate of >10%.
Development / Expansion risk for current or new properties. FIBRA Inn’s short- and medium-term growth depends partly on expansions and development of new hotels. Any delay and unexpected increase in construction costs of the trust’s developments, as well as potential negative specific-market changes, could adversely affect FINN’s operations and dividend per CBFI performance. This is one of the reasons why FINN is focusing on acquisitions rather than developments in its growth strategy.
Interest rates sensitivity. Interest rates volatility (rising rates) might reduce the spread between a FIBRA’s NOI and real market rates, lowering its attractive- ness. Rising interest rates cause RE values to decline due to its relatively fixed nature of cash flows from leases and the time value of money. However, increasing interest rates also imply an expanding economic activity, which translates into higher rents for a FIBRA (in FINN’s case into higher RevPARs). Rising interests rates can be compensated through a fast increase in NOI (increased cash flow).
Potential ST impact on dividends from the recent issuance of new CBFIs in the market. As we will observe, FINN’s 4Q2014 dividend per CBFI will show the impact from the trust’s rights offering of November 2014, in which it increased by 69.2% the total number of CBFIs outstanding to 437 million through its recent subscription. Thus dividend per CBFI estimated at MX$16.11 cents will be 30.6% lower as compared to the dividend distributed in 3Q2014, while as a total amount it will be 17.4% higher, of MX$70.4 million. Nonetheless, as FINN continues acquiring new properties throughout the year, as we are already anticipating, the dividend per CBFI will continue increasing, reflecting additional value generated by the trust.
Oversupply Or Reduction In Demand For Hotel Rooms. With this risk we refer mainly to specific market and hotel segment conditions (not for the overall Mexican lodging industry), which would adversely affect occupancy and revenues at FINN’s hotels.
75 Sound Track Record Of Accretive Acquisitions FINN's Historical Acqs. Cap Rate Sperad Since its IPO (March 13, 2013), of which 60.2% was placed locally and 39.8% within 500 international investors under rule 144A in the U.S. and Reg S outside the U.S, FINN has announced total investments of MX$4,884 million (~USD 330 MM), including the 300 acquisition of 23 hotels (3,563 rooms), 3 developments (540 rooms), and room expansions at 5 of the properties (+409 rooms). Without taking into consideration the 138bps trust acquisition portfolio announced as part of its IPO, investments total MX$3,783 100 million (20 hotels and 3,143 new rooms). As compared to its initial portfolio of 8 properties, these investments represent a 158% increase in properties’ value, or of -100 +26% if we consider the acquisition IPO portfolio as part of the initial portfolio.
Cap Rate(bps)CapSpread -300 According to an analysis we performed for each of FINN’s acquired hotels, leaving apart the 3 hotels currently under development, the entry NOI cap rate has been 8.6% (weighted average for all acquisitions), representing a +138bps spread against -500 FINN’s historical implied NOI forward cap rate (cap rate arbitrage). Thus, value has Source: Actinver estimates. been generated so far, different from what might be the market’s perception, given FINN’s current market value discount to its net asset value. It is worth noting that our estimated cap rate was calculated by including taxes and acquisition-related expenses into the formula.
Based on our analysis, there have been basically 4 hotels that have not reached so far a stabilized NOI cap rate level close to FINN’s estimated figures, as their NOI generation has been affected mainly by: i) market-specific conditions, which have led to lower than expected ADR and/or occupancy levels; and ii) temporary effects from room expansions. Regarding market-specific conditions, we are assuming that they are unchanged in the future preferring being conservative with NOI at those hotels.
On the other hand, 3 hotels have outperformed even FINN’s stabilized expectations already, particularly the Wyndham Garden Leon, Guanajuato, through a re-branding process from its previous Mexico Plaza local brand. Its increment of ~18% in ADRs and occupancy levels towards ~78% (from previous 58%) is expected to be followed by other Bajio hotels (Irapuato, Celaya, Celaya, Silao and Guadalajara) in which FINN is implementing the same strategy through its sound hotel operating capacity. As we will show later in this report, this capacity has derived in significant improvements at the trust’s hotels, some of which have been also applied to the hotels underperforming NOI expected generation. There is additional organic growth potential for those hotels in particular that we are not factoring in our projection yet.
If we only consider 2014 acquisitions, FIBRA Inn’s investment cap rate has been superior, at 9.3%, as shown in the graph below. The trust’s acquisition performance, in terms of the hotels’ short-term NOI generation, has been more consistent. It is true that there exists upside potential considering FINN’s target stabilized cap rates of 10.0%, and we see a renewed, more solid corporate structure capable of achieving it. Even so, we are being conservative in our projections assuming new acquisition NOI cap rates of between 8.75% and 9.0%. This still reflects value not being recognized.
FINN's NOI Cap Rates Of Historical Acquisitions 14.0% 12.0%
10.0% 9.3% 8.0% 8.6% 6.0% 4.0% 2.0%
Hotels' NOI Cap (%) Rates Hotels'NOI 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Acquisition IPO Portfolio Other 2013 Post-IPO Acquisitions 2014 Acquisitions Source: Actinver estimates.
76 Sound Capabilities As Hotel Operator
FINN’s mgmt. team members have transmitted to the FIBRA their large experience as hotel operators at Hoteles Prisma (created in 2001). In the particular cases of Mr. Victor Zorrilla (Chairman of the Technical Committee) and Mr. Joel Zorrilla (VP of Corporate Strategy), experience is deeper, as they have been in the industry for a lifetime, belonging to a family dedicated to the lodging business for over 50 years.
The Zorrillas initiated their trajectory in the 1950’s, working at the “Hotel Rio” (Rio DoubleTree then, now iStay) in Monterrey, and since 1993 they have been dedicated to the development, operation and mgmt. of hotels. Their relation with international hotel chains is also quite remarkable. They introduced the first Hampton Inn by Hilton (1993) and Courtyard by Marriott (2000) hotel brands in LatAm, and they developed the first Holiday Inn Express hotel under its new image in Mexico, in 2008. Mr. Joel Zorrilla, for instance, is representative of IHG Owners Mexico before the World Committee of the Priority Club Rewards of IHG. Through their experience, they are able to detect improvement opportunities within the international brands they manage and operate in Mexico, and discuss them with the hotel chain owners of such brands.
All of this is reflected in the significant improvements they have achieved in several of FINN’s acquired hotels. In some others, which have not been able to improve yet, are in the process of doing so, driven by recent initiatives being implemented. Next we present details on the 4 hotels that have not achieved the trust’s expected operating performance, the reasons behind it, as well as some of the initiatives being taken by FINN in order to improve them. Then, we present different hotel-specific case studies as to show the aforementioned turnaround operating capabilities FIBRA Inn has. We believe that through the recent incorporation of Mr. Rafael de la Mora Ceja as the new Director of Hotel Operations of FINN, this could be further enhanced.
FIBRA Inn’s Hotels With A Revelant Operating Turnaround Following Their Acquisition
Holiday Inn MTY Valle Holiday Inn Express & Suites MTY Airport
Wyndham Garden Irapuato Wyndham Garden Leon
Model NOI Cap Rate: 13.3% vs. 10.1% announced
. Higher than expected occupancy: 2015E Model implied of 78.0% vs. 68.0% Est. . Month to date occupancy at 88.0%.
Improvements
. Increase of ~17.5% in ADRs. . Re-branding from Mexico Plaza to Wyndham Garden. . Complete hotel refurbishing.
Source: FINN, Actinver’s estimates (ADRs, occupancies, cap rates).
77 FIBRA Inn’s Hotels With Operating Improvement Opportunities
Holiday Inn Express Guadalajara UAG
Model NOI Cap Rate: 6.9% vs. 9.9% announced Incorporation of 99 rooms (+99%). . Lower than expected ADRs: 2014E Model implied ADR of MX$1,110 vs. MX$1,311 Est.
Holiday Inn Express Toluca Tollocan
Model NOI Cap Rate: 3.2% vs. 11.6% announced . Lower than expected occupancy: 2014E of 36.2%. . Competition from Courtyard and Fiesta Inn. . Lower than expected ADRs: 2014E Model implied ADR of MX$771.
Improvements: . Complete hotel overhaul. . Old corporate account recovery and addition of new clients. . Improved complimentary services like ground transportation and cocktails.
Camino Real Guanajuato
Model NOI Cap Rate: 6.7% vs. 9.2% announced . Incorporation of 50 rooms (+48%). . Lower than expected occupancy: 2015E Model implied of 60.0%.
Improvements: . ADRs have increased ~14% . First Camino Real hotel in FINN’s portfolio.
Holiday Inn Mexico City Coyoacan (Tlalpan)
Model NOI Cap Rate: 5.5% vs. 9.5% announced . Lower than expected occupancy: Model implied of 62.5% vs. 68.0% Est. . Lower than expected ADRs: 2014E Model implied ADR of MX$1,127 vs. ~MX$1,303 Est.
Source: FINN, Actinver’s estimates (ADRs, occupancies, cap rates).
It is also worth highlighting that FIBRA Inn’s managers closely monitor reviews from third-party lodging websites such as TripAdvisor, which we believe is essential for any lodging company, and useful for us to have a better sense of the level of quality of the hotels from the companies under coverage. As part of FINNs operations’ improvement objectives at each of the trust’s hotels, they find key addressing their guests’ concerns and feedback, looking for hotel managers to reply and attend these reviews as soon as possible. And just as FINN does, we have performed an analysis of TripAdvisor’s guest reviews. In this website, guests assign scores to the hotels’ in 6 categories (location, sleep quality, rooms, service, value and cleanliness) with 5 possible rating levels, from terrible (1) to excellent (5).
We used a sample covering 12 hotels of FIBRA Inn, 4 random properties for each of the 3 segments: limited, select and full service. The average rating level for this sample was 3.875, which is quite remarkable, falling within the very good traveler experience, close to excellence. 75% of the sample hotels were rated with 4.0. Following comments from the guests who review the hotels is also very useful for this type of analysis, we think.
78
Analysis Of TripAdvisor Reviews Of FINN’s Sample Of Hotels
Trip Advisor Sample Reviews On FINN’s Limited- (LS), Select- (SS) and Full-Service (FS) Hotels
SS SS SS
SS LS LS
LS FS LS
FS FS FS
Source: Trip Advisor, Actinver.
79 Changes To Organizational Structure, To Address LT Growth
On February 3, 2015, FIBRA Inn announced changes to its organizational structure, with the objective of promoting the FIBRA’s growth strategy. The changes are the following:
■ Victor Zorrilla (Chairman of the Technical Committee) will now only concentrate on FINN’s strategy of delivering accretive growth (role he has performed until now), as well as focusing on the trust’s corporate governance. Previously, Mr. Victor Zorrilla was Chief Executive Officer (CEO) and Chairman of the T.C.
■ Oscar Calvillo (Chief Executive Officer – CEO) is now taking the position of CEO, in which he will execute FINN’s vision and long-term growth strategy by focusing on 3 key areas: i) overseeing the profitability of operations by maximizing income, implementing processes, improving client service, and ensuring that the trust has the necessary human capital; ii) identifying acquisition and development opportunities; and iii) value creation for CBFI holders. Mr. Oscar Calvillo previously served as Chief Financial Officer (CFO) of FINN.
■ Joel Zorrilla (VP of Corporate Strategy), among other responsibilities, he will be responsible for the trust’s strategic aspects including relationships with international chains, hotel owners (for acquisition opportunities) and key investors. Mr. Joel Zorrilla was previously Chief Operations Officer (COO) of the company.
■ Rafael de la Mora Ceja (Chief Operations Officer – COO / Director of Hotel Operations). Mr. de la Mora is being introduced to FINN’s management team. He previously worked for Grupo Posadas (since 1994), holding various positions: Director of Corporate Operations, Managing Director of Hotelera Posadas, Director of the Office of Transformation and Strategy, and Managing Director of Resorts.
■ Fernando Rocha Huerta (Director of Acquisitions and Development). Mr. Rocha joined FINN on December 1, 2014. His main responsibility is the supervision of all the hotel acquisitions’ processes, as well as the coordination of the development of hotels throughout all the stages.
■ Chief Financial Officer (CFO). This position will continue being performed by Mr. Oscar Calvillo until a new director is hired.
These changes on FINN’s organizational structure should not be overlooked as they are material changes from which the trust will largely benefit in the coming years. We find two key implications:
1) Accelerated Growth. These changes reinforce FIBRA Inn’s corporate structure by leaving Victor Zorrilla, Joel Zorrilla, and Oscar Calvillo to focus on the company’s growth strategy. FINN is now set to increase its scale through the deployment of the resources raised in its recent rights-offering (MX$2,832 million). It is worth noting that as of today it is the second smallest FIBRA in terms of market capitalization. The correct execution, through value generation, of its fire-power would support the long-term consolidation of FINN as a more relevant player in the Mexican lodging industry.
2) Recruitment Of Experienced COO From Its Closest Competitor. FINN not just hired Rafael de la Mora, highly experienced in hotels’ operations, but it took from Grupo Posadas, FIHO’s key hotel operator. Note that Mr. Rafael de la Mora previously worked for Grupo Posadas, FIHO’s main hotel operator.
Therefore, FINN is now better positioned, with additional competitive advantages that should be recognized by the market, in our view. We just should now wait to hear for good news regarding the recruitment of the trust’s new CFO.
80 It is also worth noting that these changes do not imply additional costs to the FIBRA, as these costs correspond to FINN’s Advisor and/or its affiliates, to which the trust pays the Advisory fee for its asset management (0.75% of gross asset value).
Finally, it is also relevant to note that the aforementioned changes do not suggest any modifications to FINN’s Technical Committee, which continues being comprised by 8 proprietary members (Victor Zorrilla, Joel Zorrilla, Oscar Calvillo, Jose Clariond, Robert Dotson, Juan Carlos Hernaiz, Adrian Jasso and Jose A. Gomez Aguado) and 5 independent members (Adrian Garza, Rafael Gomez, Everardo Elizondo, Hector Medina and Marcelo Zambrano).
FINN’s New Organizational Structure
Source: FINN, Actinver.
FINN’s Latest Acquisitions
Just in the last twelve weeks, FIBRA Inn closed 8 new hotel acquisitions at an average announced stabilized NOI cap rate of 10.6%. Their total expected NOI generation (using our forecasts) will be of MX$95.5 million, representing 15.5% of the consolidated NOI generation we expect FINN to reach in full-year 2015. For them, we are estimating an average NOI cap rate of 9.2% for 2015, in which we incorporate taxes and other acquisition related expenses. Such cap rate is still 230bps above FINN’s implied NOI cap rate for the same year. Value has been generated, FINN’s price does not seem to reflect it yet.
The aforementioned acquisitions comprise i) a 6-property portfolio consisting of 4 Microtel Inn & Suites by Wyndham (limited service) and 2 Casa Grande branded hotels (full service); ii) a Crowne Plaza (full service); and iii) a Mexico Plaza hotel (limited service).
81 6-Hotel Portfolio: Microtel Inn & Suites And Casa Grande Hotels
This 6-hotel portfolio with a total value of MX$470 million including taxes and acquisition expenses, was purchased with own resources from last year’s rights offering in 3 parts: i) 2 Microtel hotels (Culiacan and Ciudad Juarez) with a total value of MX$126.5 million on November 21, 2014; ii) 2 Casa Gande hotels (Chihuahua and Delicias) for a total investment of MX$192.5 million on December 14, 2014; and iii) 2 additional Microtel properties for MX$151.5 MM on December 17, 2014.
It was an accretive acquisition for CBFI Holders, for which FIBRA Inn anticipates a stabilized net operating income (NOI) of MX$50.8 million by YE2015. However, we are estimating MX$43.6 million of NOI as we might be more conservative on occupancy rates (average of 65.2% for the portfolio) and ADRs. Past experience from impressive turnaround at acquired hotels could prove us wrong. The implied forward stabilized NOI cap rate using FINN’s assumptions is 10.6%, including taxes and acquisition-related expenses.
Brief Details Of The Hotels
Casa Grande Chihuahua (2013 occupancy: 64%, ADR MX$721, RevPAR MX$460). It is located in Chihuahua, Chihuahua, in a premium area near 7 industrial parks, the city’s business district and the Autonomous University of Chihuahua. Its demand is driven by companies from various sectors including Honeywell Aerospace, Textron, Visteon Corporation, Fokker Aerospace, Delphi, Ford, Interceramic, Cementos Chihuahua, Grupo Bafar and American Industries, among others. FINN plans to convert this hotel to a “Wyndham Garden” brand, investment which is already included in acquisition-related expenses.
Casa Grande Delicias (2013 occupancy: 59%, ADR MX$770, RevPAR MX$457). It is located in Delicias, a small city of Chihuahua with a relevant presence from the pharmaceutical, medical, rubber and textile industries. Demand of hotel rooms in this location is mainly driven by pharmaceutical companies such as Bayer, Rimsa and Sanofi. As this is the most‐recognized hotel in the city, FINN will maintain its brand unchanged, by means of a brand licensing agreement.
Microtel Inn & Suites by Wyndham Chihuahua (2013 occupancy: 77%, ADR MX$683, RevPAR MX$523). It is located in Chihuahua, Chihuahua, in the highest commercial growth area in the city, near the Fashion Mall and Plaza del Sol shopping centers. Its demand is driven by corporate and industrial clients visiting the city’s center and industrial areas. FINN expects the operation of this hotel to generate synergies with hotel Casa Grande Chihuahua.
Microtel Inn & Suites by Wyndham Culiacan (2013 occupancy: 56%, ADR MX$716, RevPAR MX$402). It is located in Culiacan, Sinaloa, a city with a growing market in the agro industrial sector. The hotel is located in the new section of the city, near a country club and Hospital Angeles, and with an 8-minute distance from Culiacan’s airport. FINN expects demand of this hotel to increase due to certain interstate agreements that have been signed.
Microtel Inn & Suites by Wyndham Toluca (2013 occupancy: 60%, ADR MX$558, RevPAR MX$335). It is located in Toluca, State of Mexico, in the Metepec are of the city, facing the Galerias Metepec shopping mall as well as Plaza Las Americas. Toluca’s rooms demand is mainly driven by its wide industrial sectors’ offering, the Toluca’s International Airport, and the logistics’ sector.
Microtel Inn & Suites by Wyndham Ciudad Juarez (2013 occupancy: 48%, ADR MX$616, RevPAR MX$295). It is located in Ciudad Juarez, Chihuahua, in a premium area near the U.S. embassy and ~1 mile away from the Zaragoza international bridge. According to FINN, the operation of this hotel is expected to generate operating synergies together with the company’s Holiday Inn Express & Suites Ciudad Juarez.
82 Details On The 6-Hotel Acquisition Portfolio
Source: FINN, Actinver.
Crowne Plaza MTY Airport Hotel
On December 11, 2014 FIBRA Inn closed the purchase agreement for the Crowne Plaza Monterrey Airport hotel, located in Apodaca, Nuevo Leon, next to the trust’s Holiday Inn Express & Suites Monterrey Airport hotel. The agreed purchase price was MX$351 MM, plus MX$33.8 MM related to taxes, acquisition expenses, and an improvement of 28 rooms. It is worth noting that it is a relevant single-hotel acquisition, representing 7.0% of FINN’s investment properties’ value as of 3Q2014, and 81.3% as compared to the company’s last 6-hotel acquisition portfolio value.
This acquisition is projected by FINN at an estabilized NOI cap rate of 10.0%, and of 9.1% according to our 2015E estimates. FIBRA Inn expects this hotel to generate an stabilized NOI of MX$35.1 million in 2015. The company’s estimated stabilized cap rate reflects expected synergies to be developed with the Holiday Inn Express & Suites that should reduce operating costs and improve revenue margins. The Crowne Plaza hotel had occupancy of 64%, average daily rate (ADR) of MX$1,194, and RevPAR of MX$766 in 2013.
Crowne Plaza Monterrey Airport
Source: TripAdvisor, Actinver.
83 A Full Service segment hotel. The hotel has 219 rooms and operates in the full service segment, complementing the company’s Holiday Inn Express next to it. The property is located 3 minutes away from Monterrey’s International Aiport, in the city’s main industrial zone (containing 48.6% of total industrial inventory). According to FINN, this hotel has been the leader in terms of occupancy and rates among the hotels located in the airport area, a market known by its fierce competition.
It is worth noting that, with this acquisition, FIBRA Inn fulfilled its IPO commitments of reaching 30 hotels by year-end 2014.
Limited-Service Hotel In Guadalajara, Re-Branded To Wyndham
On December 2, 2014, FINN additionally acquired a Mexico Plaza Guadalajara hotel located in Andares, in the state of Jalisco. The agreed purchase price was MX$183 million, plus MX$24.7 million for taxes, acquisition expense and re-branding expenses. A down payment of MX$90 million was made upon signing of the agree- ment and the remaining balance was paid in January 2015, when the final public acquisition deed was expected to be completed. It is important to highlight that, upon the agreement signing on early December, FINN started receiving income from the operation of the property. With this acquisition, FINN increased its portfolio to 31 stabilized hotels and 3 under development, with 5,718 rooms (of which 645 are under development).
GDL Andares Hotel & Market Highlights. The hotel has 186 rooms and operates under the limited-service segment. An amount of Ps. 9.0 million, included in the aforementioned acquisition expenses, will be used to re-brand the hotel to the Wyndham Garden brand, which will take place during 2015. The property’s location is strategic, as it is adjacent to the Andares and Puerta de Hierro Mall, which are the most prestigious commercial and financial areas.
According to FINN the main sources of demand will come from: i) the Guadalajara Expo for meetings and conventions; and ii) the Ciudad Creativa Digital project, which is focused on creating and strengthening the digital design, software, film and video games industries; and which is expected to drive foreign investment and incentivize job creation. This is FINN’s fourth hotel in Guadalajara, which create synergies in marketing strategies in this city.
Location Of Mexico Plaza Guadalajara Andares Hotel
Source: Google Earth, Actinver.
84 Upside On The Hotel’s Valuation Through Re-Branding. FIBRA Inn mentioned that the Mexico Plaza GDL Andares hotel currently has an occupancy rate of 50.6% (cumulative from January to October 2014), an ADRs of MX$763 and a RevPAR of MX$386. The company expects to improve occupancy and ADR through the re- branding of the hotel to Wyndham Garden, similar than previous acquisitions in the Bajio Region from the same Mexico Plaza brand (Silao, Leon and Celaya).
According to our estimates, using Mexico Plaza GDL Andares’ current operating indicators, FINN is acquiring the property at an entry (last 12 month) NOI cap rate of ~6.2%E. However, with an stabilized occupancy level of 68.0% and an increment of 17.5% in its current ADR, which is aligned with the increase derived from the re- branding in the Bajio hotels, the hotel will be reaching the company’s projected 10.0% NOI cap rate. It is worth noting that we have derived these figures according to the average GOP margin of 37% to 40% from this specific hotel segment, as well as its average property tax and insurance (as % of property value), from which we finally reached our estimated NOI of the hotel. These are not the company’s numbers, but our conclusions behind them. For 2015, we have an estimated NOI cap rate of 8.2% for this property, which, once again, might be conservative.
Changes To FINN’s Structure Of Fees
FINN’s CBFI Holders approved the change of the trust’s fees structure during the meeting celebrated on October 17, 2014. With the changes, the Advisory (Asset Management) fee was increased from 0.5% of gross assets value, inflation-adjusted, to 0.75%, while the acquisition fee, which totaled 3.0% of properties’ acquisition value (1.5% of acquisition price + 1.5% of such contribution), was completely eliminated. These changes became effective since that date.
We believe these are positive changes for the following reasons: 1) makes FINN’s structure more transparent; 2) better aligns investors interests and therefore improves market perception. Why is it different from FUNO’s past rejected proposed change, which also considered the acquisition fee elimination? Because FINN is just to start a more LT aggressive growth strategy which otherwise would imply higher fees from acquisitions. FINN’s new fees structure might change in the future, for instance towards a more investor-friendly structure, as the one of FMTY, for instance.
Market Perception Of Fee Structures
• Focus that seeks asset growth. • There has been no negative feedback from investors; however, international Advisory Fee comparables tend to industry internalization. • External advisor figure is a common practice among Mexican FIBRAs.
• There has been negative feedback on these fees. There is a perception that it does not align the interests of managers with those of investors. Acquisition Fee • Only two FIBRAs charge acquisition fees. • FIBRA Inn eliminated this fee in order to achieve a better interest alignment.
• Some FIBRAs charge additional fees that are not well liked by the market: performance fees, development fees, lease renewal fees. Other Fees • Nonetheless, there are FIBRAs that, given their scale, have fewer impacts on their stock price because of fee structures.
Source: FINN, Actinver.
85 Fees’ Structures Of Mexican FIBRAs (REITs)
FUNO Terrafina Macquarie DANHOS FIHO FINN FSHOP Prologis
• 0.5% of NAV (IFRS • 1.0% of non- • 0.75% of Gross • 0.75% of Current Gross • 0.5% of Gross Asset • 1.0% of Market Cap • 1.0% of NAV Property value minus depreciated book Asset Value • 7.5% of NOI Asset Value (inflation Advisory Fee Cost (inflation (payable in advance (IFRS Property debt, appraised value of assets, (inflation adjusted) + Investment adjusted). every 6 months). value minus debt). annually). excluding cash. adjusted). Cost of Non-Valued
• 3.0% total: • 4.0% total, from rents • 1.5% to 3.0% of rental • 2.0% services fee (F2 collected: income paid to a third Sub) on lease • 3.0% management party • 2.0% of total payments from prior fee from lease • 5.0% of the total • None • 3.0% of Gross Income Property Management Fee revenues • None • 1.0% mgmt fee (F1 payments payroll (Rents), paid monthly • Property managers effectively received. Sub) from lease income on a 3-year lockup • 1.0% for accounting and maint. fee collected period post-offering support from tenants
• 10% [Mkt Cap at year- • 10% [Mkt Cap at year- • 10% [Mkt Cap at year- Fee end - (Initial Mkt Cap * end - (Inflation Adj. end - (Initial Mkt Cap * 1.09)] Initial Mkt Cap * 1.05)] 1.09)] • Paid and calculated • Paid and calculated • Paid and calculated Performance annually on a bi-annually on a Frequency • None • None • None • None • None annually on a cumulative Fee cumulative basis ("high cumulative basis ("high basis ("high water mark") water mark") water mark") • Reinvested in • Reinvested in • Reinvested in Prologis Lockup Terrafina's CBFIs with Macquarie's CBFIs with CBFIs with a 6-month a 6-month lockup a 12-month lockup lockup
• 3% of assets acquired on third party Acquisition Fee transactions; paid • None • None • None • None • None • None • None proportionally when there is a related party
• 1.5% of the initial Founder's Fee • None • None • None • None • None • None • None portfolio value
• Administrative and • 10 times the • 5 times the annual performance fee will annual advisory advisory fee - previously Termination Fee • None still be received by the • None • None fee - previously • None • None paid advisory fees (only administrator for the paid advisory fees during the first 5 years) next 10 years (only during the
• 4.0% Contingent Fee equivalent to the total costs from capital Development Fee • None • None • None • None • None • None • None improvements to existing properties or new property development proyects
• Fee equal to certain percentages of gross • 5.0% in relation to years 1-5 of the leasing Leasing Fee • None • None • None • None • None • None • None • 2.5% in relation to years 6-10 of the leasing • 1.25% in relation to years ≥11 of the leasing
• 5% of total outstanding CBFIs paid Employee Compensation over a 10-year period. • None • None • None • None • None • None • None Plan (ECP) • Retention objective 3- to 5-year vesting period.
86 Pipeline Of Investments FINN's Breakdow n Of Future Pipeline FIBRA Inn has an identified pipeline of investments of 43 hotels, including both By Region acquisitions (27 hotels) and developments (16), worth M$8,644 million (MX$5,763 Acquisitions MM / 61% of acquisitions, and MX$2,881 MM / 39% of developments). As observed Re gion # Hote ls % # Rooms % in the exhibit below, this pipeline is located in 18 states of Mexico, representing a North 3 11% 418 10% total 6,918 rooms, and 1.4 times FINN’s properties’ value as of YE2014. By region, Northeast 1 4% 94 2% most of the hotels are located in the central and south regions (63% / 27 hotels), Central & South 17 63% 2,587 61% followed by the west (19% / 8 hotels). West 6 22% 1,144 27% Tota l 27 10 0 % 4 ,2 4 3 10 0 % Among the brands found in the acquisitions’ pipeline we find Holiday Inn Express, Wyndham Garden, Staybridge, Real Inn, Holiday Inn, Intercontinental, Crowne Plaza, Developments Ibis, Arriva Express and Mexico Plaza. Arriva Express is a brand from the Arriva Re gion # Hote ls % # Rooms % Hospitality Group, local hotel chain that operates 8 hotels under 4 own brands North 0 0% 0 0% (Crown Paradise, Vista, Arriva Express, and Suites Futura) and 1 franchise Northeast 4 25% 643 24% (Staybridge) in the business and resort segments. The Arriva Express hotel subject Central & South 10 63% 1,782 67% for acquisition has 166 rooms and is located in Guadalajara, close to the shopping West 2 13% 250 9% center Plaza del Sol (5-minute distance from Expo Guadalajara). Regarding new Tota l 16 10 0 % 2 ,6 7 5 10 0 % construction hotels, FINN is contemplating the following brands: Courtyard, Fairfiled, Hampton Inn, HCE, Hyatt Regency, Aloft, City Express and City Express Plus. By Hotel Segment
Acquisitions FIBRA Inn’s Footprint Of Future Pipeline (Acquisitions And Developments) S e gme nt # Hote ls % # Rooms % Full- Service 13 48% 2,324 55% Select Service 12 44% 1,682 40% Limited Service 1 4% 120 3% Extended Stay 1 4% 117 3% Tota l 27 10 0 % 4 ,2 4 3 10 0 %
Developments S e gme nt # Hote ls % # Rooms % Full- Service 1 6% 200 7% Select Service 8 50% 1,397 52% Limited Service 6 38% 898 34% Extended Stay 1 6% 180 7% Tota l 16 10 0 % 2 ,6 7 5 10 0 %
Source: FINN, Actinver.
Source: FINN, Actinver.
FIBRA Inn’s LOI With HCITY
It is worth remembering that on November 11, 2014, FINN announced a letter of intent (LOI) with Hoteles City Express (HCE) to develop up to 10 hotels in various locations throughout Mexico during 2015 and 2016 under any of HCE’s brands: City Express, City Express Plus, City Express Junior or City Express Suites.
In accordance with this LOI, FINN will make all the necessary investments required for the development and initiation of operations of the hotels. In addition, it established that HCE will manage operations for at least six of the properties, while FINN will manage up to 4 of them. It is relevant to note, however, that FINN is not bound to develop the 10 properties, and we do not believe it to do so as FINN’s management has reiterated their commitment of focusing on acquisitions to boost dividend /CBFI expansion in the shorter term.
87 A Portfolio That Would Make Sense To Acquire
We believe that there are interesting larger acquisition opportunities in the Mexican lodging market that could be potential targets for FINN. Particularly, after analyzing some of the other local hotel chains in the country, we have found one portfolio that would make perfect sense for FIBRA Inn’s hotel portfolio, not to mention that its owners are regios (from Monterrey) as well. This portfolio, comprised of 13 hotels in Mexico, belongs to Milenium, Mexican Hotel Group. Milenium’s portfolio is comprised by 5 full- and 8 select-service hotels with a total of 2,801 rooms. As can be observed in the exhibit below, 8 of the hotels are located in Monterrey. From the hotels, 3 operate under a local brand owned by Milenium, iStay. Relevant to note as well that the iStay MTY Centro Historico hotel is precisely the previous DoubleTree Rio hotel (Hotel Rio) where the Zorrilla family initiated its trajectory as hotel operators.
According to our estimates, this portfolio has a total value of MX$3,700 to MX$3,975 MM. We can not assure if the portfolio is available for acquisition and if it is, if it would be accretive, but at least we know it perfectly suits FINN for the following reasons: i) it belongs to an institutional player with high operating skills that could become a strategic partner; ii) given their locations, synergies could be generated with FINN’s existing hotels; iii) iStay local brand could eventually be further expanded through the FIBRA’s muscle (own brand saves on royalties); iv) FINN has sufficient fire-power to fund such potential acquisition; v) 90% of FINN’s fire-power would be deployed rapidly (timing of deployment is relevant for ST divdends /CBFI).
Hotels’ Portfolio Of Milenium Hotel Group In Mexico
Presidente Intercontinental Crowne Plaza Holiday Inn Parque Fundidora Holiday Inn Express Galerias Monterrey Monterrey Monterrey Monterrey Full-Service / 303 Rooms Full-Service / 403 Rooms Full-Service / 246 Rooms Select-Service / 170 Rooms
Holiday Inn Express Tecnologico iStay Centro Historico Crowne Plaza Holiday Inn Express Monterrey Monterrey Torreon Torreon Select-Service / 160 Rooms Full-Service / 382 Rooms Full-Service / 193 Rooms Select-Service / 165 Rooms
Holiday Inn Express Holiday Inn Express Aeropuerto iStay Holiday Inn Guanajuato Silao, Guanajuato Ciudad Victoria Tijuana Select-Service / 165 Rooms Select-Service / 165 Rooms Select-Service / 175 Rooms Select-Service / 127 Rooms
+ 1 iStay hotel located in Ciudad Juarez, from the Select-Service segment, with 147 rooms.
Source: Milenium, Actinver.
88 FIBRA Inn’s Fire-Power
After its subscription-type offering of last November, 2014, FIBRA Inn reached a total fire-power of MX$4,375 million to fund new hotel investments. Through the rights offering, the trust raised MX$2,832 million, from which it used MX$900 million to prepay its existing debt. Additionally, it had MX$1,056 million committed for announced investments from year-end 2014, which have been already liquidated. Net cash on hand should be around MX$875 MM, and the trust’s capacity of raising new debt in order to reach its target 33% loan-to-value (LTV) is MX$3,500 MM.
Guidance For 2015-2016
At the end of 2014, FINN announced its growth plans for the next couple of years, in which it expects to add 15 hotels to its portfolio during 2015, and 15 more in 2016, adding up to 45 hotels by 2015 and 60 by 2016. According to the trust, the future acquisitions will comply with the established profitability criteria, consisting of properties with stabilized NOI cap rates =10%, and the development of properties at levels higher than 11.5%. Please recall that Fibra Inn has already identified a portfolio of potential acquisitions and developments valued at MX$8.6 billion. The guidance provided by the company is in line with its capacity to invest an annual amount of MX$2,500 MM, similar to what we observed in 2014, in which FINN announced 13 acquisitions and 3 developments for a total investment of MX$2,470 MM.
Assumptions For The Use Of Fire-Power
Following the trust’s guidance and available resources, we have incorporated the following assumptions in our earnings model:
■ FINN develops 4 hotels under the HCE’s brands during 2015 and 2016. It takes 9 months for the construction and development of each hotel with 120 average rooms (480 total rooms). Contribution for the first opened hotel starts in 2Q2016, and its ramp-up stage takes 36 additional months until becoming an established hotel. The last developed hotel begins contributing by 2Q2017. The total investment considered in these 4 developments is MX$412 million. These developments represent 10.1% of FINN’s total fire-power deployment. Please recall that FIBRA Inn’s main focus is on stabilized properties and its investments will be largely targeted at acquisitions rather than developments. HCE brand hotels will generate MX$39.0 MM of NOI by 2018 (more stabilized), representing 3.7% of FINN’s total NOI. We are assuming a conservative 9.5% development cap rate here.
■ FINN acquires a total of 2,580 hotel rooms (4% limited-service, 41% select, and 55% full) during 2015 and the first half of 2016. The breakdown implies 1 limited segment hotel, 5 select and 9 full service properties. Of course we are using FINN’s average quarterly running-rate of MX$650 million of investments. 1,670 hotel rooms are acquired during 2015 and 910 additional during the 1H2016. By the end of 2Q2016 FINN would have already deployed all its fire- power, reaching a 33% LTV. Regarding the total investment for these acquisitions, of MX$3,660 million, we are expecting an implied NOI cap rate of 8.6%, which is also below FINN’s target of 10% (we are being conservative here as well).
■ FINN leaves ~MX$250 million as minimum cash balance for the long-term.
We find relevant to mention that we are not parting from an estimated or target NOI cap rate to reach NOI estimates. Instead, we are using average ADRs, occupancy levels, and average GOP margins from each of the segments (limited, select and full service) in order to reach our P&L forecasts for the acquired properties. The implied NOI cap rate is therefore a result of our revenue forecasts.
89 FIBRA Inn’s Financial Forecasts FINN: Hotel Rooms In Operation 10,000 FINN’s 2015-2016 Revenues CAGR: 8,536 8,776 9,000 30.4% 8,000 7,386 Based in our new earnings model, which we are introducing later in this report, we 7,000 expect FINN to register total FIBRA revenues of MX$1,635 million in 2015, which will represent a 90% YoY growth. Room revenues will represent 93% of total revenues. 6,000 5,071 Top line will be driven by a full year contribution from FINN’s acquired properties 5,000 during 2014, including those covered in this note, as well as by new acquisitions 4,000 3,036 assumed to be closed this year through the use of the trust’s fire-power. 3,000
TotalRooms OperationIn 2,000 Total rooms in operation will increase 46% YoY by year-end 2015 to 7,386, while 1,000 available rooms will grow 67% (the aforementioned effect from 2014 acquisitions). 0 From FINN’s announced investments we are estimating the 3 developments of 2013 2014 2015 2016 2017 Saltillo, Veracruz and Campeche to be completed (3Q2015 contribution estimated), Source: Actinver. as well as the undergoing expansion at Altamira’s Holiday Inn hotel (+105 new rooms by 2Q2015E). The consolidated occupancy rate we are expecting for the year is 63.1%, +3.3 percentage points above 2014, which occupancy was affected by room expansions at 4 of the hotels, as well as by hotel re-brandings and the ramping-up of the Aloft Guadalajara hotel. For ADRs we have an estimated average 4.9% increase for all FINN’s hotels, some of which are being inflation-adjusted, while others have higher growth rates as a result of the trust’s operating improvements. Our consolidated ADR for 2015 is MX$1,038.
For 2016 we anticipate available rooms to register an additional 30.6% increase, with total rooms in operation reaching 8,536. We expect an improvement in occupancy to 65.3%, with a 6.0% growth in ADRs (mix of new full service hotels acquired with higher fares), which will result in a 9.8% expansion in revenue per available room (RevPAR). This year 2 of the developed Hoteles City Express hotels are opened.
2015-2016 NOI & EBITDA
FINN: NOI & EBITDA Forecasts After accounting for lodging direct, indirect costs and expenses and other operating expenses (all of which we explain in “Our FINN’s Earnings Model” section of this $ 1,200 35% report) we arrive to a net operating income (NOI) of MX$616 million in 2015 (+93.3% growth YoY) and of MX$909 million for 2016 (+47.5% YoY). The implied NOI margin $ 1,000 34% for 2015 will be 37.7%, 70bps above 2014. For 2016, it will expand to 38.6% due to the benefits of a larger scale of FIBRA Inn from acquisitions (some economies of $ 800 33% scale created in administrative expenses). Our stabilized LT NOI margin is estimated at 39.5%. Our 2014-2018 NOI CAGR is 35.1%. $ 600 32%
Below the Advisory fee (now at 0.75% of GAV inflation adjusted) and other corporate USD USD (Million) $ 400 31% Margin EBITDA general and administrative expenses we reach an estimated EBITDA of MX$522 $ 200 30% million in 2015 with a 32.0% margin (+80bps versus 2014). This would represent a 94.7% YoY growth. For next year our model assumes an additional 50.1% increase $ 0 29% to MX$784 MM, with a resulting margin of 33.3%. We are expecting an increase in 2014 2015 2016 2017 2018 other corporate G&A expenses in 2015 (+40% YoY) and 2016 (+26% YoY) derived NOI ($) EBITDA ($) EBITDA Margin (%) from the trust’s larger scale. In line with FINN’s long-term guidance, we are estimating a 34.5% stabilized EBITDA margin. Our 2014-2018 EBITDA CAGR is Source: Actinver. 36.2%.
2015-2016 FFO, CAD & Distributions
Funds from operations (FFO) will amount to MX$476.2 million in 2015, giving a 29.1% FFO margin. The 2.8 percentage points difference between the EBITDA and the FFO margin comes from net interest expenses of MX$46 million. We are considering that FINN starts raising debt to funds its pipeline of investments in 2Q2015, ending the year with MX$2,105 million of debt outstanding. For 2016 the trust would have already raised MX$3,500 MM of total debt, thus our estimated FFO of MX$572 MM for that year would have a lower 24.3% margin on higher interest expenses.
90 We are adjusting the company’s FFO by leasing hotels’ maintenance CapEx, which amount to MX$41.5 million in 2015 and MX$55.9 million in 2016. We have projected maintenance Capex for all hotels as a percentage of appraisal or investments’ values, equal to 0.8% for a mature property. The resulting adjusted FFOs, or Cash Available for Distribution (CAD) for 2015 and 2016 are MX$434.8 million and MX$516.3 million, respectively.
We calculate total dividends parting from the company’s FFO after hotel maintenance CapEx. Then, from that Adjusted FFO, we subtract i) changes in working capital, excluding VAT reimbursements (as it would imply that the company distributes part of its cash from the balance); and ii) debt amortizations, but excluding balloon and bullet payments expected to be refinanced. At the end, that is the real distribution potential a FIBRA has, its free cash flow to equity (FCFE). FINN’s implied total distributions as a percentage of AFFO is 94.3% in 2015, 95.5% in 2016, and 99.5% average after- wards..
In addition, we would like to mention that FINN’s 4Q2014 dividend per CBFI will show the impact from the trust’s rights offering of November 2014, in which it increased by 69.2% the total number of CBFIs outstanding to 437 million. Thus dividend per CBFI estimated at MX$16.11 cents will be 30.6% lower as compared to the dividend distributed in 3Q2014, while as a total amount it will be 17.4% higher, of MX$70.4 million. As FINN continues acquiring new properties throughout the year, as we are already anticipating, the dividend per CBFI will continue increasing, reflecting additional value generated by the trust. For 2015 we expect it to reach MX$93.82 cents, +18.8% versus 2014. Total distributions will amount to MX$410.0 million (+76.1% YoY). For 2016, our model delivers dividend per CBFI of MX$1.12, representing a 19.4% growth YoY. Total distributions for that year will be of MX$493.0 million, +20.2% YoY. By 2018, when FINN will have already an stabilized portfolio considering HCE brand hotels, we estimate a dividend per CBFI of 1.31, +66.4% as compared to 2014. Its implied yield considering current CBFI trading prices would be 8.0%.
Total Dividends And CBFIs Forecasts FINN: Dividend /CBFI Forecasts +69.2% 450 $1.40 $600 CAGR: $1.23 $539 400 $1.12 $493 $1.20 15.8% $500 350 $410 $0.94 300 $1.00 $400 $0.79 250 $0.80 $300 $233 200 $0.60 150 $200 +9.4% YoY
$110 $113 +9.4% YoY +20.2% +20.2% YoY $90 $97 100 (Million) CBFIs Total $0.40 $70 $0.25 $0.26 +19.4% YoY $100 $59 $60 +76.1% YoY $0.23 $0.23 $0.22 Total Dividends (MX$ MM) (MX$ Dividends Total $43 $0.17 $0.20 50 $0.16 +18.8% YoY $0.20 $0 0 1Q 2Q 3Q 4Q 2014 1Q 2Q 3Q 4Q 2015 2016 2017 $0.00 1Q 2Q 3Q 4Q 2014 1Q 2Q 3Q 4Q 2015 2016 2017 Total Dividends ($) Total CBFIs Source: Actinver. Source: Actinver.
91 Dividend Discount Model (DDM) Valuation
We are reinitiating coverage on FINN with a YE2015 target price (TP) of MX$19.50 per CBFI. This fair value implies a 19.6% expected capital appreciation over FINN’s trading prices of MX$16.30. We have determined this target price through a DDM valuation model, as for FIBRAs, the expected stream of dividend distributions are easier to predict (by law, FIBRAs have to distribute at least 95% of their net fiscal income as dividends).
In our DDM valuation we are discounting total dividends per CBFI in order to reflect any potential LT dilutive effect from the issuance of new CBFIs. For now we just expect a marginal impact coming from FINN’s executive share-based compensation plan which contemplates 3.0 MM new CBFIs to be granted to its CEO in 2016.
Our MX$19.50 TP /CBFI comes along with a BUY recommendation based on: i) FINN’s appealing total return of 25.4% in 2015 (including our estimated dividend yield of 5.8%); ii) its sound growth prospects for the following years; iii) its attractive dividend /CBFI growth potential; iv) the positive outlook for the Mexican lodging sector; v) its stronger position with a renewed corporate structure to capture the benefits of the consolidation of the local industry; vi) its experienced and highly institutional management team; vii) its diversified portfolio within hotel segments and international brands; and viii) its solid profitability levels.
Dividend Discount Model (DDM) Valuation (MX$ MM) Explicit Model 2015-2025 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Terminal
Funds From Operations (FFO) $ 476 $ 572 $ 616 $ 658 $ 696 $ 733 $ 766 $ 802 $ 840 $ 884 $ 921 Funds Available For Distribution (CAD) $ 516 $ 546 $ 583 $ 617 $ 651 $ 681 $ 715 $ 750 $ 791 $ 824 Dividend Payout Ratio (% of CAD) 95.5% 98.8% 99.3% 99.5% 99.5% 99.6% 99.5% 99.5% 99.5% 99.6% Cash Distribution $ 124 $ 141 $ 172 $ 208 $ 241 $ 277 $ 305 $ 337 $ 370 $ 408 $ 440 $ 7,109 Return of Capital $ 286 $ 352 $ 367 $ 370 $ 373 $ 370 $ 373 $ 374 $ 376 $ 378 $ 381 $ 6,156 Total Dividends Paid $ 410 $ 493 $ 539 $ 578 $ 614 $ 647 $ 678 $ 711 $ 746 $ 787 $ 820 $ 13,265 Outstanding CBFIs (MM) 437.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 440.0 Total Dividends Per CBFI $ 0.938 $ 1.120 $ 1.226 $ 1.314 $ 1.395 $ 1.471 $ 1.541 $ 1.617 $ 1.696 $ 1.788 $ 1.864 $ 30.147
EQR Discount Rate [Rf+Re] 9.83% 10.43% 10.46% 10.49% 10.52% 10.56% 10.59% 10.63% 10.67% 10.71% 10.75% 10.75% 10-Year U.S. Treasury 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% + Country Risk Premium [CRP] 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% + Mx-US Inflation Spread 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Risk Free Rate [Rf] 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Real Estate (RE) Risk Premium 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% FINN Relevered Beta 0.696 0.805 0.811 0.816 0.822 0.829 0.835 0.842 0.849 0.856 0.864 0.864 EQR Risk Premium [Re] 3.83% 4.43% 4.46% 4.49% 4.52% 4.56% 4.59% 4.63% 4.67% 4.71% 4.75% 4.75% Modeled (Debt+Pref.) / Equity Ratio 29.03% 49.18% 50.24% 51.30% 52.45% 53.63% 54.83% 56.12% 57.43% 58.75% 60.18% 60.18% Loan-to-Value (LTV) (%) 24.27% 34.20% 34.29% 34.83% 35.39% 35.96% 36.55% 37.15% 37.77% 38.40% 39.04% 39.04% Present Value of Dividends /CBFI $ 1.015 $ 1.005 $ 0.975 $ 0.935 $ 0.891 $ 0.842 $ 0.797 $ 0.754 $ 0.716 $ 0.671 $ 10.856
DDM Valuation Terminal Value Cap Rate 6.18% For purposes of our DDM we emphasize the relevance of disaggregating dividends in Present Value of Terminal Value $ 10.856 the form of cash distributions (based on net income) and dividends in the form of Present Value of FCFFs $ 8.599 return of capital (based on fiscal depreciation) as cash distributions are subject to a DDM Implied Equity Value /CBFI $ 19.50 30% withholding tax payment at the investor level (except for pension funds, which Outstanding CBFIs Est. (MM) 437 are tax exempt). On the other hand, returns of capital are tax free for all investors. Fair Value per CBFI (MX$) $ 8,502
FINN Last Price per CBFI $ 16.30 It is worth recalling that this value does not incorporate any additional acquisition or Expected Return to Fair Value 19.6% development different from FIBRA Inn’s fire-power of MX$4,375 million. We are + Dividend Yield 2015E 5.8% assuming that FINN maintains its loan-to-value (non-depreciated assets) in line with Total Expected Return 25.4% its 33% target for all our explicit period, implying debt refinancing at maturity.
Implied Forward NOI Cap Rate 7.72%
92 The DDM model is based on a hotel by hotel analysis with a 10-year explicit holding period. To discount our dividend forecasts, we have calculated FIBRA Inn’s discount rate assuming a 5.0% adjusted risk-free rate (using a prospective 3.5% base 10-year U.S. Treasury [Rf] plus a country risk premium [CRP] of 1.5%), a Real Estate risk premium of 5.5%, and a 1st year levered beta of 0.696. This beta was determined through the average unlevered betas of its local and international peers.
To calculate our terminal value we have assigned a 2.59% LT growth rate, which is Mexico’s mid-cycle GDP growth rate from 1993 to 2014. We believe this is the best possible terminal growth rate we could use in our DCF for two main reasons: 1) as a lodging company, FINN’s operating performance is highly correlated to the performance of the local economy, which has experienced relevant crisis periods in the past; and 2) even that FINN will detonating an aggressive growth strategy, it should not last forever, thus, assigning a higher perpetual growth rate to our DDM would be less accurate. Our implied forward NOI cap rate at our target price is 7.72%.
Net Asset Value (NAV) Valuation Approach
We are also presenting our Net Asset Value (NAV) valuation approach for FINN. As this valuation method is static at a specific point in time, it does not reflect the long- term prospects of FINN. This is the main reason why we are not using this method as a component to determine our target price.
According to our NAV, FINN is currently trading at a 8.0% discount to its NAV, at 0.92x P /NAV. Behind this calculation, we are first valuing FINN’s real estate (RE) operations on a hotel by hotel basis. We have determined the hotels’ cap rates according to our current NOI generation estimates of each of them. This NAV is calculated using only the trust’s current announced acquisitions and developments. To calculate the FIBRA cap rate we are incorporating a 0.9% spread to account for a FIBRA premium over property-based cap rates. By dividing our estimated current NOIs by their respective adjusted cap rates, we arrive at a MX$6,071 MM value for RE Operations (MX$13.89 /CBFI).
Following that, we account for balance sheet assets by adding them to our RE Operations Value. Particularly, we add the MX$432 MM construction in progress of FINN’s 3 hotels developments of Veracruz, Campeche and Saltillo, as well as a 105- room expansion at Altamira’s Holiday Inn hotel (valued at 1.25x P/BV as these will generate NOI this year) and arrive to the Gross Real Estate (RE) Value. Cash after debt repayment (MX$996 MM), and other tangible assets (MX$276 MM) are added to the Gross Real Estate Value to reach the Gross Market Value of Assets.
Afterwards, we subtract FINN’s other liabilities (MX$149 MM) from the Gross Market Value of assets to finally arrive at the Net Market Value of Assets (NAV) of MX$7,745 MM, which results in a P/NAV of 0.92x.
93 FIBRA Inn's Current Net Asset Value (NAV) - (MX$ MM)
Nominal Premium Current FIBRA Cap Current Property FIBRA vs Annualized Value /CBFI Properties Capitalized Income Rate Rooms Value Cap Rate Prop. Cap NOI (MX$) (%) (MX$ MM) (%) Rate (%) (MX$ MM)
Hotel 1 10.2% 0.9% 9.3% $ 23 223 $ 244 $ 0.56 Hotel 2 7.1% 0.9% 6.2% $ 21 227 $ 331 $ 0.76 Hotel 3 14.4% 0.9% 13.5% $ 10 145 $ 71 $ 0.16 Hotel 4 8.8% 0.9% 7.9% $ 19 178 $ 239 $ 0.55 Hotel 5 7.6% 0.9% 6.7% $ 20 180 $ 295 $ 0.67 Hotel 6 7.0% 0.9% 6.1% $ 13 182 $ 209 $ 0.48 Hotel 7 4.0% 0.9% 6.6% $ 13 280 $ 204 $ 0.47 Hotel 8 9.3% 0.9% 8.4% $ 21 198 $ 252 $ 0.58 Hotel 9 6.2% 0.9% 6.6% $ 16 100 $ 241 $ 0.55 Hotel 27 10.9% 0.9% 10.0% $ 7 113 $ 66 $ 0.15 Hotel 28 9.8% 0.9% 8.9% $ 7 129 $ 79 $ 0.18 Hotel 29 10.5% 0.9% 9.6% $ 7 113 $ 72 $ 0.16 Hotel 30 10.1% 0.9% 9.2% $ 39 219 $ 417 $ 0.95 Hotel 31 9.3% 0.9% 8.4% $ 19 186 $ 220 $ 0.50
Real Estate (RE) Operations 7.9% $ 482 $ 6,071 $ 13.89
Balance Sheet Assets P/BV Book Value Value Value /CBFI
Construction in Progress (3 Developments + Rooms Altamira) 1.25x $ 432 $ 540 $ 1.24 Land Held for Future Development 1.00x $ 11 $ 11 $ 0.02 Total Development and Land $ 443 $ 551 $ 1.26
Gross Real Estate (RE) Value $ 6,622 $ 15.15
Cash and Cash Equivalents $ 996 $ 996 $ 2.28 Other Tangible Assets $ 276 $ 276 $ 0.63 Other Balance Sheet Assets $ 1,272 $ 1,272 $ 2.91
Gross Market Value of Assets $ 7,894 $ 18.06
Balance Sheet Liabilities Value Value /CBFI
Short-Term Debt $ - $ - $ - Long-Term Debt $ - $ - $ - Total Debt $ - $ - $ - Other Liabilities $ 149 $ 149 $ 0.34
Net Asset Value (NAV) Value Value /CBFI
Net Market Value of Assets $ 7,745 $ 17.72 Current Market Capitalization $ 7,123 $ 16.30 Premium / Discount to NAV -8.0% P/NAV 0.92x
94 Our FINN’s Earnings Model
FIBRA Inn as a lodging FIBRA or REIT, not only has a very different business model as compared to FIBRAs from other RE asset segments, but its trust structure is a completely different thing as well. This is why we developed a new earnings model for FINN, which reflects last year’s changes to its hotel revenue structure.
Regarding that, we would like to recall that as a result of legislative modifications contained in the new income tax law (effective since 2014), FINN’s Technical Committee decided to change the revenue structure of the trust in late 2013 for two main reasons: 1) to maintain strict adherence to the provisions established by the law; and 2) avoid any material impact that would affect FINN’s profitability.
Basically, what this law states is that lodging FIBRAs should only receive income originated from lodging to allow the lodging of people without receiving revenues from additional services related to hospitality, such as food, consumptions, drinks, telephone and Internet, conference rooms, among others. If its fiduciary receives income from those services, the related trust will no longer be considered a trust that meets requirements stipulated in Articles 223-224 of the ISR Law and will receive the appropriate tax treatment stipulated in terms of the tax code. FINN’s structural changes for its select, limited and full-service hotels, consist in the following:
Rental Revenues From Select And Limited Service Hotels
Lodging. This services are billed directly by FINN, which is also in charge for the payment of these services’ relative costs and expenses. As for FINN’s limited and select segment hotels, these services represent ~97% of total revenues, lodging revenues are considered rental revenues by the law.
Other Services. For the remaining services which consist of the use of meeting spaces, coffee break service, telephones, laundry and dry cleaning, and snack bars, among others from the limited and select service segments, FINN rents the facilities, directly to an operator, which provides such services. For that, FINN has established rental agreements for each of the hotels with “Operadora Mexico”. Under these agreements, FINN receives fixed rental revenues and transfers to Operadora Mexico the supply of all service other than lodging. As a result, the latter receives directly revenues from these services and becomes responsible of paying the costs and operating expenses associated with them, as well as the respective income tax. Given that other services are not relevant for these two hotel segments (~3% of total revenues), FINN has established a monthly fixed rent equivalent to 55% of the revenues from these services received by Operadora Mexico at the hotels. This way FINN receives this revenue as rent and complies with the law.
Hotel Revenues’ Treatment Under FINN’s Current Structure
Select- And Limited- Service Hotels Full Service Hotels
Lodging FIBRA Inn Lodging Services (Trust F/1616) Services FIBRA Inn (Trust F/1616) Lease Fixed And Variable Spaces Rent As % Of Lease Fixed Revenue From Spaces Rent Other Services
Other Select Other Full Operadora Mexico Services Operadora Services Mexico Trust F/1765
Source: FINN, Actinver.
95 Rental Revenues From Full Service Hotels
Lodging. This services are billed directly by FINN, which is also in charge for the payment of these services’ relative costs and expenses. In the case of FINN’s full service hotels, these services represent ~65% of total revenues, thus lodging revenues are considered rental revenues by the law as well.
Other Services. For the remaining services previously mentioned, FINN also rents the facilities, directly to an operator, which provides such services. For that, FINN has established rental agreements for each of the hotels with “Operadora Mexico”. Under these agreements, FINN receives fixed rental revenues and transfers to Operadora Mexico the supply of all service other than lodging. As for the case of full service hotels, other services represent a larger amount of total revenues (~35%), they are registered and invoiced by a different trust entity (Trust F/1765). This trust pays directly its inputs and expenses related to other full services, as well as salaries and expenses related to personnel required for the provision of such services. Gross profit derived from this operation will be then transferred to Operadora Mexico, which will pay the respective income tax. For the use of these facilities, FINN has established a monthly fixed rent as well, plus a variable rent component equivalent to an average of 15% of revenues for other full services. These revenues together represent ~27% of the total revenues received for these services. It is worth noting that the rationale for FINN to have the Trust F/1765 in between is to have a third- party entity receiving the revenue amounts on which a percentage is applied to determine the variable portion of rent at each of the full service hotels. This guarantees full independence and transparency.
Fees / Expenses Paid To Related Parties
Following the changes of the trust’s revenue structure, the roles and compensation schemes for FINN’s related parties, including its advisor, hotel operator and its pay- roll provider, remained unchanged. The advisory’s fee change applied since October, 2014, was independent from the change in the revenue structure.
Advisor. FIBRA Inn pays its external advisor a fee equivalent to 0.75% of gross real estate assets’ value (inflation-adjusted) for planning and strategic services.
FIBRA Inn’s Business Related Parties
Provides Planning And Strategic Services Advisor
Lodging FIBRA Inn Pays Fees Services (Trust F/1616) Pays Fees
Provides Payroll Pays Fees Services To Hotels Provides FIBRA Inn General Hotel Integrated Operating Hotel Operator Services Provides Services Payroll Services To Pays Fees Hotels
Operadora Mexico Pays Fees Other Services Trust F/1765
Source: FINN, Actinver.
96 Hotel Operator. The compensation structure of FINN’s hotel operator is comprised by the following fees: 1) 2.0% of revenues; and 2) 10.0% of the hotels’ GOP. These fees are divided in three equal amounts, each being paid by FINN, Operadora Mexico, and Other Services Trust (F/1765).
FIBRA Inn Integrated Services. This entity offers FINN payroll services for the hotel personnel, with the exception of general and maintenance managers, which are employed by FINN’s management subsidiary (“Administradora de Activos Fibra Inn, S.C.”). This way FINN complies with the requirements not to be considered a Passive Foreign Investment Company (PFIC) for effects of federal income tax in the U.S. and compliance with U.S. tax laws. The compensation for this outsourcing fee is 3.5% of expenses incurred by payroll, taxes and related expenses.
Operating And Revenues Model
Our model was designed to deliver complete P&L forecasts for each individual hotel, with the flexibility to do it by portfolios as well. We have performed a hotel by hotel analysis for all of FIBRA Inn’s 34 properties, including the 3 hotels under development. For new properties to be acquired and developed through the use of the trust’s fire-power during 2015 and 2016, we have used more general assumptions and packed them in 5 different portfolios.
Occupancies And Seasonality Factors
As FIBRA Inn’s hotels portfolio has not yet a much wide coverage in the country, its occupancy rates are more sensitive to seasonal and temporary factors affecting the different markets in which it has presence. For example, in 2Q2014 FINN’s consolidated RevPAR declined 10.2% vs. 1Q2014, partially due to lower demand from the Saltillo and other Bajio hotels in which room demand from the auto sector is relevant. Prior to the production of new car models which begins in September, those markets usually register a lag in activity from the auto sector. Furthermore, the ramping-up of hotels in process of stabilization currently represent a relevant impact on occupancies at the consolidated level.
For these reasons, we have estimated occupancies by hotel, and assigned them seasonality factors in order to consider Holy Week holidays in Mexico (whether they fall in 1Q or 2Q), as well as other market-specific as the ones mentioned above. This is reflected in the resulting seasonality of GOP margins.
Average Daily Rates (ADRs)
We are also projecting ADRs by hotel by similar reasons as for occupancies. As observed in some of the hotels acquired in the Bajio region, under the Mexico Plaza brand and re-branded to Wyndham Garden, FIBRA Inn was able to make a significant turnaround through its sound operating capacity, increasing ADRs by 17.5% from previous, before acquisition, levels (e.g., Wyndham Garden Leon). On the other hand, there are hotels struggling to increment its occupancy, such as Toluca’s Holiday Inn Express Tollocan, for which we assume below average growth in ADRs. Consequently, our consolidated ADRs forecasts are a mix of all individual assumptions.
We find positive that, since the acquisition announcement of the 4 Microtel Inn & Suites and the 2 Casa Grande hotels in Chihuaha, Culiacan and Toluca, FINN has been disclosing current operating information, including occupancy, ADRs and RevPARs. Besides being more transparent, which is always positively perceived by the market, this becomes very useful for estimating the hotels’ operating improvement potential. Furthermore, we believe this improves FINN’s market valuation towards its fair value (currently undervalued).
97 Lodging Direct And Indirect Costs & Expenses
In forecasting our lodging direct costs and expenses, we consider they corresponding fixed and variable portions and determine them per room available, as well as the seasonality they have throughout the year. Rooms’ costs and expenses vary by hotel, depending on their locations and segments. Other lodging operating expenses are highly correlated to rooms’ costs and expenses.
Indirect costs and expenses, which include administrative, maintenance, electricity, royalties and advertising & promotion were analyzed in order to define their variable and fixed components. We do so as we believe it is the best way to reflect the RevPAR’s effect on GOP margins, making them mobile, instead of assigning static margins for GOP forecasting independently from the hotels’ occupancy levels. The result is that this way we can reach break-even points on each of the hotels or portfolios of hotels. In the case of ramping-up hotels, this form of estimating costs and expenses turns more relevant, given the negative cash flows hotels experience at the beginning of their operations.
FIBRA Inn incurs in royalty expenses for all international and local recognized hotel brands it operates. Royalties are fees calculated as a percentage of expenses, what we do for each hotel.
Property Taxes And Insurance
Property taxes (predial) and insurance are fixed expenses which we forecast as a percentage of RE property value, for which we use the hotels’ appraisal values. These percentages, however, vary slightly, basically depending on each hotels’ location and segment, respectively.
Accounting And Fiscal Depreciations
We calculate accounting and fiscal depreciations based on 4 main components: maintenance CapEx, appraisal value, capitalized broker fees, and the hotels’ building to land ratio. Fiscal depreciation is estimated for the calculation of the trust’s net fiscal income, from which it distributes the minimum 95% in dividends as required by Mexican law.
Hotel Room Expansions & Maintenance CapEx
Expansion CapEx, referring to hotel room expansions such as the one currently undergoing in Altamira’s Holiday Inn hotel (+105 rooms) are allocated by quarters, and once finalized, are subject for our depreciation and maintenance CapEx projections. Maintenance Capex for all hotels are calculated as a percentage of appraisal or investments’ values.
In the following page we present a summarized 2014-2016 P&L output from one of FINN’s hotels (Monterrey’s Hampton Inn Galerias), as an example of how is integrated this part of the model.
98 Summarized Output Of P&L Projections For Monterrey’s Hampton Inn Galerias Hotel
FIBRA Inn: Operating Metrics / Hotels P&L Operating Metrics / Hotels Revenues / GOP / NOI / EBITDA
Period 2014 1Q2015 2Q2015 3Q2015 4Q2015 2015 2016
Initial Portfolio
Hampton Inn - Monterrey - Nuevo Leon Portfolio Initial Location Monterrey, Nuevo Leon SC Galerias Property Type Hotel 223 rooms Hotel Segment Select Service Northeast Last Avg. Daily Rate - ADR (MX$) $ 917 MX$ - Denominated Hotel Code Name MTYGA Contribution Date/Period 1Q2013 Acquisition Property Value (MX$ MM) $ 192
Operating Metrics Number of Properties 1 1 1 1 1 1 1 1 Total Rooms (Initial) 223 223 223 223 223 223 223 223 Additional Rooms 0 0 0 0 0 0 0 0 69.0% Seasonality - Occupancy 1.0000 0.9576 1.0343 0.9692 1.0389 1.0000 1.0000 Occupancy Rate 4Qs Formula Adjustment Occ. Rate Est. 68.7% 66.1% 71.4% 66.9% 71.7% 69.0% 69.0% Available Rooms 81,395 20,070 20,293 20,516 20,516 81,395 81,618 Occupied Rooms 55,853 13,261 14,483 13,720 14,707 56,170 56,323 Reported Avg. Daily Rate - ADR (MX$) $ 887 N.A. N.A. N.A. N.A. N.A. N.A. Estimated Avg. Daily Rate - ADR (MX$) $ 906 $ 968 $ 955 $ 1,000 $ 845 $ 942 $ 980 Estimated ADR (YoY Change) 43.6% 4.1% 4.2% 4.1% 3.6% 4.0% 4.0% Inflation Effect Mx 3.9% 4.1% 4.2% 4.1% 3.6% 3.6% 3.5%
Revenues Days of Contribution in Period 365 90 91 92 92 365 366 Date EoP / Contribution 31-Dec-14 31-Mar-15 30-Jun-15 30-Sep-15 31-Dec-15 31-Dec-15 31-Dec-16
Room Revenues (MX$ MM) $ 50.5 $ 12.8 $ 13.8 $ 13.7 $ 12.4 $ 52.8 $ 55.1 Other Revenues (MX$ MM) $ 1.4 $ 0.3 $ 0.4 $ 0.4 $ 0.3 $ 1.4 $ 1.5 Rental Revenues (MX$ MM) $ 0.6 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.6 $ 0.7
Gross Operating Profit (GOP)
Lodging Direct Costs & Expenses: Rooms' Costs & Expenses (MX$ MM) -$ 12.7 -$ 3.5 -$ 3.3 -$ 3.2 -$ 3.3 -$ 13.2 -$ 14.0 Other Operating Expenses (MX$ MM) -$ 0.5 -$ 0.1 -$ 0.1 -$ 0.1 -$ 0.1 -$ 0.5 -$ 0.5 Total Lodging Direct Costs & Expenses -$ 13.2 -$ 3.6 -$ 3.5 -$ 3.3 -$ 3.4 -$ 13.7 -$ 14.5
Indirect Costs & Expenses: Administrative -$ 9.1 -$ 2.6 -$ 2.6 -$ 2.5 -$ 1.7 -$ 9.4 -$ 9.9 Maintenance -$ 1.8 -$ 0.5 -$ 0.5 -$ 0.5 -$ 0.3 -$ 1.9 -$ 2.0 Electricity -$ 3.2 -$ 1.0 -$ 1.0 -$ 0.9 -$ 0.4 -$ 3.3 -$ 3.5 Royalties -$ 3.4 -$ 0.9 -$ 0.9 -$ 0.9 -$ 0.8 -$ 3.6 -$ 3.7 Advertising & Promotion -$ 2.1 -$ 0.7 -$ 0.5 -$ 0.6 -$ 0.4 -$ 2.2 -$ 2.2 Total Indirect Costs & Expenses -$ 19.6 -$ 5.6 -$ 5.5 -$ 5.5 -$ 3.7 -$ 20.3 -$ 21.3
Gross Operating Profit (GOP) (MX$ MM) $ 19.1 $ 4.0 $ 5.2 $ 5.3 $ 5.7 $ 20.2 $ 20.7 Gross Operating Profit (GOP) Margin 36.9% 30.2% 36.6% 37.6% 44.5% 37.2% 36.6%
Net Operating Income (NOI)
Property Taxes (Predial) (MX$ MM) -$ 0.2 -$ 0.04 -$ 0.04 -$ 0.04 -$ 0.04 -$ 0.2 -$ 0.2 Insurance (MX$ MM) -$ 0.1 -$ 0.02 -$ 0.02 -$ 0.02 -$ 0.02 -$ 0.1 -$ 0.1 Property Value (MX$ MM) $ 191.8 $ 191.8 $ 191.8 $ 191.8 $ 191.8 $ 191.8 $ 191.8
Net Operating Income (NOI) (MX$ MM) $ 18.9 $ 3.9 $ 5.1 $ 5.2 $ 5.6 $ 19.9 $ 20.5 Net Operating Income (NOI) Margin 36.4% 29.7% 36.2% 37.2% 44.1% 36.7% 36.2%
99 Operating Model’s Property Book As Of 4Q2014
Hotel Hotel Hotel Hotel Hotel Hotel Hotel Property Contribution Number of Number of Brand Name Code Name Region City State Location Operator Portfolio Period Properties Rooms Code 3 4 5 6 7 8 9 10 64 Total Portfolio 34 5,457 Limited Service 11 1,530 11 1,530 Wyndham Garden BJXIR Central & South Irapuato Guanajuato SC Cibeles FINN - Mexico Plaza Acquisition 3Q2013 1 102 Wyndham Garden BJXCE Central & South Celaya Guanajuato Hwy. MEX-QRO FINN - Mexico Plaza Acquisition 1Q2014 1 150 Wyndham Garden BJXLE Central & South Leon Guanajuato SC Centro Max FINN - Mexico Plaza Acquisition 1Q2014 1 126 Wyndham Garden BJXSI Central & South Silao Guanajuato Hwy. Leon-Silao FINN - Mexico Plaza Acquisition 2Q2014 1 143 Fairfield Inn & Suites VERCO Central & South Coatzacoalcos Veracruz Blvd. Costero-Zab. FINN Development 3Q2015 1 180 Fairfield Inn & Suites CAMCC Central & South Ciudad del Carmen Campeche 31 Street FINN Development 3Q2015 1 180 Microtel Inn & Suites CHHMI North Chihuahua Chihuahua Fashion Mall FINN Acquisition 4Q2014 1 108 Microtel Inn & Suites CULSI North Culiacan Sinaloa Los Angeles Hospital FINN Acquisition 4Q2014 1 113 Microtel Inn & Suites TLCMI North Toluca State of Mexico Airport FINN Acquisition 4Q2014 1 129 Microtel Inn & Suites CHHMJ North Ciudad Juarez Chihuahua SC Las Misiones FINN Acquisition 4Q2014 1 113 Wyndham Garden GDLWG West Guadalajara Jalisco Andares FINN - Mexico Plaza Acquisition 4Q2014 1 186
Select Service 13 2,457 13 2,457 Hampton Inn MTYGA Northeast Monterrey Nuevo Leon SC Galerias FINN Initial 1Q2013 1 223 Hampton Inn SLWHA Northeast Saltillo Coahuila Saltillo Airport FINN Initial 1Q2013 1 227 Hampton Inn REXHA Northeast Reynosa Tamaulipas Industrial Zone FINN Initial 1Q2013 1 145 Hampton Inn QROHT Central & South Queretaro Queretaro Tecnologico FINN Initial 1Q2013 1 178 Holiday Inn Express SLWZO Northeast Saltillo Coahuila Airport Zone FINN Initial 1Q2013 1 180 Holiday Inn Express & Suites JUAZO North Ciudad Juarez Chihuahua SC Las Misiones FINN Initial 1Q2013 1 182 Holiday Inn Express & Suites TLUZO Central & South Toluca State of Mexico Airport Zone FINN Initial 1Q2013 1 280 Holiday Inn Express & Suites MTYZO Northeast Monterrey Nuevo Leon Airport FINN Initial 1Q2013 1 198 Holiday Inn Express GDLUA West Guadalajara Jalisco UAG Op. Comercios Vallarta Acquisition IPO 2Q2013 1 199 Holiday Inn Express CUNPC Central & South Playa del Carmen Quintana Roo Playacar FINN Acquisition IPO 2Q2013 1 196 Holiday Inn Express TLUDR Central & South Toluca State of Mexico Tollocan FINN Acquisition IPO 2Q2013 1 127 Aloft GDLAL West Guadalajara Jalisco Las Americas Starwood Acquisition 2Q2014 1 142 Courtyard SLWCM Northeast Saltillo Coahuila Galerias Saltillo FINN Development 3Q2015 1 180
Full Service 10 1,470 10 1,470 Holiday Inn & Suites GDLCT West Guadalajara Jalisco Centro Historico Op. Comercios Vallarta Acquisition IPO 2Q2013 1 90 Holiday Inn MTYZV Northeast Monterrey Nuevo Leon Valle Zone FINN Acquisition IPO 2Q2013 1 198 Holiday Inn PUELN Central & South Puebla Puebla La Noria Hoteles y Centros Esp. Acquisition IPO 3Q2013 1 150 Camino Real BJXCR Central & South Guanajuato Guanajuato Ave. Alhondiga Camino Real Acquisition 3Q2013 1 105 Marriott PBCMC Central & South Puebla Puebla Hwy. MEX-PUE FINN Acquisition 3Q2013 1 192 Holiday Inn MEXCI Central & South Mexico City D.F. Calzada de Tlalpan FINN Acquisition 4Q2013 1 214 Holiday Inn TAMAL Northeast Altamira Tamaulipas Hwy. Tampico-Mante FINN Acquisition 2Q2014 1 98 Wyndham Garden CHHWG North Chihuahua Chihuahua Tecnologico Ave. FINN Acquisition 4Q2014 1 115 Casa Grande CHHDL North Delicias Chihuahua 6 Oriente Ave. FINN Acquisition 4Q2014 1 89 Crowne Plaza MTYCP Northeast Monterrey Nuevo Leon Airport FINN Acquisition 4Q2014 1 219
100 Forecasted Operating Metrics By Segments
Period 2013 2014 2015 2016 2017 2018
Operating Metrics FINN Initial Portfolio + Acquisitions Number Of Rooms 3,036 5,071 7,386 8,536 8,776 8,776 Limited Service 102 1,170 1,630 1,870 2,110 2,110 Select Service 1,985 2,277 3,127 3,508 3,508 3,508 Full Service 949 1,624 2,629 3,158 3,158 3,158 Additional Rooms 0 304 1,775 910 0 0 Limited Service 0 0 100 0 0 0 Select Service 0 150 670 381 0 0 Full Service 0 154 1,005 529 0 0 Available Rooms 538,936 1,389,628 2,323,800 3,033,816 3,178,640 3,203,240 Limited Service 18,768 185,350 511,690 637,740 745,550 770,150 Select Service 365,240 809,131 1,004,875 1,265,637 1,280,420 1,280,420 Full Service 154,928 395,147 807,235 1,130,439 1,152,670 1,152,670 Occupied Rooms 333,276 830,504 1,465,548 1,980,627 2,088,061 2,119,431 Limited Service 14,333 109,497 315,340 409,310 475,244 502,715 Select Service 217,659 472,277 621,667 804,518 830,049 832,357 Full Service 101,284 248,729 528,541 766,799 782,768 784,359 Implied Occupancy Rate (%) 61.8% 59.8% 63.1% 65.3% 65.7% 66.2% Limited Service 76.4% 59.1% 61.6% 64.2% 63.7% 65.3% Select Service 59.6% 58.4% 61.9% 63.6% 64.8% 65.0% Full Service 65.4% 62.9% 65.5% 67.8% 67.9% 68.0% Average Daily Rate (ADR) (MX$) $ 718 $ 990 $ 1,038 $ 1,101 $ 1,136 $ 1,175 Revenue Per Available Room (RevPAR) (MX$) $ 444 $ 591 $ 655 $ 719 $ 746 $ 778
Initial Portfolio Hotel Number Of Rooms 1,613 1,613 1,613 1,613 1,613 1,613 Additional Rooms 0 0 0 0 0 0 Available Rooms 296,792 588,745 588,745 590,358 588,745 588,745 Occupied Rooms 184,856 361,059 383,135 386,399 389,473 391,025 Implied Occupancy Rate (%) 62.3% 61.3% 65.1% 65.5% 66.2% 66.4% Average Daily Rate (ADR) (MX$) $ 693 $ 978 $ 1,036 $ 1,077 $ 1,118 $ 1,160 Revenue Per Available Room (RevPAR) (MX$) $ 432 $ 600 $ 674 $ 705 $ 740 $ 770
Acquisition IPO Portfolio Hotel Number Of Rooms 810 960 960 960 960 960 Additional Rooms 0 150 0 0 0 0 Available Rooms 149,040 341,490 350,400 351,360 350,400 350,400 Occupied Rooms 83,830 204,131 224,392 226,909 228,906 229,649 Implied Occupancy Rate (%) 56.2% 59.8% 64.0% 64.6% 65.3% 65.5% Average Daily Rate (ADR) (MX$) $ 675 $ 1,011 $ 1,064 $ 1,106 $ 1,145 $ 1,189 Revenue Per Available Room (RevPAR) (MX$) $ 380 $ 604 $ 681 $ 714 $ 748 $ 779
Acquisitions 2S2013-1S2014 Hotel Number Of Rooms 613 1,426 1,531 1,531 1,531 1,531 Additional Rooms 0 154 105 0 0 0 Available Rooms 93,104 433,997 549,365 560,346 558,815 558,815 Occupied Rooms 64,589 250,507 351,013 380,353 381,982 383,549 Implied Occupancy Rate (%) 69.4% 57.7% 63.9% 67.9% 68.4% 68.6% Average Daily Rate (ADR) (MX$) $ 847 $ 1,002 $ 1,064 $ 1,112 $ 1,157 $ 1,200 Revenue Per Available Room (RevPAR) (MX$) $ 588 $ 578 $ 680 $ 755 $ 791 $ 824
Developments 2014 Hotel Number Of Rooms 540 540 540 540 Additional Rooms 0 0 0 0 Available Rooms 99,360 197,640 197,100 197,100 Occupied Rooms 17,885 111,740 128,121 128,129 Implied Occupancy Rate (%) 18.0% 56.5% 65.0% 65.0% Average Daily Rate (ADR) (MX$) $ 1,029 $ 1,142 $ 1,182 $ 1,227 Revenue Per Available Room (RevPAR) (MX$) $ 185 $ 646 $ 768 $ 797
101 Forecasted Operating Metrics By Segments
Period 2013 2014 2015 2016 2017 2018
Operating Metrics Acquisitions 2S2014 Hotel Number Of Rooms 1,072 1,072 1,072 1,072 1,072 Additional Rooms 0 0 0 0 0 Available Rooms 25,396 391,280 392,352 391,280 391,280 Occupied Rooms 14,806 256,320 259,201 259,734 259,740 Implied Occupancy Rate (%) 58.3% 65.5% 66.1% 66.4% 66.4% Average Daily Rate (ADR) (MX$) $ 773 $ 914 $ 950 $ 984 $ 1,021 Revenue Per Available Room (RevPAR) (MX$) $ 451 $ 598 $ 627 $ 653 $ 678
HCITY Developments 2015-2016 Hotel Number Of Rooms 240 480 480 Additional Rooms 0 0 0 Available Rooms 41,160 150,600 175,200 Occupied Rooms 13,520 70,940 98,403 Implied Occupancy Rate (%) 32.8% 47.1% 56.2% Average Daily Rate (ADR) (MX$) $ 844 $ 875 $ 908 Revenue Per Available Room (RevPAR) (MX$) $ 277 $ 412 $ 510
Acquisitions Pipeline 2015-2016 Hotel Number Of Rooms 1,670 2,580 2,580 2,580 Additional Rooms 1,670 910 0 0 Available Rooms 344,650 900,600 941,700 941,700 Occupied Rooms 232,803 602,505 628,904 628,935 Implied Occupancy Rate (%) 67.5% 66.9% 66.8% 66.8% Average Daily Rate (ADR) (MX$) $ 1,115 $ 1,170 $ 1,215 $ 1,260 Revenue Per Available Room (RevPAR) (MX$) $ 753 $ 783 $ 811 $ 842
102 Forecasted Income Statement / Valuation Metrics
Income Statement (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Room Revenues $ 8.7 $ 8.7 $ 809.0 $ 1,513.8 $ 2,177.0 $ 2,370.0 $ 2,488.5 Rental Revenue $ 63.7 $ 166.9 $ 52.2 $ 120.8 $ 176.6 $ 187.2 $ 194.5 Other Revenue $ 10.4 $ 27.2 $ - $ - $ - $ - $ - FIBRA Revenues $ 82.9 $ 202.9 $ 861.2 $ 1,634.6 $ 2,353.6 $ 2,557.1 $ 2,683.0 YoY Change N.A. 89.8% 44.0% 8.6% 4.9%
Total Costs and Expenses Of Hotel Services -$ 12.9 -$ 24.8 -$ 542.5 -$ 1,018.6 -$ 1,439.5 -$ 1,550.3 -$ 1,614.6 Lodging Direct Costs & Expenses -$ 2.4 -$ 2.4 -$ 213.2 -$ 385.1 -$ 543.7 -$ 584.0 -$ 607.3 Indirect Costs & Expenses -$ 10.5 -$ 22.4 -$ 329.2 -$ 633.4 -$ 895.8 -$ 966.2 -$ 1,007.4 Net Operating Income (NOI) $ 70.0 $ 178.1 $ 318.7 $ 616.1 $ 908.9 $ 999.9 $ 1,060.3 YoY Change N.A. 93.3% 47.5% 10.0% 6.0% NOI Margin 84.5% 87.8% 37.0% 37.7% 38.6% 39.1% 39.5%
Advisory (Asset Management) Fee -$ 4.6 -$ 11.6 -$ 26.0 -$ 55.4 -$ 76.5 -$ 82.7 -$ 86.0 Other Corporate G&A -$ 7.3 -$ 10.9 -$ 27.4 -$ 38.4 -$ 48.6 -$ 50.4 -$ 52.3 EBITDA $ 58.3 $ 149.9 $ 268.3 $ 522.3 $ 783.8 $ 866.9 $ 922.0 YoY Change N.A. 94.7% 50.1% 10.6% 6.4% EBITDA Margin 70.3% 73.9% 31.2% 32.0% 33.3% 33.9% 34.4%
Executive Share-Based Compensation -$ 4.6 -$ 14.9 -$ 18.5 -$ 18.5 -$ 4.6 $ - $ - Depreciation -$ 36.1 -$ 48.0 -$ 108.9 -$ 185.1 -$ 227.2 -$ 232.8 -$ 235.5 EBIT $ 17.5 $ 87.1 $ 140.9 $ 318.7 $ 552.0 $ 634.0 $ 686.5 EBIT Margin 21.2% 42.9% 16.4% 19.5% 23.5% 24.8% 25.6%
Interest Expense $ - $ - -$ 27.9 -$ 64.0 -$ 221.1 -$ 263.8 -$ 276.5 Interest Income $ 8.3 $ 42.8 $ 11.9 $ 18.0 $ 9.5 $ 12.7 $ 13.0 Net Foreign Exchange (FX) Gain / Loss -$ 0.1 $ 17.0 -$ 6.4 -$ 9.8 -$ 9.2 -$ 2.7 -$ 1.6 Net Income $ 25.8 $ 146.8 $ 118.5 $ 262.9 $ 331.2 $ 380.2 $ 421.3
Net Foreign Exchange (FX) Gain / Loss $ 0.1 -$ 17.0 $ 6.4 $ 9.8 $ 9.2 $ 2.7 $ 1.6 Other Non Cash Items $ 40.7 $ 62.9 $ 127.4 $ 203.6 $ 231.8 $ 232.8 $ 235.5 Funds From Operations (FFO) $ 66.5 $ 192.7 $ 252.3 $ 476.2 $ 572.2 $ 615.7 $ 658.5 YoY Change N.A. 88.7% 20.1% 7.6% 6.9%
Maintenance CapEx -$ 4.8 -$ 16.2 -$ 14.6 -$ 41.5 -$ 55.9 -$ 69.5 -$ 75.9 Cash Available For Distribution (CAD) / AFFO $ 61.7 $ 176.6 $ 237.7 $ 434.8 $ 516.3 $ 546.2 $ 582.6
Valuation Metrics
Period 4Q2013 2013 2014 2015 2016 2017 2018
NOI Cap Rate (LTM) (%) 7.3% 7.0% 8.7% 9.5% 10.1% EBITDA Cap Rate (LTM) (%) 6.1% 5.9% 7.5% 8.3% 8.8% FFO Yield (LTM) (%) 5.3% 6.7% 8.0% 8.6% 9.2% CAD Yield (LTM) (%) 5.0% 6.1% 7.2% 7.6% 8.1% Room Revenues Yield (LTM) (%) 16.9% 21.3% 30.4% 33.0% 34.7% Annualized Dividend Yield (%) 4.6% 5.8% 6.9% 7.5% 8.1%
P/E (x) 46.2x 27.1x 21.7x 18.9x 17.0x P/FFO (x) 21.7x 15.0x 12.5x 11.6x 10.9x P/CAD (x) 23.0x 16.4x 13.9x 13.1x 12.3x P /Sales (x) 6.4x 4.4x 3.0x 2.8x 2.7x EV/EBITDA (x) 16.3x 16.9x 13.3x 12.1x 11.3x P/NAV [Book Value] (x) 0.77x 1.02x 1.04x 1.06x 1.09x
E/CBFI (MX$) $ 0.4083 $ 0.6015 $ 0.7526 $ 0.8641 $ 0.9575 FFO/CBFI (MX$) $ 0.8590 $ 1.0898 $ 1.3003 $ 1.3993 $ 1.4964 CAD/CBFI (MX$) $ 0.8086 $ 0.9948 $ 1.1734 $ 1.2413 $ 1.3239 BV/CBFI (MX$) $ 16.79 $ 16.59 $ 16.17 $ 15.83 $ 15.50 Dividend/CBFI (MX$) $ 0.7900 $ 0.9382 $ 1.1205 $ 1.2259 $ 1.3145 Growth in E/CBFI (YoY) 47.3% 25.1% 14.8% 10.8% Growth in FFO/CBFI (YoY) 26.9% 19.3% 7.6% 6.9% Growth in CAD/CBFI (YoY) 23.0% 17.9% 5.8% 6.7% Growth in Dividend/CBFI (YoY) 18.8% 19.4% 9.4% 7.2%
103 Forecasted Balance Sheet / Leverage Ratios
Balance Sheet (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Total Assets $ 4,881.9 $ 4,881.9 $ 7,475.6 $ 9,599.0 $ 10,958.5 $ 10,836.7 $ 10,710.5 Current Assets $ 585.7 $ 585.7 $ 1,445.1 $ 925.9 $ 725.6 $ 629.6 $ 663.0 Cash and Cash Equivalents $ 385.6 $ 385.6 $ 1,107.7 $ 386.7 $ 236.2 $ 201.8 $ 215.2 Trade and Account Receivables $ 6.8 $ 6.8 $ 75.4 $ 141.0 $ 202.8 $ 220.8 $ 231.8 Other Current Assets $ 193.3 $ 193.3 $ 262.1 $ 398.2 $ 286.6 $ 207.0 $ 216.0 Related Parties $ 42.7 $ 42.7 $ 42.5 $ 79.6 $ 114.4 $ 124.6 $ 130.8 Other Account Receivables $ 7.7 $ 7.7 $ 18.8 $ 35.2 $ 50.7 $ 55.2 $ 57.9 Value-Added Tax (VAT) Receivable $ 142.8 $ 142.8 $ 200.8 $ 283.4 $ 121.6 $ 27.3 $ 27.3 Non-Current Assets $ 4,296.2 $ 4,296.2 $ 6,030.5 $ 8,673.0 $ 10,232.9 $ 10,207.1 $ 10,047.5 Investment Properties / Investments In Progress & Projects $ 4,077.2 $ 4,077.2 $ 5,771.9 $ 8,414.4 $ 9,974.3 $ 9,948.5 $ 9,788.9 Equipment $ 218.9 $ 218.9 $ 258.5 $ 258.5 $ 258.5 $ 258.5 $ 258.5 Other Non-Current Assets $ - $ - $ - $ - $ - $ - $ - Other Assets, Net $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 Total Liabilities $ 304.2 $ 304.2 $ 139.8 $ 2,349.0 $ 3,842.0 $ 3,870.5 $ 3,888.0 Current Liabilities $ 301.9 $ 301.9 $ 137.6 $ 241.7 $ 339.7 $ 368.2 $ 385.7 Trade and Account Payables $ 11.3 $ 11.3 $ 56.0 $ 104.7 $ 150.6 $ 163.9 $ 172.1 Other Payables $ 4.9 $ 4.9 $ 5.3 $ 9.9 $ 14.3 $ 15.6 $ 16.3 Accounts Payable to Related Parties $ 10.0 $ 10.0 $ 22.5 $ 42.1 $ 60.6 $ 65.9 $ 69.2 Creditors for Property Acquisition $ 275.5 $ 275.5 $ 18.0 $ 18.0 $ 18.0 $ 18.0 $ 18.0 Short-Term Debt $ - $ - $ - $ - $ - $ - $ - Clients Prepayments $ 0.2 $ 0.2 $ 11.2 $ 21.0 $ 30.3 $ 32.9 $ 34.6 Other Current Liabilities $ - $ - $ 24.5 $ 45.9 $ 66.0 $ 71.9 $ 75.5 Non-Current Liabilities $ 2.3 $ 2.3 $ 2.3 $ 2,107.3 $ 3,502.3 $ 3,502.3 $ 3,502.3 Long-term Accounts Payable to Related Parties $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 $ 2.0 Employee Benefits $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 0.2 Long-Term Debt $ - $ - $ - $ 2,105.0 $ 3,500.0 $ 3,500.0 $ 3,500.0 Other Non-Current Liabilities $ - $ - $ - $ - $ - $ - $ - Shareholders Equity $ 4,577.7 $ 4,577.7 $ 7,335.8 $ 7,250.0 $ 7,116.5 $ 6,966.2 $ 6,822.4
Total Liabilities and Shareholders Equity $ 4,881.9 $ 4,881.9 $ 7,475.6 $ 9,599.0 $ 10,958.5 $ 10,836.7 $ 10,710.5
Leverage Ratios
Total Debt (MX$) $ - $ 2,105 $ 3,500 $ 3,500 $ 3,500 Net Debt (MX$) -$ 1,108 $ 1,718 $ 3,264 $ 3,298 $ 3,285 Net Debt-to-EBITDA (x) 3.3x 4.2x 3.8x 3.6x Loan-to-Value (LTV) (%) 0.0% 24.3% 34.2% 34.3% 34.8% Total Debt / Total Assets (%) 0.0% 21.9% 31.9% 32.3% 32.7% DSCR (N12M) (x) 9.63x 4.11x 3.79x 3.83x 3.99x Debt-to-Equity (D/E) (%) 0.0% 29.0% 49.2% 50.2% 51.3%
104 Forecasted Cash Flow Statement
Cash Flow Statement (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Reported Net Income $ 118.5 $ 262.9 $ 331.2 $ 380.2 $ 421.3 Non-Cash Adjustments $ 133.5 $ 213.4 $ 241.0 $ 235.5 $ 237.1 Financing Activities: Finance Costs Recognized in Profit for the Period $ 9.1 $ 64.0 $ 221.1 $ 263.8 $ 276.5 Investing Activities: Interest Income -$ 6.1 -$ 18.0 -$ 9.5 -$ 12.7 -$ 13.0 Changes in Working Capital $ 4.9 -$ 107.4 $ 138.6 $ 87.5 -$ 4.2 Operating Cash Flows $ 260.0 $ 414.9 $ 922.4 $ 954.3 $ 917.8
Acquisitions CapEx -$ 2,044.1 -$ 274.0 -$ 109.0 $ - $ - Capital Expenditures -$ 96.6 -$ 2,553.7 -$ 1,678.1 -$ 207.0 -$ 75.9 Maintenance CapEx -$ 4.0 -$ 41.5 -$ 55.9 -$ 69.5 -$ 75.9 Expansion / Development CapEx -$ 92.6 -$ 2,512.2 -$ 1,622.2 -$ 137.5 $ - Interest Income $ 6.1 $ 18.0 $ 9.5 $ 12.7 $ 13.0 Investing Cash Flows -$ 2,134.6 -$ 2,809.6 -$ 1,777.6 -$ 194.3 -$ 62.9
Creditors for Property Acquisition $ - $ - $ - $ - $ - Debt Amortizations / Repayments -$ 901.1 $ - $ - $ - $ - Debt Additions $ 901.1 $ 2,105.0 $ 1,395.0 $ - $ - Interest Expense (Cash) -$ 9.1 -$ 64.0 -$ 221.1 -$ 263.8 -$ 276.5 Equity Capital Increase (Issue of CBFIs, Net of Costs) $ 2,832.2 $ - $ - $ - $ - Equity Capital Reductions -$ 60.0 -$ 268.9 -$ 336.1 -$ 364.8 -$ 369.8 Distributions (Cash Dividends) to CBFI Holders -$ 166.4 -$ 98.4 -$ 133.1 -$ 165.8 -$ 195.3 Financing Cash Flows $ 2,596.7 $ 1,673.8 $ 704.7 -$ 794.4 -$ 841.6
Net Change in Cash and Cash Equivalents $ 722.1 -$ 721.0 -$ 150.5 -$ 34.4 $ 13.3 Cash, Cash Equivalents and Restricted Cash at BoP $ 385.6 $ 1,107.7 $ 386.7 $ 236.2 $ 201.8 FX Effect on Cash and Cash Equivalents $ - $ - $ - $ - $ - Cash, Cash Equivalents and Restricted Cash at EoP $ 1,107.7 $ 386.7 $ 236.2 $ 201.8 $ 215.2
105 Forecasted Distributions / Dividends
Distributions / Dividends (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Taxable Income (Accounting Basis) $ 118.5 $ 262.9 $ 331.2 $ 380.2 $ 421.3 + Depreciation (Accounting Basis) $ 108.9 $ 185.1 $ 227.2 $ 232.8 $ 235.5 - Depreciation (Fiscal Basis) -$ 198.1 -$ 346.1 -$ 424.2 -$ 434.7 -$ 439.6 (+/-) Valuation Adjustment to Properties $ - $ - $ - $ - $ - (+/-) Net Foreign Exchange (FX) Gain / Loss $ 6.4 $ 9.8 $ 9.2 $ 2.7 $ 1.6 Other Non-Cash Items $ 18.5 $ 18.5 $ 4.6 $ - $ - Taxable Income (Fiscal Basis) $ 54.3 $ 130.1 $ 148.0 $ 181.1 $ 218.9 Legal Distribution @ 95% $ 51.5 $ 123.6 $ 140.6 $ 172.0 $ 208.0 + Depreciation (Fiscal Basis) $ 198.1 $ 346.1 $ 424.2 $ 434.7 $ 439.6
EBITDA $ 268.3 $ 522.3 $ 783.8 $ 866.9 $ 922.0 + Non-Cash Items $ - $ - $ - $ - $ - Gross Cash Flow $ 268.3 $ 522.3 $ 783.8 $ 866.9 $ 922.0 + Interest Income $ 11.9 $ 18.0 $ 9.5 $ 12.7 $ 13.0 - Interest Expense -$ 27.9 -$ 64.0 -$ 221.1 -$ 263.8 -$ 276.5 - Unused Financing Fees $ - $ - $ - $ - $ - - Maintenance CapEx -$ 14.6 -$ 41.5 -$ 55.9 -$ 69.5 -$ 75.9 Cash Available For Distribution (CAD) / AFFO $ 237.7 $ 434.8 $ 516.3 $ 546.2 $ 582.6 - Changes in Working Capital (Exc. VAT Reimbursements) $ 62.9 -$ 24.7 -$ 23.3 -$ 6.8 -$ 4.2 VAT Reimbursements -$ 57.9 -$ 82.6 $ 161.8 $ 94.2 $ - - Debt Amortizations (Exc. Est. Refinanced Balloon / Bullet Pymts) $ - $ - $ - $ - $ - Estimated Refinanced Balloon / Bullet Debt Payments -$ 901.1 $ - $ - $ - $ - Adjusted CAD / Free Cash Flow To Equity (FCFE) $ 300.5 $ 410.0 $ 493.0 $ 539.4 $ 578.4
Total Dividends (MX$ MM)* $ 61.7 $ 182.6 $ 232.9 $ 410.0 $ 493.0 $ 539.4 $ 578.4 % of CAD (/AFFO) 99.9% N.A. 98.0% 94.3% 95.5% 98.8% 99.3% Outstanding CBFIs (MM) 258 258 437 437 440 440 440 Total Distribution (Dividends Paid) per CBFI (MX$) $ 0.2388 $ 0.7067 $ 0.7900 $ 0.9382 $ 1.1205 $ 1.2259 $ 1.3145 Dividend Yield In MX$ (@ Current CBFI Price) 1.4% 4.0% 4.6% 5.8% 6.9% 7.5% 8.1% Cash Distribution (MX$ MM) $ 7 $ 44 $ 20 $ 124 $ 141 $ 172 $ 208 Cash Dividend per CBFI (MX$) $ 0.0268 $ 0.1702 $ 0.0539 $ 0.2828 $ 0.3196 $ 0.3909 $ 0.4726 Cash Dividend Yield (@ Current CBFI Price) 0.2% 1.0% 0.3% 1.7% 2.0% 2.4% 2.9% Return of Capital (MX$ MM) $ 55 $ 139 $ 213 $ 286 $ 352 $ 367 $ 370 Return of Capital per CBFI (MX$) $ 0.2120 $ 0.5365 $ 0.7361 $ 0.6554 $ 0.8009 $ 0.8350 $ 0.8419 Return of Capital (@ Current CBFI Price) 1.2% 3.0% 4.3% 4.0% 4.9% 5.1% 5.2%
FINN Last Closing Price (MX$) $ 17.22 $ 17.22 $ 15.75 $ 16.30 $ 16.30 $ 16.30 $ 16.30 Annualized Dividend Yield 5.5% 4.0% 4.6% 5.8% 6.9% 7.5% 8.1%
106 Company Profile: FIBRA Inn (FINN) Deutsche Bank Mexico, S. A. Institucion de Banca Multiple Trust F/1616 The core CBFI Holders Structure Hotel Rooms' Breakdown By Region Asset Class / Sector(s): FIBRA / Lodging Rating BUY Country: Mexico Mkt. Cap (USD MM): 478 Control Last Price (MX$): 16.30 Mkt. Cap (MX$ MM): 7,123 Trust* 16.7% Target Price 2015 (MX$) 19.50 IPO Date: 13/03/2013 Dividend Yield 5.8% Avg. Daily $ (MX$ MM) 9.7 Total Upside Potential 25.4% Avg. Daily $ (USD MM) 0.7 Company Description FINN is a Mexican Real Estate Investment Trust (REIT) created to build, acquire, develop and lease hotel properties throughout Mexico under 3 different segments: Full, Limited and Select Service. It has 34 hotels Free with 5,716 rooms located in 14 states of Mexico (3 properties under development). FINN has franchise Float agreements with IHG, Wyndham, Hilton, Starwood and Marriott to operate their global brands (10 in total). 83.3% The company also operates the Crowne Plaza and Casa Grande hotel brands. Investment Thesis - Positives 1) Diversified portfolio: 12 hotel brands, 14 states of Mexico, 3 segments (limited, select and full service); *Control Trust: Desarrollos Del Valle, ●North ●Bajio ●Central ●South 2) High exposure to recognized global brands (96% of total); 3) Solid profitability levels on its experience as Augusta RE, Initial Trustees, Actinver. 48% 29% 20% 4% hotel operator; 4) Sound and accretive track record of investments (3,304 rooms acquired + 540 under devel., +138% vs. initial portfolio); 5) Strong growth potential through visible pipeline worth MX$8.6 Bn (67% acqs. / 33% devel.); 6) Cheap fee structure, representing 3.4% of total revs.; 7) Committed, experienced GLA Distribution by Asset Type Corporate Structure and highly institutional mgmt. team; 8) Beneficiary of structural reforms. Hoteles Prisma, Initial Founders (51%) / Investment Thesis - Risk Factors Trustees, Actinver Guests (49%) 1) Small cap FIBRA with low liquidity in the market; 2) Highly cyclical / dependent on the overall strenght of 100% Hotel 100% the country's economic growth (a slowdown has a direct and immediate impact on ADRs and occupancy 100.0% Fibra Inn Promotor levels); 3) High exposure to travel disruptions (natural disasters, security concerns, epidemics); 3) Difficulty (Payroll) Control Free Float 100% to deploy its fire-power (~MX$4.3 Bn) through new accretive acquisitions; 5) Development / Expansion risk Trust for current or new properties; 6) FIBRAs' sensitivity to interest rates; 7) Potential ST impact on dividends Advisor from the recent issuance of new CBFIs in the market. 83.3% 16.7% Income Statement (MX$ MM) Fibra Inn Integrated 2015 2016 2017 2018 Services FIBRA Inn Room Revenues 1,514 2,177 2,370 2,488 3 (F/1616) Operadora Rental Revenue 121 177 187 195 5 Mexico (Non- Lodging) FIBRA Revenues 1,635 2,354 2,557 2,683 7 Total Costs and Expenses Of Hotel Services -1,019 -1,439 -1,550 -1,615 10 Hotel Management Net Operating Income (NOI) 616 909 1,000 1,060 24 Properties Operator Subsidiary YoY Change 93.3% 47.5% 10.0% 6.0% 25 NOI Margin 37.7% 38.6% 39.1% 39.5% 26 Key Operating Metrics EBITDA 522 784 867 922 31 2015 2016 2017 2018 YoY Change 94.7% 50.1% 10.6% 6.4% 32 Total Rooms In Operation 7,386 8,536 8,776 8,776 EBITDA Margin 32.0% 33.3% 33.9% 34.4% 33 Available Rooms 2,323,800 3,033,816 3,178,640 3,203,240 Net Income 263 331 380 421 46 Implied Occupancy Rate 63.1% 65.3% 65.7% 66.2% Funds From Operations (FFO) 476 572 616 658 52 Avg. Daily Rate (ADR) - MX$ 1,038 1,101 1,136 1,175 YoY Change 88.7% 20.1% 7.6% 6.9% 53 YoY Change 4.9% 6.0% 3.2% 3.5% Cash Available For Distribution (CAD) / AFFO 435 516 546 583 59 Macroeconomic Assumptions Balance Sheet (MX$ MM) 2015 2016 2017 2018 2015 2016 2017 2018 Mx GDP Growth 2.8% 3.4% 3.8% 3.9% Total Assets 9,599 10,959 10,837 10,710 3 Mx Inflation (INPC) 3.1% 3.7% 3.8% 3.5% Current Assets 926 726 630 663 4 U.S. Inflation (CPI) 1.9% 2.6% 2.3% 2.3% Cash and Cash Equivalents 387 236 202 215 5 Valuation Metrics / Yields Restricted Cash (Reserve For Lenders) - - - - 6 2015 2016 2017 2018 Trade and Account Receivables 141 203 221 232 7 NOI Cap Rate (%) 7.0% 8.7% 9.5% 10.1% Other Current Assets 398 287 207 216 8 EBITDA Cap Rate (%) 5.9% 7.5% 8.3% 8.8% Investment Properties / Developments 8,414 9,974 9,948 9,789 14 FFO Yield (%) 6.7% 8.0% 8.6% 9.2% Total Liabilities 2,349 3,842 3,871 3,888 20 Dividend Yield (%) 5.8% 6.9% 7.5% 8.1% Current Liabilities 242 340 368 386 21 P/E (x) 27.1x 21.7x 18.9x 17.0x Trade and Account Payables 105 151 164 172 22 P/FFO (x) 15.0x 12.5x 11.6x 10.9x Short-Term Debt - - - - 26 P/CAD (x) 16.4x 13.9x 13.1x 12.3x Other Current Liabilities 46 66 72 75 28 P/NAV [Book Value] (x) 1.02x 1.04x 1.06x 1.09x Non-Current Liabilities 2,107 3,502 3,502 3,502 29 Growth in FFO/CBFI (YoY) 19.3% 7.6% 6.9% Long-Term Debt 2,105 3,500 3,500 3,500 32 Performance: Revenues (MX$ MM) / NOI and CAD Margins Other Non-Current Liabilities - - - - 33 3,000 45.0% Shareholders Equity 7,250 7,117 6,966 6,822 36 Cash Flow Statement (MX$ MM) 2,500 39.5% 40.0% 38.6% 39.1% 2015 2016 2017 2018 37.7% Reported Net Income 263 331 380 421 3 2,000 35.0% Changes in Working Capital -107 139 87 -4 9 Operating Cash Flows 415 922 954 918 10 1,500 30.0%
Acquisitions CapEx -274 -109 - - 14 Margins 26.6%
Capital Expenditures -2,554 -1,678 -207 -76 15 FIBRA Revenues 1,000 25.0% Investing Cash Flows -2,810 -1,778 -194 -63 24 21.9% 21.4% 21.7% Debt Amortizations / Repayments - - - - 27 500 20.0% Financing Cash Flows 1,674 705 -794 -842 35 Net Change in Cash and Cash Equivalents -721 -151 -34 13 37 - 15.0% 2015 2016 2017 2018 Cash and Cash Equivalents at BoP 1,108 387 236 202 38 FIBRA Revenues NOI Margin CAD Margin Cash and Cash Equivalents at EoP 387 236 202 215 40
107
Equity Research HOTELES CITY EXPRESS Equity / Lodging February 16, 2015
Hotel Engineering Reinitiation Of Coverage Buy
Local Ticker: HCITY* Last Price: MX$ 23.70 Dividend Yield 2015: 0.0% Liquidity: Medium Price Target 2015: MX$ 26.90 13.5% E. Return Total Return: 13.5% Change in Recommendation Change in T.P. Change in Estimates Quarterly Review Other Stock performance
■ We are reinstating coverage on HCITY with a year-end 2015 target price (TP) of 120 MX$26.90 per share (+13.5% capital appreciation) and a BUY recommendation. 115 ■ We like HCITY on: i) its unique, profitable and scalable fully-integrated hotel 110 business model, ii) its solid growth track record, reputation and position, iii) its 105 highly recognized brands, iv) its experienced mgmt., and v) its large diversification. 100 ■ In this report we are introducing our new HCITY’s earnings model. Furthermore, we 95 present a review on the company’s: i) business platform, ii) brands, and iii) growth Return Index 90 strategy for the coming years. 85 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 With Deep Pockets To Fund Its Aggressive LT Growth Plan. With fresh resources HCITY* IPC (MX$2,578 million) from last year’s follow-on, HCITY has the resources to continue detonating its strong growth strategy for the following years, deploying ~MX$1,600 million Market Data: per year in the construction of new hotels. We anticipate the opening of 22 hotels in 2015, including 4 hotels pending from 2014, which will lead to a 23.2% year-over-year growth in Market Cap (MX$ MM): 9,120 available rooms. Afterwards we expect the opening of 20 hotels per each 12-month cycle, as delineated in HCITY’s business LT growth strategy. For the continued expansion of its hotel Firm Value (MX$ MM): 10,002 network, the company will mainly focus on ownership and co-ownership of greenfield hotel LTM Price Range (MX$): (20.02 - 27.20) projects, representing ~75% of the company’s room expansion in the following years, while Free Float: 57% the rest will correspond basically to managed hotels. As a result we project a 2014-2017 GAGR of 18.9% in total hotel rooms, and of 24.9% in HCITY’s adjusted EBITDA. Avg. Daily Trade (MX$ MM): 10.1
Leading Hotels’ Profitability To Be More Evinced Through The Expansion Of The Hotel Management Platform. Through its integrated model, HCE is able to generate economies of scale and profitability levels like no other hotel chain in Mexico. Efficiencies are created across the board, on HCITY’s i) strong capabilities as a low-cost developer; ii) operating structure with state-of-the-art proprietary IT infrastructure; iii) proprietary marketing and distribution platforms; and iv) deep hotel management expertise. All in all, these result in a low break-even business model (at 30% occupancy) with avg. ROIC levels of 12% for its established hotels. As the operations from hotel management expand, larger economies of scale will result in a higher consolidated profitability. We anticipate an adjusted EBITDA margin expansion of 240bps by 2017 to 35.4%.
Reinitiating With A YE2015 TP Of MX$26.90 /Share And A BUY Recommendation. This fair value implies a 13.5% upside potential over its current trading prices. We have chosen a DCF valuation method to determine HCITY’s fair value as it offers a deeper longer-term look at fundamentals than other valuation methodologies. The implied forward EV /EBITDA delivered through our TP is 16.5x, which is in line with the first standard deviation and below HCITY’s average historical next-twelve-month (NTM) multiple of 17.7x.
2014 2015 2016 2017 Financials (MX$ MM) Total Revenues 1,395 1,709 2,097 2,563 Pablo E. Duarte de León Operating Profit 252 317 433 581 Real Estate EBITDA 461 558 714 908 [email protected] Adjusted EBITDA 472 568 725 920 +52 (55) 1103 6600 x4334 Majority Net Income 109 148 180 235 E/Share (MX$) 0.37 0.38 0.47 0.61 Valuation Actinver EV /Adj. EBITDA (x) 13.1x 15.3x 13.4x 11.5x Guillermo Gonzalez Camarena 1200 EBITDA Cap Rate (%) 7.5% 6.4% 7.4% 8.6% Santa Fe, Mexico City, 01210 P /E (x) 70.4x 61.6x 50.7x 38.8x Earnings Yield (%) 1.6% 1.6% 2.0% 2.6% Actinver’s Equity Research
Contents
109 Table of Contents
Executive Summary……..……………………………………. 112-113 Investment Positives ………………………………………………. 112 Investment Risk Factors ………………………………………….. 113
Fully-Integrated Hospitality Business Platform …………….….. 114-121 Low-Cost, High-Volume Hotel Developer ………...…………….. 115-116 Efficient Hotel Operating Structure ………..………….………..... 116-120 Analysis Of TripAdvisor Reviews Of HCE’s Sample Of Hotels …..…………………………………………….…………. 119 Further Efficiencies Through Environmentally-Friendly Initiatives …..…………………………………………...………. 120
HCE’s Recognized Hotel Brands ………………………...……….. 121-122
Experienced Management Team ………………………...……….. 123-124
Solid Corporate Governance ……………………………..……….. 124
HCE’s Recognized Hotel Brands …….…………………..……….. 125
HCE Financial Forecasts …..……………………………………….. 125-128 Treatment Of Consolidated Operations …………………….…... 125-126 HCITY’s 2015-2016 Revenues ………………………………...... 126-127 EBITDA / Adjusted EBITDA For 2015-2016 ….……………...... 127 2015-2016 Majority Net Income ……..………………………...... 127 Longer-Term (Remaining 9-YR Explicit Period) Assumptions ... 128
Discounted Cash Flows (DCF) Valuation Method ……………... 129-131
Our HCITY’s Earnings Model …………………………….………... 132-133 Master Property Book ………….………………………………….. 132 Occupancies / Available Rooms / ADRs …...…………………... 132 Other Revenue Lines / Costs And Expenses ….………..……... 133-134 HCITY’s Hotel Segments’ P&L Output ………………………...... 133
Operating Model’s Property Book As Of 3Q2014 …….………... 134-135
Forecasted Operating Metrics By Segments ……….…………... 136
Forecasted Income Statement / Valuation Metrics …………..... 137
110 Forecasted Balance Sheet / Leverage Ratios / Return Measures ………………………………………………...….………... 138
Forecasted Cash Flow Statement ……………...…….…………... 139
Company Profile ……………………...…………...…….…………... 140
111 Executive Summary
Hoteles City Express (HCE) is a leading fully-integrated hotel chain with most of its operations being concentrated in Mexico. It is focused on providing quality, safe and comfortable standardized accommodation, following international hospitality standards. Through its integrated platform, HCE develops, acquires, manages and franchises hotels in the economy and budget limited-service hotel segments, targeting the value-conscious business travelers through 4 brands: City Express, City Express Junior, City Express Suites and City Express Plus. It is highly diversified, with presence in 53 cities among 30 states of Mexico, and 2 properties in LatAm (Costa Rica and Colombia). HCE’s portfolio consists of 96 hotels with 10,907 rooms.
Investment Thesis: Positives
Unique, Profitable And Scalable Fully-Integrated Hotel Business Model. Through its integrated model, HCE is able to generate economies of scale and profitability levels like no other hotel chain in Mexico. Efficiencies are created across the board, on HCITY’s i) strong capabilities as a low-cost developer; ii) operating structure with state-of-the-art proprietary IT infrastructure; iii) proprietary marketing and distribution platforms; and iv) deep hotel management expertise. All in all, these result in a low break-even business model (at 30% occupancy).
Solid Track Record, Reputation And Position. Through new-construction hotels, HCE has increased its portfolio at a CAGR of 30.4% during the 2003- 2014 period. Given the positive fundamentals of the Mexican lodging industry and HCITY’s position, we expect an additional 68.2% expansion in the company’s total rooms by 2017. This will represent a 25% CAGR in adj. EBITDA.
Highly Recognized Hotel Brand. Hoteles City Express brand has become a widely recognized brand associated with superior value and consistent service for business travelers within the limited-service segment. This has been achieved through the high-quality hospitality service offered by the company’s marketing and distribution activities. HCE’s brand has a value that is not precisely recognized in its market valuation.
Scale. HCE has become the third largest hotel chain in Mexico in just a few years. By continuously gaining market share from mom & pops, it dominates the limited-service lodging segment with more than double the number of hotels from its next institutional competitor, Grupo Posadas, with its One brand. This considerable scale relative to its competitors within the segment, particularly when compared to independent hotel owners, enables HCITY to achieve further operating efficiencies generated through: i) an operation with standardized mgmt. platform and set of business guidelines; ii) working with large corporate clients; iii) negotiation at better terms with suppliers in the hospitality industry; iv) marketing strategies and programs that allow HCE to reach a larger guest base.
Experienced Management Team. HCE has an experienced and very institutional management team, like few other companies have in the lodging sector, in our view among the best in Mexico. The company’s outstanding track record and success supports our view. As previously mentioned, HCITY’s 6 top managers have a combined experience of more than 100 years in the lodging industry. They have developed more rooms than any other hotel chain during the last 5 years (with information from the Mexican Secretary of Tourism).
Large Diversification Across Mexico. With 96 hotels and 10,907 rooms in operations, through its 4 different brands, has presence in 53 cities among 30 states of Mexico, and 2 properties in LatAm (Costa Rica and Colombia). HCITY expects to increase its brand coverage in markets with a high demand of hotel rooms, in which at least one but not all of its brand have presence already.
112 Investment Thesis: Risk Factors
Lower Than Expected Economic Growth In Mexico. The lodging industry is highly cyclical and dependent on the overall strength of the country’s economic activity. Thus, a slowdown in Mexico’s economic activity will have a direct and immediate impact on average daily rates (ADRs) and occupancy levels, affecting HCITY’s hotel operations.
High Exposure To Travel Disruptions. Including those related to: i) domestic and international political and geopolitical instability that could adversely affect travel conditions; ii) security issues and criminality activity, which has been recently making noise in the states of Tamaulipas (Nuevo Laredo, Reynosa, Matamoros) Zacatecas, Guerrero and Michoacan; iii) natural disasters such as hurricanes, tsunamis, earthquakes, or other unusual weather patterns; iv) health concerns including pandemics and epidemics, such as the HINI flu, avian flu, SARS, or Ebola; v) terrorist attacks; vi) financial situation of domestic or international airlines or land transportation companies that could negatively impact the lodging industry and tourism in general.
Changes In Laws And Regulations. This includes fiscal policies and zoning ordinances and the related costs for HCITY to comply with such laws and regulations. New laws and regulations within different states could also lead to longer new-construction hotel construction and development processes.
Sensitivity To Interest Rates And FX Fluctuations. As a Real Estate (RE) company, HCE is exposed to increases in interest rates (higher costs of debt) and FX, which could reduce the availability of financial institutions to continue funding the company’s investments. Given the company’s 45% LTC financing strategy, it will need to tap the debt markets during the following years.
Expansion Outside Mexico. Even though HCITY’s growth strategy will be concentrated in the country, as it still offers significant opportunities given its low penetration levels from quality hotel room supply, the company also intends to penetrate specific markets in LatAm, where it currently has 2 properties. This strategy will bring additional different country-specific risks, such as political, geopolitical, as well as risks associated with FX, interest rates and inflation from the countries where it plans to expand, not to mention the additional time HCE’s management should dedicate to that strategy.
Development / Expansion Risk For Current Or New Properties. This includes a potential increase in construction costs, including the cost of land, cement, steel, labor, and FF&E, as well as development delays.
Oversupply Or Reduction In Demand For Hotel Rooms. With this risk we refer mainly to specific market and hotel segment conditions (not for the overall Mexican lodging industry), which would adversely affect occupancy and revenues at HCE’s hotels.
Costs Associated With Renovations. In order to maintain high quality standards and consistency across its hotels’ network, HCE needs to allocate resources for the maintenance and renovations at its operating hotels. Increases in costs associated with these renovations could deteriorate the company’s cash flow generation.
113 Fully-Integrated Hospitality Business Platform
Hoteles City Express (HCE) business model involves the full integration of hotel development, ownership, management, marketing, franchising and distribution, all in which the company has vast experience and capacity, evinced in its top-notch operating profitability levels. This model gives HCE flexibility and control with respect to its investment costs, growth profile, management, commercial strategy, distribution and guest experience.
As a fully-integrated lodging company, HCITY also has the flexibility to deploy its resources on projects that maximize ROIC, while pursuing other growth opportunities that should arise through co-investments with third-parties and management contracts. According to HCE’s management, ROIC from its hotels reached 13.4% in 2014. In 2013, the achieved average ROIC for its owned and co-owned established hotels was 12.0%.
Before going through the different business segments, we would like to note that HCE was structured as a company (C-Corp) instead as a FIBRA, as its integrated business model (highlighting its strong development capabilities) and growth strategy was more suited for this type of vehicle. Furthermore, HCE requires to reinvest all its operating cash flow in new construction hotels at this stage of the company’s growth cycle. Thus we would not expect it to distribute any dividends, at least until year-end 2019, when the company will be able to fund new investments with its own cash flow.
As we know, lodging FIBRAs are involved mainly in hotel ownership, and to a lesser extent to hotel development and management, which is left to experienced third- parties. However, FIBRA Inn might argue that it also has ample know-how as hotel operator from their past experience in Hoteles Prisma (+30 years). FINN’s hotel operator currently manages 29 of its 34 hotels (including developments for 2015).
HCITY’s Fully Integrated Hotel Business Model
Management And Marketing And Development Hotels’ Ownership Franchising Distribution
• +20,000 rooms • 35 owned hotels • 20 managed hotels • Solid brand positioning developed by HCE team • 25 co-owned hotels • 4 franchised hotels • Majority of bookings • Highly standardized through own channels • 12 leased hotels • Leading operating designs and margins in the industry. • Loyalty program: City specifications. • Main focus on owned and Premios. co-owned hotels. • Rooms’ design, furniture Low / predictable costs and standardized • Corporate contracts and Participation of 50%+ Benefits of scale on processes. local agreements. in co-owned hotels. development process. • Brand licenses through • Efficient and targeted Partners contribute the • Solid historical ROICs. Franchise Contracts. marketing. land and/or capital and • Control over knowledge on the local • High-end technology and investment’s costs. market. digital platforms.
FIBRAs
Independent Hotels
Source: HCE, Actinver.
114 Low-Cost, High-Volume Hotel Developer
One of HCITY’s key strengths deals with its strong capabilities as a developer. The company’s streamlined and systematic development processes, combined with i) its high development volume and continuous flow of construction projects, ii) highly standardized hotel designs, and iii) ample experience of third-party constructors with HCE’s hotels, allows it to benefit from economies of scale and preferential contracting and pricing for inputs. At the end this is reflected in HCE’s superior hotel profitability within the sector.
HCE’s strategy is primarily focused on greenfield hotel developments (just for reconversions of existing buildings so far), as these properties cost less than acquiring, re-modeling o re-positioning outdated properties. By doing so, the company also support the long-term value of its investments, without having to incur in significant maintenance CapEx and enables it to maintain its standards of quality and safety and achieve easier its target ROIC. HCITY has been able to develop new hotel rooms at an average cost of MX$650,000 under its City Express brand (82% of total owned and co-owned hotels), or MX$598,000 excluding properties developed in Mexico City, Costa Rica and Colombia, using the average from 2011 to 2013. To put it in perspective, announced acquisitions within the segment, from FIBRA Inn and FIBRA Hotel, averaged MX$903,000 in 2014.
Location scouting and market research process. HCITY’s development process takes 9 months on average, from ground-breaking to hotel opening. However, the strategic site location and scouting process begins ~9 months before (visibility of 18 months before opening). The company’s dedicated market research and scouting teams undertake several levels of analyses to select prime site with maximum revenue potential within these areas. HCE’s top management is deeply involved in the selection process, bringing to the table their vision on which would be the most attractive markets for the construction of new hotels according to their industrial markets’ expected N18M dynamics, as well as other lodging market characteristics. HCE’s target is to have 20 to 23 plots of land in its balance as part of its N12M growth plan. As of 3Q2014 the company had 23 land parcels without construction.
HCITY’s Hotel Development Capabilities
Proven In- House Hotel Development Expertise
Predictable Costs And Time Of Delivery
Maintenance, Renovations And Improvements
Scalable Infrastructure
International Standards
Source: HCE, Actinver.
115 After a land parcel is acquired, it then passes through the permitting, and in some cases zoning, processes which vary according to the subject municipal, state or federal requirements.
HCE’s development team has developed more Construction and development process. The company’s hotels are constructed by than ~20,000 hotel rooms in the aggregate independent contractors selected by HCE through competitive and transparent through its members careers. This is another key bidding processes based on project cost, contractor experience, track record, and difference of Hoteles City Express against other technical qualifications. HCE’s own development team follows the bidding process and realized on-site project management. Contractors follow HCE’s highly detailed market participants. and standardized designs during the construction stage, which enhances HCITY’s ability of meeting budget and timing expectations. Furthermore, the standardized room size, layout and furniture, fixtures and equipment (FF&E) contributes to the company’s efficiency and control of quality.
Renovations and improvements. For established operating hotels, the company applies a strict set of guidelines for their remodeling and general maintenance. This enables it to have better cost control with upgrades and improvements, as well as a consistent quality. In a visit I realized last week to two HCE’s hotels in Toluca, I precisely experienced an ongoing painting at the City Junior hotel, a relatively new property, just as part of its general maintenance to keep it fresh.
Efficient Hotel Operating Structure
In addition to the company’s development segment, full integration allows HCE to diversify its sources of revenues among the operation of own hotels, as well as fees collected from the management and sales platform, and fees from hotels owned by third-parties, including franchises. As both the owner and operator of hotels, HCITY can effectively implement business practices and manage hotels in a profitable way, enhancing quality, room distribution, and critical aspects related to its marketing programs, reservations and training of employees.
HCE’s hotel operation and management activities fall within its 5 different hotel segments by ownership: owned, co-owned, leased, managed and franchised. A brief description of each of these hotel segments is shown below.
Brief Description Of HCE’s Hotel Segments By Ownership
• 100% ownership by HCITY - consolidated Owned Hotels • Developed by HCE. • Prior to construction the project is approved at the relevant subsidiary. • Financed with 55% equity / 45% debt.
• 50+% ownership by HCITY - consolidated Co-Owned Hotels • Partners frequently contribute land and/or equity and provide local market insight. • Financed with a combination of equity and, to a lesser extent, debt. • Minority interest reflected on balance sheet.
• 0% ownership by HCITY – consolidated hotel revenues and op. income Leased Hotels • Lease of hotels from third-party owners. • Typical lease contracts run for 15 years, with 5-year renewal options. • Fixed lease payments depending on hotels’ total cost and variable payments as a % of room revenues in certain cases.
• 0% ownership by HCITY Managed Hotels • HCE licenses its brand to the hotel property owners under management contracts. • Typical contract has a minimum term of 15 years (5-year renewal option). • Mgmt. contracts contain right of first offer to acquire the managed hotel. • Hotels’ administration according to HCE’s established specifications. • 0% ownership by HCITY Franchised Hotels • HCE franchises its brand to 3rd party hotel owners under franchise agreements. • Minimum term of agreement is of 15 years with 5-year renewal options. • HCE is not involved in the operation, but the owner is required to meet established commercial and operating specifications and strict quality standards. Source: HCE, Actinver.
116 As of 4Q2014, the company’s total portfolio was comprised by 35 owned hotels Hotel Portfolio By Ownership 4Q2014 (36%), 25 co-owned (26%), 12 leased (13%), 20 managed (21%) and 4 franchised (4%). As we will cover in the following pages, HCE’s growth strategy will be Consolidated concentrated mainly in owned and co-owned hotels (75% of new hotel ~80% constructions), and managed third-party properties (25%). Franchised Owned 4% 36% HCE’s efficiency is not limited to its operating activities, including sales, human resources, IT infrastructure and hotel operations. It is also extended to its marketing and distribution business segment, which at the end is complimentary to the company’s hotel management. Managed 21% Sales. Starting with the sales unit, HCE has a sales department responsible for Co- monitoring each hotel’s performance and that of the local market through its Owned knowledge on it. Data analyzed includes daily occupancy rates and ADR from the Leased 26% 13% company’s hotel and those from competitors. From the development process of each hotel, this department is also in charge of developing its specific pre-opening strategy in order to reach the target occupancy levels since the beginning of its ramping-up stage. Source: HCE, Actinver. Human Resources. The company’s human resource department is responsible for maintaining adequate an well-trained staff at HCE’s hotels, while focusing on minimizing employee turnover. This department uses continuous and standardized training programs including group training, individual development and coaching by fellow employees in order to achieve objectives. HCE has employee manuals that ensure standardized training across all the company’s hotels, and it monitors their training through e-learning program, making guest experience very similar independently from the visited property. Through these initiatives, the company also lowers the staff required on each hotel. On average, its properties operate with 21 employees per 100 installed rooms (0.21 employees /room), well below the Mexican system-wide index of 0.91 employees per room.
HCE intends to continue investing in updating its IT Infrastructure. HCE uses modern and sophisticated technology that is critical to systems on a continuously basis and evaluate the the efficiency and success of its operations as it is key for price optimization and to need of new or different IT platforms to enhance maintain quality across all hotels. HCE’s proprietary state-of-the-art IT infrastructure the management and marketing of its hotels. platforms enable HCITY to monitor hotel operations and adjust to the market in real- time, manage its various reservations channels and its entire room inventory from one central repository and respond to guest needs and inquiries made throughout the network. The repository of room inventory also ensures the company to accurately and quickly manage reservations through different proprietary and third-party channels. Along its IT infrastructure, HCE has also developed web-based, digital and mobile device-based applications that allow guests to conveniently book and manage reservations. They have been well received by guests, as, according to the company, ~13% of its reservations have been made via these applications and City Access, HCITY’s internet reservation system.
Hotel Operation. We believe HCE’s top management combined 100+ years of experience in the lodging industry is key for reaching top hotel operating efficiency. Operations are led from the company’s central office in Mexico City, where managers monitor all aspects related to hotels’ performance, quality and guest service. The central administration department is in charge of monitoring all hotels and setting operating benchmarks. Along the corporate administration team, it also consolidates financial statements on a monthly basis and identifies cost-cutting opportunities. Regarding its centralized yield management, HCITY has an ADR control system for all its hotel operations, which enables it to respond in real-time to the market and adjust rates, distribution channels and marketing accordingly, very similar to how airlines work with their yield management. Regarding procurement, HCE’s scale becomes an advantage for the efficient management of supplies for all hotels. Many of the products are sourced centrally in order to benefit from more favorable prices obtained in large-scale orders, but certain products are also sourced locally, when it turns more cost-efficient (e.g. breakfast food).
117 Operating Efficiency Across The Organization
Sales Human Resources IT Infrastructure Hotel Operations
• Hotel-specific pre-opening • Focus on minimizing • Proprietary IT • Standardized job strategy. employee turnover. infrastructure platforms functions and employee enable real-time training. • Local customer • Continuous and monitoring for rapid agreements. standardized training • Elimination of non- decision making and yield programs. essential amenities. • Hotel level budgeting management. based on local market • Employee satisfaction • Centralized inventory and • State-of-the-art knowledge. surveys. yield management. reservations platform. • Economies of scale in hotel supplies procurement.
Source: HCE, Actinver.
Quality Assurance. As for the lodging industry, guest satisfaction is a key element to follow, HCITY also employs several methods of quality assurance in order to increase the likelihood that its guests receive consistent quality service. For that, it has dedicated a quality control department, and its central management carries un- announced site visits to evaluate hotels’ services, standards and image, as well as how closely on-site management is adhering to the company’s general guidelines, policies and procedures.
In addition, the company utilizes a “mystery guest” program carried out by independent third-party consultants who evaluate hotels’ facilities and service by staying as guests at the hotels on an anonymous basis. Finally, HCE also follows guests electronic surveys offered at chekout, reviews them and responds to concerns. It also monitors reviews from third-party lodging websites such as Trip- Advisor, which we believe is essential for any lodging company, and useful for us to have a better sense of the level of quality of the hotels from the companies under coverage. And just as HCE does, we have performed an analysis of TripAdvisor’s guest reviews. In this website, guests assign scores to the hotels’ in 6 categories (location, sleep quality, rooms, service, value and cleanliness) with 5 possible rating levels, from terrible (1) to excellent (5).
We used a sample covering 8 HCE’s hotels in Mexico City, as well as a random pairs in both Monterrey and Guadalajara. The average rating level for this sample was 3.5, which falls within the very good traveler experience. There was just 1 hotel rated as average, City Express Monterrey Santa Catarina. Following comments from the guests who review the hotels is also very useful for this type of analysis, we think.
TripAdvisor’s Hotel Guests Reviews
Source: TripAdvisor, Actinver.
118
Analysis Of TripAdvisor Reviews Of HCE’s Sample Of Hotels
Trip Advisor Sample Reviews On HCITY’s Hotels In Mexico City, Monterrey and Guadalajara
MEX MEX MEX
MEX MEX MEX
MEX MEX MTY
MTY GDL GDL
Source: Trip Advisor, Actinver.
119 Further Efficiencies Through Environmentally-Friendly Initiatives
In addition to the company’s consistent procurement of consistent quality and accessibility across its hotels, it builds its properties to be compliant with national and international fire, safety and environmental standards. HCE’s hotels are specifically designed to meet environmentally-friendly initiatives which further enhance operational efficiency.
The company has obtained LEED certifications (USGBC) at 6 of its hotels, and is in the process of obtaining such certification for an additional 7. Also it has 6 hotels certified by EDGE (IFC), with 8 more in process of certification. Furthermore, HCITY is in the process of having all its hotels certified by the Biosphere Responsible Tourism program, a joint certification of UNESCO and the Institute of Responsible Tourism. As of October 2014, 27 of its hotels were already certified, expecting the rest to be so by 2016.
As a result of the experience from its 6 EDGE-certified hotels, the company has reduced on average by 30% and 40% their energy and water use, respectively, as compared to similarly positioned properties as of the time of the certification.
HCE’s Green Initiatives
In HCE’s DNA. Why?
• Because it cares. • Because its guests and partners care. • Because it strictly LEED Certification EDGE Certification BiosphereBiosphere Responsible complies with regulations. (USGBC) (IFC) TourismResponsible (UNESCO)
• Because it makes • First hotel in • First certified • First hotel chain business sense. LatAm certified. building worldwide in 30% and 40% reductions worldwide. process of • 6 certified hotels in energy and water use, certification. respectively, at EDGE- +7 in process of • 6 hotels certified certified hotels. certification. +8 in process of • 28 certified hotels certification. +the rest of hotels expected to be certified by 2016. Source: HCE, Actinver.
Leading Proprietary Marketing And Distribution Platforms
HCE’s success is also deeply supported by its proprietary marketing and distribution platforms, which encompass market intelligence, marketing programs, the central reservation system (CRS), corporate sales, corporate alliances and PR & publicity. These platforms not only have positioned Hoteles City Express brand as a highly recognized brand in the country, with the status of a “well-known brand” by the Mexican Industrial Property Institute (IMPI, local intellectual property authority), but also they allow for that the majority of the bookings go through their channels. Today HCE has more than 7,500 corporate accounts and locally managed agreements, which represent ~60% of the company’s room nights occupied. 87% of total reservations are made through HCITY’s own channels (53% through its CRS and 26% through electronic channels).
HCITY additionally has several corporate alliances, mainly with airlines (Aeromexico, Interjet, Volaris and Avianca-Taca), whose clients can book room nights at HCE’s hotels simultaneously with the purchase of an airline ticket. It is worth saying that the company will continue to pursue these type of targeted marketing programs in order to increase its visibility among key populations.
120 City Premios loyalty program. Within the marketing programs, HCE has a fast- growing loyalty program named City Premios that has over 370k subscribers. Points earned through the program can be used for goods and services across a large variety of retail stores, airlines, restaurants, entertainment venues and rental car agencies. According to the latest disclosed information from HCITY, reservations at its hotels made by City Premios’ members represent 20% of all reservations.
HCITY believes that the strength of its loyalty program, in addition to the 87% of its reservations made through its proprietary reservations systems or through other direct channels or relationships, demonstrates a strong consumer identification with its brand.
HCITY’s Proprietary Marketing And Distribution Platforms
Leading Marketing And Distribution Platforms In Mexico Multi-Channel Proprietary CRS
Marketing Intelligence
Marketing Programs
Central Reservations System (CRS)
Corporate Sales
Corporate Alliances
PR And Publicity
Source: HCE, Actinver.
HCE’s Recognized Hotel Brands
Hoteles City Express targets the limited-service hotel segment, which has the highest growth potential in Mexico, economy and budget, through 4 different brands: 1) City Express, 2) City Junior, 3) City Express Plus, and 4) City Express Suites. We believe that this segment offers the greatest long-term growth opportunities in the local lodging market given the business segment it attends (the largest and fastest growing) as well as its short ‘action range’. Its compact market covers a radius of just 1 kilometer, giving it a stronger growth potential. For instance, Hoteles City Express has 2 hotels (HCE Plus and HCE) in the Paseo de la Reforma Corridor with a 4 blocks (0.5 km) distance between them, both with occupancy levels above 65%. The company finds room to have 35 hotels in the Mexico City market.
Brief descriptions of each of HCITY’s hotel brands, as well as the total number of hotels and rooms the company has on each of them as of today, are shown in the following exhibit.
121 HCE’s Four Targeted Limited-Service Hotel Brands
• Flagship brand. • Budget segment • Extended-stay • Flagship brand. brand. brand. • Essential • City Express amenities. Same quality but Apartment-style product located in Description • • smaller rooms. layout. premium locations • Economy with select design. segment. • Economy segment.
Avg. Room Size 23 sqm (248 sqf) 17 sqm (183 sqf) 30 sqm (323 sqf) 23 sqm (248 sqf)
Avg. Daily Rate MX$600 – 1,200 MX$500 - 750 MX$750 – 1,700 MX$1,000 – 1,500
Rooms Per Hotel 100 - 150 105 - 134 26 - 120 70 - 150
Number Of Hotels 72 (75%) 13 (14%) 6 (6%) 5 (5%)
Number Of Rooms 8,313 (75%) 1,484 (14%) 393 (4%) 717 (7%)
Source: HCE, Actinver.
Target: Value Conscious Business Travelers These hotel brands give service to value conscious domestic business travelers looking for comfortable accommodations with international quality and safety standards tailored to their needs at affordable prices. Through its four hotel brands, HCE offers a range of ADRs from MX$500 to MX$1,700, targeting the largest combined segments of business travelers in Mexico. The company continuously performs in-house market research to assess the effectiveness of its brand architecture and to adapt it as necessary to respond rapidly to changes in the limited- service hotel segment. This strong price-value proposition has helped HCITY to gain market share by achieving a greater penetration of its brand against other brands with which it competes in Mexico. The next exhibit shows HCE’s brand segmentation as of YE2014.
HCITY’s Market Segmentation By Brands (Announced Rate, Quality And Scale)
Target Segment Select Service $1,500 Bubble size indicates number of hotels Courtyard Source: HCE, Actinver. $1,400 Hampton Inn Hilton Garden Inn $1,300 City Plus $1,200 NH Hotels Fiesta Inn $) $1,100 Holiday Inn Express $1,000 City Suites Economy $900 Real Inn Budget Microtel $800 City Express One Hotels
Announced Rate (MX Rate Announced $700
$600 Ibis $500 City Junior Hotel Quality (Stars) $400 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 Source: Companies information, HCE, Actinver.
122 Experienced Management Team
HCE has an experienced and very institutional management team, like few other companies have in the lodging sector, in our view among the best in Mexico. The company’s outstanding track record and success supports our view. As previously mentioned, HCITY’s 6 top managers have a combined experience of more than 100 years in the lodging industry. They have developed more rooms than any other hotel chain during the last 5 years (with information from the Mexican Secretary of Tourism).
Most of the management team members have been in HCE since is foundation, and their experience encompasses key lodging areas: investment, development, financing, management, operations, marketing and distribution.
Set forth below are the name, position, and a brief description of the business experience of each Hoteles City Express’ management team members:
Luis E. Barrios Sanchez (CEO). Mr. Barrios is Chairman of the Board of Directors. Mr. Barrios has over 25 years of hospitality industry experience and has been Chairman of the Board and Chief Executive Officer since inception. Prior to co-founding our company in 2002, he held several top management positions at Grupo Posadas, one of the largest hotel operators in Latin America, including Chief Executive Officer (1994-1999) and Chief Financial Officer (1986-1993). He was responsible for leading Grupo Posadas’ IPO in 1992.
Mr. Barrios also participates in the Board of Directors of Corporacion Actinver, S.A.B. de C.V., Consejo Consultivo Metropolitano de NAFINSA, Asociacion Mexicana de Hoteles de la Ciudad de México, A.C. and Asociación Mexicana de Cadenas de Hoteles. Mr. Barrios holds a degree in Systems Engineering from the Universidad Iberoamericana, as well as a Master’s degree in Business Administration from the University of Texas.
Roberto Palacios Prieto (CFO). Mr. Palacios has been with the company since 2006. Mr. Palacios is responsible for finance, planning, administration, business development and legal activities. Mr. Palacios has managed the structuring, capital-raising and debt financing supporting the development of hotels during his tenure at Hoteles City. Prior to joining Hoteles City, Mr. Palacios served as Operations Director in Grupo Dupuis and previously worked for the investment bank- ing division of Goldman, Sachs & Co. and Protego (Evercore Partners). Mr. Palacios holds a Business Administration degree from the Instituto Tecnológico Autónomo de Mexico, as well as a Master’s degree in Business Administration from Stanford University Graduate School of Business.
Rogelio Avendaño Martinez (COO). Mr. Avendaño has been with HCE since 2003 and has over 20 years of industry specific expertise in hotel management, operations and human resources. Mr. Avendaño has had direct managerial hotel responsibilities with Posadas (in Fiesta Americana and Fiesta Inn), InterContinental Hotels Group (Crowne Plaza and Holiday Inn) and other hotel brands. Mr. Avendaño holds a degree in Business Administration and has completed advanced management studies through the IPADE and ITESM / IE executive business studies programs.
Blanca A. Herrera Colmenero (Chief Marketing and Franchise Services Officer). Ms. Herrera joined the company in 2002 and was previously a manager in the market research and marketing team of Posadas. Ms. Herrera obtained broad experience in market research by initiating her career at Fomento Turistico Banamex. Ms. Herrera has more than 20 years of experience in the tourism industry and has led the company’s marketing, commercial and distribution initiatives. Ms. Herrera holds a degree in Tourism from the National Polytechnic Institute and has completed advanced management studies through IPADE’s executive business studies program.
123 Francisco J. Fabregat Ramirez (Chief IT and Systems Officer). Mr. Fabregat has been with HCE since 2002 and previously headed the IT department at GMAC Mexico, Posadas, and Serfin (now Banco Santander). Mr. Fabregat has over 20 years of experience in technology management and IT infrastructure development. Mr. Fabregat designed the company’s IT platform and enhanced and implemented the product. Mr. Fabregat holds an engineering degree in Information Technology and Systems and various advanced certifications from IT hardware and service providers.
Abelardo Loscos Nahoul (Corporate Finance and IR Director). Mr. Loscos joined the company in 2011 and is responsible for corporate finance, risk management and investor relations activities, and reports to the Chief Financial Officer. Prior to joining the company, Mr. Loscos was Vice President of Global Banking at HSBC Mexico. He also previously worked in the investment banking division at Goldman, Sachs & Co., focusing on Latin America generally and Mexico in particular. Mr. Loscos holds a degree in Business Administration from the Instituto Tecnológico Autónomo de Mexico, as well as a Master’s degree in Business Administration from IESE Business School.
Solid Corporate Governance
On HCITY’s corporate governance we find relevant to note that it is aligned with best practices of the market. Its Board of Directors is comprised by a large majority (89%) of independent board members (8) (Armando J. Garcia Segovia, John Timothy Morris, Juan L. Elek Klein, Ricardo Maldonado Sosa, Eduardo R. Azcarraga Perez, Francisco Andragnes, Sergio del Valle Cantu, and Jose I. Mariscal Torroella). The only related member is Luis Barrios, Chairman of the Board and CEO.
HCE’s Board of Directors is comprised by 6 committees: i) Audit, ii) Corporate Practices, iii) Planning and Finance, iv) Procurement and Construction, v) Compensation, and vi) Nominating, as shown below. As required by the Mexican Securities Law, members of the Audit and Corporate Practices committees are 100% independent.
HCE’s Board Of Directors Committees
Audit Corporate Practices Planning And Finance (100% Independent) (100% Independent) (established by HCE)
Board Of Directors
Procurement And Compensation Nominating Construction (established by HCE) (3 members) (established by HCE)
Source: HCE, Actinver.
124 HCITY’s Business Growth-Strategy For The Coming Years
As stated by the company's management, HCE’s primary business growth-strategy is to continue leveraging its integrated business platform, maintaining a highly visible growth pipeline through the continuous identification of opportunities throughout Mexico. For the continued expansion of its hotel network in the country, the company will mainly focus on ownership and co-ownership of greenfield hotel projects. As we already mentioned, these two hotel types will represent ~75% of the company’s room expansion in the following years, while the rest will correspond basically to managed hotels (minimum increase in franchises). HCITY intends to grow its development capabilities up to ~20 hotels per 12-month cycles in the coming years.
Through this strategy, HCITY expects to increase its brand coverage in markets with a high demand of hotel rooms, in which at least one but not all of its brand have presence already. At the same time, the development of new hotels will continue replacing obsolete or old room inventory belonging to mom & pops (non-chained hotels), throughout the company’s target markets. It goes without saying that the company will continue rolling renovations of its existing properties to ensure that its guests can continue relying on its hotels for superior quality in its target segments.
However, HCE leaves the door open to engage in strategic and opportunistic acquisitions of existing properties in markets where there is a general scarcity of sites available for the development of new-construction hotels.
Furthermore, HCE will continue reinvesting a significant portion of its management and franchise services’ fees in its brands in order to improve further is market position in the country and to penetrate specific markets in LatAm. The latter not being contemplated in the short-term.
HCE Financial Forecasts
Treatment Of Consolidated Operations
Before going forward with our HCITY’s earnings forecasts, we would like to emphasize that the company’s consolidated operations come basically from two different business segments, or entities: the Real Estate Owner subsidiary and the Hotel Management subsidiaries. Thus, HCE’s consolidated financial statements result from the combination of the operations from hotel ownership and hotel management.
Hotel Operation. Revenues from hotel operation are basically generated from rooms and other hotel revenues from HCE’s owned, co-owned and leased hotels. Because of the company’s focus on the limited-service hospitality segment, ~95% of its hotel operation revenue is derived primarily from rooms, and ~5% from food & beverage, guest services and other amenities. Operating costs and expenses include those directly attributable to the hotels’ operation (room expenses, payroll, promotional and sales expenses, utilities, maintenance expenses, property taxes and insurance).
Hotel Management. Revenues come primarily from mgmt. fees charged to all hotels. In this unit, HCE also collects revenues from hotel development services to both own hotels (intercompany transactions), as well as to hotels owned by 3rd-parties. Selling & administrative expenses are attributable to the hotel mgmt. segment and include corporate expenses related to managing hotels on a consolidated basis. The most relevant expenses within this category include: salaries, administrative, call center, marketing & advertising, corporate office rent, legal fees and severance payments for operational staff, sales & marketing offices, hotel development and supervision teams and administration, accounting, legal corporate finance and corporate human resources and IT departments, as well as the office of the senior mgmt.
125 As HCE’s own hotels enter into the same long-term hotel mgmt. contracts with the company’s Hotel Management subsidiaries as with any 3rd-party hotel owner, the hotel management segment receives management and other fees from that segment. Under IFRS (IAS 27), these mgmt. fees charged to the hotel operation segment (accounted for as revenues in the hotel mgmt. segment) are eliminated as both revenues of the hotel mgmt. segment and expenses of the hotel operation segment, while costs and expenses of the hotel mgmt. segment are not eliminated.
HCE's Corporate Structure
Hoteles City Express
Hotel Ownership Hotel Management And Franchising
Owned Hotels Co-Owned Hotels Leased Hotels M anaged Hotels Franchised Hotels
Ownership 100% 50%+ 0% 0% 0%
Revenues Room Revenues Room Revenues Room Revenues M anagement Fees Royalties' Fees Other Revenues Other Revenues Other Revenues Incentive Fees Bookings' Fees M arketing Fees M arketing Fees Development Fees Development Fees Pre-Operating Fees Pre-Operating Fees
Eliminations Eliminations
Costs & Expenses Lodging Direct Lodging Direct Lodging Direct S&A Expenses S&A Expenses Indirect Costs Indirect Costs Indirect Costs Property Taxes Property Taxes Property Taxes Insurance Insurance Insurance Hotel M anagement Hotel M anagement Hotel M anagement Pre-Operating Pre-Operating Pre-Operating Leasing Of Properties
D&A Hotels D&A Hotels D&A Equipment D&A Equipment D&A Equipment
Corporate Expenses
Consolidated Other Income / Non-Recurring Expenses Net Financial Result Income Taxes
M inorities M inority Interest
Bottom Line Majority Net Income
Source: HCE, Actinver.
HCITY’s 2015-2016 Revenues
We expect HCE to open 22 new hotels in 2015 (+2,640 rooms), reaching 118 hotels, and 20 more in 2016 (+2,400 rooms), leading to 138 total hotels. For 2015 we are including the 4 properties that have been already announced but have not yet opened. The resulting anticipated rooms’ growth will be of 24.2% in 2015 and 17.7% in 2016.
Following the company’s growth strategy, we are assuming that 75% of the new- construction hotels will correspond to owned and co-owned hotels, with a blended 78% ownership. The remaining 25% is for managed hotels. We are not including any additional franchised hotel for the next years.
Based in our new earnings model, which we are introducing in the “Our HCITY’s Earnings Model” section, we expect HCITY to reach MX$1,709 MM of consolidated revenues (+22.5% YoY) in 2015, consisting of MX$1,618 MM of revenues from hotel operation (+22.0% YoY), and MX$90.9 MM of hotel mgmt. (+31.1% YoY).
126 For 2016 we anticipate total revenues of MX$2,097 million (MX$2,001 MM from hotel operation and MX$95.9 MM from hotel management), representing a 22.7% YoY increase.
We have reached these revenue forecasts by assuming a 58.3% consolidated occupancy for the 4.43 million available rooms expected for 2015. By hotels’ maturity we anticipate a 63.4% occupancy for established hotels (59.8% of the total) and of 49.9% for non-established hotels (40.2% of the total). As we will show in major detail in the next section, we have built our revenues and operating model in such a way that it separates established from non-established hotels according to each hotel’s months in operations. For non-established properties we assign general ramp-up assumptions for their 36-month maturity phase. Once matured, our model makes their transition to the established hotels’ segment. Our estimated occupancy rates are a reflection of that.
Turning to 2016, we expect consolidated occupancy to reach 59% (64% of established hotels, and 52.3% of non-established). As the years pass and HCE’s portion of non-established hotels decrease, occupancy levels will get closer to those of established hotels at ~64%. In a similar way, cash flow generation will increase, with pre-operating expenses and development CapEx becoming smaller.
Regarding average daily rates (ADRs), we expect a 3.0% YoY increase in 2015 to MX$769, and of 3.7% YoY in 2016 to MX$797. New, non-established hotels have been opened with ~10% higher ADRs, which in the long-run will generate a consolidated above-inflation growth.
EBITDA / Adjusted EBITDA For 2015-2016
It is worth noting that HCITY isolates EBITDA from pre-operating expenses from new hotels in order to reach a normalized, adjusted EBITDA, as during the company’s strong-growth phase, these expenses become more relevant and distorts its real operating cash flow generation capacity.
For 2015 HCITY will register a 21.1% increase in its EBITDA, which will amount to MX$558 million, a 32.6% margin. The adjusted EBITDA will be MX$568.1 million (+33.2% YoY), with a resulting 33.8% margin. For 2016 we expect a MX$713.9 MM EBITDA (34.0% margin, +36.5% YoY change) and an adjusted EBITDA of MX$724.7 million (34.6% margin, +27.6% YoY expansion).
2015-2016 Majority Net Income
At the bottom line we expect HCITY to register MX$148.0 million in 2015, represent- ing a 35.6% YoY growth. By share, earnings will be of MX$34.46 cents, a +4.1% increase taking into consideration the company’s ~MX$2,578 MM follow-on (+109.7 million new shares, 40% of previous total outstanding). The consequent net margin will be of 8.7% this year.
Behind this line we also consider MX$163.1 MM of interest expenses from the total debt at year-end of MX$2,811 million. Following its investment plan, we are assuming that HCITY will continue with its 45% loan-to-cost (LTC) financing strategy. Cash on hand will generate MX$67.8 MM interests during the year, and income tax expenses will reduce EBT by MX$49.6 MM. For the latter we are contemplating a 22% effective tax rate, in line with the company’s expectations. Non-controlling interests, which we estimate based on net income generated by co-owned hotels and the corresponding stake on them of HCITY’s partners, are estimated at MX$28.0 million. For next year we anticipate majority net income of MX$179.9 million with an 8.6% margin.
127 Longer-Term (Remaining 9-YR Explicit Period) Assumptions
For the rest of our model’s explicit period (9 more years), we are assuming the following:
■ The company opens 20 new hotels from 2017 to 2019, reaching a total of 198. Before 2019 ends, according to our model, HCE will have enough potential as to fund further growth (20 hotels per year) going forward with its own cash flow generation capacity. Evidently, we are maintaining the company’s 45% LTC financing strategy. For 2020 we assume that HCITY opens half of the hotels (10) and stops there, leaving the remaining 5 years of our explicit period with no additional hotels. We are doing so as to better reflect HCITY’s long term cash flow generation potential and to avoid leaving 1) all of our DCF’s fair value to terminal assumptions, and 2) the model’s last year cash flow with a relevant amount of CapEx, that at the end will results in a less accurate valuation (perpetuity growth and other assumptions left to the analyst’s criteria in order to reach a fair value).
■ For our long-term ADRs we are just assigning a Mexican inflation growth rate, besides the aforementioned effect from higher ADRs in new non-established hotels.
■ For established hotels, occupancies are left in stable mature 64% levels.
■ Debt is refinanced, maintaining a loan-to-value (to depreciated properties’ value) of 36.5%.
■ We are not considering any dividends’ distribution.
Our valuation assumptions are included in the following section.
128 Discounted Cash Flows (DCF) Valuation Method
We are reinitiating coverage on HCITY with a year-end 2015 target price (TP) of MX$26.90 per share. It implies a 13.5% upside potential over its current trading prices. We have chosen a DCF valuation method to determine HCITY’s fair value as it offers a deeper longer-term look at fundamentals than other valuation methods.
Given HCE’s long-term growth story, it is precisely the method that suits better for it, in our view. A multiples valuation becomes less accurate and more assumptions- driven, as the company’s forward multiples are not comparable to multiples from the rest of its local and global competitors. On the other hand, a Sum-Of-The-Parts (SOTP) methodology, if performed by independent DCF’s for each of the business units (hotel management and hotel operation), becomes quite challenging given their relevant intercompany transactions. At the end, we have forecasted our cash flows for each of the two business segments, which should result in the same consolidated DCF valuation.
Discounted Cash Flows (DCF) Model (MX$ MM) Explicit Model 2015-2025 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Terminal
Operating Profit (EBIT) $ 317 $ 433 $ 581 $ 703 $ 828 $ 942 $ 1,023 $ 1,072 $ 1,117 $ 1,167 $ 1,215 Cash Taxes -$ 50 -$ 61 -$ 80 -$ 94 -$ 114 -$ 135 -$ 153 -$ 169 -$ 185 -$ 202 -$ 220 Effective Cash Tax Rate 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% NOPLAT $ 267 $ 372 $ 501 $ 609 $ 714 $ 808 $ 870 $ 903 $ 932 $ 965 $ 995 Depreciation & Amortization (D&A) $ 241 $ 281 $ 328 $ 376 $ 427 $ 472 $ 501 $ 507 $ 512 $ 519 $ 525 Maintenance CapEx -$ 66 -$ 78 -$ 93 -$ 110 -$ 128 -$ 147 -$ 163 -$ 174 -$ 180 -$ 186 -$ 192 Expansion / Development CapEx -$ 1,450 -$ 1,540 -$ 1,598 -$ 1,570 -$ 1,533 -$ 711 $ - $ - $ - $ - $ - Changes in Working Capital (ΔWC) $ 11 $ 14 $ 17 $ 17 $ 18 $ 17 $ 11 $ 6 $ 6 $ 6 $ 6 Free Cash Flow to the Firm (FCFF) -$ 996 -$ 951 -$ 846 -$ 678 -$ 502 $ 439 $ 1,220 $ 1,242 $ 1,271 $ 1,304 $ 1,334 $ 21,953
EQR Discount Rate [Rf+Re] 10.98% 11.27% 11.55% 11.46% 11.37% 11.41% 11.30% 11.20% 11.10% 11.01% 10.91% 10.91% 10-Year U.S. Treasury 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% + Country Risk Premium [CRP] 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% + Mx-US Inflation Spread 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% Risk Free Rate [Rf] 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Real Estate (RE) Risk Premium 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% HCITY Relevered Beta 0.905 0.959 1.008 0.993 0.977 0.983 0.964 0.945 0.927 0.910 0.894 0.894 EQR Risk Premium [Re] 4.98% 5.27% 5.55% 5.46% 5.37% 5.41% 5.30% 5.20% 5.10% 5.01% 4.91% 4.91% After-Tax Cost of Debt [Kd (1-T)] 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% 4.87% Effective Cash Tax Rate 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.0% 22.00% Modeled (Debt+Pref.) / Equity Ratio 39.02% 47.23% 54.82% 52.54% 50.03% 50.94% 48.02% 45.16% 42.40% 39.74% 37.20% 37.20% WACC 8.59% 8.25% 7.88% 8.00% 8.12% 8.08% 8.21% 8.34% 8.46% 8.57% 8.66% 8.66% Present Value of FCFFs -$ 879 -$ 727 -$ 538 -$ 367 $ 297 $ 760 $ 709 $ 664 $ 622 $ 581 $ 9,563
DCF Valuation Our MX$26.90 /share TP comes along with a Buy recommendation. Besides its attractive upside potential, we like HCITY for the following reasons: 1) it is well Present Value of Terminal Value $ 9,563 positioned, with very-well recognized brands, in the hotel segment with the highest Present Value of FCFFs $ 1,122 LT growth potential, to continue benefiting from the consolidation of the Mexican Firm Value $ 10,686 lodging industry; 2) its sound LT growth potential (adjusted EBITDA CAGR of +25% Net Debt -$ 450 for 2014-2017); 3) its solid profitability (ROIC of 12% of established hotels), achieved Non-Controlling Interest $ 784 through efficiencies generated across its fully-integrated business model; 4) its DCF Implied Equity Value $ 10,351 experienced and highly institutional management team; 5) the solid momentum Outstanding Shares Est. (MM) 385 experienced in the local lodging sector; and 6) the company’s strong growth track- Fair Value per Share (MX$) $ 26.90 record through new-construction hotels. HCITY Last Price per CBFI $ 23.70 Expected Return to Fair Value 13.5% DCF assumptions: To discount our FCFF forecasts, we have calculated HCITY’s + Dividend Yield 2015E 0.0% discount rate assuming a 6.0% adjusted risk-free rate (using a prospective 3.5% Total Expected Return 13.5% base 10-year U.S. Treasury [RF] plus a country risk premium [CRP] of 1.5% and a Mx-U.S. inflation spread of 1.0%), a Real Estate risk premium of 5.5%, and an Implied FWD EV /EBITDA 16.5x unlevered beta of 0.651, which results in a 0.905 levered beta for 2015.
129 We determined our target beta for HCITY by considering the average betas from its local competitors, and its global lodging peers (Accor, Choice, Hilton, Marriott, Wyndham, Millennium, InterContinental, NH and La Quinta). Our final 0.651 beta was basically reached through the average from these peers (90% weight). For the remaining 10% weight we also took into account HCITY’s statistical beta for the last 2 years.
We are using evolving WACCs in our DCF in order to account for changes in equity [EQR] discount rate, the cost of debt [Kd] and HCITY’s modeled (Debt + Preferred) / Equity ratio. For the first year of our DCF, the resulting EQR and WACC are 10.98% and 8.59% respectively.
To calculate our terminal value we have assigned a 2.59% LT growth rate, which is Mexico’s mid-cycle GDP growth rate from 1993 to 2014. We believe this is the best possible terminal growth rate we could use in our DCF for two main reasons: 1) as a lodging company, HCITY’s operating performance is highly correlated to the performance of the local economy, which has experienced relevant crisis periods in the past; and 2) even that HCE will continue executing its aggressive growth strategy, it should not last forever, thus, assigning a higher perpetual growth rate to our DCF would be less accurate.
The implied forward EV /EBITDA delivered through our MX$26.90 /share TP is 16.5x, which is in line with the first standard deviation (16.5x) and is below HCITY’s average historical next-twelve-month (NTM) multiple of 17.7x. It is even below HCITY’s current forward multiple of 17.0x, which is at an 4% discount to the historical average.
HCITY: Forward (NTM) EV /EBITDA Multiple
21.0x
20.0x
19.0x 18.7x
18.0x 17.6x
17.0x 17.0x
16.5x NTM EV /EBITDA (x) 16.0x
15.0x
14.0x Jul-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14
Source: HCITY, Bloomberg, Actinver.
As compared to its global peers, HCITY trades at a 17% premium in terms of 2015’s estimated EV /EBITDA multiple, and of 12% for 2016, which we believe is justified given HCITY’s superior operating profitability, growth prospects, and its solid position in Mexico’s growing quality lodging market. As compared to the local peers, which are basically lodging FIBRAs, HCITY trades at more similar multiple and implied EBITDA cap rate levels, even at slight discounts, when it has higher profitability levels. Nonetheless, as local peers belong to a different asset class (meaning FIBRAs, not straight equity) they are not 100% comparable.
130 Relative Valuation Of Selected Lodging Peers
Tic ke r Compa ny Country La st Pric e Market Cap EV/EBITDA (LTM) EBITDA Cap Rate EBITDA Margin EBITDA Growth Na me (Loc a l $ ) (USD) 2 0 15 E 2 0 16 E 2 0 15 E 2 0 16 E 2 0 15 E 2 0 16 E 2 0 15 E 2 0 16 E
C- Corps AC FP Accor France $ 45.41 $ 11,955 11.1x 10.1x 9.0% 9.9% 17.9% 18.9% 11.0% 9.7% CHH.US Choice U.S. $ 61.75 $ 3,593 17.3x 15.4x 5.8% 6.5% 29.9% 30.2% 9.2% 8.6% HLT.US Hilton U.S. $ 28.57 $ 28,131 13.7x 11.9x 7.3% 8.4% 24.6% 25.2% 10.6% 10.9% MAR.US Marriott U.S. $ 79.40 $ 22,497 15.2x 13.8x 6.6% 7.3% 11.5% 11.8% 12.2% 9.9% WYN.US Wyndham U.S. $ 90.57 $ 10,919 9.4x N.A. 10.7% N.A. 24.1% 24.2% 6.1% 5.3% MLC.LN Millennium U.K. $ 560.50 $ 2,794 10.1x 10.4x 9.9% 9.6% 27.3% 28.0% 5.9% 5.6% IHG.LN InterContinental U.K. $ 2,588 $ 9,382 13.5x 12.2x 7.4% 8.2% 42.2% 43.3% 10.3% 9.0% NHH.SM NHH Spain $ 4.54 $ 1,806 15.3x 12.3x 6.5% 8.2% 11.7% 13.4% 20.8% 21.6% LQ.US La Quinta U.S. $ 21.59 $ 2,822 10.9x 9.7x 9.1% 10.4% 38.6% 39.5% 8.4% 8.9%
Average C- Corps $ 10 ,4 3 3 12 .9 x 12 .0 x 8 .0 % 8 .5 % 2 5 .3 % 2 6 .1% 10 .5 % 10 .0 %
FIBRAs / REITs FINN13.MM FIBRA Inn Mexico $ 16.30 $ 477 16.9x 13.3x 5.9% 7.5% 32.0% 33.3% 94.7% 50.1% FIHO12.MM FIBRA Hotel Mexico $ 20.30 $ 638 21.8x 14.1x 4.6% 7.1% 25.0% 27.1% 42.7% 65.5%
Average FIBRAs / REITs $ 5 5 8 19 .4 x 13 .7 x 5 .2 % 7 .3 % 2 8 .5 % 3 0 .2 % 6 8 .7 % 5 7 .8 %
HCITY*.MM Hoteles City Me xic o $ 2 2 .7 0 $ 6 12 15 .5 x 13 .6 x 6 .4 % 7 .4 % 3 2 .6 % 3 4 .0 % 2 1.1% 2 8 .0 %
Source: Bloomberg's consensus, Actinver.
131 Our HCITY’s Earnings Model
With this report we are also introducing our completely new earnings model for HCITY. The model was developed in such a way we could rapidly incorporate every single new hotel opening announcement, without losing any details along the company’s consolidated operations, which we described before.
Master Property Book
Our operating and revenues model begin with a master book in which all existing properties and assumed new-construction hotels for the years to come, are introduced. Regarding our pipeline assumed hotels, we introduce expected opening dates for each of them (this way we can distribute more precisely openings through- out the years), as well as the type of investment (by ownership with a respective percentage / hotel segment) and number of rooms. With that inputs our model recognized the hotel’s land acquisition (considering a 18-month visibility period) going backwards, as well as its CapEx deployment during its construction and development phase. For each hotel brand we have also forecasts on cost per key. Previous to the opening of the hotel our model also reflects its respective pre- operating expenses.
Occupancies / Available Rooms / ADRs
Depending on the opening date of each of the hotels, our model recognizes if it is a non-established or an established property, separating them in these two drawers. This is basically done so we can better sensitize the ramping-up stage (occupancy rates) of the non-established hotels, which lasts 36 months in average. For that we have incorporated a maturity curve which applies the same for all hotels, which we believe is valid considering the company’s large diversification by markets and brands. Once a non-established hotel reaches maturity at month 36, it makes an automatic transition to the established hotels’ drawer.
As new hotels today still represent a relevant portion of the company’s total rooms, we are also sensitizing the days of operations each new opened hotel will have during the quarter depending on its opening date, so our available rooms’ forecasts are more precise.
We will not go at major detail on ADRs, but they are basically estimated by hotel segment.
Other Revenue Lines / Costs And Expenses
Regarding costs and expenses, which include lodging direct (rooms’ costs and personnel) and indirect expenses (general & administrative, advertising & promotion, energy, maintenance) we have considered their fix (~40%) and variable portions (~60%) and forecasted them by available rooms as to have the occupancy and ADR sensitivity reflected in our gross operating profit (GOP) margins, which, as a consequence are not static and do reflect swings in occupancies. For instance, with an occupancy of 30%, our hotels’ EBITDA margin go to break-even. Other below the GOP line expenses such as property taxes and insurance are estimated separately. Certain differences such as leasing expenses from leased hotels are also considered. Please recall that leasing contracts run for 15 years, with fixed payments depending on the hotels’ total cost and variable payments as a % of room revenues in certain areas.
Forecasts for hotel management are a little bit more sophisticated as we have to consider 8 different types of fees, 3 of which depend whether the hotel is managed or franchised and 2 apply to all HCITY’s hotels, which at the end derive in some eliminations from intercompany operations. Hotel development fees become quite relevant as they represent a large portion of the hotel management segment’s net revenues (39% in 2015).
132 Selling and administrative expenses are forecasted differently, depending on whether they are “fixed” (inflation-adjusted kind of) expenses or variable. All of these expenses include salaries, phone & communication, leasing of properties (different from the ones of leased hotels), agencies’ commissions, professional & legal fees, travel expenses, advertising, rent of equipment, maintenance and others.
HCITY’s Hotel Segments’ P&L Output
Next we present the summarized output of our P&L statements by hotel segments, which are the result of our operating and revenues models. It is worth noting that we present the summarized output of our operating model as well in the following pages, along with our forecasted consolidated financial statements.
HCITY: Hotel Segments' P&L
Period 2014 2015 2016 2017 2018
HCITY Consolidated (Hotel Operation + Hotel Management) Hotel Operation Revenues (MX$ MM) $ 1,332.3 $ 1,617.8 $ 2,001.4 $ 2,449.7 $ 2,915.3 Room Revenues $ 1,245.1 $ 1,512.0 $ 1,870.5 $ 2,289.5 $ 2,724.6 Other Revenues $ 87.2 $ 105.8 $ 130.9 $ 160.3 $ 190.7 Net Hotel Management Revenues (MX$ MM) $ 69.4 $ 90.9 $ 95.9 $ 113.3 $ 128.6 HCITY Consolidated Revenues (MX$ MM) $ 1,401.7 $ 1,708.7 $ 2,097.4 $ 2,563.0 $ 3,043.9 Hotel Operating Costs And Expenses -$ 748.0 -$ 921.1 -$ 1,123.5 -$ 1,360.5 -$ 1,634.6 Selling And Administrative Expenses -$ 192.8 -$ 220.1 -$ 249.9 -$ 283.7 -$ 319.5 Hotel Pre-Operating Expenses -$ 12.4 -$ 10.4 -$ 10.7 -$ 11.1 -$ 11.6 Hotel Operation And Management EBITDA (MX$ MM) $ 448.5 $ 557.2 $ 713.3 $ 907.6 $ 1,078.2
Hotel Operation Room Revenues (MX$ MM) $ 1,245.1 $ 1,512.0 $ 1,870.5 $ 2,289.5 $ 2,724.6 Other Revenues $ 87.2 $ 105.8 $ 130.9 $ 160.3 $ 190.7 Total Hotel Revenues (MX$ MM) $ 1,332.3 $ 1,617.8 $ 2,001.4 $ 2,449.7 $ 2,915.3 Total Lodging Direct Costs & Expenses -$ 328.9 -$ 408.7 -$ 504.8 -$ 617.9 -$ 749.2 Total Indirect Costs & Expenses -$ 334.4 -$ 415.5 -$ 513.2 -$ 628.2 -$ 761.6 Gross Operating Profit (GOP) (MX$ MM) $ 669.0 $ 793.6 $ 983.3 $ 1,203.6 $ 1,404.5 Gross Operating Profit (GOP) Margin 50.2% 49.1% 49.1% 49.1% 48.2% Net Operating Income (NOI) (MX$ MM) $ 649.6 $ 769.5 $ 954.1 $ 1,168.3 $ 1,362.7 Net Operating Income (NOI) Margin 48.8% 47.6% 47.7% 47.7% 46.7% Leasing Of Properties -$ 49.3 -$ 56.1 -$ 58.9 -$ 61.2 -$ 63.4 Corporate Expenses -$ 16.0 -$ 16.6 -$ 17.2 -$ 17.9 -$ 18.5 Hotel Pre-Operating Expenses -$ 12.4 -$ 10.4 -$ 10.7 -$ 11.1 -$ 11.6 Hotel Management Expenses -$ 278.4 -$ 338.1 -$ 418.3 -$ 512.0 -$ 609.3 Other Eliminations -$ 2.7 -$ 3.2 -$ 4.0 -$ 4.9 -$ 5.8 Hotel Operation EBITDA (MX$ MM) $ 290.8 $ 345.0 $ 444.9 $ 561.2 $ 654.0
Hotel Management Third-Parties Hotel Operation Room Revenues (MX$ MM) $ 338.5 $ 473.5 $ 616.0 $ 764.0 $ 904.5 Room Revenues Of Managed Hotels $ 274.2 $ 405.8 $ 545.2 $ 690.8 $ 828.4 Room Revenues Of Franchised Hotels $ 64.3 $ 67.8 $ 70.8 $ 73.3 $ 76.0 Other Revenues $ 23.7 $ 33.1 $ 43.1 $ 53.5 $ 63.3 Total Hotel Revenues (MX$ MM) $ 362.2 $ 506.7 $ 659.1 $ 817.5 $ 967.8 Total Revenues Of Managed Hotels $ 293.3 $ 434.2 $ 583.4 $ 739.1 $ 886.4 Total Revenues Of Franchised Hotels $ 68.8 $ 72.5 $ 75.7 $ 78.4 $ 81.3 Total Lodging Direct Costs & Expenses -$ 90.9 -$ 129.6 -$ 166.2 -$ 204.9 -$ 248.7 Total Indirect Costs & Expenses -$ 92.4 -$ 131.8 -$ 168.9 -$ 208.3 -$ 252.9 Gross Operating Profit (GOP) (MX$ MM) $ 178.9 $ 245.3 $ 324.0 $ 404.3 $ 466.2 Gross Operating Profit (GOP) Margin 49.4% 48.4% 49.2% 49.5% 48.2% GOP Of Managed Hotels $ 144.5 $ 209.1 $ 286.3 $ 365.7 $ 426.9 GOP Of Franchised Hotels $ 34.4 $ 36.2 $ 37.7 $ 38.7 $ 39.3 HCITY's Hotel Management Hotel Mgmt. Revenues From 3rd Party Hotels (MX$ MM) $ 34.0 $ 47.3 $ 62.1 $ 77.4 $ 90.6 Revs. From Hotel Mgmt. Of HCITY's Hotel Operation (MX$ MM) $ 278.4 $ 338.1 $ 418.3 $ 512.0 $ 609.3 Gross Hotel Management Revenues (MX$ MM) $ 393.6 $ 515.6 $ 603.8 $ 718.2 $ 834.3 Eliminations -$ 324.3 -$ 424.7 -$ 507.8 -$ 604.9 -$ 705.7 Net Revenues Hotel Management (MX$ MM) $ 69.4 $ 90.9 $ 95.9 $ 113.3 $ 128.6 Selling And Administrative Expenses -$ 5.8 -$ 6.6 -$ 7.5 -$ 8.5 -$ 9.6 Hotel Operation EBITDA (MX$ MM) $ 63.6 $ 84.3 $ 88.5 $ 104.8 $ 119.0
133 Operating Model’s Property Book As Of 4Q2014
Current Current Non- Hotel Hotel Investment Hotel Hotel Hotel Hotel Opening Number Of Number Of Hotel Hotel Established Established Number Name Type Ownership Country Location Region Date Properties Rooms Age (Years) Maturity Rooms Rooms Code Consolidated HCITY 90 10,204 5.3 6,625 3,579
Hotel Operation 68 7,900 5.1 5,222 2,678 Owned Hotels 31 3,743 5.8 2,634 1,109 City Express Junior 2 234 5.5 234 N.A. 37 Mexicali Owned 100% Mexico Baja California North 1-Feb-09 1 106 6.0 Established 106 N.A. 47 Ciudad Juárez Owned 100% Mexico Chihuahua North 1-Mar-10 1 128 5.0 Established 128 N.A.
City Express 25 2,998 6.5 2,013 985 1 Saltillo Owned 100% Mexico Coahuila North 1-May-03 1 120 11.8 Established 120 N.A. 2 San Luis Owned 100% Mexico San Luis Potosi North 1-Jul-03 1 120 11.6 Established 120 N.A. 3 Monterrey Santa Catarina Owned 100% Mexico Nuevo Leon North 1-Oct-03 1 105 11.4 Established 105 N.A. 4 Querétaro Owned 100% Mexico Queretaro Bajio 1-Nov-03 1 121 11.3 Established 121 N.A. 5 León Owned 100% Mexico Guanajuato Bajio 1-Dec-03 1 120 11.2 Established 120 N.A. 7 Puebla Owned 100% Mexico Puebla Central 1-May-04 1 124 10.8 Established 124 N.A. 10 Irapuato Owned 100% Mexico Guanajuato Bajio 1-Nov-04 1 104 10.3 Established 104 N.A. 17 Guadalajara Owned 100% Mexico Jalisco Bajio 1-Jul-06 1 145 8.6 Established 145 N.A. 19 Mexicali Owned 100% Mexico Baja California North 1-Dec-06 1 117 8.2 Established 117 N.A. 20 Toluca Owned 100% Mexico State of Mexico Central 1-Dec-06 1 141 8.2 Established 141 N.A. 21 EBC Reforma Owned 100% Mexico Mexico City Central 1-Jan-07 1 70 8.1 Established 70 N.A. 30 Lázaro Cárdenas Owned 100% Mexico Michoacan Bajio 1-Nov-08 1 119 6.3 Established 119 N.A. 33 Silao Owned 100% Mexico Guanajuato Bajio 1-Dec-08 1 121 6.2 Established 121 N.A. 35 Monterrey Aeropuerto Owned 100% Mexico Nuevo Leon North 1-Dec-08 1 130 6.2 Established 130 N.A. 40 Los Mochis Owned 100% Mexico Sinaloa North 1-Jun-09 1 124 5.7 Established 124 N.A. 49 Nogales Owned 100% Mexico Sonora North 1-Nov-10 1 109 4.3 Established 109 N.A. 56 Aguascalientes Owned 100% Mexico Aguascalientes Bajio 29-Aug-11 1 123 3.5 Established 123 N.A. 61 Manzanillo Owned 100% Mexico Colima Bajio 16-Nov-11 1 116 3.2 Established N.A. 116 63 Ciudad Obregon Owned 100% Mexico Sonora North 31-Jan-12 1 120 3.0 Established N.A. 120 64 Campeche Owned 100% Mexico Campeche Southeast 5-Apr-12 1 110 2.9 Non-Established N.A. 110 66 Villahermosa Owned 100% Mexico Tabasco Southeast 24-Jul-12 1 127 2.6 Non-Established N.A. 127 69 San José Owned 100% Costa Rica Costa Rica Costa Rica 7-Nov-12 1 134 2.3 Non-Established N.A. 134 71 Tijuana Insurgentes Owned 100% Mexico Baja California North 20-Dec-12 1 127 2.1 Non-Established N.A. 127 78 La Paz Owned 100% Mexico Baja California Sur North 20-Dec-13 1 124 1.1 Non-Established N.A. 124 80 Cali Owned 100% Colombia Colombia Colombia 20-Dec-13 1 127 1.1 Non-Established N.A. 127
City Express Suites 1 91 6.2 91 N.A. 34 Toluca Owned 100% Mexico State of Mexico Central 1-Dec-08 1 91 6.2 Established 91 N.A.
City Express Plus 3 420 5.0 296 124 24 Insurgentes Sur Owned 100% Mexico Mexico City Central 1-Jul-07 1 159 7.6 Established 159 N.A. 36 El Angel Owned 100% Mexico Mexico City Central 1-Jan-09 1 137 6.1 Established 137 N.A. 77 Patio Universidad Owned 100% Mexico Mexico City Central 18-Dec-13 1 124 1.2 Non-Established N.A. 124
Co-Owned Hotels 25 2,893 2.5 1,674 1,219 City Express Junior 3 371 2.6 134 237 42 Tijuana Co-Owned 50% Mexico Baja California North 1-Jun-09 1 134 5.7 Established 134 N.A. 79 Puebla Autopista Co-Owned 50% Mexico Puebla Central 20-Dec-13 1 113 1.1 Non-Established N.A. 113 84 Cd. Del Carmen Aeropuerto Co-Owned 50% Mexico Campeche Southeast 17-Feb-14 1 124 1.0 Non-Established N.A. 124
City Express 19 2,252 4.7 1,540 712 9 Ciudad Juárez Co-Owned 50% Mexico Chihuahua North 1-Oct-04 1 114 10.4 Established 114 N.A. 11 Reynosa Co-Owned 50% Mexico Tamaulipas North 1-Feb-05 1 104 10.0 Established 104 N.A. 18 Tampico Co-Owned 50% Mexico Tamaulipas North 1-Nov-06 1 124 8.3 Established 124 N.A. 22 Hermosillo Co-Owned 50% Mexico Sonora North 1-Apr-07 1 120 7.9 Established 120 N.A. 25 Coatzacoalcos Co-Owned 50% Mexico Veracruz Southeast 1-Aug-07 1 118 7.5 Established 118 N.A. 31 Pueb la Angelópolis Co-Owned 50% Mexico Puebla Central 1-Nov-08 1 118 6.3 Established 118 N.A. 48 Poza Rica Co-Owned 50% Mexico Veracruz Southeast 1-Mar-10 1 118 5.0 Established 118 N.A. 50 San Luis Univ. Co-Owned 50% Mexico San Luis Potosi North 1-Dec-10 1 109 4.2 Established 109 N.A. 51 Minatitlán Co-Owned 50% Mexico Veracruz Southeast 1-Mar-11 1 109 4.0 Established 109 N.A. 52 Mérida Co-Owned 50% Mexico Yucatan Southeast 1-Apr-11 1 130 3.9 Established 130 N.A. 54 Culiacan Co-Owned 50% Mexico Sinaloa North 1-Jun-11 1 133 3.7 Established 133 N.A. 58 Playa del Carmen Co-Owned 50% Mexico Quintana Roo Southeast 13-Sep-11 1 135 3.4 Established 135 N.A. 59 Puebla Autopista Co-Owned 50% Mexico Puebla Central 4-Oct-11 1 108 3.4 Established 108 N.A. 62 Ciudad del Carmen Co-Owned 50% Mexico Campeche Southeast 20-Dec-11 1 129 3.2 Established N.A. 129 67 Queretaro Jurica Co-Owned 50% Mexico Queretaro Bajio 25-Sep-12 1 135 2.4 Non-Established N.A. 135 68 Durango Co-Owned 50% Mexico Durango North 16-Oct-12 1 120 2.3 Non-Established N.A. 120 81 Cananea Co-Owned 50% Mexico Sonora North 10-Dec-13 1 98 1.2 Non-Established N.A. 98 82 Irapuato Norte Co-Owned 50% Mexico Guanajuato Bajio 20-Dec-13 1 122 1.1 Non-Established N.A. 122 86 Dos Bocas Tabasco Co-Owned 50% Mexico Tabasco Southeast 29-May-14 1 108 0.7 Non-Established N.A. 108
City Express Suites 2 111 0.9 N.A. 111 74 Santa fe Co-Owned 50% Mexico Mexico City Central 15-Aug-13 1 39 1.5 Non-Established N.A. 39 89 Puebla Autopista Co-Owned 50% Mexico Puebla Central 26-Sep-14 1 72 0.4 Non-Established N.A. 72
City Express Plus 1 159 1.7 N.A. 159 73 Santa fe Co-Owned 93% Mexico Mexico City Central 15-Jun-13 1 159 1.7 Non-Established N.A. 159
134 Operating Model’s Property Book As Of 4Q2014
Current Current Non- Hotel Hotel Investment Hotel Hotel Hotel Hotel Opening Number Of Number Of Hotel Hotel Established Established Number Name Type Ownership Country Location Region Date Properties Rooms Age (Years) Maturity Rooms Rooms Code Leased Hotels 12 1,264 7.1 914 350 City Express Junior 5 529 4.9 423 106 27 Toluca Leased 0% Mexico State of Mexico Central 1-Feb-08 1 106 7.0 Established 106 N.A. 45 Cancun Leased 0% Mexico Quintana Roo Southeast 1-Nov-09 1 106 5.3 Established 106 N.A. 46 Tlaquepaque Leased 0% Mexico Jalisco Bajio 1-Feb-10 1 107 5.0 Established 107 N.A. 55 Veracruz Leased 0% Mexico Veracruz Southeast 1-Jul-11 1 104 3.6 Established 104 N.A. 60 Tuxtla Gutierrez Leased 0% Mexico Chiapas Southeast 28-Oct-11 1 106 3.3 Established N.A. 106
City Express 6 709 5.5 465 244 12 Cancun Leased 0% Mexico Quintana Roo Southeast 1-Mar-05 1 128 10.0 Established 128 N.A. 23 Celaya Leased 0% Mexico Guanajuato Bajio 1-May-07 1 104 7.8 Established 104 N.A. 26 Tepozotlán Leased 0% Mexico State of Mexico Central 1-Dec-07 1 109 7.2 Established 109 N.A. 43 Veracruz Leased 0% Mexico Veracruz Southeast 1-Sep-09 1 124 5.5 Established 124 N.A. 72 Chetumal Leased 0% Mexico Quintana Roo Southeast 6-Mar-13 1 109 1.9 Non-Established N.A. 109 88 D.F. Central de Abastos Leased 0% Mexico Mexico City Central 18-Sep-14 1 135 0.4 Non-Established N.A. 135
City Express Suites 1 26 10.9 26 N.A. 6 Anzures Leased 0% Mexico Mexico City Central 1-Apr-04 1 26 10.9 Established 26 N.A.
City Express Plus 0 N.A. N.A. N.A. N.A.
Pipeline Hotels - Hotel Operation 81 N.A. -2.5 N.A. N.A. Average All-Brands 81 N.A. -2.5 N.A. N.A. 93 Monterrey Nuevo Sur Owned 100% Mexico Nuevo Leon North 18-Dec-14 1 N.A. 0.2 Non-Established N.A. N.A. 94 Matamoros Owned 100% Mexico Tamaulipas North 22-Dec-14 1 N.A. 0.1 Non-Established N.A. N.A. 95 Salamanca Owned 100% Mexico Guanajuato Bajio 23-Dec-14 1 N.A. 0.1 Non-Established N.A. N.A. 96 Villahermosa Owned 100% Mexico Tabasco Southeast 28-Dec-14 1 N.A. 0.1 Non-Established N.A. N.A.
Hotel Management 22 2,304 5.4 1,403 901 Managed Hotels 18 1,911 3.7 1,010 901 City Express Junior 1 109 1.0 N.A. 109 83 Cd. Del Carmen Isla de Tris Managed 0% Mexico Campeche Southeast 13-Feb-14 1 109 1.0 Non-Established N.A. 109
City Express 15 1,637 4.3 965 672 8 Nuevo Laredo Managed 0% Mexico Tamaulipas North 1-Aug-04 1 107 10.5 Established 107 N.A. 13 Tepatitlán Managed 0% Mexico Jalisco Bajio 1-Apr-05 1 80 9.9 Established 80 N.A. 28 Mazatlán Managed 0% Mexico Sinaloa North 1-Jun-08 1 110 6.7 Established 110 N.A. 32 Tijuana Río Managed 0% Mexico Baja California North 1-Dec-08 1 131 6.2 Established 131 N.A. 39 Tula Managed 0% Mexico Hidalgo Bajio 1-Mar-09 1 103 6.0 Established 103 N.A. 41 Zacatecas Managed 0% Mexico Zacatecas North 1-Jun-09 1 109 5.7 Established 109 N.A. 44 Saltillo Sur Managed 0% Mexico Coahuila North 1-Dec-09 1 107 5.2 Established 107 N.A. 53 Torreón Managed 0% Mexico Coahuila North 1-May-11 1 115 3.8 Established 115 N.A. 57 Buenavista Managed 0% Mexico Mexico City Central 5-Sep-11 1 103 3.4 Established 103 N.A. 70 Xalapa Managed 0% Mexico Veracruz Southeast 11-Dec-12 1 126 2.2 Non-Established N.A. 126 75 Oaxaca Managed 0% Mexico Oaxaca Southeast 2-Oct-13 1 103 1.4 Non-Established N.A. 103 76 Salina Cruz Managed 0% Mexico Oaxaca Southeast 23-Oct-13 1 116 1.3 Non-Established N.A. 116 85 Tehuacan Puebla Managed 0% Mexico Puebla Central 26-Mar-14 1 108 0.9 Non-Established N.A. 108 87 Monterrey Norte Managed 0% Mexico Nuevo Leon North 12-Aug-14 1 115 0.5 Non-Established N.A. 115 90 Apizaco Managed 0% Mexico Tlaxcala Central 29-Sep-14 1 104 0.4 Non-Established N.A. 104
City Express Suites 2 165 5.9 45 120 15 Querétaro Managed 0% Mexico Queretaro Bajio 1-Dec-05 1 45 9.2 Established 45 N.A. 65 San Luis Potosi Managed 0% Mexico San Luis Potosi North 23-Jul-12 1 120 2.6 Non-Established N.A. 120
City Express Plus 0 N.A. N.A. N.A. N.A.
Franchised Hotels 4 393 7.1 393 N.A. City Express Junior 1 105 6.0 105 N.A. 38 Chihuahua Franchised 0% Mexico Chihuahua North 1-Mar-09 1 105 6.0 Established 105 N.A.
City Express 3 288 8.3 288 N.A. 14 Tuxtla Gutiérrez Franchised 0% Mexico Chiapas Southeast 1-Dec-05 1 124 9.2 Established 124 N.A. 16 Chihuahua Franchised 0% Mexico Chihuahua North 1-Mar-06 1 104 9.0 Established 104 N.A. 29 Morelia Franchised 0% Mexico Michoacan Bajio 1-Jul-08 1 60 6.6 Established 60 N.A.
City Express Suites 0 N.A. N.A. N.A. N.A.
City Express Plus 0 N.A. N.A. N.A. N.A.
Pipeline Hotels - Hotel Management 30 N.A. -2.2 N.A. N.A. Average All-Brands 30 N.A. -2.2 N.A. N.A. 91 Ciudad Victoria Managed 0% Mexico Tamaulipas North 29-Oct-14 1 N.A. 0.3 Non-Established N.A. N.A. 92 D.F. Satélite Managed 0% Mexico Mexico City Central 31-Oct-14 1 N.A. 0.3 Non-Established N.A. N.A.
135 Forecasted Operating Metrics By Segments
Period 2014 2015 2016 2017 2018
Operating Metrics HCITY Initial Portfolio + Acquisitions Number Of Rooms 10,907 13,547 15,947 18,347 20,747 Established 6,976 8,095 9,329 10,907 13,547 Non-Established 3,931 5,452 6,618 7,440 7,200 Additional Rooms 1,578 2,640 2,400 2,400 2,400 Available Rooms 3,596,193 4,430,095 5,266,962 6,129,415 7,005,415 Established 2,333,848 2,747,122 3,148,325 3,702,310 4,607,455 Non-Established 1,262,345 1,682,973 2,118,637 2,427,105 2,397,960 Occupied Rooms 2,132,532 2,581,438 3,118,713 3,689,083 4,246,746 Established 1,455,973 1,742,162 2,011,375 2,365,469 2,944,210 Non-Established 676,558 839,276 1,107,338 1,323,613 1,302,536 Implied Occupancy Rate (%) 59.3% 58.3% 59.2% 60.2% 60.6% Established 62.4% 63.4% 63.9% 63.9% 63.9% Non-Established 53.6% 49.9% 52.3% 54.5% 54.3% Average Daily Rate (ADR) (MX$) $ 746 $ 769 $ 797 $ 827 $ 854 Established $ 724 $ 745 $ 770 $ 799 $ 829 Non-Established $ 794 $ 818 $ 845 $ 877 $ 910 Revenue Per Available Room (RevPAR) (MX$) $ 442 $ 448 $ 472 $ 498 $ 518 Established $ 451 $ 473 $ 492 $ 511 $ 530 Non-Established $ 426 $ 408 $ 442 $ 478 $ 494
Hotel Operation Number Of Rooms 8,406 10,206 12,006 13,806 15,606 Established 5,573 6,446 7,461 8,406 10,206 Non-Established 2,833 3,760 4,545 5,400 5,400 New Rooms 945 1,800 1,800 1,800 1,800 Non-Established 945 1,800 1,800 1,800 1,800 Available Rooms 2,811,024 3,351,150 3,954,636 4,601,430 5,258,430 Established 1,850,746 2,201,355 2,515,167 2,882,865 3,474,990 Non-Established 960,278 1,149,795 1,439,469 1,718,565 1,783,440 Occupied Rooms 1,677,744 1,972,039 2,354,412 2,772,070 3,189,266 Established 1,154,621 1,396,015 1,606,848 1,841,841 2,220,525 Non-Established 523,123 576,024 747,564 930,229 968,741 Implied Occupancy Rate (%) 59.7% 58.8% 59.5% 60.2% 60.7% Established 62.4% 63.4% 63.9% 63.9% 63.9% Non-Established 54.5% 50.1% 51.9% 54.1% 54.3% Average Daily Rate (ADR) (MX$) $ 746 $ 766 $ 794 $ 825 $ 854 Established $ 724 $ 745 $ 770 $ 799 $ 829 Non-Established $ 794 $ 818 $ 845 $ 877 $ 910 Revenue Per Available Room (RevPAR) (MX$) $ 445 $ 451 $ 473 $ 497 $ 518 Established $ 451 $ 473 $ 492 $ 511 $ 530 Non-Established $ 433 $ 410 $ 439 $ 475 $ 494
Hotel Management Number Of Rooms 2,501 3,341 3,941 4,541 5,141 Established 1,403 1,649 1,868 2,501 3,341 Non-Established 1,098 1,692 2,073 2,040 1,800 New Rooms 633 840 600 600 600 Non-Established 633 840 600 600 600 Available Rooms 785,169 1,078,945 1,312,326 1,527,985 1,746,985 Established 483,102 545,767 633,158 819,445 1,132,465 Non-Established 302,067 533,178 679,168 708,540 614,520 Occupied Rooms 454,787 609,399 764,301 917,012 1,057,480 Established 301,352 346,147 404,526 523,628 723,684 Non-Established 153,436 263,252 359,774 393,384 333,795 Implied Occupancy Rate (%) 57.9% 56.5% 58.2% 60.0% 60.5% Established 62.4% 63.4% 63.9% 63.9% 63.9% Non-Established 50.8% 49.4% 53.0% 55.5% 54.3% Average Daily Rate (ADR) (MX$) $ 747 $ 776 $ 805 $ 833 $ 855 Established $ 724 $ 745 $ 770 $ 799 $ 829 Non-Established $ 794 $ 818 $ 845 $ 877 $ 910 Revenue Per Available Room (RevPAR) (MX$) $ 433 $ 439 $ 469 $ 500 $ 517 Established $ 451 $ 473 $ 492 $ 511 $ 530 Non-Established $ 403 $ 404 $ 448 $ 487 $ 494
136 Forecasted Income Statement / Valuation Metrics
Income Statement (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Revenues From Hotel Operation $ 292.5 $ 1,055.7 $ 1,326.0 $ 1,617.8 $ 2,001.4 $ 2,449.7 $ 2,915.3 YoY Change 17.6% 18.5% 25.6% 22.0% 23.7% 22.4% 19.0% Revenues From Hotel Management $ 13.7 $ 48.3 $ 69.3 $ 90.9 $ 95.9 $ 113.3 $ 128.6 HCITY Total Revenues $ 306.2 $ 1,104.0 $ 1,395.3 $ 1,708.7 $ 2,097.4 $ 2,563.0 $ 3,043.9 YoY Change 17.1% 18.4% 26.4% 22.5% 22.7% 22.2% 18.8%
Total Costs And Expenses -$ 248.7 -$ 910.5 -$ 1,134.8 -$ 1,381.8 -$ 1,654.4 -$ 1,971.8 -$ 2,330.3 Hotel Operating Costs And Expenses -$ 148.5 -$ 569.7 -$ 716.4 -$ 921.1 -$ 1,123.5 -$ 1,360.5 -$ 1,634.6 Selling And Administrative Expenses -$ 50.9 -$ 177.2 -$ 210.0 -$ 220.1 -$ 249.9 -$ 283.8 -$ 319.6 Depreciation And Amortization (D&A) -$ 49.3 -$ 163.7 -$ 208.5 -$ 240.7 -$ 281.0 -$ 327.5 -$ 376.1
Expenses Asociated With New Hotel Openings -$ 8.5 -$ 16.0 -$ 11.2 -$ 10.4 -$ 10.7 -$ 11.1 -$ 11.6 Other Income / Non-Recurring Expenses -$ 0.0 $ 1.1 $ 2.9 $ 0.6 $ 0.7 $ 0.9 $ 1.0
Operating Profit (EBIT) $ 49.0 $ 178.6 $ 252.3 $ 317.1 $ 432.9 $ 580.9 $ 703.1 YoY Change 53.6% 45.2% 41.3% 25.7% 36.5% 34.2% 21.0% EBIT Margin 16.0% 16.2% 18.1% 18.6% 20.6% 22.7% 23.1%
EBITDA $ 98.3 $ 342.2 $ 460.7 $ 557.8 $ 713.9 $ 908.5 $ 1,079.2 YoY Change 39.5% 28.0% 34.6% 21.1% 28.0% 27.2% 18.8% EBITDA Margin 32.1% 31.0% 33.0% 32.6% 34.0% 35.4% 35.5%
Adjusted EBITDA $ 106.8 $ 358.2 $ 471.9 $ 568.1 $ 724.7 $ 919.6 $ 1,090.8 YoY Change 45.0% 28.1% 31.7% 20.4% 27.6% 26.9% 18.6% Adjusted EBITDA Margin (%) 34.9% 32.4% 33.8% 33.2% 34.6% 35.9% 35.8%
Interest Expense -$ 28.6 -$ 106.2 -$ 111.0 -$ 163.1 -$ 229.5 -$ 313.8 -$ 350.6 Interest Income $ 15.1 $ 38.2 $ 40.4 $ 67.8 $ 72.6 $ 86.5 $ 74.3 Net Foreign Exchange (FX) Gain / Loss $ 1.1 -$ 2.2 -$ 15.4 $ 3.8 $ 0.7 $ 11.1 $ 2.1 Profit Before Tax (EBT) $ 32.9 $ 102.5 $ 157.6 $ 225.7 $ 276.7 $ 364.7 $ 429.0
Income Tax Expense -$ 4.8 -$ 18.8 -$ 32.3 -$ 49.6 -$ 60.9 -$ 80.2 -$ 94.4 Consolidated Net Income $ 28.1 $ 83.7 $ 125.3 $ 176.0 $ 215.9 $ 284.5 $ 334.6 Non-Controlling Interests -$ 9.7 -$ 11.2 -$ 16.2 -$ 28.0 -$ 35.9 -$ 49.2 -$ 59.5 Majority Net Income $ 18.4 $ 72.6 $ 109.1 $ 148.0 $ 179.9 $ 235.3 $ 275.1 YoY Change 81.5% N.A. 50.4% 35.6% 21.6% 30.8% 16.9% Net Margin (%) 6.0% 6.6% 7.8% 8.7% 8.6% 9.2% 9.0%
Valuation Metrics
Period 4Q2013 2013 2014 2015 2016 2017 2018
EBITDA Cap Rate (LTM) (%) - To FV 5.3% 5.3% 7.5% 6.4% 7.4% 8.6% 9.3% Adjusted EBT Yield (LTM) (%) - To Mkt. Cap 2.1% 2.1% 2.5% 2.4% 3.0% 3.9% 4.7% Earnings Yield (LTM) (%) - To Mkt. Cap 1.2% 1.2% 1.6% 1.6% 2.0% 2.6% 3.0% Hotel Revenues Yield (LTM) (%) - To Mkt. Cap 19.3% 19.3% 19.8% 17.7% 21.9% 26.9% 32.0% FCFE Yield (LTM) (%) - To Mkt. Cap -10.9% -10.9% -15.1% -5.1% -8.0% -7.8% -15.2% FCFE Yield (LTM) (%) - To FV -10.2% -10.2% -18.8% -5.4% -7.5% -6.7% -12.0%
P /E (x) 83.4x 83.4x 70.4x 61.6x 50.7x 38.8x 33.2x EV /EBITDA (x) 18.8x 18.8x 13.4x 15.5x 13.6x 11.7x 10.7x EV /Adj. EBITDA (x) 18.0x 18.0x 13.1x 15.3x 13.4x 11.5x 10.6x P /Adj. EBT (x) 59.1x 59.1x 44.7x 41.1x 33.0x 25.8x 21.4x P /Sales (x) 5.5x 5.5x 5.5x 5.3x 4.3x 3.6x 3.0x P /NAV [Book Value] (x) 1.40x 1.40x 1.09x 1.27x 1.23x 1.18x 1.13x P /E To Growth Ratio (PEG) (NTM) (x) 1.65x 1.65x 1.98x 2.86x 1.65x 2.29x 1.65x
E /Share (MX$) $ 0.0670 $ 0.2892 $ 0.3695 $ 0.3846 $ 0.4676 $ 0.6116 $ 0.7149 Adj. EBT /Share (MX$) $ 0.1138 $ 0.3883 $ 0.5771 $ 0.5765 $ 0.7173 $ 0.9190 $ 1.1092 BV /Share (MX$) $ 15.71 $ 15.71 $ 18.26 $ 18.72 $ 19.28 $ 20.02 $ 20.89
Growth in E /Share (YoY) 27.8% 4.1% 21.6% 30.8% 16.9% Growth in Adj. EBT /Share (YoY) 48.6% -0.1% 24.4% 28.1% 20.7%
137 Forecasted Balance Sheet / Leverage Ratios / Return Measures
Balance Sheet (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Total Assets $ 7,416.3 $ 7,416.3 $ 10,129.7 $ 11,309.2 $ 12,406.9 $ 13,700.6 $ 14,191.8 Current Assets $ 1,950.8 $ 1,950.8 $ 3,788.5 $ 3,692.2 $ 3,452.0 $ 3,381.1 $ 2,567.6 Cash And Cash Equivalents $ 1,687.3 $ 1,687.3 $ 3,435.8 $ 3,260.3 $ 2,921.8 $ 2,733.3 $ 1,798.1 Trade And Account Receivables $ 63.2 $ 63.2 $ 81.0 $ 99.2 $ 121.8 $ 148.8 $ 176.7 Other Current Assets $ 33.6 $ 33.6 $ 63.7 $ 78.1 $ 95.8 $ 117.1 $ 139.1 Recoverable Taxes $ 166.8 $ 166.8 $ 208.0 $ 254.7 $ 312.6 $ 382.0 $ 453.7 Non-Current Assets $ 5,465.5 $ 5,465.5 $ 6,341.1 $ 7,617.0 $ 8,954.9 $ 10,319.5 $ 11,624.2 Property, Equipment And Leasehold Improvements, Net $ 5,449.9 $ 5,449.9 $ 6,321.6 $ 7,596.7 $ 8,933.5 $ 10,296.9 $ 11,600.3 Other Non-Current Assets $ 3.0 $ 3.0 $ 3.7 $ 4.5 $ 5.6 $ 6.8 $ 8.1 Other Assets, Net $ 12.6 $ 12.6 $ 15.8 $ 15.8 $ 15.8 $ 15.8 $ 15.8
Total Liabilities $ 2,390.3 $ 2,390.3 $ 2,344.6 $ 3,322.8 $ 4,128.8 $ 4,983.4 $ 5,123.3 Current Liabilities $ 242.6 $ 242.6 $ 574.7 $ 545.3 $ 593.2 $ 658.8 $ 657.9 Trade and Account Payables $ 44.7 $ 44.7 $ 70.7 $ 86.6 $ 106.2 $ 129.8 $ 154.2 Other Taxes, Accrued Expenses And Other Liabilities $ 84.7 $ 84.7 $ 133.2 $ 163.1 $ 200.2 $ 244.6 $ 290.5 Income Tax Payable $ 4.2 $ 4.2 $ 11.5 $ 14.0 $ 17.2 $ 21.0 $ 25.0 Derivative Financial Instruments $ - $ - $ - $ - $ - $ - $ - Short-Term Debt $ 107.9 $ 107.9 $ 357.2 $ 278.9 $ 266.2 $ 259.3 $ 183.4 Direct Employee Benefits $ 1.1 $ 1.1 $ 2.2 $ 2.7 $ 3.4 $ 4.1 $ 4.9 Non-Current Liabilities $ 2,147.7 $ 2,147.7 $ 1,769.9 $ 2,777.5 $ 3,535.6 $ 4,324.6 $ 4,465.4 Deferred Revenues $ 15.9 $ 15.9 $ 24.0 $ 29.4 $ 36.0 $ 44.0 $ 52.3 Employee Benefits $ 1.1 $ 1.1 $ 1.7 $ 2.0 $ 2.5 $ 3.0 $ 3.6 Derivative Financial Instruments $ 10.7 $ 10.7 $ 15.1 $ 15.1 $ 15.1 $ 15.1 $ 15.1 Long-Term Debt $ 1,966.6 $ 1,966.6 $ 1,566.3 $ 2,531.6 $ 3,237.3 $ 3,963.3 $ 4,039.2 Deferred Income Tax $ 153.4 $ 153.4 $ 162.8 $ 199.4 $ 244.7 $ 299.0 $ 355.1
Shareholders Funds $ 5,026.0 $ 5,026.0 $ 7,785.1 $ 7,986.4 $ 8,278.2 $ 8,717.3 $ 9,068.5 Controlling Interest $ 4,322.1 $ 4,322.1 $ 7,026.0 $ 7,202.0 $ 7,417.9 $ 7,702.4 $ 8,037.0 Non-Controlling Interest $ 704.0 $ 704.0 $ 759.1 $ 784.4 $ 860.3 $ 1,014.9 $ 1,031.6
Total Liabilities and Shareholders Equity $ 7,416.3 $ 7,416.3 $ 10,129.7 $ 11,309.2 $ 12,406.9 $ 13,700.6 $ 14,191.8
Leverage Ratios
Total Debt (MX$) $ 2,074 $ 2,074 $ 1,924 $ 2,811 $ 3,503 $ 4,223 $ 4,223 Net Debt (MX$) $ 387 $ 387 -$ 1,512 -$ 450 $ 582 $ 1,489 $ 2,424 Net Debt-to-EBITDA (x) 1.1x 1.1x -3.3x -0.8x 0.8x 1.6x 2.2x Loan-to-Value (LTV) (%) 38.1% 38.1% 30.4% 37.0% 39.2% 41.0% 36.4% Total Debt / Total Assets (%) 28.0% 28.0% 19.0% 24.9% 28.2% 30.8% 29.8% DSCR (N12M) (x) 0.71x 0.71x 1.08x 1.41x 1.60x 1.78x 2.33x Debt-to-Equity (D/E) (%) 48.0% 48.0% 27.4% 39.0% 47.2% 54.8% 52.5%
Profitability / Return Measures
Return On Equity (ROE) (NTM) (%) 2.5% 2.5% 2.1% 2.5% 3.2% 3.6% 4.1% Non-Cash ROE (NTM) (%) 2.9% 2.9% 2.6% 3.1% 3.7% 4.4% 4.7% Return On Invested Capital (ROIC) (NTM) (%) 5.9% 5.9% 6.3% 6.6% 7.2% 7.3% 7.5% Return On Capital Employed (ROCE) (NTM)(%) 4.5% 4.5% 4.0% 4.6% 5.4% 5.8% 6.5% Return On Assets (ROA) (NTM) (%) 4.3% 4.3% 3.8% 4.4% 5.1% 5.5% 6.2%
138 Forecasted Cash Flow Statement
Cash Flow Statement (MX$ MM)
Period 4Q2013 2013 2014 2015 2016 2017 2018
Profit Before Income Tax $ 32.9 $ 102.5 $ 157.6 $ 225.7 $ 276.7 $ 364.7 $ 429.0 Non-Cash Adjustments $ 42.9 $ 158.0 $ 216.5 $ 236.8 $ 280.3 $ 316.4 $ 374.0 Other Adjustments $ - $ - -$ 13.6 -$ 77.7 -$ 96.8 -$ 129.4 -$ 153.9 Financing Activities: $ 33.6 $ 109.4 $ 112.3 $ 163.1 $ 229.5 $ 313.8 $ 350.6 Investing Activities: -$ 14.3 -$ 33.6 -$ 37.4 -$ 67.8 -$ 72.6 -$ 86.5 -$ 74.3 Changes In Working Capital -$ 35.0 -$ 108.6 -$ 13.9 $ 11.1 $ 13.8 $ 16.5 $ 17.1 Operating Cash Flows $ 60.2 $ 227.6 $ 421.6 $ 491.2 $ 630.9 $ 795.6 $ 942.4
CapEx - Property, Equipment And Leasehold Improvements -$ 255.1 -$ 994.2 -$ 1,123.1 -$ 1,515.7 -$ 1,617.9 -$ 1,690.9 -$ 1,679.6 Net Cash Outflow On Acquisition Of Subsidiaries $ - -$ 66.6 $ - $ - $ - $ - $ - Net Outflow On Exchange Of Assets $ - $ - $ - $ - $ - $ - $ - Other Assets -$ 9.3 $ 7.3 -$ 3.2 $ - $ - $ - $ - Interest Income $ 15.1 $ 38.2 $ 40.4 $ 67.8 $ 72.6 $ 86.5 $ 74.3 Investing Cash Flows -$ 249.4 -$ 1,015.4 -$ 1,085.9 -$ 1,447.9 -$ 1,545.2 -$ 1,604.4 -$ 1,605.2
Debt Amortizations / Repayments -$ 171.3 -$ 412.2 -$ 519.0 -$ 353.4 -$ 278.2 -$ 255.1 -$ 257.1 Debt Additions $ 340.4 $ 784.7 $ 385.0 $ 1,244.2 $ 971.8 $ 985.3 $ 259.3 Interest Expense (Cash) -$ 27.0 -$ 98.0 -$ 126.2 -$ 163.1 -$ 229.5 -$ 313.8 -$ 350.6 Other Assets, Net $ - $ - $ - $ - $ - $ - $ - Equity Capital Increase (Issue Of Shares, Net Of Issue Costs) $ 8.0 $ 1,568.7 $ 2,594.2 $ - $ - $ - $ - Equity Capital Reductions $ - $ - $ - $ - $ - $ - $ - Increase / Decrease In Non-Controlling Interests $ 0.1 $ 200.5 $ 78.1 $ 53.4 $ 111.8 $ 203.8 $ 76.2 Distributions (Cash Dividends) To Shareholders $ - $ - $ - $ - $ - $ - $ - Non-Controlling Interest Dividends Paid -$ 4.6 -$ 4.6 -$ 1.8 $ - $ - $ - $ - Payments To Acquire Non-Controlling Interests $ - -$ 105.5 -$ 27.5 $ - $ - $ - $ - Financing Cash Flows $ 145.5 $ 1,933.7 $ 2,382.8 $ 781.1 $ 575.9 $ 620.3 -$ 272.3
Net Change in Cash and Cash Equivalents -$ 43.6 $ 1,146.0 $ 1,718.5 -$ 175.6 -$ 338.5 -$ 188.6 -$ 935.1 Cash, Cash Equivalents and Restricted Cash at BoP $ 1,771.0 $ 555.0 $ 1,687.3 $ 3,435.8 $ 3,260.3 $ 2,921.8 $ 2,733.3 FX Effect / Hedging Valuation Effects on Cash and Cash Equivalents -$ 40.1 -$ 13.7 $ 30.0 $ - $ - $ - $ - Cash, Cash Equivalents and Restricted Cash at EoP $ 1,687.3 $ 1,687.3 $ 3,435.8 $ 3,260.3 $ 2,921.8 $ 2,733.3 $ 1,798.1
139 Company Profile: Hoteles City Express (HCITY) Hoteles City Express, S.A.B. de C.V. The core CBFI Holders Structure Hotel Rooms Breakdown By Region Asset Class / Sector(s): Equity / Lodging Rating BUY Country: Mexico Mkt. Cap (USD MM): 612 IFC & ALAC Last Price (MX$): 23.70 Mkt. Cap (MX$ MM): 9,120 7.0% Target Price 2015 (MX$) 26.90 IPO Date: 14/06/2013 Morgan Free Dividend Yield 0.0% Avg. Daily $ (MX$ MM) 10.1 Stanley Float RE 57.0% Total Upside Potential 13.5% Avg. Daily $ (USD MM) 0.7 Fund Company Description 9.0% HCITY is a leading Mexican fully-integrated hotel chain. It is focused on providing quality, safe and comfortable standardized accommodation in the economy and budget limited-service hotel segments . Other* Holders HCE develops, acquires, manages and franchises hotels with 4 different brands: City Express, City 27.0% Express Junior, City Express Suites and City Express Plus. It has presence in 53 cities among 30 states of Mexico, and 2 properties in LatAm. HCE’s portfolio consists of 96 hotels with 10,907 rooms. ●LatAm* Investment Thesis - Positives 2% 1) Unique, profitable and scalable fully-integrated hotel business model; 2) Strong capabilities as a low- *Holders with no more than 5% stake each. ●North ●Bajio ●Central ●South cost developer; 3) Solid operating structure with state-of-the-art proprietary IT infrastructure; 4) Proprietary 36% 17% 20% 24% marketing and distribution platforms; 5) Deep hotel management expertise; 6) Solid track record, reputation * Costa Rica and Colombia. and position; 7) Highly recognized hotel brand; 8) Scale (enables HCITY to achieve further operating GLA Distribution by Asset Type Corporate Structure efficiencies); 9) Experienced management team; 10) Large diversification across Mexico. Other MS RE IFC & Free Float Investment Thesis - Risk Factors Holders Fund ALAC 1) Lower than expected economic growth in Mexico as it is highly cyclical and dependent on the overall Hotel 57% 27% 9% 7% strenght of the country's economic activity; 2) High exposure to travel disruptions including those related 100.0% to: political and geopolitical instability, security issues and criminality activity, natural disasters, health concerns, terrorist attacks, among others; 3) Changes in laws and regulations; 4) Sensitivity to interest Hoteles City rates and FX fluctuations; 5) Expansion oustide Mexico; 6) Development / Expansion risk for current or Express (HCITY) new hotels; 6) Oversupply or reduction in demand for hotel rooms; 7) Renovations' costs. 100% Income Statement (MX$ MM) 2015 2016 2017 2018 Managemen Managemen Managemen Managemen t Subsidiary t Subsidiary t Subsidiary t Subsidiary Revenues From Hotel Operation 1,618 2,001 2,450 2,915 3
Revenues From Hotel Management 91 96 113 129 5 Hotel Hotel Intl. RE Mgmt. Mgmt. Invest. Owner HCITY Total Revenues 1,709 2,097 2,563 3,044 6 Mexico LatAm Vehicle YoY Change 22.5% 22.7% 22.2% 18.8% 7 Costa Rica Chile Co- Total Costs And Expenses -1,382 -1,654 -1,972 -2,330 9 & Ownership Colombia Operating Profit (EBIT) 317 433 581 703 39 Depreciation And Amortization (D&A) -241 -281 -328 -376 34 Key Operating Metrics EBITDA 558 714 908 1,079 43 2015 2016 2017 2018 YoY Change 21.1% 28.0% 27.2% 18.8% 44 Number Of Rooms 13,547 15,947 18,347 20,747 EBITDA Margin 32.6% 34.0% 35.4% 35.5% 45 Available Rooms 4,430,095 5,266,962 6,129,415 7,005,415 Adjusted EBITDA 568 725 920 1,091 47 Implied Occupancy Rate 58.3% 59.2% 60.2% 60.6% Adjusted EBITDA Margin (%) 33.2% 34.6% 35.9% 35.8% 49 Avg. Daily Rate (ADR) - MX$ 769 797 827 854 Majority Net Income 148 180 235 275 63 YoY Change 3.0% 3.7% 3.8% 3.3% Net Margin (%) 8.7% 8.6% 9.2% 9.0% 65 Macroeconomic Assumptions Balance Sheet (MX$ MM) 2015 2016 2017 2018 2015 2016 2017 2018 Mx GDP Growth 2.8% 3.4% 3.8% 3.9% Total Assets 11,309 12,407 13,701 14,192 3 Mx Inflation (INPC) 3.1% 3.7% 3.8% 3.5% Current Assets 3,692 3,452 3,381 2,568 4 U.S. Inflation (CPI) 1.9% 2.6% 2.3% 2.3% Cash and Cash Equivalents 3,260 2,922 2,733 1,798 5 Valuation Metrics / Yields Trade And Account Receivables 99 122 149 177 6 2015 2016 2017 2018 Other Current Assets 78 96 117 139 7 P /E (x) 61.6x 50.7x 38.8x 33.2x Recoverable Taxes 255 313 382 454 8 EV /EBITDA (x) 15.5x 13.6x 11.7x 10.7x Property, Plant And Equipment, Net 7,597 8,934 10,297 11,600 10 P /Sales (x) 5.3x 4.3x 3.6x 3.0x Total Liabilities 3,323 4,129 4,983 5,123 14 P /NAV [Book Value] (x) 1.3x 1.2x 1.2x 1.1x Current Liabilities 545 593 659 658 15 P /E To Growth Ratio (PEG) (NTM) (x) 2.9x 1.6x 2.3x 1.7x Trade and Account Payables 87 106 130 154 16 EBITDA Cap Rate (LTM) (%) - To FV 6.4% 7.4% 8.6% 9.3% Taxes, Accrued Exp. And Other Liabilities 163 200 245 290 17 Earnings Yield (LTM) (%) - To Mkt. Cap 1.6% 2.0% 2.6% 3.0% Short-Term Debt 279 266 259 183 20 FCFE Yield (LTM) (%) - To Mkt. Cap -5.1% -8.0% -7.8% -15.2% Non-Current Liabilities 2,777 3,536 4,325 4,465 22 Growth in E /Share (YoY) 4.1% 21.6% 30.8% 16.9% Long-Term Debt 2,532 3,237 3,963 4,039 26 Performance: Revenues (MX$ MM) / NOI and CAD Margins Other Non-Current Liabilities 246 298 361 426 3,500 40.0% Shareholders Funds 7,986 8,278 8,717 9,069 29 35.4% 35.5% Cash Flow Statement (MX$ MM) 3,000 34.0% 35.0% 32.6% 2015 2016 2017 2018 30.0% 2,500 Profit Before Income Tax 226 277 365 429 3 25.0% Changes in Working Capital 11 14 17 17 13 2,000 Operating Cash Flows 491 631 796 942 14 20.0%
Capital Expenditures -1,516 -1,618 -1,691 -1,680 16 1,500 Margins 15.0% Interest Income 68 73 86 74 20 1,000 Investing Cash Flows -1,448 -1,545 -1,604 -1,605 21 10.0% 8.7% 8.6% 9.2% 9.0%
Debt Amortizations / Repayments -353 -278 -255 -257 23 Property Operating Revenues 500 5.0% Financing Cash Flows 781 576 620 -272 33 Net Change in Cash and Cash Equivalents -176 -338 -189 -935 35 - 0.0% 2015 2016 2017 2018 Cash and Cash Equivalents at BoP 3,436 3,260 2,922 2,733 36 HCITY Total Revenues EBITDA Margin Net Margin (%) Cash and Cash Equivalents at EoP 3,260 2,922 2,733 1,798 38
140 Equity, Economic, Quantitative and Fixed Income Research Departments
Equity Research
Gustavo Terán Durazo, Head of EquityResearch (52) 55 1103-6600 x1193 [email protected] CFA Senior Analysts Telecommunications, Media and Martín Lara (52) 55 1103-6600x1840 [email protected] Financials
Carlos Hermosillo Bernal Consumption (52) 55 1103-6600 x4134 [email protected]
Pablo Duarte de León FIBRAs (REITs) (52) 55 1103-6600 x4334 [email protected]
Mining, Metals, Paper and Pablo Abraham Peregrina (52) 55 1103-6600x1395 [email protected] Conglomerates
Ramón Ortiz Reyes Cement, Construction and Concessions (52) 55 1103-6600 x1835 [email protected]
Federico Robinson Bours Energy, Chemicals and Industrial (52) 55 1103-6600 x4127 [email protected] Carrillo Junior Analysts Telecommunications, Media and Juan Ponce (52) 55 1103-6600x1693 jponce@actinver,com.mx Financials Enrique Octavio Camargo Energy, Chemicals and Industrial (52) 55 1103-6600x1836 [email protected] Delgado José Antonio Cebeira Consumption (52) 55 1103-6600x1394 [email protected] González
Mining, Metals, Paper Conglomerates , Mauricio Arellano Sampson (52) 55 1103-6600 x1835 [email protected] Cement, Construction and Concessions Economic and Quantitative Research
Head of Economic and Quantitative Ismael Capistrán Bolio [email protected] Research (52) 55 1103-6600 x6636
Jaime Ascencio Aguirre Economy and Markets [email protected] (52) 55 1103-6600 x1100
Santiago Hernández Morales Quantitative Research [email protected] (52) 55 1103-6600 x4133
Roberto Ramírez Ramírez Quantitative Research (52) 55 1103-6600x1672 [email protected]
Roberto Galván González Technical Research [email protected] (52) 55 1103 -66000 x5039
Fixed Income Research
Araceli Espinosa Elguea Head of Fixed Income Research (52) 55 1103 -66000 x6641 [email protected]
Jesús Viveros Hernández Fixed Income Research (52) 55 1103 -66000 x6649 [email protected]
141 Disclaimer
Guide for recommendations on investment in the companies under coverage included or not, in the Mexican Stock Exchange main Price Index (IPC) StrongBuywith an extraordinary perspective. According to the analyst, in the next twelve months, the valuations of stock and/or prospects for the sector are EXTREMELY FAVORABLE Buy. According to the analyst, in the next twelve months, the stock’s valuation and / or prospects for the sector are VERY FAVORABLE Neutral. According to the analyst, in the next twelve months, the valuation of stock and / or sector ARE NEUTRAL OR FAVORABLE but with a similar perspective to the IPC Belowmarket. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NOT POSITIVE Sell. According to the analyst, in the next twelve months, the valuation of stock and / or sector outlook ARE NEGATIVE, or likely to worsen In reviewwith positive outlook In review with negative or unfavorable perspective
ImportantStatements. a) Of theAnalysts:
“The analysts in charge of producing the Analysis Reports: Jaime Ascencio Aguirre; Mauricio Arellano Sampson; Enrique Octavio Camargo Delgado; Ismael Capistrán Bolio; José Antonio Cebeira González, Pablo Enrique Duarte de León; Araceli Espinosa Elguea; Roberto Galván González; Ana Cecilia González Rodríguez; Carlos Hermosillo Bernal; Santiago Hernández Morales; Martín Roberto Lara Poo; Ramón Ortiz Reyes; Pablo Abraham Peregrina; Juan Enrique Ponce Luiña; Federico Robinson Bours Carrillo; Gustavo Adolfo Terán Durazo; Jesús Viveros Hernández, declare”:
1. "All points of view about the issuers under coverage correspond exclusively to the responsible analyst and authentically reflect his vision. All recommendations made by analysts are prepared independently of any institution, including the institution where the services are provided or companies belonging to the same financial or business group. The compensation scheme is not based or related, directly or indirectly, with any specific recommendation and the remunerationis only received from the entity which the analysts provide their services. 2. "None of the analysts with coverage of the issuers mentioned in this report holds any office, position or commission at issuers underhis coverage, or any of the people who are part of the Business Group or consortium to which they belong. They have neither held any position during the twelve months prior to the preparation of this report. " 3. "Recommendations on issuers, made by the analyst who covers them, are based on public information and there is no guarantee of their assertiveness regarding the performance that is actually observed in the values object of the recommendation" 4. "Analysts maintain investments subject to their analysis reports on the following issuers: AC, ALFA, ALPEK, ALSEA, AMX,AZTECA, CEMEX, CHDRAUI, FEMSA, FIBRAMQ, FINDEP, FUNO, GENTERA, GFREGIO, GRUMA, ICA, IENOVA, KOF, LAB, LIVEPOL, MEXCHEM, OHLMEX,POCHTEC, TLEVISA,SORIANA, SPORTS, VESTA, WALMEX.
b) On Actinver Casa de Bolsa, S.A. de C.V. Grupo Financiero Actinver
1. Actinver Casa de Bolsa, S.A. de C.V. GrupoFinanciero Actinver, under any circumstance shall ensure the sense of the recommendations contained in the reports of analysis to ensure future business relationship.
2. All Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver business units can explore and do business with any company mentioned in documents of analysis. All compensation for services given in the past or in the future, received by Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver by any company mentioned in this report has not had and will not have any effect on the compensation paid to the analysts. However, just like any other employee of Actinver Group and its subsidiaries, the compensation being enjoyed by our analysts will be affected by the profitability gained by Actinver Group and its subsidiaries. 3. At the end of each of the previous three months, Actinver Casa de Bolsa, SA de C.V. Actinver Financial Group, has not held any investments directly or indirectly in securities or financial derivatives, whose underlying are Securities subject of the analysis reports, representing one percent or more of its portfolio of securities, investment portfolio, outstanding of the Securities or the underlying value of the question, except for the following: * AEROMEX, BOLSA A, FINN 13, FSHOP 13, SMARTRC14. 4. Certain directors and officers of Actinver Casa de Bolsa, SA de C.V. GrupoFinanciero Actinver occupy a similar position at the following issuers: AEROMEX, MASECA, AZTECA, ALSEA, FINN, MAXCOM, SPORTS, FSHOP and FUNO. This report will be distributed to all persons who meet the profile to acquire the type of values that is recommended in its content.
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