Quarterly Report - PDF document

1 1 FIHO Quar
1 FIHO Quarterly Report Operating improvement, but distribution slowdowns ▪ FIHO continued to grow , closing 3Q19 with 12,300 rooms in operation (+1.3% vs. 3Q18). It presented mid - single digit increments in NOI and EBITDA, but lower profitability ▪ Hotel occupancy fell, but an increase in the average rate boosted the total portfolio’s effective rate (+2. 1% yoy). Cash distribution in 3Q19 totaled MXN 0.1711 (1.9% yield) ▪ We have set our PT 2020E at MXN 10.4 per CBFI with a Buy rating. Despite uncertainty in hotel demand, the expectation of low rates may boost the CBFI Annual increments improve during the q uarter, although lower marg i ns continue. FIHO closed 3Q19 with 86 hotels and 12,555 rooms, including 85 hotels in operation (12,300 rooms, +1.3% vs. 3Q18) and one under development (255 rooms) . Total revenue rose 9.4%, NOI ( Net Operating Income ) increased 6.3% and EBITDA climbed 5.7%. Such results stood above our estimates. On the other hand, NOI and EBITDA margins contracted by 0.9pp each to stand at 30.1% and 24.7%, respectively. A challenging environment in terms of the sector‘s demand continued. It shou ld be mentioned that FFO and AFFO showed downturns yoy, to close below expectations. We have set our PT 2020E at MXN 10.4 with a Buy rating (18.5% yield). Although 2019 has been a challenging year for FIHO given weak demand in the sector, by 2020 we expect a recovery in operating results (with high single - digit increments), as well as better margins. On the other hand, we consider that even while facing unc ertainty related to hotel demand, the expected lower rate outlook in the country could boost the price of the CBFI. Equity Research Me xico October 30, 2019 www.banorte.com @analisis_fundam José Espitia Airlines/ Airports / Cement / REITs / Infrastructure jose.espitia@banorte.com BUY Current Price $8.78 P T 20 20 $10.40 Upside Potential 18.5 % Distribution payment 19e (%) 10.5 % Max – Mi n LTM (MXN $) 10.56 – 6.38 Market Cap (US$m) 364.53 Shares Outstanding (m) 786 Float 80 % Daily Turnover (P$ m) 5.6 Valuation metrics TTM P/AFFO 8.4 x FV/EBITDA 9.2 x Relative performance to MEXBOL LTM This document is provided for the reader’s convenience only. The translation from the original Spanish version was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English transl ation. The origin al document entitled “Mejora operativa, pero disminuye distribuci ó n” was released on October 24, 2019 . Document for distribution among public -40% -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 MEXBOL FIHO12 2 FIHO — Results 3Q19 MXN, million Revenue & EBITDA Margin MXN, million Concept 3Q18 3Q19 Var % 3Q19e Var % vs Estim. Revenue 981 1,074 9.4% 1,039 3.4% NOI 304 324 6.3% 304 6.5% Ebitda 251 266 5.7% 248 7.0% Net Income 88 56 - 36.0% 63 - 10.5% Margins NOI Margin 31.0% 30.1% - 0.9pp 29.3% 0.9pp Ebitda Margin 25.6% 24.7% - 0.9pp 23.9% 0.8pp Net Margin 9.0% 5.3% - 3.7pp 6.1% - 0.8pp Distribution payment $0.21 $0.17 - 17.5% $0.21 - 18.2% Income Statement (Million pesos) Year 2018 2019 2019 Change Change Quarter 3 2 3 % YoY % QoQ Net Revenue 981.1 1,125.5 1,073.7 9.4% - 4.6% Cost of goods sold 661.2 740.3 734.0

2 11.0% - 0.8% Gross profit 319.8
11.0% - 0.8% Gross profit 319.8 385.3 339.6 6.2% - 11.8% General expenses 178.7 196.9 197.9 10.7% 0.5% NOI 304.4 368.9 323.7 6.3% - 12.3% NOI Margin 31.0% 32.8% 30.1% (0.9pp) (2.6pp) Operating Profit Adjusted 125.9 187.4 138.9 10.3% - 25.9% Operating Margin 12.8% 16.6% 12.9% 0.1pp (3.7pp) Operating Depreciation 106.9 115.7 118.4 10.8% 2.4% EBITDA 251.4 310.1 265.6 5.7% - 14.3% EBITDA Margin 25.6% 27.5% 24.7% (0.9pp) (2.8pp) Interest income (expense) net (38.7) (75.7) (81.1) 109.4% 7.1% Interest expense 47.8 89.8 93.2 94.9% 3.8% Interest income 16.6 17.4 17.5 5.3% 0.6% Income before taxes 87.5 111.7 58.5 - 33.1% - 47.6% Income taxes (0.6) 1.8 2.2 N.A. 18.6% Consolidated Net Income 88.1 109.8 56.4 - 36.0% - 48.7% Minorities 0.0 0.0 0.0 N.A. N.A. Net Income 88.1 109.8 56.4 - 36.0% - 48.7% Net Margin 9.0% 9.8% 5.3% (3.7pp) (4.5pp) FFO 195.0 227.6 176.9 - 9.3% - 22.3% AFFO 167.3 178.3 134.9 - 19.4% - 24.4% Distribution payment 0.207 0.226 0.171 - 17.5% - 24.4% Balance Sheet (Millions) Total Current Assets 1,221.7 1,154.8 1,397.1 14.4% 21.0% Cash & Short Term Investments 854.8 697.8 995.0 16.4% 42.6% Long Term Assets 15,829.6 16,407.1 16,472.8 4.1% 0.4% Property , Plant & Equipment (Net) 11,642.2 11,726.0 11,729.9 0.8% 0.0% Properties under development 1,072.1 653.3 741.1 - 30.9% 13.4% Total Assets 17,051.3 17,561.9 17,869.9 4.8% 1.8% Current Liabilities 889.5 909.3 693.5 - 22.0% - 23.7% Short Term Debt 279.3 283.3 165.9 - 40.6% - 41.4% Accounts Payable 347.8 306.4 245.8 - 29.3% - 19.8% Long Term Liabilities 3,155.8 3,783.6 4,466.6 41.5% 18.1% Long Term Debt 3,155.8 3,783.6 4,466.6 41.5% 18.1% Total Liabilities 4,045.4 4,692.8 5,160.0 27.6% 10.0% Common Stock 13,005.9 12,869.1 12,709.8 - 2.3% - 1.2% Minorities 0.0 0.0 0.0 N.A. N.A. Total Equity 13,005.9 12,869.1 12,709.8 - 2.3% - 1.2% Liabilities & Equity 17,051.3 17,561.9 17,869.9 4.8% 1.8% Net Debt 2,580.4 3,369.1 3,637.5 41.0% 8.0% Cash Flow (Million pesos) Cash Flow from Operating Activities 266.9 311.6 287.5 Cash Flow from Investing Activities (330.3) (192.2) (193.0) Cash Flow from Financing Activities (39.1) (76.1) 202.6 FX effect on cash 0.0 0.0 0.0 Change in Cash Balance (102.5) 43.4 297.2 NOI & NOI Margin MXN, million AFFO / Distribution payment MXN, million Source: Banorte, BMV. 25.6% 26.0% 27.3% 27.5% 24.7% 23.0% 23.5% 24.0% 24.5% 25.0% 25.5% 26.0% 26.5% 27.0% 27.5% 28.0% 900 950 1,000 1,050 1,100 1,150 3Q18 4Q18 1Q19 2Q19 3Q19 Revenue EBITDA Margin 31.0% 32.2% 33.0% 32.8% 30.1% 28.5% 29.0% 29.5% 30.0% 30.5% 31.0% 31.5% 32.0% 32.5% 33.0% 33.5% 0 50 100 150 200 250 300 350 400 3Q18 4Q18 1Q19 2Q19 3Q19 NOI NOI Margin 0.207 0.262 0.211 0.226 0.171 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0 50 100 150 200 250 3Q18 4Q18 1Q19 2Q19 3Q19 AFFO Distribution payment 3 Inorganic growth declines. In 3Q19, the REIT closed the period with 86 hotels (12,555 rooms), including 85 in operation and one under development. In addition, FIHO still has assets that are undergoing a maturity process (81 hotels are considered stabilized as at 3 Q19). An increase in the average ra te more than offset lower occupancy, which lead to a higher effective rate. For the 81 stabilized hotels (excluding FACC) in operation as at 3Q19, the average rate stood at MXN 1,155 (+1.0% vs. 3Q18), occupancy at 64.3% ( - 1.0pp)

3 and the effective rate at M XN 743 ( -
and the effective rate at M XN 743 ( - 0.5%). The REIT indicated that the market remained highly competitive during the quarter with lower demand for hotel rooms given the slowing economy, reduced public spending, low investment in corporate projects and control on discretionary spendi ng. On the other hand, based on the total portfolio of 84 hotels in operation (excluding FACC), the average rate stood at MXN 1,206 (+5.1%), occupancy at 63.2% ( - 1.8pp) and the effective rate at MXN 762 (+2.1%). It is worth noting that, in 3Q18, the REIT’s total portfolio included 83 hotels in operation. The report indicated that the average All Inclusive rate for the FACC hotel was MXN 4,142 ( - 4.6% yoy), with an occupancy of 79.7% (+7.5pp) and an All - Inclusive effective rate of MXN 3,300 (+5.3% vs. 3Q18). Hence, during 3Q19, FIHO received MXN 49.8 million in hotel lease revenue. NOI and EBITDA grew, but profitability continued to decline. In 3Q19 , FIHO reported growth (yoy) of 9.4% in total revenue, 6.2% in lodging contribution, 6.3% in NOI, and 5.7% in E BITDA, standing at MXN 1. 1 billion, MXN 340 million, MXN 324 million and MXN 266 million , respectively. FIHO’s operating profit came in at MXN 147 million (+1.9% vs. 3Q18). It should be mentioned that the REIT reported non - operating expenses worth MXN 8.4 million. Therefore, it presented MXN 139 million in adjusted operating profit. (+10.3% vs. 3Q18). In terms of profitability, the following variations were reported: - 1.0pp in lodging contribution and - 0.9pp in NOI and EBITDA margin, to stand at 31.6%, 30.1 % and 24.7%, respectively. Th e latter results from a lower operating leverage due to reduced dynamism in the sector’s demand. Net profit during the quarter was MXN 56 million ( - 36.5% vs. 3Q18) due to a higher cost in Comprehensive Financing Result (+109% vs 3Q18), partially offset by higher operating profit. On the other hand, AFFO totaled MXN 135 million ( - 19.4% vs. 3 Q18). FIHO ended 3Q19 with MXN 4.6 billion in debt, and with MXN 17.8 billion in total assets, which corresponds to a 25.9% debt level. FIH O’s cash position as at 3Q19 was of MXN 995 million. Debt service coverage ratio is of 1.93x (the required minimum is 1.0x). It should be mentioned that the REIT placed a long - term bond for MXN 2.5 billion at an 8.83% fixed rate, allocating the resources t o pay financial liabilities and for corporate uses in general. Hence, FIHO improved its debt profile with an average life that rose from 5 to 8 years and released MXN 2. 4 billion of mortgage - backed securities, leaving approximately 87% of real - estate asset s free from collateral. 4 FIHO’s Technical Committee approved a cash distribution of MXN 0.1711 per CBFI, which equals a 1.9% yield (July 24 th closing price was MXN 8.78 per CBFI). Such distribution shall be payable on November 8th, 2019. L T M accumulated yield amounts to 10.1%. 2020 Estimates We forecast the following growth in 2020E: 8.5% in revenue, 11.2% in NOI and 9.9% in EBITDA. We estimate that revenue per available room will post a low to mid - single digit increase driven by a higher average rate s uppo rted by occupancy improvement. We expect FIHO to expand 0.8pp in NOI margin and 0.4pp in EBITDA margin, to stand at 32.9% and 26.9%, respectively . On the other hand, we forecast a 10.5% increase in AFFO. Therefore, estimated yield from FIHO’s cash dis tr ibution by 2020 will be 10.5%. Valuation and PT 2020E at MXN 10.4 Using a DCF valuation method we obtained a price target for 2020E of MXN 10.4. Within our assumptions we considered a weighted average cost of capital (WACC) of 11.0%, cost of debt of 9.7 %, a Beta of 0.9, a risk - free rate of 7.55%; a market risk premium of 5.5%, and a 2.0% perpetuity growth rate. The upside potential of our PT 2020E is 18.5% over the current price (pesos). FIHO - DCF ( Millions o

4 f pesos) Concept 2021e 2022e 202
f pesos) Concept 2021e 2022e 2023e 2024e 2025e Perpetuity (2025 e) Free Cash Flow 963 1,006 1,042 1,083 1,119 12,442 CBFIs (millions) 794 MXN $ PT DCF 10.40 Value DCF 8,259 Current Price 8.78 Market Cap. Current 6,975 Upside potential 18.5 % Sourc e: Banorte Cap Rate FIHO’s current implicit Cap Rate (N OI/Firm Value) is 13.1 %. It is important to consider that within this estimate there are resources that are not productive - 1 hotel under development - which will begin to operate. 2020 e stimated cap rate stands at 14. 1 %. 5 Certification of Analysts. We, Gabri el Casillas Olvera, Delia Maria Paredes Mier, Alejandro Padilla Santana, Manuel Jiménez Zaldívar, Tania Abdul Massih Jacobo, Katia Celina Goya Ostos, Juan Carlos Alderete Macal, Víctor Hugo Cortes Castro, Marissa Garza Ostos, Miguel Alejandro Calvo Domíngu ez, Hugo Armando Gómez Solís, Gerardo Daniel Valle Trujillo, José Itzamna Espitia Hernández, Valentín III Mendoza Balderas, Santiago Leal Singer, Fr ancisco José Flores Serrano, Luis Leopoldo López Salinas, Jorge Antonio Izquierdo Lobato and Leslie Thalía O rozco Vélez, certify that the points of view expressed in this document are a faithful reflection of our personal opinion on the company (s) or firm (s) within this report, along with its affiliates and/or securities issued. Moreover, we also state that we have not received, nor receive, or will receive compensation other than that of Grupo Financiero Banorte S.A.B. of C.V for the provision of our services . Relevant statements. In accordance with current laws and internal procedures manuals, analysts are allowed to hold long or short positions in shares or securities issued by companies that are listed on the Mexican Stock Exchange and may be the subject of this report; nonetheless, equity analyst s have to adhere to certain rules that regulate their partic ipation in the market in order to prevent, among other things, the use of private information for their benefit and to avoid conflicts of interest. Analysts shall refrain from investing and holding transactions with securities or derivative instruments dir ectly or through an intermediary person, with Securities subject to research reports, from 30 calendar days prior to the issuance date of the report in question, and up to 10 calendar days after its distribution date. Compensation of Analysts. Analysts’ c ompensation is based on activities and services that are aimed at benefiting the investment clients of Casa de Bolsa Banorte Ixe and its subsidiaries. Such compensation is determined based on the general profitability of the Brokerage House and the Financi al Group and on the individual performance of each analyst. However, investors should note that analysts do not receive direct payment or compensation for any specific transact ion in investment banking or in other business areas. Last - twelve - month activit ies of the business areas. Grupo Financiero Banorte S.A.B. de C.V., through its business areas, provides services that include, among others, those corresponding to investment banking and corporate banking, to a large number of companies in Mexico and abroad. It may have provided, is providing or, in the fut ure, will provi de a service such as those mentioned to the companies or firms that are the subject of this report. Casa de Bolsa Banorte or its affiliates receiv e compensation from such corporations in consideration of the aforementioned services. Over the course of the last twelve months, Grupo Financiero Banorte S.A.B. C.V., has not obtained compensation for services rendered by the investme

5 nt bank or by any of its other business
nt bank or by any of its other business areas of the following companies or their subsidiaries, some of which could be analyzed wit hin this report. Activities of the business areas during the next three months. Casa de Bolsa Banorte, Grupo Financiero Banorte or its subsidiaries expect to receive or intend to obtain revenue from the se rvices provided by investment banking or any other of its business areas, by issuers or their subsidiaries, some of which could be analyzed in this report. Securities holdings and other disclosures . As of the end of last quarter, Grupo Financiero Banorte S.A.B. of C.V. has not held investments, directly or indirectly, in securities or derivative financial instruments, whose underlying securities are the subject of recommendations, representing 1% or more of its investment portfolio of outsta nding securities or 1 % of the issuance or underlying of the securi ties issued. None of the members of the Board of Grupo Financiero Banorte and Casa de Bolsa Banorte, along general managers and executives of an immediately below level, have any charges in the issuers that may be analyzed in this document. The Analysts of Grupo Financiero Banorte S.A.B. of C.V. do not maintain direct investments or through an intermediary person, in the securiti es or derivative instruments object of this analysis report. Guide for investment recommendations . Referen ce BUY When the share expected performance is greater than the MEXBOL estimated performance. HOLD When the share expected performance is similar to the MEXBOL estimated performance. SELL When the share expected performance is lower than the MEXBOL estimated performance. Even though this document offers a general criterion of investment, we urge readers to seek advice from their own Consultants or Financial Advisors, in order to consider whether any of the values mentioned in this report are in line with their investment goals, risk and financial position. Determination of Target Prices For the calculation of estimated target prices for securities, analysts use a combination of methodologies generally accepted among financial analysts, including, but not limited to, multiples analysis, discounted cash flows, sum - of - the - parts or any other method that could be applicable in each specific case according to the current regulation. No guarantee can be given that the target prices calculated for the securities will be achieved by the an alysts of Grupo Financiero Banorte S.A.B. C.V, since this de pends on a large number of various endogenous and exogenous factors that affect the performance of the issuing company, the environment in which it performs, along with the influence of trends of the stock market, in which it is listed. Moreover, th e inves tor must consider that the price of the securities or instruments can fluctuate against their interest and cause the partial and even total loss of the invested capital. The information contained hereby has been obtained from sources that we consider to be reliable, but we make no representation as to its accuracy or completeness. The information, estimations and recommendations included in this document are valid as of the issue date, b ut are subject to modifications and changes without prior notice; Grupo Financiero Banorte S.A.B. of C.V. does not commit to communicate the changes and also to keep the content of this document updated. Grupo Financiero Banorte S.A.B. of C.V. takes no responsibility for any loss arisi ng from the use of this report or its con tent. This document may not be photocopied, quoted, disclosed, used, or reproduced in whole or in part without prior written authorization from Grupo Financiero Banorte S.A.B. of C.V . History of PT and Ratings Stock Date Rating PT FIHO12 24/10/2019 Buy MXN $10.4 FIHO12 15/07/2019 Hold MXN$9.8 FIHO12 22/04/2019 Hold MXN$11.3 FIHO12 26/02/2019

6 Hold MXN$11.8 GRUPO FINAN
Hold MXN$11.8 GRUPO FINANCIERO BANORTE S.A.B. de C.V. Gabriel Casillas Olvera Chief Economist and Head of Research gabriel.casillas@banorte.com (55) 4433 - 4695 Raquel Vázquez Godinez Assistant raquel.vazquez@banorte.com (55) 1670 - 2967 Delia María Paredes Mier Executive Director of Economic Analysis delia.paredes@banorte.com (55) 5268 - 1694 Katia Celina Goya Ostos Senior, Global Economist katia.goya@banorte.com (55) 1670 - 1821 Juan Carlos Alderete Macal, CFA Senior Economist, Mexico juan.alderete.macal@banorte.com (55) 1103 - 4046 Miguel Alejandro Calvo Domínguez Economist, Regional miguel.calvo@banorte.com (55) 1670 - 2220 Francisco José Flores Serrano Economist, Mexico francisco.flores.serrano@banorte.com (55) 1670 - 2957 Luis Leopoldo López Salinas Analyst, Global Economist luis.lopez.salinas@banorte.com (55) 1103 - 4000 x 2707 Lourdes Calvo Fernández Analyst (Edition) lourdes.calvo@banorte.com (55) 1103 - 4000 x 2611 Alejandro Padilla Santana Head Strategist – Fixed income and FX alejandro.padilla@banorte.com (55) 1103 - 4043 Santiago Leal Singer FX Senior Strategist santiago.leal@banorte.com (55) 1670 - 2144 Leslie Thalía Orozco Vélez Fixed Income and FX Strategist leslie.orozco.velez@banorte.com (55) 5268 - 1698 Manuel Jiménez Zaldivar Director Equity Research — Telecommunications / Media manuel.jimenez@banorte.com (55) 5268 - 1671 Victor Hugo Cortes Castro Technical Analysis victorh.cortes@banorte.com (55) 1670 - 1800 Marissa Garza Ostos Equity Research – Conglomerates / Financials/ Mining / Petrochemicals marissa.garza@banorte.com (55) 1670 - 1719 José Itzamna Espitia Hernández Equity Research – Airlines / Airports / Cement / Infrastructure / REITs jose.espitia@banorte.com (55) 1670 - 2249 Valentín III Mendoza Balderas Equity Research – Auto Parts/ Consumer Discretionary / Real Estate / Retail valentin.mendoza@banorte.com (55) 1670 - 2250 Jorge Antonio Izquierdo Lobato Analyst jorge.izquierdo.lobato@banorte.com (55) 1670 - 1746 Itzel Martínez Rojas Analyst itzel.martinez.rojas@banorte.com (55) 1670 - 2251 Corporate Debt Tania Abdul Massih Jacobo Director Corporate Debt tania.abdul@banorte.com (55) 5268 - 1672 Hugo Armando Gómez Solís Senior, Corporate Debt hugoa.gomez@banorte.com (55) 1670 - 2247 Gerardo Daniel Valle Trujillo Manager, Corporate Debt gerardo.valle.trujillo@banorte.com (55) 1670 - 2248 Armando Rodal Espinosa Head of Wholesale Banking armando.rodal@banorte.com (55) 1670 - 1889 Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales alejandro.faesi@banorte.com (55) 5268 - 1640 Alejandro Aguilar Ceballos Head of Asset Management alejandro.aguilar.ceballos@banorte.com (55) 5268 - 9996 Arturo Monroy Ballesteros Head of Investment Banking and Structured Finance arturo.monroy.ballesteros@banorte.com (55) 5004 - 1002 Gerardo Zamora Nanez Head of Transactional Banking, Leasing and Factoring gerardo.zamora@banorte.com (81) 8318 - 5071 Jorge de la Vega Grajales Head of Government Banking jorge.delavega@banorte.com (55) 5004 - 5121 Luis Pietrini Sheridan Head of Private Banking luis.pietrini@banorte.com (55) 5004 - 1453 René Gerardo Pimentel Ibarrola Head of Asset Management pimentelr@banorte.com (55) 5268 - 9004 Ricardo Velázquez Rodríguez Head of International Banking rvelazquez@banorte.com (55) 5004 - 5279 Víctor Antonio Roldan Ferrer Head of Corporate Banking victor.roldan.ferrer@banorte.com (55) 5004 - 1454 Research and Strategy Economic Analysis Fixed income and FX Strategy Equity Strategy Wholesale Banki