GRUPO POSADAS, S.A.B. de C.V.

Transcription

1 GRUPO POSADAS, S.A.B. de C.V. Paseo de la Reforma 155, PH-B Col. Lomas de Chapultepec Del. Miguel Hidalgo Mexico, D.F Series A and Series L shares representing the corporate capital of Grupo Posadas, S.A.B. de C.V. quoted on the Mexican Stock Exchange Market, S.A.B. de C.V. Quote codes: Posadas A Posadas L The shares are registered in the National Securities Registry and quoted on the Mexican Stock Exchange Market, S.A.B. de C.V. Registration in the National Securities Registry does not imply certification of the merit of the securities, or of the issuer s solvency, of the accuracy or truthfulness of the information contained, nor does it validate the acts which, if applicable, were made in violation of the law. ANNUAL REPORT PRESENTED IN KEEPING WITH THE PROVISIONS GENERALLY APPLICABLE TO SECURITIES ISSUERS AND OTHER MARKET PARTICIPANTS FOR THE CORPORATE YEAR ENDING DECEMBER 31st OF 2009

2 INDEX 1) GENERAL INFORMATION 2 a) Glossary of Terms and Definitions 3 b) Executive Summary 4 c) Risk Factors 7 d) Other Securities 20 e) Significant Changes in Rights of Securities Registered in the RNV. 23 f) Public Documents 23 2) THE COMPANY 23 a) Company History and Development 23 b) Business Description 24 i) Principal Activity 24 ii) Distribucion Channels 26 iii) Patents, Licenses, Trademarks and Other Contracts 26 iv) Principal Clients 28 v) Applicable Legislaction and Tax Status 28 vi) Human Resources 30 vii) Environmental Performance 31 viii) Market Information 31 ix) Corporate Structure 33 x) Description of Principal Assets 34 xi) Judicial, Administrative or Arbitration Proceedings 37 xii) Representative Shares of Corporate Capital 38 xiii) Dividends 38 3) FINANCIAL INFORMATION 39 a) Selected Financial Information 39 b) Financial Information per Business Line, Geographic Zone and Export Sales 40 c) Relevant Loan Information 40 d) Comments and Analysis of the Management on the Operating Results and Financial Situation of the Company 41 i) Operating Results 41 ii) Financial Situation, Liquidity and Capital Resources 52 iii) Internal Control 58 e) Estimates, Critical Accounting Allowances or Reserves 59 4) ADMINISTRATION 60 a) External Auditors 60 b) Related Party Transactions and Conflicts of Interest 60 c) Administrators and Shareholders 60 d) Corporate By-laws and Other Agreements 66 5) STOCK MARKET 69 a) Stock Structure 69 b) Share Behavior on the Securities Market 70 c) Market Maker 71 6) PERSONS RESPONSIBLE FOR THE INFORMATION CONTAINED IN THE ANNUAL REPORT 72 1

3 7) ATTACHMENTS 74 Opinion of the independent auditors and consolidated financial statements 2009 and 2008 Opinion of Audit Committee 2

4 1) GENERAL INFORMATION a) Glossary of Terms and Definitions TERM BMV or Stock Exchange DEFINITION Shall mean Mexican Stock Exchange Market, S.A.B. de C.V. CNBV Shall mean National Banking and Securities Commission. Company or Posadas Shall mean Grupo Posadas, S.A.B. de C.V. and its subsidiaries. Issuer Grupo Posadas, S.A.B. de C.V. Audited Financial Statments The financial statements audited by Galaz, Yamazaki, Ruiz Urquiza, S.C. for the corporate years ending December 31, 2008 and 2007 included in the present Annual Report. Report The present Annual Report. RNV National Securities Registry under the National Banking and Securities Commission. $ or Pesos or M.N. Currency of legal tender in the United Mexican States. US or Dollars Currency of legal tender in the United States of America. M Millions. NIF Mexican financial information norms. 3

5 b) Executive Summary This summary is not intended to contain all of the information which may be relevant to make investment decisions regarding the securities that are herein mentioned. Therefore, the investing public should read all of the Annual Report, including the audited financial statements and, in the respective case, the corresponding notes before making an investment decision. Grupo Posadas, S.A.B. de C.V. and Subsidiaries ( the Company ) is better known for operating hotels in various Latin American countries, principally in Mexico and Brazil. According to Hotels magazine, we are the major Latin American operator based on the number of hotels and hotel rooms. We also believe that we are the leading operator in Mexico based on the number of hotels, rooms, geographic coverage, income and market participation. We stand apart from other operators by offering superior franchise services which include, among others, centralized reservation and marketing services, income optimization services, information collection and analysis platforms, robust loyalty programs and strong well-defined brands. Through our subsidiaries, to December 31, 2009, we operated 110 hotels (including four vacation club resorts), for a total of 19,454 rooms in 57 destinations in Mexico, United States, Brazil, Argentina and Chile. We are concentrated in Mexico, where we operated at the end of 2009, 94 hotels for a total of 16,487 rooms in 44 destinations. We also operated 3 hotels and 679 rooms in the state of Texas in the United States of America, 10 hotels in Brazil for a total of 1,899 rooms, two hotels in Argentina with 247 rooms and a hotel in Chile with 142 rooms. To December 31, 2009, of the 110 hotels operated, the Company had a majority holding in 33 hotels, operated 58 and leased 19. Our hotels are located in both urban as well as beach destinations serving a broad base of tourist and business travelers. Approximately 80% of our rooms are in urban destinations. We also operate a vacation club business through Fiesta Americana Vacation Club o ( FAVC ). FAVC markets and sells memberships to members so that members purchase a 40 year right to use represented by annual FAVC points. The FAVC points may be used for lodging at any of the four FAVC complexes located in Los Cabos, Baja California Sur, Acapulco, Guerrero, Cancun and Kohunlich in Quintana Roo, Mexico, as well as in any of the hotels operated by the Company. Additionally, FAVC members may use their points at Resorts Condominium International (RCI) complexes and Hilton Hotels Corp. or any complex affiliated to the latter in different parts of the world. In the majority of cases, we provide financing to those persons who buy memberships. In recent years we have marketed both our management abilities as well as our technological platforms through a series of service providing entities which were originally developed to support our hotel operations business: Ampersand, which manages loyalty programs for diverse unrelated businesses; Konexo, a call center; Conectum, which provides third-party management services or "shared services" for different industries; and GloboGo, which offers on-line travel planning services. The Company has expanded through strong positioning and development of its brands, which insure service consistency and client recognition. The Company operates its hotels in Mexico principally through the brands Live Aqua, Fiesta Americana, Fiesta Inn and One Hotels. The Live Aqua brand is a luxury brand for our lifestyle hotel located in Cancun. The Fiesta Americana hotels offer a wide variety of services and luxury rooms appealing to high economic level tourism in beach destinations and executive business travelers in city destinations. On the other hand, the Fiesta Inn hotels are smaller in size, with more moderate prices, comfortable rooms, a variety of services and located in small to medium sized cities, as well as in the suburbs of large urban areas. One Hotels attract business travelers who are looking for the best price at an excellent location since these hotels have standardized services and are located in urban areas. In Brazil, Argentina and Chile, the Company operates its luxury hotels under the Caesar Park brand, and has presence in the four star market in the principal industrial and commercial cities in those countries through its Caesar Business brand. The Company has achieved a leadership position by using different strategies and taking advantage of opportunities that have allowed it to constantly grow, creating a diversified and balanced portfolio: owned, leased and managed hotels, both city and beach hotels, serving both tourist as well as business travelers with a geographic coverage that extends across five countries, a Vacation Club which is leader in profitability and the capitalization of our management abilities into businesses that help third parties do better business. 4

6 This summary is not intended to contain all of the information which may be relevant to make investment decisions regarding the securities that are herein mentioned. Therefore, the investing public should read all of the Annual Report, including the audited financial statements and, in the respective case, the corresponding notes before making an investment decision. Selected Financial Information The following summarizes the Company s financial information. The information herein presented has been prepared in accordance with the Mexican financial information norms ( NIF ), issued by the Mexican Council for Financial information Norm Research and Development, A.C. ( CINIF ), which decided to rename the generally accepted accounting principles previously issued by the Mexican Public Accountants Institute, AC., as NIF. This consolidated financial information summary is presented for the years 2009, 2008 and 2007, based on the Company s consolidated financial statements which have been audited by Galaz, Yamazaki, Ruiz Urquiza, S.C., the Company s external auditors. The financial information presented should be reviewed jointly with the financial statements indicated in the previous paragraph and, if applicable, its respective notes. Likewise, the financial information summary should be reviewed with all the explanations provided by the management of Posadas in the Financial Information Chapter, specifically in the section Comments and Analysis of the Management on the Operating Results and Financial Status of the Company. Some figures may vary due to rounding off. 5

7 Audited Consolidated Financials (figures in millions of pesos) For the years that ended on December 31st: Income Statement Data: Total revenues Ps. 7,082.9 Ps. 6,904.5 Ps. 5,974.2 Corporate expenses Depreciation, amortization, and real estate leasing Operating income (EBIT) , ,031.9 Comprehensive financing cost (income) , Taxes (111.2) Net income (701.8) Majority net income (615.4) Balance Sheet Data (End of Period): Current assets Ps. 2,463.8 Ps. 2,667.0 Ps. 2,440.8 Property, plant and equipment, net 9, , ,266.0 Total assets 13, , ,144.8 Current liabilities 2, , ,934.8 Long-term debt 4, , ,884.4 Total liabilities 8, , ,428.7 Stockholders equity 4, , ,292.4 Other Financial Data: EBIT / Total revenues 11.4% 16.5% 17.3% Net result / Total revenues 3.7% n.d. 3.4% EBITDA $1,242.9 $1,529.9 $1,462.9 EBITDA Margin 17.5% 22.2% 24.5% Indebtedness / EBITDA 4.0 X 3.5 X 2.9 X Current assets / Current liabilities 1.02 X 1.00 X 1.26 X Total liabilities / Equity 1.97 X 1.97 X 1.40 X The shares which represent the corporate capital of the Company are listed on the Mexican Stock Exchange Market, S.A.B. de C.V., where they have quoted since The number of shares in circulation (weighted average) to December 31, 2009 amounts to approximately 486 M. Of the number of shares of capital subscribed, approximately 81% are series A common shares with full voting rights and 19% are represented by series L shares with limited voting rights. Additionally, approximately 20,000 series A shares and 48,000 series L are quoted on the PORTAL system (Private Offerings, Resales and Trading through Automated Linkages) of the NASD (National Association of Securities Dealers) in the form of ADS (American Depositary Shares). Series A shares have shown minimum negotiability according to the BMV s rating while the Series L shares low negotiability to the BMV rating, therefore both series operate according to a BMV bid scheme. Trading in series A and series L shares has never been suspended by the regulatory authorities. The following table shows the annual behavior of the series A and series L shares during the last five years on the Stock Market: 6

8 POSADAS A Price (High) Price (Low) Price (Closing) Average daily volume (thousands of shares) POSADAS L Price (High) Price (Low) Price (Closing) Average daily volume (thousands of shares) Source: Bloomberg (The daily average volume is based on trading days). For more information regarding share behavior see section 5 b) Stock Market Share Behavior on the Securities Market. c) Risk Factors The investing public should consider carefully all the information contained in the Annual Report, and specifically the following risk factors. These risks are not the only ones that the Company faces. Additional risks and uncertainty of which the Company is not aware or that are currently thought immaterial may have a material adverse effect on the Company s business, operations, financial situation and operating results. Risks Relating to Our Hotel and Vacation Club Business Substantial volatility in the global capital markets, unavailability of financing in the global capital markets at reasonable rates and widely documented commercial credit market disruptions since the fall of 2008 have had a significant negative impact on financial markets, as well as the global and domestic economies. The effects of these disruptions are widespread and difficult to quantify, and it is impossible to predict when the global financial markets will improve. There is now general consensus among economists that the economies in which we operate and much of the rest of the world were and may continue to be in a recession, and we are experiencing reduced demand for our hotel rooms and vacation club units. Substantial increases in air and ground travel costs, and decreases in airline capacity arising primarily from reduced flights have also reduced demand for our hotel rooms and vacation club units. Accordingly, our financial results have been impacted by the economic slowdown and our future financial results and growth may be further harmed if current global economic conditions persist or worsen, resulting in wide-ranging, adverse and prolonged effects on general business conditions, and adverse effects on our results of operations and liquidity. The effects of the current economic situation are extremely difficult to forecast and mitigate. A high percentage of the hotel rooms we manage are in luxury hotels or in hotels in locations which have been particularly impacted by the current economic downturn, which has had and continues to have a significant adverse effect on the operating and financial results of our business. Approximately 34% of the rooms that we manage are in Hotels classified as luxury hotels. Luxury hotels generally command higher room rates. In an economic downturn, these hotels are susceptible to a decrease in revenues, as compared to hotels in more economical categories, since hotels in this segment 7

9 generally target business and high-end vacation. In periods of economic difficulties, such as the current situation, business and leisure travelers reduce their travel costs or limit or reduce the number of trips. If the current economic conditions persist, it may have an adverse effect on our operating and financial results. The geographic concentration of our hotels in Mexico and Brazil exposes us to any adverse developments specifically affecting those countries. The Company s operation are principally concentrated in Mexico since of the 110 hotels operated 94, that is 85% of the rooms operated are located in Mexico and these represent 89% of income while 10 hotels, or 10% of rooms and 8% of income correspond to Brazil. In spite of the fact that inventory in Mexico is diversified to serve the city and beach segments as well as vacation and business travelers, the Company is significantly dependent on its Mexican operations. If these Mexican operations do not function according to the Company s designed plan and strategy, it could have material adverse effect on the Company s operations, financial situation or its overall operating results. A regional, national or global outbreak of influenza or other diseases, such as the recent international outbreak of H1N1 influenza, could adversely affect our business and operating results. In April 2009 an outbreak of influenza A (H1N1) occurred in Mexico and the United States which spread to more than 70 countries, leading the World Health Organization to declare the first global flu pandemic in over 40 years. In Mexico, localized public-health measures were implemented as a result of the H1N1 influenza outbreak, including travel bans, the closings of schools and businesses, and cancellations of events. The H1N1 influenza epidemic adversely impacted public perception of the safety or desirability of travel to and within Mexico, which materially reduced demand for our hotel and vacation club businesses and, correspondingly, significantly reduced our income. New H1N1 influenza outbreaks or other communicable diseases could impact travel and lead to the implementation of additional public-health measures and result in reduced demand for public accommodations, such as our hotels and vacation clubs, and negatively affect our business and operating results. Likewise, any outbreaks or recurrence of avian flu, SARS, H1N1 influenza or other adverse public health developments in Mexico or Brazil may have a material adverse effect on our business operations. We face competition for management and leasing agreements. Competition for guests. The hotel business is highly competitive. Foreign investors, using Mexican corporations, may directly or indirectly purchase a 100% holding in tourism-related businesses, including construction, sale, rent, or operation of realty in Mexico. Competition in the hotel sector is represented by a variety of national and international hotel operators, some of these, especially international operators, are substantially bigger than the Company and may have greater marketing and financial resources than the Company. Said operators may operate under recognized international and Mexican brands. In addition to competing for guests with other Mexican resorts, the Company also competes for guests with resorts in other countries. Competition for management and leasing agreements. When the Company seeks to grow through increasing the number of hotel properties, it faces competition from other entities seeking the same opportunities. The Company competes with other entities that have greater financial resources or that have better-recognized international brands so as to enter into management contracts and leases with hotel owners. In addition to the competition for new opportunities, the Company is also subject to competition from other hotel chains when the Company s existing management or lease contracts expire. Although in the past the Company has been successful in renewing its management contracts, there can be no assurance that the Company will continue to be as successful in the future. Competition may generally reduce the number of growth opportunities in the future, increase the bargaining power of hotel owners and reduce the Company s operating margins. 8

10 Our Management Contracts and Leases may be terminated or not renewed under various circumstances, which may have a material impact on our operating results. Under certain of our Management Contracts, the owner may cease our property management services and terminate the contracts if specified performance standards for the hotel are not met or if we breach any material obligation under these Agreements. In addition, although our Management Contracts and/or Leases ordinarily limit the owner s ability to transfer or convey such hotels or to assign the rights to a third party and seek other protective measures, we cannot assure that such transfer or conveyance will not occur nor that the third party to which the land or rights are conveyed will continue performing under such Agreements. We have not experienced any problems with respect to renewal of our management or lease agreements, but we cannot insure that the termination protections included in our Management Contracts and Leases will prevail in our favor. The termination of Management Contracts as a result of hotel conveyances or our inability to renew such Contracts on terms favorable to us may have an adverse effect on our income. In addition, hotel owners may choose to wait out expiration of our management contracts. As of December 31, 2009, the average remaining term of our Management Contracts was 6.4 years. In addition, as regards some of our owners, we do not have the right to assign the Management Contract to a third party without prior consent from the relevant hotel owner. The termination of Management Contracts could have a material adverse effect on our operating results. Our income may not be sufficient to cover our obligations under our lease agreements. Of the hotels we operate, we Lease 19 from third-party owners. We must comply with our lease obligations, including lease payment obligations and other obligations that require us to incur determined operating expenses, even if the hotel operation is not profitable. During the year ending December 31, 2008, eight of our 23 leased hotels during such period did not generate sufficient revenues to cover our lease payment obligations. To December 31, 2009, 13 of our 19 leased hotels during such period did not generate sufficient revenues to cover our lease payment obligations. In accounting terms, leases are not capitalized and are registered as expense as they accrue. Our financial and operating condition may be adversely affected to the extent that our income and operating profits are not sufficient to cover our obligations under the lease agreements. Our growth strategy may not improve our operating results. The Company has a growth strategy for its hotel, vacation club and service businesses. The Company s ability to expand will depend on a number of global economy factors including, but not limited to, the conditions of the United States, Mexican, Brazilian, Argentine and Chilean economies, the ability of investors to construct new properties for the Company to manage and/or lease and the selection and availability of new hotels locations. There can be no assurance that our expansion plans can be achieved, or that the new hotels or vacation club developments will meet with consumer acceptance or be operated profitably. In this same manner, the Company continues to develop new businesses related to offering thirdparty services, such as loyalty program management, rendering management services and contact services. Our new services businesses may not be successful and may affect our hotel business. We have recently created certain services businesses, including Ampersand, Konexo, Conectum and GloboGO, which, on a consolidated basis, represented 14% of our revenues for the year ending December 31, These service businesses have grown in comparison with our competencies, and we have attempted to leverage to diversify our operations beyond the hotel industry; however there can be no assurances that these services businesses will perform in accordance with our expectations. Moreover, our efforts to establish these service businesses are likely to divert management attention and resources. If we take longer than anticipated or are not able to successfully establish the service businesses, their anticipated benefits may not be partially or fully attained, or it may take longer to attain than expected. In addition, we rely on several of these businesses to perform certain critical functions, such as administering our loyalty program, operating our call center and providing outsource processing services such as accounting, payroll and technology services. If any of these companies cease to provide us with their 9

11 respective services, or if they provide them less effectively, our operations and financial condition would be adversely affected. Our properties are subject to risks relating to Acts of God and any such event may materially adversely affect our operating results. The properties that the Company operates are subject to Acts of God, such as natural disasters, particularly in locations where we own and/or operate various hotels. Some of these events may be hurricanes, earthquakes, epidemics, terrorism and environmental hazards, which may be either uninsurable or insurance costs are too expensive with significant deductibles to the Company. Notwithstanding, that said properties are insured against All Risks the damage that said events may cause represent a materially adverse risk factor to the properties managed and to the income derived from these properties, to the Company s financial situation or to its operating results. The Company operates 19 hotels in beach locations which are subject to hurricanes and which may be affected by loss of business due to business activity reduction caused by a hurricane. The coastal areas of Mexico are prone to hurricanes, and our financial condition will be affected if its hotels suffer damage from hurricanes, as well as from the loss of business due to hurricane activity in these areas. High crime rates and the threat of violence may adversely and materially affect our results. Insecurity in cities and in the country, as well as internal and foreign perception of the country s lack of public safety may influence on tourist and business traveler flow to the destinations in which the Company operates a hotel. High crime rates, violence resulting from drug-trafficking activities and kidnappings have been experienced in several areas of Mexico and Brazil, including areas in which we operate, and have been widely covered in the media. Therefore, both tourists and business travelers may be deterred from traveling to Mexico and Brazil which would materially and adversely affect our revenues and operating result due to decreased travel and reduced demand for the destinations affected by such events. We have significant amounts of indebtedness which become due in the next several years, and we cannot assure secure refinancing on favorable terms. Historically, we have addressed our liquidity needs (including funds required to make scheduled principal and interest payments, refinance indebtedness, and fund working capital and planned capital expenditures) with operating cash flow, borrowings under credit facilities, proceeds of debt offerings and proceeds from asset sales. The global credit markets have recently experienced significant price volatility and liquidity disruptions which have caused market spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making financing terms for materially less attractive and, in several cases, have resulted in the unavailability of certain types of financing. This volatility and illiquidity has negatively impacted a broad range of fixed-income securities. As a result, the market for fixed-income securities has experienced decreased liquidity, increased price volatility, and increased defaults. These factors and the continuing market disruption have had, and may continue to have, an adverse effect on the Company, including on its ability to refinance indebtedness. In addition, continued uncertainty in the equity and credit markets may negatively impact our ability to access additional short-term and long-term financing which would negatively impact our liquidity and financial condition. We are subject to significant claims in Mexican tax disputes for which we do not maintain reserves. We are involved in various tax proceedings, including several tax disputes with federal tax authorities regarding our operations in the States of Baja California Sur and Quintana Roo alleging underpayments by the Company and some of our subsidiaries for an aggregate accumulated amount of approximately Ps.1,121.0 million. The foregoing amount does not include other amounts such as fines, surcharges and updates interest that we may be required to pay if these claims are unfavorable to the Company. On November 12, 2004, the Servicio de Administracion Tributaria (Tax Administration Service), or SAT, the Mexican federal revenue service, alleged that we failed to pay income taxes in fiscal year 2000 and levied a claim seeking Ps (U.S.$7.7) million. We filed a juicio de nulidad (annulment action) before the Tribunal Federal de Justicia Fiscal y Administrativa (Federal Fiscal and Administrative Justice Court), or TFJFA, to challenge the claim. One of our subsidiaries, Inmobiliaria Hotelera Posadas S.A. de C.V., has 10

12 provided a payment guarantee in the amount of the claim in connection with the annulment action. Said proceeding is pending decision. On April 28, 2005, the SAT alleged that Compañia Hotelera Los Cabos S.A. de C.V., one of our subsidiaries, failed to pay value-added taxes and income taxes in fiscal year 2000 and levied a claim seeking Ps million. The Company initiated an administrative proceeding before the SAT to challenge the claim. The SAT did not act on our challenge and, consequently, we filed an annulment action before the TFJFA to challenge the claim. On January 23, 2006, the SAT alleged that Compañia Desarrolladora Los Cabos S.A. de C.V. failed to pay certain value added taxes and income taxes in the fiscal year 2000 and levied a claim seeking approximately Ps million. The Company initiated an administrative proceeding before the SAT to challenge the claim. The SAT did not act on the administrative proceeding filed and, consequently, we filed an annulment action before the TFJFA to challenge the claim. One of our subsidiaries, Inmobiliaria Hotelera Posadas S.A. de C.V., has provided a payment guarantee in the amount of the claim in connection with the annulment action. Said proceeding is pending decision. On September 4, 2007, the SAT alleged that the Company failed to pay income taxes in fiscal year 2000 and levied a claim seeking Ps million. The Company filed an annulment action before the TFJFA to challenge the claim. Two of the Company s subsidiaries, Operadora del Golfo de Mexico, S.A. de C.V. and Gran Inmobiliaria Posadas, S.A. de C.V. have granted a lien on one of our hotels with a value in excess of the amount of the claim. The annulment action is pending decision. On April 25, 2008, the SAT alleged that the Company failed to pay certain asset and income taxes in fiscal year 2001 and levied a claim seeking Ps.89.7 (U.S.$6.6) million. The Company filed an annulment action before the TFJFA to challenge the claim. Two of our subsidiaries, Posadas de Mexico, S.A. de C.V. and Hoteles La Mansion, S.A. de C.V., have provided payment guarantees in the amount of the claim in connection with the annulment action. The annulment action is pending decision. If any of these various actions is resolved unfavorably to the Company s interest, we may ultimately be required to pay the amounts levied together with the corresponding updates, surcharges and fines. In the respective case, these amounts are likely to be significant if so resolved. Generally speaking, tax proceedings pose a significant amount of unpredictability and, as a result, we cannot forecast the outcome of any of these proceedings, when they may be resolved or the final amounts that may be payable in connection therewith. To this date, the Company s management has not allocated any reserve in relation to such disputes since based on the opinion of the Company s tax advisors, and as permitted by NIFs, that an unfavorable outcome is possible but less than probable, and as such the actions of the Company s Management are based on the latter opinion. If all or a significant part of these actions were decided adversely to us, it could have a material adverse impact on our business, financial situation and operating results. We are exposed to currency and exchange rate risk on our debt, and we have entered into derivatives contracts. Historically, the majority of our indebtedness had been denominated in U.S. dollars. As of December 31, 2009, approximately 83% of our indebtedness was denominated in U.S. dollars (Ps.3,827.0 (U.S.$283.7) million). In addition, approximately half of our indebtedness bore interest at variable rates. As a result, we were also exposed to risks from fluctuations in interest rates. To help minimize our exposure to high volatility in peso interest rates, we have sought to maintain a significant percentage of our indebtedness in U.S. dollars. In times when non-u.s. dollar markets are available to issue debt, we enter into derivative financial instruments with financial institutions so as to balance our debt in alignment with our revenues. Specifically, income from certain hotels in Mexico, Brazil and Argentina whose room rates are typically quoted in U.S. dollars, as well as the sale and financing of time-share club memberships which are also typically quoted in U.S. dollars. We do not usually enter into derivative financial instruments for any other purpose than those stated, however these are limited in amount and frequency, and although we may do so in the future. The types of derivative instruments we have typically entered into in recent periods principally include cross-currency swaps in which we generally pay U.S. dollar amounts based on fixed interest rates and receive peso amounts based on peso floating interest rates. Our use of derivative instruments is primarily intended to provide protection against the exchange rate risk of our indebtedness. Our use of derivative instruments for interest-rates is intended to mitigate risk. We may determine that such risks are acceptable or that the protection available through derivative instruments is insufficient or too costly. These determinations depend on many factors, including market conditions, the specific risks in question and our expectations concerning future market developments. We review our 11

13 derivatives positions regularly, and our hedging policies change from time to time. Notwithstanding such review, our derivative positions may be insufficient to cover our exposure. If financial markets experience periods of heightened volatility, as they have recently, our operating results may be substantially affected by variations in exchange rates and, to a lesser degree, interest rates. These effects include foreign exchange gain and loss on assets and liabilities denominated in U.S. dollars, fair value gain and loss on derivative instruments, and changes in interest income and interest expense. Although we attempt to match the cash flows on our derivative transactions with the cash flows on our indebtedness, the net effects on our reported results in any period are difficult to predict and depend on market conditions and our specific derivatives positions. Although we seek to enter into derivatives that are not affected by volatility to a significant extent, in the event of volatile market conditions our exposure under derivative instruments may increase to a level that impacts our financial condition and operating results. In addition, volatile market conditions may require us to post collateral to counterparties in our derivatives transaction, which would affect our cash flow position, the availability of cash for our operations and may impact our financial condition and operating results. Our derivative transactions may also be subject to the risk that our counterparties will seek bankruptcy protection. The instability and uncertainty in the financial markets has made it more difficult to assess the risk of counterparties to derivatives contracts. Moreover, in light of the greater volatility in the derivatives and stock exchange markets, there may be fewer financial entities available with which we could continue entering into derivative financial instruments to protect the Company against currency risks and the financial condition of our counterparties may be adversely affected under stressful conditions. Any failure to protect our brands could have a negative impact on the value of our brand names and adversely affect our business. We believe our brands and trade names are an important component of our business. We rely on laws that protect intellectual and industrial property rights to protect our registered proprietary rights. The success of our business depends in part upon our continued ability to use our industrial property rights to increase brand awareness and further develop our brands in both the Mexican and international markets. Monitoring the unauthorized use of our intellectual property is difficult and burdensome. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources to said purpose and which may result in counterclaims or other claims against the Company, divert management attention and could significantly harm our operating results. From time to time, we apply to register or keep certain trademarks registered. There is no guarantee that such trademark or trade name registrations will be granted. We cannot assure that all of the steps we have taken to protect our trademarks in Mexico and other countries in which we operate our business will be adequate and sufficient to prevent imitation of our trademarks by third parties. The unauthorized reproduction of our trademark and trade names may result in diminishing the value of our brand, losing of competitive advantage or brand goodwill, and could adversely affect our business. Costs of compliance with employment laws and regulations could adversely affect operating results. Collective bargaining agreements for hotel employees are up for renewal periodically. Although under the terms of the management contracts, the collective bargaining agreement or the individual contracts, as applicable, the employees at our managed hotels are employed by the hotel owners, nevertheless such employees may direct their claims against us. In such circumstances, if we are not successful in defending our position before a labor court, we may be held liable for those employee claims. In addition, we have a significant number of employees working at our wholly owned hotels. Although we have not experienced labor stoppages or disruptions in the past, the failure to timely renegotiate the expiring contracts may result in labor strikes or disruptions which could adversely affect our revenues and profitability. Labor costs, including those related to indemnity payments under labor laws are significant, may also escalate beyond our expectations which could have a material adverse effect on our operating margins. 12

14 We depend on our key employees. We are dependent on the members of our Executive Committee and other key members of our executive management staff, the loss of whose services could have a material adverse effect on our business and future operations. Our insurance coverage may be insufficient to cover potential losses. We carry insurance coverage for general civil liability, damage to property, business interruption and other risks with respect to our owned, managed and leased hotels and we make available insurance programs and package to the owners of hotels we manage. These policies offer coverage terms and conditions that we believe are usual and customary for our industry. Generally, our all-risk policies provide that coverage is available on a per occurrence basis and that each occurrence has a limit as well as various sub-limits on the amount of insurance proceeds we will receive in excess of applicable deductibles. In addition, there may be overall indemnification limits under the terms of the policies. Sub-limits exist for certain types of claims such as service interruption, debris removal, expediting costs or landscaping plant material replacement, and other landscaping elements, however the amounts covered under these sub-limits are significantly lower than the amounts covered under the overall coverage limit. Our policies also provide that, for the coverage of earthquakes, hurricanes and floods, all claims from any hotel resulting from a covered event must be combined for purposes of the annual aggregate coverage limits and sub-limits. In addition, any such claims will be combined with claims by the owners of managed hotels that participate in our insurance program. Therefore, if covered events occur that affect more than one of our owned hotels and/or managed hotels that participate in our insurance program, the claims from each affected hotel will be added together to determine whether, depending on the type of claim, the per occurrence limit, annual aggregate limit or sub-limits have been reached. If the limits or sub-limits are exceeded, then each affected hotel would only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third-party owners would reduce the coverage available for our owned and leased hotels. There are also other risks including, but not limited to, armed conflicts or guerillas, certain forms of nuclear, biological or chemical terrorism, certain forms of political risks, some environmental hazards and/or certain events of acts of God that may be deemed outside of the general coverage limits of our policies, uninsurable or for which carrying insurance coverage is cost-prohibitive. Obtaining payment from insurance providers of a particular claim that we believe to be covered under our policy may also be considered a risk. Should an uninsured loss or a loss in excess of our insured limits occur, we could lose all or a portion of the capital we have invested in a hotel owned, managed or leased by us, as well as the anticipated future income from any such hotels. In that event, we might nevertheless remain bound for any lease payments or any other financial obligations related to the hotel. Our vacation club business is subject to regulation. We develop and operate vacation club resorts and we market and sell time-share memberships in our vacation club. We generally sell the memberships pursuant to interest-accruing monthly installment payment arrangements. These activities are all subject to regulation by various federal agencies, including the standards established by the Normas Oficiales Mexicanas (Official Mexican Standards). For example, Mexican regulations grant the purchaser of a time-share vacation club membership the right to rescind the purchase contract at any time within a minimum statutory rescission period of five business days runs upon the signing of the contract. In addition, the Procuraduria Federal del Consumidor (the Mexican Consumer Protection Agency) must authorize our model contract for the sale of time-share memberships. Although we believe that we are in material compliance or in the process of complying with all applicable and enforceable laws and regulations to which time-share vacation club marketing, sales and operations are currently subject, including the terms of our agreements, changes in these legal requirements or a determination by a regulatory authority that we were not in compliance may adversely affect our business and the manner in which we operate our vacation club. The vacation club business is subject to risk of member defaults. At present, we bear the risk of defaults under purchase contracts for vacation club (time-share) memberships. Vacation club members buy a 40-year-right-to-use evidenced by an annual allocation of vacation club points. We typically charge an initial payment of between 10% and 30% of the price of the 13

15 membership and offer monthly installment payment plans that accrue interest for the balance of the purchase price. We recognize as income the entire value of a purchase contract at the time 10% of the purchase price is paid, and we create a reserve for future uncollectible accounts based on our market experience and knowledge. At the time a purchaser enters into a time-share installment purchase agreement the defaults on said sale is covered by the reserve. It may be the case that our reserve would not be sufficient to offset breaches which could negatively affect our financial results. Also, historically, substantially all of our vacation club sales have been denominated in U.S. dollars. Due to the on-going financial crisis, a significant portion of our vacation club revenues have been recalculated, albeit at a higher interest rate, at the request of certain members facing liquidity difficulties. The great majority of Mexican members that wanted to convert their installment payment obligations from U.S. dollars were able to do so. We expect to continue to offer peso-denominated payment plans to Mexican residents challenged by the current economic situation. Recently we have financed our receivables in pesos, generating a better currency match of cash flows. Notwithstanding our redenomination of a significant portion of our vacation club receivables portfolio, many outstanding vacation club sales and loans to purchasers remain denominated in U.S. dollars. Accordingly, our results will still be affected by U.S. dollar-peso exchange rate fluctuations. While membership payments are made in U.S. dollars throughout the payment period in force, and sales revenues are recognized in U.S. dollars at the time the contract is signed, the value of the memberships may ultimately be discounted to the extent that the ratio of pesos is depreciated in relation to the U.S. dollar. We do not completely hedge against our exposure to exchange rate fluctuation risk. Traditionally, we have not executed hedging transaction for this exposure. Risks Relating to the Hospitality Industry We are subject to all of the operating risks common to the hotel and vacation club industries. Operating risks common to the hotel and vacation club industries include: changes in general economic conditions, including the timing and robustness of a recovery from the current economic downturn; impact of public insecurity, armed encounters and terrorism on travel desirability; domestic and international political and geopolitical conditions, including civil uprisings and unrest, expropriation, nationalization and repatriation; travelers fears of exposures to contagious diseases; decreases in demand or increases in offer of memberships of vacation clubs or ownership interests; the impact of internet intermediaries on pricing and our increasing reliance on technology; cyclical over-building of hotel and vacation club properties; restrictive changes or interpretations of laws or regulations, as well as any other governmental actions, including those relating to zoning and land use, health and safety, the environment, taxation, travel and immigration; changes in tourist and travel patterns; changes in operating costs including, but not limited to, energy, labor and labor-related liabilities such as social security, insurance and unanticipated costs incurred or foreseen due to natural disasters and their consequences; disputes with third-party property owners which may result in litigation; disputes relating to the right to use brands and trade names; the availability of capital to fund construction, renovations and other investments; foreign exchange fluctuations; personal injury and other types of litigation brought by our customers or consumers; the financial condition of third-party property owners; and 14

16 the financial condition of the airline industry and its impact on the hotel industry. We are also impacted by our relationships with third-party property owners. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us in certain circumstances, such as the bankruptcy or reorganization of the hotel owner, the failure to meet certain financial or performance criteria and, in some cases, if the property is sold. Our ability to meet these financial and performance criteria is subject to, among other things, the risks described in this section. Additionally, our operating results would be adversely affected if we are not able to maintain existing management agreements or obtain new management agreements on terms as favorable as the existing agreements. We are subject to government regulations. We are subject to laws, ordinances and regulations relating to, among other things, taxes, environmental matters, the preparation and sale of food and beverages, handicap accessibility, construction, occupational health and safety, and general building and zoning requirements in the various jurisdictions in which our hotels are located. Owners and managers of hotels may also be subject to laws governing the relationship with hotel employees. Compliance with and monitoring these laws may be cumbersome. Failure to comply with the preceding laws may materially and adversely affect our operating results. Environmental laws, ordinances and regulations of the various jurisdictions in which we operate regulate our properties and may make us liable for the costs of removing or cleaning up hazardous or toxic substances on, under, or in property we currently own, operate or lease or that we previously owned, operated or leased without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properly clean up such substances if present could jeopardize our ability to develop, use, sell or rent the affected realty or to borrow money using such property as a guarantee. We are also subject to other laws, ordinances and regulations relating to lead, asbestos-containing materials, operation and closure of storage tanks, and preservation of wetlands, coastal zones or endangered species, which could limit our ability to develop, use, sell or rent our real property or use it as collateral. Future changes in environmental laws or the discovery of currently unknown environmental conditions, including archeological zones, may have a material adverse effect on our financial condition and operating results. In addition, Mexican environmental regulations have been increasingly stringent over the last decade. This trend is likely to continue and may be influenced by the environmental agreement entered into by Mexico, the United States and Canada in connection with the North American Free Trade Agreement, or NAFTA. Accordingly, there can be no assurance that more stringent enforcement of existing laws and regulations or the adoption of additional laws and regulations would not have a material effect on our business and financial (or other) condition or prospects. The hotel industry is seasonal in nature. The hotel industry is cyclical by nature. Of the 19,500 hotel rooms that the Company operated to December 31, 2009, approximately 20% are located in beach destinations where the cyclical nature is more pronounced in contrast to hotels that cater primarily to business travelers. Generally, our resort hotel revenues are greater in the first and third quarters than in the second and fourth quarters, which reflect winter vacations. This seasonal cycle may generate quarterly fluctuations in the Company s revenues. Concentration in Internet distribution channels may negatively impact our distribution costs. A significant number of our hotel rooms are booked through internet travel intermediaries that have expanded in the past several years. To the extent that internet bookings increase, these internet travel intermediaries may be able to obtain higher commissions or reduced room rates. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the price and general quality indicators (such as three-star downtown hotel ) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations systems rather than to the brands of the hotel supplier. Although we expect to derive most of our business from our direct distribution channels (call center, our corporate sales booking tools and our websites) and traditional distribution channels, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be harmed. 15

17 The hotel industry places significant dependence on technology. The hospitality industry continues to demand the use of sophisticated technology and systems including solutions utilized for property management, income management, quality and brand control, procurement, reservation systems, operation of our customer loyalty program, and guest distribution and services. These technologies may be expected to require enhancements and new interfaces, including those to comply with legal requirements such as privacy regulations and specifications established by third parties such as the electronic payment card industry. Further, the development and maintenance of these technologies may require significant capital. There is no assurance that as various systems and technologies becomes outdated, or new technology is required, we will be able to replace or introduce these as quickly as our competition or within budgeted costs and timeframes for such technology. Furthermore, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology platform or system. The hotel and vacation club industries are capital intensive. For our hotel properties to remain attractive and competitive, the Company or the hotel owner, as applicable, must periodically spend a percentage of their cash flow. This creates an ongoing need for cash and, to the extent the Company or the hotel owners, as the case may be, cannot fund capital expenditures from cash flow generated by operations, then the funds must come from additional financing. In addition, the Company to continue growing its vacation club business, the Company needs to use cash flow or contract additional indebtedness to develop new units. Accordingly, the Company s financial results may be affected by the cost and availability of such funds. General Risks of Real Estate Investment. The Company is subject to the risks inherent in real property ownership. Profitability on the Company s hotels may be affected by changes in local economic conditions, competition from other hotels, interest rate variations and financing availability, environmental legislation impact and compliance with environmental laws, continuous need for improvements and remodeling, especially of old structures, tax modification affecting realty, adverse changes in governmental and fiscal policies, as well as disasters, including earthquakes, hurricanes and other natural disasters, adverse changes in state laws and other factors beyond the Company s control. Lack of Real Estate liquidity. Real estate are relatively liquid. The Company s ability to diversify its hotel properties investment in response to economic or other conditions may be limited. There can be no assurance that the market value of any of the Company s hotel will not decrease in the future. The Company cannot guarantee that it will be able to dispose of a hotel if it deems it advantageous or necessary, nor can the Company assure that the sale price of any of its properties will recoup or exceed the amount of its original investment. According to NIFs, book value of the Company s properties to December 31, 2007 was restated using factors derived from the National Consumer Price Index ( INPC ). Beginning on January 1, 2008, the Company suspended recognizing inflationary effects. Moreover, the Company s practice is to capitalize improvements, remodeling, and replacements. In regards to ownership of foreign subsidiaries, they are valued at historical cost and converted into pesos, as explained in Note 2c in the Audited Financial Statements. New service businesses may not be successful and may affect our hotel business. Recently we have created certain service business, including Ampersand, Konexo, Conectum and GloboGo that consolidated represent 14% of the Company s total income to December 31, 2009 and These businesses have been developed from our hotel business but it cannot be assured that these businesses will fulfill our expectations. Furthermore, the implementation and development of these businesses may distract the management team and divert funds. If the implementation of these service businesses takes longer than planned or if it is not successfully completed, the forthcoming benefits may be less or null. However, we depend on these businesses to operate various businesses, such as the Fiesta Rewards program, the contact or call center, accounting processing, payroll payments, and technology services. If any of these companies cease to provide their respective services to us, or if they provide them less effectively, the Company s operations and financial condition would be adversely affected. 16

18 Our clients may undergo financial difficulties and we may be unable to recover accounts receivables. During a contract term, the financial situation of our clients may change thus affecting their ability to pay their obligations and our ability to collect commissions and for the services provided. Although there are several ways to collect accounts receivables, these methods may be costly and are also time consuming yet do not guarantee recovery. Inability to collect on our accounts may adversely affect the Company s profitability. A failure in operating systems could cause service delays or interruptions which could cause us to lose customers and income. We rely on our telecommunication infrastructure to provide our hotel customers reliable access to our reservation system, customer services and other services, including internet and telephone. Some of the risks to our network and infrastructure include, amongst others, physical damage, natural disasters such as hurricanes, earthquakes, flooding and storms, and other events beyond our control. Although we carry the necessary insurance against loss and we have installed alternate backup systems, service interruptions or reduced customer capacity may occur, either of which could cause us to lose customers and revenues or incur additional expenses which would adversely affect the Company s operations, financial condition and operating results. Holding Company Structure. The Issuer is a holding company which principal assets are the share of its subsidiaries. Even though at present the majority of the subsidiaries are not contractually limited to pay dividends to the Issuer, any financing or other agreement that in the future restricts the subsidiaries ability to pay dividends or make other payments to the Company may adversely affect the latter s liquidity, financial situation and operating results. Generally, Mexican corporations may pay dividends to their shareholders if dividend payments and the financial statements reflecting distributable net profits have been approved by the shareholders, after establishing the legal reserves, and only if all losses have been absorbed or paid. Since the Company is a holding company the possibility that the Issuer may satisfy the demands of its creditors ultimately depends on its ability to participate in its subsidiaries asset distribution upon liquidation. The Issuer s right, and therefore its creditors right to participate in said asset distribution, is effectively subordinated to the subsidiaries creditors payment claims (including claims having legal preference and the Company s creditors claims which are guaranteed by said subsidiaries). We will be obligated to adopt new accounting standards in 2012 that may affect our consolidated financial statements and may affect the measurement methods used by the financial community to evaluate our results. We currently prepare our financial statements in accordance with NIFs. In January 2009, the CNBV approved a new regulation requiring all publicly listed companies in Mexico, including us, to apply international NIFs, or IFRS (International Financial Reporting Standards) in preparing their consolidated financial statements, including presentation of comparable annual statements for the prior year, by January 1, Because our financial statements prepared in accordance with IFRS may differ from our financial statements prepared in accordance with NIFs, the methods used by the financial community to assess our financial results and value our publicly traded securities, such as debt-to-equity ratios may be affected. As of the date hereof, we have not assessed the impact of adopting IFRS on our financial statements. Risks Relating to Mexico Mexican economic conditions and governmental policies. The Company is incorporated according to Mexican law, and its corporate offices as well as an important part of its assets are located in Mexico. As a result, the Company s operating results have been and in the future shall be significantly affected by the political, social and political conditions in Mexico. 17

19 The Mexican federal government has exercised, and continues to exercise, significant influence over the Mexican economy. Due to the above government economic policies, these may have a significant impact on the private sector, on the Company in particular, as well as on market conditions, on prices and payment of the securities issued by Mexican entities, including those issued by the Company. In the past Mexico has experienced periods of slow, including negative, economic growth, the peso suffered drastic devaluations and currency exchange systems were implemented. Beginning in 1994, and during 1995, Mexico underwent an economic crisis characterized by devaluation of the peso in regard to other currencies, increased inflation, high interest rates, capital flight, negative economic growth, reduction in consumer purchasing power, and a high unemployment rate. The Mexican economy suffered another economic slowdown during the second semester of 1998 due to a fall in the price of oil, an important part of the Nation s income, and from the existing volatility in emerging markets, caused by economic crisis in Asia, Brazil and Russia. From 2001 to 2003, Mexico experienced a period of low economic growth, resulting from a slowdown in the United States economy. In 2001 the Gross Domestic Product (PIB) decreased 0.2% and increased in 2002 and 2003 by 0.7% and 1.3%, respectively. To the contrary, in 2004, 2005, 2006, 2007 and 2008 the Mexican economy experienced GDP growth of 4.4%, 3.0%, 4.8%, 3.7% and 1.3%, respectively, principally driven by a low interest rate and controlled inflation environment. However, by 2009 the economy presented a decrease of 6.5% as a consequence of the pronounced global economic slowdown that began in the last quarter of 2008 and of the influenza A (H1N1) epidemic which broke out at the end of April During the first semester of 2009, the global financial markets became highly volatile causing in the short term the bankruptcy and rescue of some financial institutions, mainly in the United States of America. As a consequence of the preceding, local investors became risk adverse and this was reflected in the securities markets, less credit and a market liquidity crisis, as well as a depreciation of the peso in relation to the U.S. dollar of about 25%. The crisis and the slowdown in the Mexican economy may generate a material adverse effect on the Company s operations and financial conditions. Currency fluctuations To December 31, 2009, approximately 83% of our total indebtedness is denominated in U.S. dollars, while the majority of the Company s sales are Peso denominated an important portion of its debt, as well as accounts payable are denominated in Dollars, see Note 17 to the Company s audited consolidated financial statements included in this Annual Report. The peso has been subjected to significant depreciations in the past and may be depreciated in the future. Peso depreciation would negatively impact the Company s results and financial condition due to the implicit increase in financing costs. This would be because the peso cost of the Company s debts in dollars would increase and would affect the Company s ability to pay its dollar denominated debt. The closing currency exchange rate to December 2009 was $ Mexican pesos per United States of America dollar which represented a 3.7% appreciation during the corporate year and presented high volatility during In regards to the use of derivative instruments, we principally use cross currency swaps for which we, generally, pay a fixed interest rate in U.S. dollars and receive a variable interest rate in pesos. To December 31, 2009, the Net Mark to Market derivatives position was $270.4 M. During periods of high volatility, like those recently experienced in the markets, these may represent important variations such as exchange losses or gains and, to a lesser extent, interest rate variations that may significantly affect operating results. Inflation Even though inflation rates have decreased since 1998, Mexico has suffered in the past high inflation rates. Inflation caused high interest rates, peso devaluations and, during a good part of the 80 s and the beginning of the 90 s, governmental controls on currency exchange rates. Since a significant portion of the Company s operating costs are denominated in pesos, a significant inflation increase may in turn cause an increase in the Company s operating costs. Inflation may affect our customer s purchasing power and so adversely affect demand for hotel rooms and vacation club memberships. Inflationary fluctuations could have an important impact on the Company s financial condition and operating results. Annual inflation rates, according to the INPC s measurements published by the Banco de Mexico, have been 3.8%, 6.5% and 3.6% for 2007, 2008, and 2009, respectively. 18

20 Interest Rates Similar to the value of the peso in relation to the dollar and inflation rates, historically interest rates in Mexico have experienced periods of volatility. Adverse situations which have affected the Mexican economy, including increased inflation, have resulted in substantial increases to interest rates in the Mexican market during said periods. Interest rate movements directly affect the Company s integrated financing results by increasing its financing costs since a part of its bank indebtedness is contracted at variable rates. However, the low interest rates recently experienced by the international markets have reduced the Company s financial risk. Interest rates on 28-day CETES (Mexican treasury bills) averaged for 2007, 2008, and 2009: 7.2%, 7.7% and 5.5%, respectively. To date, the Company has promptly complied with all of its due dates, both of interest and capital payments, derived from banking, securities and operating commitments. Risks Relating to Brazil According to Brazil s Central Bank, in 2009 the GDP only decreased 0.2% and the principal decreasing sectors were the industrial and agricultural sectors. Inflation for 2009 was 3.7% which favorably compares with the 6.9% reported for the previous year. In 2009, the Brazilian Real (R$) appreciated 26.1% in relation to the U.S. dollar, from R$ 2.3 per U.S. Dollar on December 31, 2008 to R$ 1.7 per U.S. Dollar on December 31, The currency exchange rate appreciation reflected the lesser volatility perceived by the exchange market originated by the global financial crisis. To December 31, 2009, we operated 100 hotels in Brazil. Risks related to Argentina According to Argentina s Central Bank, in 2009 the GNP decreased 2.8% due to the global financial crisis and the influenza outbreak. Inflation increased marginally to 7.9% for 2009 and the Argentine Peso depreciated by 8.6% in relation to the U.S. Dollar from P$ 3.5 per dollar on December 31, 2008 to P$ 3.8 per dollar to December 31, On this same date, we operate two hotels in Argentina. Risks related to downturn in United States of America economic activity The risk of a downturn in the United States of America may imply changes to the spending patterns of the inhabitants of that country, such as postponing or cancelling travel decisions, which may be reflected in lower occupancy in the Company s hotels, specifically those beach destinations with greater influx of these types of tourists, such as Cancun and Los Cabos. To December, 31, 2009, approximately an 80% of the Company s rooms are located in city destinations, and the remaining 20% in beach hotels. To December 31, 2009, we operate three hotels in the southern part of the state of Texas. Risks related to Chile According to Chile s Central Bank, in 2009 the GNP decreased 1.5%, inflation decreased to levels of - 0.9%, and the Chilean Peso depreciated by 20% in relation to the U.S. Dollar. To December 31, 2009 we operate one hotel in Chile. External Information Sources and Expert Statements All of the information contained in the present annual report is responsibility of Grupo Posadas, S.A.B. de C.V. and has been prepared by this Company. This Annual Report contains, amongst others, information related to the hotel and construction industry. This information has been collected by a series of sources, including the Ministry of Tourism, and the National Institute for Statistics, Geography, and Computing, amongst others. Likewise, the Company has utilized information from a series of public sources, including among others, the Banco de Mexico. The information which is not based on a source has been prepared in good faith by the Company, based on its knowledge of the industry and the market in which it participates. The terms and methodology used by the different sources are not always congruent among themselves, and for these reasons, comparisons are difficult. 19