Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, my name is Hector, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2020 First Quarter Earnings Conference Call. FibraHotel issued its quarterly report on Wednesday. If you did not receive a copy via e-mail, you can find it at www.fibrahotel.com or e-mail [e-mail].

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Additionally, I would like to remind you that FibraHotel issued COVID market updates on March 23 and April 8, in which it notified the market that going forward, investors should consider the potential risk that COVID-19 could represent to its financial, business, leases and operating conditions. Unless noted, all figures included herein were prepared in accordance with the International Financial Reporting Standard and are stated in nominal Mexican pesos.

Joining us today from FibraHotel are Mr. Simón Galante, CEO; Mr. Eduardo Lopez, General Manager; Mr. Edouard Boudrant, CFO; and Mr. Guillermo Bravo, CIO.

With that, I will turn the call over to Mr. Simón Galante. Sir, please begin.

[Simón Zaga, executive]

Thank you, Hector, and good morning, everyone. I'm going to begin today's call by providing an overview of the first quarter of 2020 results, give you a business update on current business conditions as we deal with COVID-19 pandemic and we will then turn on the call to Edouard Boudrant, our CFO, who will discuss our financial results in more detail, and we will then open the call for questions and answers.

The COVID-19 pandemic and related travel restrictions and other containment efforts has had a significant impact on the travel industry. The economy and as a result on our business, has our industry and country continued to navigate through unprecedented challenges from the effects of COVID-19 pandemic. We remain committed, first and foremost, to the safety and well-being of our associates and guests. Since the second week in March, FibraHotel found a crisis committee, which recommended the implementation of certain preventive health and safety measures, including the restriction on corporate travel, mandatory home office and reformat information campaigns with recommended actions such as limited social interaction and encouraging social distancing, among others.

As the crisis evolved, FibraHotel have taken fast and decisive measures, together with our operating partners to face the crisis. On March 23, we issued the first communication on the market regarding COVID-19 measures, including the difficult decision to temporarily suspend hotel operations. Initially, we closed 30 cluster hotels where we could have cost efficiency by sending them to midrise hotels. Later, as announced to the market on April 8, we closed the majority of our hotels in accordance with regulations and recommendations issued by federal and local governments as the best measure to stop the spreading of the virus and to safeguard our associates and guests.

To put the crisis in perspective, building the portfolio since our first hotel has taken us over 25 years and 7 as a public company. In that time, we have only closed a couple of hotels for natural disasters, and they were located in certain regions. In the past 3 weeks, we have closed 84 hotels which took us over 25 years to open.

With the spread of COVID-19 in the U.S. beginning in mid-March and a little later in Mexico, we began to experience a significant decrease in demand and saw rise in cancellation for all our hotels.

[indiscernible] was similar across all segment brands, regions and across business and leisure travel. This was due to the social distancing period as well as the cancellation of events and conferences. Travel restriction imposed by certain countries and the slowdown in local and regional economic activity. Even though the portfolio was largely impacted in the second half of March, RevPAR decreased 45% for March year-on-year in our stabilized portfolio driven mostly by occupancy, which closed March at 37% or a decrease of almost 3,000 basis points. To put this figure in context, RevPAR for our comparable portfolio for the months of January and February was up 2.5% year-on-year. Unfortunately, the impact will continue through the second quarter as we now have most of our hotels closed. We do not expect a material improvement in results on the business traveler and general confidence related to the crisis of COVID-19 pandemic improves. [ Biased ] governmental restriction on travel and freedom of movement are [indiscernible] and as companies surpass the full economic impact of this crisis.

Even the social restrictions are lifted, and we are able to reopen hotels, it remains uncertain as to the time it will take to see a meaningful increase in travel and demand for lodging and travel-related experience. To mitigate this uncertainty, we have taken extraordinary incentives, initiatives to reduce all nonessential expenditures and have reviewed every line item to lower the cost basis of the hotel in order to achieve a lower breakeven volume. We are satisfied with the progress on these initiatives, and they will help us extend our runway in case this crisis drags out longer than expected and could improve profitability going forward.

As we look past this crisis, we expect several fundamental changes in the hotel business. Going forward, there will be special focus on health and safety measures, with -- together with certifications, can provide customers confidence to travel and stay in our hotels. We also see changes, such as the food and beverage offering and an accelerated technology transformation for safe and process search at check-in. We want to lead in these areas, and our asset management team is already working to quickly adapt to this new reality.

During this period, we have seen the benefits from our business model based on strong relationships with leading operators and brands. By partnering with a large and global operators such as Marriot, we have an advantage to quickly implement processes, which have already been approved -- already been proven to work in other locations around the globe. Additionally, their brand recognition and standards will be key in the future, and we believe that travelers would prefer safety over other booking decisions.

Additionally, our full variable fee agreement, which was intended for moments like this help us reduce the minimum cost for hotels.

At the corporate level, FibraHotel has implemented initiatives to conserve liquidity and improve its financial profile. Measures include, among other things, reduced, postponed or canceled all nonessential expenditures; the third plan, capital investment project; eliminate the distribution payment for the first quarter 2020; defer the advisory fee payment. With these initiatives and assuming all of our hotels are closed, we estimate that monthly cash burn for the company.

[Technical Difficulty]

[Operator]

Ladies and gentlemen, we're experiencing technical difficulties. Stand by one moment.

And now rejoining Simón Galante.

[Simón Zaga, executive]

Thank you, and sorry for the brief -- did you continue reading my statement or I should continue where I left off?

[Edouard Boudrant, executive]

You can continue, Simón, please.

[Simón Zaga, executive]

Thank you. And sorry again.

From our experience, we have always believed in having a prudent leverage policy and FibraHotel came into crisis with a solid balance sheet. This strong financial structure and our sound liquidity positions are one of the key competitive advantages today. Some highlights include: we have almost MXN 1,000 million in cash, loan-to-value of 28% and a net loan-to-value of 22.5%. In the last couple of weeks, we disbursed MXN 366 million in credit lines. We agreed with BBVA on a 6-month grace period for capital and interest payments on their loans. We have only MXN 31 million in amortization for the rest of 2020 and MXN 224 million in interest payments for the rest of 2020, of which MXN 94 million are related to the fiscal '19 bonds and are due in September.

Long-term debt, with over 80% of capital and amortizations after 2023 and is covered for changes in interest rates. Only $13 million or 7% of liabilities are denominated in dollars. FibraHotel has more dollar-denominated revenue than dollar-denominated obligations. By nature, the hospitality industry is cyclical. Even though these are unique circumstances, they have impacted our hotels in our portfolio. FibraHotel was intentionally structured to weather challenging time. And we remain confident in the strength of our hotel portfolio and the experience of our team to successfully manage these unprecedented times. I'm incredibly proud and thankful for the efforts of our employees and the commitment from our key partners to serving the best interest of all FibraHotel stakeholders.

With that, I will now pass the call over to Eduardo Boudrant, the CFO of FibraHotel, to discuss the financial and operating results of the quarter.

[Edouard Boudrant, executive]

Thank you, Simón, and good morning, everyone. As you know, FibraHotel started the first quarter with 86 hotels in operation and closed it with 41 hotels temporarily closed on 45 hotels in operation. For the total portfolio of 85 hotels for 2020, excluding Fiesta Americana Condesa Cancun, in comparison to the first quarter of last year, ADR increased by 2% at MXN 1,252. Occupancy rate decreased by 1,120 basis points at 49.7%. Overall, RevPAR decreased 16.8% at MXN 622. Fiesta Americana Condesa Cancun hotel had a net package ADR of MXN 5,026. Occupancy was 71.1%, and net package RevPAR was MXN 3,573, representing a 12.4 percentage risk against the first quarter of 2019.

Total revenues for the quarter was MXN 949 million, of which 70% was room revenues, 17% was food and beverage revenues and 13% was leases and other revenues. During the quarter, the rent of Fiesta Americana Condesa Cancun stood at MXN 61 million. Compared with the same quarter last year, revenues decreased by 9%. In terms of revenue generation from beginning of January to the first half of March, our numbers were quite in line with the budget. However, during the second half of March, revenues have dropped strongly as a result of cancellation of reservation and travel restriction. Our lodging contribution for the quarter stood at approximately MXN 293 million, and our EBITDA reached MXN 221 million, decreasing, respectively, by 19% and 22% versus last year. The lodging contribution margin for managed hotels reached 22.6% versus 26.6% the same quarter last year. The EBITDA margin reached 23.3% versus 27.3% the same quarter last year.

We closed the first quarter with a net debt of MXN 4 billion. Gross debt amounted to MXN 5 billion. We finished the quarter with a conservative LTV ratio of 28%. During the quarter, the debt position generated a financing cost of MXN 100 million. We do not capitalize interest anymore as we have no properties under development. The net financial income was minus MXN 140 million. We had a MXN 52 million foreign exchange loss without any effect on our cash flows.

Our debt position in U.S. dollar generated a $70 million negative impact, partially offset with our cash position in U.S. dollar and generated an $18 million further revenue impact? At the end of the quarter and in order to reinforce the liquidity situation of the company, we decided to draw down our 2,200 million revolving facility on an MXN 166 million available on our long-term credit line facility.

Our cash position at the end of the quarter was MXN 970 million. We also agreed with one of our lenders on the 6-month gross period in both capital and interest. From April to September, we will defer MXN 78 million of capital amortization and MXN 41 million of interest payment. As a result, our capital amortization for the next 9 months is only MXN 31 million. And to the issuance of our first bond in September of last year, our debt structure is very healthy. Less than 10% is maturing during 2020 and 2021.

Half our debt is fixed at fixed rate and half as variable rate. We have only 6% of our debt in U.S. dollar, USD 30 million. At the beginning of March -- of April, sorry, Fitch notified us of its decision to lower our long-term credit corporate and bond rating from AA to do AA minus and changed its perspective from stable to negative. During the first quarter, we deployed MXN 170 million, MXN 107 million for the closing of the acquisition of the Fiesta Americana Hermosillo Hotel, MXN 38 million for repositioning and maintenance CapEx, and MXN 25 million for hotel we developed.

Since mid-March and anticipating suspension of operation at the vast majority of our hotels, we decided alongside with our operators to lower the cost structure of our hotels, suspension of all non-essential expenses, negotiation with suppliers to reduce essential expenses, postponement of planned Capex. Our asset management team is hardly working on structuring the current cost structure we will have once we will be able to start operation again in order to reduce and quickly reach the breakeven point.

Please note that the 100% variable fee contract restructure in all our hotels since the inception of FibraHotel is a key element for us in such adverse condition as it allows us to have an even lower breakeven point. At corporate level, we also took measures to ensure cash savings and preserve the liquidity of FibraHotel. SG&A consolidation and limitation of capital expenditure. Also, our Practices and Technical Committee approved to request to the adviser the postponement of the payment of the advisory fee and the change in the distribution policy.

Historically, we distributed on a quarterly basis, 100% of our AFFO. For the first quarter of 2020, there will be no distribution. As a result of this on-property and above-property initiatives, we significantly reduced cash flow needs, 2/3 of level of cash flow we had prior the current situation. And we are already working to be well prepared for the reopening of our portfolio.

At this point, I would like to open the floor for the question-and-answer session. Operator, we are ready to take any questions.

[Operator]

[Operator Instructions]

Your first question comes from the line of Sheila McGrath with Evercore ISI.

[Sheila McGrath, analyst]

Yes. First, I'm very sorry for these challenging conditions. I know it's toughest for hotels and real estate. Hopefully, it's just a temporary situation. But I was wondering if you could give us insight on how your -- Edouard, how your cash burn rate looks versus the liquidity that you currently have? Or if you could just simplify it for us a little bit? You said you cut spending a lot, just give us some insight on -- after minimizing the expenses, how much your cash burn is per month or something? That would be helpful.

[Edouard Boudrant, executive]

Okay. Thank you, Sheila, for your question. Basically, prior the current situation we have, we had a MXN 300 million cash flow expenses, including VAT. And with all the measure that we took in order to reduce the cost at the level of property and also in terms of corporate initiative, and for example, for the postponement of the advisory fee payment. As of today, in terms of operation cost for the hotel, we are talking about roughly MXN 100 million a month. So this is the cash burn that we have as of today for maintaining the -- all the property closed.

And after that, we have to take into account the debt service that we have. And to give you more details for the next quarter, we are talking about MXN 26 million. For the third quarter, we are talking about a little bit more than MXN 130 million. Why? Because we have the half payment of the bond that we pay every March and every September. And for the fourth quarter of the year, we are talking a little bit less of MXN 19 million. So basically, as we are talking for the next quarter, for example, we -- MXN 100 million a month, plus less than MXN 10 million for the debt service coverage.

[Sheila McGrath, analyst]

The MXN 10 million, Edouard, for the debt service is per month or per quarter? Per month?

[Edouard Boudrant, executive]

It's per months. And basically, it's mostly interest because we have very, very little capital amortization. And also, as we mentioned with BBVA, we agreed in a capital [indiscernible], all the capital amortization will be delayed until the end of the life of the credit.

[Simón Zaga, executive]

Yes, Sheila, but basically -- this is Simón. Just to make it in a very nontechnical way, we have a runway ready for almost the next 2.5 quarters being basically closed for business, and we have the cash position that we have and we formed of almost MXN 1 billion. So almost 8 to 10 months, we can stay closed. We do not anticipate that it's going to take that long, but the ramp-up is going to be hard and difficult. But at the end of the day, we have -- we lowered the burn rate, thanks to the effort of all the team in analyzing line item by line item and creating a lot of pressure on lowering debt. And we extended the runway through that, and we think that we are in a good cash position at this point.

And we entered this crisis with a very healthy balance sheet, and that will help us sail through it and on the recuperation period as well, will help us.

[Sheila McGrath, analyst]

Okay. That's very helpful. And one quick follow-up. Can you explain to us, again, how many hotels are subject to leases that have minimum rent? And how do you expect that to play out? I know the Cancun Hotel and San Miguel both have leases. But just remind us how that works and which hotels?

[Edouard Boudrant, executive]

So basically, the hotel we have minimum rents, we are talking about Fiesta Americana Condesa Cancun and Fiesta Inn Perisur. And the minimum rate is based in USD. And regarding the hotel, we have a minimum guaranty. We are talking about San Miguel de Allende, Fiesta Americana Viaducto and Fiesta Americana Satelite. And it's pesos denominated.

[Sheila McGrath, analyst]

Okay. And are those hotels currently closed or open?

[Edouard Boudrant, executive]

Yes, as of today, they are currently closed. And until March, we'll receive all the rents. And we are currently negotiating with the operator regarding the close of the contracts while we have the suspension of operation told by the government authorities in Mexico.

[Operator]

Your next question comes from the line of Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

I have 2 questions. The first one is regarding the breakeven point of your hotels, I know it is hard to tell the shape of the recovery, but assuming that the economy reopens in the summer, when do you expect to reach the breakeven point? If you can remind us what is the occupancy for breakeven in your hotels?

And the second question is regarding the advisory fee. When -- what mechanisms are you analyzing? When do you expect to pay this fee? Is it something that we can expect for the next few years? Or can we expect a discount or a fee to be paid in CBFIs? If you can give us some color on this, it will be helpful.

[Simón Zaga, executive]

Guillermo, can you -- if you can please take the first question? And I will take the second or Edouard, it's okay. And I'll take the advisory fee question.

[Edouard Boudrant, executive]

Okay. So I will answer regarding the first question, Paco, thank you very much. I think that the breakeven point is -- it's a key element in our business model. I think as of today, or prior the current situation, we had a very low breakeven point. And analyzing all the cost structure that we have prior to that at the hotel levels, I think that the breakeven point was between 25% and 30% on the whole portfolio. But what we have to take into account is that the post-COVID situation, as mentioned by Simón, we anticipate that the market will change, the guest behavior will change and the guest needs will change.

So basically, as of today, what we are looking for and what we are doing is to reanalyze the cost structure of the hotels, to reanalyze what we anticipate to be the new trends in terms of travel, business and both leisure demand to see what could be a new breakeven point. So as of today, it's a little bit early to answer that question. But what we are intending to do is to lower even more the breakeven point that we have for the current situation, that between the -- depending on the kind of hotels, it between 25% and 30%. And this is to answer your question on the breakeven point. After that, we -- that's very complicated as of today to see when the economy will really shape operation and what will be the trend of the ramp-up of the new operations.

So we are monitoring closely what is happening in Asia and in Europe and what we will do in -- when we will be able to reopen the hotels, what we will do? It's, we will do like when we open a new hotel, we will not open with a full cost structure, but we will liberate the cost and the structure on a gradual basis, depending on the occupancy. So basically, what we want is to lower even the breakeven point and to monitor closely the expense situation at the hotels in order to be able to reach the breakeven, the soon as possible -- as soon as possible.

[Simón Zaga, executive]

Paco, on your question on the advisory fee, I think it's very important to clarify that the adviser is completely aligned with the Fibra and this is a sample on deferring the payment that we are completely open to any future structure, that we can find or talk about what you say of paying with CBFI and paying it later. This is not an issue right now. We're completely aligned. My interest is with the ownership of the Fibra. And when something as terrible as this has happened, I have shown that I'm not -- that I am flexible and there will be something that we will do in the future. We don't have to see it right now because the numbers are so bad, and we have so much money going into closed hotels, that this is not an issue right now.

When we reopen and we have a positive cash flow, then we will find a way, and we will find the structure to continue being aligned with the investor. That's the key issue and the message I want to send. As the largest shareholder of FibraHotel, my family and myself are totally committed to FibraHotel future. And today, we need to look at preserving cash position and that's what we're doing. And we will see this in -- when the time comes, and we will discuss it with the investors to find ideas that is suited for this fee. So that's my point of view, and there's no hurry in determining when or how, but what people need to know is that we are completely aligned with the Fibra interest.

[Operator]

Your next question comes from the line of Froylan Mendez with JP Morgan.

[Fernando Froylan Mendez Solther, analyst]

I hope all of you and your families are doing all right. So I have 2 questions. Have you secured any additional credit facility with the banks? And how would you describe the willingness from the banks to continue providing liquidity to the sector? That's my first question. And secondly, have you identified any additional capital sources, maybe land bank sales or minorities in hotels? And how fast could you move in those venues?

[Edouard Boudrant, executive]

Froylan, thank you very much for your question. So basically, on the secure additional credit card, we're in talks with lenders to have additional liquidity access. And what we saw is that there is a strong support for the -- from the banking center and especially for the 2 main lenders to support FibraHotel and to support the world tourism industry in particular. I think which is important to mention is that we have more than 25% -- 25-year experience with them. We go through several crisis with them, and we have always had a very pragmatic way to resolve this issue.

So basically, we're just -- we are working on that. Also what is very positive is that with the bond that we issued, we significantly reduced, at the end of last year, the exposition that this bank has with them. So basically, as of today, we see that, yes, they are willing to support us with additional credit lines, and we are working on them and to finalize the TNC of new funding facilities.

And regarding the...

[Simón Zaga, executive]

And just -- Edouard, Froy? We do have several other alternatives. As you know, one of the key items of our business is that we own these real estate assets and properties, and we also have a little bit of land bank, as you mentioned. But the reality is we're very comfortable with the current position we're in. We've been very well supported by the banks. And I think going forward, we will continue to see their support. And we are comfortable with the structure we have. We still have a lot of room on the -- our situation to add some debt to the place we have if it were needed.

We also have a lot of unencumbered assets that we have. So we could look at additional liquidity measures, as you mentioned, but more as an opportunistic basis, and it is not the right time to do that. We -- fortunately, we have built this company with a solid structure, and we do not need to take any emergency measures or anything that would be out of our strategic plan. So at this point, we do have other alternatives and we could explore them. But at this point, we're comfortable with the liquidity situation we are in and with what we could -- we think we could get with traditional financing.

[Operator]

[Operator Instructions]

The next question comes from the line of Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

My question is related to the payment of the operator’s fees. Should we expect a minimum payment on this side? Or what changes should we expect throughout this operator's fee?

[Edouard Boudrant, executive]

Armando, thank you for your question. So basically, the answer is very simple and straightforward. The fee is 100% variable, depending on the result of the hotels. During the period, we have all the hotels closed, we will not generate any positive results. So there is no fee to be paid for the operator.

[Operator]

Your next question is a follow-up from Sheila McGrath with Evercore ISI.

[Sheila McGrath, analyst]

Yes. I wanted to ask you if you have any insights or if you've heard anything from the government about when they expect to consider opening parts of the country? And will it be in different regions that are less impacted first? Any insight you might have from what the government is seeing in that regard.

[Simón Zaga, executive]

Yes, I will tell you that we do not have information, a clear information at least. They are now extended this period until May 30. So basically, we have until that time, but we do not have a clear path on opening. Here in Mexico, you need to remember, Sheila, that we are 2 to 3 weeks or 4 weeks behind the U.S. in -- when measures were started. At the end of the day, we are participating in many organizations, both the hotel organizations and business related, and we have a lot of information, but still, the government has not managed the expectations that we have regarding the restart on the economy or how it's going to be.

All our hotels, I think it's important to clarify, are on a 48-hour to 72-hour reopening scenario. Why is that? Because we are having the hotels maintained and with -- and all the essential machinery and water and heat and all of that is maintained in order for us to reopen quite fast. We will be very attentive on the information on the government, but we will reopen when it makes financial reasoning to open again. What does that mean? Even if the restrictions are lifted, but nobody is traveling at that time, we will reopen as we closed. We will not open all the hotels in one market, we will test the waters with one, then the second and then we will be very careful on planning.

We have this committee that -- we have daily, the emergency committee. And we're discussing today -- every day how we are going to reopen and when, and that's our main focus. So we are focusing on what we can manage and waiting for this to turn out. But at this point, we're in the level 3, as they call it here in Mexico, of the precautions that we have. And listen, we hope the best of health for all our team members, all of the Mexican people and everybody that has a risk of this as -- pertains that the health system in Mexico has a lot of challenges.

So when this is finished, we will have a plan, we will have a sketch. We will know exactly what we have to do. And we're focusing every day, every second on doing this plan intelligently. So we do not burn, and we can reach -- we can reach the level of at least stopping the losses in the hotel, and reach that point that is our next milestone that we have to comply to.

[Operator]

There are no further questions at this time. Thank you for participating in FibraHotel's 2020 First Quarter Results Conference Call. If you have any further questions, please do not hesitate to contact FibraHotel's Investor Relations department. This concludes today's call. Thank you, and have a good day.