Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2020-Q2

[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 Second 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]. Additionally, FibraHotel issued its first sustainability report, which is also available at www.fibrahotel.com.

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. Unless noted, all figures included herein were prepared in accordance with International Financial Reporting Standards and are stated in nominal Mexican pesos. Joining us from FibraHotel are Mr. Simon 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. Simon Galante. Sir, please begin.

[Simón Galante Zaga;CEO, executive]

Thank you, Hector, and good morning, everyone. I am going to begin today's call by providing an overview of the second quarter of 2020 results, which are atypical as we had most of our hotels closed. And I will also comment on the current situation and will then turn the call over 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.

As our industry continues to navigate through unprecedented challenges from the effects of COVID-19, we remain committed to confront in the best way possible for the company. The pandemic and related containment efforts and travel restrictions have had a significant impact on the travel industry, the economy and our business. We took early and decisive measures, starting in March, by closing the majority of the portfolio, which extended through April and May. Our portfolio started gradually opening in June.

Additionally, during the quarter, we had over 8,000 room nights in our hotels for doctors, nurses and health professionals.

The closing and opening period has given us many learnings. During the quarter, we first had to close 84 hotels in a few weeks. We then had to care for the hotels while closed for a couple of months, and at the same time evaluate the best practices and business model going forward. Finally, we reopened again 81 hotels in a few weeks with new policies and procedures. As of today, all of our hotels are open except 5 hotels, which will remain closed as we seek alternatives, as I will later describe.

Even though the hotels are open, occupancy at most of our hotels is still limited by different federal and local government restrictions. Occupancy in June was not meaningful as hotels reopen. But to give you an idea of the trend, average occupancy of our open portfolio during July to date has been around 17%. Another example is that during the third week in July, a quarter of our hotels had an occupancy above 25%, a quarter of our hotels had occupancies between 15% and 25%, and half of the hotel had occupancies below 15%.

The impact on demand from COVID-19 was almost total across all segments, brands, regions and across business and leisure travel. However, we expect that demand to recover to be different, and we believe that diversity of our portfolio will be the strength going forward. We expect the faster recovery [ in driving to ] leisure markets, hotels such as Fiesta Americana Hacienda Galindo, which is already posting solid numbers on weekends as well as the Live Aqua San Miguel de Allende hotels will recover quicker than the rest of the portfolio. These hotels provide a higher quality local alternative for pent up demand in leisure travel, and they have large public areas and open spaces, which are well-suited for social distancing.

We have also seen a slow but steady recovery in the leisure market, and in Cancun specifically. Even though occupancy are still subject to certain government limitation, occupancy has been between 25% and 30%. Forward bookings look better for the remainder of the year, especially as many events were postponed and not canceled. We believe that leisure markets will continue to improve as airlift to the destination increases.

In general, business travel has been slower to recover. We have still not seen most corporate clients return to business as usual, and it could take some months for them to travel again. We have also seen a slow increase in individual business travels, but we expect this segment to recover faster as mobility improves. We have especially seen a slow market in Mexico City as businesses have not returned to normal, cases continue to be high.

On the positive side, we have seen strength in certain pockets of demand such as manufacturing-related regions as well as certain essential groups and business governor -- and government business. On the other hand, these groups that generally provide an occupancy base also have the lowest average rates. As such, we expect to face headwinds in ADR from the change in business mix in the near term.

Finally, we believe that conferences, large corporate groups as well as sporting and citywide events are further away and will be the last to recover. Overall, we expect a slow but steady improvement in occupancy, but are still uncertain about the full recovery until there is more confidence related to the risk of COVID-19, and we see better economic conditions. Based on market conditions and the expected recovery, we determined to temporarily close 5 hotels from the portfolio without a determinate reopening date. These hotels are the Live Aqua Boutique Playa del Carmen with 60 rooms, the Fairfield Inn Saltillo hotel with 139 rooms, the Gamma Leon with 159 rooms, the Gamma Ciudad Obregon with 135 rooms and the One Coatzacoalcos hotel with 126 rooms.

The franchise and brand agreements have been canceled, and FibraHotel is evaluating different alternatives for these assets, such as the sale of the properties, the reopening as hotels under a different operator or brand, the reposition of the properties for alternative uses as well.

From the operation perspective, our operating partners have implemented hygiene and safety policies with guests and employees as the number of priority, we have made significant investments in technology, protections and sanitization equipment at all hotels. The hotels operated by Grupo Posadas has implemented the Travel with Confidence program in partnership with 3M and the ABC Hospital.

The hotels operated by Marriott International have implemented the Commitment to Cleanliness program in partnership with Ecolab. And the hotels operated by Grupo Real Turismo have implemented the [ Real Clean program ]. We believe that these programs are highlighted by the benefits of partnering with well-regarded brands and operators, and that they will gain market share from competitors as they can provide the customer with a higher confidence to travel.

In regards to our operator relationships, we are aware that Grupo Posadas have decided to enter in a financial restructuring period. In our experience, their operations have continued on a business-as-usual basis, and we believe that, that has not impacted their ability or focus on the proper management of our hotels. Additionally, as you know, FibraHotel has a unique operating structure as the revenues from the hotels are received directly by FibraHotel trust, which then funds all operating expenses to the operators. So in essence, we control the cash.

Regarding our rent agreements with Grupo Posadas, during the quarter we did not receive rent from the Fiesta Americana Condesa Cancun hotel or the minimum guarantees at 3 other hotels. We agreed to Grupo Posadas on a structure of payment that will gradually return to normal for the remainder of 2020 as the hotels are able to open without limitation and will fully return to normal beginning 2021.

We believe, as Winston Churchill said, that we should never let a good crisis go to waste. We expect several fundamental changes in the hotel business going forward. As such, our asset management team, together with our operating partners, took advantage of the temporary closing of the hotels to truly evaluate the efficiency and the profitability of certain process and offerings at the hotels. Based on the results of these analyses, we have implemented the changes to our hotels in areas such as food, beverage, banquets and check-ins, among others, to provide adequate services based on current situation.

The initiative will help us improve operating margins and reduce fixed cost at the hotels. Going forward, these changes could reduce the revenue from certain departments such as food and beverage, would be more than an offset of the lodging contribution level from a reduction in operating costs.

In the second quarter, certain expenses were incurred relating to this initiative. Thanks to this business model, combined with the value of our fully variable fee agreements, we believe we can reach breakeven point at this hotel -- at the hotel level at 25% to 30% of occupancy, which if the current trend continue could happen in the next couple of months. At the corporate level, we continue to take measures to reduce cost and cash burn, including, among other things, eliminating all nonessential expenditures, deferred capital investment projects, closed the 5 hotels mentioned before, eliminated the distribution payment and deferred the advisory fee payment.

We have always believed in a prudent leverage policy in FibraHotel, came into this crisis with a solid balance sheet, with strong financial structure and our sound liquidity positions are one of our advantages today. Some highlights include, we have MXN 600 million in cash, even though cash burn is slowing, we are in the process of signing a new credit line of MXN 250 million to improve our potential access to liquidity. We agreed to grace periods and waivers on the financial covenants with our bank's credit lines.

Our loan-to-value is 28%. Long-term debt with only MXN 25 million in amortization in 2020 and over 80% of capital amortization after 2023. Only $13 million or 7% of the liabilities are denominated in dollars. FibraHotel has more dollar-denominated revenue than dollar-denominated obligations.

During the period, we have faced unique circumstances and have reacted with fast and decisive measures to overcome the current situation and make us a better company in the future. The hospitality industry is cyclical. And even though many things have changed, I believe that fundamentally, the long-term perspective on the hotel business and its drivers have not changed.

I'm incredibly proud of the work we have achieved during these trying times, and I am thankful for the efforts of our employees, the leadership of our Technical committee, and the commitment from our key partners to serving the best interest of all FibraHotel stakeholders.

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

[Edouard Boudrant, executive]

Thank you, Simon, and good afternoon, everyone. During the second quarter of 2020, our results were negatively impacted by the temporary closure of our portfolio. During the month of April and May, 84 out of 86 hotels were closed. And during the month of June, we gradually reopened our portfolio. We closed the month of June with 63 hotels opened.

The occupancy rate of the quarter was 3.7% for managed hotels, 2% in April, 1% in May and 8% in June. Average daily rate was MXN 1,018. The Fiesta Americana Condesa Cancun was closed during the month of April and May, and reopened on June 11. During the quarter, FibraHotel did not collect rent from the hotel. Total revenues for the quarter were MXN 72 million. The month of June accounted for 60% of the revenues. Our lodging contribution for the quarter was a loss of MXN 174 million.

Since the end of the last quarter, we have been actively working on adjusting the operating cost structure of our properties, anticipating strong changes in the industry, long-term recovery in terms of occupancy, reduction of the food and beverage activity. The main goal of this initiative being an even lower breakeven point compared with the level we had precrisis. In the press release we published yesterday, we added some details on the operating cost we had at hotel levels. For the quarter, they stood at MXN 277 million. Adjusted from extraordinary items and in order to compare the operating cost of the closed portfolio for April and May and the operating cost for the -- in the reopening in June. In April, we had MXN 73 million of adjusted operating cost. In May, we had MXN 67 million of adjusted operating cost, reflecting the impact of our cost adjustment from the second half of the month. In June, we had MXN 75 million of adjusted operating cost, only MXN 3 million more than in April, a 3% increase, while the number of guest reserves increased by 26,000, a 300% increase.

During the quarter, we had nonrecurring expenses as the cost of restructuring, that amounted to MXN 44 million. We estimate that the payback should be around 5 to 6 months. And we have sanitization expenses for MXN 11 million, half for initial inventory and half for real expenses during the month of June. Please note that through specific management contracts, 100% viable, based on the annual gross operating profit generated by our hotels, is a key element for our business model, and especially in such adverse conditions. The quarterly loss generated a MXN 40 million credit on future fees to be paid, taking into account the cumulative half year results, fees based on the positive results during Q1 and fees credit on Q2 losses.

Our EBITDA reached a loss of MXN 278 million. Also impacted by nonrecurring real estate expenses. Real estate expenses were MXN 60 million versus MXN 16 million during the first quarter. The increase being mainly MXN 27 million for the quarterly loss of the hotel Fiesta Americana Condesa Cancun, Live Aqua Boutique Playa del Carmen; and MXN 12 million for the restructuring cost of Fiesta Americana Condesa Cancun and the 5 hotels we temporarily closed.

In total, restructuring cost amounted to MXN 56 million, and the payback period should be around 6 months. Regarding the corporate expenses, we continued with the measures that we presented during the last earnings call to ensure cash shedding and preserve the liquidity of FibraHotel. SG&A cost reduction [indiscernible] is a 15% decrease versus the first quarter, the postponement of the payment of the advisory fee and limitation of capital expenditure.

We closed the quarter with a net debt of MXN 4.4 billion versus MXN 4 billion at the end of the last quarter. Gross debt amount to MXN 5 billion. We finished the quarter with a very conservative loan-to-value ratio of 29%. During the quarter, the debt position generated a financing cost of MXN 101 million. The net financial income was negative MXN 85 million. We had an MXN 11 million foreign exchange gain without the effect on cash flows. Our debt position in U.S. dollar generated a MXN 15 million positive impact, partially offset with our cash position in U.S. dollar that generated a MXN 4 million negative impact.

Regarding our banking relationships. We signed with one of our lenders a 6-month grace period in both capital and interest. During the quarter, we deferred MXN 57 million of capital amortization to the end of the credit, and MXN 22 million of interest payments. As a result, our capital amortization for the next 6 months is only MXN 25 million. We obtained waivers on financial covenants through December 31, 2020, with BBVA, and June 30, 2021, with Banorte and Sabadell. And we are in the process of signing the MXN 250 million facility with one of our lenders. Thanks to the issuance of our first bond in September of last year, hotel structure is very healthy. Less than 9% is maturing during 2020 and 2021. Half of debt is at fixed rate and half at variable rate, and we have only 7% of the debt in USD 13 million.

At the beginning of the quarter, Fitch notified us of its decision to lower our long-term credit corporate and bond rating from AA(mex) to AA-(mex) and change its perspective from stable to negative. And HR Ratings notified us its decision to lower on long-term credit corporate and bond rating from AA+ to AA- and change its perspective from stable to negative.

During the second quarter, we deployed only MXN 21 million, MXN 17 million for maintenance CapEx and MXN 4 million for repositioning CapEx. Please note also that since the second quarter of 2020 FibraHotel implemented the use of the Amefibra definition of Funds from Operation. Amefibra, which is the national association of Fibras, published the definition to standardize certain metrics in the real estate sector in line with the best international practice. For detailed information, please refer to our FFO reconciliation at the end of our press release.

For the quarter, our FFO was negative MXN 372 million, and our AFFO was negative MXN 373 million.

Finally, please note that in line with the decision taken regarding the dividend for the first quarter of the year, we decided to suspend also the dividend payment for the second quarter of this year.

At this point, I would like to open the floor for the Q&A session.

Operator, we ready to take any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Sheila McGrath with Evercore.

[Sheila McGrath, analyst]

I have a couple of questions. I was wondering, maybe this is for you, Edouard, if you could simplify for us the liquidity that you have on hand and the cash burn rate per month, so we can just understand the financial flexibility of FIHO.

[Edouard Boudrant, executive]

So basically, as of today, we have MXN 600 million in cash. The next big payment that we will have to do is the payment of the half year interest on that bond, which represent MXN 111 million, and that we will have to pay at the end of September. So basically this is the most important payment that we will have to do regarding the bond. And also regarding the capital amortization that we have for the next quarter, we are talking about MXN 25 million. It's regarding the amortization on the Banorte facility. And also on the fourth quarter on the BBVA facility.

As you know that BBVA gave us a grace period for the period from April to September. And of course, we are in close communication with them to see if there is any opportunity to extend the grace period that was initially regarding a 6-month period. So basically, this is the liquidity status of the company. And for the next year, in terms of amortization, we have MXN 412 million amortization.

And basically, it's MXN 200 million of the revolving facility that we have with Sabadell, which is maturing in May of next year. We're also in talks with them in order to see if we have the possibility to extend this period. As you know, the first time we signed this credit line facility was in 2017. We extended in 2019. And we want to extend it in 2021. And also, we have some important amortization in the third quarter of last year with BBVA.

And as we mentioned, also we are in the process of signing a new credit facility of MXN 250 million in order to have some room to maneuver, to have more liquidity if the situation gets complicated. After talking about the liquidity regarding the cash burn that we have. So basically, it's the same that we speak 3 months ago, during the first quarter calls. We made some improvement due to the restructuring that we have made during the months of May.

If you remember, at this time, we were talking about an operating cost at OpEx level of about MXN 80 million, plus some SG&A at corporate level and VAT, we were talking about MXN 100 million on a monthly basis. And I think that with the restructuring and the cash saving policy that we adopted, we can reduce this cash -- monthly cash burn by 10%, by MXN 10 million.

[Sheila McGrath, analyst]

And then another question. I think it's impressive that you're able to possibly break even at 25% to 30% occupancy. Could you explain what were the major changes there? Are you not offering any food and beverage at the hotels? Is that where the savings is coming from?

[Edouard Boudrant, executive]

So basically, at the F&B business of the hotels, we are -- the offering is much lighter than we had in the past, for example, the breakfast buffet. It's much lighter than we had prior to that. And also what we did and the strong effort has been in reducing the cost structure, the fixed cost, in order to have the minimum cost at the hotels level. So basically, yes, we anticipate that the F&B will be reduced a lot.

And also, we've made some strong adjustment in the rooms department. And for example, the amenities, we are reducing a lot the kind of amenities and the number of amenities we will give to the guest. In this period of what is very important is to reach the 25% occupancy rate in order to ensure the breakeven. And just you to be aware, what we did, all this kind of policies we did should allow us to reduce the breakeven between 300 and 400 basis points.

And also, what we see is that on a long-term basis, it should be very profitable in terms of profitability of the hotels because what we did during the 3 months, we took the power in order to analyze and to understand very, very well the cost structure of the hotels and to implement the best practices in order, first of all, to preserve cash flow; second, to reduce the breakeven point; and third, as the quote that Simon mentioned regarding Winston Churchill, to benefit from the crisis and to be strengthen the level of FibraHotel at the exit of this crisis.

[Operator]

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

[Francisco Chávez Martínez, analyst]

And thanks for the update on your business model and financial situation. I have 2 questions. The first one is regarding the headwinds on ADR that Simon was talking at the beginning of the call. After the decline in ADR during the second quarter, can you share with us what are you seeing in terms of ADR during July? Are your competitors more aggressive in order to gain market share at this point? And the second question is regarding the fair value of the hotels. I noticed that the loan-to-value remains stable, but I assume that the fair value of the properties has changed, especially in those hotels that are closed right now. So when do you expect to make an update on the fair value and in your assets?

[Simón Galante Zaga;CEO, executive]

Franco, thank you for your question and interest of FibraHotel. So let me start by the first question, which is the trends in ADR. And I think the market overall has not seen -- we haven't seen a discounting or really a rush to lower prices. I think we have continued to see, in general, that hotels and travelers right now are not as price sensitive as you would think. I think the value of staying at a property that really provides the proper safety measures is more important to many of our customers. And so what we see on a same segmentation basis is that the rates actually have not decreased. What we do see and what we do think that we will continue to see is a little bit of a change in mix.

So for instance, to give you an example, during -- the ADR that you see in June, it is not included some of the full-service hotels, which were later to open, so it did not include the Live Aqua San Miguel de Allende, which has a higher ADR, or the Fiesta Americana [indiscernible]. So if you start seeing the mix between the hotels, that's one of the things we see in ADR, and we will continue to see. And the other is that, as we mentioned, the -- how you build occupancy is really by starting with some basis of groups. We sometimes use the example that whenever the hotels are full, you start eliminating some airline crews because you can optimize the rate by kicking them out and getting a higher-rate customer. When demand plummets like it has, we are actually very welcoming of this type of groups which provide an occupancy rate at a lower ADR.

So recovery is a change in mix. We do continue to expect to face some pressure from ADR. But we have not really seen a pressure at the pricing at the hotel level. We have seen it more from a mix perspective, and we think it will take time, but that should normalize because, again, it's not like we're -- you're seeing lower rates of the hotels. Regarding your second question, which is the valuation of the assets, you have to remember that the large majority of our portfolio is valued on a cost basis and has been depreciated. So to give you an example, all of the assets that we bought from the initial portfolio, we bought them 7, 8 years ago, and they have been depreciating year-over-year for the past 8 years. So the cost basis that we have at many of those hotels not only have not been marked up to fair value, but have been depreciated down over time.

So we think we have a cushioning in terms of the balance sheet for where you see our assets marked right now. However, as you mentioned, we do expect to continue to evaluate very closely whenever we see a chance of impairment, we are looking at those possible scenarios. Specifically, as you mentioned, in some of the hotels where we see. And in that case, we will have to evaluate the properties at cost and to see if those are lower than what we have on our balance sheet. So we do expect to see a fluctuation going forward in the value of our assets. But we do not expect that at this point to be significant.

And what we are trying to do is to be very cautious in terms of how we approach that because any impairment then you do not get to write it up. So we want to get a little bit more clarity on the cash flows and what we do with the hotels because, again, we could reopen some of those 5 hotels or we can see better trends or different things going forward that can impact the valuation. So we do expect to see some changes, and we would expect to see them in the next couple of quarters. But we don't expect them to be substantial. And again, the point of our assets on the balance sheet being at cost, I think, provides us a little bit of a buffer to face these changing conditions in the market.

[Operator]

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

[Fernando Froylan Mendez Solther, analyst]

I have 2 questions. Firstly, on the Posadas fixed agreement in Cancun, have they approached you guys to renegotiate the fixed rent agreement? Maybe given the restructuring process through which they are going through, are they having larger flexibility to negotiate this with you? What could we expect on that contract for the second half? And secondly, I understand the short-term impact on ADRs, explained by the mix change and that part that you were explaining on the groups.

But I find it hard to think that this kind of crisis will not impact on a fundamental basis, the ADR growth. And this is something that we have seen in other markets, maybe more developed markets. But maybe if I could get your thoughts on why could Mexico be different? Is it because of the lower penetration of formal brands? Maybe some color there on the more long-term trends in the ADR?

[Simón Galante Zaga;CEO, executive]

Thank you, Froylan. I'll take the question. On the question regarding Posadas. Obviously, as we had to close the hotels, not only in Cancun, but the other hotels that have a minimum guarantee with 0 cash generation what we try to do is to do a calendarization with Posadas in order for them to start paying the minimum rent for the remaining of the year and to be regular for 2021.

As I mentioned on the call, Posadas, obviously, on the operational side will continue to work exactly as before with their bond renegotiation that they're doing. So by us controlling the cash on the properties, we feel very well about it, and we think that going forward Posadas will comply with the agreement of this lease agreement. This is a temporal only that is going to take, I think, from now to the end of the year, and then by 2021 we will go in the agreement that we hold with Posadas. Before Guillermo gives you an answer to the second question, what I want to tell you is that the visibility that we have in other 30 days that we have reopened some of the properties is very limited.

We do not believe that Mexico is going to be an outlier against the rest of the market. Rates are going to be pressured because of limited demand and a lot of offering. So we have to be very cautious in limiting and being very creative in the expense per guest that we have in our properties. Without losing the excellent expense that we have, I do see a possibility of growth regarding the sanitization and the guarantee of stay of these guests staying in our hotels that have the higher -- the highest sanitation standards anywhere.

And these branded professionally managed properties will be above and will have a better chance than a mom and pop operators that have no brand or no standard. The other thing that I believe that there's going to be a great advantage of branded properties is that rented apartments in platforms like Airbnb that you do not have the guarantee or you don't have the unification of protocols will give us a chance for us to take away some of that business that has been going to this kind of platform before. So I believe that there's opportunity and opening for us as this unreplaceable portfolio that FibraHotel owns that's divided almost at half in resort and sun and beach properties and other half in business. Everything will have their own issues to come out.

But I believe that this diversification will be key in the future of FibraHotel as well as the open architecture. And I just want to comment about what Sheila was saying before, I don't want to leave without it. The low occupancy that we need in order to have the -- in the property that we do not lose money, at the end of the day it's because we have a variable, 100% variable fee agreement. So this variable fee agreement will let us have a lower occupancy in order to reach profitability earlier. That's in the property level. So Guillermo, if you want to talk a little bit more about the second question of Froy, go ahead.

[Guillermo Escobosa, executive]

Yes, Froy. I agree with Simon. I don't think Mexico is exempt from any global trend. And clearly, we're living in a very uncertain environment. But what I think in terms of the rate is I think there's a couple of things that could be headwinds in terms of rate for the future. The first is that, remember that many of our rates are dollar-denominated. And so when you take the average of some of these rates with the FX benefit, you will see a little bit of an improvement there.

And I think really most important in terms of the sensitivity to rate is the fact that Mexico's rate has just started to raise in the past couple of years. But on an absolute basis, the rate at most of the hotels, especially select and limited service hotels continue to be quite low on an absolute basis. So if you're thinking about select-service hotels and how much you can charge for these hotels, I think there is more upside than downside just because of the base of the rent.

For our portfolio, you're talking about an area in the range of MXN 1,200. And so we don't see as much. If you want to sell the hotels a lot lower than that, you're not going to get as much of a market. So I do think that in general there will be sensitivity, but that will be more based on the fact that you had to build occupancy first. And in order to build occupancy, you have to attract more rate-sensitive customers. But I don't think the market overall will have as much sensitivity to rate. So I think that's why we will see some impact on rate, but we believe it will not be as much.

[Operator]

Your next question comes from the line of [ Esson Magia with ECS Capital ].

[Unknown Analyst]

I have a couple of questions, but I will start with a little bit more of the local business environment because I remember that Simon said on a panel a few weeks ago with [ Andrea Omen ] that probably the fundamental change is going to be more local tourists and more local clients. So I was wondering if you can give us color about specific properties that you notice that you have this local business environment? And my second question is regarding to these 5 properties that are closed and the problem really of selling one of them or 5 of them, if you can give us more color about if this is a real scenario or it's only in this earlier stage due to the pandemic.

[Guillermo Escobosa, executive]

Thanks for your question. This is Guillermo again. I'll start with your second question. As you know, we have already started looking at asset recycling before this pandemic hit. So we already have a small group of our hotels which we were looking to sell or to recycle at the beginning of the year and we were, in some cases, further along than in others to doing that. So that has always been an [ opening ], it's always something that we look for. Clearly, today, the market conditions have tightened, especially for buyers and especially with the uncertainty in the sector. I think buyers need to get a little bit more certainty to be able to properly underwrite transactions.

And so we will continue to look into that and we will look at it more directly for those hotels. But we don't see something in the short term, at least right now. However, what we think from those hotels is that they were basically earning money, but they were earning lower returns than the rest of the portfolio. And so by closing them, we were able to reduce a lot of the fixed costs and also to think more strategically. So we were able to cancel a lot of the operating and franchise agreements. And what we will do with those hotels is to think out of the box. We're exploring alternatives to turn them into something that is not specifically hotels as well as sell them, and all of the other options.

So basically, what we are doing is we're basically taking it out of the focus from an operating perspective. And we're taking it into more of a real estate perspective to see what we can do with those assets. And we hope to give you more color, but we don't expect that to be something that we are able to fully execute in the short term. And regarding your first question, I think that Simon mentioned that a little bit, but we do believe that the -- first, we do believe we're social animals and people want to travel. They need to feel safe to travel, but they want to travel.

And we think there is an opportunity for several hotels in our portfolio where now that borders are closed or now that the U.S. customers maybe don't feel as safe in taking a long-term trip to Europe or to Japan, they might then look into Mexico, and the same thing with local Mexican travelers. And so a couple of hotels, as Simon mentioned, are the Fiesta Americana Hacienda Galindo, which has large gardens and which is very good for this type of period, and Live Aqua San Miguel de Allende. There are other hotels, for instance [indiscernible] had a very good tourism sector. The same is Puebla, Veracruz. So there are several hotels in our portfolio which are either directly or not completely directly drive-to markets. And we do believe that those will recover a bit quicker in terms of the rest of the portfolio.

[Operator]

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

[Armando Rodriguez, analyst]

Well, my question to you, if you could comment little bit more about the changes that you've implemented, particularly in areas such as food, beverage among others, and for example, the delivery process. And my second question is maybe for Edouard. You talk about lower operating breakeven. But can you comment a little bit more about the breakeven at corporate level, considering also the credit lines that you recently reflected? That's my only 2 questions.

[Edouard Boudrant, executive]

Thank you very much. So basically -- go ahead, Guillermo. I will answer the second one. Go ahead, if you want, with the first one.

[Guillermo Escobosa, executive]

Thanks, Edouard -- I think Armando. So it's already been mentioned, but I think it's been a very interesting process. We have taken advantage and we have actually partnered very closely with the operators. And so we were able to look at every process and line item. And to give you an idea, to give you an example, is what the breakfast buffets used to be. Now in this, as health is a really important component, we do not expect many of our hotels to offer large breakfast buffets and will in turn change to a different offering, which is more in the line with the reality. And I think that is what we have been looking for to -- as mentioned, the same with the deliveries.

A few years ago, you had the big benefit of staying at the hotel because you could get food at any time in your hotel and you were certain that you were going to get something delicious when you get to your hotel from work. But today, the reality is what we see in some of the limited service hotels and especially in many hotels in our portfolio where we are located in mixed-use projects, is that you can just use a delivery app. You can use a QR code; instead of having the money you can use a QR code and you can order. And if you have a process for security at the hotel where they can take it to your room, it's more efficient for the customer because he orders from a larger variety of places.

And for the hotel, if you don't have enough volume of demand, it's better as well because you don't have as much of the related cost to provide that service. And so I think it's a very useful thing because the convenience that you get from those areas is a benefit for the customer. And from the hotel perspective, you also have the benefit of having lower costs, especially in the short term as we see less banquets and events. And so we believe that it's a good benefit for everybody. And it took us a little bit of getting to this point to push us into this sort of technological improvement.

[Edouard Boudrant, executive]

And regarding the second question, Armando. So basically, what we mentioned is that at the hotel's level, we should have a breakeven point at 25% occupancy rate. And it will depend on the ADR, on this current analysis. It's with an ADR of around MXN 1,100. And if we want to see the breakeven point at the corporate level, if we analyze the AFFO plus CapEx, that is to say we pay all the corporate expenses, various tax expenses, the insurance of the debt, and we pay the CapEx with the policy of 5% of the total income that is reserved for CapEx, we should be a little bit higher of 41% to 42%.

So basically, there is an element that is very important that we have to take it into account and that allows us to lower the breakeven, in that after the contribution of the hotels, we receive the rent of Fiesta Americana Condesa Cancun and some other hotel [indiscernible] that we have and other retail segments that we have. And that allowed you to reduce the breakeven point. So basically on the corporate [ breakeven point ] with a tariff of MXR 1,100 was a little bit higher of 40% prior to debt amortization, taking into account, for example, the total debt amortization for next year, which is MXN 410 million. If we do not renegotiate nothing, it should be around 55% occupancy rate.

[Operator]

Ladies and gentlemen, there are no further questions at this time. Thank you for participating in FibraHotel's 2020 Second Quarter Results Conference Call. If you have any further questions, please do not hesitate to visit www.fibrahotel.com or contact FibraHotel's Investor Relations department. This concludes today's call. Thank you, and have a good day.