Concentradora Fibra Hotelera Mexicana SA de CV

BMV:FIHO12

Earnings Call Transcript 2020-Q3

[Operator]

Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to FibraHotel's 2020 Third 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 today's call, I would like to remind everyone 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 include 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 would like to turn the call over to Mr. Simon Galante. Sir, please go ahead.

[Simón Zaga, executive]

Thank you, operator, and good morning, everyone. I am going to begin today's call by providing an overview of the third quarter 2020 results and the COVID situation, will then turn the call over to Edouard Boudrant, our CFO, who will discuss our financial results in more detail, and we will open the call for questions and answers.

We continue to navigate through the unprecedented challenges that COVID-19 and the related measures to contain the spread of the virus have had on travel and hotel industry. As you know, we closed most of our hotels during April and May and began to gradually reopen them during June and July.

We are still not in a normal operating situation, and there is still uncertainty with regards to the speed of the recovery from an economic, health and business perspective. The occupancy of our portfolio has had a slow but steady recovery. Since opening, each week and each month has been -- has seen growth in occupancy.

During July, we had an occupancy of 18%. In August, we have an occupancy of 25%. And in September, we had an occupancy of 31%. In October to date, we have accumulated occupancy of 35%. From the total portfolio, 24% of hotels had a 27 day occupancy of over 50%. 47% of hotels had an occupancy between 25% and 50%, which means they have reached or pass the breakeven point, and only 28% of hotels have an occupancy below 25%.

These occupancy numbers are ahead of their competitive sets as we have seen a faster recovery than comparable hotels in general. As we have previously mentioned, recovery speeds are different at each hotel base on demand drivers, the regions, the traveler side and the hotel segment. The diversification of our portfolio is and will continue to be a strength going forward.

The weakest recovery is in the lesion markets. There is a pent-up demand for hotels that are accessible and can offer the right services to customers. A pickup in leisure in local visual travel by Mexican benefits properties like the Aqua San Miguel de Allende Hotel.

In Cancun, there has been a flow of steady recovery. The Fiesta Americana Condesa Cancun had an occupany during the quarter of almost 37%. There is a positive booking and early growth for the next few months, especially from U.S. and Mexican travelers. Other regions like Canada, Europe and South America have not returned.

For the winter, we continue to see a good booking pace by individuals, but not expect to receive large group bookings as we have in previous years. Another positive recovery for hotels in the secondary cities as well as the north and manufacturing clusters. The production in this region have generally returned to normal and most of our guests are business travelers, such as technicians, where their jobs require them to be physically present.

The slowest recovery is in the main cities, especially in Mexico City and Monterrey. This is mainly due to a weak corporate business travel, which has not returned. Most corporate clients are working from home and not traveling. Even though, we expect this business to return, we are uncertain on the time frame from companies to ease travel restrictions. We also expect to see headwinds from the segment due to reduced travel budgets.

Finally, we have not seen conference or large groups, and it will take some time before they return. Operationally, our asset management team continues to focus on making the business model more efficient with improvements in processes, technology and services offered. We have received positive feedback from customers on the certification and health and safety procedures used at the hotels.

We have implemented changes in areas, such as food and beverage, banquets, check-in, among others, to provide adequate services based on the current situation. These initiatives help us improve operating margins and reduce fixed cost at the hotels.

Thanks to cost control, the operating focus on our variable fee agreements in August, we reached breakeven point at the hotel level. And in September, we reached breakeven point at the corporate level before financing costs.

During the quarter, we started to see partial rent from Fiesta Americana Condesa Cancun and 3 other hotels. This is in line with the agreement reach on structured payments that will gradually return to normal and is partially impacted by government capacity restrictions.

With regards to the 5 closed hotels, we continue to evaluate different alternatives, such as the repositioning of the properties for their highest and best use that reopened as hotels under a different operator of brands and/or [ accordable sales ] as conditions improve.

At the corporate level, we continue to take measures to conserve liquidity, such as reducing all nonessential expenditures, having no distribution and deferring the payment of the advisory fees. We have always believed in a prudent leverage policy and have a strong financial and liquidity position, with MXN 471 million in cash and MXN 250 million credit line.

We have reached agreement for great previous waivers of the financial covenants with our lenders and continue to look at different liability management options. Even though we continue to be in an uncertain environment regarding the speed and shape of the economic and hotel recovery, I am convinced that we will find opportunities from this crisis, and that we have the right team and assets to deal with the situation in the best possible -- in the best way possible for the company.

I am thankful for the effort of our associates, the leadership of the technical committee and the commitment from our key partners for serving the best interest of all of FibraHotel stakeholders.

With that, I will now pass the call over 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 morning, everyone. During the third quarter of 2020, result substantially improved versus the second quarter, which was negatively impacted by the temporary closure of the portfolio. We closed the third quarter with [ 81 hotels ] of them.

The occupancy rate for the quarter was 24.3% from managed hotels versus 4% during the second quarter. On a monthly basis, occupancy rate was 18% in July, 25% in August and 31% in September. Average daily rate was MXN 1,091. Quarterly RevPAR was MXN 265 versus MXN 38 during the second quarter.

The Fiesta Americana Condesa Cancun Hotel had a net package ADR of MXN 3,900. Occupancy was 36.7% and net package RevPAR was MXN 1,431. Total revenues for the quarter were MXN 376 million versus MXN 72 million for the second quarter. Our lodging contribution for the quarter was a positive MXN 47 million.

During the quarter, we continued our initiative to adjust the operating cost structure of our properties, anticipating strong change in our industry. Long term recovery in term of occupancy reduction of the F&B activity. The main goal of the initiative being an even lower breakeven point compared with the level we had requested.

As a result, during the month of August, we achieved a positive operating result at property level with a 25% occupancy rate, validating our hypothesis with us for the cost structure adjustment. In the press release we published yesterday, we added some details on the operating cost we had a [indiscernible]. For the quarter, they stood at MXN 329 million.

Adjusted from small extraordinary items, in July, we had MXN 100 million of adjusted operating costs for an 18% occupancy rate and 62,000 occupied rooms. In August, we had MXN 111 million of adjusted operating costs or a 25% occupancy rate and 87,000 occupied rooms. And in September, we had a MXN 130 million of adjusted operating cost for a 31% occupancy rate on more than 100,000 occupied rooms.

Our EBITDA resulted in a loss of MXN 20 million versus a loss of MXN 278 million during the second quarter. Please note that on a monthly basis, we reached a positive EBITDA during the month of September. Real estate expenses were MXN 17 million versus MXN 60 million during the second quarter or MXN 18 million adjusted from restructuring costs.

Regarding corporate expenses, we continued with the measure we presented during the last earning call to ensure cash saving and pressured the liquidity of euro debt. SG&A cost reduction with our respective 12% and 25% decrease versus the second and the first quarter of the year, the postponement of the payment of the advisory fee and limitation of the capital expenditure.

We closed the quarter with net debt of MXN 4.5 billion versus MXN 4.4 billion at the end of the last quarter. Gross debt amounted to MXN 5 billion. We finished the quarter with a very conservative LTV ratio of 29%. During the quarter, the debt position generated a financing cost of MXN 96 million.

The net financial income was negative MXN 93 million. We had an MXN 8 million foreign exchange gain without effect on cash flow, with debt position in U.S. dollar generated a MXN 10 million positive impact, partially offset with our cash position in USD that generated a MXN 2 million a negative impact. Please note that at the end of the third quarter, 30% of our cash position is dollar denominated.

Regarding banking relationship. We signed MXN 250 million facility with one of our lenders. This facility is still available, and we are under negotiations to include our amortization schedule for next year.

Thanks to the issuance of [indiscernible] bond in September of last year, our debt structure is very healthy. Less than 9% is maturing during 2020 and 2021, and half of our debt is at fixed rate and half is at variable rate. And we only have 6% of our debt in U.S. dollar, $30 million.

During the quarter, Fitch notified us its decision to lower our long-term rating corporate from AA- to A+ in local rating. During the second quarter, we deployed only MXN 23 million, MXN 15 million from maintenance CapEx and MXN 8 million for repositioning CapEx. Please note that also that since the second quarter of 2020, FibraHotel implemented the use of the [indiscernible] definition of funds from operations.

For the quarter, our FFO and AFFO were negative MXN 115 million. During the last 6 months, COVID-19 negatively impact our cash flow generation. We started the third quarter with MXN 970 million and ended the third quarter with MXN 471 million, a MXN 500 million negative cash flow.

Operating cash flow was a negative MXN 340 million. Please note that on a quarterly basis, operating cash flow for the third quarter was positive. [ Investigator ] cash flow was a negative MXN 23 million, and financing cash flow was a negative MXN 162 million, mainly interest savings. As previously announced, we do not expect to pay distribution over 95% of the fiscal income and will not pay a distribution this quarter.

At this point, I would like to open the floor for the Q&A session. Operator, we are ready to take any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Francisco Chávez with BBVA.

[Francisco Chávez Martínez, analyst]

My question is regarding the market conditions on the average daily rent. Have you seen the -- your competitors more aggressive in order to ramp up the occupancy in the last few weeks?

[Guillermo Escobosa, executive]

This is Guillermo. Regarding the ADR, what you see is a difference in mix. But I think from our perspective, the markets have been very prudent in not discounting rates, wherever it is not completely necessary. So we have not seen a discounting of the public rates. So we have not seen a lowering of important -- that we have seen in past crises.

So we have seen a more professional sector as a whole. What we see and what we expect to see is that at this point with these occupancy levels, we are not able to optimize rates. And so in the past, we were able to have more choice in some of the customers. And right now, we and most of our competitors are accepting different types of groups or clients that maybe we're taking share from other players like independents.

So we -- in certain cases, we are offering certain promotions, sort of, for instance, for leisure travel within the week. But in reality, we see the normal rates as they have been in the past. And what we see in terms of ADR factor is more of a shift in mix than a discounting of the product. We -- and I think the industry as a whole believes that this is really a demand problem and the prices is not going to fix this problem.

The persons that feel comfortable are willing to pay the market rate for the hotels. And so we do not yet see any issue in people over discount or being too aggressive in this case.

[Operator]

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

[Fernando Froylan Mendez Solther, analyst]

This is Froylan. Following up on the previous question, how relevant were those groups and corporate travelers for your average portfolio? That would be my first question. Secondly, if you were able to go back to 2019 occupancy levels, how much lower do you think that cost and general expenses would be, given all the efficiencies you have made during the pandemic?

And thirdly, if the restrictions in overall the country were lifted today, do you think it would substantially change your 35% of occupancy as of October?

[Simón Zaga, executive]

I'll start with the last part of the question. And I will let Edouard speak a little bit about the changes in the cost structure. So basically, what we see today is that the market is not as different. We do not see the meaningful changes. When I get looked a little bit -- what was the question around the [indiscernible]

[Fernando Froylan Mendez Solther, analyst]

It's okay. If the restrictions in the country were to be lifted today, all of them in every state, would that 30% occupancy that you're seeing in October? Would it substantially change? Or is more a demand thing?

[Simón Zaga, executive]

Yes. The reality is, it wouldn't change. So we have seen wherever it has been required that hotels have limits above that. We have been able to get permits from the authorities because the reality is that most of the workers that we host are required workers. And so it has not really been a material issue.

However, we do believe that it is more related to a sentiment issue. And so for instance, in Mexico City, people, because of the stop size and because of the warning, have not really been able to react to their daily activities or their travel. And so I don't think it's an issue that would directly impact.

I think the demand is still the main issue, but I do think that it would make a meaningful change because it would signal the people that we are in a better stage, and it would make the economy get back to normal a little bit more. I do think that, that would help us return back to normal quicker.

[Edouard Boudrant, executive]

Froylan, regarding your question about the cost reduction, basically, what we anticipated in the restructuration and the optimization of cost that we had is once we recuperate a level of revenue similar to 2018 or 2019, it was to up roughly between 15% and 20% of lower cost structure.

And for example, just to give you an example, as of today, in terms of wage we feel very comfortable that the wages between the first month of this year on the first month of the next year, we should be, or we will be able to reduce this cost by roughly 30%. And this is one of the most important expense for the hotel.

So basically, it's taking on same level between 15% and 20%. I think the fact that in August, we reached the breakeven, and we purchased some positive figure, not only 0, but positive figure with a 25% occupancy rate, taking into account that we still have strong very low occupancy rate in a Marriott portfolio in the big Fiesta America line in Mexico City, which have the hotels that drive up the average [indiscernible] of the portfolio.

We feel very comfortable that we would be able to do that. And also an example, very clear example, we have put some [indiscernible]. We make in September the same amount of cash flow that in November of last year with 30% less of revenues. How we did that? Strong structure in the cost. And if we analyze the cost per guest during the days month, we'll reduce it by more than 35%.

So basically, what we did we change a lot the business model. We approved with the operator to make a deep change in the cost structure. And as of today, it's working. So basically, yes, we are confident in that. We will improve the margin. It will -- maybe it will take time to recover the level of revenue that we have last year. But in terms of profitability, we will recover very soon.

[Simón Zaga, executive]

The opportunity that we see because of this crisis is that we shifted the operator mentality about things that before were difficult or even impossible, now it is possible we have clustered operations.

And these things and all these movements and this change of business plan, as we call it. The challenge and what we're focused on is that moving forward, when we are backing the occupancy, we are not backing the expenses we were before.

We want to reinvent that area, some of the expenses will return because with more gets, we need to give the services. But we will not return to the levels we were before. We will cease this opportunity to become more profitable and a better company.

[Fernando Froylan Mendez Solther, analyst]

Congrats on the strong results.

[Operator]

Our next question comes from the line of Ed [indiscernible] with EFC Capital.

[Unknown Analyst]

I have a couple of them. The first one is, could you give us more details about breakeven point at hotel and corporate label, what's the differences? And what exactly that means? The second one is regarding to this MXN 250 million credit line, could you give us more details in secured/unsecured [indiscernible] as you -- for collateral or it's more likely a revolving type of credit line?

And last but not least, it's regarding to this LIBOR software transition. Do you think that it's going to impact on the notion now of the credit line that you have with BVA, which is around USD 13 million.

[Edouard Boudrant, executive]

Yes, thank you very much for the question. So basically, to answer the first question on the breakeven. So we have different level of breakeven. The first one is the breakeven at hotel [indiscernible], that is to say what is the cash flow that we can extract from the hotels.

And as of today, and what we validated in August is that the whole breakeven portfolio breakeven point is 20% occupancy rate. This is for the managed hotels. This is -- do not take into account the rent that we have, the guarantee that we have similarly on rents also.

If we go to the EBITDA level breakeven also without taking into account the rents, basically, we are talking between 33% and 35%. But we have to take into the account the rents, for example, the big rent in Cancun, which is almost USD 10 million fixed rent. If we take into account that, at EBITDA level, we can lower the breakeven to 20% in the managed hotels.

So basically, this is the level that we manage as of today. Hotels, 25% to be in current number. And if we take it into account the vehicle to be at breakeven in EBITDA, we need to have a 20% occupancy rate. Is that clear for you [indiscernible]

[Unknown Analyst]

Yes. It's really clear.

[Edouard Boudrant, executive]

Okay. Regarding the credit line, the MXN 250 hundred (sic) [million] that we signed with Banorte, it's the same structure that the previous credit line that we have with Banorte. It's a copy/paste, basically. And we have 24 months to make the drawdown.

But we have the option to send it up to 10 years. And we have to give some properties in guarantee. So basically, it's not a revolving, it's medium, long-term financing.

And I did not catch the last question. I think it was related to the USD 13 million that we have with BBVA. Could you repeat that?

[Unknown Analyst]

Yes. The last question is regarding that, like I think 2 years ago around the world [indiscernible] decided to make another transformation in rates. So basically, they decided to put LIBOR, or they transform LIBOR to solve for it.

What I want to understand is if you have talk with BVVA for probably an impact. Because at the end of 2021, LIBOR will be extinct. And for our perspective, there's going to be differences between mark-to-market value in derivatives. And I'm not saying on you, but in the more capacity general. So I was wondering if you can -- do you have any color about that? Or it's too early to discuss this.

[Edouard Boudrant, executive]

It's too early to discuss that. What we -- we are in touch with BBVA to see how we can face the forthcoming amortization, including this U.S. denoted debt. What we aim to do, and we agree with BBVA is to maintain the nominal in USD. Because as of today, we are receiving some U.S., and we have a natural hedging in terms of currency. So -- but in terms of mark-to-market and change in national, there is nothing to highlight.

[Operator]

[Operator Instructions] Our next question comes from the line of Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

I have two questions. The first one, we have a seen some contrast on the demand in some regions, for example, San Miguel or [indiscernible]. So considering this, can you share your comments about your foreign travelers, particularly North American and European travelers in the following quarters?

And my second question is related to a previous one on the breakeven. Considering these reductions and travel restrictions and cost and particularly on the debt side, Edouard, have you seen some changes in the breakeven at financial level -- corporate level, sorry?

[Simón Zaga, executive]

Armando, thank you for your question. I'll start with the first part in terms of the traveler recovery. And I think what Simon mentioned in his remarks is that we have seen some strong recovery for leisure and for other type of travelers. And as you well pointed out, there's been a varied range of responses depending on the city. For instance, what we see is San Miguel and [indiscernible] earning more this year than last year at that hotel, I think is a very strong point to the recovery of that hotel. But what we see is that it's mostly Mexican.

And so at that hotel, where we generally compete [indiscernible] of the [indiscernible], at this point, we are having a higher penetration because we -- there are more Mexican and travelers in Posada. Those have an advantage there, which we have been able to capitalize during this time.

So in many of the places, especially the drive to market, specifically San Miguel, [indiscernible], QueréTaro, so some places like that, we have seen mostly Mexicans return and not really international travel. What we have seen on the other hand in Cancun is very different.

In Cancun, we have been a very, very interesting increase in airlift, and we have seen or continue to see plans for this to increase we have even seen that in some cases, there are new routes that opened to Cancun. So routes that before the crisis didn't exist, are now having a direct connectivity to the U.S. because of the demand. Because many of the U.S. travelers are not able to go to many places. Canada is still close, Europe is too far.

And so really Mexico without any limitation in terms of travel in terms of the distance and the security that they feel because they are familiar with the country, has been somewhat benefited. We're still far away from where we were before this dynamic. But we have seen a steady increase and especially from U.S. travelers, we do see that as the health conditions improve, the travel has improved. And so we have seen them return.

Other countries, we have not seen them returns. So Canadians, which also used to represent an important component for many of the big hotels are still not traveling at all. Europeans, I think we were about to get one of the first flights from Europe to Cancun. It's just about to start, and it's going to be very slow, and the same with South America. So the reality is what we see today is based mostly on U.S. travelers and some Mexican travelers.

[Edouard Boudrant, executive]

Regarding relation about breakeven thinking into account the financing. Basically, as of today, with the business model and the reduction of the breakeven. What we see for next year in terms of AFFO, we should need an occupancy rate of roughly 35% to be breakeven at AFFO. Basically, it's EBITDA minus the financing results.

And after that, to breakeven post debt amortization, it will depend on the results -- on the outcome of the discussion that we have with the banks. But basically, each percent or the same stability that cash flow has to 1% plus or minus in terms of occupancy rate is about MXN 25 million.

So if you add 1% or if you the delayed 1% of occupancy, it will move the cash flow from MXN 25 million. So basically, as of today, we have a little bit more than MXN 400 million of amortization next year. It equals to a 50% occupancy rate to be breakeven at [indiscernible] minus debt amortization.

[Armando Rodriguez, analyst]

Right. I think that's an achievement compared to the 40% level that you mentioned in the previous quarter, right?

[Edouard Boudrant, executive]

Basically, if we see the trend, the trend in the past month in the past weeks, has been slow but very steady. And if you see 18% in July, 25% in August, 31% in September, as of today, we have accumulated of 35%, 36% in September. We are now reaching week days, Wednesday or Thursday at more than 40% occupancy rate.

So we see that the increase of the occupancy is steady. We hope that this trend will continue in the forthcoming forthcoming weeks. And I think it will be very positive for us, and we will have positive free cash flow very, very soon.

[Operator]

[Operator Instructions] There are no further questions at this time. Thank you for your participation in FibraHotel 2020 Third Quarter Results Conference Call. If you have any further questions, please do not hesitate to visit www.fibrahotel.com or contact FibraHotel Investor Relations department. This concludes today's call. Thank you, and have a wonderful day.