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Signum Research

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Joaquín Sánchez

Joaquin Sanchez, CFA

Signum Perspectives

Impact of the current health contingency on the lodging sector and new measures

The current health crisis is having a direct impact on the domestic and international lodging industry. Hotel demand is being undermined by government prevention and policy measures aimed at containing the spread of the COVID-19 pandemic. In the specific case of Mexico, a number of companies have communicated new operating and financial measures aimed at curbing its effect.

Group Posadas, which has the largest hotel portfolio in the country, mentioned the gradual suspension of the operations of 76 hotels as of March 23rd. According to the company, occupancy rates are around 20% so far in March and should average 16% for March, April and May. On the financial side, management said it had enough resources to meet interest payments on Senior Notes maturing in 2022. As of March 23, cash amounted to P$1.6 bn, including US$51 MN.

Fibra hotel (FIHO) announced an aggressive cost reduction plan and the temporary closure of 30 hotels (3,957 rooms) in diverse business categories and regions of the country that are mostly operated by Group Posadas and account for 35% of the current portfolio.

Management said the hotels are located in the same area, city or cluster in order to channel occupancies to its other hotels. FIHO is not ruling out the temporary closure of 20 more hotels (approx.3,000 rooms).

On the financial side, FIHO has a cash balance of P$650 mn excluding access to a P$200 mn revolving credit line and is currently negotiating new credit lines with banks.

We estimate that in the current environment, commercial banks may increase the cost of credit to companies in general, or else considerably restrict access to credit due to a change in the risk profile of most industries.

FIHO’s debt schedule includes large amortizations as of 2023, most of which have a fixed rate. Less than 5% of the debt matures this year. Current leverage is 25.8% (Debt/Total Assets), which we consider prudent.

According to management, the share repurchase fund will remain inactive for the time being in order to keep resources available for other operating or financial purposes. We believe that other sector companies may also implement similar policies in light of the current situation.

Hotels City Express (ticker symbol HCITY) will implement health and safety protocols and prevention mechanisms with guests and also announced changes to reservation policies and the extension of loyalty programs.

Regarding financing, the company has drawn on a PS1 bn revolving credit line as a precautionary measure to guarantee liquidity. We believe this will provide it with the solvency required in a scenario in which the effects of the current pandemic are expected to last into coming quarters. Leverage (Net Debt/EBITDA) was 4.4x at the end of 2019; however, 97% of the debt matures as of 2023.

HCITY maintains a very competitive operating breakeven for the industry, which we estimate at around 30% of occupancy on average. So far the company has mentioned no measures related to temporary hotel closures.

HCITY has been actively repurchasing shares following the strong market correct. As of March 11th, its share buyback fund amounted to P$567.7 mn and 4.7 mn repurchased shares.

Based on the estimates of some companies, during N1H1, hotel occupancy rates decreased 10 percentage points on average. The current contingency is different though, as it is not known how long the preventive measures will last. We believe that first quarter results will to some extent be offset by January and February when occupancy rates were relatively stable. However, March will have a material impact.

So far, Fibra Inn (FINN) has disclosed no respective strategies, but based on 2019 results, this REIT should remain in a relatively comfortable position as FINN18 (amounting to P$3.2 bn) does not mature until 2028. Liquidity for the period amounted to P$780 mn with P$194.6 mn in recoverable VAT. The REIT estimates interest amortizations amounting to P$504.9 mn over the next six quarters.

In our view, the companies under coverage (FINN, FIHO and HCITY) have enough liquidity to meet their short-term financial needs. Nevertheless, our rating is HOLD until their operating inflection point becomes clearer.

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