Fideicomiso Irrevocable F/2061 FHipo (FHIPO14) Earnings Call Transcript & Summary

Good morning, and thank you all for joining us today. Welcome to FHipo's Second Quarter 2020 Earnings Conference Call. FHipo released its earnings report yesterday after market close. If you did not receive a copy of the report, please contact FHipo directly. Today's call is being recorded. [Operator Instructions] We are joined by Mr. Daniel Braatz, Chief Executive Officer; Mr. Jesús Gómez, Chief Operating Officer; and Mr. Ignacio Gutiérrez, Chief Financial Officer. For opening remarks and introduction, I would like to turn the call over to Mr. Daniel Braatz. Daniel, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. First, I'd like to say that I hope all of our participants and their families are keeping safe and healthy during these times. I'd like to start with FHipo's performance and achievements during this quarter before moving on to the response to the COVID-19 crisis that we executed to maintain our operations. Last quarter, we announced a successful combination of the internalization process to bring our Advisor and Manager in-house, and we are already seeing a positive impact. As a result of the internalization, we generated savings in administration expenses, mainly from the management fee, amounting to MXN 49 million compared to the same period of the previous year. In addition, for the second quarter of 2020, despite the global health and economic situation, we reached an ROE of 7% with a net income per CBFI of MXN 0.40 per share, resulting in an estimated distribution of MXN 0.388 per CBFI, that is an increase of MXN 0.25 when compared to the distribution base in the second quarter of 2019. This demonstrates FHipo's ability to continue delivering strong results even during the times of great economic uncertainty. In June, the rating agency Verum assigned the rating 1M for both FHipo's short term as well as for the short-term portion of up to MXN 3 billion as part of the FHipo's dual program bond certificates. This rating reflects FHipo's excellent management and work that allows the company to currently maintain a solid financial position. Given the second quarter of 2020, market conditions and the movements in the interest rates, we executed a restrike on one of our interest rate hedging swaps, leaving the rate at 5.5%, that is 2.1% below its past reference rate. It is important to mention that our current financial derivative guidelines retained the objective that financial derivative transactions are exclusively for hedging and that FHipo will seek to maintain a stable level of debt exposure at floating rates. Moving on to our COVID-19 strategy. We continue to work from home effectively without impacting FHipo's operations and remain in close communication with our loan servicers to ensure that all possible beneficial measures are implemented to strengthen asset quality given the current situation in Mexico. We are financially strong, supported by our robust cash position, we have limited leverage, appropriate exposure to floating rates, and we continue to mitigate exchange rate risk. As part of our effort to support borrowers who have faced problems as a consequence of this pandemic like suffering a reduction on their salary or losing their jobs, we have adhered to Infonavit support measures, which were approved by its Board of Directors last quarter. These measures were launched on April 15 with the option to extend through August 2020. They include the use of the Fondo Universal de Pérdida de Empleo or the Universal Job Loss Fund, supporting borrowers by covering loan payments for up to 3 months of the required mortgage payment with a 0% co-payment and this period can be extended for an additional 3 months. For those borrowers that are not eligible for this fund that works as an insurance, Infonavit has also implemented a payment tolerance to allow borrowers to defer capital and interest payments for up to 3 months with available 3-month extension as well. The loans will not accrue interest during this period. As for the benefits for borrowers who employers have faced stoppages in operations, a discount on the amortization is offered for a fixed amount of time. So before I hand over to Jesús, I would like to reiterate that we are constantly analyzing the most attractive opportunities and then executing on them, thereby demonstrating our ability to generate attractive returns for our investors. Maintaining a high-quality portfolio is fundamental for us. Therefore, given the current situation, we will continue to take a conservative approach to new transactions and focus our attention on maintaining the quality of the mortgage pool and using our resources efficiently. I'm confident that our strategy and financial positioning will put us in a good place to continue to achieve positive results for our investors and clients. For the upcoming slides regarding our portfolio composition, I will hand over the call to our COO, Jesús Gómez.

Thank you, Daniel. Good morning, everyone, and thank you for joining us today. I would like to continue the call with Slide 7 and discuss the breakdown of our mortgage portfolio as of the second quarter of 2020. FHipo's consolidated portfolio reached MXN 28.9 billion, amounting to 101,000 loans, a decrease of 6% compared to the second quarter of last year, mainly due to the amortization of portfolio, a lower pace of mortgage origination and the sale of rights of our portfolio during the fourth quarter of last year. These loans come from our partnerships with multiple origination programs, such as Infonavit Total, Infonavit Más Crédito, Fovissste and Smart Lending's collection rights. The average loan to value at origination stood at 77.7%. The payment to income ratio for the quarter remained stable at 24.2% as of the second quarter of 2020, and 96.7% of our portfolio remains current, thus giving an NPL ratio of 3.3%. In peso terms, the portfolio of MXN 28.9 billion is broken down as follows: MXN 11.6 billion belongs to Infonavit Total; MXN 14.3 billion belongs to Infonavit Más Crédito; MXN 2.7 billion to Fovissste; and MXN 370 million to Smart Lending loans. Moving on to Slide 8. We can see how FHipo's portfolio remains geographically diversified across all 32 Mexican states. Regarding our partnerships and origination programs, our portfolio divided in the following ways: First, Infonavit Total VSM or minimum wage index loans, represents 19.9% of the total portfolio; the Infonavit Total pesos program represents 20.2%; Infonavit Más Crédito program, which is our current origination program, represents almost half of the total portfolio with 49.4%; the Fovissste portfolio represents 9.2% of the total portfolio; and finally, the Smart Lending portfolio represents 1.3% of our loan portfolio. We will continue to closely monitor and analyze the effects of the pandemic and the global economic situation on our portfolio so that we can continue to achieve positive results while supporting borrowers as they need. I will now hand the call over to our CFO, Ignacio Gutiérrez, to discuss FHipo's financials.

Thank you, Jesús, and good morning, everyone. I will continue the presentation by going through our diversified sources of funding on Slide 11. FHipo maintains a conservative leverage strategy through multiple sources of funding, including securitizations, long-term covered bonds, short-term unsecured bonds and warehousing facilities. It is important to mention that given the challenging environment we are facing due to the pandemic and taking advantage of our financial strength, we have lowered our exposure to short-term debt by MXN 600 million in the past 6 months, thus reducing risk on upcoming debt maturities. As of quarter end, our consolidated debt-to-equity ratio stood stable at 2.17x, and our on balanced debt-to-equity ratio amounted to 1.6x. Looking at Slide 13. I will go through the asset quality of our portfolio loans and our expected loss coverage. FHipo's NPL portfolio remains stable in consolidated terms. Nevertheless, we maintain adequate levels of loan loss reserves with our expected loss coverage at 1.64x. As Jesús already mentioned, our NPL ratio represented 3.32% of FHipo's consolidated portfolio, a 114 basis point increase compared to the same period of the previous year. Our strategy to remain diversified among several origination programs and geographies is supporting the portfolio quality and performance during these unprecedented times, minimizing extensive losses. Moving on to Slide 16. I will go through the financial results and key metrics for the quarter. The net interest income from mortgage loans amounted to MXN 609.6 million, while the investment income amounted to MXN 28.2 million, which totaled a net interest income of MXN 637.8 million, representing a 1% decrease compared to the second quarter of 2019. This decrease was mainly due to the effect of lower interest rates on the return over cash and investment in securities as global risk rate interest rates continue to fall. The interest expense for the quarter was MXN 415 million, MXN 9.4 million more than the same period of last year. This increase, as Daniel mentioned, includes the nonrecurring expenses related to the restriking made through the interest rate swap during the quarter. The allowance for loan losses, which reflect the performance of our portfolio, was MXN 9.5 million for the quarter. The valuation of receivable benefits from securitization transactions, mainly reflecting the net income of our position in off-balance transactions resulted in MXN 41.1 million, a decrease of MXN 54 million when compared to the second quarter of 2019, primarily driven by the natural seasoning of the off-balance structures and to the effect of the increased NPL...

I think we lost Ignacio on the line.

Sorry?