Hyatt Hotels Corp Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for joining us for the Hyatt First Quarter 2020 Earnings Conference Call. Currently, all participants are in listen-only mode. After the presentations, we will have a question-and-answer session. I would now like to turn the call over to our speaker today, Brad O’Bryan, Senior Vice President. Please proceed.

Thank you, Josh. Good morning, everyone, and thank you for joining us for Hyatt’s first quarter 2020 earnings conference call. On the call today are Mark Hoplamazian, Hyatt’s President and Chief Executive Officer; and Joan Bottarini, Hyatt’s Chief Financial Officer. Before we get started, I’d like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K and other SEC filings including the Form 8-K filed on April 21, 2020. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday along with the comments on this call are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today’s remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in yesterday’s earnings release. An archive of this call will be available on our website for 90 days. With that, I’ll turn the call over to Mark.

Thank you, Brad. Good morning and welcome to Hyatt’s first quarter 2020 earnings call. I hope that all participants on this call and your families are safe and healthy. The COVID-19 pandemic has taken a devastating toll on people around the globe and has significantly disrupted the global economy, particularly the travel and tourism industry. The Hyatt family is grateful for those on the front line, including medical personnel and volunteers who are working tirelessly to protect the health and safety of so many around the world. This has affected everyone in meaningful and sometimes painful ways. Unfortunately, the Hyatt family has been directly impacted. While I’m grateful that the percentage of colleagues who have contracted the virus has been quite low, every member of the Hyatt family matters in a powerful way. We have had 103 confirmed cases and several hundred colleagues in active quarantine due to possible exposure. Tragically, to date, we’ve had 6 colleagues lose their lives and many more who’ve lost family members or loved ones to the virus. Our deepest sympathies go out to all of those who’ve experienced losses during this pandemic. I also want to express regret and sorrow for the large number of colleagues who are suffering financial hardship due to this crisis. With a bit over a third of our hotels having suspended operations and with low occupancies in those that remain in operation, approximately 65% of our managed hotel employee base globally has been furloughed or placed on leave. It is for this reason that we established our already announced Hyatt Care Fund to support colleagues with the most pressing financial needs due to COVID-19. The Care Fund was financed with initial contributions from salary reductions of Hyatt’s senior leadership team and Board of Directors, as well as through donations from the Hyatt Hotels Foundation, Pritzker Family Foundations, and certain Hyatt hotel owners, and it continues to grow, thanks to ongoing contributions from individual donors. To date, the Hyatt Care Fund has received applications from thousands of colleagues around the world and is prioritizing those who are not working and ineligible for government assistance. Beginning this week, we provided grants to nearly 500 colleagues and are processing thousands more in the coming weeks. In addition to our colleagues, we’ve been actively engaged with our hotel owners as we work to assist them in navigating this very challenging period. Our owner base is represented by a wide variety of entities ranging from large, well-capitalized private and public institutions, including a number of REITs, to individual properties owned by small businesses. The impact of suspended or substantially reduced operations has had a significant impact on hotel owners. We’ve been working closely with owners to help them access government assistance where appropriate and as requested, and through cost reductions or relief we are providing directly. We also understand the challenges that our corporate and association customers, our guests, and our World of Hyatt members face during this disruption. In the spirit of our purpose of care, we’ve implemented actions to provide guests with some measure of flexibility or relief including an offer of points for certain canceled prepaid reservations and the waiver of fees associated with changed reservations. For World of Hyatt members, we also suspended the forfeiture of points through the end of this year, extended expiration dates for free night awards, suite upgrades, and club awards through the end of this year, and extended tier status to early 2022. We continue to evaluate opportunities to support our guests as they look forward to resuming their travel with us once the challenges of COVID-19 dissipate. In a few moments, Joan will provide more details regarding the impact of the severe decline in demand on our results during March and April, and the proactive steps that we’ve taken to address the immediate operating environment with a focus on cost reductions and liquidity. Before turning it over to Joan, I’d like to cover two topics, the first of which is how we’re thinking about the recovery of demand when shelter-in-place and travel restrictions begin to lift. It is very difficult to have any certainty around the timing or shape of the recovery, but we do know we’ll get through this and travel will recover. We expect that the basic human desire to explore and travel will persist with a continued focus on seeking out experiences rather than products. We understand that our corporate customers are evaluating how they will ramp up following the relaxing of the strict guidelines that remain in place in most commercial centers around the world at this time, and that their plans will likely include modified work-at-home and travel practices. When we think about what the profile of a recovery might look like in the second half of this year and into 2021, it’s helpful to break down the primary sources of business into leisure transient, business transients, and group. We believe transient travel in general will lead the recovery with leisure transient perhaps being the first to return. You will likely see stronger demand in drive-to resorts and leisure destinations initially. We believe business transient travel will follow as businesses ramp up their activities. We believe group business will be the slowest to recover, given lingering concerns around larger group gatherings and ongoing social distancing mandates. While our group cancellations to date have been concentrated in the first half of 2020, we believe that corporate group bookings for the second half of the year are at risk, especially for meetings involving a significant number of people. We believe that association group business will be somewhat better than corporate group business through the third and fourth quarters of this year, based on our discussions with our association customers. Overall, we expect group business to be down significantly this year with higher confidence about recovery in group in 2021 where cancellations to date have been very limited. Looking to the future, our recovery task force is focused on all aspects of recovery with special emphasis on safety and cleaning standards in preparation for reopening hotels that have suspended operations or ramping up for those that remain open. Providing safe and clean environments for colleagues and guests has always been a top priority for Hyatt hotels. But going back to January of this year, we began consulting with infectious disease and occupational health experts to get ahead of the situation and quickly implement enhanced cleaning and disinfecting procedures. We’ve also taken steps along the way to ensure that procedures and protocols are aligned with guidance provided by various health organizations including the World Health Organization, the Centers for Disease Control and Prevention, as well as various local authorities in the markets that we serve. Just last week, we announced our Global Care & Cleanliness Commitment as an enhancement to our operational guidelines and resources around colleague and guest safety. Included as part of that commitment is an announcement that we have initiated an accreditation process through the Global Biorisk Advisory Council or GBAC at our hotels around the world. GBAC is a division of ISSA, the Worldwide Cleaning Industry Association, and is composed of leaders in the area of microbial pathogenic threat analysis and mitigation, designed specifically to deal with biological threats and real-time crises like the COVID-19 pandemic. We believe that Hyatt is the first hospitality company to announce plans to commit to independent accreditation at our hotels globally. As part of these efforts, we are also developing group meeting standards and protocols to ensure that groups can continue to meet in a safe and effective manner while health concerns related to COVID-19 persist. In addition, we have established a working group that includes American Airlines and Enterprise Holdings to provide guidance in this area and across the travel journey. Meanwhile, we are also working closely with the American Hospitality and Lodging Association on industry-wide standards in this area. In summary, we are actively engaged and taking all of the steps necessary to ensure a safe and enjoyable experience for both our colleagues and our guests as travel begins to recover over the coming months and beyond. The secondary topic I’d like to briefly discuss is our commitment to our long-term strategy. We remain committed to driving asset-light growth through the growth of our management and franchising business, while continuing our asset disposition program. During our Investor Day event in March of 2019, we announced, as part of our capital strategy, a commitment to sell an additional $1.5 billion in owned real estate. By way of reminder, we completed more than $950 million in asset sales against that $1.5 billion commitment as of the end of 2019, and have until March of 2022 to complete the remainder. We intend to fulfill that commitment. We’ve always been clear that we wouldn’t sell assets in a distressed market simply to sell assets. And to the extent there is near-term pressure on demand and pricing, we may see less activity for a short period of time. Our remaining portfolio of assets is comprised of many well-located assets with sustainable value. With respect to the growth of our management and franchising fee business, for several years running, we’ve been delivering industry-leading net rooms growth. And our initial expectations for 2020 indicated that would continue. We delivered net rooms growth of 6.3% in the first quarter. And our pipeline, which has increased by approximately 11% year-over-year, benefited from new signings that kept pace with the solid pace of first quarter openings. If you exclude the impact of the previously disclosed removal of the Ocean Resort in Atlantic City, which had a large room base but a small fee base, our net rooms growth would have been approximately 7% in the first quarter. While we had a healthy first quarter, we do expect delays in certain planned openings for the year and some disruption in new deal activity, as we work through the worst of this crisis. We nonetheless retained an exceptionally strong pipeline of new hotels scheduled to open over the next four or five years, and remain committed to expanding our presence over time. In addition to aggressively pursuing new development opportunities, we are also very focused on conversion opportunities, which may be available at higher-than-normal volumes given current business conditions. Our brand reputation, strong owner relations, and under-penetrated distribution should all serve as advantages in capitalizing on these opportunities. I’ll conclude my prepared remarks this morning by saying that while we are clearly facing an unprecedented challenge as an industry and as a company, we have a highly experienced management team that is well-prepared to overcome these challenges. We’ve been proactive in taking the steps necessary to reduce costs, manage cash flow, and secure the necessary liquidity to weather the storm, as Joan will discuss in a minute. We are also actively focused on positioning Hyatt to emerge in a position of strength as the brand of choice for travelers as they resume activity over the coming months and beyond. Finally, we remain committed to the execution of our growth strategy and our asset disposition strategy. I’ll now turn it over to Joan to provide additional details on our opening results and some of the steps that we’ve taken to manage through this challenging environment. Joan, over to you.

Thank you, Mark, and good morning, everyone. I’d like to start by acknowledging our colleagues and owners, who are demonstrating their commitment to Hyatt despite a very challenging time for our business. While we have experienced a material impact to our financial results, we have taken significant action to mitigate the impact and secure liquidity. As Mark mentioned, we are also positioning ourselves to effectively meet the needs of our guests as travel restrictions are lifted. Late yesterday, we reported a first quarter net loss attributable to Hyatt of $103 million and a diluted loss per share of $1.02. Adjusted EBITDA for the quarter was $86 million with a system-wide RevPAR decline of approximately 28% in constant dollars. I want to start by breaking down our first quarter results to better demonstrate the impact of the COVID-19 virus on our business and then provide some insight into what we experienced in April. We began the year with solid performance coming off of a strong year in 2019. Excluding our Asia Pacific region, global system-wide RevPAR increased 1.6% through February and 2.6% in our owned and leased hotels. With base, incentive and franchise fee growth of over 10% in constant currency, excluding Asia Pacific and comparable owned and leased margins up 270 basis points through February, we had exceeded our own expectations on a year-to-date basis. As the month of March progressed, the impact of COVID-19 expanded in Europe, North America, and other parts of the world, and we began to see significant reductions in occupancy. The rate of decline in occupancy accelerated over the course of the month of March, and by April, demand had declined to the lowest levels the industry has seen. The one exception to this decline during April was Greater China, where we began to see increases in occupancy. And to give you an idea of the progression, I’ll walk through the RevPAR results for our business segments over that period of time. For the Americas, February year-to-date RevPAR was up 1%, March RevPAR was down 64% and April was down 96%. For the U.S., February year-to-date RevPAR was up 1%, March RevPAR was down 64% and April was down 96%. For our Europe, Middle East and Southwest Asia segment, February year-to-date RevPAR was up 4%, March RevPAR was down 69% and April was down 95%. For our Asia Pacific segment, February year-to-date RevPAR was down 32% or 14% excluding Greater China. March RevPAR for the segment was down 78% or 71% excluding Greater China and April was down 85% or 90% excluding Greater China. As of the end of April, we had suspended operations in approximately 35% of our hotels globally. In Greater China, where we’ve begun to see early signs of recovery as the economy opens back up, we now have only one hotel with fully suspended operations, down from a high of 26 hotels in the first quarter. Occupancies in Greater China improved to approximately 25% by the end of April, up from the mid-single-digits at the low point. Additionally, in South Korea, we’ve seen bookings double from levels seen just three weeks ago, driven by short-term transient business as demand begins to show early signs of improvement in that market. Notwithstanding the improvements we’ve seen in China and positive booking trends in South Korea, results elsewhere in the world worsened in April, and we expect the second quarter to be our worst quarter of the year. We expect May to look a lot like April and it’s hard to say what the shape of the recovery might be beyond that. The RevPAR declines I just discussed put pressure on our cash flow and working capital. And as a result, we’ve taken the following actions. We’ve reduced 2020 capital expenditures by at least $125 million, a 50% reduction from our original guidance. We suspended share repurchases and our quarterly dividends to the first quarter of 2021. We’ve reduced current monthly SG&A by about 40% compared to our original plan, by eliminating all spending considered nonessential in the current environment and reducing near-term payroll and related personnel costs within SG&A, primarily through unpaid leaves and salary reduction. We’ve reduced owned hotel expenses significantly through reduced staffing and in many instances suspension of hotel operations or closures of certain outlets and facilities within hotels that remain open. We’ve also taken a number of significant actions relating to services managed on behalf of and reimbursed by our hotels around the globe. As both an operator and owner of hotels, we understand the pressure that we are all facing and are taking steps to minimize costs wherever possible during this low-demand environment. As a result of a reduction in activity levels from many hotels support functions, we reduced the associated costs on a current monthly run rate basis by approximately 50%. To assist owners with their cash flow requirements, we’ve also temporarily modified brand requirements or wage restrictions on the use of funded reserves for replacement of furniture and equipment and negotiated reductions in costs from third-party vendors. Reimbursed system-wide expenses are included within the line items in our income statement referenced as reimbursed revenues and costs incurred on behalf of managed and franchised properties. For the full year 2019, these costs were approximately $2.5 billion, about three quarters of those costs were payroll-related with the remainder comprised primarily of costs for services such as technology, sales and marketing, and the global contact centers that we manage on behalf of our system-wide hotels, the World of Hyatt program, various reimbursed, shared, or centralized services and insurance. With respect to hotel-level payroll-related costs, occupancy levels will inform decisions made in staffing, resulting in a reduction of these costs for hotel owners in the current environment. With respect to the most of the remaining reimbursed costs I described earlier, we have significantly reduced or suspended many services resulting in reductions averaging 50% on a current monthly run rate. In summary, given the uncertainty around the shape of the recovery, these actions are meaningful and important as we work to mitigate the negative financial and operational impacts of COVID-19. Next, I’d like to walk you through some important actions we took during April to secure additional liquidity. First, we amended our revolving credit facility to obtain a waiver of financial leverage covenants for four quarters through the first quarter of 2021. For the two quarters that follow, we also obtained an increase in our leverage ratio to 5.5 to 1, calculated on an annualized basis beginning with the second quarter of 2021. And second, we successfully issued $900 million in bonds on April 21, 2020. Subsequent to the issuance of the $900 million in bonds, we paid down the $350 million of outstanding revolving credit facility borrowings, and therefore today have access to the full borrowing capacity of $1.5 billion. As a result, our total liquidity, inclusive of cash and equivalents, combined with borrowing capacity is presently over $3.1 billion. Furthermore, the only long-term debt maturity we have in the next 36 months is $250 million of senior notes due in the third quarter of 2021. We believe these successful efforts to secure additional liquidity provide us with the ability to operate at current levels for at least 30 months. We expect current occupancy levels to be temporary and improve as travel restrictions are lifted, and we therefore expect our burn rate to improve over the recovery period. I will conclude my prepared remarks by saying that while we have seen an unprecedented decrease in demand over the last two months, I have great confidence in our ability to manage through this challenge. We have been proactive in managing all aspects of our expenditures and cash flow, and we’ve taken meaningful steps to secure additional liquidity, providing significant assurance for an extended period of time. We believe those steps combined with our focus on recovery efforts including safety procedures and protocols will position us to appropriately ramp up operations in line with demand growth over time. Thank you. And with that I’ll turn it back to Josh for Q&A.

Your first question comes from Michael Bellisario with Baird. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

The first question is for you on incentive fees. Can you maybe provide a little bit more info on the makeup of the fees? What’s the breakdown by region? And then, importantly, what percentage sits behind an owner’s priority?

Yes. So, first of all, the incentive fees are comprised of incentive fees that are driven from hotel profits. And in general, the structure of incentive fees stands behind an owner priority in the United States and not, and in general, outside the U.S., they are from dollar one of operating profits. And in almost all cases, they’re defined. It’s defined in the contract as to how to measure the operating profits. A majority of our incentive fees are from non-U.S. hotels, and it’s about 25% of incentive fees that are from U.S. properties. So, that’s the mix in terms of geography. We obviously had a significant decline in the incentive fee base in the quarter, as a result of declining profitability at hotels where we have incentive fees.

That’s helpful. And then, just one follow-up on the RFP season in the fall. Looking ahead a few months, what would need to happen? What might travel planners request? Additionally, how are you considering or collaborating with your management partners on pricing and volume strategies for the upcoming year?

It's still too early for us to determine what the business profile will look like at that time. We have been very actively engaged with our key corporate customers, especially group customers, to understand their travel plans, their outlook for meetings, and how they plan to conduct meetings in the future. Many corporations still find it premature to make definitive plans, particularly for 2020. I believe that as we move into the fall, we will gain more visibility into the outlook for 2021. If there are significant advancements in a vaccine or other therapeutics, the visibility could improve considerably. However, if not, people are likely to be more cautious and may plan for the latter half of 2021. We have been collaborating closely with some association customers and key corporate clients to design strategies for hybrid meetings, where both in-person and virtual participants can attend. This approach is especially crucial for association customers that depend on these meetings for a substantial portion of their annual revenue. Therefore, we anticipate a reluctance to fully cancel gatherings by associations, even later this year, which is why we are actively working with them to develop a safe and secure way to hold those meetings.

That’s helpful. Thank you.

Your next question comes from Patrick Scholes with SunTrust. Please go ahead.

Hi. Good afternoon. I wonder if you could just touch on your ability to cut costs for your own hotels, the ones that are unionized versus non-unionized. Thank you.

Sure. Patrick, let me give you some perspective on what we’ve done, some of the numbers that I quoted in my prepared remarks. For the owned and leased portfolio, what we’ve done is we’ve reduced about 75% of the cost base from our stabilized cost base in the month of April. And as we noted, there’s a significant amount, over 80% of our hotels that are closed right now. And if you think about the 25% of costs that remain in the owned hotels, we’ve actually positioned those because we believe in the near term those hotels will need to be in a position to recover in the next couple of months. So, the 25% of the existing costs that remain have about a portion of those that are truly, truly fixed, which I would say of the total stabilized expense base, that’s about 15% of the total stabilized expense base that’s truly fixed. And we’ve included a layer there of variable costs that remain at the properties today in order to prepare for restart. Certainly, to your point about union hotels, it’s a factor that we think about in the requirements under those union contracts. But generally speaking, you can refer to the percentages that I just covered.

Okay. Thank you.

You’re welcome.

Your next question comes from Shaun Kelley with Bank of America. Please go ahead.

Good morning, everyone. Joan, thank you for the additional details on the working capital aspect. I want to follow up on the previous question to ensure we're aligned. Could you provide more insight into the system and services fund, specifically regarding the fixed cost run rate or how much working capital will be tied up in the managed operations across the portfolio over the next few months?

So, let me talk a little bit about burn rate and how we’re thinking about the burn rate and the levels of liquidity that we have. Because I think that’s helpful maybe to give a big picture of how we’re thinking about the costs that we’re incurring today and how we think about the burn rate. So, I mentioned in the prepared remarks that our total available liquidity today is just over $3.1 billion, and that includes $1.6 billion of cash and equivalents and $1.5 billion of available capacity on a revolver. And we estimate that in our current levels of demand and spending levels, we have at least 30 months of liquidity under that total amount of liquidity that we have available. And we break that down. It’s about $90 million in our estimate on a monthly basis in the current environment. And if you break the $90 million down, it’s about a little over a half relates to cash flows from operations, which includes our owned and leased hotels operating costs, corporate overhead operating costs, and monthly interest costs. And then of the remainder of that $90 million, that’s split about 50-50 between investment spending. The investment spending includes a small amount of maintenance CapEx and working capital requirements is the second half of that number. And the working capital requirements reflect some of the concessions that we’ve provided to owners and our current working capital needs. So, again, all of this is based on our current run rate and current demand levels that we’re seeing today. So, hopefully that gives you kind of a perspective of order of magnitude and what we’re seeing and how we’re managing that cash flow.

No, it’s very helpful. Thank you for going deeper with your question. My other question is regarding Hyatt’s portfolio in comparison to other operators. I believe Hyatt tends to focus more on high-end and larger group assets. We’re noticing more closures or suspensions of operations within Hyatt’s portfolio compared to what we see with other systems. Can you provide some more insights on this? Does this impact our approach as we enter the reopening phase? Is there anything we need to be aware of regarding these closures? The statistics you provided about China are encouraging, but I’m curious if the same will hold true in the U.S. or if it will depend more on some of Mark’s earlier comments regarding group dynamics. That would be helpful.

Certainly. We have a noticeably larger presence in full-service offerings compared to some of our major public competitors, along with a stronger foothold in urban and resort areas. In our U.S. full-service portfolio, urban and resort hotels make up about two-thirds of our total room count. This indicates both significant differences in chain scale and location compared to some of our rivals, which contributes to the variations in our reporting. The hotel closure rates across different chain scales differ greatly. For example, in our Americas select-service category, around 19% of properties are closed, which is significantly lower than the closure rates for full-service hotels in other areas. Thus, the current closure rates vary considerably. When we analyze where demand is concentrated, specifically in the short term, we find that airline, cruise, and airport hotels are experiencing the highest occupancies and the lowest closure rates. Our select-service portfolio also relies heavily on government contracts, including with the National Guard, Department of Defense, and Army Corps of Engineers, as well as healthcare workers. This reflects the immediate demand landscape in the U.S. At the same time, we need to monitor how changes in travel guidelines may affect demand as they ease. A lot of this will hinge on people resuming air travel. Looking at global markets, we see China as having the most time elapsed since the virus outbreak began, with our hotel closures declining significantly from 26 to 1. Following a drop in new infection rates below 100 cases per day, we've observed a steady uptick in occupancy and bookings. This trend is mirrored in South Korea, where an increase in bookings started shortly after new cases fell to low levels. Our analysis reveals that in China, occupancy has been steadily rising throughout the month, and notably, the last week was very positive, with some hotels even reaching full capacity over the holiday weekend. It’s significant that we had hotels selling out, as it shows a notable recovery. The highest demand has been for hotels situated in drive-to destinations, with increased interest in Sanya, a fly-to area on Hainan Island. However, overall activity remains concentrated among leisure travelers, particularly during this holiday weekend, with drive-to markets leading the way. This trend supports our expectation that leisure travel will spearhead the recovery, indicating the patterns we have observed thus far, albeit with very limited data, focusing on just a few weeks rather than quarterly trends.

Thank you for the color.

Your next question comes from Stephen Grambling with Goldman Sachs. Please go ahead.

Hi. Thanks. My first is actually a follow-up to Shaun’s question on working capital, contribution to cash burn. How would you generally think about the trajectory of that level under various scenarios, and would you generally anticipate needing to provide any additional support to owners to get back open?

So, Stephen, it’s difficult to tell. At this point, we have not seen significant requests for deferrals or challenges at our properties and from our owners. So, in the current environment, we haven’t seen a lot of that dragging on our working capital. We have provided some concessions to our owners to help, and I’ve gone through some of the other actions that we’ve taken to help reduce the pressure on their liquidity. So, we’re definitely very focused on it. But, as we think about the recovery and what the shape of the recovery will be over the coming months, it’s very difficult to say what those needs will be. But, we have provided a reserve for it in our burn rate assumptions that I just described.

And maybe just a little extra color. We announced concessions to owners in China dating back to February. We followed on that with concessions to owners. This is really 60 concessions in March, in both Europe and in the United States. And the duration of those was through June. So, we have provided for relief for owners through June at this point. We’ve been trying to stay very responsive and very close to our owners. So, I would say, while it’s through June, I’m not saying that it will end in June. It might extend into the third quarter. But at this point, that’s what we have provided. And we also are taking some measure of reserve in our own minds and in our own planning with respect to working capital needs to further accommodate timing of payments and the like, which is what Joan addressed earlier. So, that might give you a little bit more color on the time, evolution of our engagement with owners in different places.

That’s helpful. And then, changing gears, as a follow-up, and as you think about the development activity, how would you characterize your developer base relative to peers, and your properties and how they may or may not respond coming out of this environment, not only in the near term but as we think over the next couple of years relative to some of the targets that you had originally set out?

Yes. Given the current crisis, it's challenging to be optimistic about the future. However, we have a strong group of developers with whom we have built extensive relationships over time. At the start of the year, we anticipated over 80 new hotel openings. Based on what we know now, which may change, we think around 10 hotels may be delayed until next year due to various factors, including construction not being deemed an essential service. This situation has pushed back project openings, with about 60% of the affected rooms in ASPAC and roughly 25% in Europe. We are witnessing significant disruptions in several areas, which has also impacted the U.S. market. We will monitor how this situation unfolds in the short term. In the long term, the fundamentals driving our hotels are linked to macro travel trends. Our positioning caters to higher-end travelers, who might be eager to return to travel for both leisure and business purposes, potentially feeling less constrained due to their economic status. The owner community we work with is generally in good shape, despite the stress on existing owners, which we are mindful of as we are owners ourselves. We are confident that with some assistance in certain cases and the strong balance sheets of others, they will continue to navigate through these challenges.

That’s super helpful color. Thanks so much.

Your next question comes from Smedes Rose from Citibank. Please go ahead.

Hi. Thanks. I just wanted to ask on the hotels that are closed. Do you have any concerns that some of them may not be able to open? And it sounds like, if I’m reading what you said right, that you’re willing to work potentially with financing needs for some owners, if they’re not able to work it out locally with banks or through government programs. Is that correct?

Yes. I would say, in general, we’re looking to try to figure out what owners might need. And I think in some cases, the way that I think we have thought about this in the past and that it has presented itself in the past, it has to do with help with respect to deferring fees and the like. We haven’t had any discussions with respect to deferring management and franchise fees at this point. Of course, management and franchise fees are all dependent on top-line revenue. And when revenues decline so dramatically, so too does the fee base. So, there’s no significant issue there. But with respect to chain services or hotel services that we provide outside of our management fee base, there are some fixed elements to that. And so, we are paying attention to what we need to do in order to help provide some relief to owners during that period of time. So, the primary way you can think about it is through the provision of working capital, which is really extending credit, if you will, to owners. In some cases, it might involve actual capital transactions. But that’s really going to be the minority of the cases.

Okay. And then, I just wanted to ask you, you along with other brands have talked about the stepped-up cleaning processes. Do you see any incremental labor costs to owners now, either with taking longer to clean a room or more downtime between rooms. How might that factor over the next several quarters with these sort of enhanced cleaning protocols?

Yes. First of all, we are currently working to optimize how we schedule work and improve our supply chain to provide a cost-efficient solution for protective gear and sanitization products. This approach will differ from how we did things in the past, and while it may be somewhat more expensive, we don't see it as materially impacting our overall expense base. Most of the costs are related to materials and supplies rather than labor. As part of our global commitment to care and cleanliness, we are designating a hygiene manager for each property worldwide. This role is not necessarily additional staff; most of our hotels in Asia and Europe already have hygiene managers. For our hotels in the U.S. without one, we plan to train an existing colleague extensively through our partnership with GBAC to ensure they can train others and implement the necessary practices. This primarily involves expanding the duties of current staff rather than increasing headcount. Regarding the timeline, we are also developing an estimate for how long it will take to clean an individual room. There may be some slight increases in time, but they won't be significant. It’s really about implementing new processes and supplies that will enhance our standardization.

All right. Thank you.

Sure.

Your next question comes from David Katz with Jefferies. Please go ahead.

Good afternoon, everyone or morning, I guess, it’s still morning, where you are. I wanted to go back to the matter of conversions. Look, I wanted to try and go just a layer deeper. Are you thinking about the opportunities or strategies to assume franchise opportunities? Are you thinking in terms of management contracts that may transfer, or you’re talking about independents that may want to join your system? How would you highlight those opportunities?

Thank you. To answer your question, I would say all of the above. Reflecting on the deals we've encountered this year, I can identify examples of each type you mentioned, including management deals, conversions from other brands, franchise agreements, and independents. We anticipate opportunities across those areas. Last year was quite successful for us in terms of conversions, with numerous opportunities arising mainly from independent hotels or those where the owners initially planned to manage the properties themselves but then reconsidered. This has proven to be a significant area of opportunity, and we believe it will continue to be fruitful. In this unpredictable demand environment, owners who have developed and opened hotels might reconsider self-management, which we are beginning to observe. This is a focus for us as we move ahead.

And so, the natural follow-up might be, are you thinking about key money or allocating any capital in order to compete for any of those deals?

I think in some situations, key money may be necessary while in others it may not. Ultimately, the marketplace influences that decision along with the competitiveness of the process. Most of our prime opportunities are in markets where we are either absent or have a limited presence. In fact, that describes many markets for us. The majority of global markets are ones where we aren’t competing against ourselves on every street corner.

Right. Perfect. Thank you very much. Be safe.

You too.

Thank you.

Your next question comes from Thomas Allen with Morgan Stanley. Please go ahead.

Hi. So, what kind of occupancy levels or RevPAR declines are you looking for to reopen more of your owned and leased hotels? And, I’m assuming you would reopen when it’s accretive to the current free cash flow declines. So, what level does it also get to break even EBITDA?

Sure, Thomas. Let me provide some insight on our breakeven considerations. The breakeven point can vary significantly based on the type and location of the hotel. For a full-service hotel in the U.S., breakeven occupancy levels are roughly between 40% and 45%. A select-service hotel typically requires about 10 percentage points lower, around 30% to 35%. Additionally, hotels with lower labor costs in some international markets might also fall within the 30% to 35% range. Conversely, hotels in markets with higher labor costs could exceed 40% to 45%. It's worth noting that these factors will also depend on the food and beverage operations that will be available once hotels start reopening. We're closely monitoring demand and the reservation activity that will emerge as we navigate the recovery phase.

Couple of points I would add to that. I think, the occupancies that Joan just referenced are at the operating income line. If you looked at gross operating profit, GOP level, if you’re familiar with the hotel P&Ls, it would probably be about 10 points lower than each of those numbers that Joan just cited. So, she was talking about breaking even at the operating income line as opposed to the GOP line. In terms of the question you asked about what level of occupancy we might be looking to as we think about targeting reopening our hotels, we think that something like 15% occupancies are about a crossover point between how much you lose by staying closed versus how much you might lose by reopening. And if you thought you were going to run 15% occupancy for a few days and go back to 5%, then you wouldn’t reopen of course. So, part of it also has to do with our outlook for a given market and how we imagine the profile of demand might look over time.

That’s all really helpful. And then, just as a quick follow-up. Do you have any updated thinking around your sensitivity to like 1% RevPAR change?

What we’ve disclosed previously is that a point of RevPAR impacts EBITDA by approximately $10 million to $15 million. In this environment, it would be reasonable to assume that the impact is slightly higher than that.

Very helpful. Thanks, Joan. Thanks, Mark. Stay safe.

You too.

Josh, we’ll take our last question now, please.

Certainly. Your last question comes from Jared Shojaian from Wolfe Research. Please go ahead.

Hi, everybody. Thanks for taking my question. So, 30 months of liquidity is obviously a pretty substantial amount of capital. Your balance sheet is in pretty good order. Can you just remind us, I guess, in this environment how you’re thinking about M&A? And given, we’re likely to see some pretty distressed asset prices, would you be more willing to acquire something that came with a larger portfolio of real estate with intentions of disposing of that over time, or should we think about any M&A looking more like Two Road with more of a pure asset light exposure?

Yes. Thank you. I have to admit to you that I think most of our time and attention has been spent on managing through the initial phase of this crisis and making sure that we are positioning ourselves to take care of our various constituents, not so much time spent on imagining what the environment might bring in terms of the M&A opportunities. I think one of the realities is that when you go through a disruption of this magnitude and this severity, a lot of people, I think, will end up taking a step back from making any major decisions with respect to buying and selling unless there is distress. And so far, maybe still a little early, but we haven’t seen too many things that have been put out into the marketplace because of a distress situation. And overall, the deal market for either hotels or in general has actually been quite quiet. You’ve seen more publicly announced deals that have come apart, than you have any new deals that are either launching or getting closed in our industry, and I think that will probably persist for a little period of time. There are some really important reasons why that’s true. The first is that for any potential buyers of assets, hotel assets in particular, the timing and severity of the decline in demand is kind of an important underwriting factor, and it’s really hard to put your hands around that yet. The second major issue is financing. I think the stress of this whole pandemic across the banking sector has been pretty significant. And I think banks in general will either be reluctant to or unable to actually underwrite deals with respect to assets. So, I think that for those reasons, I think the total deal environment is going to be at a suppressed level for the foreseeable future. With respect to our attitude and how we think about the world, we remain committed to continuing to expand our presence. We think that we’ve done that effectively through the Two Roads acquisition. If another opportunity came up, we would be very open to pursuing it. But I don’t expect any to arise in the near term. I think that it’s possible that there are some independent or smaller management platforms that might have other stresses and strains with their owner communities and alike, where we might be able to either be helpful by way of a partnership, a venture of some kind, or by way of an acquisition. But we have established a very strong balance sheet, first and foremost to make sure that under any circumstance, we don’t need to worry about our liquidity, and that’s what we think we’ve done. And we want to make sure that that remains the case. There are many uncertainties that still remain. I think, there is at least a possibility that there’s a reinfection rate curve that we hit in the fall. We have no ability to assess that at this point, and very few experts have an ability to assess it at this point. But we just have to maintain some, I think balance, as we think about deployment of capital at this point and making sure there will be a better visibility to the future before we start making commitments that would consume a lot of capital in one way or another. So that’s our thinking at this point.

Okay. Thank you, Mark. And then, just for my follow-up. As it takes time to get back to prior demand levels, I think in the interim, there could be more supply if you’re still compounding units at high single digits while others probably are too, just given the industry construction pipeline. How are you thinking about that supply and demand balance going forward over the next couple of years?

I believe it will be a challenging time until a widely distributed vaccine is available, leading to a very uneven market landscape that will vary based on specific positioning and customer needs. However, once we move past that stage, I anticipate a significant pent-up demand and a strong resurgence in travel. This will likely result in a major shift in the supply and demand dynamics, reaching a crucial turning point. It's difficult to predict how long it will take to reach that stage, as the timeline could vary from six to eighteen months, which would lead to different scenarios for the future.

Okay. Thank you very much.

That’s all the time we had for questions. I’ll turn the call back to presenters for closing remarks.

All right. Thank you, Josh. And thank you to everyone for taking the time to join us today. Please stay safe out there. We look forward to speaking with you more in the coming days and weeks, and certainly hope to see everyone in person before long. Take care.

This concludes today’s conference call. Thank you very much for joining. You may now disconnect.