Earnings Call Transcript - HLT Q3 2020

Operator, Operator

Good morning and welcome to the Hilton Third Quarter 2020 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Vice President, Investor Relations. Please go ahead.

Jill Slattery, Vice President, Investor Relations

Thank you, Chad. Welcome to Hilton's Third Quarter 2020 Earnings Call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10-K as supplemented by our 10-Q filed on August 6, 2020. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our third quarter results. Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Christopher Nassetta, President and Chief Executive Officer

Thank you, Jill, and good morning, everybody. We appreciate you joining us today, particularly after what might have been a very late night for many of you on the call. Our third quarter results continue to reflect the impact of COVID-19. However, I’m encouraged by the progress we’ve made over the last several months. Travel demand is gradually picking up around the world, and occupancy is meaningfully up from the lows we saw in April. As a result of these improvements, I’m pleased to say that we were able to welcome back most of our furloughed corporate team members last month. We have navigated the first phase of reopening our corporate offices successfully. We have reached important milestones with the vast majority of our properties around the world now open, development deals continuing to pick up, and customers starting to feel more comfortable traveling again. We remain focused on sustaining our recovery and driving better results for our owners. Turning to the quarter, RevPAR declined approximately 60% year-over-year, with performance in urban full-service hotels remaining particularly challenged due to the lack of meetings and events, negligible international travel, and local COVID protocols. System-wide occupancy increased sequentially throughout the quarter, with all major regions showing improvement. However, momentum slowed in September, with occupancy only slightly better than August levels. In the U.S., occupancy increased roughly 5 points month-over-month in both July and August but remained largely steady in September. Over Labor Day weekend, roughly half of our properties achieved occupancy levels of 80% or higher given strong leisure demand. As expected, we saw leisure trends slow post-summer, offset by a modest uptick in business transient into the fall. Asia Pacific led the recovery, driven largely by domestic leisure travel in China, with occupancy levels reaching nearly 70% in August, the highest since December 2019. Performance in China was further boosted by local corporate transient and domestic group. In Europe, positive summer momentum stalled in September due to a rise in coronavirus cases and tightening government restrictions, resulting in relatively stable occupancy levels of around 35% in August and September. Overall, these trends have generally continued into the fourth quarter with fairly steady occupancy as more hotels reopen and ramp, tempered by continued uncertainty surrounding the virus. With more than 97% of our global hotels open and operating, we estimate the vast majority of those hotels are running at breakeven occupancy levels or better. As we look to the balance of the year, we expect trends to remain relatively steady, resulting in fourth quarter RevPAR declines generally in line with the third quarter. On the development side, activity continues to pick up. In the quarter, we signed over 17,000 rooms, boosted by better-than-expected conversions, which increased approximately 50% year-over-year and accounted for roughly 20% of our total signings. Year-to-date, we command an industry-leading share of global conversion signings with more than 9,300 rooms signed, representing 1 in 5 deals. Recent notable signings included the Waldorf Astoria Monarch Beach in California and the Conrad Abu Dhabi Etihad Towers. These conversions plus new development projects like the Conrad Rabat Arzana in Morocco will further enhance our global luxury and resort footprints. In new development, we continue to see strong interest across our focus service brands, with signings up roughly 32% versus the second quarter. Additionally, we recently celebrated our 500th Hampton signing in China. At quarter end, our development pipeline totaled 408,000 rooms, representing an 8% increase versus the prior year. Additionally, the high quality of our pipeline, with more than half of our rooms under construction, gives us confidence in our ability to continue delivering solid net unit growth for several years. We opened more than 17,000 rooms in the third quarter and achieved net unit growth of 4.7%. Openings in the Americas were up more than 31% year-over-year, driven primarily by conversions. Notable openings in the quarter included the Conrad Punta de Mita in Mexico and the Hilton Beijing Tongzhou in China. Additionally, we were thrilled to open the Motto by Hilton in Washington, D.C. City Center, marking our first hotel under the Motto brand. For the full year 2020, we now expect net unit growth to be 4.5% to 5% with continued positive momentum in conversions. Additionally, we look forward to celebrating our 1 millionth room milestone in the coming weeks. Since our team came in and implemented the company's transformation 13 years ago, we've doubled our size in rooms and number of brands, driven entirely by organic growth. Our commitment to delivering on our customers' evolving needs and preferences is even more important now than ever before and calls for even greater innovation and agility in the current environment. To that end, we were excited to launch WorkSpaces by Hilton, which provides guests with a clean, flexible, and distraction-free environment for productive remote working. Each of our day-use rooms includes a spacious desk, a comfortable ergonomic chair, free Wi-Fi, plus the use of all available business and leisure amenities. We also announced further enhancements to previous Hilton Honors program modifications that will increase flexibility for our more than 110 million members, including reducing 2021 status qualifications and extending status and points expiration. Decisive actions, relentless determination, and unwavering commitment to our core values have helped us successfully navigate what has been a challenging and uncertain environment. They have also helped position us well for recovery. We're confident that our business model, coupled with our disciplined strategy, will enable us to further differentiate ourselves in the industry and emerge stronger and more efficient than ever before. With that, I'll turn the call over to Kevin for more details on the third quarter.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Thanks, Chris, and good morning, everyone. In the quarter, as Chris mentioned, system-wide RevPAR declined 60% versus the prior year on a comparable and currency-neutral basis, with decreases across all chain scales and regions. Occupancy drove the majority of the declines with rate pressure due largely to customer mix, further hampering performance. However, we saw sequential improvement throughout the quarter driven by hotel reopenings, loosening travel restrictions in most areas, and a pickup in summer leisure demand, particularly in China and the U.S. Adjusted EBITDA was $224 million in the third quarter, declining 63% year-over-year. Results reflect the continued reduction in global travel demand due to the pandemic and related temporary suspensions at some of our hotels during the quarter. Management and franchise fees decreased 53%, driven by RevPAR declines. Overall, revenue declines were mitigated by greater cost control at both the corporate and property levels, with corporate G&A expense down approximately 38% year-over-year. Our ownership portfolio posted a loss for the quarter due to temporary closures, fixed operating costs, and fixed rent payments at some of our leased properties. Cost control measures mitigated losses across the portfolio. Diluted earnings per share adjusted for special items was $0.06. Turning to liquidity. We ended the quarter with total cash and equivalents of nearly $3.5 billion. Our cash burn rate improved in the third quarter given gradual recovery in the macro environment, further helped by continued cost discipline and better-than-expected collections. As we look ahead, we remain confident in our liquidity position and ability to navigate the current environment and recovery. Further details on our third quarter can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have.

Operator, Operator

Chad, can we have our first question, please?

Carlo Santarelli, Analyst, Deutsche Bank

Guys, just in terms of the pipeline, obviously, you talked about a kind of 3.5% to 4% was the expectation for this year. You obviously spoke to the high end of that range. Now looking for more, Chris, you spoke a lot in your prepared remarks about the impact of conversions, and I believe you said was 20% of the 17,000 rooms signed in the quarter. As we move out further into 2021, 2022, could you talk a little bit about the role that you're foreseeing for forward conversion means to net unit growth? And maybe potentially also talk about what changed this year. Is it just more construction timing and things kind of getting back, started in terms of hotels that were close to the finish line? Maybe a little bit in advance of when you thought they would?

Christopher Nassetta, President and Chief Executive Officer

Sure. There's a lot to cover, but I'll break it down. Over the past three to four months, our net unit growth has increased to 4.5% to 5%, which aligns with your question. This improvement is due to construction ramping up more quickly than we anticipated, allowing us to deliver more than expected this year. While most of the benefits from conversions will be noticeable in 2021 and 2022 due to a lag effect, we are already observing more conversions than we anticipated this year, reflected in a 50% increase in signings during the third quarter. This is how we arrived at the 4.5% to 5% growth figure. Looking ahead to conversions, last year, a significant portion of our net unit growth came from conversions, estimated in the high teens percentage. This year, we expect that to increase by 400 to 500 basis points. Even though there's a time lag for renovations compared to new builds, we anticipate being in the low to mid-20s for conversions in the near future. Historically, during the Great Recession, conversions peaked around 40%, but I don't foresee reaching that level again, even though we now have more brands available, including DoubleTree and three soft brands. I believe conversion growth will continue to rise beyond the low to mid-20s into 2021 and 2022. While it's early for precise predictions, I see this as a positive trend. For net unit growth, we've indicated in previous discussions that we expect it to be in the 4% to 5% range over the next few years. This year, we anticipate being slightly above that, with several projects in motion, including conversions that are already financed. Despite a potential decline in construction due to current financing market conditions, we have numerous projects in progress. Overall, I think our net unit growth will hover in that 4% to 5% range, and while precise forecasts are challenging, we'll keep you informed as we move forward.

Carlo Santarelli, Analyst, Deutsche Bank

And Chris, if I could, just a quick follow-up on your response there. That 4% to 5% range, is there an air pocket anywhere in there as you think about kind of maybe the financing globally that could potentially impact the 2022 or 2023, whatever may be in the lead time? Or do you think that's pretty consistent and steady?

Christopher Nassetta, President and Chief Executive Officer

Yes, it depends on how successful we are in offsetting the expected decline in new builds with conversions. It’s difficult to look too far ahead, which is why I suggest focusing on the 4% to 5% range for now. This estimation is based on our extensive experience, current trajectories, projects already in the pipeline, constructions underway, and ongoing activity with conversions. We believe the next few years will fall within those parameters. While it may not stay exactly in the middle every year, as our projections indicate, it could fluctuate slightly. That’s as detailed as we can be at this time.

Operator, Operator

The next question will be from Joe Greff with JPMorgan.

Joseph Greff, Analyst, JPMorgan

Chris and Kevin, you have done an excellent job managing G&A costs. I understand there are some impacts from furloughs in the G&A line that are not expected to continue. While this may not be an immediate concern for the fourth quarter, could you discuss how you envision handling incremental G&A expenses over the next couple of years in relation to RevPAR and fee recovery? Specifically, considering 2022 with RevPAR at 80%, 85%, or 90% compared to 2019, what do you see as the relationship for G&A costs when using 2019 as a reference point?

Christopher Nassetta, President and Chief Executive Officer

Yes, that's a very fair question. You've pointed out some of the offsetting factors. While you didn't specifically ask about the fourth quarter, it's worth noting that a similar dynamic existed for 2021 and 2022. We will lose the benefits from the furloughs we experienced in the second and third quarters, but we will also gain from the ongoing benefits of the workforce reductions and other cost control measures we've implemented. In terms of guidance, it’s still early to provide specific insights for 2021 and 2022. Our perspective is that most of these savings should be semi-permanent, and that eventually, the business will grow to a point where we will need to reinstate some costs. For the foreseeable future, we expect that most savings will remain in place, allowing us to grow roughly in line with inflation over the next couple of years, and that's about as much guidance as we can offer at this time.

Operator, Operator

The next question is from Shaun Kelley from Bank of America Merrill Lynch.

Shaun Kelley, Analyst, Bank of America Merrill Lynch

So Kevin, in your prepared remarks, you talked a little bit about just sort of where we are with the cash burn piece. And I was just wondering, can you just kind of lay out for us directly or clearly, is the corporate entity sort of on a run rate or a monthly basis? Or are you guys at cash burn neutral or even positive at this point? Or what does it take to get there? And then maybe as the follow-up, just straight up, it would be how are kind of the broader working capital and franchisee collections going? How is that relationship with franchisees playing out? And how would you characterize some of the risk around any collection at this point?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, sure. Thanks, Shaun. I'll address the second part first. The relationship we have with our owners is really positive. Everyone is doing their best, and to the extent they can, they are paying us. During the third quarter, we experienced a burn of about $100 million, which was better than most expectations, including ours. Overall, collections have been going well, and everyone is putting in their best effort. Looking ahead, are we at breakeven? I'd say we're getting there. If collections remain consistent and we have a similar experience in the fourth quarter, I expect our performance will be equal to or slightly better than the third quarter. We do have some timing issues, like a significant interest expense payment due in October, but overall, I believe the fourth quarter will match or exceed the third quarter. As for achieving positive cash flow, we're close. We likely need a little more demand and improved operating performance to get there.

Operator, Operator

The next question is from Stephen Grambling with Goldman Sachs.

Stephen Grambling, Analyst, Goldman Sachs

Combining both Carlo's earlier question and the current context, you’ve seen solid net unit growth and effective cost management. Considering these factors, what level of RevPAR decline relative to 2019 would you expect to return to 2019 EBITDA levels, and possibly even reach the 2019 levels of free cash flow? Additionally, what other factors should we consider that might impact this situation?

Christopher Nassetta, President and Chief Executive Officer

Thank you for your question. It’s a bit challenging to provide an exact model, but we do have one. If we consider both factors you've mentioned, it's implied that we will return to free cash flow and EBITDA levels of 2019 before we reach demand levels of that year due to a more efficient cost structure. This seems like a reasonable assumption, and our models support it. Coming out of this situation, as both Kevin and I have noted, we'll continue to grow. We will have more units operating under normal demand levels against a reduced cost base. This means that once we reach a more stable period, we will operate as a significantly higher-margin business because we've cut many costs and plan to maintain that efficiency despite some basic inflationary pressures. While I can’t provide a specific number or guidance, particularly for the long term, basic calculations based on our previous statements should help you get there. You can observe our projections for unit growth and make assumptions on RevPAR, where we've provided solid guidance. We anticipate a reduction in our G&A structure by 25% to 30% this year, likely leaning towards the higher end when finalized. The rest is just arithmetic. We won't finish that arithmetic for you, but your baseline is accurate: we'll reach 2019's EBITDA and free cash flow levels before returning to demand levels from the same year for those reasons.

Stephen Grambling, Analyst, Goldman Sachs

Right. And I guess one other just quick follow-up is just as we think about working capital or other components of cash flow, whether it's CapEx or otherwise, is there anything there that we should be cognizant of that could be different relative to where you were trending kind of pre-COVID?

Christopher Nassetta, President and Chief Executive Officer

I don't think so. No, I don't think so. I mean, obviously, on CapEx, we've reduced CapEx numbers in this environment like pretty much everybody on earth, certainly in our industry and most industries. I think as we get back to that, I think there will normalize and be more like it was, but there will be efficiencies, I think, we will garner on that. When you get to a normalized environment, I think the working capital things sort of go back to the way they were.

Operator, Operator

The next question is from Thomas Allen of Morgan Stanley.

Thomas Allen, Analyst, Morgan Stanley

Thank you for your earlier comments indicating that you expect the fourth quarter RevPAR trends to mirror those of the third quarter. Could you provide additional insight into what you are currently observing by region? While we can analyze the third quarter results, I've noticed increased closures in Europe. I'm interested to know if the APAC region is continuing to show improvement. Additionally, can you share any insights from the ongoing corporate rate negotiations?

Christopher Nassetta, President and Chief Executive Officer

Thank you, Thomas. There’s a lot to discuss, so let me break it down. Regionally, what you’ve been reporting aligns with what we are observing. Currently, despite the situation in the U.S., including the election and a rise in coronavirus cases, we are seeing stability in mobility and demand. That said, Europe and the Middle East are experiencing a slight decline, which is expected. As we approach the fourth quarter, we've had to adjust our projections downward due to lockdowns, which is understandable. In Latin America, the trends are following those in the U.S. Similarly, Asia Pacific, particularly China, continues to show growth, while outside of China, the region resembles the U.S. in its trends. Overall, Europe is facing some setbacks, Asia is making modest progress, and the U.S. remains stable, which informs our outlook for the fourth quarter. Our preliminary October data supports this assessment, although risks remain due to the pandemic’s developments both domestically and internationally. People are working to manage their risk, and while widespread lockdowns in the U.S. seems unlikely, there is enough mobility to sustain our current operations. Looking ahead, I believe we might see a significant shift by spring, particularly after the election, which will likely relieve some tension. I anticipate positive advancements in vaccines and therapies, potentially available later this year or early next year, after we navigate the winter and flu seasons. This could foster a notable shift in public sentiment and overall performance. In terms of our segments, they reflect these shifts to varying degrees. Leisure travel is picking up post-summer, benefiting from people having more free time with offices closed. Business travel, though not at pre-pandemic levels, has shown improvement into the fourth quarter. As for group travel, we recorded about 10% participation in the last quarter, which is around half of typical levels, with these groups being largely affected by the ongoing crisis. I expect a more significant return to group travel next spring as we transition in our response to the health crisis. Regarding corporate rate negotiations, we’ve seen positive outcomes. The main concern is not just the rates themselves, but also how many attendees will actually participate in the programs next year, which remains uncertain. Nevertheless, we’ve had good success overall, with many clients agreeing to maintain the 2020 rates, acknowledging the challenges we are all facing, which gives us a confident outlook. I hope this addresses your questions and provides additional context.

Operator, Operator

And the next question is from David Katz with Jefferies.

David Katz, Analyst, Jefferies

Good to hear you're all well. You have largely addressed the two major buckets that I wanted to ask you about, but I'd like to just take the prior question a little bit further. How much thinking have you sort of put into flexible strategies around what-ifs, if the timings on therapeutics and so forth or the effectiveness of distribution, et cetera? And I mean, specifically around the buckets of demand, which have included a majority from business versus leisure and how you sort of fill up your buckets should you have to as things move forward.

Christopher Nassetta, President and Chief Executive Officer

That's a great question and something we discuss every Monday morning in our executive committee meeting. As you might expect, while I’ve shared my perspective on what the recovery could look like moving forward, we’re not relying solely on that. It's our hope, but only time will tell. My father used to say, 'Son, fish where the fish are,' and currently, the demand is primarily in leisure travel, particularly from those who are not the typical leisure customers. Business travel, on the other hand, consists of smaller businesses and frontline workers responding to the crisis. Group travel isn't what it used to be, but there are still groups that need to meet. Many people are not back in their offices, so they require spaces for gatherings and meetings. We also introduced WorkSpaces by Hilton, which allows rooms to be used as workspaces, catering to those who need an escape from home and require Wi-Fi along with some privacy. Our marketing strategies have adapted to meet these changes. We’ve pivoted our efforts with Honors as well. We are very aware of the current situation and focused on ensuring we capture more than our fair share of the market, which we are achieving. In this environment, our relative performance is strong, and we intend to maintain that. However, this won’t last indefinitely; our current strategy won’t be permanent. We’re developing new skills that we will retain, allowing us to have additional tools at our disposal when demand normalizes. Pricing strategy is essential for generating demand—the more demand you create, the higher the prices you can implement. As we refine our approach now, we aim to merge the best aspects of both our current and future strategies to drive demand and set appropriate pricing in the long run. We are acutely aware of our responsibility to support our stakeholders, many of whom are facing challenging circumstances in this unprecedented time for our industry. Our focus is to help them navigate through this period while also preparing for the future.

Operator, Operator

And our next question is from Robin Farley with UBS.

Robin Farley, Analyst, UBS

I wanted to go back to the topic of unit growth because I know you mentioned conversions were 20% of total signings in the quarter. I'm just wondering what percent of openings they were in the quarter just given the increase in your unit growth since last quarter. I'm wondering if that’s conversion’s driving...

Christopher Nassetta, President and Chief Executive Officer

They were about 20% in the quarter. They’ll be, as I think I already suggested in a prior comment, a bit more that for the full year. But we do expect that those percentages will creep up in '21 and '22.

Robin Farley, Analyst, UBS

So the increase in your unit growth for this year from just a quarter ago sequentially, is that more just construction projects getting back on track faster? I didn't know that, that was...

Christopher Nassetta, President and Chief Executive Officer

It's both. We're doing more. I mean while most of the benefit of conversions is going to happen in '21 and '22, we're getting some deals done that the world is opening up fast enough where we're going to open a bunch of incremental conversion hotels in the year for the year that we didn't think we'd open. Plus, yes, now I'd say the vast majority of things that were under construction, 90-plus percent of what was under construction when we went into the crisis is back under construction. They’re making really good progress. So we assume sort of a lag effect that when things got up and going, it would take a while for things to wind back up. But honestly, the construction trades around the world, particularly here in the U.S., were ready to go, and they’ve been ready to work. Activity picks up a lot faster. Those are the two reasons why we're delivering more this year.

Robin Farley, Analyst, UBS

And then just when we think about maybe some that did get pushed into next year just from your kind of pre-COVID original guidance, it sounded like your guidance for next year is in that kind of 4% to 5% range. Are there some things that were originally in next year's openings that just have kind of fallen off that didn't end up going forward?

Christopher Nassetta, President and Chief Executive Officer

Not much has changed. A little more will open this year, which we initially thought would push into next year. So, that brings some of next year's expectations into this year. We still feel it's too early to be precise. At this point, we can estimate a range of 4.5% to 5% because some factors may influence that number. Over the next few years, we anticipate being in the 4% to 5% range, and we will need some time to refine our estimates.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, Robin, I’d like to add a bit more to that. Your thinking on this makes a lot of sense. However, it's important to remember that when we initially mentioned half or slightly better, we were at the very start of the crisis, in its depths. A significant amount of construction had been halted, and we were uncertain about when it would resume. Now that we're further along, we've had a more favorable experience with construction restarting than we expected. I wouldn't try to overanalyze how this impacts future years.

Operator, Operator

The next question will come from Bill Crow with Raymond James.

William Crow, Analyst, Raymond James

Chris, given the positive comments from Kevin on the cash burn nearing zero and your discussion of cost cuts and margins going forward, I’m just wondering how much confidence level you could provide that you might return to share repurchases as we look forward to 2021?

Christopher Nassetta, President and Chief Executive Officer

I think that's a really good question, but it's a bit early to comment. Our long-term philosophy on returning capital hasn’t changed. When we get back to a more normalized environment, we expect to generate significant free cash flow. We don't need much of that to grow because we have the leading brands in the industry, and we believe we can continue to grow organically. Therefore, it’s best for that capital to be returned to our shareholders, primarily through buybacks. Our philosophy remains the same, but it's premature to say exactly when we will resume that program. Our leverage levels have increased as a result. If you examine our net debt, it hasn't risen year-over-year. However, our EBITDA has significantly decreased, even though we haven't provided guidance. We want to see our debt-to-EBITDA ratios improve before we restart our share repurchase program. This doesn't mean it has to return to the historical ranges we've discussed, but we want to ensure we are firmly positioned for the next stages of recovery and that our debt-to-EBITDA levels are moving towards a more normalized state. Given our current situation, which doesn't feel great but is manageable regarding liquidity, I believe we will make that shift in the spring. We need to see those conditions met first. I understand people are eager to know, and I hope this provides some clarity on our perspective, but right now we can’t specify when that will happen.

Operator, Operator

And the next question is from Smedes Rose with Citi.

Smedes Rose, Analyst, Citi

I wanted to ask about the 97% of the rooms that are currently open. While I understand that it represents a small portion of the total room base that is closed, is the area of about 25,000 to 30,000 rooms primarily concentrated in the owned and leased portfolio? Or is it more widespread? Additionally, do you anticipate that any of those rooms might not reopen?

Christopher Nassetta, President and Chief Executive Officer

Yes, I believe the majority will reopen. There may be a few exceptions, but it is primarily focused on urban destinations in the U.S. and Europe. While Europe has experienced setbacks, we still had more hotels set to open there, but the recent lockdowns have hindered our progress. It's possible that some hotels in Europe may go back into suspension. In the U.S., the challenges are mainly affecting large urban hotels in major markets.

Smedes Rose, Analyst, Citi

So I guess it would also be skewed towards the owned and leased portfolio, which I know is small, but it just...

Christopher Nassetta, President and Chief Executive Officer

No, all of our owned and leased hotels are currently open. However, there are some hotels in certain parts of the world that are going back into lockdown.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, it skews. It skews heavily towards the management franchise, almost very heavily towards managed and to a lesser degree, franchised.

Operator, Operator

The next question is from Richard Clarke with Bernstein.

Richard Clarke, Analyst, Bernstein

I just want to ask a question on loyalty. How much has loyalty been a boost to your cash flow through the last couple of quarters? Are you still getting money from the credit cards? And I suppose as the follow-up to that, you'll probably come out of this crisis with a bigger loyalty liability than you normally would have. And how do you think about managing that with regard to cash flow over the next couple of years? And how does that feed into your thoughts about what the balance sheet should look like?

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes. Rich, I would generally say that I don’t expect to emerge from this with a significantly higher liability than we currently have. It's a complex calculation regarding what we receive and what we reflect on the balance sheet concerning the liability. However, it tends to self-regulate; when rates are lower, the costs of redemptions and folio charges are also lower. We typically manage to break even overall. This doesn't significantly impact our cash flow. We do receive a portion of the credit card remuneration, but as you can imagine, credit card spending has decreased. Therefore, that remuneration has gone down, although not to the same extent as revenue per available room (RevPAR). So, the impact is not substantial in either direction.

Operator, Operator

The next question is from Patrick Scholes with Truist.

Charles Scholes, Analyst, Truist

I wonder if you could comment about what you're observing for group booking and cancellation trends for both 1Q and 2Q of next year?

Christopher Nassetta, President and Chief Executive Officer

Yes, it's probably not surprising. We are primarily a booking business, and while this year we're not seeing significant amounts of bookings, it's mostly for unique group meetings, smaller corporate gatherings instead of in-office meetings, and groups focused on sports or recovery efforts. Regarding traditional group bookings or rebookings, our goal is to rebook everything that has been canceled this year, and I believe we've done a commendable job in that regard. Currently, while we are seeing an increase in bookings and rebookings into next year, very little of it is for the first quarter. Some is booked for the second quarter, but the majority is focused on the third and fourth quarters. This is primarily because many are holding off for the winter season, waiting to get through flu season and to see how the vaccine rollout progresses. If someone is planning a large group meeting now in November, they are likely not looking to do it in the first quarter and are hesitant about the second quarter, although some bookings are occurring. The bulk of our current bookings, which are increasing at a good pace, are for the latter half of next year and beyond.

Operator, Operator

The next question is from Anthony Powell with Barclays.

Anthony Powell, Analyst, Barclays

You mentioned that you observed interest in your select service brands. Could you potentially attract new developers or different types of owners? Considering the relative resilience of that segment, could this lead to increased interest in those brands moving forward and a larger share for you in the development pipeline at the peak of the next cycle?

Christopher Nassetta, President and Chief Executive Officer

Yes, I believe the reason we're seeing this interest is that many owners remain very strong. They think that the best time to build is during down cycles, which allows them to deliver projects during an up cycle. Many of these owners are part of our select service development community, and they see this as an opportunity to acquire better sites with strong brands and solidify their positions before seeking financing to move forward, hoping to benefit from a significant upswing. While there are some new owners, the majority of what we're seeing appears to be from our existing owner base. It's worth noting that this trend was evident before COVID, as the majority of developments in the U.S. were in the limited service sector. This is even more pronounced now due to the economic model, the margins they can achieve, the costs of building, and other considerations. I don't see this as a new phenomenon. Our brands are exceptionally strong and capture substantial market share. I believe owners want to capitalize on the current situation to position themselves for the best opportunities once we emerge from this phase.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes, it's worth noting, Anthony, that we mentioned in our prepared remarks that there was quarter-over-quarter growth in signings within focused service. Generally, the trend appears to lean more towards existing owners rather than new ones, as it seems you need to be quite established in the development sector to execute deals at this stage. Additionally, in the third quarter, our approvals and signings were roughly one-third full service and two-thirds limited select service or focused service, and this was fairly well distributed across different regions. This aligns with our experiences from previous quarters and years, so there isn’t much that’s changed in that regard.

Operator, Operator

The next question is from Jared Shojaian with Wolfe Research.

Jared Shojaian, Analyst, Wolfe Research

Can you just talk about how occupancy trends have evolved in China? Specifically, where is business travel versus leisure travel today versus the prior peak? And then just one unrelated clarification. When you say G&A down 25% to 30%, does that mean the entire year in 2020 is down 25% to 30%? Or should we assume fourth quarter is also down 25% to 30%, and that's the run rate level going forward?

Christopher Nassetta, President and Chief Executive Officer

That is the full year 2020, and I’ll let Kevin talk about China.

Kevin Jacobs, Chief Financial Officer and President, Global Development

Yes. In China, during the third quarter, China was about 50% leisure, 30% corporate, 20% group. That was a little bit less leisure and a touch more group than in prior quarters. I actually don't have in front of me where it was to prior peak. I suspect still skewed more towards leisure than it would have been on a normalized basis.

Operator, Operator

The next question is from Vince Ciepiel with Cleveland Research.

Vince Ciepiel, Analyst, Cleveland Research

I wanted to touch a bit on distribution. Could you talk about what you've seen over the last couple of quarters in terms of direct business versus OTA share? If coming through this pandemic, as you evaluate distribution going into next year or years into the future on a recovery of demand, you've made great strides driving more direct business. I'm just curious if this changes that at all or further accelerates the gains you've seen on that path.

Christopher Nassetta, President and Chief Executive Officer

Yes. I don't believe that it changes anything in the long term. Looking at our OTA percentages through Q2, they were consistent with what we've experienced over the past couple of years. In Q3, they increased as expected due to the type of business we had during the summer, which was more inclined towards OTA bookings. The rise wasn't alarming; we anticipated it and wanted it, as it translates to access to those customers. Our long-term perspective remains unchanged. We view OTAs as good partners for specific business types. They have been helpful during the crisis, and there have been areas of demand we have collaborated on. Simultaneously, we've been focused on building more direct relationships since COVID, enhancing our digital platform and the Honors program to give customers reasons to book directly with us. The initiatives stemming from the pandemic, such as CleanStay and other hygiene measures, are intended to encourage direct bookings. As demand normalizes, the efforts we've made during the crisis will strengthen our ability to cultivate more direct relationships and business. In the meantime, we will engage more with OTAs as necessary. Currently, most of our distribution comes from direct channels, with nearly three-quarters from those sources. Interestingly, while our overall percentage of direct bookings has remained stable, hotel direct bookings have significantly increased, and other digital channels have decreased. This trend is surprising, but it reflects the nature of current business. Two-thirds of our bookings are made within a week, and almost 40% occur on the same day, resembling the traditional method where customers call directly. Though we know this won't last, OTAs have increased slightly, while GDS has declined due to the reduction of traditional corporate business. As we assess the overall picture, we find ourselves in a similar position. I expect that as demand levels return to typical patterns, everything will realign to a more usual trajectory. I'm optimistic about our progress with Honors and our ongoing efforts to strengthen direct relationships with customers.

Operator, Operator

The next question is from Rich Hightower with Evercore.

Richard Hightower, Analyst, Evercore

I was hoping to get you to opine a little bit on short-term rentals. When you think about the recovery and maybe some share gains in that segment over the course of the summer and through Labor Day, did that surprise you at all? And Chris, you've made comments in the past about how it's not precisely the same customer that Hilton is going after, but would you make that same statement today?

Christopher Nassetta, President and Chief Executive Officer

That’s a great question. It doesn’t really change my perspective. I won’t go into too much detail since you already know us, but I believe it’s a different business model. We operate in a branded space where we deliver consistent products and services, along with amenities and loyalty, which we package together and sell at a premium. In contrast, other options may meet customer needs but lack the consistency, service, and amenities. They may offer some loyalty, but not to the same extent, leading to a different value proposition. We firmly believe we’re in the hospitality sector, and the premiums we receive are due to our unique offerings. While both business models are related, they serve distinct purposes. I'm not surprised by their success; I expected it based on the type of business this summer, which was primarily value-oriented leisure—a perfect match for those platforms. That’s beneficial for them. If anyone thought that was the only demand available, it would be concerning. I don’t share that belief. I expect that in 2 to 3 years, as time goes on, we will return to a more normalized demand environment. People who have been willing to pay a premium for our services will continue to do so, even as some will choose them for a different kind of value. So, this development isn’t surprising at all; it makes perfect sense given the current demand landscape.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Chris Nassetta for any closing remarks.

Christopher Nassetta, President and Chief Executive Officer

Thank you all for joining us today. I hope those who didn't get enough rest are able to do so now. We'll see what unfolds with the upcoming elections in the U.S. We appreciate your time. Clearly, there is a lot happening globally and within our business. As I mentioned earlier, we feel very positive about the progress we've made. From a liquidity perspective, we're in a strong position. Additionally, regarding our commitment to our ownership community, our customers, and our teams, as well as our cost management strategies, I genuinely believe that once we move past this phase, we will emerge as a larger, better, stronger, more efficient, and higher-margin business. We look forward to updating you as our journey continues. Thank you, and have a wonderful day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.