Earnings Call Transcript - MAR Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Marriott International’s third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. If you require any further assistance, press star, zero. I would now like to hand the conference over to our speaker today, Arne Sorenson, President and CEO. Thank you, please go ahead.

Arne Sorenson, President and CEO

Good morning everyone and welcome to our third quarter 2020 conference call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer; Jackie Burka McConagha, our Senior Vice President, Investor Relations; and Betsy Dahm, Vice President, Investor Relations. I want to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings which could cause future results to differ materially from those expressed in or implied by our comments. Statements made in our comments and the press release we issued earlier today are effective only today and will not be updated as events unfold. Please also note that unless otherwise stated, our REVPAR and occupancy comments reflect system-wide constant currency year-over-year changes for comparable hotels and include hotels temporarily closed due to COVID-19. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our Investor Relations website. Before I talk about the quarter, I want to again thank our incredible team of associates around the world who continue to work tirelessly and show true resilience during these challenging times. The power of the Marriott culture has never been more evident, and I am incredibly grateful. I hope everyone joining us today is staying safe and well. While COVID-19 is still significantly impacting our business, our third quarter results showed meaningful improvement versus the second quarter. Third quarter worldwide REVPAR declined 66%, almost 19 percentage points better than last quarter’s decline. Globally, 94% of our hotels are now open with 97% open in North America. Our worldwide occupancy levels improved each month during the quarter and continued to close the gap to last years. We saw a steady climb in demand through August and then the rate of improvement began to plateau towards the end of the quarter in most regions; however, we are pleased with the overall progress we have made since the trough in April. In September, our global occupancy reached just over 37%, an improvement of 25 percentage points from April’s 12%. Worldwide REVPAR in September declined 64% versus September of last year, over 25 percentage points better than the year-over-year decline in April. The recovery trajectories have differed greatly by region. The recovery in Greater China, especially in mainland China, has been the strongest. Results have improved meaningfully since February, demonstrating the resiliency of travel when the virus is perceived to be firmly under control. Occupancy in mainland China reached 67% in September, a bit ahead of occupancy in September of last year and an extraordinary improvement from 9% occupancy in February. In 2019, around 75% of room nights in mainland China were sourced from domestic guests. Even with strict travel entry requirements limiting visitors from outside the mainland, demand has rebounded strongly across all segments. Leisure transient bookings in the third quarter were over 25% ahead of last year’s bookings, helped by domestic travelers taking more trips inside the country. Business transient and group bookings have strengthened each month since February solely from domestic meetings and events but are still lagging a bit compared to last year. Hong Kong and Macau, which rely on visitors from the mainland, are recovering more slowly as travel restrictions are easing, but cumbersome entry procedures are still inhibiting demand. Demand in the rest of Asia Pacific has also continued to improve but generally at a much slower pace. Countries are in various stages of reopening with many still imposing strict travel restrictions. Japan, Australia, New Zealand, South Korea, and the Philippines continue to drive performance, helped by quarantine business for travelers entering those countries. In North America, where 95% of room nights in 2019 were sourced from domestic travelers, results in the third quarter were also meaningfully better than the second quarter, though the rate of improvement did slow in September. Third quarter REVPAR declined 65% versus the third quarter of last year with occupancy reaching 37%. During the quarter, all chain scales continued to show improvement versus the second quarter, although there were still large variations among hotels and markets. Drive-to leisure demand continued to lead the recovery, particularly for extended stay and resort hotels and for properties in secondary and tertiary markets. Business transient and group bookings in the quarter picked up modestly versus the second quarter but still remain significantly lower compared to last year. The improvement in demand in Europe, the Middle East, Africa, and the Caribbean and Latin America, or CALA, has also been slower than in North America and China. In the last few weeks, rising numbers of cases in many countries in Europe and CALA have led governments to re-impose or extend lockdowns, travel restrictions, and social distancing regulations. These measures discourage international travelers, who made up about 40% of Europe’s room nights and about 60% of CALA’s room nights in 2019. Compared to CALA and Europe, demand trends have been a bit better in the Middle East and Africa, where international guests have historically made up around 50% of room nights. Certain resort properties in Turkey, the UAE, and Qatar were particularly strong in the quarter. Currently, 20% of hotels are closed in CALA, 26% of hotels are closed in Europe, and 9% are closed in the Middle East and Africa. Globally, the plateauing of demand that we saw towards the end of the third quarter has generally continued into the first few weeks of the fourth quarter. Occupancy levels in most regions have remained relatively in line with slightly better versus September levels, which were marginally ahead of occupancy levels in August. Booking windows remain very short and visibility is still limited; nonetheless, we do expect an easier year-over-year REVPAR comparison in the fourth quarter given our historical seasonality. We usually see a substantial step down in occupancy around the world in November and December as compared to September and October due to the holidays and relatively less business travel. In 2019, global occupancy was around five percentage points lower in November than October, and then December occupancy was another eight percentage points lower than November. This year, with the leisure segment showing the strongest demand, we could see occupancy levels throughout the fourth quarter remain relatively flat with September and October. As a result, year-over-year REVPAR comparisons could look better in the fourth quarter than they did in the third. Of course, as we have seen to date, results vary greatly by region and can change quickly, and the recent virus resurgences in numerous countries could have a dampening effect on demand. We know the road to recovery is going to take some time; however, we have been very pleased with the progress we are making across a number of key operational and financial areas. One of the biggest operational adjustments has been our heightened cleanliness standards. The health and safety of our associates and guests remains a top priority. Throughout the pandemic, we have adjusted our protocols to elevate our cleanliness guidelines and tools, and every property across our portfolio is now required to complete a monthly commitment to clean certification. By increasingly leveraging contactless technologies such as mobile and web check-in, mobile key, and mobile chat, we are re-imagining the guest stay experience while also amplifying operational efficiencies. We also continue to roll out innovative targeted phased-in marketing strategies. Our messaging emphasizes our heightened cleaning guidelines and safety measures while appealing to evolving consumer sentiment and travel intent. Many of our recent creative offerings, such as Fall for Travel and our October Week of Wonders, have been very successful in sparking leisure demand, and at the end of October we announced our new Work from Anywhere packages, which are designed to capture additional revenue driven by the remote work trend. Our award-winning loyalty program underpins all of our marketing strategies and we remain focused on engaging with our 145 million Marriott Bonvoy members, including those who are not yet ready for a hotel stay. We have also been highlighting non-hotel stay experiences such as Eat Around Town and Homes and Villas by Marriott International, and in collaboration with American Express and Chase, we have been offering numerous grocery and retail spending accelerators and limited-time offers on our co-branded credit cards. The increased demand amongst our Bonvoy members for our homes and villas whole home rentals during the pandemic and a much more modest decline in Chase and Amex Bonvoy card spend compared to the decline in REVPAR are great indicators of the value of the Bonvoy program to our customers. Another key constituency is our owner and franchisee community. We have had an unprecedented level of engagement with them this year, including weekly webinars in many regions and more frequent interactions with our owner advisory committees. We are deeply committed to working closely together to manage through these challenging times. We remain focused on reducing their costs as much as possible in this environment, as Leeny will discuss during her remarks. On the development front, we now anticipate net rooms growth of 2.5% to 3% in 2020, the high end of our expectation from a quarter ago, reflecting strong openings in the third quarter. This takes into account 1.5% to 2% deletions, which is around 50 basis points higher than we estimated in February, primarily due to certain hotels that were already struggling entering 2020 deciding to close permanently due to COVID-19. Given the current fluid environment, we have more uncertainty than usual on opening dates for many hotels nearing completion, but the good news is that 46% of our almost 500,000 room pipeline is currently under construction, with rooms under construction up 6.5% from a year ago. Although signings are not as strong as in 2019, they are quite solid considering the extraordinary impact of COVID-19 on our industry. We believe that many of the rooms that do not open in 2020 as a result of COVID-19 will now likely open in 2021. The pace of openings will likely vary depending on the recovery of lodging demand in specific markets, with heightened uncertainty in markets where air lift is key. We are also encouraged by the increasing number of conversations we are having around conversions. We remain keenly focused on conversion opportunities that are accretive from both a brand and a financial value perspective. Assuming progress is made in containing the virus, we would expect our gross room additions to accelerate next year compared to our expectations for 2020. We are in the middle of developing our 2021 budget so it is too soon to give a definitive outlook for room deletions for the coming year. It is worth noting that the potential 2021 exit of the 89 hotels owned by Service Properties Trust, which are almost all limited service properties, would create a short-term headwind of roughly 1% in net rooms growth, but we are confident in our ability to replace many of those first-generation limited service hotels with brand-new updated products. Finally, as Leeny will discuss in a moment, we have made significant strides in shoring up our financial position to weather the crisis. While the recovery is going to take longer than anyone would like, we are seeing encouraging signs that demand can be extremely resilient. With the steps we have taken for our customers and owners, the power of Marriott Bonvoy, our strength and liquidity position, and our incredible team of associates around the world, I am confident that we are very well positioned now and for the future. Now I’ll turn the call over to Leeny Oberg, our CFO.

Leeny Oberg, CFO

Thanks Arne very much. I hope all of you on the call are staying safe and well. I’d also like to thank our team of associates for their incredible work this year in making sure Marriott comes through this crisis strong and healthy. In the third quarter with global REVPAR down 66%, our gross fee revenues totaled $397 million, a decline of 58% versus the year-ago quarter. Gross fees were comprised of base management fees of $87 million, franchise fees of $279 million, and incentive management fees, or IMFs, of $31 million. Seventy-five percent of IMFs in the quarter were earned at hotels in the Asia Pacific region where contracts generally have no owner's priority. Over 90% of our hotels in Greater China had positive gross operating profit in September with almost three quarters generating positive profit for the first nine months of the year. These results are a reflection of the strong rebound in demand and our ability to help our owners control costs. With franchise fees, our non-REVPAR related franchise fees were again much more resilient, totaling $119 million in the third quarter, down 18% from the year-ago quarter with credit card fees down 22%. Third quarter G&A improved by 40% year-over-year, primarily reflecting a full quarter of the difficult but necessary steps we took earlier this year in response to COVID-19. These steps included furloughs, reduced work weeks, and meaningful cuts in executive compensation. As REVPAR has improved from the global trough experienced in April, corporate and above property furloughs and reduced work weeks generally ended by late September. Of course, REVPAR is still well below 2019 levels and expected to take some time to fully recover. With that in mind, we focused on restructuring our organization to reduce costs on a more sustainable basis at the corporate and above property level, as well as at the hotel level so we can operate more efficiently today and going forward. Our restructuring efforts are anticipated to reduce total corporate and other above property controllable costs by 25%, in line with the expectation we noted last quarter. This includes both classic corporate G&A as well as programs and services we provide to the hotels, for which we are reimbursed. We are still working through our budget and exact allocations for 2021, but based on our preliminary estimates, we expect total corporate G&A costs in 2021 could be around 20% lower than our original 2020 guidance of $950 million to $960 million, with expenses for reimbursable programs and services down well over 25%. Importantly, we expect the reduction in G&A to be largely sustainable subject to wage and inflationary increases. We reported third quarter adjusted EBITDA of $327 million, down 64% versus the third quarter of last year and a significant improvement from adjusted EBITDA in the second quarter of this year. We do have a couple headwinds in the fourth quarter compared to third quarter adjusted EBITDA. As we have mentioned, G&A savings will not be as large as in the third quarter with the return of our workforce to full time, and the fourth quarter is a seasonally slower quarter. At the hotel level, as part of our cost mitigation efforts, we conducted a thorough review of all reimbursable programs and services in order to reduce the associated costs to our hotels. This work went beyond the naturally lower fees charged in this environment given that the majority of bill is based on a percent of hotel revenues. Our work has led to significantly lower expenses for the hotels. While some savings are volume-related given fewer associates, transactions and the like, others reflect a real reduction in program rates. For example, after providing a discount this year on certain fixed mandatory fees paid by all of our hotels around the world, we have worked to provide a meaningful discount on these same fees in 2021 as well. Of course, we have also significantly cut our expenses associated with providing programs and services given the lower expected levels of reimbursements from the hotels. As we noted last quarter, we’ve been able to reduce breakeven profitability rates at our managed properties by three to five percentage points of occupancy. As you might imagine, we are applying this same disciplined approach to our owned and leased properties as well. We have also been allowing owners to access FF&E reserves for working capital and have extended the waiver of required funding of these FF&E funds through the end of March 2021, with lender consent where applicable. Additionally, we worked with our U.S. managed hotels to file for CARES Act tax credits which led to refunds of $119 million, which should help support our hotels’ working capital position. These measures combined with our aggressive collection efforts have been quite effective. The vast majority of our owners and franchisees continue to pay their bills on time or are on short-term payment plans. Despite the current environment, only a small number of hotels have gone into foreclosure this year as lenders have been relatively patient to date, and with only a handful of exceptions, the few hotels that are in foreclosure or receivership are retaining our flag. In North America, our management and related agreements generally protect us and historically we have held onto most franchise agreements as well when properties go into foreclosure. Last quarter, we laid out a cash burn scenario with REVPAR down 70% that indicated a monthly cash burn rate of around $85 million, or $255 million a quarter at that REVPAR decline. Our actual cash burn for the third quarter was around flat, much better than the model would have shown even including severance payments of around $60 million in the quarter that were not included in the model. We were pleased that total fees came in higher than our $2 million to $2.5 million of monthly fees per REVPAR point sensitivity would have predicted, with REVPAR for the quarter down 66% primarily due to higher incentive management fees. The other major drivers of our neutral cash burn were better owned lease results, lower G&A costs, strong working capital management, and robust loyalty program cash flows. The model we provided last quarter should still be useful as we think about potential monthly cash burn in the fourth quarter, with a couple updates. We still expect the sensitivity of a one-point change in REVPAR on our fees would be in the $2 million to $2.5 million per month range. As we’ve seen, the sensitivity is not completely linear given the variability of IMFs and does not include the impact of changes in credit card fees. We expect that continued strong collections of receivables should again help minimize our working capital outlays in the fourth quarter. Investment spending for the full year is now expected to be slightly below the low end of our prior expectation of $400 million to $450 million and significantly below our original forecast of $700 million to $800 million at the beginning of the year. This is another example of the strong progress we have made in reducing cash outlays in the current environment. The variance versus last quarter’s expectation is primarily due to the timing of key money payments and additional reductions in systems spending. There are also two timing-related items to highlight, which will impact our cash flow in the fourth quarter. In October, our working capital was impacted by the funding of our 2019 company match to associates’ 401k plan contributions, which totaled around $130 million. That payment usually occurs earlier in the year. Also, cash interest payments will be roughly $100 million higher in the fourth quarter than in the third quarter due to the timing of when the payments are due. Through the first three quarters of 2020, with year-over-year REVPAR down an unprecedented 59% through September 30, we have demonstrated our ability to adapt quickly and we’ve confirmed the power of our asset-light business model. Our cash from operations less capital expenditures has been positive year to date. At the end of the third quarter, our net liquidity was approximately $5.1 billion, representing roughly $1.5 billion in available cash balances plus $3.6 billion undrawn on our revolver. The substantial increase in liquidity from the prior quarter reflects our August $1 billion bond issuance maturing in 2032. Most of those proceeds were used to pay down a portion of our revolver balance. We believe our liquidity position and resilient cash flow from operations comfortably positions us to meet our short and long-term obligations. In closing, while the timing of a full recovery is unpredictable, we’re confident that COVID-19 will eventually be contained and that travel will come back quickly. We look forward to welcoming new and returning guests to our hotels before too long. Thank you for your time this morning, and we’ll now open the lines for questions.

Operator, Operator

Your first question comes from the line of Shaun Kelley with Bank of America.

Shaun Kelley, Analyst

Hi, good morning everyone.

Arne Sorenson, President and CEO

Hey Shaun.

Shaun Kelley, Analyst

Hi Arne. Just to start off, you covered a lot of ground in the prepared remarks, so thank you for all that. Could we hit on the net unit growth commentary for next year a little bit more deeply? Arne, I think you talked about a couple of the puts and takes around the SVC terminations being a bit of a drag, but what else could factor in, and just broadly speaking, do you expect to see some level of maybe elevated terminations relative or system exits relative to past behavior, just given the environment we’re in, or do you think these kind start to normalize? And in this comment, could you give any thoughts around particularly just maybe the health and status of the Starwood legacy portfolio? Thank you.

Arne Sorenson, President and CEO

All right, well there’s a lot in that, and let me start maybe by saying it’s still a little early, obviously. There is a lot of uncertainty out there because of the pandemic. I think we were pleased to see in Q3 the increase in openings again compared to Q2. I think Q2, to some extent, even as projects were ready to reopen, either restrictions precluded it, or the total lack of business precluded it, or just the uncertainty in the environment precluded it. So to get to about 19,000 rooms opening in Q3, I think is a sign that at least for projects that are under construction and nearing completion, those will open, and I think that’s what gives us the most optimism about not just Q4 but looking into 2021, that we should see - obviously all of this depends on the virus, but that we should see these projects that are under construction open as scheduled, over the course of the next couple of years, something like that, but very much including 2021. The deletion side of the equation is harder, and of course there’s an offsetting potential upside, which is conversions. Both depend a little bit on what happens with properties that are under trouble and what happens with change in ownership or change in capital structure for existing hotels. Some of what we’ve lost year to date, as we mentioned in the prepared remarks, are hotels that entered the COVID-19 pandemic already under financial pressure and simply did not make sense to reopen, certainly not to reopen under their current positioning. I suspect we’ll see some that next year. Besides SVC, we don’t have a number for it yet - we’re obviously just in the process of trying to build our budget. Our teams are dealing with owners all around the world. I think by and large on the positive side, conversions into our system and on the negative side deletions from our system will become clearer as ownership of hotels change hands or as the new capital stacks are put in place, and I suspect that will begin to occur more in 2021 than it is doing right now.

Shaun Kelley, Analyst

Thanks for the follow-up on this topic. Are there many of these types of cross, single guarantee contracts out there? Is the SVC situation quite unique? Any insights you can share on these types of structures would be appreciated.

Arne Sorenson, President and CEO

Yes, SVC is very unusual. Those portfolios were initially put in place with HPT 20 years ago, maybe 25 years ago, something like that, and they were initially a lease structure or a lease-like structure. They’ve evolved since to be sort of a management structure but with a cap guarantee. That structure was redone with SVC earlier this year. We were quite optimistic that actually it was done in a way that would bode well for long-term, including getting substantial additional new capital into those assets to bring them up to standard, and of course the pandemic had a profound impact on that. We are in discussions with SVC today about the possibility of renewing that. I think based on what we heard, including as recently as yesterday from that team, they seem to be hardwired to make those hotels Sonestas. We of course don’t know exactly how Sonesta would perform, but looking at the ROI from assets that are Sonesta flag versus ours, it looks like that ROI is roughly half, and it’s a little bit surprising to us that the separate stockholder and debt holder interest in SVC could be furthered by converting those to Sonesta’s brand, as opposed to the dramatically stronger brands that are on those hotels today. But again, that seems to be the direction they’re heading, and so our expectations would be that those hotels would leave the system. We do not think there is anything comparable to that that remains in the system.

Shaun Kelley, Analyst

Thank you for all the clarity.

Leeny Oberg, CFO

It’s also just worth noting one addition, that when you think about the impact on fees, it’s quite minimal related to that portfolio. I think total fees in 2020 this year are expected to be $10 million to $15 million from those hotels.

Joe Greff, Analyst

Good morning everybody.

Leeny Oberg, CFO

Hey Joe.

Joe Greff, Analyst

Arne, you mentioned in your comments for next year in terms of gross room additions, for that to accelerate next year, and part of that confidence is some of the rooms that would have opened in 2020 were being pushed out to open in 2021. To what extent are the ones that you would have thought a year ago to open in 2021 will be pushed out to beyond 2021, into 2022, and does that room addition acceleration comment from you take that into account? Is there typically visibility in stuff that gets pushed out, so if something wouldn’t hit in ’21 right now, would Marriott in November of 2020 have a good sense of that?

Arne Sorenson, President and CEO

It’s a valid question. Generally, we would say that everything in our pipeline has been delayed by a few months. While that may be a slight exaggeration, considering the significant business disruptions we faced at the end of the first and second quarters of this year, including various restrictions in many global markets, it certainly led to many projects slowing down, even those already under construction. If we look back to January 2020, when we aimed for openings in June 2021, it's realistic to expect those openings have slipped by a few months. We have a team working with our development partners to keep them informed about construction statuses and expected openings. On a positive note, about 45% of the rooms in the pipeline, which amounts to roughly 230,000 rooms under construction, have a strong likelihood of opening. However, for the hotels not yet under construction, we need to monitor the situation closely. These are legitimate projects, with owned land, completed designs, and signed contracts for most of them. Yet, if construction has yet to begin, each partner must weigh the potential benefits of building in a weaker environment against the risks of committing to a project that may open in an unpredictable market. Historically, most projects that are not under construction tend to open eventually, but the delays could span from several quarters to a few years, especially for higher-end luxury or full-service projects that require more time for financing and commencement. Overall, we can reasonably anticipate an increase in gross openings next year, depending on what unfolds with COVID-19, but it’s still too early for precise numbers.

Joe Greff, Analyst

That’s helpful. Then as a follow-up, Leeny, your mutual cash burn in 3Q was impressive, and you mentioned working capital management was a contributor to the EBITDA upside. To what extent do you think working capital be a source of-a positive contribution to cash flow, operating cash flow, free cash flow next year?

Leeny Oberg, CFO

Well, one of the big questions is around loyalty. If you remember, Joe, last year we actually had loyalty as a use of cash relative to strong redemptions throughout the system, and this year it’s kind of a bit of the opposite. Now, the reality is I actually would expect next year that that stabilizes a bit as we continue to rebound from the low levels of demand that we are, so that while I would expect meaningfully more redemptions, they won’t be quite at the same peak prices that they were in 2019. From that perspective, I would expect that loyalty is not as large a source of cash as this year, but also not like 2019 either. When I think about it overall, we’re still early days as we go through the budgeting process, but I would not see it as a major source but also not a major use of cash next year, as we think about from a working capital perspective.

Robin Farley, Analyst

Thank you. Could you discuss how some of your owners have mentioned achieving permanent cost reductions by altering brand standards? I'm curious about the permanence of these changes. Currently, you may not require a doorman or a 24-hour airport shuttle, but do you anticipate these services will eventually return? Additionally, with 30 brands, could changing some brand standards permanently dilute what makes each brand unique?

Arne Sorenson, President and CEO

Good question, Robin, and good morning. We aim for the savings we implement to be long-lasting, which is quite apparent. Your question highlights several key issues. For instance, food and beverage service is one of my top priorities, perhaps even more critical than having a doorman. In areas where demand is currently low, our food and beverage services are limited, and that won't meet the expectations of most guests when demand normalizes. While guests are understanding during tough times, once things stabilize, they will expect full services, especially from a full-service hotel. That said, we will likely see advancements in keyless entry and adjustments in our staffing models based on our experiments. Additionally, some of the cuts in overhead costs we’ve implemented are expected to remain in place for a while. Presently, our estimates suggest we’ve reduced the breakeven occupancy by three to five points, depending on the brand. However, we must ensure that the guest experience remains satisfactory, and you're right—it will differ from one brand to another and across segments. The higher-end segment should start to see rates increase as costs also rise gradually. Overall, we anticipate that our actions will lead to sustainable margin improvement, although it's still too early to specify what that number will be.

Robin Farley, Analyst

Then maybe just as a quick follow-up on the conversation about conversion, I know in the release you mentioned the percent of conversions, 1,400 out of the 19,000 rooms opened, so still a pretty small percent because obviously that was all pre-COVID. Can you talk about the signings in the quarter, what percent of those are conversions, and did you see that go up during the quarter for signings? Thanks.

Arne Sorenson, President and CEO

I don’t have that number. However, the team is currently engaged in significantly more discussions about conversions than in the past. Single quarter signings may not have a substantial impact. I’m aware of a few major ones in progress that the transactor team is optimistic about finishing in the fourth quarter, though we cannot guarantee that outcome. We’ve reviewed our conversion experiences over time, recognizing that this is important to both us and you. Even in the two years leading up to COVID, we had 18% of our openings in 2019 as conversions, compared to 12% in 2018. This illustrates that even in similar economic conditions, conversions can vary and be challenging to predict. For most of the past decade, we have been in the teens for conversion percentages. Conversions peaked after the Great Recession, with 2011 being higher than 2010, and it continued to rise through 2013. While we expect an increase in conversion discussions going forward, the actual rise in openings will depend on the new ownership and financial structures that will enable hotel owners to plan for the future with more clarity.

Patrick Scholes, Analyst

Hi, good morning everyone. With the layoffs in corporate-level sales staff and also property-level sales staff, should we interpret that as your belief that it’s going to be a long, slow recovery for your group business, and also related to that, how is your group business tracking for next year? Thank you.

Arne Sorenson, President and CEO

Our group business for next year is down about 30%. It won’t surprise you to know that the first quarter is the worst by far in terms of group business on the books, and as you get farther into the year, the decline is meaningfully less than that 30% number. What does that tell you? It tells you that folks are still optimistic about holding their meetings, that COVID-19 will allow them to hold their meetings as you get further into 2021. I think we are optimistic, as are many, that we can have a vaccine or two, maybe, approved by the end of this calendar year, and could see it start to get broadly distributed by sometime in the first half, maybe it’s the latter part of the first half, but sometime in the first half of 2021. As that takes hold, we’re optimistic that group business will come back. I think what we’re seeing in group today, and I think you’ve heard this from other companies in the industry, there is group business. Obviously it’s stronger in China, but coming back to the United States for a second, the group business in hotels in the United States is not a lot like the group that I think we all first think of, which is corporate group and association business and the like. I think the group business we have today is much more likely to be healthcare workers or somehow connected with the COVID-19 pandemic itself, or things that are more leisure focused - that could be some athletic groups, or it could be some larger family groups, that sort of thing. The core corporate business is still pretty weak. I don’t think you should read too much into the efforts we’ve made to manage our costs in the sales space. Obviously those costs are borne by the system of hotels that are out there. We have got to make sure that we’re managing those costs in a way that meets the level of reimbursement that can come in there, and we’re doing our best to do that and to make sure we continue to call on the customers that we know are important to us and important to the recovery. We’d be optimistic, I think, if COVID-19 goes the way we think, that we will start to see this group business that’s on the books hang tight and ultimately come to pass, and we’ll start to see meaningfully more bookings when those vaccines start to take effect.

Steven Grambling, Analyst

Hey, good morning. Thanks for taking the questions. I just had a bit more of a strategic question related to the loyalty program. You’ve mentioned the strength in Bonvoy and corresponding credit cards. What are you learning from how consumers are engaging with the program in this difficult time that could drive changes to further differentiate the brand in a recovery, and potentially even lead to stronger conversions and/or development in the future?

Arne Sorenson, President and CEO

Conversions and development - you’re talking about hotel development, or back to credit cards and the Bonvoy program?

Steven Grambling, Analyst

I mean, it’s really all together because I feel like if you’re creating additional value and differentiation for the consumer, ultimately that drives stronger REVPAR and development opportunities in the future.

Arne Sorenson, President and CEO

Yes, well I think we mentioned a bit of this in the prepared remarks, that we’ve been actually quite pleased with the performance of the credit card portfolio during this crisis. It’s probably worth starting with that because you would wonder about how well that would do, an Affinity card for travel in a market in which there is very little travel. But what we’ve seen is that folks are still aspiring to travel, dreaming about travel, eager to get back on the road, and as a consequence when we’ve with our credit card partners done things around grocery or done things around restaurants or around hardware, the card has performed extraordinarily well. The Bonvoy membership, I think, has continued to engage with us in a way that’s pretty powerful. I think if you go back to before the pandemic, what we saw was a continued increase year-over-year on the number of Bonvoy members as a percentage of the total business in our hotels, and one of the frustrating things, we talked about this a quarter ago, about the timing of this pandemic is as we got into the second half of 2019 particularly, the Starwood integration work was behind us, the systems work was behind us, the new Bonvoy program was launched and we could see, whether it was in REVPAR index or in loyalty penetration or other data we look at very carefully, really powerful momentum towards proving the value of those programs. I don’t have any doubt that we will get back to that. It will come back stronger, obviously, the sooner people get back on the road and know that travel is going to be a part of the way they live their lives, but when they do, they will find that they’ve got a credit card program, they’ll find that they’ve got a broad portfolio of destinations to stay at - we have the biggest portfolio of hotels around the world, clearly the strongest in the luxury and lifestyle and resort and urban space, plus other things like Eating Around Town and Homes and Villas and other things that we still are working on and hope to get launched before too long.

Leeny Oberg, CFO

The only other thing I’d add, Steven, is the digital experience. If you think about travelers today, if they are traveling, the contactless element of the experience is all the more important, and that is all driven through the Bonvoy app, so as you see more and more people signing up for that experience, that again gets them more invested and they really have an opportunity to see what Bonvoy can do for you.

Steven Grambling, Analyst

Makes sense. That’s helpful. I guess one unrelated follow-up on just at the hotel level from a profitability standpoint, what are you learning from reopened hotels that can inform when incentive management fees could come back in fuller force in North America?

Arne Sorenson, President and CEO

Leeny, you want to take that?

Leeny Oberg, CFO

Yes, I think the reality is that we are in a situation where, for a full-service hotel, it is generally better to be open than closed. This is not true in every case, but in most instances, it comes down to what is the least unfavorable option. We still have a long way to go before reaching occupancy levels that meet IMFs, largely due to the priorities of hotel owners in the U.S. However, with the reduction in our cost structure, I believe this will facilitate our ability to reach incentive fees sooner than we might have anticipated before COVID, thanks to the efforts we've made on managing costs. On the other hand, we are facing wage pressures that I don't expect to diminish anytime soon. We have been focusing on enhancing efficiency across all areas of our hotels, which should help drive more profits. I believe we will be able to maintain some of these savings in a sustainable manner, but the impact of wage pressure in a full-service hotel is significant, since it constitutes around 40% of the hotel's cost structure, and this will influence how quickly we can recover.

Anthony Powell, Analyst

Hi, good morning. You mentioned that business travel in China has lagged leisure despite the virus being under much greater control there. Is there anything to read into from that in terms of the potential recovery in the U.S. or other markets?

Arne Sorenson, President and CEO

No, I don’t think so. Obviously we talked about occupancy being higher than it was a year ago, and so that’s a really good sign; but beneath that total, you’ve got two things that are happening. One is that business transient travel and group travel is still a bit softer than it was last year, and the second is you’ve got the Chinese travel business that used to go abroad staying home, which is driving those leisure numbers meaningfully higher. Remember we had in February 9% occupancy in China, a country entirely shut down, and even today now we have occasionally a flare-up in a market in which the Chinese government response is to essentially shut down that market and test everybody in the market for COVID-19, and they’ve managed at least in two or three circumstances to nip that in the bud, if you will, and get those markets reopened and get going again. They have had an impact on us, probably less than a point or so on REVPAR, but a little bit of an impact as they roll forward, but it’s just a reminder that even in China, where there’s a much broader sense that COVID-19 is under control, it is not irrelevant yet. Until it becomes irrelevant, I suspect we will see a little bit of relative weakness in business transient and group, albeit they are dramatically stronger than what we’re seeing in the United States, which of course would be the next strongest big market. You get to Europe and the rest of Asia Pacific, it’s probably weaker yet.

Anthony Powell, Analyst

Understood, thanks. You’ve mentioned a few times the relative strength of Homes and Villas over the summer, but it still seems that you view that as more of an amenity versus a core business. Is there an opportunity for you to maybe grow the inventory there and grow that business a bit more dramatically, given the demonstrated popularity of the offering that you’ve seen?

Arne Sorenson, President and CEO

We are growing it. As we’ve talked about from the beginning, though, our effort here is a whole home product and obviously if you look at our urban markets globally, but particularly in the United States, you would see that we’ve got tremendous hotel capacity and extraordinarily little demand in those markets. Partly that’s because offices remain closed in too many of those markets, you don’t have business transient travel, you may not have much leisure travel because people are more inclined to go to resort destinations or other destinations. We will remain focused, I think, on whole home, warm weather, ski country, resort destinations. I am quite convinced that that will continue to grow substantially, and it will be a nice complementary feature to the traditional hotel business for us.

Anthony Powell, Analyst

Could you work with developers to maybe build new inventory in those markets, like ski resorts or warm weather, or is that mainly going to be finding existing inventory?

Arne Sorenson, President and CEO

It’ll be both. We have had conversations with some of our good partners about exactly what you’re talking about, which is building new inventory, if you will, in some of those resort markets.

David Katz, Analyst

Hi everyone, thanks for taking my questions.

Arne Sorenson, President and CEO

How are you, David?

David Katz, Analyst

Good morning, everyone. It's great to hear from all of you. As you discuss with your industry colleagues, we are clearly all very focused on the aspect of business travel. Do you believe that the main concern is solely therapeutic, or is that just one part of a broader strategy to encourage people like me to start traveling again? What insights have you gathered?

Arne Sorenson, President and CEO

I believe there are three key factors to consider, with the most pressing and impactful being the situation with COVID-19. Travel has significantly declined due to risks associated with it, influenced by both formal and informal restrictions, such as airline capacity and international travel. This impact has been substantial. I anticipate a notable increase in group and business travel once the risks related to COVID-19 diminish. Beyond that, we need to focus on two additional aspects. First, we must assess the condition of the underlying economy. Historically, demand in our industry closely aligns with economic strength, and I expect the economy will experience lingering weaknesses due to small business closures, many of which may not reopen, along with relatively high unemployment levels worldwide and various other factors that will take time to resolve. Second, we should consider the implications of remote work and the digital tools we have increasingly utilized to stay connected during times when travel is constrained. There is considerable discussion about how this may influence long-term travel patterns. This situation somewhat mirrors discussions we had during the Great Recession and after the tech bubble burst in early 2001 and the subsequent travel downturn following 9/11. Typically, we observed that in the years after such events, most group and business travel returned, though not all of it. Over the past two decades, we've seen a slight shift of a few percentage points from combined business and group travel towards leisure travel. I anticipate this trend will continue, as leisure travel remains a significant driver of demand. Ultimately, people enjoy traveling for personal reasons as well as for work, and I believe we will see the majority of that travel rebound, even if it doesn’t return to every single night from every company we work with. Does that answer your question, David?

David Katz, Analyst

It largely does. If I can follow it up, just specifically around the COVID piece of your answer and the need for a vaccine to be a gating factor to mitigate the risks of COVID, are you hearing from any of your peers about interim steps or alternative strategies in conjunction with or instead of vaccine? Just trying to think about whether we’re sitting around waiting for one single event or a series of things, just from what you’re hearing.

Arne Sorenson, President and CEO

Yes, I spend considerable time engaging with our major customers, whether in business roundtables or one-on-one meetings. While I can't speak for the global corporate landscape as a whole, I sense a growing recognition that with each month, we are losing more of the connection between individuals across various industries. This is particularly evident when it comes to collaboration, innovation, and strategic discussions, which are more challenging to facilitate through Teams calls or digital platforms. Therefore, when conditions permit safe measures, we should consider reopening offices and welcoming employees back. However, this is complicated by a resurgence of the virus, with the U.S. seeing over 100,000 new cases some days, as well as varying school situations with some markets open, some closed, and others operating in a hybrid model. Companies are navigating these challenges. Nonetheless, I am optimistic that even before widespread vaccine distribution, we will begin to reopen offices with proper social distancing, mask wearing, and reduced density, progressively moving towards a more normal setting. It’s essential that this is done safely, and I believe it can be, as the office environment doesn't seem to be more dangerous than a grocery store, for example. I anticipate that this shift could positively affect our business, possibly even before the vaccine is available.

David Katz, Analyst

Right. If I can ask one more very short follow-up, you commented earlier in your remarks about conversions and accepting or embracing those that are financially accretive and brand accretive. If you could just color us, because all conversions are clearly not created equal beyond the financial impact, how you think about that brand accretive concept beyond just REVPAR index and the like?

Arne Sorenson, President and CEO

Yes, I'm not sure you can even find out what we all do because we don’t necessarily publish it. Some players in the industry are compensating their teams simply for adding units. Our compensation tools are designed to reward individuals for units that deliver value, and an NPV calculation is a significant part of our compensation scheme for the team members who are helping us grow. We also have our brand and operators involved in ensuring that the products we bring on meet brand standards. This is important for conversion regarding property improvement plans for existing hotels that we want to associate with our brand. We want to ensure we're growing but only if it's delivering value. Our focus is on creating value, not just adding rooms that have no worth. We understand that the long-term strength of growth relies on the power of the brands, so we need to ensure we are acquiring quality that reflects the brand positively. All three of these elements will be very much considered, and if we are not confident that all three are present, we will not pursue that product.

Thomas Allen, Analyst

Good morning. It was noted in the prepared remarks that over 90% of hotels in China had positive gross operating profit in September. Do you have that percentage broken down by region or for your broader portfolio, and how do you expect it to trend? Thank you.

Leeny Oberg, CFO

Yes, I don’t have it for you by region. Obviously it’s not going to surprise you, we’ve got big chunks of hotels still closed in CALA and Europe and with REVPAR down in the 70%, that’s an extremely difficult process for them. In the U.S., I’ll work in getting you some numbers, but obviously it’s going to be a far lower percentage. But again, I think it shows you in China the remarkable resilience of both the profits and the revenues from a demand perspective.

David Katz, Analyst

Thanks, everyone.

Arne Sorenson, President and CEO

I appreciate you joining us this morning and for your questions, and hope you all have a great day.

Operator, Operator

Thank you. This concludes today’s conference call. You may now disconnect.