Q1 2020 Earnings Call

Just last week. We announced our Global care and cleanliness commitment as an enhancement to our operational guidelines and resources around colleague and gas safety.

Included as part of that commitment is an announcement that we have initiated and accreditation process through the global bio risk advisory Council or at our hotels around the world GBA see is a division of ISS a the worldwide cleaning industry Association and is composed of leaders in the area of microbial pathogenic threatening us and mitigation designed specifically to deal with biological threats and real-time crises like the covid-19 pandemic.

We believe that Hyatt is the first hospitality company to announce plans to commit to Independent accreditation at our hotels globally.

As part of these efforts we are also developing group meeting standards and protocols to ensure that groups can continue to meet in a safe and effective manner while health concerns related to covid-19 purchased.

In addition, we have established a working group that includes American Airlines and Enterprise Holdings to provide guidance in this area and across the travel Journey.

Meanwhile, we are also working closely with the American hospitality and Lodging Association on industry-wide standards in this area.

In summary, we are actively engaged and taking all of the steps necessary to ensure a safe and enjoyable experience for both our colleagues and our guests as travel begins to recover over the coming months Beyond.

The second area. I'd like to briefly discuss Is our commitment to our long-term strategy. We remain committed to driving asset-light growth through the growth of our management and franchising business while continuing are aspects of disposition program.

During our investor Day event in March of 2019. We announced as part of our Capital strategy a commitment to sell an additional one and a half billion dollars in own real estate wage slave reminder. We completed more than $915 in assets sales against that one point five billion dollar commitment as of the end of nineteen twenty nineteen and have until March of 2018 to complete the remainder. We intend to fulfill that commitment. We've always been clear that we wouldn't sell assets in a distressed Market simply to sell assets and get to the extent. There is near-term pressure on demand and pricing. We may see less activity for a short period of time.

A remaining portfolio of assets is comprised of many well-located assets with sustainable value.

With respect to the growth of our management and franchise franchising fee business for several years running. We've been delivering industry-leading net rooms growth and our initial expectations for 2020 indicated that would continue. We delivered net runes growth of 6.3% in the first quarter in our pipeline, which has increased by approximately 11% year-over-year benefit from new signings that kept pace with the solid piece of first-quarter openings.

If you exclude the impact of the previously disclosed removal of the Ocean Resort in Atlantic City, which had a large room base, but a small fee base Arnett rooms game would have been approximately 7% in the first quarter while we had a healthy first quarter. We do expect delays in certain planned openings for the year and month option in New Deal activity as we work through the worst of this crisis. We nonetheless retain an exceptionally strong pipeline of new hotels scheduled to open over the next four or five years and remain committed to expanding our presence over time.

In addition to aggressively pursuing the new development opportunities. We are also very focused on conversion opportunities, which may well be available higher than normal volumes given business conditions.

Our brand reputation strong owner relations and under-penetrated distribution should all serve as an advantage in capitalizing on these opportunities. I'll conclude my prepared remarks this morning by saying that while we are clearly facing an unprecedented challenge as an industry. And as a company, we have a highly experienced management team that is well prepared to overcome these challenges. We've been proactive and taking the steps necessary to reduce costs manage cash flow and secure the necessary liquidity to weather the storm as John will discuss in a minute.

We are also.

So actively focus on positioning Hyatt to emerge in a position of strength as the brand of choice for travelers as they resumed activity over the coming months and Beyond.

Finally, we remain committed to the execution of our growth strategy and our asset disposition strategy. I'll now turn it over to John to provide additional details on our opening results and some of the steps that we take to manage through this challenging environment Joe over to you. Thank you Mark and good morning everyone. I'd like to start by acknowledging our colleagues and owners who are demonstrating their commitment to Hyatt despite a very challenging time for our business while we have experienced a material impact to our financial results. We have taken significant action to mitigate the impact took her liquidity as Mark mentioned. We are also positioning ourselves to effectively meet the needs of our guests and as travel restrictions are lifted late yesterday. We reported a first-quarter net loss attributable to Hyatt of a hundred and three million dollars and a diluted loss per share of $1.02.

Adjusted ebitda for the quarter was $86 with a system-wide revpar decline of approximately 28% in constant dollars.

I want to start by breaking down our first quarter results to better demonstrate the impact of the covid-19 virus on our business and then provide some insight into what we experienced in April.

We began the year with solid performance coming off of a strong year in 2019, excluding our asia-pacific region Global system-wide revpar increased 1.6% through February and 2.6% in are owned and leased hotels with base incentive and franchise fee growth of over 10% in constant currency, excluding asia-pacific and comparable owned and leased margins up 270 basis points through February. We had exceeded our own expectations on a year-to-date basis.

It's a month of March progressed the impact of covid-19 expanded in Europe North America and other parts of the world and we began to see significant reductions in occupancy off the rate of Decline and occupancy accelerated over the course of the month of March and by April demand had declined to the lowest level of the industry has seen the one exception to this decline during April was greater China where we began to see increases in occupancy and to give you an idea of the progression a walk through the revpar results for our business segments over that period of time.

For the Americas February year-to-date was up 1% March was down 64% and April was down 96% for the month of February. Year-to-date revpar was up 1% March revpar was down 64% and April was down 96% for a Europe Middle East and Southwest Asia segment, February. Year-to-date revpar was up 4% March revpar was down 69% and April was down 95%

For asia-pacific Segment February year-to-date revpar was down 32% or 14% excluding greater China March revpar for the segment was down 78% or 71% excluding greater China and April was down 85% or 90% excluding greater China.

As of the end of April we had suspended operations in approximately 35% of our hotels globally in Greater China where we began to see early signs of recovery as the economy opens back up. We now have only one hotel with fully suspended operations down from a high of 26 hotels in the first quarter occupancies and greater China improved approximately 25% by the end of April up from the mid single-digits at the low point.

Additionally in South Korea we've seen bookings double from levels. Just seen three weeks ago driven by short-term transient business as demand begins to show early signs of improvement in that money notwithstanding the improvements we've seen in China and positive booking Trends in South Korea results elsewhere elsewhere in the world have worsened in April and we expecting a second quarter to be our worst quarter of the year. We expect May to look a lot like April and it's hard to say with the shape of the recovery might be beyond that.

The Rev car declines. I just discussed pressure on our cash flow and working capital and as a result, we've taken the following actions. We've reduced 20/20 Capital expenditures by at least $825 million dollars a 50% reduction from our original guidance.

We've suspended share repurchases and our quarterly dividend to the first quarter of 2021. We've reduced current monthly sg&a by about 40% off as compared to our original plan by eliminating all spending considered non-essential in the current environment and reducing near-term payroll and related Personnel costs within sg&a Prime through unpaid leaves and salary reductions and we've reduced owned Hotel expenses significantly through reduced Staffing and in many instances suspension of Hotel operations or closures of certain outlets and Facilities within hotels that remain open.

We've also taken a number of significant actions relating to Services managed on behalf of and reimbursed by our hotels around the globe as both an operator and owner hotels, we understand the pressure that we are all facing and are taking steps to minimize the costs wherever possible during this low demand environment as a result of a reduction in age levels for many Hotel support functions. We reduce the associated costs on a current monthly run-rate basis by approximately 50%

To assist. Oh

With their cash flow requirements. We've also temporarily modified brand requirements or waved restrictions on the use of funded reserves for replacement of furniture and equipment and negotiated reductions in costs from third-party vendors reimburse system-wide expenses are included within the line items in our income statement referenced as reimbursed revenues and costs incurred on behalf of managed and franchised properties for the full year 2019. These costs were approximately 2.5 billion dollars about three-quarters of those costs were payroll related with the remainder comprised primarily of cost for services such as technology sales and marketing and the global context centers that we managed on behalf of our system-wide hotels the world of Hyatt program various reimbursed shared or centralized services and insurance.

With respect to hotel level payroll related costs occupancy levels will inform decisions made in Staffing resulting in a reduction of these costs for hotel owners in the current month payment.

To respect to most of the remaining reimbursed cost I described earlier we have significantly reduced or suspended many services resulting in reductions averaging 50% on a monthly run rate in summary given the uncertainty around the shape of the recovery. These actions are meaningful and important as we work to mitigate the negative financial and operational impacts of covid-19. Next. I'd like to walk you through some important actions. We took during April to secure additional liquidity first founded our revolving credit facility to obtain a waiver of financial leverage covenants for four quarters through the first quarter of 2021.

For the two quarters that follow we also obtained an increase in our leverage ratio to 5.521 calculated on an annualized basis beginning a second quarter of 2021 and the second we successfully issued $900 million dollars in Bonds on April 21st, 2028 subsequent to the issuance of the nine hundred million dollars in bonds. We paid down the 350 million dollars of outstanding revolving credit facility borrowings. And therefore today have access to the full borrowing capacity of one point five billion dollars.

As a result our total liquidity inclusive a cash and equivalents combined with borrowing capacity is presently over three point 1 billion dollars furthermore the own no long-term debt maturity we have in the next 36 months is 250 million dollars of senior notes due in the third quarter of 2021. We believe these successful efforts to secure additional liquidity provide us with the ability to operate a current levels for at least 30 months. We expect current occupancy levels to be temporary and improve as travel restrictions are lifted and we therefore expect our burn rate to improve over the recovery.

I will conclude my prepared remarks by saying that well, we have seen an unprecedented decrease in demand over the last two months. I have great confidence in our ability to manage through this challenge wage proactive in managing all aspects of our expenditures and cash flow and we've taken meaningful steps to secure additional liquidity providing significant Assurance for an extended period of time.

We Believe those steps combined with our focus on recovery efforts including safety procedures and protocols will position us to appropriately ramp up operations in line with demand growth over time, thank you and with that I'll turn it back to Josh for Q&A at this time. I would like to remind everyone in order to ask a question, please press star then the number on your telephone keypad. If you would like to withdraw your question, please press the pound key. And your first question comes from Michael Bellisario with their please. Go ahead.

Morning, everyone.

Morning, I just first question for you on on incentive fees. Can you maybe provide a little bit more info on the make up of the fees? What's the breakdown by region? And then importantly what percentage wage sits behind an owner's priority?

Yeah, so first of all, the incentive fees are comprised of incentive fees that are driven from hotel profits and the in general the structure of of incentive fees is they stand behind an owner's priority in the United States, uh, and not end in general outside the US they took from dollar one of of operating profits and in almost all cases, they are defined it's defined in the contract as to how to measure the operating profits majority of our of our life instead of fees are from non us hotels and it's about 25% of incentive fees that are from us properties. So that's that's the mix in terms of geography. Um, we obviously had a significant decline in those in the incentive fee base in the quarter as a result of declining profitability at

at hotels where we have in Santa fe's

that's helpful. And then just one follow-up maybe on the RFP season in the fall. If you can look out a few months to thinking about it. Will it need to happen What Might Travel Planners ask for Tom? How are you guys thinking about or at least working with your your management third-party management companies think about pricing and volume strategies for the upcoming year. Yeah. It's it's quite early for us to know what the profile of business is going to look like at that time. We've been extremely engaged very highly actively engaged with our key corporate customers Home Group customers in particular to understand and Association customers to understand what their Outlook is with respect to their own activity. That is when they're going to be traveling again how they took what their outlooks are for meetings and and how they will hold meetings in the future. Um, I think it's it's still early for many corporations to make definitive plans wage.

certainly for 20 20 I think once we get into the fall the

Outlook for 20 21 will have um a little bit we'll have some more visibility. It could be much higher visibility if there have been great advances in um a path to towards a vaccine or birth of the Therapeutics, but if not, then I think people will be more cautious and probably look to plan into the back half of 2021. We've been working very closely with some Association customers and some key corporate customers to start design work for how we could help them. Hold a hybrid meeting in which you would have both in person and virtue participants. We think this is particularly important for Association customers who rely on those meetings for a key part of their in some cases the vast majority of their wage base for the year. So there's going to be a disinclination to fully cancel Gatherings for by associations even even later this year, which is why we are rolling up our sleeves wage.

and trying to co-create um an approach to being able to hold those meetings in a safe and secure way

that's all thank you

your next question comes from Patrick Schultz with SunTrust please go ahead

hi good afternoon I wonder if you could just touch on your ability to cut costs for your own hotels the ones that are unionized versus non-unionized thank you

Sure, Patrick. Let me let me give you some perspective on what we've done some of the numbers that I quoted in my prepared remarks for the owned and leased portfolio of what we've done is we've reduced about 75% of the cost base from a from our stabilized cost base in the month of April. And as I said we noted there's a there's a significant amount over 80% of our hotels that are closed right now. And if you if you think about the 25% of cost that remain in the owned hotels actually positioned those because we believe in the near-term those hotels will need to be in a position to recover in the next couple of months. So the 25% off of the existing cost that remains have about a portion of those that are truly truly fixed which I would say of the total stabilized expense base. That's about 15% of the

Total stabilized expense base. It's truly fixed and we've included a layer they're of variable costs that remain at the properties today in order to prepare for Life restart certainly to your point about Union hotels, you know, that's a it's a factor that we think about in in the requirements under those Union contracts, but generally speaking you can you can refer to the the percentages that that I just covered.

Okay. Thank you.

You're welcome. Your next question comes from Sean Kelly with Bank of America, please go ahead.

Hi, good morning. Everybody. Joan appreciate the the extra color on the working capital component. And and I think this is really a follow-up to the last question. But just to be clear, Can you just give us a little bit more color on of the kind of system and services fund and particular, you know, either what the the the fixed cost run rate is in that or or maybe just more directly, you know kind of how much working capital, you know across the managed operations is really going to get tied up over the next over the next couple of months across the portfolio.

so

let me talk a little bit about burn rate and how we're thinking about the burn rate and the levels of liquidity that we have cuz I think that's helpful. Maybe to give up a big picture of of how am speaking about the the cost that we're incurring today and how we think about the burn rate. So I I mentioned in the prepared remarks that are total of available liquidity today is just over three point 1 billion and that includes a billion six of cash and equivalents and a billion five of available capacity on our revolver and we estimate that took in our current levels of demand and spending levels. We have at least 30 months of liquidity under under that uh, total amount of liquidity that we have available and we break that down. It's about ninety million in our estimate on a monthly basis and in the current environment and if you break the ninety million down, it's about a little over a month.

Half relates to cash flows from operations which includes our owned and leased hotels operating costs corporate overhead operating costs and monthly costs and then of the remainder of that ninety million that split about fifty-fifty between investment spending the investment spending includes a small amount of Maintenance capex and working capital requirements is the is the second half of that number and the working capital requirements is reflects. Some of the fact that we've provided two owners and our current working capital needs. So again, all of this is based on our current run-rate and current demand levels that we're seeing today off. So hopefully that gives you kind of a perspective of odor order of magnitude and and what we're seeing and how we're managing that cash flow know it's it's very helpful. Thank you for for taking an alert or deeper and then yep.

Question I have is just you know, as we think about highest portfolio relative to some of the other operators out there rate, I think specifically because you probably skew a little bit more towards high-end and some of these large-scale group assets you ever seeing more closures or suspensions of operations and hides portfolio than what we're seeing, you know, maybe across some of the the other systems. Can you just help us think about life a little bit more does that does this change the calculus as we move into a reopening phase at all? And is there anything you know, we kind of need to know or be aware of as it relates to those closures clearly the statistic you gave out of China or encouraging but just wondering is it going to apply exactly the same way in the US or is going to be a little bit more dependent on you know, maybe some marks earlier comments on group would be helpful.

Sure, so, yes, we have clearly a more.

Mexican representation in full service then some of our large public peers and also higher representation and urban and Resort markets off. If you look at our Urban and Resorts within within our Us full service portfolio with bourbon and Resort account for about two-thirds of our total room count. So we got we got both a chain scale some some significant change scale differences as well as dead some a locational differences relative to some of our competitors, which is really driving a lot of the differences that you might see. It's not reporting the the closing rate for hotels. Um, uh in different in different chain scales is quite significantly different as well the Dead

The number of properties that are closed for example in our America's select service category is down 19% So we it's a and significantly different therefore than than the full-service Hotel closures that you see elsewhere. So I think the closing down your rate is different from currently and I think a lot of the when you when you really disaggregate kind of where the demand is at the moment and really talking about like Nano. We're talking about the coming weeks not even months. You're really focused on and seeing Airline Crews and Airport hotels running at the highest occupancies and lowest closure rate in our case the other categories of business that Dominate and this is mostly in our select service portfolio our government business National Guard Department of Defense Army Corps of Engineers is a big customer.

And then healthcare workers. So that's kind of what you see is the immediate demand profile in the United States at the moment. I think that over time we'll have to see how some of the the change in the guidelines that are currently prohibiting or or diminishing travel. Once they start to come off what the what the evolution is going to look like. A lot of that will be dependent on people getting on airplanes. If we look elsewhere the market that we have the longest runway. And in terms of time that has elapsed since the beginning of the outbreak of the virus, it's China and Joan mentioned that we've gone from 26 to 1 hotel that's not currently closed and and apart from that what we've seen is pretty steady increase in both occupancy wage.

Kings from an after the time that

The new infection rate drop below a hundred cases per day. The same is true in South Korea. We saw a significant increase in bookings that began to build immediately after you hit that very low level of new new new cases per day. We've been looking at various models and and looking at demand the thing that was striking to us is that in China while life has been building over the course of the month. The last week was quite significantly positive. We even had a a few hotels that sold out over the last weekend due to holiday weekend, the the very fact that you could even have a hotel that could sell out is is kind of a notable thing at this point to begin with. Yes the hotels that are that were in the highest demand with hotels that have a very significant drive to Marketplace. Um, and we did see some enhanced demand in to Sonia which is a on Hylan wage.

A flight to Market, but I would say the really the concentrations of activity have been amongst Leisure Travelers. And this was a holiday weekend, of course home. And and again the highest concentration was in in some of the drive to Market. So that's really it validates. I think what we expect to see elsewhere, which is Leisure will lead off drive to markets will lead and and that's that's really what we've observed so far recognizing that we're dealing with very limited data. I mean, we're talking about, you know, a number of weeks here as opposed to a quarter after quarter. So that's what we've seen so far.

thank you for the color

your next question comes from Steven Grambling with Goldman Sachs please go ahead

I think my first is actually a follow-up to Sean's question on working capital contribution to cash burn how would you generally think about the trajectory of that level under various scenarios and would you just anticipate needing to provide any additional support two owners to get back open

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

And maybe just a a little extra color.

We we announced some concessions to owners in China dating back to February. We followed on that with commissions two owners. This is really fixed fee concessions in March in both Europe and in the United States, and the duration of those was through June. So we've we have provided for relief for owners through June at this point. We've been trying to stay very responsive and very close to our owners though. So I would say while it's through June I'm not saying that that it will end in June it may end into the third quarter. But at this point that's what we provided and we also are taking uh some measure of Reserve in our own minds and on our own planning with respect to working capital needs to further accommodate timing of payments in the like which is really what Joan address earlier so that that might give you a little bit more color on the time.

Evolution of of our engagement with owners and different places.

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

Yeah, actually right now as you know, given that we're in the midst of a crisis. It's it's a little hard to to wax optimistic about the the future here, but I would say that we have a very very solid group of developers with whom we've developed. We we've been we've developed relationships, uh, extensively over time. We started the year off looking at, you know, new openings of over 80 hotels. Um, and uh, we know based on what we know now, which is all subject to change. Of course, we think there could be slippage of maybe ten hotels into the next year based on what we're seeing currently where did that come from? It came from the fact that in certain cases wage construction was not considered an essential service and therefore was shut down for some period of time there for it pushes project opening up opportunities some of it off.

About 60% of the rooms that were impacted or in a SPAC another something like 25% off or in Europe. So we're seeing places where there was early and significant disruption and that's really had a effect of pushing the remainder of the month obviously, so we'll have to see how this evolves in the near-term. I think in the longer term, you know, the fact is that a lot of the underlying underwriting for our hotels wage is based on macro travel Trends. We given are given our position in the marketplace. We serve a relatively higher end traveler and I think it's kind of a downturn we might enjoy a benefit of of those higher-end Travelers wanting to get back out and start traveling both for leisure purposes, but also wage

business reasons, um

And they they might be slightly less constrained as a as a result of their their, you know, economic demographic level, but I think that the black community with whom we are engaged as is quite healthy at this point. Of course, this is putting a lot of stress on existing owners. Were we are super mindful of a guy that we're on ourselves but we we have some confidence that that with some help in some cases and in other cases, uh, because they've got great balance sheets. Um, they'll be able to persevere and and continue to do what they do.

That's super color. Thanks so much.

Your next question comes from both with Citibank, please go ahead.

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

I would say in general. We're looking to try to figure out what owners might need and I think in some cases the way that I think are we we have thought about this in the past and that it is preserved in the past. It has to do with help with respect to deferring fees and the like not we haven't had any discussions with respect to deferring management and franchise fees at home. Of course management. The franchise fees are all dependent on top line revenue and when revenues declined so dramatically so too does the fee base so there's no significant issue there, but with respect to change services office or hotel services that we provide outside of our management fee base. There are some fixed elements to that and and so we are paying attention to what we need to do in order to help provide summer two owners during that period of time. So the the primary way you can think about it is through the provision of working capital, which is really extending credit if you will to birth

In some cases it might it might involve actual Capital transactions, but that's really going to be the minority of the cases.

Okay, and then I just wanted to ask you to you you along with other brands have talked about so stepped up cleaning processes. Do you see any incremental labor costs to get owners now either with taking longer to clean a room or more down time between blooms or how might that factor over the next several quarters with these sort of enhance cleaning protocols. Yeah. So first of all, I would say that the we're we're we're working on this right now to to optimize the the way in which we schedule the work. And also how bout we we're working on supply chain to to ensure that we can deliver a very cost-efficient, uh, a solution because um, providing protective gear as well as off handset ization hand sanitizer and other sanitization, uh Solutions is going to be different to how we have a pig.

This in the past so different means somewhat more expensive but not massively more.

Expensive we don't think it's material actually. If you look at the totality of the expense base and most of the expenses have to do with materials and supplies then they do with labor. We have as part of our Global commitment care and cleanliness commitment have designated took a hygiene manager for every single property around the world that is not a added position necessarily. In fact, first of all in in the vast majority of our hotels in Asia and in Europe, we already have hygiene managers on staff and secondly with respect to our hotels in the us where we don't have one. We would be looking to go through put put a colleague true very extensive training that we've obtained through our relationship with Casey and get them accredited so that they can actually um train others but also wage

Practice what we need them too. So it's really a a expansion or extension of what an existing colleague might do as opposed to adding adding staff and then with respect to the timeline we're working right now on timeline for how long it takes to actually go through it and and individual room there will be some expansion of that but it's not going to be material. I think it's really a matter of new and different processes and new and different supplies that will Elevate the level of of standardization that you end up with.

All right. Thank you. Sure.

To next question comes from David Katz with Jeffries, please. Go ahead.

Sorry afternoon, everyone or morning. I guess it's still morning where you are. I wanted to go back to the matter of conversions wage. You know, look I I I wanted to try and go just a layer deeper. Are you you know thinking about the opportunities are strategies to them, you know assume, you know franchise opportunities. Are you thinking in terms of you know management contracts? You're talking May transfer or you're talking about independence that may want to join your Club. What what you know, how would you highlight those opportunities?

Yeah, so thank you first I would say all of the above because as I think back on the on the deals that we've seen over the course of a year so far. I can put my finger on individual examples of each one of the excuse me examples that you provided manage deal converting from a another brand of franchise deal. And in fact, it's so I would say we we think it's going to be across those Dimensions. We had a a very successful year last year, maybe one of our strongest and conversions and we had a

we had a

A number of different opportunities that arose that came out of mostly independent hotels are hotels that we're an owner built the property decided that they would self manager plan to self-manage it and then decided to thought better of it and and then we had an opportunity to step in the so that's really been a particularly Rich area of opportunity. We think it will continue to be a rich area of opportunity because especially in in this kind of environment where I think it's going to be a very tumultuous and uncertain demand environment for a period of time someone who developed an open to hotel and thought they would do it themselves might well reconsider and that that is actually what we're starting to see and what we are going to stay focused on as we move forward.

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

Sure. I mean I think in some cases it will require key money. In other cases. It won't but I think we the marketplace does does drive that direction and how how competitive a given a given process might be. I think our most wage our best opportunities fall in markets where we are either not represented or under-represented and lie for us that's a lot of markets with the with the the vast majority of markets around the world of markets in which we don't we're not stepping on ourselves on every on every street corner, right? Perfect. Thank you very much. Be safe.

you too thank you your next question comes from Thomas Allen hey so so what kind of occupancy levels or particle lines are you looking for it to reopen more of your own and Lease hotels and I'm assuming you would reopen when it's accretive to the current free cash flow declines but at what level did not get to break even a bit. Thank you

okay Thomas I'll give you some some color or how we think about break even and I would start by saying it depends a lot on the location and type of hotel that you're talking about do you think about a a a full-service hotel in the occupancy levels at break-even are about 40 to 45% and off select service Hotel would be about 10 points lower than that 30 to 35% and then you can think about hotels with lower labor costs maybe what else tells some International markets being in that 30 to 35% range as well and then hotels in higher labor markets would be above that 45% potentially so some of that will depend also on the f&b operations that are made available when the hotels reopen and obviously we're

watching demand

And very closely and the the reservations are activity levels that that will be made available to us over time. As long as we go through every. A couple couple of points. I would add to that the the I think the occupancies that Joan just referenced are at the operating income line. If you looked gross operating profit GOP level if you're familiar with Hotel P & L's it would probably be about 10 points lower than each of those numbers that Joan just cited. So she was talking about breaking even at the operating income line as opposed to the GOP line in terms of the question you asked about what level of what level of occupancy we might be looking to as we think about targeting re-opening our hotels. We think that something like 15% off.

Tipping fees, um are about a crossover point between ugh how much you lose by staying closed versus how much you might lose, um by reopening and if you thought you were going to run 15% occupancy for a few days and go to back to 5, then you wouldn't reopen of course. So part of it also has to do with our outlook for a given market and how bout we imagine the profile of demand might look over time.

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

What we've disclosed previously is that a point of revpar is approximately ten to Fifteen million of ebitda as a 10 to 15 million dollar impact and so in this environment, I would assume assume you should you should assume that it is higher than that, but a little bit higher than that.

Very helpful. Thanks John. Thanks, Mark safe. Josh will take our last question now, please your last question comes from home.

Hi everybody. Thanks for taking my question. So 30 months of liquidity is obviously a pretty substantial amount of capital your balance sheet is in pretty good order. Can you just remind us wage in this environment how you're thinking about m&a and given we're likely to see some pretty distressed asset prices. Would you be more willing to acquire something that came with a larger portfolio of real estate with intentions of disposing of that overtime or should we think about any m&a looking more like two roads with more of a pure asset light exposure?

Yeah, thank you. I you know, I have to admit to you that I think most of our time and attention has been spent on managing through the initial phase of this crisis and making sure that we are positioning ourselves to Thursday to take care of our of our various constituents not so much time spent on imagining what the environment might bring in terms of them and the opportunities. I think what the one of the realities is that when you go through A disruption of this magnitude and this this severity a lot of people I think will end up taking a step back from making any major decisions with respect to buying and selling unless there's distress and so far maybe it's still a little early but we haven't seen too many things that have been put out into the marketplace because of a distress situation and overall the deal market for either hotels or in general has has actually been quite quiet. You've seen more dead.

We announced deals that have come apart then you.

Have any new deals that are either launching or getting closed in our industry. And I think that will probably persist for a little little period of time. There's some really important reasons. Why that's true. The first is that off for any potential buyers of assets Hotel Assets in particular the the timing and severity of the decline in demand is kind of an important underwriting factor and it's really hard to put your hands on that yet. The second major issue is financing. I think the stress of this whole pandemic across the banking sector has been pretty significant wage and I think banks in general we'll have we'll either be reluctant to or unable to actually underwrite deals with respect to assets. So I think that off for those reasons, I think the the total deal environment is going to be at a suppressed level for the foreseeable future with respect to our attitude and a dog

We think about the world. We remain committed to continuing to expand our presence. Um, we think that we've done that effectively through the towards acquisition. If another opportunity came up, we would be very open to pursuing it, but I don't expect any to arise in the near-term. I think that it's possible that there are some independent a smaller management platforms that might have other stresses and strains with their own or communities and like where we might be able to either be helpful by way of a partnership uh-uh adventure of some kind or by way of an acquisition. But you know, we we have established a a very strong balance sheet first and foremost to make sure am under any circumstance circumstance. We don't need to worry about our liquidity and that's what we think we've done and we want to make sure that that remains the case there are many uncertainties that Still Remains.

I think there's at least a possibility that there's a reinfection rate curve that we had in the fall. We have no ability to assess that at this point and very few experts have an ability to assess it at this point, but we just have to maintain some I think balance as we think about deployment of capital at this point and making sure that we have better visibility to the Future before we start making commitments that would consume a lot of capital in one way or another. So that's our that's our thinking at this point.

Okay, thank you Mark. And then just for my follow-up as it takes time to get back to Prior demand levels. I think in the interim there there could be more Supply if you're still compounding units at five digits. While others probably are too just given the industry construction pipeline. How are you thinking about that supply and demand balance going forward over the next couple of years.

You know, I think it's going to be truncated I think between now and the time that there's a widely distributed and deployed vaccine. It's going to be very choppy and it'll be market-specific and positioning specific and customer-specific. I think once that I think once we're past that point the pent-up demand is going to be significant and I think we're going to see a Resurgence of travel at a very very high level. And so I think that the whole dynamic of supply and demand is going to shift it's going to hit a very very significant inflection point at that point shifting it in a very significant way. I you know, it's it's hard to know exactly how much time a little lapse between now and the time that that happens so part of my answer to what is volte feature beyond that point look like depends on whether that point whether that inflection point in widely distributed vaccine happens 6 from six months from now twelve months from now or eighteen months from now dead.

Those are those are three different.

Versions of the world and it's it's too hard to say.

Okay. Thank you very much.

Has all the time we have for questions, they'll turn the call back to the presenters for closing remarks. All right. Thank you, Josh, and thank you to everyone for taking the time to join us today. Please stay safe out there. We look forward to speaking with you more in the coming days and weeks and certainly hope to see everyone in person before long. Take care. Thank you very much for joining. You may now disconnect.

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