Q2 2020 Hyatt Hotels Corp Earnings Call
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Thank you.
This begins with creating a safe and inclusive environment for our colleagues in our guess throughout the world.
We don't live out our purpose only when it's easy or convenient.
It is fundamental to who we are especially during these highly disruptive times.
We continue to engage in our communities through direct support of organizations that focus on creating work opportunities for opportunity you.
Who are concentrated in underserved and underprivileged communities and in the U.S. Many of these communities are predominantly black and let next communities.
In addition to these efforts we are caring for our colleagues who are being affected financially by the pandemic.
We established the height care funds, specifically to provide financial assistance for colleagues, who are suffering financial hardship as a result of cobot 19.
I'm pleased to report that the care fund has taken an approximately $9 million and donations to date and already dispersed in excess of $5 million to over 12000 colleagues around the world over the past several months with many additional applications in process.
The care fund will continue to help members of the hide family, who most need our support at this time and I couldn't be more proud of this great work.
The mutual support across the hide family is palpable and inspiring it defines who we are.
While we are obviously managing through many challenges we remain undeterred.
We are committed to re imagining our business and resolved to emerge from this pandemic as a stronger and leaner business with stronger personal ties to our colleagues guests customers and hotel owners.
Working together with our owners our colleagues are re imagining both the guest experience and the manner in which we operate hotels to optimize results even add significantly reduced levels of occupancy.
We are also supporting our guests as they have returned to our hotels.
By providing a safe and welcoming environment and we've taken extra steps to care for our world of Hyatt members through a variety of benefits, allowing them to maintain their status and enjoy additional benefits as they get back to traveling.
This morning, I will review the type of demand we are seeing around the world and discuss how we are responding by re imagining operations and engaging with key stakeholders.
In addition, I will provide a perspective on our future growth and our growth initiatives.
When we last spoke to you we were during our first quarter call. We noted that the second quarter would bring the lowest demand levels. The industry has ever seen and that we expected that the second quarter would be low point of demand associated with this pandemic.
We had closed over a third of our hotels in April.
And taken a number of important steps to weather, the storm, including securing additional liquidity and reducing costs by way of furloughs pay reductions and elimination of nonessential spending.
In May we took additional painful steps to reduce the size of our workforce.
During the month April we reached our peak of hotel closures at approximately 35% of our hotels globally.
We are taking a deep analytical approach to identify those factors that support reopening in each market and each hotel.
We have applied financial modeling, including Ts say, an airline data.
Search and mobility data.
And hotel bookings data.
To determine when it becomes desirable to reopen hotel.
Based on this approach Weve reopened many hotels over the past few months with 80% of our hotels open at the end of June and approximately 87% at the end of July.
We plan to reopen most of the remaining hotels within the next couple of months.
We have seen encouraging signs of strengthening travel demand in China, and South Korea in particular.
Joan will share some occupancy numbers for China, shortly but what I'm. Most encouraged by is the significant increase in Revpar index, we've seen through this recovery in China.
While we consistently delivered strong results in the past our Revpar index in the second quarter for full service hotels in greater China has reached levels about 15 points higher than 2019.
Indicating that we are significantly outperforming our competition through the early stages of this recovery.
This is a direct result of the proactive ingenuity of the teams in our hotels.
It is also a strong reflection of the strength of our brands.
In China and the high degree of trust travelers have in our brands during these uncertain times.
Outside of China in South Korea, we are seeing positive increases in demand for certain markets around the world, but at a slower rate of growth.
Most of this business is being driven by leisure demand.
Leisure demand was the principal driver of now 13 weeks of increases in occupancy and net bookings across the globe.
However, the rate of growth in demand moderated in the middle of July following the due July 4th holiday.
Due to the impact of rising case counts in certain areas and many cross border travel restrictions that remain in place across the world.
We have seen increased momentum in the latter half of July.
However, until meaningful and consistent progress is made towards slowing the spread of the virus international travel in particular will continue to be negatively impacted.
In addition, the booking window has shortened substantially.
In the US for example over 65% of our full service bookings and over 75% of our select service bookings are being made only four days ahead of the date of stay.
This is the shortest transient booking window, we have seen.
With respect to group business in North America, we continue to experience near term group cancellations and expect this to continue over the remainder of this year.
All this makes it challenging to forecast results or planned for demand levels.
And we are up for this challenge.
Our response to this has been to compress our decision, making on promotional activity and to pivot our actions as appropriate in real time.
We have significantly increased the speed of response in local markets around the world and this increased agility is serving us very well as we discover new pockets of demand and new ways of going to market.
We are re imagining the guest experience in a number of ways that I will describe and Joan will later explained how we are re imagining our hotel operating models to optimize financial results.
We've been pro proactive in connecting with and listening to our guests, including importantly, our world of high members in our corporate and association customers to understand and respond to their needs in this new environment.
Again, because these connections were a natural extension of our purpose of care.
And because of the importance we have consistently placed on engagement, we moved quickly and effectively in this direction.
The need that is first and foremost to safety and security.
We reviewed our global care in cleanliness commitment during our first quarter call and are happy to report that as of the end of June we hit trained hygiene and well being leaders in each of our hotels around the world.
We've also recently announced mask requirements for all guests and visitors in our us and Canadian hotels as a meaningful step to enhance the safety of our guests and colleagues.
Beyond our global Karen climbing this commitment we are reimagine the hotel experience to help guests rediscovered their love of travel with a focus on safety onest and well being always.
With an increased interest in private experiences reusing spaces in new ways. For example, with private rooftop yoga in sweet dining or pit picnic basket dinners on the lawn with live music.
We also develop new in room experiences such as spot kits and mixologist kits for guests to create their own cocktails.
Importantly, we continue to be dedicated to holistic wellbeing, which is more important than ever. These days and we just opened our third year of all resort the mere evolve Berkshares in Linux, Massachusetts.
Alongside these in state innovations, we're working hard to allow our guest to control their experience by completing the rollout of our enhanced digital engagement options, including digital check in keyless entry and housekeeping preferences.
These capabilities are rolling out in the next few months for most properties and by the end of the year for all properties.
Mobile food and beverage ordering will also be available at all participating hotels in the coming months.
In addition, and additional area of focus is the meetings and advice and events experience.
While demand for large meetings is limited we have smaller group events occurring and have been working with meeting planners on new designs for events.
In addition to standard safety protocols and unique food and beverage options, we're piloting and testing hybrid meeting formats, which sometimes involve the use of multiple hotel locations to accommodate distinct distancing requirements and travel limitations and the use of technology to seamlessly combined virtual and live experiences.
All these efforts are designed to be responsive to consumer and meeting planner sentiment and ultimately drive business back into our hotels.
Many of these modifications in the guest experience will survive beyond this pandemic and our engagement with our guests will continue to serve as a compass to guide to how these experiences evolve overtime.
Now, let me turn to dressing future growth.
Even as we continuously adapt our business to current circumstances, we remain focused on long term growth.
We delivered second quarter net rooms growth of 5.8% despite the toughest business conditions the industry has ever faced.
The disruption that has resulted from this pandemic has cost us construction delays for projects underway, which is pushing certain opening dates back.
We do expect these delays and some isolated terminations to negatively impact what would otherwise have been another very strong year of net rooms growth.
Helping to offset some of that pressure, however will be additional conversion opportunities that we're pursuing some of which we expect to realize prior to the end of year.
As demonstrated last year conversions are becoming a larger contributor to our growth profile and we expect that to continue.
As evidence of our strong track record of driving growth I would note that over the past five years, our net rooms have grown by over 40% and our pipeline has almost doubled.
We believe our robust pipeline positions us well to support continued growth over time.
We continue to make solid progress on full service development around the world with particular strength in our Asia Pacific segment.
Select service production in the us has slowed.
Due primarily to constraints on financing, which we expect to impact our pipeline growth for these brands in the near term.
Longer term. However, we expect select service production to recover as there are significant opportunities for global growth of our select service brands supported by the performance of these brands and given our relatively modest market penetration across the globe.
I would also add that we've seen some slowing within our pipeline of hotels that are advancing to the design and construction phase.
While we do not expect this impact to be material. We are undertaking an in depth review of these projects and we will provide updates as appropriate over the coming quarters.
Finally, I'd like to highlight some of our recent announcements under our Thompson and the Leila brands, which demonstrate the enhancement to our growth that we expected as a result of our acquisition of two roads hospitality less than two years ago.
You May recall me discussing the brand synergies with the two roads brands being more focused on lifestyle and resort hotels important and strategic areas of growth for us.
Earlier in July we announced two new Thompson properties Thompson, Savannah, and Thompson Buckhead, both Georgia hotels that we expect to open in 2021.
These two properties joined nine existing Thompson properties and an additional seven under development across the us in Mexico.
Given the unique brand ecos, coupled with a proven track record of performance, we've seen significant interest from third party developers.
Also in early July we announced plans for the first new build a leila resort in the Americas located Encinitas, California.
And scheduled to open by early 2021.
This luxury hotel situated along coastal bluffs, and overlooking Grandview and south ponto beaches in Encinitas will join another iconic resort the 11 Tonagh up the coast in Big serve California.
The Thompson and a Leila brands along with those while the Viiv brand, which has been a successful conversion brand for us have proven in just a short period of time to be an enhancement to our strong suite of brands that we expect will continue to drive growth for us over the long term.
I'll conclude my prepared remarks, this morning by saying that the second quarter was challenging but in line with what we expected.
We do believe the worst is behind us and we're seeing positive signs developing around the world with some clear pockets of strength.
The recovery, especially as it relates the business travel here in the US we'll continue to be challenging, but we're confident that pent up demand for travel will lead to meaningful recovery as cobot 19 cases come under control and ultimately when effective treatments and or vaccines are widely available.
China serves as a great example, that travel recovery is possible, even without pharmaceutical treatments or a vaccine as long as proper well coordinated actions are taken to significantly reduce the spread of the virus.
In the near term, however, the timeframe over which demand recovers, especially especially in the us is less important than the manner in which we've prepared to continuously adapt to whatever conditions we face.
Through the strength of our hotel leadership teams and the agility of our business leaders Weve quickly adapted and capitalize on opportunities to Reimagine. The business. We are proactively re imagining both the guest experience in the way in which we operate hotels efficiently and effectively and we are confident these actions combined with the strength of our balance sheet.
Enduring value of our brands and our continued focus on growth.
Well not only allow us to navigate the recovery, but emerged from this challenging period in a stronger position with enhanced profitability.
I'll now turn it over to Joe and to provide additional detail on our operating results shown over to you.
Thank you Mark and good morning, everyone as Mark just mentioned, we entered the second quarter anticipating the low levels of demand we experienced.
I want to thank our team in that the various challenges proactively with ingenuity and with resolve.
Our demand levels gain positive momentum from May to July and our liquidity position is stronger than we previously anticipated.
Late yesterday, we reported a second quarter net loss attributable to Hyatt at $236 million and a diluted loss per share at $2.33.
Adjusted EBITDA for the quarter with negative $117 million and a reported system wide revpar decline of approximately 89% in constant dollars.
Our reported system wide revpar declines are impacted by both the inclusion of closed hotels in the calculation and by our chain scale composition, which includes significant exposure to upper upscale and luxury properties and to the top 25 markets in the U.S. that had been weaker than other market tracks.
Over the past several months.
I'll now provide a few additional details on our operating results for the quarter and into July.
Our reported results by definition include all comparable hotel and therefore, those hotels and suspended operation during the period skew the revpar results, making comparability to statistics reported for the industry difficult.
And as a result, the information I'll share with you now fully based and only opened hotels. So that you can get a better picture of performance for those hotels actually in operation for the four month reported.
We've also posted a supplement containing revpar information for opened hotels on our Investor Relations website.
I'll just touch on a couple highlights starting with the area we are seeing the greatest strength.
Greater China full service open hotel occupancy levels had already begun to rise off their loans during the first quarter two about 22% in April and has since climbed to approximately 55% in July based on preliminary estimates.
Excluding Hong Kong Macau in Taiwan were travel restrictions significantly depressed demand in those markets.
Later, China full service open hotel occupancy rose from 25% in April two a preliminary estimate of approximately 64% in July demonstrating the strength of domestic travel demand led by transient leisure.
We've also seen strengthening business transient demand during the quarter now amounting to more than a quarter of total demand.
Occupancy levels for open full service and select service hotels in the Americas range from a low of approximately 6% and 15% respectively in April to approximately 21% and 43% for the month of July based on our preliminary estimates.
Our EMEA southwest Asia segment occupancy levels for open full service hotels were 7% in April and grew to a preliminary estimate of approximately 25% in July.
While the numbers demonstrate that we are starting to see varying signs of recovery occupancy levels are nonetheless still at historically low levels.
As a result, I'd like to spend a little time reviewing how we are successfully re imagining our hotel operating models to optimize financial results with lower demand levels.
Before I review the modifications, we have made to hotel operations I did want to briefly review the action, we've taken with respect to overhead cost and services provided on behalf of our hotels.
During our first quarter call, we discussed the various ways in which we are both reducing overhead costs and managing cash flow and liquidity.
Subsequent to that call and as Mark briefly mentioned earlier, we announced reductions in our workforce of approximately 1300 positions at corporate regional and shared service center locations around the world.
This was an incredibly painful decision.
But when we believe was appropriate to adjust our cost structure given the significant reduction in revenues combined with expectations of an extended recovery period.
Cost savings associated with those reductions compared to our original plan translate into about.
35% reduction in our monthly as DNA and approximately 40% reduction in our monthly costs for certain system wide services that are reimbursed by our hotel owners.
Shifting to hotel operations and opportunities beyond the reduction of reimbursed costs. This environment has inspired creativity combined with resolve to not just reimagine the colleague and guest experience, but also reimagine the manner in which we operate our hotels.
The two most significant areas of opportunity include staffing and food and beverage offerings.
On the staffing front, we found ways to accomplish more with less through carefully reduced staffing levels.
Experienced staff our position to provide multiple services with fewer guests in the hotels in certain cases, where we have multiple hotels in a given market. We've increased the use of clustering, where we provide oversight with colleagues that are responsible for multiple hotels.
On the food and beverage side, we've been thoughtful about how to service limited demand and cost effective ways.
That typically includes expansion of our very high quality grab and go concept that we call the market and who are demand warrants. It limited two or three meal options and selected outlets with temporary suspension of other outlets.
I'll just share two examples of owned hotels and what we've been able to accomplish through these steps.
I'll start with our 422 room Hyatt Regency Lake Tahoe and owned property. This is a one of a kind at leisure oriented property, which effectively serves as a drive to location for many in California and Nevada.
In the month of June this resort rent and occupancy at about 56%, which was strong for a larger full service property in this environment, but nonetheless down significantly from the 81% occupancy realized in June of last year.
Despite the lower occupancy the extraordinary efforts of the team on property to manage costs resulted in strong margins that were only about 500 to 600 basis points lower than achieved in June of 2019 at Bro at both the growth operating profit and EBITDA level.
With rates slightly lower increased productivity and a lower mix of S&P revenues health achieve this excellent flow through result.
Another example, I'd like to share with you is our 491 room Hyatt Regency loss Pines resort just outside of Austin, Texas Another owned hotel.
This is another drive to leisure resort that experience increased demand in June with just over 26% occupancy for the month compared to about 85% in June of last year.
Despite the far lower occupancy the team on property was again able to manage costs and still drive positive EBITDA for the month.
With higher rates and improved productivity. This resort had an implied breakeven occupancy for the month of less than 25%.
These types of efforts are being applied across all of our hotels and this approach has supported the reopening of hotels in a limited occupancy environment to mitigate some of the negative financial effects of hotel closures.
We have effectively reduced the breakeven occupancy level of our full service hotels by at least five percentage points around the world and in some cases more.
Our teams continue to be innovative and fiscally responsible and managing hotel operations in order to maximize financial results for both third party owners and far owned hotels.
I'd now like to provide a brief update on liquidity during our first quarter call I discuss the steps we've taken to secure additional liquidity and indicated that based on our level of liquidity at that time, we could continue to operate those significantly reduced revenue less levels for greater than 30 month.
During the second quarter, we utilized approximately $20 million less cash per month.
Then the $90 million monthly burn rate, we originally assumed.
Excluding severance payments and other onetime costs.
We achieved this result, due in large part to the reduction of expenses, which offset the impact of owner concessions fueling fewer working capital needs for third party owners and improved cash management at owned hotels.
We've worked with third party owners on financial concerns and have both reduced and deferred amounts owed for system services and we will continue to monitor the circumstances closely as we move forward.
As of June 30, our total liquidity inclusive of cash and equivalents combined with borrowing capacity with almost $3 billion with the only near term maturity of long term debt being $250 million a senior notes due in the third quarter 2021.
We believe our existing liquidity combined with lower actual cash usage demonstrated during the second quarter support our ability to operate at second quarter 2020 demand levels for an additional 36 months we.
We expect second quarter occupancy levels to be temporary and improve as travel restrictions are lifted and demand continues to increase and we therefore expect our monthly burn rate to continue to improve over the recovery period.
I will conclude my prepared remarks by saying that while the second quarter was as expected the most challenging quarter, we've ever experienced as a business. We are beginning to see some early signs of improvement and remain optimistic about continued progression of demand in the month in quarters to comp.
We nonetheless, our prepared for an uneven recovery and intend to continue to proactively we imagine our operating model to maximize results under very demand levels.
We believe these actions and the strength of our liquidity position will allow us to effectively navigate the recovery.
Optimize earnings and support our growth strategy as demand improves over time.
Thank you and with that I'll turn it back to Stephanie.
Thank you.
This time animal to remind everyone in order to asked a question. Please press star and the number one on your telephone keypad and we'll pause for a moment to compile the keynote roster.
Your first question comes from Stephen Grambling with Goldman Sachs.
Please go ahead.
Hi.
Good afternoon, thanks for taking the questions, perhaps I missed it. So can you quantify the amount of support provided to owners in the form of deferred Cds or other working capital benefits and how you generally think about this.
Cash outflow unfolding over the remainder of this year and also longer term.
Yes, Hi, Stephen out we have not disclose the actual amount of concessions that we provided but we've been working with our owners and have provided concessions since April.
And we've been able to effectively cut the costs that are that would offset those concessions that we've provided to our owners. So as we think about that going forward, we're going to stay very close to demand levels and the needs of our owners and continue to evaluate what concessions we need providing.
Future.
And those savings that we've achieved even represent the majority of the improvement.
In the run rate.
Cash burn that we had previously projected that we John mentioned that we picked up $20 million of.
Of lower cash furtive in effect the majority of outside of that difference has to do with the fact that we reduce those expenses associated with the concessions that we provided to owners.
Not if thats helpful clarification, as an unrelated follow up.
How are your corporate conversations going as you think about the path of recovery in business transient and group and how might the experience in China and for most of that path within those segments.
Yes, it's it's a good question I think it's a it's a relevant comparison because we have a lot more longitudinal data other trying to look at.
The.
The discussions with most of our key corporate customers has to do with how they are evolving their own.
Returned to office experience and also how they're meeting the demands that they've got with respect to their business and.
I would say the the approaches are quite varied but one.
One thing that his is true in many cases is that there is still in discovery mode to understand how many people are going to be coming back into offices in different places.
I would say that many people entered the summer expecting that by the middle of the summer they would they would be in a cadence of people were turning to office and I think many people have deferred the decisions until after labor day.
With respect to China, the progression has been really.
Great to see very encouraging.
We've seen a steady progression of of occupancy is in the market over the course of.
The last several months and.
To the point, where if you look at the different regions within China and the performance there.
We've seen.
Very strong performance in East, China cell, China, and West China to the point, where by the end of July they were at occupancy levels equivalent where we were in 29 team which is quite remarkable.
Rates are beginning to catch up as occupancy is have continued to expand north China is is lower and the reason is that Beijing had a bit an outbreak about.
Five or six weeks ago, and there was a subsequent shutdown in Beijing for several weeks while.
The caseload came down but the thing that we're seeing now as you can I think we ended.
The month of July in greater China, with mid Fiftys occupancy, but that skewed because if you got take Hong Kong, Macau, and Taiwan out of that equation, where there were a lot more travel restrictions in those markets. It was more like mid sixtys occupancy.
For the remainder of greater China.
And you can't get to those occupancy levels without having midweek business. So we're seeing now the return of business transient which represented more than a quarter of that total demand.
As we have seen.
The progression of our occupancy is rise.
The last thing I will say is that in July. We also saw the return of some group business. We had we hosted product launches by some key customers of ours, like BMW and Volvo and Gucci.
Who are launching and holding new product launches and gatherings in our hotels. So we're also starting to see the return of group.
So we're encouraged by this across the board.
The only other thing I would say is that the that the transient activity that we've seen especially of leisure transient activity in China, which these are lessons that we are applying everywhere else around the world.
Our increase in our Revpar index, which I cited in my comments was driven by some extraordinary actions taken by our local teams and deployment of a new go to market platform with we chat and it's made an enormous different so I have to I have to acknowledge the fact.
That it was a lot of ingenuity and innovation amongst our teams in China to.
Allow us to expand share the as much as we did.
Thanks, so much apologies for the home office background noise.
Yes, no orders.
Your next question comes from Jared Shaw Jain with.
With that Wolfe research.
Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question.
Can you talk about what you're hearing from the development community for projects that are in the pipeline, but where construction has not yet begun because there is a widely held view that in the next year. So we could see a lot of hotels become available can you just help us understand from an owner's perspective, the benefits of Newbuild construction given there may be.
Some opportunities to acquire distressed real estate.
Sure.
First and foremost you know this already but it's very clear that.
The answer to your question is highly dependent on where and what type of hotel you're talking about so there are many.
Many markets in which there is either new city center or new development underway where existing.
Supplied doesn't exist. So I would say, it's going to depend a lot on on the type of market.
[music].
And the.
Economics right now I think that we're seeing in on the of in the development pipeline evolution on the select service side, especially is really a financing phenomenon and I think the banks are at this point waiting to have better visibility to what the profile of recoveries can look like before they make commitments to new construction.
So I think that is a hindrance at the moment and I think that that'll have a short term effect on new starts.
And we're tracking this carefully across the globe and I would say the.
Dynamics in the us are probably the most pronounced when it comes to finance related.
Construction start.
Impact.
In terms of our own outlook on our own growth. We we are still quite positive we.
Have an outlook, which suggest that our net rooms growth could be more in the range of 4% to 4.5%. This year as opposed to the original guidance that we provided of 6.5 to seven.
That does not include.
A number of conversions on which we're working right now we have signed term sheets on a number of conversions that will impact that number, but we're not including those at this time.
And at the same time that we do that we do expect to expand our pipeline over the course of this year. So we're seeing continued activity it's at a lower level than we had previously thought.
A lot of that impact in the net rooms growth. This year has to do with rooms that are moved into 2021.
So we would I would say, it's probably in excess of 100 basis points of impacts.
With respect to our growth rate net rooms growth this year due to rooms moving into 21, so thats kind of the profile that we're looking at at the moment.
Thank you that's very helpful and Mark you also talked about a slowing of demand in the middle of July within a pickup in latter part of a month.
And then you also said you're booking window has shortened pretty significantly so with that topic caveat can you just talked about the trends toward the latter half of July into August have you seen.
Based on I guess, what you have on the books right now in the in the early days of August have you seen continued improvement here in the early days of August when are you assuming all this looks kind of.
Similar to the recent month over month sequential improvement that you've been seeing throughout the second quarter.
So Jared I'll I'll respond to that end market at any commentary you know the moderating that mark referred to within the growth rate. So we saw an increase in the beginning of July in a lot of that was related to the holiday in the U.S. and then the growth rate started to moderate but now.
We've seen some improving week on weak demand into the latter half in July and in fact.
We of course look at daily information and we saw that over the weekend, we saw a nice uptick in July and July excuse me in August in the first began in August as well. So it's been on even and we're tracking it very closely but we do see continued progression that comment was related to the growth rate moderating because we did see it acts.
Finally.
Rising pretty nicely through the end to end of June and into the July 4th Holiday I would just also say that.
The impacts.
With respect to growth rate was pronounced in the markets in which you had surges of covert 19 cases, thats pretty obvious right Thats something that you would otherwise have expected I.
I would say other than Arizona, those those rates of progression have largely returned.
And.
So we're we're tracking that carefully because I do think that we should expect and I think it's logical to expect that that surges in case load will have an impact and given the booking windows that we discussed earlier the impact is instantaneous. So the bad news is its short term the good news as you know right away, it's like Theres no speculate.
Asia.
Okay. Thank you very much.
Your next question comes from Smedes Rose with Citi.
Please go ahead.
Hi, Thank you.
I wanted to ask you just a little bit more about the.
The operating model for owned hotels, you talked about doing more with less on the staffing side and some some clustering as demand continues to come back would you anticipate being able to maintain more efficient operating model and do you have a sense of maybe on a.
If you applied these cost savings to 2019 kind of what the difference would be on on the around.
Margin.
This means we we went through a couple of examples in the prepared remarks that of what we're seeing and how our teams at the property level are really shifting their mindset and re imagining the way in which they apply themselves to retaining.
Driving as much hotel revenue as they can and retaining the flow through at each property. So one of the examples was on the loss Pines example, where we've got breakeven occupancy is well below we had anticipated as a benchmark and had disclosed in our Q1 call. So I would say that we are.
Extremely encouraged by the ways in which are our hotel operations teams are thinking creatively and driving greater levels of flow through at these levels of demand. It's it's very early to tell what.
The what our expectation is.
Going into the future, but I have every expectation that that we well this mindset will continue and that will continue to.
Be able to expand margins at lower levels of occupancy than we previously thought on a breakeven basis.
Okay. Thanks, and then can you just remind us what what sort of.
I guess percent of overall earnings, it's China, contributing though to the comfortable.
It's been it's been running in and around.
A bit a bit less than 10%.
In the aggregate if you look at greater China.
Great. Okay. Thank you.
Your next question I'm, sorry, so just to just excuse me for one second just to correct. That's had a that's at a fee level not an earnings level. So you'd have to apply a margin to that but at a at.
At a at a management and.
Management and franchise fee level, it's it's a it's in the range of 10% and.
We would estimate maybe somewhere in the range of 5% on an earnings basis.
Okay.
Your next question comes from Shaun Kelley with Bank of America Merrill Lynch.
Please go ahead.
Hi, good afternoon everybody.
I just wanted to go back to I guess two areas you guys have already discussed the first one is on.
Kind of the franchise fee relief and deferrals on Joe and I know, it's probably a little hard to quantify some of these numbers, but could you just give us any sense either anything directionally on.
What tech collection rate, you're seeing from from franchisees or what percentage of owners are paying at them at this moment.
Or just what's the maybe whats the tenor of those discussions are you surprised positively or negatively.
That would be to start and then the second one maybe just a broader question have kind of how what is your perception at the moment of the broader.
Franchise and ownership community and their broader financial health.
Sure Sean.
With respect to what we've seen in the quarter is low it is has exceeded our expectations that it's been lower than.
And what we might have otherwise thought we havent provided any.
Relief on the front management and franchise fees, we have provided some deferrals and those deferrals have been for.
A handful of hotels that have requested the relief and so those have been negotiated at I know one off basis. So thats kind of what we've seen in in the quarter and as we look going forward. We're prepared as we said for the even recovery and we're going to stay close to it and stay close to our owners to.
Adapt to changing environment.
I would say I mean, having recently taken to look at those together I think my recollection is that.
Receivables with respect to hotel services.
Our in good shape, we're not seeing significant expansion of those of receivables that we have from ownership groups.
With respect to owners.
I think in general I would say.
Our owners are holding up we have a couple of examples of hotels that are under particular stress financial stress at this point, but they were they really are concentrated in hotels, where.
They may have had.
A.
A capital structure that left less less them in a more stressed situation even be even pre co bid to begin with.
Those are the exceptions, but overall I would say quite positive.
In sum in many of the markets outside the US we we have very large and well capitalized ownership groups.
Without tremendous leverage in the system. So.
If you quite good about that I do think that as time goes on and.
As initial rounds or initial wave of of concessions from banks and.
Forbearance agreements.
Either lapse or start to extended length, and there's a chance that we will see more financial stress in the market.
We've recently I've personally been spending a lot of time with with my friends at agent delay.
Really helping to tell the story on Capitol Hill and at the Treasury Department.
To encourage them to take a hard look at how they can provide some relief for owners cruise mortgages are part of CMBS structures, I think thats, a particular risk because the direct relief there is more difficult to achieve.
If you got a bank that hold your your your debt the dead on your hotel you could actually if someone to talk to whereas special Servicers don't really engage in one off discussions very very often.
So we've we've really pitched different ideas relating to the main street lending program, which is not really been productive to date.
And also how PPP loans might be able to be applied to help.
Owners, especially those with mortgages that are part of CMBS structures to get some relief. So we're working hard to do that because we have concerns that if.
You have a elongated period of time during which there's just a persistent volatility in demand.
Some of the owners will likely have.
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Real fiscal issues along the way.
Thank you for the detail and then maybe just as a quick a quick follow up I was interested and encouraged by the RP I comment as it relates to China and I'm just curious.
Maybe too early to have this data do you have anything or any signs at how your ARPU I might be performing in the United States, whether it's by category or buy something just to get a sense of I think the broad question, we get them on investors or power brands going to hold off is there still a market share beneficiary relative to independence that sort of thing any.
Any sign post there.
It's really difficult I'm looking at the progression of the the number of hotels that we've had closed in the Americas over this period of time and we were in the sixties in terms of the percentage of hotels full service hotels closed in April and May.
Just the only started to come down in June so really really difficult for us to say, it's just too early to make any.
Valid comparisons and look at.
And look at.
Comp sets that makes sense and an STR world.
With respect to select service, though.
Select service has our select service brands have been performing well on an index basis I don't I don't have the data handy at the moment, but.
I would say that it's we've seen a we've seen a progression of improving index over the course of time from the time that we had 20% of our select service hotels close to the time in the Americas, where we now have less than 5%. So.
I'd say, we'll have much better handle on all this by the end of next quarter.
Thank you.
Sure.
Your next question comes from Thomas Allen with Morgan Stanley.
Please go ahead. Thank you. Thank you. So this in terms of incentive management fees are obviously the harder to predict.
On the call you reverse some of the fees you are taking early in the year, but if current in June through August trends continue to give us any sense of where those would shake out the year. Thanks.
Sure Thomas.
It.
As a reminder, our fees in the U.S. are largely after hurdles that are had we have to achieve after GLP flow through positive geos p. flow through is.
Isn't outcome. So when you think internationally, where we've we structure of those contracts our incentive fees earned on GLP dollars.
One thing that's encouraging is that in China were seeing in in June that over half of our hotels have a year to date positive result at the GLP line. So we're going to be in a position here now to start to earn incentive fees in China, which is on.
Where we're seeing the greatest momentum in recovery, so as as the recovery progressive that that incentive fee growth will follow particularly internationally in and it and in the us it will be a little bit lag because of the structural reasons that I described.
Okay. So.
Kind of Ed if we take the first half of this year.
It can improve from here as those international markets start to show some some positive momentum.
That's right.
Correct.
And then I know you commented that the there was an adjustment made in the second quarter two some reversals that we have taken.
From the first quarter incentive fees that we had previously recorded.
Yes, a smaller and and then and then.
Mark in your prepared remarks.
Are there was encouraging that you said you expect your pipeline more grow this year.
There was stable quarter over quarter, which I don't think anyone will be surprised to see units that environment.
But what do you think is going to drive it to reaccelerate. Thank you.
Well I, we have we just have.
A a base of.
Of projects under discussion that.
Our continuing we're not getting.
Developers, who are withdrawing or or suspending discussions and.
A lot of the.
Momentum that we've seen as we as we enter the second half of the year is coming in.
Our EMEA and southwest Asia region.
I think Asia Pacific will remain actually strong in the second half of the year I think that's making up for what I think will be a lag in select service.
Production in the us.
But again I think the other factor that we are tracking and per and pursuing vigorously is in conversions and I do think that that will be at least as if not more productive for us this year as it was last year.
The time exact timing of when those deals either make it into the pipeline or show up as owned hotels I am sorry open hotels.
His unknowable because every every one of these has got its own sort of profile, but.
Yes, I mean, and we've done a.
You can imagine we're going back to drawing board and re looking at everything a fresh.
Constantly so our current perspective is based on our most recent assessments.
Thank you.
Your next question comes from David Katz with Jefferies. Please.
Please go ahead.
David If you are speaking we cannot cannot hear you you might be muted.
Okay.
Okay.
Okay, Stephanie maybe we'll just moved to the next caller on.
This our last question.
Thank you your last question comes from Kevin Kopelman.
And I apologize, Kevin Kopelman with Cowen and company.
Please go ahead, thanks a lot.
Thank you.
Just kind of a follow up could you could you expand on.
Just given the business travel environment.
Dried up currently what leverage you're able to Paul and things are working on to drive more leisure travel demand to extend that you can't.
Yes, the answer in a nutshell is go local.
Go is local as possible and.
Our teams have demonstrated that understanding where pockets of demand exists.
Is that the thats been the key to to seeing great revenue generation.
A lot. This has been talked about widely across the industry, but it's true for us that a lot of our demand is from people who are driving to our destinations as opposed to flying so understanding how to source demanded different places.
And working.
That at a local level has been really the key to.
Our our performance.
That was I think really evidence in how we went to market in China.
And produced tremendous results, it's been true for us in our resorts and our resorts overall have really performed well our risk. If you look at our resorts as it as a category the numbers.
Don't would particularly robust but that has to do with the fact that Hawaii has been largely shutdown.
So I think over the course of the second quarter for example.
45% of the inventory in Hawaii was out of the market. So it's really been.
Maybe the the most.
Significantly hit market from a from a total supply perspective.
But for other resorts.
Do enjoy the drive to demand and Joan cited a couple of them in her prepared remarks doing really really well. So I would say, it's really very much a local focus and I think having.
Really strong teams on the ground in those hotels is critical.
We're leaning on relationships that we've got with travel advisors, especially for luxury.
Resorts and luxury properties has also been very productive.
A lot of this is based on trust and a lot of this is based on relationships. So this is very much a exercise in sort of old old School Hotel hotel EA practices.
And it's working and I think that Thats really what weve been relying on that I think we'll continue to until we see a little little bit bigger of a base against which we can actually see some compression in certain periods.
Thanks, so much.
Sure.
Okay. Thank you everyone for taking the time to join US today take care and be safe, we'll look forward to speaking with you again soon.
Thank you. This concludes today's conference call you may now disconnect.
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