Wyndham Hotels & Resorts, Inc.

Welcome to the Wyndham Hotels and Resorts first quarter 2020 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press the star and 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Lastly, if you should require operator assistance, please press star and zero. I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations.

Thanks, Hopper. Good morning, and thank you for joining us. With me today are Jeff Bilotti, our CEO, and Michelle Allen, our CFO. Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, and any subsequent reports filed with the SEC. We will also be referring to a number of non-GAAP measures. Corresponding gap measures and a reconciliation of non-gap measures to gap metrics are provided in our earnings release, which is available on our investor relations website at investor.windomhotels.com. In addition, last evening, we posted an investor presentation containing supplemental information on our investor relations website. We may continue to provide supplemental information on our website in the future. With that, I'll turn the call over to Jeff.

Good morning and thanks everyone for joining us. As you'd expect, our comments today will be focused on our response to the pandemic and its impact on our business. It's clear that the near-term outlook for the economy is dependent on many factors, including the duration of government stay-at-home restrictions around the world. That said, we'll make every effort to address the issues that we know are important to you. Our highest priority throughout the COVID-19 outbreak has remained the health and safety of our guests, owners, and team members. to whom we are providing continuous support and assistance. And we hope that everyone listening on this call today is healthy and remain so during this difficult time. First, we want to reiterate that our franchise, leisure transient, fee-for-service business model is highly resilient during economic turmoil. Over 90% of our hotels here in the United States remain open and operating, and we have an unwavering confidence in our ability to weather this crisis. This confidence is reflected in our Board of Directors' decision which we announced yesterday to maintain a quarterly dividend now at $0.08 per share with a goal of raising the dividend in the upcoming quarters as visibility improves and travel demand continues to recover. We have made difficult and measured decisions to adjust our cost base to this new reality to preserve liquidity and to support our franchisees. Altogether, our actions since the start of this crisis have resulted in the identification of approximately $255 million in cash savings that will help mitigate revenue declines and provide us with the funds to continue to offer support to our franchisees. The actions affecting our team members were especially difficult decisions. To support them during this challenging time, we have provided benefits and partnered with several organizations to give displaced team members access to job opportunities across various industries that are now rapidly expanding their workforces, such as retail, grocery, healthcare, and senior living. Our team members' passion for hospitality makes them ideal candidates, and we're extremely grateful to have been able to partner with so many leading companies. To further assist team members, we have increased and expanded our fundraising efforts for the Wyndham Relief Fund, which was developed many years ago to support team members facing unforeseen financial hardships. A great number of people, many of whom are experiencing their own challenges from this crisis, have stepped up to support their colleagues, a strong testament to our values-driven culture. Our thousands of franchisees are also very much top of mind. This is an incredibly challenging time for them and their long-term success is critically important to us. We've taken proactive steps to help them preserve cash during this period. We've suspended certain fees and we've provided payment relief by deferring receivables and suspending interest charges and late fees. And we've deferred property improvement plans and certain non-essential brand standards requiring cash outlays. In addition, We're dropshipping difficult to procure emergency supplies grounded in guidance from the CDC for all of our U.S. hotels, employees and guests. And we have partnered with industry associations to advocate for increased government relief. Through constant communications and webinars with leading subject matter experts, we have guided our franchisees through the relief provided by the CARES Act for which the majority of our owners qualify. While Wyndham is not applying for any federal loan assistance, industry estimates suggest that more than 95% of our franchisees have applied for a PPP and or an EIDL loan, that nearly 80% were approved for one or both. As a reminder, the vast majority of our franchisees are financed by local and regional banks, of which nearly 90% are already providing forbearance or other forms of debt relief, according to the American Hotel and Lodging Association. and a large portion of our franchisees are SBA loan borrowers and are benefiting from the six months of debt relief the SBA is providing. Furthermore, with over 90% of the hotels in our system in the select service space, these hotels are less labor intensive and typically operate at higher margins than full-service hotels. They generally average fewer than a dozen full-time employees and staff levels are highly scalable to demand. We believe that the majority of our hotels can support debt service at occupancy levels of approximately 30% before receiving any governmental assistance, which lowers this 30% break-even considerably. We could not be prouder of our franchisees and how they have risen to the occasion. So many have volunteered free stays for traveling doctors, nurses, and other first responders, and others are offering their unused kitchens to help feed those who need meals. We've been moved by many of our loyal guests who are also supporting recovery efforts around the world. It was last month that we launched Wyndham's Everyday Heroes Initiative, which provides essential workers like truck drivers, warehouse workers, like grocery associates, and of course, healthcare workers with complimentary upgraded gold status through our Wyndham Rewards Program. Our brands, which are concentrated in the select service chain scale segments, have been outperforming the higher-end full-service hotels. Nearly 90% of our domestic properties are positioned along highways and suburban, small metro locations, which have fared better than those in downtown metro markets. Our customer profile in the U.S. is about 70% leisure and almost 90% drive-to, making us less reliant on business days and air travel. While the impact of COVID-19 continues to rapidly evolve, and the ultimate duration remains highly uncertain, as this pandemic abates here in the U.S., Our franchisees should be among the first to benefit, positioning us well for a quicker recovery. As it relates to net rooms growth, we finished the quarter with 828,000 rooms, a 2% increase over the prior year. The pandemic has inhibited our ability to open rooms both internationally and domestically. Room openings in the quarter declined from approximately 12,000 last year to 6,000 this year as franchisees have been focused on the crisis, and our development teams and opening teams have had to curtail travel. New construction projects are being completed, but some owners are waiting to open until travel demand begins to recover. We expect that new construction starts will slow over the next 12 to 24 months, as financing is expected to be constrained until there are signs of recovery. Our global development pipeline ended the quarter with 189,000 rooms, an increase of over 8,000 rooms, or 4% year over year. Our new construction pipeline grew by 3%, and our conversion pipeline increased 8%. Our pipeline in the US is now 52% conversion and 48% new construction. While we still believe we could continue to grow our new construction system with low cost and highly efficient prototypes in our select service brands, we believe that this growth will continue at a slower pace than it has in recent years. Converting independent hotels to our brands has always been an important part of Wyndham's consistent rooms growth through both up and down cycles. And as this industry recovers from COVID-19, we believe conversions will become an even more important growth vehicle for us. With over 15,000 independent economy and mid-scale hotels in the United States, we have restructured our franchise sales and development teams to increase our conversion coverage by approximately three times, redeploying new construction salespeople to convert independent economy and mid-scale franchisees to our brands, brands that are designed to drive higher market share through our larger loyalty and marketing programs. In addition to the increased support our teams can provide franchisees navigating through the post-COVID-19 recovery, our brands can help increase franchisee profitability by driving lower sourcing, technology, distribution, and OTA commission costs given our size and scale as the world's largest hotel franchise company. Our brands such as Days Inn, Super 8, and La Quinta generate some of the highest donated brand awareness in the industry. and provide significant value to our franchisees, especially during difficult times. Like never before, travelers today and going forward will be looking for brands that they can trust, not only for quality, but also for cleanliness and for safety. Our field teams are focused on helping to ensure that our franchisees are as prepared as ever, ready to confidently welcome guests back to their hotels. We are working to implement enhanced, rigorous cleaning protocols based on guidelines and safety information provided by the CDC and using EPA-registered disinfectants provided by Ecolab. In leveraging our scale and relationship with world-class distributors, we're providing our franchisees what they most need and yet can't individually source themselves, washable cloth masks for team members, as well as hospital-grade hand sanitizer and disinfectant wipes for our guests at check-in. We're providing new health and safety training to our frontline team members. We're making health and safety training available to our franchisees so they can address guest concerns. And we're mandating new health and safety operating standards. At the same time, we're identifying offsets to the cost of these new standards to help our franchisees drive profitability. And we're also updating additional existing brand standards to address social distancing and other protective measures building on our established processes and procedures to provide a clean and a safe stay. We are extremely proud of how the entire Wyndham family has responded to this crisis. We remain confident in the strength and the engagement of our team and our franchisees and property owners whom they support. While these are extraordinarily difficult times, we are certain that our Acid Light Select Service franchise business model is optimally positioned for continued long-term growth. Travel will inevitably rebound, and when it does, Wyndham will be there ready to welcome the everyday traveler to our approximately 9,300 hotels around the world. With that, I'll turn the call over to Michelle.

Thanks, Jeff. Good morning, everyone. I'll begin my remarks today with a brief review of our first quarter results and provide more detail around recent REVPAR trends. I'll then provide some insights on the rest of the year where possible, as well as capital allocations. Constant currency RevPAR declined 23% on a global basis in the first quarter, or 17% on a comparable basis, which excludes closed hotels. Comparable RevPAR was down 16% in the U.S. and 20% internationally, led by China, not surprisingly, where RevPAR declined 61%. First quarter revenues decreased $58 million, or 12% to $410 million, including a $29 million decline in cost-reimbursable revenues due to hotel closures as well as asset sales by core point lodging. Excluding cost reimbursements, revenues decreased $29 million or 9% reflecting the REVPAR decline as well as a $4 million decline in license fees from Wyndham destinations. Our adjusted EBITDA declined $4 million or 4% to $107 million in the first quarter reflecting the revenue decline partially offset by $19 million of cost savings primarily related to our COVID-19 mitigation plan. Adjusted EPS declined 4% to 50 cents, reflecting lower adjusted EBITDA and a higher tax rate, partially offset by lower depreciation expense. Our first quarter results clearly do not reflect the full effect of the pandemic on travel demand, especially in the U.S., where we're showing preliminary REVPAR results for April down 66%. Occupancy was at its lowest point during the week of April 11th, averaging 22%, but has been showing slight improvement sequentially since then, up to 29% last week. Nearly 5,900 of our 6,300 hotels in the U.S. remain open and operating, and the economy and mid-scale segments, where 75% of our portfolio is concentrated, are showing relative strength, with these brands outpacing all other chain scales, running occupancy now in the mid-30s for our economy brands and high 20s for our mid-scale brands. In China, we now have over 85% of our system back open, and we are seeing gradual signs of recovery with recent occupancy levels running in the mid-20s up from low single digits back in March. In Southeast Asia, we are running occupancy in the low 30s. And Europe, the Middle East, and Canada are all running occupancy in the low 20s, while Latin America is running in the mid teens. As Jeff mentioned, we've taken a number of steps to mitigate these impacts. We came into this year with a cost infrastructure that was 65% variable and 35% fixed. We've already reduced our expected cash outflows in 2020 by approximately $255 million. In addition to workforce and salary reductions, we reduced advertising spend by over 50%, cut our travel budgets by over half, and eliminated 100% of non-essential discretionary spend. We've also reduced our capital budget by nearly half, funding only the highest priority projects. While variable and marketing expenses will eventually return, we believe at least $100 million of these cost savings will be permanent and reset our ongoing cost base, which is about a 500 basis point improvement to our 2019 full-year margin. At March 31st, we had $749 million of cash on hand. Free cash flow was a net inflow of $10 million in the first quarter compared to a net outflow of $2 million in the same period last year. Year-over-year free cash flow benefited from $17 million of lower special item cash outlays related to the 2018 acquisition of La Quinta and separation from Windham Worldwide. Looking at the balance sheet, as a reminder, we have limited financial and operating liabilities, excluding long-term debt. and our debt maturities are well-laddered with the first not occurring until 2023. Last week, we successfully completed an amendment to our credit agreement waiving the quarterly tested leverage covenant until the second quarter of 2021. The covenant calculation was also modified for the second, third, and fourth quarters of 2021 to use annualized EBITDA rather than the last 12 months EBITDA as previously required. In return for this modification, For the amendment period, we agreed to maintain a minimum liquidity of $200 million, pay 25 basis points of higher interest on outstanding borrowings, and restrict share repurchases. Importantly, we retained our ability to make future dividend payments provided we maintain at least $300 million in liquidity. We have the ability to elect out of the waiver period earlier, which would eliminate the restrictions on both dividends and share repurchases. The amendment, coupled with our substantial cash reserves, gives us ample liquidity to operate our business and support our franchisees through this crisis and through the recovery period. Let me take a moment to address the dividend. As Jeff mentioned, we have reduced the quarterly expected dividend payment from 32 cents per share to 8 cents per share. The impacts of COVID-19 are significant, but temporary. Over time, our business will naturally produce significant free cash flow, Maintaining a quarterly dividend payout is a clear demonstration of the resilience of our business model and of our board's confidence in the long-term growth prospects of the business. Moving on. While we are unable to provide outlook given the uncertainties ahead, we would like to give you our best current view on certain operating statistics and financial metrics for 2020. At this time, we cannot predict future REVPAR trending given all the uncertainty. With respect to room growth, We expect new construction room openings will be delayed beyond their scheduled dates and that conversion activity will be slow in the near term but accelerate when travel demand begins to normalize. Also, consistent with our strategy to increase our direct franchise portfolios, we are increasing our efforts to eliminate non-compliant hotels in our China master portfolio and expect to remove another 9,000 rooms in the second quarter. These deletions will have minimal effect on revenues. We expect our marketing funds will adversely impact EBITDA in 2020, the amount of which will depend on the length of the pandemic. Normally, we offset marketing fund revenue declines by proportionately reducing variable expenses. However, given the magnitude of declines, it is likely that we will see some EBITDA impact in 2020. On average, for every point of REVPAR decline, you can expect to see about $1.5 million of impact to EBITDA in this environment. License fee revenues will be at least $70 million, reflecting the minimum levels outlined in the underlying agreement, $65 million from wind-up destinations and $5 million from platinum equity. Even as managed hotels reopen throughout the year, we expect cost reimbursement revenues to continue to decline as CorePoint executes its asset disposition strategy. I'll remind you these revenues have little to no impact on EBITDA. Turning to expenses, as discussed, we have implemented $255 million of savings, $20 million of which is capital-related, with the remainder impacting the P&L. Consequently, we now expect expenses to be $235 million lower than our original guidance. As Jeff mentioned, we have deferred franchisee payments until September 1st to provide a few months of positive cash flow at the property level. As a result, we are expecting a working capital drag in the second quarter that reverses in the back half of the year and into 2021. We now expect capital expenditures to be in the range of 25 to 30 million. Last, I'll remind you that we still have about another 30 million of special item cash outlays remaining in 2020, primarily relating to the La Quinta acquisition and our separation from Wyndham Worldwide, as well as two restructuring charges now in 2020 that will require cash payments of approximately $30 million in total, the majority of which will be made this year. We've updated our regional RevPAR sensitivities, which can be found in the appendix of the investor presentation we posted on our website last evening. Jeff covered our portfolio dynamics and how our franchisees are well positioned through this crisis and for the recovery. But before we open for Q&A, I would like to clarify a few other elements of our business model that are unique to us and particularly attractive in a down cycle. First, 96% of the hotels in our system are franchised. so we have minimal exposure to asset risk and the associated operating costs and capital requirements. We are truly asset light, requiring less than $15 million in annual capex spend compared with $200 to $600 million at big box lodging C-Corps. We also have minimal exposure to incentive fees, so our revenue will improve as occupancy improves. As demonstrated, our cost structure is highly variable and can be quickly modified in response to market dynamics. With the $255 million of recently implemented savings, of which at least $100 million will be recurring in 2021, we will emerge from this crisis more efficient than ever, generating even higher margins. Next, our growth is independent of the new construction environment. We have a long proven track record of growing net rooms during lodging cycle downturns by igniting our conversion engine, which is fueled by the strength and flexibility of our value proposition. Even during the great financial crisis of 2008, when debt markets were closed, we grew our system 3%. Finally, our business naturally generates substantial excess cash. We know we will get through this, and when we do, we will continue to put that cash to work by investing in the business to produce long-term results or absent that opportunity by returning it directly to shareholders through dividends and share repurchases. In conclusion, Our asset-like business model is remarkably resilient, and our concentration in the select service segment provides a path for strong recovery, sustained system growth, and substantial free cash flow, which, as always, we are committed to using to achieve high returns for our shareholders. With that, Jeff and I would be happy to take your questions. Operator?

The floor is now open for questions. At this time, if you have a question or comment, please press the star and 1 on your touch-down phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Again, we do ask that you limit yourself to one question and one follow-up.

And our first question comes from Joe Gref with JP Morgan.

Please go ahead. Your line is open.

Good morning, everybody, and thank you for the slide deck and hope you and your families are healthy and well. With respect to the slide number 25, the April cash burn, I just had a few questions on that. With regard to the $32 million of franchise and management fees, I'm presuming that that's a cash number as it relates to franchise. So is there a deferred franchise number that this $32 million is net of?

Yes. Hi, Joe. Actually, this is not net of any deferrals at this moment. We're still collecting cash. I think back in the great financial crisis of 2008, we saw about a quarter of our franchisees needed additional assistance. So if you were to apply that same percentage, you could see about $8 million a month in working capital drag.

And that is your expectation, is that going forward through September 1, as you would see that drag?

Yeah, it's hard to predict, but certainly we're planning for that as the minimum amount.

Okay, great. And then with respect to the $45 million expenses on the other side of slide number 25, is that inclusive of some of the cash charges of $18 million that you'll take in the 2Qs? And then secondarily on that $45 million, is that fully taking into account the $235 million of OpEx savings? Yes and yes. Yes and yes. Easy enough. Okay. And then with regard to your development pipeline, I heard your comments, you know, loudly and clearly before. Of the 48% that's new construction, how much of those have committed to financing for that. I get the delayed comments, certainly.

Thanks, Joe. So if you look at our pipeline, as you point out, 40% is new construction. And of that 40% of the pipeline that's under construction, we would expect those to continue and to open within the next 12 to 24 months.

Okay. And then what did you see with regard to conversion activity in April? Was there much in the way of that? I kind of get the environment, but just to get a sense of how conversions look early on in this pandemic.

Yeah. You know, I think to Michelle's point, and it's back on slide seven, I'm sorry, on slide, yeah, slide seven, you saw what happened in the last downturn. I think we're already starting to see that when you look at our opens in the first quarter of 2020, they were considerably skewed towards conversion. And that is certainly what we saw in April as well.

Great. And then, Jeff, I think your comments at the beginning of the call you talked about, I think it was not necessarily your franchisees, but the industry, about 95% of franchise owners have received PPE or some sort of EIDL loan with 80% approved, do you have hard-in-fact numbers for your franchisees? Do you think it's on par? We think it's similar.

It's really tough to be pinpoint specific on that, Joe, but the HNLA is doing a great job. They released last Friday their survey estimating and they were surveying probably the biggest piece of that survey. the domestic industry, and they're estimated that 95% of those franchisees have applied for either the PPP or the EIDL loan, and we think that we're probably somewhere in that ballpark.

Great. Thank you very much, guys.

We'll take our next question from Sean Kelly with Bank of America. Please go ahead. Your line is open.

Good morning, everyone. I hope everybody's safe and thank you for the additional disclosures. So maybe just to follow up on the franchise fee deferral point, Michelle, I think if I caught that comment correct in the last question, roughly an $8 million expectation for April. But I think you said that that would be consistent with behavior back in terms of what you saw in the relief needed in the global financial crisis. I guess the first question is, would the math be right to think if we were looking at an $8 million number over the next six months, something in the $50 million ballpark could be a helpful guide for working capital needs for the business? That would be the first part of the question. Second, is that behavior correct just given the magnitudes of the REVPAR declines we're seeing are so much greater than what we saw during the global financial crisis. Is 25% enough? Are the asks currently substantially higher than that? Or just sort of what's the kind of tenor from the conversations you're having with franchisees right now?

Thanks, Sean. I think the way that you're thinking about it is the right way, taking the $8 million per month somewhere between $50 million, potentially $75 million, for the full year of 2020, because we do expect, we don't expect all of our franchisees will need the assistance, but we do also expect that there will be some that need additional assistance, some extended payment terms. And so that could push some of those fees out of 2020 and then into 2021. For the second part of your question as to whether or not the 25%, the quarter that needed it in the last down cycle is the right anchor, That we don't know. We are not asking our franchisees to request financial hardship. What we have told them is that we will defer the fees until September 1st, and that is meant to provide a couple, what we hope to be a couple months of positive cash flow at the property level before they have to make payments to us. Now, we are still seeing cash collections come in every day, and what we're seeing right now for the month of April would be relatively in line with that 25%, maybe a little higher, like maybe somewhere between maybe a third. And then I would also say that it depends on REVPAR and what the amount of fees are that we're billing.

Right, okay. I think that's helpful. And then Just to drill down a little further, sorry to get lost in the weeds here, but I think this is pretty important because you're the first major franchisee and franchisor and management company to report. So in terms of what's actually being deferred, are these both royalty and sort of system and services fees that would be in that, or are both those on the table, or is it only a portion of the overall fee structure? No, it's 100% of the royalty and the system fees both. Okay, both. that's helpful. And all of that's incorporated in the 8 million or the numbers that you're seeing thus far. That's okay. I think that's it for me. Again, I really appreciate all the extra help and disclosures.

Thank you, Sean.

We'll take our next question from Patrick Scholes with SunTrust. Please go ahead. Your line is open. Hi. Good morning, everyone.

Good morning, Patrick.

I'm wondering if you could provide a little color on your hotels in China, specifically what percentage are open today and what does that compare to at the trough likely in February? And then additionally, of the customers that are coming back to your hotels in China, what are the characteristics? Is it primarily leisure or outside of the city, what customers are coming back first? That's my first question.

Thank you. Thanks, Patrick. It is right now right around 200 of our 1,600 hotels are still closed, and that's down from at the peak. approximately 1,200 of our 1,600 hotels in China being closed. Occupancy has continued to tick up. We've been running occupancies in the 20s up from the single digits and low teens two weeks ago, so that's encouraging. In terms of the travelers, it's a lot like here. What you saw as business began to pick up were people that needed to be traveling, whether it was government, whether it was emergency crews, but we are beginning to see leisure travel pick up in China.

Okay. Thank you. And then my last question concerns your pipeline and how, you know, we analysts should think about a growth rate for this year. It had been 2 to 4%. What would you state or mark a realistic range the day that net growth would be for you for this year?

Well, I think it's absolutely possible to see positive net room growth this year, Patrick. As we pivot to more conversions, as we were able to do in 08 and 09 and 10, and to Joe's question earlier, we saw a big pickup in terms of our mix of opens in the first quarter domestically. 85% of our opens were conversion. And that's sort of the just question where we picked it up. We have an ability to continue to add rooms from a conversion standpoint and look to do that. When you look out across the industry in terms of the hotels that are closed right now and you look at Smith's numbers, It is in the independent space that our teams will be focused on. And so, yes, absolutely possible, and that's our hope longer term. Absolutely continue to maintain our 2% to 4% guidance with a look to move that up over time to 3% to 5%.

Okay, very good. Thank you. Thanks, Patrick. We'll take our next question from Anthony Pound with Barclays.

Please go ahead. Your line is open.

Hi. Hello. Good morning. Similar question in terms of U.S. rep art trends. You mentioned that you saw a trough in early April with improvement since. What kind of customers drove that incremental, I guess, demand over the past week or two in the U.S.? Do you see more discretionary travel happen here?

Yes, we're continuing to see a real wide mix, and it just continues to expand. I mean, what we saw immediately was our hotels that many of them filled and have been running the occupancy and the economy in mid-scale in the sort of 30% range right now, filled with emergency care case workers, filled with armed force personnel, both Navy and Army business, be it fleet relocations or family stays, a lot of government from state and county buyouts. But what we're most focused on right now or what we're beginning to see pick up are what our GSO team refers to as boots and beds, those who are traveling, still traveling, who continue to have project-related lodging needs. It's the construction workers. It's the transport workers. It's utility infrastructure. petrochemical. And look, as long as stay-at-place orders remain in effect, that will be the business that our global and national sales teams, be it in China or be it here in the United States, target. But as people begin to travel and we begin to see and believe that they will, the first thing they'll want to do is get in their car and drive to visit family members and friends. We're not seeing a lot of that yet, but we have had a lot of pickup from the groups I just mentioned.

Got it. And you left yourself some room to maybe increase the dividend to $0.16 a share quarterly this year. You see a improvement in demand. What exactly are you looking for to make a decision? Do you need to reach a positive cash monthly or what kind of metrics are you looking for to make that jump?

Hi, Anthony. I would say what we're looking for is some certainty in the outlook, right? So we're just looking for when will travel demand begin to recover so that we can put a pin in our outlook and in our liquidity analysis, and then I don't see a reason why we wouldn't look to increase it to the maximum allowable amount under the credit agreement.

Maybe one more, Jeff, what you just said about leaves and kind of the leisure travel. Can you just give me more color of what kind of leaves you're seeing? That's all for me.

Thank you. Sure. From a leisure transient standpoint, we're seeing business, you know, begin to especially, you know, the question a little, Earlier ago, in terms of what's happening overseas is travel restrictions are lifted. We're seeing leisure travel begin to pick up. What we saw over the weekend with Beijing relaxing its quarantine requirements for arrivals and sea trip reporting both air and train arrivals pick up. I think we'll begin to see that from a leisure standpoint, which is what we're looking to pivot to and shift to here in the United States as soon as travel restrictions are lifted. But again, You know, what we're targeting right now here in the United States are those emergency management and healthcare, those hospitals and medical workers and those people that need to be traveling or out there traveling.

Thank you. Thank you. We'll take our next question from David Katz with Jefferies.

Please go ahead. Your line is up.

Hi. Good morning, everyone. Good to hear your voice. I hope everyone's well. I wanted to ask about conversion hotels versus new builds. And if you could talk about the economic impact, broadly speaking, of conversion hotels entering your system and the degree to which those start to earn compared to a new build, which presumably goes through a ramp-up phase. Is there any differential between, you know, the garden variety conversion versus the new build and, you know, the rate at which they start to generate fees?

Hi, David.

Hi.

I think that any time you open a new hotel, there's going to be a little bit of a ramp-up just in your paid search and getting – getting your name out there and starting to build reviews and just awareness in general online and with some of the other groups that Jeff kind of mentioned, but mostly from the leisure side online. And for a conversion hotel, we wouldn't expect to have that. They're already well positioned in their market. So we would expect that the earnings for a conversion hotel, the increased profitability that our brands are driving would start immediately for those hotels. Right.

Now, if I may follow that up, you indicated that you're putting more resources, right, or ramping up the conversion engine. Does that involve, you know, adding inducements, right? Presumably, you know, you're competing with other systems, right? to capture new units. Are you allocating any balance sheet or other financial resources that may go up that we should contemplate?

We have earmarked $30 million in our initial guidance to support development activities. We do think there will be incremental opportunities in this environment and we'll be selective about using our capital, but But, yeah, we could see it potentially increasing beyond the 30.

Got it. And one last one, if I may. You know, in the past, when we focused specifically on, you know, the La Quinta system, but I suppose it's relevant broadly speaking, can you talk about your exposure to oil-related markets and, you know, what, you know, you're seeing or expecting or contemplating so far?

Specifically, David, to La Quinta, correct?

Well, actually, I was kind of trying to slip in two at once there, so yes, La Quinta, and yes, broadly speaking.

Good to hear your voice. The La Quinta oil market exposure is, as we've talked before, a little bit heavier than overall for us. We are 18% of the La Quinta units overall, and I'm talking the entire 1,000 La Quinta system are located in oil and gas markets. And we have seen muted to no impact in those markets. Recall in the last call we talked about how Q1 would be really our last tough quarter and then things would begin to improve. What we're actually seeing right now, David, is those oil and gas markets for La Quinta operating slightly better, 200 basis points better over the last six weeks than the rest of our entire system. And it's remarkable that 96% of that 18% that are located in the oil and gas markets are open and that they're operating. Crews are in there doing maintenance, doing research, doing cleaning. And it's also a situation where often those crews would have to double up They're now being told that it's one crew member to a room. Overall, our oil and gas exposure is similar over the month of April. And so far, the last few days, they've been performing no worse and a little bit better than the rest of our system. The oil and gas markets are 12% of our system, and they're, again, 96% of ours. of our hotels in those markets are open.

Got it. Thank you very much and be safe, everyone. Thanks, Dave.

We'll take our next question from Ian Zafino with Oppenheimer. Please go ahead. Your line is open.

Hey, good morning, guys. This is Mark on for Ian. Thanks for taking our question. So thanks for giving all the details, you know, around the additional disclosures. I just wanted to dig a bit into the international side. So can you guys just walk through sort of what type of occupancy levels are needed for breakeven in Europe and Asia? Is that similar to, you know, the US assets or the US footprint? And then, you know, to tack on, has there been any talk of, you know, government financial support internationally, you know, there as well? Thanks.

You know what, I'll take the first part of that question, and I think Jeff will talk a little bit more about the governmental support or maybe lack thereof. With respect to breakeven, we don't have, I don't have in front of me the international regions, but what I can tell you is that globally we think we can breakeven at about 40% occupancy. It'll probably be a little bit higher in the international regions because there's not as much scale from an infrastructure standpoint, So, you know, my guess is probably around that 50% mark, but we would have to have Matt go in and grab the numbers and send them over to you guys.

And I think, Michelle, I answered Mark the second part of that question. There is nowhere near the amount of governmental assistance or support that we're seeing here in the United States, really, in any of the regions that we're operating.

Okay, great. Thank you. Thanks, guys. Thank you. And we'll take our next question from Jared Choja with Wolf Research.

Please go ahead. Your line is open.

Hi. Good morning, everyone. I hope you're all doing well. Michelle, maybe a question for you. I guess just going back to the $100 million of 2021 savings, if I run the math from the margin number you gave, it sounds like about half of that is EBITDA-related, but correct me if I'm wrong on that. And then is the remainder savings for your franchisees, is that the right way to think about it? And then as we think about the long term, are these permanent savings beyond 2021, or do you think that eventually some of these costs are going to have to come back once you're operating back to a prior peak level?

Hi, Jared. For the $255 million, those are all our savings. And then we think that 100 million of those are resetting the ongoing cost basis. So those would be savings into years beyond 2020. There are no franchisee savings in that number. Those would be calculated separately on behalf of the franchisees. What is sticking is about we have 440 positions that we're eliminating. So the salary and wages associated with those employees will be sticking into the future years, as well as some facilities reductions and other discretionary spend items such as vendor spend and certain other tools that we're no longer going to be using in the business.

Thank you. So just to clarify, I mean, are you saying that with these savings, last year's $613 million EBITDA would have been $713 million. I mean, how do I think about that?

Yeah, that's the right way to think about it.

Okay. And you feel pretty confident that 2022, 2023, once we're back to whenever it is, when we get back to peak level, that you're not going to have to bring on some of these costs. I mean, it just seems like that's such a big number when you're already running at about 70% margin. I guess any incremental color you can share on that?

Yeah, I would say, listen, there are always going to be other investments we're going to make in the business as we move forward, right? So the 440 positions that we eliminated right now are not volume related. And so we don't expect that those would come back. The facilities reductions, again, those are based upon where we see our workforce. And we don't expect that we would have to increase our facilities footprint into the future. You know, would we choose to spend some incremental discretionary spend on new initiatives? Yes, potentially, you know, potentially we would. But I do think the vast majority of that $100 million would be sticking into the future.

Okay, very helpful. Thank you. And then just for a follow-up, maybe for Jeff, on slide eight you showed that independents in the lower chain scale segment are two and a half times higher than your room count, do you have a sense as to what percentage of those independents would have better economics from being part of a brand affiliation? Because inevitably, I would think for many, it might not make sense, particularly at the very low end. Can you just talk about why they haven't converted previously and why they may now be more likely to convert?

Sure. I think why now is they are not receiving the support that so many of their branded competitors are receiving. And I think the biggest savings for them, Jared, and we've talked about this before, anywhere between 50% to 100% of their business is coming through an OTA at possibly a 25% commission rate. To be able to cut that in half and shut that or switch that 50% to 100%, to cut it in half to 25% or a third is a compelling reason enough, in addition to all the other support that is provided by the brands in terms of the sourcing and all of what we mentioned in the script we could provide. And that was certainly, again, back to that slide, the case back in 2008 and 2009. We opened 60% more rooms in 08 and 40% more rooms in 09 than we did in 2019, and the majority of that came from independence. And, you know, I think that is going to be the case coming out of this in 2021, 2022, 2023, where independence will be much more likely to consider. I also think there's a lot of – in the economy space, a authority that goes along with being affiliated with a large branded company. And people, as they begin to travel again, are going to be looking for hotels that they believe are very focused on safety and on cleanliness. And I think those will be some of the decision makers that independents, which might not have been willing to consider that before, may consider at this time.

Okay. Thank you very much. Thanks, Jared.

And we'll take our final question today from Michael Bellisario with Baird. Please go ahead. Your line is open.

Good morning, everyone. Good morning, Michael. Can you just remind us what happens if an owner hands the keys back to the lender? What do you, the franchisor, do in that situation? What happens to the fee stream? What happens to the brand?

Sure. First off, we just want to say that to date we have seen zero hotels out there hand any keys back to the bank or to any receiver, and we've seen zero terminations due to coronavirus. But what happens is generally the banks would prefer to continue with the 20-year relationship with banks the local entrepreneur who has a franchise agreement. And again, we believe that demand is still out there. And for 2020 and hopefully into 2021, we're not going to see a lot of hotels handing keys back to the bank. As Michelle said, the break-even occupancy is 30%. It drops a lot when you factor in PPE or EIDL loans or who knows in terms of what's still coming, the passage of the Main Street Lending Act could be another big support. We believe our franchisees have ample liquidity and support. Their banks are looking to work with them and defer those interest payments, be they three months, be they six months. We've heard stories of being deferred until the end of the year. Generally, the bank is looking to work hand-in-hand with the operator. They're not looking to manage and the franchisee.

I can cover the technical part of that question, Michael, really quick. Typically, what happens is the franchise agreement would be assigned to a receiver. the receiver would enter into a short-term agreement with us while they look to sell the asset. When the asset sells, we would be the incumbent, which puts us in a better position to win the long-term franchise agreement.

That's helpful. And then if you look back to 2008-9, can you provide any stats about the percentage of hotels that were maybe handed back to the lender last cycle, just for perspective?

Yeah, it was – Very. It was insignificant in 08. It began to build in 09. By 10, I think we saw, Michelle, correct me if I'm wrong, about 4,000 rooms come back at the peak. It was right around there.

Yeah, it was less than 4% of the system. Less than 4% of the system, I think, over three to four years. but in total less than 4% of the system.

That's helpful. Thank you. Thank you.

And there are no further questions on the line at this time. I'll turn the program back to Jeff Bilotti for any closing remarks.

Well, thanks, David, and thanks, everybody, for dialing in. We all remain intent on making sure that we're taking the appropriate steps to minimize the impact of the crisis, ensure we're all well positioned in the year ahead. Michelle, Matt, and I look forward to talking to you in the weeks ahead and hopefully seeing you in person very soon.

Thank you. This does conclude today's Wyndham Hotels and Resorts First Quarter 2020 Earnings Conference Call. You may disconnect your lines at this time and have a wonderful day.