Wyndham Hotels & Resorts, Inc.

Welcome to the Wyndham Hotels and Resorts Second Quarter 2020 Earnings Conference Call. At this time, all participants have been placed on 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 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 zero. I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations.

Thank you, Keith. Good morning, and thank you for joining us. With me today are Jeff Pilotti, 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 and 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 GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release, which is available on our investor relations website at To the extent there are non-GAAP measures discussing future impact, we are unable to provide the comparable GAAP metric. 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. Accordingly, we encourage investors to monitor our website in addition to our press releases, filing submitted with the SEC, and any public conference calls or webcasts. With that, I will turn the call over to Jeff.

Thanks, Matt. Good morning and thanks everyone for joining us. Our comments today will be focused on the impact that COVID-19 is having on our business and how we believe our actions are best positioning us to emerge from this pandemic as a stronger company. But first, I'd like to remind you why we believe we're uniquely positioned to outperform not just during the crisis and the recovery, but also for the longer term. Our business is fueled by leisure travelers, representing 70% of our bookings. Yet the other 30%, coming from guests for whom travel is essential to their job, is predictable and dependable. Our portfolio of hotels is not reliant on air travel. Rather, it's predominantly drive-to, with about 90% of our US hotels located in suburban interstate, or small metro markets. With these destinations primarily appealing to domestic travelers, the vast majority of our portfolio is also not reliant on international travel. We lead the select service space. 99% of our U.S. hotels are select service, and these hotels fare much better in turbulent times than in higher-end chain scales. We have a proven track record of growing our unit base even during times of economic difficulty. We do this by focusing our efforts on conversion opportunities and by leveraging the significant breadth and depth of benefit we could provide to potential owners in being associated with the world's largest hotel franchise system driven by a strong brand and strong value proposition. Finally, our business model is low risk. With over 95% of our hotels franchised, we have limited exposure to operating costs and capital requirements associated with owned assets. We require less than 50 million in annual capex spend, and we have minimal to no exposure to incentive fees. Our revenue and cash flows are highly predictable and reliable. And it is due to these strengths that nearly all of our hotels were able to remain open throughout this crisis, even during the softest days of late March and early April when occupancy across the industry fell to nearly 20%. While downtown, urban, group, and meeting destination hotels were forced to close, our hotels remained open, hosting essential frontline emergency, medical, government, transportation, and other workers who travel for a living, no matter the circumstances. During the second quarter, our economy brands outperformed their competitive set by over 300 basis points. and our mid-scale brands outperformed their competitive set by over 1,000 basis points. These results were also fueled by our recovery efforts. We established the building blocks of the first phase of our recovery plan, with a campaign in April launching our Everyday Heroes initiative, honoring essential frontline workers while at the same time reinforcing our flexible booking policies, loyalty member enhancements, and loyalty partnership benefits to drive direct bookings. In the second phase of our recovery plan, which kicked off in early June, we shifted our messaging to highlight our cleanliness and enhance safety policies. We rolled out new brand standards requiring the use of EPA-approved hospital-grade cleaning and disinfecting supplies, and we began drop shipping face masks and alcohol-based hand sanitizer and disinfectant wipes to our franchisees providing guests with visible reassurance that they are in a safe and clean environment at a time when health and social distancing is their number one priority. The third or welcome back phase of our recovery plan is currently reinforcing our direct booking benefits across our omnichannel platforms, targeting high-value customer segments with a high propensity to travel. With nearly 90% of our U.S. hotels in drive-to markets near key leisure destinations and locations, we know we are best positioned to capture leisure demand as it returns. This type of travel has always been core to who we are in the basis of our prior, you're about 10 minutes away from a hotel by Wyndham marketing campaign. With our new national and regional marketing campaign that builds on this prior positioning, we will continue to give guests the confidence that Wyndham is ready to welcome them back with our count on us, safety first commitment, our booking and cancellation flexibility, our Wyndham Rewards member perks, including our relaxed requirements for earning member levels, our extension of premium status for our most important members, and the largest and most trusted portfolio of economy and mid-scale branded properties and drive-to locations of any loyalty program. The campaign targets summer travel attenders with a focus on Wyndham's everyday traveler and the locations that are currently showing demand by engaging with them at the moment they're looking to book. providing the opportunity to scale up or scale down with our marketing dollars as travel demand dictates. For the last six weeks, the campaign has been running across all of our global sales, marketing, and PR channels, showcasing a value-added promotion offering Wyndham Reward members with 2,000 bonus points for every qualified stay. And we also just launched a new Stay Two Nights and Get One Free Night offer through September that rewards our members for booking direct, and staying now while giving them a reason to come back in the fall. Our recovery plan is already showing meaningful results. Direct channel web bookings are up 80% since the April-May timeframe. Volume into our call centers is trending near pre-COVID levels, and loyalty member occupancy has increased by over 400 basis points year to date compared to 2019. and as volumes have increased and demand has begun to recover, we have been able to welcome back thousands of team members to our managed properties, and we have been able to bring back all furloughed team members to our corporate offices. Drive-to leisure demand to our thousands of hotels near beaches and national parks or to our hotels along the interstate on the way to get there remains strong. Weekend occupancy has outperformed weekday occupancy for the last 14 consecutive weeks and July month-to-date weekend occupancy is averaging 10 points higher than weekdays. Overall occupancy continues to show sequential improvement in our economy and mid-scale brands in the U.S. and our month-to-date occupancy is averaging almost 50% in the U.S. and recently reached a high point of nearly 60% reflecting strength in drive-to leisure destinations. Today, over 99% of our 6,300 domestic hotels are open. And while we are seeing some plateauing in the harder hit larger markets like Florida, Texas, and California, we are seeing continued occupancy improvement in the smaller markets like Colorado Springs, Lake Michigan, and the Texas Gulf Coast. Aside from leisure travel, we are seeing consistent demand from guests who have to travel in the transportation, in the utility, logistics and infrastructure industries with project and construction work coming back to near business as usual levels. We are also seeing increasing demand from the military, from the government, medical and small social segments like family reunions, birthdays, anniversaries and small weddings. We of course continue to keep a close eye on the impact of certain reopening plan rollbacks and we are very well aware that leisure travel may abate somewhat in the fall. Nevertheless, we are encouraged by continued consumer confidence and drive-to getaways. We're pleased to welcome guests back to our hotels, and we're relieved that the majority of our franchisees were able to generate positive operating cash flow during June and July. And it's important to note that our leisure mix does not change dramatically from quarter to quarter. Less than 1% of our franchisees' room nights are generated by group business, and we are no more reliant on corporate or contracted business in the third and fourth quarters than we are in the second quarter. In 2019, Leisure made up 70% of our business in the second quarter, 71% in the third quarter, and 69% in the fourth. Moving to other parts of the globe, all of our international regions are experiencing occupancy improvement. In Asia Pacific, where 93% of our system is now open, occupancy is now running over 60% in China. In Canada, 98% of our system is open, and occupancy is now in the 40s. And in the Europe, Middle East, and Africa region, where two-thirds of our system is open, occupancy is running over 30%. Latin America remains our most challenged region, with around 100 hotels still closed, and occupancy levels at less than 30%. We finished the quarter with 813,000 rooms, which was flat to prior year. And despite our franchise sales and operations teams being sequestered at home and unable to travel for most of the quarter, we nevertheless opened 5,700 rooms. While we were only able to open 300 rooms in April, we opened 1,100 rooms in May and 4,300 rooms in June as our teams began to travel again, and independent economy and mid-scale hotel owners began to look towards the future in search of a brand that could generate rev par premiums, operating cost savings, lower distribution costs, and increased market share, all of which we could offer as the world's largest hotel franchising company. Conversions improved dramatically in June as well, representing over 70% of our volume versus 57% a year ago. We were pleased with the pickup and conversion activity as the quarter progressed, both on the signings and on the openings front. We expanded our soft branded trademark collection by Wyndham, the fastest growing brand in our portfolio, with independent hotel conversions across the United States, across Canada, and Germany. In China, we added six new hotels to our armada by Wyndham brand, five new construction and one conversion, further strengthening our presence in that country. Additionally, we were thrilled with our continued international expansion of La Quinta, adding two high-quality independent conversions in Turkey, the La Quinta Bodrum off the shores of the Aegean Sea and the La Quinta Gerasun on the coast of the Black Sea, both coming from new owners on the heels of the opening of the highly rated La Quinta Istanbul. Earlier this year, we announced plans to open two new La Quinta hotels in New Zealand, marking the arrival of of La Quinta in our Asia Pacific region, and just last month we expanded on that by signing our first La Quinta in China, the La Quinta by Wyndham Guilin, which is scheduled to open later this year. Turning to franchisee health and retention, with the termination of the dilutive 9,000 master franchise rooms in China that we previewed on our last earnings call, Our international retention rate over the last 12 months was, as anticipated, 92%. Our domestic retention rate held steady at 95%. Now, while recent data is showing spikes in CMBS delinquencies, less than 10% of our 6,300 domestic hotels are reliant on the CMBS market and are instead financed by local and regional lenders who are largely working with our franchisees on forbearance plans. Approximately 90% of our franchisees have also benefited from a Paycheck Protection Program loan, and approximately 40% have received an economic injury disaster loan. Nearly 70% of our U.S. franchisees are operating above 40% occupancy. Even so, we know hotel owners across the industry are suffering, and we know it's inevitable that there will be some that cannot stay afloat. We expect well-capitalized franchisees with reasonable debt service to navigate successfully through the crisis with the support provided through the CARES Act, along with the support that their banks, vendors, and Wyndham are providing to them. However, owners whom are more thinly capitalized with higher debt service levels are unfortunately more likely going to fail. Michelle will walk you through our plan to assist as many owners as we possibly can throughout this crisis. At the end of June, our global development pipeline was 180,000 rooms, a decrease of 4% or 8,000 rooms year over year. The decline reflects the soft April and May sales activity as the world remained on pause as so many were under stay-at-home orders. The pipeline was also impacted by the deliberate removal of deals that no longer meet our recently increased hurdle rates, coupled with a higher degree of conservatism applied to new construction and development projects that have not yet secured financing. Our review, we believe, prudently reflects a more accurate picture of deals in our pipeline that have the highest likelihood of opening in a post-COVID environment. Despite the ongoing impacts of the pandemic, there remains opportunity in the market, especially in conversions, as owners evaluate the best way to manage their future And as noted on our last call, we believe that conversions will become an even more important growth vehicle for us over the next several years. Finally, we'd like to recognize and thank our friends and colleagues who we had to say goodbye to and their positions were eliminated. We will never forget their many contributions and we'll be forever grateful for their service. Additionally, words can't express how much we appreciate the patience the understanding and the loyalty of those team members who were placed on furlough. While 2020 has not been the year any of us expected it to be, the actions we have taken in response to the pandemic will allow us to emerge as a stronger company financially and operationally, intensely committed to the survival and the success of our most engaged franchisees and owners. Of course, none of these efforts could have been accomplished without are incredibly talented team members who have been working harder and more efficiently than ever across every function and in every corner of our world. They've been bringing Wyndham's Count On Me culture to life every single day. And with that, I'd like to turn the call over to Michelle. Michelle?

Thanks, Jeff. Good morning, everyone. I'll begin my remarks today with a detailed review of our second quarter results. I'll then review our cash flows and balance sheet as well as our best current view on certain operating statistics and financial metrics for 2020. In the most challenging quarter our industry has ever experienced, we generated $258 million of revenue and $63 million of adjusted EBITDA. This success was driven by our portfolio of brands that appeals to the mass demographic and by an incredibly flexible cost structure. We were able to reduce our cost and capital spending in the quarter by $101 million, and we used these funds to support our franchisees through fee waivers and deferrals, helping them preserve cash during this critical time. Comparable REVPAR, which is in constant currency and excludes hotels temporarily closed due to COVID-19, declined 54% on a global basis in the second quarter, including declines of 51% in the U.S. and 65% internationally. A little more than two-thirds of the decline in the U.S. was due to occupancy. We were encouraged by the trends we saw through the second quarter, where occupancies for our select service hotels improved sequentially each month from a low of 26% in April to absolute levels of over 45% in June and continued to push forward to nearly 60% in July, as Jeff mentioned. From a pricing perspective, less than one-third of our domestic rev part decline was due to rate. Furthermore, since the trough in mid-April, ADR for our economy and mid-scale brands has increased 15% on average during the weekdays and 32% on average during the weekends. Importantly, the current price differential between economy and mid-scale hotels is roughly $20, and the price differential between mid-scale and up-scale hotels is roughly $30, both significant enough gaps we believe to impact decision-making for our value-conscious everyday travelers. Internationally, occupancy levels for the second quarter averaged mid-20s in China, low 20s in Canada, mid-teens in Southeast Asia, and below 10% in EMEA and Latin America. July month-to-date results are much stronger, with occupancy running 15 to over 25 points higher in each region. Second quarter revenues decreased from $533 million last year to $258 million, including a $94 million decline in cost-reimbursable revenues, primarily due to property-level employee furloughs and asset sales by core point lodging. Excluding cost reimbursements, revenues decreased $181 million, or 49%, reflecting the decline in global rev par as well as $21 million of lower revenue due to the temporary closure of our two owned hotels in April and May, $12 million of non-royalty fee waivers granted as part of our COVID-19 franchisee relief measures, and $11 million of lower license fees from Wyndham destinations due to reduced travel demand. These revenue declines were partially offset by the non-cash recognition of $16 million of previously deferred revenues in our loyalty program, unrelated to our COVID-19 fee deferral relief program. Our adjusted EBITDA declined $96 million from $159 million to $63 million in the second quarter, reflecting the revenue changes partially offset by a 39% reduction in cost. Adjusted diluted EPS declined to $0.10. As mentioned on last quarter's call, we've taken a number of steps to mitigate the revenue losses from the COVID-19 travel disruption. We reduced our expected cash outflows in 2020 by approximately $255 million, of which $101 million was achieved in the second quarter and $29 million had been achieved in March. About 75% of the second quarter savings are volume-related, with the remaining 25% being permanent changes to our cost infrastructure. The second quarter savings will be the highest of any quarter this year, as we expect corporate furloughed employees to return to work on August 3rd, and we have recommenced advertising spend to capture the summer travel demand. Keep in mind the $101 million represents cash savings, including capex, so it won't tie perfectly to the P&Ls. As we have previously noted, approximately 155 million of the 255 million expected savings represent volume-related reductions, with the remaining 100 million representing savings from our restructuring actions that are permanent changes to our cost infrastructure and will provide benefits beyond 2020. Of this 100 million, we expect about 40 million will drive incremental EBITDA on a continual basis, and that $60 million will free up dollars within our marketing, reservation, and loyalty funds to invest in higher ROI marketing programs with the goal of driving increased profits for our franchisees. In connection with our restructuring, we also undertook a detailed review of our portfolio and identified properties that have a history of compliance issues, having consumed significant operational resources over the years despite reasonably healthy economies. We have been working with the owners of these properties to develop a path forward, but now with COVID-19, that outcome is far less likely. Therefore, we have determined the most practical solution is to terminate the existing license agreements rather than to continue to expend additional operational and financial resources that can be redeployed to more engaged franchisees in need of our support. Over the next two quarters, we will take the necessary legal and compliance steps to remove these hotels from our system. Importantly, all of these hotels are dilutive to the royalty rates within their regions. The annual adjusted EBITDA impact related to removing these 85 hotels, representing 16,000 rooms, is approximately $3 million, which is more than offset by the savings we are driving from our restructuring initiatives. These actions will depress our international retention rate by about 500 basis points in the short term, but we expect this impact will be behind us moving into 2021. Longer term, removing these dilutive properties will free up significant management and operational bandwidth to focus on higher value growth going forward. Apart from these rooms, we expect approximately 3,500 rooms primarily relating to the SVC portfolio to leave our system in the third quarter of this year. These hotels were previously under hotel management guarantee contracts that we exited in 2019. The eight RLJ guarantee contracts that we also reached agreement to exit in 2019 are now fee-generating properties that are expected to remain in our system into 2021 on a non-guarantee basis. Turning to cash, we ended the quarter with $664 million of cash on hand. Free cash flow for the quarter was a net use of $68 million, or $40 million, excluding special item cash outlays related to severance and our 2019 contract terminations. This cash use reflects a $67 million impact from our COVID-19 franchisee fee deferral program. We saw our franchisees utilize this cash conservation measure to defer about 65% of franchise fees until September 1st, and as of July 24th, the 35% of fees that had been paid has already increased to over 40%. We have great confidence in our balance sheet, liquidity, the resiliency of our business, and in our ability to produce significant cash flow. And our board of directors shares this confidence as evidenced by their decision in May, which was unique in the industry, to approve a quarterly dividend of $0.08 per share. Looking at the balance sheet, because of the travel disruption resulting from COVID-19, we were required to conduct a detailed review of the carrying values of our assets, to ensure those balances did not exceed their fair market values. This review resulted in non-cash impairment charges totaling $206 million, primarily related to our most recent brand acquisition, La Quinta. With continued domestic and international net unit growth, our confidence in the La Quinta by Wyndham brand remains strong, and our projections of the brand's future cash flows have not changed materially from our original assumptions. However, given the current environment, the discount rate applied to the cash flows to calculate the fair value is higher than the rate at the time of acquisition. We therefore recorded a non-cash charge of $155 million to reduce the carrying value of our La Quinta trademark to its current fair market value. Beyond La Quinta, there were smaller charges totaling approximately $50 million with respect to three other trademarks and to the goodwill associated with our two owned hotels. Turning now to Outlook. While we remain unable to provide an outlook given the REVPAR uncertainties ahead, we would like to give you our best current view on certain operating statistics and financial metrics for 2020. Given the unusually lower year-to-date openings combined with the strategic noncompliant hotels we expect to remove from our system in the third and fourth quarters, we are not currently anticipating positive net room growth this year. As mentioned last quarter, we expect our marketing funds will adversely impact EBITDA in 2020 by a meaningful number. Normally, we offset marketing fund revenue declines by proportionately reducing variable expenses. However, given the magnitude of this year's declines and our intention to support our franchisees through this crisis and the recovery, we have decided not to reduce these costs on a one-for-one basis with the corresponding revenue declines. On average, for every point of rep part change in 2020, you can expect to see about $1.5 million of a marketing fund impact to EBITDA. And note that our accounting for our marketing funds is not comparable to our peers. We do not remove the net effect of these funds from our adjusted EBITDA as they are germane to our operations and our value proposition to our franchisees. We continue to expect license fee revenues to be at least $70 million, reflecting the minimum levels outlined in the underlying agreements. We expect cost reimbursement revenues to continue to decline as CorePoint executes its disposition strategy of non-core assets, which will remain looking to franchisees under new ownership. We remind you these revenues have no impact on EBITDA. The amount of the year-over-year decline is contingent upon the timing of sales by CorePoint. Below EBITDA, we expect depreciation and amortization expense to be between $60 and $64 million and interest expense to be between $105 and $110 million. We expect our diluted share count to be $93.4 million for the full year 2020. We expect capital expenditures to be approximately $30 million and development advance spend to be in the range of $20 to $25 million. Last, I'll remind you that we still have another $15 million of special item cash outlays remaining this year, primarily relating to the restructuring charges. And we continue to expect special item cash outlays will be behind us in 2021. In closing, while the shape and duration of the recovery remain uncertain, we have demonstrated the resiliency of our drive-to and leisure-oriented franchise business model by generating positive adjusted EBITDA in the second quarter and minimizing our cash burn through strong cost management, all amidst the worst crisis in our industry's history. We remain focused on driving profitability through enhanced margins, higher royalty rates, and strong free cash flow conversion, and on putting that cash to work to drive shareholder return. With that, Jeff and I would be happy to take your questions. Operator?

And at this time, if you have a question or comment, please press 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. Again, we do ask that you limit yourself to one question and one follow-up. Thank you. We'll take our first question from Joe Greff with J.P. Morgan. Please go ahead.

Good morning, everybody, and thanks for all this information. Jeff, can you talk about, and Michelle, can you talk about what you're anticipating in the second half for working capital drags related to third-party hotel owners continuing to defer payment of franchise fees? I know you talked about maybe the ability to pay from here. So here's how I'm thinking. I'm guessing that if 70% of U.S. franchisees are at or above 40% occupancy now in July and obviously higher than at different points in the 2Q, their ability to pay franchise fees is also higher. So my question is this. Should there be less of a quarterly run rate drag in the 3Q and similarly something in the 4Q that's less than the 3Q? Or conversely, is there this anticipated lag? And if so, what is that?

Hi, Joe. Thanks for the question. We're expecting considerably higher collections in the third quarter than in the second. Exactly how much probably depends on how travel demand recovers. I would say, yes, we do believe with the majority of our portfolio now above break-even levels that they have the ability to pay. I think I do think, you know, some franchisees are a little concerned about what the fourth quarter holds, and so we're going to remain flexible and continue to monitor the situation to make sure that we're providing as much support as we can to ensure their success through the pandemic.

Okay. I'll follow up with you later. Okay, and then... One question on conversions. Obviously, the most recent month had a higher level of conversions, and maybe some of that is related to the prior two months, which had a lower amount of activity. I mean, do you look at the conversion level that you've seen more recently as sort of a good run rate here, or what are you seeing in terms of the conversion activity? And what's anticipated in your comments about not seeing any net room growth this year, but what's the gross amount of conversions that we should expect?

Sure. It was definitely, Joe, a really positive momentum throughout the quarter. The 5,700 opens, roughly 2,000 of those were conversion. And if I just look at the way it picked up in terms of our opens domestically, we had 100 in April, 400 in May, and 2,000 we mentioned in June. Eighty-five percent of those were conversion. were conversion rooms, and so many of them opened in the same quarter. I mean, we were able to open over a dozen hotels in the quarter that were picked up in a quarter in brands like Days Inn and Super 8 and Baymont and Travelodge and Trademark. So it was encouraging. Domestically, it was also encouraging to see the pickup Internationally, we had great same-quarter sell-and-opens, and so many of those were conversions. We went similarly from a couple hundred to 1,000 to 2,500 in June. Our teams are back out there domestically and internationally. They're traveling again, and we think we have a big conversion opportunity ahead.

Thank you. I have one quick follow-up. I know I'm messing a lot here. Given your comments that the leisure mix generally in a 4Q is indistinguishable from that mixed percentage in a 2Q or 3Q, all things being equal, would you expect the lack of an occupancy retrenchment as we shift from 3Q into 4Q, all things being equal? And I know the all things being equal is sort of a big question mark.

I think... All things being equal means that we typically would see some retrenchment in the fourth quarter coming off of the second and third quarter in leisure demand, right? So I don't expect from a seasonality perspective to see anything different from that this year. So we will see, my guess is, occupancy levels decline in the fourth quarter compared to the summer travel season. However, our ability to capture that leisure demand does not change, right? So as we're much more leisure focused, and that's just kind of the way we always do business, whatever demand is out there, we do feel like we're going to be able to capture that just as effectively or more effectively than we had in past years.

Thank you very much, guys. Thanks, Jo.

Thanks, Jo.

Our next question is from David Katz with Jeffries.

Please go ahead. Hi, good morning, everyone, and thank you for all the detail. I wanted to ask about the room deletions that you discussed and are in the investor deck. Assuming that the world and the market remains stable and starts to improve, Do you have an expectation that, you know, beyond what we've laid out today, there'll be, you know, more meaningful dilutions? And by meaningful, I would say, you know, beyond kind of a normal, you know, bottom rung that, you know, burns off that, you know, we're used to seeing, you know, across the industry over a number of years.

Hi, David. Hi. I would say... Hi. I would say this is everything we know at the present time. Of course, we're going to have some franchisees that struggle through COVID, and what comes next for them remains to be seen. But for good operators with a history of brand engagement, we're going to use every tool we have available to them, that we have available to us to help them avoid failure. So at this point, everything that we have in the system is that we know of has been identified.

Got it. And if I may follow up quickly, and apologies if it's in here somewhere and I missed it, but how many LaQuintas did you add to that brand in the quarter? And if you could just talk about the prospects for growing those units.

Sure. LaQuinta, David, we've been very pleased with the growth of LaQuinta. On the franchise side, the system grew 4% 2019. It's grown 2% year-to-date, and quarter-on-quarter, we added five hotels, so it was up 1% sequentially. Look, we've executed 85 new deals since acquisition, and the retention rate remains strong at slightly over 98% since we acquired the brand. And the prospects really hinge on our team's ability to sell what's just performing so well for this brand right now. It is the strongest performing brand in our lineup. The REVPAR index has grown to 107% both year-on-year and on a two-year stack basis. And it is a brand that is really outperforming. It's also our highest occupancy brand right now. I mean, it has been for our entire system. Michelle talked about to Joe's question looking ahead, which is tough to forecast, but it has been 15 consecutive weeks where occupancy week on week has improved. And there's no brand where it has improved stronger or faster or higher than La Quinta. La Quinta ran 65% occupancy this Saturday night. And that was up from the prior Saturday night as it's been for 15 consecutive weeks. So our franchise sales team feel very good about it on both the new construction and the conversion standpoint. And I think what is also becoming apparent is that it is a brand that our teams are excited about growing internationally. We have added eight executed deals, four under construction in the Dominican Republic, We opened a hotel in Istanbul, Turkey, and we had an opportunity to find two more conversion opportunities and convert those brands to La Quinta. We talked about that in the script, both in Bodrum and on the Black Sea. And we've executed two in New Zealand and just signed one in China. So we're very bullish on La Quinta moving forward. Got it. Thanks very much.

Our next question is from Steven Grambling with Goldman Sachs. Please go ahead.

Steven Grambling Thanks, Morning. This is a bit of a follow-up to Joe's second question and the last questions. But I'll also tie in development, I guess. How are the conversations with independents and developers changing as we assess the availability of capital and any need for you to provide support in the form of additional key money or loans? And are you seeing any major differences as it relates to that support by region?

Yeah, no real differences. As we've talked about before and we joke, Michelle squeezes key money out with an eyedropper, and we're not certainly seeing any any need to do anything more than we've done in the past. I think, as we've talked about, Stephen, in the conversion market, there is a significantly lower need to use our balance sheet. But the conversion opportunity for us is, as you say, and we've talked about, important. And it's a big opportunity for us domestically, and we think it's an even bigger opportunity internationally. When you look at the the addressable market that Smith Travel tracks in the United States with roughly 15,000 rooms that are tracked that we're targeting. And recall that over two times the independents right now are closed today versus economy or mid-scale branded hotels. And then you look at the international opportunity, which is even larger and less branded. We don't anticipate the need. to use our balance sheet anymore going forward than we have in the past.

Yeah, and I would just add to that, you know, we have earmarked some rescue capital in our plan, and so we're happy to put it to work where it makes sense. Of course, we would do that on a select basis and only where it would generate strong ROIs for us and for our franchisees. We do see now that financing is a little tighter. You know, the... the key money could become a more important element of a deal going forward where capital stack needs to be filled. So we're watching it closely and seeing where and how we can put that rescue capital to work, but as of right now, we're not seeing a ton of those opportunities beyond what we would typically see, but we are hopeful that they'll come our way.

As a very quick follow-up, and maybe I missed this in the opening remarks, but I guess what percentage of the rooms in the pipeline have secured financing in place and or would be considered already under construction?

Sure. We've got 180,000 rooms in the pipeline and under construction, as we point out, I think it's on slide seven of the deck, 46,000 are under construction. Those rooms obviously have financing in place. And to your question on the New construction rooms that are in the pipeline, as we've gone through it, we estimate that approximately 55% of those rooms that are not yet in the ground have financing in place. Super helpful. Thanks so much. Thanks, Stephen.

Our next question is from Anthony Powell with Barclays. Please go ahead.

Hi. Good morning. It's another question on conversions. Are hotel owners kind of willing and able to convert right now? I mean, there was an increase in June. Do you expect conversions to continue to increase this year, or do you think the larger increase would be in 2021 as hotel owners have a better view on kind of medium-term fundamentals?

Yeah, great question, Anthony. We do think it will continue to increase, and we think the bigger opportunity is later this year and next year. So many independents right now are just trying to deal with their banks and with forbearance. And when they come up to that deadline, whether it's later this year or whether it's next year in Q1 or Q2, banks are going to be looking for a plan. They're going to be looking for a reason that they should continue to work with that independent owner. And we want to be part of that plan. We want to be part of that plan because the independent owner is going to be able to show its bank that our brand delivers a red part premium, that it delivers dramatically lower distribution costs and significant operating cost savings from procurement, from FF&E, from OS&E, from F&B, from technology, from the labor related to both of those. And when you combine that with what our marketing program, Wyndham Rewards, drives right now, we continue to see an increasing share of occupancy. We're up and have just been very pleased to see that direct share of occupancy coming up, what that does to their overall cost structure, lowering the amount of rooms they're getting through an OTA at a much lower cost of contribution. We think our value proposition and pitch becomes a lot more compelling later this year and into the first and second quarter of next year. But We were pleased with how much pickup we saw in June, both domestically and internationally, versus what we had in April and May.

Thanks. And on another topic, would you consider another formal against feed referral program in the winter if obviously that's kind of ticked down as leisure demand kind of seasonally kind of gets a bit lower in the winter months?

We're not prepared to speculate on what relief measures we may or may not provide moving into the fall and winter season at this point in time. We want to wait and see how the summer months perform and, you know, what the outlook holds for the broader industry as a whole.

Okay.

Thank you. Thanks, Anthony.

Thank you.

Our next question is from Patrick Scholes with SunTrust. Please go ahead.

Hi. Good morning, Jeff and Michelle.

Good morning, Patrick.

All right. Looks like you had a pretty, what I would call a seismic shift in market share gains for economy and mid-scale brands. I'd like to hear a little bit about a color, a little bit of color from you folks as to what you think is, you know, behind that. Thank you.

Sure. There is so much that we're proud of that we've been able to attract and capture this quarter in terms of share gains from business travelers that have been out there having to travel for work. And that was really in those early months what, I mean, our share gain had never been stronger. I mean, we just had all of those at essential everyday business-as-usual travelers that, you know, are not per se white-collar travelers, but, you know, are out there because they have to be. But, you know, and we've been certainly picking up a lot of alternative use room nights. We've had great success. Our team has had great success on university lodging. We've picked up... and filled hotels in Pittsburgh and Houston and New Jersey and most recently at La Quinta in Colorado Springs with universities that are looking to move in. But as leisure travelers picked up, what's really been driving that pickup is that drive-to business. And it's what's driving bookings now. We've seen tremendous improvement in our direct mobile and call volume leisure bookings, drive-to bookings. Our mobile business, which was down, when we were filled with those essential workers, down 80% is now down less than 30%. And it's improved every consecutive week. And our direct voice booking channels continues to improve as well. Our call center conversion bookings are back up to almost pre-COVID levels. The booking windows are expanding. Sunday night has become our busiest period. We're staffing back to book getaways for those looking to get away on a drive-to vacation. And what's most encouraging, Patrick, is that our ADR has been really holding steady. We've been actually seeing our ADR continue to tick up as our occupancy has continued to tick up now for 15 consecutive weeks, and it's been doing so. Every week, week on week, across the country because of that drive-to leisure travel that's looking to get away.

Okay. Thank you. Jeff, another question here, shifting topics, and correct me if I'm wrong here. I believe that both Marriott and Hyatt have instituted requirements that all guests wear masks. I don't believe that you folks have done that or have done that yet. Can you tell us your rationale? at this point for allowing or not allowing masks.

Yeah, thanks.

Making it mandatory.

Yeah, thank you. No, thanks for the question, Patrick. It is by far and away the most important thing that all of us in the industry do, and it was the American Hotel and Lodging Association, Chip Rogers and his team with all of the industry on a call a few weeks ago that held hands and reached the consensus and decision that as part of Safe Stay, mandatory mask wearing would be a requirement across this nation. I think it was, well, it was all of us that agreed that no one brand should own safety. And we've all been contributing team members to stay safe. We've all been working through our franchise advisory councils. And, yes, we are announcing this this morning. If it hasn't gone out already that, you know, after working through our franchise advisory councils and our leaders who speak on behalf of the general managers and small business owners who manage these hotels, that it is indeed a requirement in all of our hotels as well.

Required for guests going forward, correct?

Yep, absolutely.

Okay. Congratulations. That's an excellent move, in my opinion. Thank you.

Thank you. So next to Dan Wozniak with Morningstar, please go ahead.

Hi. Just first a question on the pipeline activity. I think you called out financing hurdles and travel restrictions kind of hindering that in the quarter. Just wondering if you could maybe get some details on which of those two had a greater impact. And then on the travel restrictions, I know you mentioned that that had improved in June versus April and May. Just wondering if there's any kind of a new version in July in travel restrictions hindering your ability, given some state-to-state quarantine restrictions?

We have not seen it yet. We continue to be encouraged by what we're seeing out there from our franchise sales teams domestically and internationally. I'd say the best call of the week Michelle and I get to get on is Friday afternoons with all our franchise sales people. Obviously, there are some requirements in terms of where they can and can't drive, but we have not felt any significant slowdown, I think. Moving forward, we feel good about our prospects. And the first part of your question?

Yeah, just, you know, between the two, I guess, drivers called out on the pipeline activity, the financing hurdles, the higher financing hurdles, and, you know, the travel restrictions earlier in the quarter, you know, which of those had the greater impact? I guess it's, you know, partly answered in your first response that travel restrictions have become less of an hindrance. Absolutely. Absolutely.

Yeah, I would say the travel restrictions at the front of the quarter really did have an impact on the ability to build the pipeline. And then the increased hurdle rates, it's probably a little less.

Okay, great. And then if I could just ask one question kind of from a longer-term perspective. I know you guys have called out some – permit savings opportunity. And just as we get to kind of a more normal travel demand environment post-COVID, how do you guys view the potential for overall operating margins, EBITDA margins? Are those going to be able to get back to pre-COVID levels, maybe even be stronger with kind of the cost initiatives you have in place? And if you can kind of, I guess, include cost reimbursements in that viewpoint, that'd be helpful. Thanks.

Yeah, sure. We are expecting in a post-COVID world we would drive higher operating margins because we are driving at least $40 million of incremental EBITDA through some of the more permanent changes we made to the cost infrastructure. And then what was the second part of that question?

Hold on a minute. Yeah, no, it was just, I guess, including, you know, the cost reimbursement.

Oh, yes, yes.

The question there is, you know, moving forward longer term, do you guys think that, I guess, cost reimbursements, those go up kind of overall, or do they go down because of your ability to, you know, utilize the initiatives like Buy Windham and have lower marketing costs? costs, you know, that way. Just kind of thoughts, I guess, of long-term, how to think about cost reimbursement revenue and expenses.

So cost reimbursement revenue and expenses on our P&L are related to our managed business, and they're predominantly payroll costs that are funded by the hotel owners, but GAAP requires us to gross it up on our P&L. I think what you're referring to are the marketing revenues and marketing expenses that And as we look at those in 2020, we are expecting an EBITDA drag related to what we refer to as our marketing funds, which is how the revenues and expense kind of match each other, or in the case of 2020, won't match each other. Typically, we will offset our revenue declines in the marketing funds with a one-for-one reduction in expenses. We're not doing that in 2020 because the revenue declines The clients are so severe, and we wanted to keep some marketing spend, as well as the GSO teams and other teams that are directly supporting our franchisees through the crisis and through the recovery. So we won't have a one-for-one decline, and we are expecting in 2020 that the marketing funds will drag EBITDA by about a million and a half for every point of rep part, I should say. Moving forward in 2021, we expect that our marketing funds would, again, begin to become break-even, with one exception. We will be in a position where we can recapture some of the 2020 overspend over time, and we will figure out how to phase that in as we move through our budgeting and strategic planning processes.

Okay, understood. Very helpful. Thanks for the clarity. Okay.

Our next question is from Danny Assad with Bank of America. Please go ahead.

Hey, good morning, everybody. My question is just on franchisee support. So can you give us a sense for the mix of domestic versus international franchisees that have needed assistance so far? Yeah, we... Go ahead, Michelle.

No, no, no, please, Jeff. No, go. No, okay. We're... We have about 65% through the end of the second quarter, which has already decreased to 60% globally that have needed some assistance. We are seeing higher take rates on the deferral program internationally than in the U.S., especially for EMEA and in China where we had complete shutdowns for a bunch of our hotels.

Got it. And then just from my follow-up, so for like the 40% of collections of the billings, how did that trend for the peak months of April and May? And what's your best guess for what that could be for in July for June and maybe for the quarter, if you have some sense of that?

I would say I was actually pleasantly surprised to see the collection rate so high in the month of April given how there was so much uncertainty with respect to the summer travel season. So it's improved as we've moved through the quarter and as franchisees have been more positive operating cash flow in the months of June and I would say even July. I don't want to speculate about how much we're going to collect in the third quarter because it really is – there are really a lot of assumptions that we would have to make to provide you with any type of range.

Got it. Okay. And one more, and this is more of a clarification, but when we talk about your franchisees making positive cash flow in June and July – does that mean they're making debt service payments or is it just like before debt?

Yeah, so we're saying positive operating cash flow. So on an operating basis before debt service, we feel very confident that they would be positive cash flow. The debt service question really depends on how they're capitalized. For example, for the majority of our franchisees that are reasonably capitalized at like a 70% or lower LTV at 40% occupancy, they should be able to cover off debt service. If they're higher than 70% levered, then they'll have a harder time covering off the debt service and will require higher occupancy to be able to do that.

Understood. Okay. Thank you so much.

Thank you.

Next question is from Michael Belisario with Baird. Please go ahead. Michael Belisario Good morning, everyone.

Good morning, Mike. Just another clarification question on the fee deferrals. Maybe help us better understand the timing of everything. Correct me if I'm wrong. March, April, May payments were deferred, but you're saying only 40% plus or minus has been collected through, I think, July 24th. Does that mean The June payments that are not being paid in July, are those not subject to a deferral program? Or how should we think about what's being paid, what's not being paid relative to the three months that you actually deferred?

Yes. The three months that we deferred, you're right, March, April, May, are not due until September 1st. What we have seen is that 40% of those have been paid prior to the September 1st due date. With respect to June billings, we haven't provided any detail around those collections because June performance was only billed in July, and so they're actually not technically due until August 10th.

Got it. That's helpful. And then just one more quick clarification question. I think the comparable rough part figure includes closed hotels. What would that negative 54% comparable figure be if you included all closed hotels for the period?

Oh, that would have been the reported number, which I believe was minus 61%. Thank you. You're welcome. And you can find that on, I think we have a supplemental schedule posted to our website that gives the comparable and reported rev pars for each of the regions.

Our next question is from Jared Shojian with Wolf Research. Please go ahead.

Hi, good morning, everyone. Thanks for taking my question. So in terms of your comments on units being down this year, I apologize if I missed this, but if you neutralize for removing all the non-compliant rooms that you did in the second quarter and you talked about in the second half, would you be expecting unit growth to be positive this year after neutralizing for that or no?

Hi, Jared. I think if we were to neutralize for the deletions in the second quarter for the 9,000 rooms in China, and as well as the incremental rooms we're going to take out in the third and fourth quarter, yes, I do think we would have expected to see positive net room growth for the full year.

Okay. Thank you. That's helpful. And then it looks like you had been showing pretty consistent improvement in weekly RevPAR until the most recent week, which took a step back. Any color you can share there? I realize there's week-to-week noise. I don't want to be too near-term focused, but I think in this environment right now, which is so fluid, I think it's important. Any color you can share there?

Sure. We actually, it's been 15 consecutive weeks, Jared, this past week that just reported the week of July 25th. was our 15th consecutive week of occupancy up and rate coming down just a little bit. It certainly has slowed somewhat this past week. Thirty-five states were reporting occupancy up, 15 down slightly, and I know there's a lot of focus right now on Texas, on Florida, and even in those two markets, which are big markets for us, both went backwards. They were one of the 15 states that were down slightly by less than 100 basis points, I think. Texas dropped from 49 to 48.5. Florida dropped from 45 to, I think, something like somewhere in the 44s. And it was remarkable for us to see California improve. California actually, another important state for us, saw its 15th consecutive week. It was one of the 35 states that were up. remarkably grow from 56% to 57%. What's driving the growth in our consecutive week-on-week occupancy, our highest occupancy levels are in those real great outdoor road trip states that are so important to us, where people just have the desire and the confidence to get out. Idaho and Colorado are running 68 percent. South Dakota and Montana are running 67 percent. Michigan, we talked about in the script, up consistently at 65 percent now. And we're seeing really steady and fast growth. The fastest growing states right now are in the northeast. Maine jumped from 31 to 36, Mass from 40 to 45, Rhode Island from 50 to 55 percent last week, and Vermont from 52 to 56. So when you roll all that up and look at where people want to go and want to drive to, it has been occupancy-wise, week on week, 15 consecutive weeks up.

Okay. Thanks, Jeff. Just to follow up on that real quickly. So in the slide, July 18th, you have red bar down 39%. It sounds like you have the new week for July 25th. You know what that comparable rough part number as if you're down 39 July 18th. And again, I apologize for being so near-term focused, but again... No, no, no. Yeah.

And I'm looking at overall occupancy levels. And obviously coming out of the July 4th holiday, we did see both Memorial Day and July 4th, the weekends drop, which we see generally week on week. And it goes back to what we're comparing it to in prior week in occupancy. Michelle, I don't have the REVPAR down week on week. I'm looking at you on Zoom, but the occupancy week for July 25th, if you look to the right side of that chart on slide five, was up from 50 to 51. Do you know what the REVPAR was? I'm actually looking. I think it's flat at 39% down to prior year. up to my prior comments for the 15th consecutive week to 51.

Okay. And sorry, just one more quick. Any reason why the rate is falling off a little? Is that just some year-over-year noise or anything specific or franchisees choosing to lower rates a little bit right now? What would you say is driving that?

We're not seeing that, Jared. We're seeing what is causing it. Certainly, we do have some full-service urban hotels that are seeing rate drop. But in the economy and in the mid-scale segment, our rate's been remarkably resilient and has been improving on the weekends a little bit for us. Okay.

Thank you very much.

Yeah. Occupancy was up about 10 basis points week over week for the week ending July 25th, and we're seeing just slight week over week improvement in REVPAR about up a point still. We are seeing, as Jeff mentioned, some softness in Florida and Texas, but that's being offset by week over week improvement in California, Georgia, and a majority of our other top 15 states, such as Virginia and Pennsylvania.

Okay. Thank you very much.

Next question is from Alton Stump with Fongbo Research.

Please go ahead. Great. Thank you, and good morning, everybody. Thanks for taking the question. I think most of the questions have been asked. I was just going to ask, you know, from a consumer standpoint, there's obviously not a lot of people that are, you know, hopping on planes this summer, so I presume that they are going on vacation out there, hopping in their cars for road trips, which obviously fits very well you know, in your model. Are you seeing evidence of that, that, you know, what have been, you know, trips in the past that were, you know, on point are now being done via cars and therefore, you know, potentially, you know, helping to, you know, to drive higher demand for your average hotel stays?

Sure. Thanks, Alton. We read every consumer survey and consumer intent data point that's out there, whether it's FocusWire or Sabre or The most recent I saw yesterday, which I think is a good one, is from MMGY. They've been surveying consumers across the country, and they just released, I think it was this week, it was either yesterday or the day before, I can't remember when I saw it, their Wave 6, I believe it was. And what they point out is that it continues to be over 50% of consumers in the United States are as likely, if not more likely, to travel, they're saying this fall. And over 60%, I believe the figure was, expect to take a leisure trip in the next six months. But for us and our model, what is so important for us and was great to see is that over 70% continue to be twice as likely to travel by car, and they want to use their own car, their own personal car. And another interesting thing that has been surveyed and reported and that we're certainly hearing and seeing is from our marketing team is that more consumers are willing to drive further distances. A third are willing to drive, according to MNGUI, over 300 miles, and a fifth now are willing to drive over 500 miles. So, you know, our advantage is that everyday traveler that wants to get out and vacation. And, you know, there's plenty of other surveys out there that are saying that what people most want and what they're most looking for are recognized and trusted brands where they know that that brand has a cleanliness and cleaning protocol in place where, you know, if it's a roadside or suburban or interstate hotel, they could feel safe in. That's all.

Thanks for the call, Jeff. That's all I got. I'll hop back in the queue. Thanks, Al.

We'll go next to Robert Mullins with Gordon Haskins. Please go ahead.

Good morning. Jeff, can you share what you're seeing in terms of booking windows? Are consumers beginning to book hotel stays further out, or are the majority of the bookings being made for near-term stays?

Yeah, great question. It was early on, really, day of, and we're certainly seeing start – consumers start to plan. My comment earlier of Sunday suddenly becoming our busiest night in the call center is exactly that. So it was nearly 100% of bookings for same day, next day back in April is reduced significantly. It's probably 60% now. And that booking window continues to lengthen.

And then you also mentioned that you were working with some universities. How big of an opportunity is that, and do you have any thoughts around guests being unwilling to stay at a hotel that's housing college students?

The great thing in so many of these buyouts is that they're in and for their entirety. I mean, the last one I mentioned, the U.S. Air Force is an example that just recently booked the La Quinta Colorado Springs North for both the fall and the spring semesters. They've booked it in its totality. It was a $2 million booking. the University of Pittsburgh, which booked the Wyndham downtown in Pittsburgh, they've booked it in its entirety. I've seen very few, and we've got numerous other opportunities out in the works that we're about to sign that I won't mention on this call, but I've seen very few where it is a piece of the hotel and it's been more the hotel in its entirety.

Great. And then just one more for Michelle. In terms of cost savings, what gives you confidence that you won't need to bring back some of those 440 positions that were impacted as demand recovers in 2021 and beyond?

Yeah, it's a great question. And it's something that we're always looking at. In reality, we did leave a little bit of cushion because we know we wouldn't have gotten it 100% right. So there will be a few positions that we do need to bring back. But we believe that we've reflected that in the $255 million number we provided.

Great. Thank you very much.

Thank you.

It appears we have no further questions. I'll return the floor to Jeff Bellotti for closing remarks.

Okay. Thanks, Operator, and thanks, everybody, for your interest in Wyndham Hotels and Resorts. We can't tell you how much we appreciate it. Michelle, Matt, and I look forward to speaking with many of you in the week's to come, but more importantly, hopefully meeting with you face-to-face in the not-too-distant future. We'd like to remind any of you golf fans to please tune in to the Wyndham Championship from August 13 through August 16, which will be airing on both the Golf Channel and on CBS, where if you have not seen our new advertising yet, you'll certainly see it there. Enjoy the rest of your summer. Take care, and most importantly, thanks again, everybody, for dialing in today.

And this does conclude today's Wyndham Hotels and Resorts second quarter 2020 earnings conference call. Please disconnect your lines at this time. Have a wonderful day.