Good morning, and welcome to
the Hilton First Quarter 2020 Earnings Conference Call. All participants will be in a listen only mode. Please also note today's event is being recorded. And at this time, I'd like to turn the call over to Jill Slattery, Vice President, Investor Relations. Ma'am, please go ahead.
Thank you, Jamie. Welcome to Hilton's Q1 2020 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward looking statements. Actual results could differ materially from those indicated in the forward looking statements, and forward looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements.
For a discussion of some of the risk factors that could cause actual results to differ, please see the Risk Factors section of our most recently filed Form 10 ks as supplemented by our Form 8 ks filed on April 16, 2020. In addition, we will refer to certain non GAAP financial measures on this call. You can find reconciliations of non GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment Kevin Jacobs, our Executive Vice President and Chief Officer, will then review our Q1 results. Following their remarks, we'll be happy to take your questions.
With that, I'm pleased to turn the call over to
Chris. Thank you, Jill. Good morning, everyone, and thanks for joining us today. As I think we can all agree and certainly probably have all been saying a lot lately, these are truly unprecedented times. COVID-nineteen has created challenges that our industry has never encountered before.
On behalf of Hilton's entire leadership team, I'd like to express our deepest sympathies to those who have lost loved ones during this devastating pandemic. I'd also like to extend our sincere gratitude to the millions of workers on the front lines across many industries and in many roles working selflessly to help keep us all safe. I also want to our team members around the world for their remarkable dedication, hard work and sacrifice. Many of our own team members have been personally impacted by this crisis and yet through this adversity, they've continued to spread the light and warmth of hospitality. Across every region, we've adapted quickly to provide hospitality to new ways in our communities.
In London, several of our properties are hosting Health Service and other key workers. The Hilton Orlando has been hosting the National Guard and working to distribute essential items to community residents in need, and over 500 hotels around the world are being used for recovery efforts. Our properties have also donated 1,000 of pounds of food and supplies to local food banks. Through the Hilton Effect Foundation, we are providing disaster response grants for organizations and communities fighting the spread of COVID-nineteen. As part of this effort, our Hilton Honors members have donated more than 6,500,000 points to these causes.
In partnership with American Express and our ownership community, we committed to donating up to 1,000,000 room nights to frontline medical professionals in the United States to support those who are putting their lives on the line to protect us. Since its launch just 4 weeks ago, tens of thousands of medical professionals have booked hundreds of thousands of rooms through the program. Further building on this initiative, just this week, we and American Express announced a partnership with World Central Kitchen to deliver freshly prepared meals at no charge from restaurants in local communities to frontline responders staying at our hotels. Already active in 3 major markets, there are plans to expand this initiative in the coming weeks. Turning to the business, to ensure we effectively navigate this challenging time, we've focused our priorities on 3 core areas: protect our people, protect our core business, and prepare for recovery.
While our long term goal remains the same, to drive loyalty across all of our stakeholders, the current situation requires greater levels of responsiveness and preparedness in the near term. With this in mind, we've worked closely with industry associations and the administration to advocate on behalf of our team members and hotel owners and to help shape the broader recovery. Given our leadership team's extensive crisis management experience, coupled with the global nature of our business, we had a relatively early glimpse of the impact this pandemic started to have in the Asia Pacific region. In response, we took swift action to protect our business and ensure that we have sufficient liquidity to operate in these unprecedented times. With travel demand at record lows, we currently have suspended operations at approximately 950 or 16% of our hotels globally, including approximately 10% of our hotels in the Americas, 60% of our hotels in Europe, the Middle East and Africa and 15% of our hotels in Asia Pacific.
At the hotel level, we acted quickly at the beginning of the crisis to make decisions to help our owners respond, including suspending hotel operations, temporarily suspending brand and operating standards, deferring capital expenditure requirements, eliminating quality assurance audits and allowing the use of FF and E reserves for operating expenses. Going forward, we are working closely with our ownership community to define the hotel operating model of the future, with the goal of developing operating standards that will keep our customers safe and drive enhanced efficiency and profitability while continuing to deliver products and service that customers will pay a premium for. At the corporate level, we've reduced executive salaries, furloughed nearly 2 thirds of our corporate workforce, eliminated other non essential expenses, including capital expenditures and suspended share buybacks and dividends. Further, as a precautionary measure to preserve financial flexibility, we drew down on the remaining amount under our credit facility, presold Hilton Honors points to American Express and successfully executed a bond offering, all of which resulted in a pro form a cash position of $3,800,000,000 at the end of the quarter, which we believe is more than adequate liquidity to get us through the crisis. Turning to the quarter, RevPAR declined 23% with performance through February largely in line with our expectations excluding the Asia Pacific region.
RevPAR in March dropped 57% as the virus spread across Europe and the U. S. Overall, we do not think our first quarter results provide clear insight into the current environment as the timing of the pandemic and we given the timing of the pandemic, and we expect a much more dramatic impact on our 2nd quarter results. With travel at a virtual standstill, we expect system wide RevPAR declined roughly 90% in April. With that being said, we are starting to see glimmers of travel resuming and economies reopening.
In China, nearly all 150 hotels that have been closed due to the pandemic have since reopened, with occupancy reaching more than 50% during the May Day holiday this past weekend, up significantly from 9% in early February. Additionally, the majority of our previously halted construction projects in China have restarted. In the U. S. And Europe, we're starting to see sensible and staged re openings of economies.
We think temporary hotel suspensions have plateaued and we are now seeing reopening requests. Our sales teams are engaged with customers on business for the back half of the year and into 2021 beyond. In the last week alone, we booked tens of 1,000,000,000 of dollars in group business in the Americas. In addition, we are starting to see double digit increases in digital traffic and booking activity across all segments. Global occupancy levels have gone from a low point of 13% to 23% currently.
Assuming we start to see mobility and we don't have a significant recurrence, demand should slowly rebuild in the Q3. These green shoots allow us to keep our eye on what the future of hospitality may look like As we carefully consider what travelers' needs will be in a post COVID-nineteen world, we are proud to announce a partnership with Lysol and the Mayo Clinic last week to introduce Hilton CleanStay, a new program that will deliver an industry defining standard of cleanliness at all of our properties around the world. We believe this program is the first of many steps we can take to build on the trust and loyalty of our more than 106,000,000 Hilton Honors members as they begin to travel again. A full recovery will take time and it could take several years to return to the hotel demand levels we experienced in 2019. But as we shift our focus to the future, we are incredibly confident about the long term prospects of the business and our model.
Our industry leading brands, powerful commercial engines and innovative technology platforms should enable us to continue delivering incremental value to guests, owners and shareholders for years to come. With that, I will turn the call over to Kevin for details on the Q1.
Thanks, Chris, and good morning, everyone. In the quarter, system wide RevPAR declined 23% versus the prior year on a comparable and currency neutral basis. RevPAR is down across all regions with the weakest results in Asia Pacific. Decreases were primarily driven occupancy declines with rate pressure from our lower rated business further impacting results. Adjusted EBITDA was $363,000,000 in the 1st quarter, declining 27% year over year.
Results reflect significant reductions in travel demand and the temporary suspension of operations at a number of hotels across the world. While the decline was somewhat mitigated by greater cost control, more significant measures were largely implemented after quarter end. Management franchise fees decreased 18% to $422,000,000 driven by RevPAR declines and roughly flat license fees. Given the extremely challenging operating environment, which included the suspension of operations at 35 of our leased hotels during the quarter, our Ownership segment posted a loss due to higher levels of operating leverage and fixed rent structures at some of our leased properties. Diluted earnings per share adjusted for special items was $0.74 During the quarter, we opened nearly 9,000 rooms meaningfully lower than prior expectations due to postponed openings driven by COVID-nineteen.
Approvals and construction starts increased ahead of our expectations, largely due to the signing of our Much like the Much like the rest of our business, development activity for the balance of the year will depend on a number of factors. However, we do expect that our ultimate rate of net unit growth for the year will be significantly lower than our pre crisis expectations, likely around half the rate or a bit better. Turning to liquidity, as Chris mentioned earlier, we have taken a number of actions to enhance our position and increase our financial flexibility, including executing on the bond transaction that Chris referenced earlier. We were very pleased with the outcome of that transaction through which we issued 2 $500,000,000 tranches of senior notes at pricing that was very attractive relative to other transactions executed in the same timeframe. At the time, it also marked the 1st 8 year high yield financing done since the crisis, which allowed us to continue to enhance our maturity schedule.
We continue to have no debt maturities prior to 2024 and a well staggered maturity ladder thereafter. Factoring for the senior note issuance as well as the $1,000,000,000 Hilton Honors points presale, we ended the quarter with cash and cash equivalents of $3,800,000,000 on a pro form a basis, which we think should provide us with ample liquidity to navigate the current environment and prepare for recovery. Further details on our Q1 can be found in the earnings release we issued earlier this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have.
Jamie, can we have our first question?
And our first question today comes from Joe Greff from JPMorgan. Please go ahead with your question.
Good morning, Chris, Kevin and Jill. Good to hear your voices.
Yes. Someday we'll see you again. Same here, Joe.
I was hoping to get a better understanding of your operating sensitivities in this environment. And as we kind of look at these, unbelievable to me, you'd be talking about the magnitude of these RevPAR declines. But given these pretty steep RevPAR declines, how do you see the relationship to base and franchise fees? How do you see that relationship, which I can guess, on the incentive management fee side? How are you thinking about your run rate G and A from here?
If you give us some sort of some points on understanding the components of your monthly cash burn, I think that would be helpful to us.
Wow, that's about 20 questions in there, Joe. Good job.
Don't ask me to repeat it. I can't remember.
I can't either. So I'll take some of that. You want the whole model, Joe? Yes. We can't as we said, we're not giving guidance.
So we'll answer what we can, but happy to talk about the sensitivities at a high level. I would say, as we look at the what I think would be helpful is sort of RevPAR to EBITDA relationship, the way I would think about it in terms of sensitivities and there's thousands of assumptions as you would guess that go into this is, if you had RevPAR declines and we're not giving such that up to around 30% RevPAR declines, the whole company RevPAR to EBITDA is a bit better than 1 to 1 and when it goes over 30, it's a bit worse than 1 to 1, but not materially so. The base fee business throughout that continuum is better than 1 to 1. And what obviously hurts is the higher you go is a certain level of negative operating leverage because no matter how much you cut corporate costs, which we've done a lot of, there's a limit to how far you can go and keep the system going. And then the real estate, the lower the RevPAR is given that these are leased assets with some degree of fixed rent structure, that creates a tailwind.
But again, that's a very small part of the business overall and has been. So it keeps us even I've seen the industry sort of numbers I've seen from a bunch of folks, I think, including you were sort of minus 50 for the year. It's sort of funny to hear myself say that, but after doing this for 35 plus years, but that's what the industry thinks. I think, as I said, we our ratio EBITDA overall ratio would be a little bit a touch above 1 to 1, the base fee business would be better even at those levels. On G and A, sort of the G and A as we see it on a GAAP basis, I think given the mitigation that we have done with an assumption that as you get into the 3rd Q4, you will have some sort of you will start to see recovery.
I mean the truth is, while it's slow, we're starting to see it now. We've gone from 13% to 23 percent already. Not a lot to be thankful for, but we do believe once you get through the epicenter of the crisis, Q4. I think when you net all that out, and Q4. I think when you net all that out, probably G and A is 25% to 30% lower.
Remembering for us and it's a point worth making, our G and A for the last 3 years has basically been flat. We are, we believe, always very disciplined about our G and A. And coming into the year, we were actually guiding before pre COVID-nineteen to a modest decline in G and A. Obviously, that decline given the mitigation that we have gone through to sort of right size the business for the operating environment will be much greater than what we would have suggested pre COVID-nineteen, but sort of in the ranges that I talked about. On cash burn, we have already as part of the bond deal and otherwise put out public information on that.
I think the way to think about it is in the environment we are sort of in the second quarter, which I said, I don't believe we will maintain that level of performance. I think the Q3 will be the worst of it even at those levels that are sort of circa 80% to 90% off. We think we have at least 24 months of liquidity. And if you take sort of industry the industry view that I'm seeing broadly that I discussed earlier, actually at that level of performance, we are better than cash flow positive. So that hopefully gives you sort of a bit of a range again recognizing we are not giving specific guidance, but just trying to give you general trajectory.
Kevin, what did I miss out of his laundry list?
I think you covered most of it. I think overall embedded in that cash burn, those cash burn guidance is obviously an assumption of pretty extensive mitigation on our gross controllable expenses outside of G and A. And I'd say on an overall basis, we think we can over the course of the year mitigate about 60% of the gross controllable expenses, but that's all embedded in the cash burn assumption. And I think you actually said the 3rd quarter was going to be the worst, but we think the second quarter.
The Q2, I did say that, yes, 2nd quarter, I've already skipped the quarter. Yes. 2nd quarter, Q4 recovery. That's all
helpful guys. That's all.
To a degree, yes.
Great. Thank you.
Thanks, Joe.
Our next question comes from Carlo Santarelli from Deutsche Bank. Please go ahead with your question.
Hey, guys. Thank you very much for your prepared remarks and obviously the color you just provided. Kevin, acknowledging that you mentioned kind of nug half of the 6 to 7 you were prior that you were previously looking for this year. How much of that, call it, 300 to 3 50 points of nug erosion for this year relates to just delays in the pipeline that we will see come through presumably next year? And how much of that is just stuff that maybe was early and has a lower likelihood at this point of getting finished?
So more or less, even if you wanted to take a bigger picture approach, when you think about the opportunities for conversions and whatnot, looking out to 'twenty one, 'twenty two, 'twenty three, etcetera, are you still reasonably comfortable in kind of a mid single digit net unit growth baseline for those years?
Yes. So here's what I would say Carlo, and obviously a good question. Virtually all of the decline in our outlook for NUG for this year is due to delays related to COVID-nineteen. Meaning, we do have in our guidance is always an embedded assumption for conversions. And I'll come back to that.
I know that's part of your question. But the decline is really entirely related to delays because going into the year, even for a limited service hotel, if something is expected to open this year, it's going to be under construction this year, right? So as of about a third of the hotels that we had under construction that we expected to open this year went into some form of suspension over the last month or so as part of the crisis. About half of those that went under suspension are already back under construction, but they're going to be somewhat delayed, right, obviously because they suspended. And about half of them, the other half we think will resume construction largely every project we think will resume construction over the balance of the year.
There certainly will be onesies, twosies of things where a deal might not make sense. But generally, once the hotel starts construction, it opens, right? And so what that means is almost all of it will push into next year. So as a result, we think that whatever this year ends up being will be the bottom and that will climb back from there. And yes, on a run rate basis, once we get back to normal, we are more than comfortable with a mid single digit growth rate.
And we think that conversions, there will be some period of time where obviously at the moment, although we are working on some conversions as we speak, we are working on a bunch of them actually. But at the moment, transaction activity is relatively limited. But in general, we think the crisis will probably create more opportunities than it hurts. And so hopefully that covers
the land management. Yes, that's it, Kevin. Thank you very much. And then guys, if I could just one quick follow-up. When you guys think about the financial crisis and the resumption, obviously, it was different circumstances and whatnot.
But speaking specifically to the group elements of the business, when you think about the recovery in that era on the group side relative to now and based on obviously the positive traction you guys have had with rebookings and some sales progress on future periods, etcetera, What are you hearing or what do you view as being kind of the key differentiators between that group recovery and getting kind of adequate pricing back on the books etcetera in this period relative to that period?
There are going to be a lot of similarities, Carlo, and then some differences as you might guess. I mean, I think that the economic fallout we'll see. I mean, I think the economic fallout here is likely to be greater. And then you put on top of that a mobility issue and a health and hygiene issue, which is people not wanting to for a period of time until maybe there's a vaccine or therapeutics or we get past this not wanting to congregate in large groups. So I think being pragmatic about it and straightforward about it, I think group always is the last to recover in the 30 whatever years I've been doing this and going through these ups and downs, group is the last to recover for no other reason that it's longer lead business, right?
So it's sort of logical. I think here it will be a little longer than normal because of those factors. I think the economic impact is going to be greater than most of what we've seen in my time And we have to get people are going to have to sort of not only just come out of their foxholes, but ultimately get 90 days ago than it looks right now. I think it will look very, very similar 90 days ago than it looks right now. I think it will look very, very similar to it.
But I think it's going to take time and progression. It's going to depend on what happens with reopening. It's going to depend on what happens with how we fight COVID-nineteen. It's going to depend on things that are unknowns today, which is where we end up with vaccines and therapeutics. I'm super optimistic based on the people I'm talking to about those things, but I'm not a health expert and I'm not in the pharma business and I don't know.
But those things are all sort of variables that it's just too early to judge. So the simple answer would be, I think what the contours of this recovery like prior recoveries to a degree with a little bit of nuance will be leisure transient first, business transient second and group third. I think they're all going to be a little bit different in contour than prior cycles for obvious reasons of the impact of COVID-nineteen being different in terms of the impact that it has on people and business. But I think that is the progression. And while you didn't ask it, I'll say it.
I do think as we get into correcting thank you for correcting me, Kevin. I do think Q2 is going to be very bad because we know that. I do think you will start as you get reopenings around the world and in America moving again, if the government and state federal government and state governments are responsible. Get into Q3, in my opinion, in Q4. I think that the initial stages of that, just given how very low Q2 is, will look like a pretty decent snapback.
But trying to but I don't want to be Pollyannaish. Getting back to sort of the levels of occupancy, like for us that we're in the low to low mid-70s in 2019, which were all time highs, that's going to take time. I think you will see the down, you will see a bit of a snapback as you get mobility off of very low levels. And then I think you're going to sort of slowly recover as people get more comfort and businesses start to get back in business, start to think about hiring and investing and all those fun things. And that, as I said in my prepared comments, that's going to take 2 or 3 years to get back, in my opinion, to those levels.
And that's my honest view. The truth is this thing is moving really fast. So and there are a lot of unknowns as I just said. So that's my view based on what I see and I've seen a lot and talked to a lot of people, but time will tell, which is exactly why we haven't given guidance because it's just too early to know. But everybody on this call knows I'm a born optimist and that will never change.
So I feel spectacularly good about the long term for the industry. I feel spectacularly good about our model and the long term opportunities for Hilton. And we just sort of have to go through a period of time to rebuild and get back on our feet as an industry and a company to get back to where we were.
That's great to hear. Thank you, Chris.
And our next question comes from Harry Curtis from Instinet. Please go ahead with your question.
Hi, Chris. Given your vast experience through prior recessions, let's go back to 2,008 and 'nine where there was a significant amount of hand wringing about the impact of video conferencing on corporate travel. And it didn't really pan out. Do you think it pans out in the recovery? I know it's anybody's guess, but is it different this time, do you think?
Yes.
It's any I mean, it's anybody's guess. I mean, certainly, I have done more WebEx meetings and Zoom than I ever want to do in my life. I don't know about all of you, maybe it's now in a whole commudgen. I'm tired of it. The last thing I'm going to want to do when I get done with this is do another video conference.
And I'm by the way hearing that from a lot of people. So the honest answer is, I don't know. I would say on the margin, yes, there's going to be certain trip occasions where maybe because people have become more accustomed to this out of necessity to sort of be able to function that they'll think, well, I can do that, I don't have to do a trip. But I think much like the debate that I've been part of for the last 20 or 30 years as this has evolved, I think it is an unstoppable force that people want to travel and see each other and need to, to build relationships, whether that is going to stop going to stop. And I am highly confident we can all wake up in 2 or 3 years and you can tell me I was right or wrong, but I'm highly confident.
As I said, when you wake up in 2 or 3 years, the world is going to it's hard to see it now, the world is going to look an awful lot like it did 90 days ago in terms of customer behavior and demand patterns and the like. There will be some differences. As I said, maybe on the margin, there's some business transient where people do it, but I think they are going to want to see people. There are going to be other things that happen that change, but it's going to be things I think that we are sort of forming where it will accelerate other things like our digital key, digital check-in, which we've had great adoption. I think we'll have a So I think the digital world was already very important to us.
I think it's going to get more important because some of those trends are going to be accelerated. But I do not I wake up at night thinking about a lot of things these days. I do sleep, but I get up awfully early, as I told Kevin. But I do not worry that people are not going to want to see each other, meet with each other and ultimately congregate. I think that is the human condition.
And I think there is an argument that on the margin I described, it could take some 2 occasions. There is also, I think, an even better argument that people are going to want to see people more than ever. They just need to feel safe, right? And I think when they feel safe, they will go back largely to their own patterns and behaviors. Looking at the great looking at prior activities, I think nineeleven is probably the most instructive.
While it's not the same, because none of these this is unprecedented, as we keep saying. There are some lessons that were learned there like basically everybody said, well, after 9eleven nobody traveled. Video conferencing wasn't as good, but they figured out other ways to do things because they were afraid to get on planes and travel and go out. You fast forwarded 2 or 3 years, we had figured out how to manage the world and figured out how to not get rid of terrorism, but manage it. And people went back largely to their prior behaviors with it did accelerate a few things that were not, frankly, I would argue harmful that were probably helpful.
I think the same thing is going to happen here. I think as we get through this and we realize that COVID-nineteen and these types of viruses are part of our future, they have been, we have dealt with the seasonal flu, there was a time where dealing with the seasonal flu felt like this, that we will figure out as a global community how to deal with this. We will hopefully have a vaccine. Time will tell. We will certainly have therapeutics.
We will certainly have better practices and procedures to make sure that we protect the very small part of the global population that is really truly most impacted by this. And I think as people then start to feel like this is a safe environment, they are going to go back largely to their old behaviors. I would bet a lot of money on it. And that's what history would tell you.
I appreciate that. And as a quick follow-up, what are your peers in the airline industry telling you about the pace of their restart?
I would say, I have been talking to a lot of my peers, but looking at the data, to be honest, I thought at least in the last couple of weeks and in these days, it's like every week makes a difference. But based on the conversations I have had over the last couple over the last month or 2, and then just looking at the data, I think, while we're not in some let's be clear, we're not in the showing robust recovery trends right now. We're, I said, we are like teeny, in China we are, but the rest of the world, it's like teeny tiny steps forward. Think the airlines are way behind. And if you just look at the passenger mile data, how many employments, they are just way behind and here is the thing, that's because people are real those that are willing to travel are only willing to go so far from home.
So as I think about our teams, you didn't ask, but I will answer because we are spending an immense amount of time on recovery. I spent, I had all 500 of our commercial leaders around the world on a Zoom call yesterday and talking about how we are retooling our approach to go to market over the next 6, 12, whatever it takes, 18 months. And that is going to be really much more about local business and a lot more in the beginning about drive to business, right? So if you think about it, I mean sort of the natural human reaction is like I'm going to want to move, I want to get out, I'm starting to feel safe, I'm going to get out of my house, I'm going to go to my neighborhood, maybe I'll will sort of move around the region, maybe I will go to the region next door, eventually I am going to cross the country, am going to get on a plane and go around the world, but I think it's in that progression. And so if you think about it that way, while we have seen a little bit of pickup, I would argue almost all of it has been in Drive 2.
And we thankfully, we have a big portfolio. We have a lot of brands, but we have a lot of Drive. We have in the world, 2,600 or 700 Hampton Inn's and we have thousands, I think, limited service hotels in the U. S, we have almost 4,000 of them and they are very well set up for that sort of local street corner type business and drive to business. So I think there is a little bit of a disconnect and there will be for a period of time where I think we will likely show, I think, recovery at a faster pace because we can accommodate types of demand that don't require air travel.
Ultimately, we need the airlines. We need people to get on planes to get to the nirvana, which is back to more normal patterns of demand, obviously, that has to happen. But in the short term, I think it's going to be a little bit more local, a little bit more drive to. And our industry, if you can accommodate that business, is going to be ahead of the airlines.
I appreciate the thoughts. Thanks.
Our next question comes from Shaun Kelley from Bank of America. Please go ahead with your question.
Hi, good morning everyone and it's good to hear everybody's voices again. So Chris, I wanted to switch the subject a little bit to kind of the franchisee side of the world here. I was just wondering if you could give us a little bit more color on how some of those conversations are going with your franchise partners. If it's possible and I appreciate it's both early stage and it may be hard to give these numbers, but any sort of sense of magnitude of either asks of how many of your franchisees are looking for any form of fee relief or what that dialogue is kind of looking like right now?
Sure. So this is something I commented on for good reason in my prepared comments because we are spending, as you would guess, a huge amount of time with our franchise and broader ownership community because they are the engine of our growth and they are our most important partners in business. And times are difficult for everybody, but times are more difficult for them given the situation which is no essentially no demand or very little demand yet even with furloughs and all those things, they still have to pay debt service, they still have to pay for insurance and real estate taxes and utilities and all that fun stuff. So we've had a multi tiered approach. I'd say 1st and foremost, and I Hill to try and industry, which is our ownership community and frankly trying to get relief for our frontline team members that have been furloughed and not in any way relief for Hilton.
We don't need it. We have not asked for it in any way, shape or form, but we have been pushing really hard with the administration, Treasury. I've had lots of conversations with all the right people, including the President, Secretary Mnuchin throughout the PPP. Reality is, I could go on a long time, you don't want me to. PPP is a really good program and Congress and the administration should be given a lot of credit for moving that fast and getting that much money into the system that will help owners and small business folks and ultimately employees keep stay on the payroll.
Reality is for our industry, it hasn't been, but just because of the complexity of ownership structures and the like, it has not been that helpful. The second wave hopefully is more helpful, but there is a the Fed is getting ready to launch a main street lending program, which we're working very hard on to make sure that there is more access. And so a bunch of our owners, by the way, lots and lots, dozens and dozens have had access to PPP. We're hoping that a much larger set of them get access to Main Street Lending Program. And so that is an important part of what we're doing because they need a bridge, right?
I mean, ultimately, we're also working with the administration on stimulus for the industry when we get to the other side to get demand going and people reemployed. But right now, our owners need a bridge. So we've been working very hard in that regard. We also, as I mentioned in my prepared comments, have done tons of things in terms of, by the way, suspending operations at 9.50 hotels. We've never done that, right?
In the 100 years we've been around other than closing a hotel to tear it down or whatever, we've never done that. We've suspended massive amounts of our brand standards, operating standards, capital programs and a whole bunch of other things to sort of really take give them huge flexibility in how they operate, which I think they have appreciated. As I also mentioned, one of the most important things that we are doing right now, which I am spending and our team is spending an immense amount of time on, which I mentioned very lightly, is the hotel operating model of the future. We are working with all of our owners, franchisees across every brand, every category to figure out both we have already done the short term, but intermediate and long term, how do we use this time, necessity, as I and that we think makes sense to create more efficiency, what better and that we think makes sense to create more efficiency, what better time to sort of think about our standards and sort of put them all in the bucket and really, really put a bright light on them. And so we are doing that with deep involvement of our owner advisory councils.
We kicked this off a couple of weeks ago, and we're in full swing. And that's incredibly important work as we again get to the other side and hopefully get stimulus from the government, which I think we will, and that we create an opportunity in the intermediate term for them to be able to operate at lower demand levels and still have profitability. And then longer term, as we get back to normal, have even greater levels of profitability than when we went into it. In terms of fee relief, I would say you wouldn't be surprised to hear that there have been owners that have asked for fee relief, but not hand over fist. And the reality is, I think there's a real simple reason.
Our fee structures, as you know, which is different for different players in the industry, all of our fee structures, whether it's the franchise fee or management fee or the system charges, they're all based on a percentage of revenue. So we have given the ultimate fee relief, meaning when you are 90% off, there really aren't many fees because there is not much revenue. And so I think most of the owners everybody would like every bit of help that they can get. I think most of the owners that I have talked to sort of understand that the fees have been right sized with the demand in the business that they're not at the moment, sadly for us paying and sadly for them, they're not paying us a lot of fees in any event. So that we will continue to look at all options with our owner community.
As I said, there is no more important partner and stakeholder that we have. They are the engine of opportunity for us. They are investing all the capital they have been and I believe they will, as Kevin noted with the pipeline and numbers, they will continue to do so. And so we are literally and personally I'm in daily conversations with huge numbers of them. And I think you can ask them yourself and while we're never going to be perfect, so far the feedback I get from our owner community and you can validate it is very high marks that we were there earlier than most understanding the severity of this.
We took very decisive and bold action to provide relief early. And again, while we're not perfect, my impression and the owners I'm talking to and I'm talking to 100 of them is while they're hurting, they are certainly appreciating the partnership that we have provided.
Great. Thanks for all the detail, Chris. And then maybe a little bit more of a specific one for Kevin, I guess. Kevin, could you outline for us a little bit more on maybe just this kind of point in time working capital drag that we could potentially see as it relates to mismatching on the reimbursed costs? Primarily, I think it's the system fund, but anything else that maybe investors should be aware of just given the situation we are in when the music stops and drops as much as it is, kind of where cash to be trapped for a period of time and then how you expect to recover that down the road?
Yes, sure. Obviously, it's a question that's on a lot of people's minds. So it's a good one. I think to take a step back, if you think about, there's really 3 buckets of receivables that we have, right. In hotels that we manage, which is a minority of the system, right, roughly 70% of the system is franchised, but in hotels that we manage, the owner is responsible for the working capital and all the obligations.
And some of those ultimately are paid by us and then reimbursed by owners. So there is an opportunity there. Then you have license fees and then system charges, as Chris mentioned right? So we're just if you think about the crisis really starting in right? So we're just if you think about the crisis really starting in March, you don't even build these things until the following month and then you give people 30 days to pay.
And so we're sort of just getting into it. So anything we would say there would be speculative. But that said, embedded, I think it's probably obvious, but worth saying embedded in the discussion that we've given you both publicly and in Chris's and some of Chris's commentary earlier is a working capital drag, whereas we've said, if things stay the way they are, meaning circa 90% down in revenue and in this environment, we have at least 24 months of liquidity and you've got our cash balance. And so you can sort of just do the math and realize that if things stay the way they are, there is an embedded cash drag in there that could be in the 100 of 1,000,000 of dollars ultimately. And so but of course, it depends on duration of the cycle, how it plays out.
And ultimately, we believe, as Chris just got done explaining, that the business is healthy, it's going to come back and when it comes back, we think we're going to get paid.
Thank you very much.
And our next question comes from Anthony Powell from Barclays. Please go ahead with your question.
So longer term, how do you think this event changes the financing market for new hotel construction? Do you think lenders may require higher equity contributions or higher cash reserves? And could this be a headwind for construction in your net unit growth over the medium to longer term?
Yes. It's a good question, Anthony. And the reality is, we don't really know. But what I think is that generally when you come out of these crises, lenders get appropriately more cautious. Although I would say that even pre COVID, we were pretty deep into an economic cycle and so you were starting to see caution.
That said, over the long term, I would say for construction, most of the hotels that get built in our system are not actually even financed aggressively. When you're talking about like big full service hotels and luxury hotels, sometimes they use more leverage. But the lion's share of the hotels that get built in our system are not actually financed all that aggressively. You're talking about like 50% loan to cost. And I would say, personally, I think that when the business recovers, the lending community will be there.
And as long as hotels are productive and profitable investments that they'll be able to be financed. And then I think the last thing I'd add is you have to remember the amount of liquidity that is in the system. Pre COVID, you're talking about tripling plus of the money supply from quantitative easing and then even more capital being injected into systems globally. There's going to environment and then it will and as it always does, it will recover back to normal. Okay.
And then, I'll just environment and then it will and as it always does, it will recover back to normal.
Got it. And maybe just one more, you mentioned that you've relaxed brand standards across the board, which has helped owners. How do you manage that with customer expectations as you start to see recovery? Hilton Honors has been known for a very consistent experience across the board. Customers are going to be returning to seeing no breakfast buffets or whatnot.
How do you manage that going forward?
Yes. It's a really good question. I think in the short term, as we've been talking to customers and surveying customers, everybody gets what's going on in the world. So they're incredibly lenient. And so we have not we are not serving sadly that many customers, but those that we are, who are mostly on the front lines of recovery efforts have been fine with all of the standard changes and suspension of certain elements of the service.
The work that I described that we're doing is sort of in the intermediate and long term in making sure that we, 1, create the most efficient operating model and 2, obviously continue as you implied as implied to your question to drive premium market share. I mean, we're not we continue to have the premium market share in the industry. We have no plan to give that up. The trick is as we transition from the intermediate to the longer term, what are the things that you basically put back in to the standards and what do you take, what do you leave out and or change. And that's sort of, I can't give you the answer, not because I don't want to, I don't have it yet.
I mean that's the work that we are doing right now. I will others during the intermediate timeframe when customers are very forgiving. And what we're going to do is iterate with the objective of making sure that we are delivering premium product and service always to get our market share premiums, but we want to drive efficiency. So short term is easy, intermediate term I think will be a significant opportunity for testing when you're still in a relatively low demand environment where customers are still quite sort of accepting of things that are different. And then I think what we learn in that intermediate timeframe, we will sort of institute as our longer range standards.
And we're working through all of that. I think there'll be a whole bunch of things that we'll do that'll be more efficient long term. And there are going to be some that we're going to have some standards that we are going to that our customers are going to want in a more normalized environment and we are going to reinstitute.
Thank you.
Our next question comes from Stephen Grambling from Goldman Sachs. Please go ahead with your question.
Two related follow ups. First, on the working capital drag you cited in the 100 of 1,000,000 of dollars potentially, you mentioned it depends on how long this will last. So on the cash burn and months of liquidity you provided in the debt deal, I think you were assuming that this is or maybe you can elaborate on whether you're assuming this is a consistent drag each quarter or if that would potentially moderate even if things remain weak? And then second, can you talk a little bit more about what you're seeing from consumers as it relates to the loyalty program via some of the partnerships you have and how that may impact the model both during this period and then also how you ensure customer engagement to position yourselves to use this asset to take share in an eventual recovery?
Yes. So on the working capital, Stephen, I would say, look, the assumptions that we gave publicly, which again, just to make sure everyone is clear, as part of the bond deal, we said 18 to 24 months, that was pre money for the bond deal, and we ended up upsizing that deal. So that's sort of how you get to the longer end of that range. I would say that, again, when the crisis is new, things are a little sharper. So the way I'd characterize it is, the 1st month, Q2 of this year probably would be the worst on that front and then it would moderate from there.
But again, the assumptions in that
now But the assumption that the 24 month or at least 24 months are basically you have little or no
You stay that way. Yes, you stay that way. And from that perspective, again, I said it would be a little bit harsher at the beginning and then it would be relatively flat. Again, in that under those assumptions, with any kind of recovery curve, it gets better from there.
And then on the loyalty program side, just any color you can provide on
it? Yes. We have done a bunch of things. If you look at it, I'd say, first of all, not that we have a lot of business, but our Honors occupancy with the modest business we have has skyrocketed. So, it was already very high and now it's a lot higher because seemingly they are more willing to travel than I guess non Honors members.
But what we have been focused on during this timeframe and you can see it in a lot of the things I talked about and that you would see publicly is people aren't traveling that much. So what can we do to build loyalty? We can give them flexibility. So we in the industry, we were the first ones, I believe, certainly we were very early to come out and give very significant cancellation flexibility. We were definitely the first to come out and give status, allow people to remain, keep their status.
We were definitely the first to come out and say we weren't going to we're not going to have points expire. We did a bunch of things to say to our Honors members, no fault of your own, you can't travel and we're not going to hold that against you. We have been communicating with them regularly and so far I would say that's going well. The work that we are doing in community, we are doing that because we want to be part of the solution, not part of the problem. So our 1,000,000 room nights with Amex to first responders for free, our World Central Kitchen work, all of the other work that we're doing is about sort of continuing to build our brand, the Honors brand with consumers who are sitting around and can't move, but are watching a lot of TV and reading a lot, doing a lot of social media and they are seeing these things.
The net result is, in terms of our numbers, our marketing team has been looking at it, like intent to consider purchase of our product, net promoter score, whatever, those numbers have gone way up through the crisis. As a result of people realizing we're doing the right things. And so my attitude, which is the way I think about life when you go into this, just like the way I thought about it when we went into the Great Recession, which was different, but similar is when everything is good, it's really hard to differentiate yourselves. I mean, I think we have, I think we have done a great job, but you get caught up in an arms race. When everything is bad, people peel off and go different directions and you have a real opportunity to differentiate yourself.
And so what I have said from the day we got in this crisis is, as much as we need to solidify the core and deal with liquidity, which Kevin and the team have done an amazing job on and protect and deal with the cost structure and all those things. We have been crazy focused on making sure we are listening to customers, particularly Honors members and doing the right thing for them, that we are crazy focused on our owners, as I've already talked a lot about to do everything we can for them that we're crazy involved in our communities so that people remember that we were part of the solution because that will continue to build loyalty. And obviously, as impactful as it has been to our team members that we're as we're impacting them, we're doing it in the right way, in a way that is really taking care of them as best we can. And so my attitude is, while this is all painful, there's no other way to describe it. What we do now will determine our future and we are absolutely committed as a team and a company to continue to differentiate ourselves with all of our stakeholders and to come out the other side of this stronger, including with our Honors members.
And so far, we're I think doing a very good job doing that.
That's great. Thanks so much.
Our next question comes from Bill Crow from Raymond James. Please go ahead with your question.
Hey, good morning folks. Chris, based on your discussion, I think it was with Harry earlier, it sounds like your view is that the primary gating factor for travel is not the hotel, it's the airplane, the airline. And if that's the case, is it fair to suggest that no matter how much they discount fares, it's probably not going to be as stimulative as it would have been prior downturns? And then the second part of that is, does that also mean that larger coastal gateway markets come back far later than the rest of the country?
Well, to a degree, yes, but let me re frame it a little bit. What I was saying, which is right, that to get back to full recovery, I think the airlines are a gating issue. People have to be comfortable to get on planes, planes have to be flying. There is a bunch of the business, particularly in the big in the major markets that it's fly to. And so to get the full recovery, you have to have that.
I absolutely believe you can get a significant amount of recovery before you get there. I think it's Bill, I wish I had all the answers. I think it's wrapped up in a whole bunch of different things that relate to what's going on with vaccines, therapeutics, human nature and just a comfort factor. My own belief is as you continue to get more testing, which is what I've been reinforcing with the White House and everybody that will listen and including antibody testing that you are going to understand that because the data is pretty clear that while this is a terrible virus and it's affecting people's lives and it is killing people, which is horrific and every life is important, when you get down to it, it has impacted a lot more people than we know and the mortality rate is much, much lower than people have thought. And the real data suggests there is a very small part of the population that is really at risk.
I think the more of the testing data that comes out even without a vaccine or a therapeutic, the more people are going, particularly those that are not as at risk, the more comfort that they are going to have. With a vaccine and or therapeutic, I think it's game changing. And so I'm not trying to be evasive. I just think it's going to be iterative. I think you're going to have drive to business, you're going to have some fly to business, people are going to socially space, wear masks and all that and there will be people that go out.
The more they understand the real mortality rate, the more therapeutics and or vaccine progress we have, I think it will, as I said, 2 or 3 different times, I think when you wake up in a couple of years, it will feel a lot more like it did 90 days ago than it does now. And the past depends on a whole bunch of variables that are not particularly well known. But I think it will progress. We will recover first with more Drive 2, some Fly 2 and that will happen. I mean people are you're going to this summer, you start looking at the airline numbers and you're going to see a big shift up.
It is not going to be anywhere near where it was, but in my opinion, this summer, you will see a heck of a lot more people get on planes and in airports than you see right now. So I think it's just going to be a progression.
I hope you're right. Chris, if I could just follow-up with one other question that not sure you can answer. But as you look out, you're talking about 2, 3, 4 years out using this period for innovation and whatnot, do you think the operating cost or cost per occupied room will be lower or higher as we start to stabilize this industry?
Lower, for sure. Lower. I mean just because all the things that we're working on, I can't tell you how much lower because I don't have the answer yet. But clearly, I mean there are a few things, Bill, as you might guess that are going to cost a little bit more like our clean stay standard working with Lysol and Mayo. Yes, I mean Lysol products may be a little more expensive than some of the products we use.
That's relatively insignificant. The other things that we're thinking about in terms of gartering efficiencies vastly outweigh that. So I think when we wake up on a stabilized basis, operating costs are going to
go down. Thank you. Wish we could see you in person, but It won't be long.
It won't be long.
All right. Thanks, Chris.
Thanks.
Our next question comes from Robin Farley from UBS. Please go ahead with your question.
Great. Thank you. Most of my questions have been asked, but I did want to follow-up on the unit growth question. And I appreciate how difficult it is to have visibility on this. You were talking about financing that there'll be capital available.
But I guess just thinking about from a perspective of owner appetite And when you kind of look at historic downturns, anything under construction, as you pointed out, would open. And the decline or I guess slower rate of growth typically in supply would usually come a year or 2 later because of those new projects. So I wonder if you could talk about kind of owner appetite. It seems like given even what you're saying about how it could take a couple of years to get back to 2019 levels that maybe an owner or developer that hasn't put a shovel in the ground yet would be rethinking anything that's not under construction and then we would see something much lower than mid single digit growth in terms of pipeline kind of a year or so out from now?
Yes. I think, listen, it's a good point, Robin. And certainly that is generally how it worked last time, although not really. I mean, I think the 1st year after the great financial crisis was the low point and then it sort of started building from there. There was another year in 2012 where it was sort of stayed low slash went down a touch because of what you're describing.
The difference this time is it's delayed, right? I mean it's a different crisis and you've just got construction that's being suspended. Things are going to take longer and it's going to push. And then the other thing is you've had, this is coming at the end of a cycle. So you just had, you've had a bunch of deliveries and there are existing hotels and there's going to be a little bit less demand for a while and more we think more demand for our engines.
So we do think we'll drive a higher level of conversions going forward and thus we think a growing trajectory from here. We'll see what happens, but that's what we think.
Okay. No, great. That's helpful. And then one other sort of point on the same topic is, we've looked at all the data historically for hotel removals, right, hotels that close and never reopen in previous down downturns. And like interestingly, that doesn't go up a lot even in 2009 that wasn't really that much above average.
I would assume that you don't expect removals to be at a higher rate this year with this issue as well or I mean, but tell me if that's not
No, that's accurate. We think removals will be very normal.
Great. Thank you very much.
And our next question comes from Thomas Allen from Morgan Stanley. Please go ahead with your question.
Hey, good morning. Just in terms of buybacks, just want to be so in the prepared remarks in the press release, it said Hilton formerly suspended your buyback program, but the program remains authorized and you may resume share repurchases in the future at any time. How are you thinking about the buyback program? How are you thinking about the right leverage levels? Any clarity there would be helpful.
Thank you.
Yes, a really good question. And I'd say a little bit early given where we are to have sort of a be dispositive about it. But I don't think long term we have a in the short term we're not going to be doing dividends and buybacks. We've made that pretty clear. As we get back to recovery and more a normalized environment, I don't think our capital allocation strategy has really changed.
One might argue, even though I think from a liquidity point of view, we find ourselves in a really good position and we did the right things, not just post crisis, but pre crisis in terms of having credit available, maturity schedule that was very attractive. Those weren't lucky. I mean, we knew we were at the end of a business cycle and those are things that we planned out to make sure that we had all the financial flexibility we would need. Now that we know we would have COVID-nineteen, of course not. But we knew we were at the end of a business cycle and we wanted to have be really set up well for it.
And so we are. And so I'd say this should hopefully be the greatest test of all time for a balance sheet. It's hard to believe another one could be worse given what's happened. And I think I think we feel like we're in a really good position to sort of pass that test and have the liquidity and the credit profile to get through it. So, I don't think when we get back to a normalized environment, we have too much of a different view.
What I would say is you could argue about would you be a little bit lower leverage than you might have been. I'm sure we will debate that and this isn't the time to conclude that, but more broadly, we will definitely resume at some point when we get to a normalized environment. I believe our intention would be to resume sort of where we left off in terms of our capital allocation strategy.
Thank you.
Okay. I think that's it. Well, it's an interesting call and interesting times. We appreciate everybody's time. I know we've been talking with lots of people sort of as this has been going on, obviously happy to continue doing that as we work our way through this.
As we said in our comments, Q2 will not be pretty, but hopefully Q3 and Q4 will be back on the road to recovery. So everybody stay safe, stay well, and we're going to keep working awfully hard to do the right things here and we will look forward to catching up with you and updating you on where we are after the second quarter.
Ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for joining. You may now disconnect your lines.