Ladies and gentlemen, thank you for standing by, and welcome to the Marriott International’s First Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Arne Sorenson. Please go ahead, sir.

Good morning, everyone, and welcome to our first quarter 2020 conference call. I hope everyone and their families are safe and healthy during these unprecedented and challenging times. And I would like to send my deepest condolences to those of you who have lost friends or family because of COVID-19. Please know that our thoughts are with you. Joining me today from their respective homes are Leeny Oberg, Executive Vice President and Chief Financial Officer; Jackie Burka McConagha, our Senior Vice President-Investor Relations; and Betsy Dahm, Vice President-Investor Relations. I believe this is the first time that Marriott team has not been together in the same room to host this call. And that includes an earnings call from China in 2018 and one during a blizzard in 2010. I want to remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Statements in our comments and in the press release we issued earlier today are effective only today and will not be updated as actual events unfold. Please also note that unless otherwise stated, our RevPAR and occupancy comments reflect system-wide constant currency and year-over-year changes, and include hotels temporarily closed due to COVID-19. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our Investor Relations website. Let me begin with what is clearly top of mind for all of you, how Marriott is navigating through the extraordinary and continually evolving worldwide impact of COVID-19. This is by far the most significant crisis ever to impact…

Thank you, Arne. I hope all of you and your families are staying healthy and safe. I also want to thank our teams around the globe for their dedication and tireless efforts during these unprecedented times. Worldwide RevPAR was down 22.5% for the quarter, driven by the sharp 60% global decline in March. First quarter gross fee revenues totaled $629 million comprised of $214 million of base management fees and $415 million of franchise fees. Under the terms of our contracts, our portfolio of managed hotels earned $64 million of incentive management fees or IMFs in the first quarter. However, under accounting rules we can only recognize IMFs to the extent that the full-year forecast supports that these fees will not be reversed later in the year. At this point, there is significant uncertainty around full year performance, so we did not recognize any IMFs in the quarter. Within franchise fees, other non-RevPAR related fees totalled approximately $140 million, up 5% from a year ago, primarily driven by stable year-over-year credit card and time share branding fees as well as higher year-over-year residential branding fees. Adjusted EBITDA of $442 million included $79 million of bad debt expense and guarantee reserves related to COVID-19. Given the uncertainty around the timing and trajectory of a recovery, we’re unable to provide our normal quarterly and full year P&L guidance. Instead, I thought it would be helpful to talk through a modelling scenario for our monthly run-rate of major sources and uses of cash in the current environment with worldwide RevPAR down roughly 90% and also provide you with a few modelling sensitivities. Note that this is just one scenario and not an estimate of actual results. Marriott’s overall cash flow is easiest to describe in two broad categories. The first category is classic…

Thank you. [Operator Instructions] Your first question comes from Shaun Kelley of Bank of America.

Hi. Good morning, everyone.

Hey, Shaun.

Good morning, Shaun.

Good morning. I was trying to type about as fast as I’ve ever typed to get through this section you just gave. So thank you for all the detail and hope everyone is doing well. Leeny, maybe to start with a high level one to just digest everything you kind of gave us, and do really appreciate that, could you give us a sense on maybe just the broader franchise and management system at this point? What have been some of the asks by the owner community at this point as we think through what their own kind of cash level needs may be? And specifically, if you could give any color on the percentage or number of either managed or franchise hotels that are sort of asking for either fee deferrals or fee relief at this stage?

So, a couple things. First, I’ll remind everybody once again that a huge proportion of our fees that we charge are revenue-based, so there is an automatic decline that has happened as a result of the drop in RevPAR. So that if you think about it for the mandatory programs and services that we charge, when you also include the deferral and the 50% discount that we gave in April and May, there’s actually very little due at the moment from – on the mandatory programs and services. At the managed hotels in North America, we have also, as I talked about, dropped payroll incredibly, as well as all the operating costs at the hotels. So of course, you do have owners, just as we too are thinking about how we are managing our payables, everybody’s trying to manage their cash as best they can. But I will say, our owners and franchisees are paying their bills. We have a really very, very small fraction of our hotels that are having trouble paying at the moment, and then except for a bit of extended payable terms that you can see, otherwise, it’s really all systems go for the moment. And as I said in April, we actually saw, relative to those numbers I gave, really a fairly dramatically better situation than the one that I gave you, but we wanted you to have the benefit of our cash planning so that we are making sure that, no matter the situation, that we’re able to manage through it.

Thank you very much.

Your next question comes from the line of Joe Greff of JPMorgan.

Hi. Good morning, everybody. Good to hear everybody and hope all of you are – and your families are healthy and well.

You too, Joe.

Thanks. Just with respect to your hotel owners, do you have a sense in North America how many of them accessed federal loans relief program? And then my second question is, can you estimate what you think maybe breakeven occupancies are for your North American full service, North American select service hotels? And I guess in that breakeven occupancy threshold, what ADRs are you assuming there? Thank you, both.

So, there’s a lot we don’t know about the details of our owners’ access of the Payroll Protection Program (sic) [Paycheck Protection Program] and other government support. Obviously, we’re in touch with them and we hear back. We think that there are hundreds of hotels that have successfully applied for the Payroll Protection Program (sic) [Paycheck Protection Program]. How many of them have actually received the dollars is a little harder for us to keep track of. And the percentages that have been approved are in the 50% to 60% range, if you include the select service hotels. Select service hotels obviously tend to be more clearly small business than full service hotels, but for each hotel owner, there tends generally to be eligibility under some of these programs to get the kind of support that the government is intended to apply. We continue to work with them to try and navigate through that. I think the other thing that’s important is what we hear anecdotally from our owners in North America is that lenders have been reasonably accommodating as well. And so you put those things together and then you put the collaboration that Leeny has just described between Marriott and our owners, which includes very much our cutting above property costs including costs of programs that are paid for by the system and then work at deferring brand standards and initiatives and working to tap – defer FF&E spending and to tap FF&E dollars and those sorts of things. And generally, we think the – well, there’s pressure all around. We think overwhelmingly that the system is surviving so far. Obviously, it will get tougher the longer it lasts. But we do think we’re at bottom and think we’re likely to see some release in pressure as we…

Thank you.

Your next question comes from the line of Patrick Scholes of SunTrust.

Hi. Good morning. Wondering if you could give us some thoughts...

Hey, Patrick.

Good morning.

Hi. Good morning. Some thoughts about potential recovery. Do you see at this point groups returning in the back half of the year? Your thoughts on corporate fly-to demand? And then any early indications of summer leisure? I know it’s sort of tough to figure out but just interested in your thoughts.

Well, I think what we’ve got to say here is probably not incrementally all that new from what others in the industry have been saying the last few weeks and what we’ve been saying actually the last few weeks. It’s – obviously, we’ve got a global phenomenon underway that is sort of stunning in its breadth. We’ve talked about China a little bit, and China does appear to be recovering and holding. I know there’s lots of debate about whether or not there is a resurgence of the virus in China. We’ve got tens of thousands of associates working in our hotels and basically have a way of tapping into that community and listening to both their sentiment and to some extent the data. And by and large what we hear there is reassuring that in fact demand is coming back and the virus spread does not appear to be profound. That doesn’t tell us for certain where it’s going in the next few months, but there is something that’s encouraging there. When you go around the world, you’re going to see a different dynamic in various parts of the world. I think in Europe, Europe, unlike China and the United States, is meaningfully more dependent on long-haul travel. You think about Europe as being a destination for vacationers from all around the world who want to see those great European cities, and because it’s dependent on air and long-haul, I suspect it will be probably the slowest to get back to the kind of levels that we enjoyed before COVID-19. Advantages of China and the United States are they’re both domestic markets. Even in normal times, the US is about 95% to 96% US travel with only 4% to 5% in total dependent on in-bound travel from the rest…

Okay. Thank you for the very detailed answer.

Your next question comes from Thomas Allen of Morgan Stanley.

Hi. Good morning. I hope everyone’s well. Can you give us an update on how you’re thinking about net unit growth? Thanks.

Well, we’re watching it, I think, is the right answer. Obviously, we’re a month and a half into the extraordinary crisis outside of China and a couple of months longer than that in China. In various parts of the world, construction was essentially banned. In some markets, it was an essential service that was allowed to continue. Beyond that, you’ve got some question about hotels that were ready to open and whether or not the final furniture supply was in-hand or not or whether it was dependent on the global supply chain, which itself slowed down. I think we can say with a relatively high level of confidence that the overwhelming majority of hotels, which were scheduled to open in 2020 would have been very far along in their construction and they will still make sense to reopen, assuming some kind of reasonable assumptions around recovery. And so while there will be delay in getting them opened, we would expect that they will open. Whether that delay is a number of months or a number of quarters probably will depend a little bit on those supply chain dynamics, construction restrictions which by and large have been released. I mean I think California banned construction for a period of time, and I think construction is now back on in California. And just the owners’ sense about – obviously there’s less urgency to get open but whether it’s more logical to be open or to defer opening. It is likely we will have fewer new hotel openings than we assumed before COVID-19 in 2020. Whether that’s down by half or down by a quarter, we’ll have to watch and see. I think it’s still way too early to identify. I do think that most of the hotels that were scheduled to open in 2020 will ultimately open into our system, and the same I think can be said for certainly most of the first half of 2021 openings as well.

Thank you.

Your next question comes from the line of Smedes Rose of Citi.

Hi. Thank you.

Hi, Smedes.

Hi. I wanted to ask you guys and others have made pronouncements around what cleaning will look like in hotels in kind of a post-COVID world as you reopen. Just how do you think about just the overall labor cost at a hotel going forward? Do you think they’ll ultimately stay about the same? Or do you see significant increases or decreases from here?

Well, it’s going to be very interesting I think to watch. I think in the early stages, obviously, we’re going to have less F&B service, for example. I think we’re likely to have either fewer restaurants open, fewer meetings and the staffing that’s associated with meetings, probably a difference in the approach to buffets and some of those sorts of things. So I suspect in the early quarters, it’s going to be more grab and go and pre-packaged material, vary a little bit obviously by segment and by market around the world. But I think those things would generally tell you that for the balance of 2020, labor costs as a percentage of revenues are probably likely to be lower. I think when you look longer term, it’s going to be interesting. Certainly, in the first stage, we would expect that digital check-in, think about using your phone as a key or checking in at a kiosk, will be important both to protect associates and to protect guests. I think there will be relatively greater effort in housekeeping between guests than there was before to make sure that those rooms are virus-free to the extent we can be certain of that. I suspect there could be relatively less services provided during the stay, however, and those things may offset each other a little bit. But obviously, we’ll work our way through that in the best case we can. Long-winded way of saying I think in the near term certainly labor costs will be less, and obviously, we’ll be looking longer term at making sure that we meet what our guests’ expectations are and that the services provided are the services that are needed by our guests and also making sure that our owners get back to a place where their investments make sense and where their financial well-being is good for the long term.

Okay. Thank you. Could I just ask you one more too? Do you think – I guess particularly in North America, as maybe some owners struggle to get reopened or maybe have difficulty working with their banks, I mean, does Marriott – would you see more of a lending capacity or potentially putting out guarantees for debt to some of the owners maybe on a short-term basis? Or is that sort of not on the table right now?

Leeny, you got that?

Yeah, I do. Yeah, I think as you know, we typically really use our capital to propel our growth. Now, we do obviously from time to time work with an owner in a specific situation, particularly when there’s reinvestment going into a property as we have done with Host, for example. But I think, broadly speaking, we have reimbursables. We expect to get paid. We provide those programs and services, and the owners have an obligation to pay us. So while there is an ongoing dialogue and we certainly, as you’ve seen from all of our efforts to reduce our costs as well as to defer the payment of some mandatory required fees, then wanting to be understanding about the situation. But at the same time, I would not expect to see that we would be doing extensive either guarantees or loans to deal with this.

Thank you.

Your next question comes from the line of Harry Curtis of Instinet.

Hi. Leeny, just a quick follow-up on that question. As you think about your development going forward, does this crisis really change the way that you approach key money and mezz loans, given the reserves that you’ve – not the reserve, but the impairment charge that you took today?

So first of all, on the impairment charge, if you think about the biggest chunks of the impairment charge today, two of them were related to leases. They are leases that have been around, and as you know with the lease accounting change, we have these assets on our books called right of use assets that extend over the life of the lease. So frankly, they really don’t relate to the classic sort of giving of key money with that. And frankly, there was one impairment charge that we took this quarter that we mentioned, the $14 million, that’s on a very large portfolio of limited service hotels. And as part of that transaction, there was an agreement by the owner to spend hundreds of millions of dollars to reinvent those properties. So quite frankly, still a transaction that was in the broader scheme of keeping up our portfolio and making them competitive, make a ton of sense. Now, I think, in general, as you think about what we have to invest in our pipeline, it’s actually fairly small. It tends to be that on the more complex higher-end projects that we at the margin are going to have a little bit more capital in than if it’s on a kind of small price-limited service hotel. But I think fundamentally, we still view that the way that we approach investing in deals to be appropriate. Now, at the same time, I will say we are obviously cognizant of kind of where we are from a liquidity standpoint as well as rebuilding the business over the next few years. So when we think about, for example, our restrictions that we have put into our revolver covenant waiver, we’re obviously going to keep very closely, a very close watch on the amounts of investment that we’re spending. But I think from a fundamental approach, we still feel really good about the value that we are driving with these key money type of investment.

And thank you. Arne, maybe you can respond to the second question, which is, as you imagine the recovery two to three years from now, and the house process margin that was generated across your portfolio in 2019, you’ve walked through some of the gives and takes on higher and lower expenses. Is it unrealistic to think that you can get there in the next two or three years, assuming the same level of occupancy?

Get back to the same level of profit per room, you’re talking about?

Exactly.

Yeah, yeah. I don’t think it’s certainly really not unrealistic to try, and I think we will work hard at that, if not getting back to the same levels, getting to even better levels. I do think that the – in the first instance, the recovery, top line recovery obviously is really important to this as well as what we do on the cost side. Top line recovery in the first instance is going to be COVID-19 driven. What is the sense of government restriction that gets in the way of our business? And what is the sense of sort of remaining concern or anxiety about the spread of the virus that dampens down demand? And the recovery from that is going to depend significantly on the progress of the virus, the development of a vaccine, the development of other treatments, maybe ubiquity of testing, all the things that are being talked about every day and endlessly every day. I think beyond that, that the question about the top line is going to be driven by the economy. And none of us knows how severe the economic hangover will be when the fear of COVID-19 recedes. But there is every reason to suspect that there may be some stickiness to a weaker demand environment, at least for a period of time, simply because of GDP activity. And so, those things I think are both important from a top line perspective. From a cost perspective, we will obviously do the kinds of things that we’re going to do. To the extent the top line is depriving us of dollars per room of revenue, that challenge becomes a little bit more significant. But I think as we move our way down the recovery and we see revenue per room come back, we ought to have a fighting chance at getting profits per room back too.

Thanks, everybody. And Leeny, if you could send us the spreadsheet of your presentation, that would save us a lot of work.

Your next question comes from the line of Anthony Powell of Barclays.

Hi. Hello. Good morning, everyone.

Good morning.

Good morning, Anthony.

Good morning. Question on, I guess, supply growth. So do you expect this event to have an impact on how vendors approach construction financing? Do you expect them to maybe require more equities and require more cash reserves? And could that be kind of a long-term headwinds to new construction over time?

Well, I’ll start. And then, Arne, feel free to add on. So I think first of all, let’s talk about what’s already under construction. The financial institutions today are in vastly better health than they were back in the Great Recession. And as Arne was saying earlier, these deals still make sense. They’re under construction. There’s no reason to think that they won’t get finished as the final supplies are delivered and they have the ability to open. Now, could it be that they open a bit later, depending on the environment for demand? Sure. But again, from everything we hear anecdotally as well as see – I don’t know if you notice around your towns that construction actually is one of the few businesses that you can actually still see a fair amount going on. And so, as you then think about the pipeline of new deals, I think that clearly is one that there’s more question around and that there is likely to be at least a bit more of a wait-and-see attitude by the lenders on committing to new deals. However, the one thing I will say is that as you think about, if they are going to lend, who are they going to lend to, it’s kind of classically been the case that the stronger brands get the financing when deals are getting done. And I would expect with all that you’ve heard around what we’re doing related to cleanliness and making sure that the guests know the standards that they can expect our hotels to have when they come, that will continue to be one of the strong points that our brands have when a developer goes to consider getting a loan. And the other thing I’ll say that the conversations that our developers are having continue apace. Obviously, conversion activity is up right now as we think about those conversations as well as then continued on new construction. These are folks who are looking for the longer term, and from a longer term perspective, they still view it quite strongly.

Got it. Thanks. And you mentioned, Arne, that you saw some good RevPAR index gains in January and February. How do you maintain that momentum in this kind of environment? Is that something you can even focus on? And looking maybe to early next year in a downturn scenario, what tools do you have to continue to grow RevPAR index?

Well, we call that Marriott Bonvoy. I think as of the end of the quarter, we’re at 142,000 members or something like that. And I think the program remains a powerful tool for us to drive loyalty of travelers to our brands. And we’ll continue to stay focused on making sure that program is strong and is relevant to folks, both as they travel and when they’re not traveling, and I think that will be the principal tool in our toolkit. Beyond that, of course, it’s the questions that are sometimes related, sometimes mutually reinforcing of that but it is the breadth of distribution. It is hotels that continue to inspire people when they dream about travel, which is often about resort destinations and about luxury and lifestyle hotels, not exclusively, but that certainly is a piece of that. And I think our portfolio there is extraordinarily strong. And then questions about how do we go to market with the sales force and how do we make sure we’re delivering the kinds of operational excellence which Marriott has long been known for. I think all of those things will remain tools that we rely on. We’re disappointed obviously by COVID-19 for so many reasons, but partly the momentum that we had built in the latter part of 2019 and which continued into 2020 with, as we mentioned, 330 basis points of index growth in January and February, which are massive numbers for a portfolio of our size, speak very well for our ability to get back there and rebuild that momentum. There’s nothing about COVID-19 which should disrupt that momentum in the years ahead.

Thank you.

You bet.

Your next question comes from the line of Robin Farley of UBS.

Great. Thanks. I wanted to follow up on what you mentioned earlier about unit growth and I understand the new construction uncertainty of kind of how much of that will get delayed, but I’m wondering if you could talk about conversions and what level of interest you may be seeing, especially given that some owners out there not in your system are probably under some pressure. And how much could conversions offset some of the slower growth in new units? And how quickly could they get into your pipeline? And then just as a point of comparison on the same topic, if you could tell us a little bit more about how in the last downturn that may have – it seems like conversions obviously uptick in a downturn. And how much did that offset changes in maybe what your – the decline in new unit growth? Thanks.

So, Leeny, you may have this data top of mind. I’m not sure I do. But if you look through cycles, and this would be directional, not probably as concrete as you’d like, Robin, in a weaker environment, conversions go up. They go up for us. They go up for the stronger brands, because not every hotel can perform as well in a weaker environment. And so, we’re already seeing conversations pop up where folks are looking at oh, my goodness, how do I get this hotel reopened, and don’t I need a pipeline of customers in a loyalty program today more than I needed six months ago or three months ago. And so, all of that will help. I think at the same time, it’s fair to say that while conversions step up in a weaker environment, new builds step down and they probably step down at least as much as the conversions step up. And so, we would, if you look at 2010, 2011, 2012, the hotels that were under construction before the Great Recession continued to open into our system. But we had not signed hotels, new hotels in 2009 and 2010 at the kind of pace that we had before the Great Recession hit. And so we end up with a percentage unit growth even with the benefit of conversions which is certainly not higher than what we would have had before and, if my recollection serves, would, on average, have been a little bit lower. I think when we look now into the next period of time, I think our brands are stronger, I think the portfolio is stronger, I think the momentum with the loyalty program and our index numbers are stronger. All of which will bode well for conversion activity as by the way is the depth of the decline in performance of the industry as a whole, which gives then much more motivation I think for owners to move. At the same time, as Leeny has just gone through, I think we’re going to see that while the banks are much stronger than they’ve been in the prior crises, they will inevitably pause and either require more equity or get to see whether or not we can get more clarity before they’re going to provide the kind of financing commitments that they were providing before COVID-19 hit. Put all those things together, I suspect we’ll find opportunities here. But we will be less likely to be seeing an increase near term in net rooms openings into our system than a decrease. Leeny, do you disagree?

No, I totally agree. The only thing I’ll add, Robin, is one of the differences between now and the Great Recession is our strong portfolio of soft brands, and frankly, the interest that we’re seeing in those brands around the world. So the conversion vehicles that we have now as compared to 12 years ago, I do think are meaningfully stronger, which I think is helpful. I think the financing realities are going to stay the same, so that’s kind of we’re going to have to – if somebody’s looking for financing or refinancing to do a deal, we’ll have to work through that in the demand environment with COVID. But I do think that we’ve got the right portfolio of brands, kind of across all 30. And we definitely are seeing increasing conversations. But as Arne said, if you’re looking at kind of normally maybe 15% to 20% of your room openings are conversion and let’s say that number goes up to a third, that still is not going to offset what you’re seeing in terms of the slowdown in new construction.

Great. That makes sense. Thank you. And maybe one small follow-up. And just if you think about sort of last year or something typical, what percent of your conversions were from the soft brands, which like you said, something you didn’t have in the last downturn? Thanks.

In North America, it’s going to be overwhelmingly that way. So if you think about in full service, the full service rooms that we opened may be about call it 25%, 20% of our room openings in North America, because limited service is such a big chunk in our current pipeline, not of the existing stock but of the room openings, they’re going to overwhelmingly be soft brand, either new build or conversions. So I’d say we can get you the specific numbers, but a good percentage.

Okay. Great. Thank you very much.

Your next question comes from the line of David Katz of Jefferies.

Hi. Good morning, everyone.

Good morning.

Good to hear everyone’s voices, and thank you for all the detail and transparency as usual. I just wanted to pose a strategic issue. When you sort of think about growing your business going forward and in the context of this event and other events we’ve been through, how do you think about the hurdle rates of taking on a hotel as a management contract versus a franchise with a third-party operator and sort of calibrating all of the risks and returns associated with all that, given where we are? And this may be a larger question for another day, but I thought I’d pose it anyway.

Yeah, it’s a fair question and obviously one that has been raised a few times. I think there are obvious differences between management and franchise. The franchise model is dramatically more prevalent in the lower segments of the industry. Franchising is also dramatically more prevalent in the US than it is in other markets around the world. And there are obviously different reasons for those distinctions. One is that the farther up the chain scale you go, the more likely you’re getting into group, the more likely you’re getting into luxury, the greater premium is placed on operational expertise. And by no means do I mean to suggest that there aren’t franchisees that have expertise that is able to do that. But not all franchisees do and in some markets of the world, those franchisees by and large have not existed yet. I think that there is room for us to consider whether in some of the lower segments we have more management than we need to have, whether we’ve had sort of a cultural bias towards management that is unnecessary. At the same time, I think the power of the luxury brands, the power of the lifestyle brands, the power in the group space, the power in food and beverage, I for one wouldn’t trade that away. I think that is something that is going to drive the stickiness of the loyalty program, drive aspirational travel, drive higher-end travel which will continue to be strong. And we want very much to keep that as a prominent and industry-leading part of our portfolio and would not trade Marriott’s model for being purely in the lower segments. There might be a different risk profile there, but there’s also a different upside this year.

Perfect. Thank you very much.

Your next question comes from the line of Wes Golladay of RBC Capital Markets.

Hey. Good morning, everyone. Can you talk about what drove the $65 million of bad debt expense this quarter?

Yeah, sure. As you know, the new accounting standard called CECL, better known as CECL, does it a little bit differently than the way that bad debt was done for us before, and it’s an accounting standard that everybody out there has got to follow. And before, for us, it was truly writing them off once it was very clear that the receivable was absolutely uncollectible. The requirement now is a little bit more as you think about like a classic loan portfolio for a bank, where it has to have obviously what you reflect as uncollectible, but also an estimate of future expected losses. So it requires that you go when you’re looking at your past history of your receivables and making an estimate based on performance of where they will prove out, and so you actually are taking a classic loan loss provision against that base of receivables as well as when you’ve actually got a specific receivable that’s deemed uncollectable. So as you can see in the number that we talked about, $65 million, as part of what was in G&A this quarter, that obviously is meaningfully impacted by COVID-19. So it’s got whatever ones that we very specifically deem uncollectible but also given the environment an estimate of future expected losses.

Okay. Thank you.

Your next question comes from the line of Bill Crow of Raymond James.

One for each of you. Leeny, is there any risk to collecting what is owed from the timeshare business?

I’m sure they’re listening to this call, so I would say, no. No. I think that’s, as you know, is overwhelmingly a fixed charge, and we feel great about our partner, Marriott Vacations Worldwide, and we do not believe that there is risk associated with that fee.

Okay. And then, Arne, bigger picture, any change given the current dynamics to your investment, your commitment to Homes & Villas?

Oh, no, I don’t think so. The amount of money we’ve invested in Homes & Villas is really very modest. You’re talking about a handful of millions of dollars, something like that, to keep the business up and running. And I think the way we’ve positioned that business, which is the higher end of the home-sharing space sort of skewing towards whole home and luxury which is quite different from traditional hotel product and has different dynamics I think too in a COVID-19 environment, because you’re not really sharing a part of a home and you’re ending up in a place which I think can be where we can deliver the kind of professional services that we like to deliver which suggests there’s still opportunity for that. It is, as a consequence, I think something that we will continue to pay attention to.

Do you think it will ramp back up similar to the way the hotels are ramping up?

Yeah, I would think so. I mean, it’s obviously a tiny business for us by comparison to what we’re doing, and it is leisure focused, more leisure focused than our hotel business is. There could be some modest differences in the way that the ramp occurs. I wouldn’t think they’re very dramatic though.

Okay. Thank you.

You bet.

Your next question comes from the line of Michael Bellisario of Baird.

Good morning, everyone.

Hey, Michael.

Good morning.

Just one quick question for you. I think you mentioned payment deferrals and 50% fee discounts, but that was I think just for April and May. When do you decide or what gets you to offer the same concessions for, say, June and July, for example, or maybe even longer? What are you looking for? What do you have to see? What do you have to hear from franchisees?

Well, again, I think as I talked about before, we’ve done a remarkable job of being able to reduce our costs down to this level where we were able to offer this and still feel like we’ll be able to recoup our expenses in providing these kind of basic mandatory programs and services. So I don’t expect at this point that we would be looking at offering a further discount.

And then what’s the timing or your expected timing for recouping those fees?

Oh, sorry. Yes. September.

Okay. Thank you.

Your next question comes from the line of Carlo Santarelli of Deutsche Bank.

Hey. Good morning, everybody. Just a quick one from me. Arne, Leeny, what percentage of your occupied room nights in 2019 were from guests originating from a flight?

We’ve asked that question too. You may have noticed that when you check into a hotel we actually don’t typically ask people how they came. And so we’ve looked at this a little bit based on other data sources. And it won’t surprise you to learn that it varies dramatically from market to market. The select brands in the United States are going to be much less dependent on fly-to business than some markets where basically you can’t get there unless you fly. Think about the Canary Islands as an example. Our estimate is it’s probably half, something like that. But again, in a way you’ve got to be careful about a global average because it hides dramatic variation within it.

That’s helpful. Thank you. And then, if I could, just one quick follow-up. With respect to the, I guess, it’s $900 million of commercial paper outstanding right now, the next payments on that are due – any kind of sense of when that [indiscernible].

Yeah. Mostly in the third quarter.

Great. Thank you, both, very much.

You bet.

Your next question comes from the line of Jared Shojaian of Wolfe Research.

Can you tell me what percentage of your pipeline is under contract or approved but has not yet begun construction? And, Arne, you mentioned you haven’t really seen an unusual amount of deals drop from the pipeline. Are you surprised by that? And I guess a lot of the conversation today seems to be around financing availability going forward. But from an owner’s perspective, the economics of building today are certainly very different. So I guess why wouldn’t we see a lot of that particular segment of the pipeline go away, the segment that has not begun construction?

[indiscernible] started construction. So I think the number we shared with you – and jump in here, team, if I’m remembering this wrong – 230,000 of the 516,000 are under construction.

That’s right.

So that’s like 40%, something like that. 45% maybe.

Yeah, yeah, yeah.

In that range. And so that’s the concrete number we can give you. I think what happens with this, the balance that are not under construction over the course of the next couple of years, there’s a few things to bear in mind here. One is that hotels are not entering that pipeline until typically they have been worked for a substantial period of time. It could be a year on average, although I’m guessing here a little bit where an owner is identifying a site, doing detailed work about how much it’s going to cost to build it, doing pro formas about what the returns are going to be and it is not, even though it may not be under construction, it is something which is very serious. We’re not putting deals in our pipeline, for example, just because somebody shows up and says I want to build a courtyard in X market, but I haven’t identified the site yet or I don’t have a specific deal to get done. And when viewed in that context, I don’t think it is at all surprising that 60 days into a crisis like this one that has a fairly uncertain path out that people are being tentative about making permanent decisions about killing deals that they’ve worked on for a period of time. I think the second thing to bear in mind is while we certainly have suffered a substantial hit in terms of top line performance, we will all be looking together to see what the best thinking can be about when that top line comes back. And for hotels that have not yet been built, what is the advantage that is available to me, if I can get it financed at a lower construction cost? And if I’m not open and I’m not going to be open for the two or three years that I need to be under construction, which may coincide with the weaker demand environment and also the weaker construction environment, my deal actually may be a decent deal and I may decide to pursue it. I probably won’t accelerate my construction until I get smarter about thinking that through, but there will be upsides as well as downsides associated with this weakness for projects that are not yet under construction.

Okay. Thank you. And just a point of clarification, if I may. You did give the number, 45% that’s under construction. But is that other 55%, is some of that conversions? Or are you saying that all that 55% is [indiscernible]?

Yeah. I can give you that. So roughly 16,000 are pending conversions, and then as we said in the press release, about 24,000 are approved, but not yet signed. All the rest are new build pending construction starts.

Got it. Thank you very much.

Call it, roughly 240,000, broadly speaking.

Thank you.

Your next question comes from the line of Richard Clarke of Bernstein.

Hi. A couple of [indiscernible] again, I believe. The first one is just your view on rates. You’ve talked about offering a 20% discount for prepaid vouchers. Your rate was down just 1% in the last quarter on the hotels where you control it. So just much are you willing to flex the rate to drive incremental demand?

Well, I think we’ll watch that obviously. We want to make sure that we’re not dropping rate to chase demand, which is not there and that obviously does nothing for us. At the same time, we compete in an industry which is highly distributed in terms of its pricing. And this is one of the challenges that we bear perpetually. People view us as, okay, you’re the largest hotel company in the world, doesn’t that give you pricing power. Well, the fact of the matter is, even as the largest hotel company in the world, we’ve only got – what’s our global distribution, Leeny? 14%? 15%? Something like that of all rooms in the world? And a significant number...

7% percent globally. 16%, North America, 16%. 3% outside of the world.

And many of those rooms are priced by our franchisees, not priced by Marriott. And so we will – we’re not going to push rates down by any means. We’re going to do everything we can to make sure we’re maintaining pricing power, but there will be price competition in our industry too as we try and get demand energized and coming back into the system. And we’ll do the best we can, making the kinds of judgments that need to be made.

And just a quick follow-up, if I may. Just the comment on incentive fees, you booked none this quarter, despite receiving some. Just whether I can understand how – I wonder what process would you refund incentive fees you received, and what assumptions are you making to book now in the first quarter.

So, as you know, you basically are looking every month at the expectation of the performance against a budget and against a target, depending on what the contract requires. So if there’s an owner’s priority then you need to have exceeded that but again, based on that month’s performance expectation. The issue, however, becomes you don’t actually technically earn it at the end of the year, until you see what the full year performance is. So based on, for example, January and February which were really terrific and really strong performance, we clearly were clicking along, doing well, and as I said, now would have locked in early on $64 million of incentive fees, however, even despite Greater China starting to really feel some impact in February and March. But when we look, knowing as we enter into April that you’re looking at 90% decline in RevPAR, our comfort that we can feel secure, that we won’t have to give those back is not great enough for us to feel like that we can recognize them as income.

Very good. Thank you very much.

Your final question will come from the line of Rich Hightower of Evercore.

Hey. Good morning, everybody. Thanks for taking the question here.

Hi, Rich.

Hope everybody’s well. So can you just help us understand the implied cost of capital for the $900-odd-million of coming in incrementally from the credit card agreements? Just help – I know there’s a lot of assumptions in there but just help us understand that as a source versus other sources of capital.

Sure. So let me do this, and then, Arne, obviously jump in. Think about it this way, that as people spend on their credit cards, our credit card issuers pay us an agreed amount of money, based on that credit card spend. And that is to compensate us for obviously being a part of the Bonvoy program and also for being able to affiliate with the Marriott brands. So when you think about that kind of amount over a number of years, there’s kind of an expectation about how much you could be collecting in revenues from the credit card companies. And basically, it’s getting some of it upfront. So what will happen over the next several years is what they will pay us based on the amount of credit card spend will be moderately a modest amount less than they otherwise would have paid us. So if you think about it from a kind of classic cost of capital, it’s extremely efficient and economic for Marriott to have. It also doesn’t have obviously any of the classic characteristics of debt in terms of required repayment terms, et cetera. So it’s really, again, overwhelmingly a reflection of monies that we receive earlier that then will get essentially paid back by them paying us less than they otherwise would have over the next several years. .

And the cost is less than our last bond deal.

Meaningfully.

Got it. Got it. Thank you, guys.

You bet.

Thank you all very much for your time this morning. We appreciate obviously your interest in us and in the recovery of Marriott and the industry. Wishing nothing but the best as we work our way through this challenging time, as a business, as an industry and as society. But know that we’ll be there to welcome you as soon as you get back on the road with bells on. Thank you.

Thank you very much.

Thank you. That does conclude today’s conference call. You may now disconnect.