Ladies and gentlemen, thank you for standing by, and welcome to Marriott International’s third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. If you require any further assistance, press star, zero. I would now like to hand the conference over to our speaker today, Arne Sorenson, President and CEO. Thank you, please go ahead.

Good morning everyone and welcome to our third quarter 2020 conference call. Joining me today 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 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 made in our comments and the press release we issued earlier today are effective only today and will not be updated as actually events unfold. Please also note that unless otherwise stated, our REVPAR and occupancy comments reflect system-wide constant currency year-over-year changes for comparable hotels 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. Before I talk about the quarter, I want to again thank our incredible team of associates around the world who continue to work tirelessly and show true resilience during these challenging times. The power of the Marriott culture has never been more evident and I am incredibly grateful. I hope everyone joining us today is staying safe and well. While COVID-19 is still significantly impacting our business, our third quarter results showed meaningful improvement versus the second quarter. Third quarter worldwide REVPAR declined 66%, almost 19 percentage points better than last quarter’s decline. Globally 94% of our hotels are now open with 97% open in North America. Our worldwide occupancy levels improved each month during the quarter and continued to close the gap to…

Thanks Arne very much. I hope all of you on the call are staying safe and well. I’d also like to thank our team of associates for their incredible work this year in making sure Marriott comes through this crisis strong and healthy. In the third quarter with global REVPAR down 66%, our gross fee revenues totaled $397 million, a decline of 58% versus the year ago quarter. Gross fees were comprised of base management fees of $87 million, franchise fees of $279 million, and incentive management fees, or IMFs, of $31 million. Seventy-five percent of IMFs in the quarter were earned at hotels in the Asia Pacific region where contracts generally have no owners priority. Over 90% of our hotels in Greater China had positive gross operating profit in September with almost three quarters generating positive profit for the first nine months of the year. These results are a reflection of the strong rebound in demand and our ability to help our owners control costs. With franchise fee, our non-REVPAR related franchise fees were again much more resilient, totaling $119 million in the third quarter, down 18% from the year ago quarter with credit card fees down 22%. Third quarter G&A improved by 40% year-over-year, primarily reflecting a full quarter of the difficult but necessary steps we took earlier this year in response to COVID-19. These steps included furloughs, reduced work weeks, and meaningful cuts in executive compensation. As REVPAR has improved from the global trough experienced in April, corporate and above property furloughs and reduced work weeks generally ended by late September. Of course, REVPAR is still well below 2019 levels and expected to take some time to fully recover. With that in mind, we focused on restructuring our organization to reduce costs on a more sustainable basis…

[Operator instructions] Your first question comes from the line of Shaun Kelley with Bank of America.

Hi, good morning everyone.

Hey Shaun.

Hi Arne. Just to start off, you covered a lot of ground in the prepared remarks, so thank you for all that. Could we hit on the net unit growth commentary for next year a little bit more deeply? Arne, I think you talked about a couple of the puts and takes around the SVC terminations being a bit of a drag, but what else could factor in, and just broadly speaking, do you expect to see some level of maybe elevated terminations relative or system exits relative to past behavior, just given the environment we’re in, or do you think these kind start to normalize? And in this comment, could you give any thoughts around particularly just maybe the health and status of the Starwood legacy portfolio? Thank you.

All right, well there’s a lot in that, and let me start maybe by saying it’s still a little early, obviously. There is a lot of uncertainty out there because of the pandemic. I think we were pleased to see in Q3 the increase in openings again compared to Q2. I think Q2, to some extent, even as projects were ready to reopen, either restrictions precluded it or the total lack of business precluded it, or just the uncertainty in the environment precluded to it. So to get to about 19,000 rooms opening in Q3, I think is a sign that at least for projects that are under construction and nearing completion, those will open, and I think that’s what gives us the most optimism about not just Q4 but looking into 2021, that we should see - obviously all of this depends on the virus, but that we should see these projects that are under construction open as scheduled, if you will, over the course of the next couple of years, something like that, but very much including 2021. The deletion side of the equation is harder, and of course there’s an offsetting potential upside, which is conversions. Both depend a little bit on what happens with properties are under trouble and what happens with change in ownership or change in capital structure for existing hotels. Some of what we’ve lost year to date, as we mentioned in the prepared remarks, are hotels that entered the COVID-19 pandemic already under financial pressure and simply did not make sense to reopen, certainly not to reopen under their current positioning. I suspect we’ll see some that next year. Besides SVC, we don’t have a number for it yet - we’re obviously just in the process of trying to build our budget. Our teams are dealing with owners all around the world. I think by and large on the positive side, conversions into our system and on the negative side deletions from our system will become clearer as ownership of hotels change hands or as the new capital stacks are put in place, and I suspect that will begin to occur more in 2021 than it is doing right now.

Thanks, and maybe just as a follow-up on the same topic, are there a large number of these sort of--let’s call it cross, single guarantee type contracts out there? Is the SVC situation pretty unique? Just any color you can provide on those types of structures.

Yes, SVC is very unusual. Those portfolios were initially put in place with HPT 20 years ago, maybe 25 years ago, something like that, and they were initially a lease structure or a lease-like structure. They’ve evolved since to be sort of a management structure but with a cap guarantee. That structure was re-done with SVC earlier this year. We were quite optimistic that actually it was done in a way that would bode well for long term, including getting substantial additional new capital into those assets to bring them up to standard, and of course the pandemic had profound impact to that. We are in discussions with SVC today about the possibility of renewing that. I think based on what we heard, including as recently as yesterday from that team, they seem to be hard wired to make those hotels Sonestas. We of course don’t know exactly how Sonesta would perform, but looking at the ROI from assets that are Sonesta flag versus ours, it looks like that ROI is roughly half, and it’s a little bit surprising to us that the separate stockholder and debt holder interest in SVC could be furthered by converting those to Sonesta’s brand, as opposed to the dramatically stronger brands that are on those hotels today. But again, that seems to be the direction they’re heading, and so our expectations would be that those hotels would leave the system. We do not think there is anything comparable to that, that remains in the system.

Thank you for all the clarity.

You bet.

It’s also just worth noting one addition, that when you think about the impact on fees, it’s quite minimal related to that portfolio. I think total fees in 2020 this year are expected to be $10 million to $15 million from those hotels.

Thank you.

Your next question comes from the line of Joe Greff with JP Morgan.

Good morning everybody.

Hey Joe.

Arne, you mentioned in your comments for next year in terms of gross room additions, for that to accelerate next year, and part of that confidence is some of the rooms that would have opened in 2020 were being pushed out to open in 2021. To what extent are the ones that you would have thought a year ago to open in 2021 will be pushed out to beyond 2021, into 2022, and does that room addition acceleration comment from you take that into account? Is there typically visibility in stuff that gets pushed out, so if something wouldn’t hit in ’21 right now, would Marriott in November of 2020 have a good sense of that?

Yes, it’s a fair question. I think generally we would say that everything in that pipeline has gotten extended by at least a few months. Undoubtedly that’s a little bit of an overstatement, but when we deal with--think about the end of the first quarter and the second quarter of this year, with business sort of functionally disappearing in many markets around the world, including restrictions on lots of activity that is happening in those markets, the uncertainty and those restrictions certainly caused many, many, many projects to slow down, even if they were already under construction, so I think it’s a fair point to say that if in January of 2020, we targeted a June of 2021 opening, that opening could well have slipped by a few months. We do have a team that is out there working with our development partners and trying to make sure they understand what is under construction and what the status of that construction and what the forecasted opening is, for obvious reasons. I think on the very positive side here, the 45% or so of the rooms that are in the pipeline that are under construction, 230,000 rooms roughly, we can all have an extraordinarily high level of confidence that those hotels are going to open. I think you get beyond that to the hotels that are not under construction yet and I think we’re going to have to watch that. I think they are real projects, in many respects the land is owned and controlled, they’ve been designed, they’ve been improved by us and by our partners. We have signed contracts for the overwhelming majority of them, but if construction hasn’t started, each one of those partners has got to make a decision about what do I get for building in a weaker environment, which I might save something on construction costs, and what do I potentially lose in committing myself to a project that may open in a market that is harder for me to predict and underwrite today. Our experience from prior crises is that most of the projects which are not under construction overwhelmingly will ultimately open, but the delay in those openings could be not just some quarters, but some years, particularly for the higher end luxury or full service projects that may take some time to get financed and get underway. So on balance, I think we would say we can have a reasonably high level of confidence that the gross openings will step up next year - again, this is based on reasonable assumptions on what happens with COVID-19, but it’s a little bit too soon for us to give you really precise numbers about it.

That’s helpful. Then as a follow-up, Leeny, your mutual cash burn in 3Q was impressive, and you mentioned working capital management was a contributor to the EBITDA upside. To what extent do you think working capital be a source of-a positive contribution to cash flow, operating cash flow, free cash flow next year?

Well, one of the big questions is around loyalty. If you remember, Joe, last year we actually had loyalty as a use of cash relative to strong redemptions throughout the system, and this year it’s kind of a bit of the opposite. Now, the reality is I actually would expect next year that that stabilizes a bit as we continue to rebound from the low levels of demand that we are, so that while I would expect meaningfully more redemptions, they won’t be quite at the same peak prices that they were in 2019. From that perspective, I would expect that loyalty is not as large a source of cash as this year, but also not like 2019 either. When I think about it overall, we’re still early days as we go through the budgeting process, but I would not see it as a major source but also not a major use of cash next year, as we think about from a working capital perspective.

Thanks guys. Have a great day.

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

Great, thanks. I wonder if you can talk a little bit about, you know, some of your owners have talked about saving--permanent cost reductions from changing brand standards. I just wonder if you can talk about how permanent is that really, because right now, okay, you don’t need a doorman on duty or you don’t need a 24-hour shuttle to the airport, but won’t those come back, so how permanent are they really? Also, when you have 30 brands, do you lose some of what distinguishes the brands if some of those brand standards do change permanently?

Good question, Robin, and good morning. I think what we want to do is have as many of the savings as we’ve been able to find and implement be long lasting, to state the obvious. I think there are some, and your question illustrates a few of them. I mean, food and beverage service, I think would be one that’s on the top of my list, maybe even before a doorman. We have, particularly in the markets in which demand is the weakest, we have fairly limited, sometimes dramatically limited food and beverage service, and that’s not going to be satisfactory to most guests when we get back to a normal demand environment. Guests can be quite sympathetic and empathetic during a tough, tough time, but when we get back to something that feels a little bit more normal, they’re going to expect the full services, particularly from a full service hotel that they have come to anticipate. Having said that, I think we will see some things in keyless entry, I think we will see some things in the staffing models that we have been experimenting with. I think some of the above property costs that have been cut, and Leeny can talk a little bit about that, we think will stick and stay for a while. I mean, our estimates today, I think are--we’ve probably reduced breakeven occupancy by three to five points, something like that, depending on the brand. At the end of the day, though, we’ve got to make sure that the guest is satisfied with the experience that they’re getting, and you’re right - it’s going to vary a little bit from brand to brand and segment to segment. Obviously the advantages, of course, on the higher end segment is we’ll see rate begin to move at some point up too, even as the costs move forward a little bit. Net-net, we’d expect that what we’ve done should deliver some long lasting margin improvement. It’s a little too soon to be able to tell you what that number will be.

Then maybe just as a quick follow-up on the conversation about conversion, I know in the release you mentioned the percent of conversions, 1,400 out of the 19,000 rooms opened, so still a pretty small percent because obviously that was all pre-COVID. Can you talk about the signings in the quarter, what percent of those are conversions, and did you see that go up during the quarter for signings? Thanks.

Yes, I don’t have that number. I know that the team is talking, having significantly more conversations around conversions than they’ve had in the past. The one quarter signings don’t necessarily make a huge amount of difference - I’m aware of a few significant ones that are underway now and the team of transactors that are working on them are hoping that they get done in the fourth quarter. Whether that happens or not, of course, is another question. We’ve gone back and looked at our conversions experience through the cycles - obviously we knew this is of interest not just to you but to us as well, and you can see even in the last two years before COVID, we had--of our openings in 2019, 18% were conversions, but the year before in 2018, it was 12%, and so you can see a little bit the obvious fact here, which is even in a very similar economic environment, these things can be a little bit lumpy and a little bit hard to predict. We’re in the teens for most of the last decade or so, and conversions as a percentage of our openings were highest coming out of the Great Recession - ’11 was higher than ’10, ’12 was higher than ’11, ’13 was higher than ’12, and as a percentage they peaked in ’13 but the number of rooms we opened as conversions in 2014 was higher yet again. Again, this is what we said before, but we would expect conversion activity to increase certainly in terms of discussions starting now. We would expect that the more substantial increase in terms of actually opening into our system will depend a bit on the new ownership structures or financial structures for hotels that caused those folks to be able to look to the future and say, I now know what I want to do with that hotel.

Great, thank you very much.

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

Hi, good morning everyone. With the layoffs in corporate level sales staff and also property level sales staff, should we interpret that as your belief that it’s going to be a long, slow recovery for your group business, and also related to that, how is your group business tracking for next year? Thank you.

Our group business for next year is down about 30%. It won’t surprise you to know that the first quarter is the worst by far in terms of group business on the books, and as you get farther into the year, the decline is meaningfully less than that 30% number. What does that tell you? It tells you that folks are still optimistic about holding their meetings, that COVID-19 will allow them to hold their meetings as you get further into 2021. I think we are optimistic, as are many, that we can have a vaccine or two, maybe, approved by the end of this calendar year, and could see it start to get broadly distributed by sometime in the first half, maybe it’s the latter part of the first half, but sometime in the first half of 2021. As that takes hold, we’re optimistic that group business will come back. I think what we’re seeing in group today, and I think you’ve heard this from other companies in the industry, there is group business. Obviously it’s stronger in China, but coming back to the United States for a second, the group business in hotels in the United States is not a lot like the group that I think we all first think of, which is corporate group and association business and the like. I think the group business we have today is much more likely to be healthcare workers or somehow connected with the COVID-19 pandemic itself, or things that are more leisure focused - that could be some athletic groups, it could be some larger family groups, that sort of thing. The core corporate business is still pretty weak. I don’t think you should read too much into the efforts we’ve made to manage our costs in the sales space. Obviously those costs are borne by the system of hotels that are out there. We have got to make sure that we’re managing those costs in a way that meets the level of reimbursement that can come in there, and we’re doing our best to do that and to make sure we continue to call on the customers that we know are important to us and important to the recovery. We’d be optimistic, I think, if COVID-19 goes the way we think, that we will start to see this group business that’s on the books hang tight and ultimately come to pass, and we’ll start to see meaningfully more bookings when those vaccines start to take effect.

Okay, thank you. I certainly hope so. Thanks.

Your next question comes from Steven Grambling with Goldman Sachs.

Hey, good morning. Thanks for taking the questions. I just had a bit more of a strategic question related to the loyalty program. You’ve mentioned the strength in Bonvoy and corresponding credit cards. What are you learning from how consumer are engaging with the program in this difficult time that could drive changes to further differentiate the brand in a recovery, and potentially even lead to stronger conversions and/or development in the future?

Conversions and development - you’re talking about hotel development, or back to credit cards and the Bonvoy program?

I mean, it’s really all together because I feel like if you’re creating additional value and differentiation for the consumer, ultimately that drives stronger REVPAR and development opportunities in the future.

Yes, well I think we mentioned a bit of this in the prepared remarks, that we’ve been actually quite pleased with the performance of the credit card portfolio during this crisis. It’s probably worth starting with that because you would wonder about how well that would do, an Affinity card for travel in a market in which there is very little travel. But what we’ve seen is that folks are still aspiring to travel, dreaming about travel, eager to get back on the road, and as a consequence when we’ve with our credit card partners done things around grocery or done things around restaurants or around hardware, the card has performed extraordinarily well. The Bonvoy membership, I think, has continued to engage with us in a way that’s pretty powerful. I think if you go back to before the pandemic, what we saw was a continued increase year-over-year on the number of Bonvoy members as a percentage of the total business in our hotels, and one of the frustrating things, we talked about this a quarter ago, about the timing of this pandemic is as we got into the second half of 2019 particularly, the Starwood integration work was behind us, the systems work was behind us, the new Bonvoy program was launched and we could see, whether it was in REVPAR index or in loyalty penetration or other data we look at very carefully, really powerful momentum towards proving the value of those programs. I don’t have any doubt that we will get back to that. It will come back stronger, obviously, the sooner people get back on the road and know that travel is going to be a part of the way they live their lives, but when they do, they will find that they’ve got a credit card program, they’ll find that they’ve got a broad portfolio of destinations to stay at - we have the biggest portfolio of hotels around the world, clearly the strongest in the luxury and lifestyle and resort and urban space, plus other things like Eating Around Town and Homes and Villas and other things that we still are working on and hope to get launched before too long.

The only other thing I’d add, Steven, is the digital experience. If you think about travelers today, if they are traveling, the contactless element of the experience is all the more important, and that is all driven through the Bonvoy app, so as you see more and more people signing up for that experience, that again gets them more invested and they really have an opportunity to see what Bonvoy can do for you.

Makes sense. That’s helpful. I guess one unrelated follow-up on just at the hotel level from a profitability standpoint, what are you learning from reopened hotels that can inform when incentive management fees could come back in fuller force in North America?

Leeny, you want to take that?

Yes, sure. Again, I think the reality is that we are in a position now where, in many cases, you’ve got for a full service hotel, it is better to be open than closed, not in all cases but in most cases, but that is really about what is the least bad, so we’re still a very long way from obviously occupancy levels that get us to IMFs, because overwhelmingly in the U.S. you’ve got owners priorities. But at the same time, I’ll say with the reduction in cost structure, that I do think that it will help us as we come back to get to incentive fees earlier than perhaps we were before COVID, because of all the work that we’ve done on the cost structure. I think the other side of that is obviously wage pressures, and I don’t see any sign of those actually going away. I think what we obviously have done is try across every single discipline of our hotels to improve our efficiency and to improve ways that can drive more to the bottom line, so I do think it’s certainly that we will hold onto a bunch of these savings in a sustainable way, but I think the wage pressure element on a full service hotel is obviously going to be--you know, with those being, call it 40% of your cost structure of a hotel, that’s going to be a big element of how quickly we get back.

Helpful, thanks so much.

Your next question is from Anthony Powell with Barclays.

Hi, good morning. You mentioned that business travel in China has lagged leisure despite the virus being under much greater control there. Is there anything to read into from that in terms of the potential recovery in the U.S. or other markets?

No, I don’t think so. Obviously we talked about occupancy being higher than it was a year ago, and so that’s a really good sign; but beneath that total, you’ve got two things that are happening. One is that business transient travel and group travel is still a bit softer than it was last year, and the second is you’ve got the Chinese travel business that used to go abroad staying home, which is driving those leisure numbers meaningfully higher. Remember we had in February 9% occupancy in China, a country entirely shut down, and even today now we have occasionally a flare-up in a market in which the Chinese government response is to essentially shut down that market and test everybody in the market for COVID-19, and they’ve managed at least in two or three circumstances to nip that in the bud, if you will, and get those markets reopened and get going again. They have had an impact to us, probably less than a point or so on REVPAR, but a little bit of an impact as they roll forward, but it’s just a reminder that even in China, where there’s a much broader sense that COVID-19 is under control, it is not irrelevant yet. Until it becomes irrelevant, I suspect we will see a little bit of relative weakness in business transient and group, albeit they are dramatically stronger than what we’re seeing in the United States, which of course would be the next strongest big market. You get to Europe and the rest of Asia Pacific, it’s probably weaker yet.

Understood, thanks. You’ve mentioned a few times the relative strength of Homes and Villas over the summer, but it still seems that you do that as more of an amenity versus a core business. Is there an opportunity for you to maybe grow the inventory there and grow that business a bit more dramatically, given the demonstrated popularity of the offering that you’ve seen?

We are growing it. As we’ve talked about from the beginning, though, our effort here is a whole home product and obviously if you look at our urban markets globally, but particularly in the United States, you would see that we’ve got tremendous hotel capacity and extraordinarily little demand in those markets. Partly that’s because offices remain closed in too many of those markets, you don’t have business transient travel, you may not have much leisure travel because people are more inclined to go to resort destinations or other destinations. We will remain focused, I think, on whole home, warm weather, ski country, resort destinations. I am quite convinced that that will continue to grow substantially and it will be a nice complementary feature to the traditional hotel business for us.

Could you work with developers to maybe build new inventory in those markets, like ski resorts or warm weather, or is that mainly going to be finding existing inventory?

It’ll be both. We have had conversations with some of our good partners about exactly what you’re talking about, which is building new inventory, if you will, in some of those resort markets.

Great, thank you.

Anthony, just one follow-up on your comment about business travel, is to remember that in the ballpark of a quarter of the travel in China in our hotels is from international business from outside China, so the fact that business nights, yes, they are down but again you’re also having the impact that you’re not getting the travelers from outside China coming in. So all things considered, I would--although it’s not quite as robust as leisure because people are not traveling outside China, it’s still quite robust a recovery on the business side.

Thanks for that detail, appreciate it.

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

Hi everyone, thanks for taking my questions.

How are you, David?

Hey, good morning. Good to hear everyone’s voices. As you talk to your business peers, we obviously are all very focused on this business travel element. Do you think the collective wisdom is that--you know, the gating factor is entirely therapeutic, or is that one component of maybe a larger set of strategies to get the likes of me out and traveling again? What are you hearing?

Well, I think there are three things, and obviously the most urgent and most impactful will be what happens with COVID-19. Clearly travel has plummeted because of the risks associated with it and the way those have impacted either through formal restrictions or informal restrictions - think about airline capacity, international travel, all of those sorts of things - that impact has been very profound. We will have, I think, a meaningful step up in group and business transient travel the moment that COVID-19 risk recedes from the threatening horizon, if you will. I think once that happens, there are two other things that we’re going to have to pay attention to. One is what’s the state of the underlying economy, and as we’ve all watched for years and years and years, demand in our industry does correlate well with the strength of the economy, and my guess is we’re going to see an economy which has got some lingering weakness because of small businesses being closed, many probably not able to reopen, relatively higher levels of unemployment around the world, a number of factors that it will take some time for us to work our way through. Then I think the third is what happens as a function of remote work, the digital tools we’ve all learned to use even more than we used before to meet with each other and stay connected in a time in which we can’t be out, maybe can’t even be in our offices let alone traveling, and there of course you’ve got significant conversation about how much of that will impact long term travel trends. That last piece, to some extent, is similar to the conversations we participated in during the Great Recession and even when the tech bubble burst in early 2001 and 9/11 followed, and the travel recession we had then. What generally we saw is that in the few years following, most of that group and most of that business transient travel comes back. Not all of it - if you look at 20 years’ worth of mix for the industry and including for Marriott, we have seen a couple of points, maybe two or three points shift from business transient and group combined towards leisure. I suspect we’ll continue to see that in the years ahead as leisure remains probably a pretty powerful driver of demand, but we’ll get through--we’ll see business transient move to--the fact of the matter is, people love to travel, they love to travel both for themselves personally and they love to travel for work. It’s often the most interesting, and the places they’re going to learn the most, and we’ll see the lion’s share of that come back, even if it’s not every single night from every single company that we do business with.

Noted, and--

Does that answer your question, David?

It largely does. If I can follow it up, just specifically around the COVID piece of your answer and the need for a vaccine to be a gating factor to mitigate the risks of COVID, are you hearing from any of your peers about interim steps or alternative strategies in conjunction with or instead of vaccine? Just trying to think about whether we’re sitting around waiting for one single event or a series of things, just from what you’re hearing.

Yes, I think--I do spend a lot of time talking to our big customers, sometimes though the business roundtable, sometimes in other one-on-one contexts, and I’d hesitate to speak for the corporate world globally but I do think there is an increasing sense that with each passing month, we lose a little bit more in terms of the connective tissue between our people in companies in all sorts of different industries. I think as a consequence--and you know, when you’re talking about collaboration or innovation or strategic conversations, that maybe is most obvious that those are the things that are harder to do through a Teams call or through some sort of digital tool, so I think there is a sense that when we can safely do it, we should start to probably more significantly open offices and bring people back to work. That is made difficult by a resurgence of the virus today - you know, I think we’re talking about some days with over 100,000 new cases in the United States, and it’s made difficult by the school situation, which some markets they’re open, some markets they’re closed, in many market they’re hybrid, and employers are trying to work their way through that process. But I am hopeful that we will, even before the vaccine is broadly distributed, we will start to see offices opened up with social distancing, with mask wearing, and probably with reduced density, but starting to get to a place where it’s at least a step towards a more normal environment. It has to be done safely, but I think it can be done safely because I don’t think the office environment is a particularly risky one. I don’t think it’s probably as risky as the grocery store, for that matter. We will start to see, I think, some positive impact on our business from that too, and that could precede the vaccine.

Right. If I can ask one more very short follow-up, you commented earlier in your remarks about conversions and accepting or embracing those that are financially accretive and brand accretive. If you could just color us, because all conversions are clearly not created equal beyond the financial impact, how you think about that brand accretive concept beyond just REVPAR index and the like?

Yes, I’m not sure you can even find out what we all do because we don’t necessarily publish it. I think some of our--some players in the industry are compensating their folks simply for adding units. Our compensation tools basically are to reward folks for units that deliver value, so an NPV calculation is a big part of or compensation scheme for the folks on our team that out there, helping us grow. We’ve also got our brand and operators that are involved in making sure that the products we bring on meet brand standards, and typically that will come home to roost for conversion in what does that property improvement plan look like for a pre-existing hotel in order to put one of our flags on it, and we want to make sure that--obviously we want to make sure we’re growing. We’re really interested only in growing if it’s delivering value. We’re about creating value, we’re not about simply adding rooms that have no value, but we know long term that the reinforcing aspect of the power of growth depends on the strength of the brands, and so we’ve got to make sure that we are getting the kind of quality that represents the brand well. So all of those three things are going to be very much in the mix, and if we can’t be satisfied that all three of those exist, we’re not going to take that product.

Thanks very much. Be well, everyone.

You too.

Your next question is from the line of Thomas Allen with Morgan Stanley.

Hey, good morning. It was helpful in the prepared remarks that over 90% of hotels in China had positive gross operating profit in September. Do you have that percentage by region or for your broader portfolio, and how has it--I know you anticipate it to trend. Thank you.

Yes, I don’t have it for you by region. Obviously it’s not going to surprise you, we’ve got big chunks of hotels still closed in CALA and Europe and with REVPAR down in the 70%, that’s an extremely difficult process for them. In the U.S., I’ll work in getting you some numbers, but obviously it’s going to be a far lower percentage. But again, I think it shows you in China the remarkable resilience of both the profits and the revenues from a demand perspective.

I guess the bigger question in a way is the--I mean, on the surface, I think people view that this is going to be a relatively--I mean, in the short term, it’s a very deep downturn, and then there’s some concerns it’s going to be a long recovery and hotels may be seeing negative operating profits for a prolonged period of time, which on the surface a lot of people feel like will lead to closures, maybe not now but maybe once debt maintenance deferrals are put off. What gives you confidence that that’s not going to be the case?

A couple things. First, again I think you do have to look back at how-you do have to look at China as being somewhat helpful in evaluating how things can come back, so I don’t think--although we haven’t seen it everywhere else, I think it is instructive. Then for example, when you’ve seen in the luxury occupancy at the resorts, you’ve clearly seen that the leisure demand has moved that up quite nicely when you see the Ritz Carlton brand, for example, had 27% occupancy in the third quarter in North America, and we’ve talked before about how breakeven occupancy can be around 40%, and that’s still with REVPAR for Ritz Carlton being down 64%, so all that to be said is I think it can rebound fairly quickly. I think if you look back and see what happened in the Great Recession, you also had the most complex hotels dramatically impacted by a massive drop in demand, and what you saw is while it took a little bit of time, they did get through it, they did get through to generally not being foreclosed upon, and getting back to strong profits and, in many cases, incentive fees for us. So while I appreciate--we all appreciate that this is going to take longer than any of us would like, I think the most--the guiding light, I know that we see, is how quickly when people feel comfortable about travel, how quickly demand returns and, frankly, rate. All things considered, rate has held up fairly well when you think about big picture, where things are. For example, when you see a quick pop to demand and a drive to luxury resort, you actually see that rate stays in pretty good shape, and again I think we’ve worked on the cost structure at the hotels to be able to take up some of the slack that has been created from the demand side. You know, you’re right about it will depend based on how long this takes, but generally speaking the hotels are in better shape from a leverage standpoint than they were the last go around. I do think the lenders have been quite patient and I think when we get some ability to travel, that the demand is going to come back fairly quickly.

Helpful color, thank you.

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

Hi, thanks. You covered a lot of ground this morning, but I just wanted to ask you longer term, when free cash does start to re-accelerate more meaningfully, are there any changes in the way that you’re thinking about the leverage levels that you’d like to attain, or should we expect that you’ll just really focus on reducing debt, or maybe how do you think about returning to a dividend program or some sort of repurchase program?

Sure, thanks Smedes. I would love to be thinking about those questions. I think for the moment, that’s still a little ways off. This will obviously depend on how quick REVPAR come back, and we’ve got--as you know, we’ve got leverage ratios that we want to get back in line, certainly on our revolver covenant, to even consider share repurchase and dividends. We need to get back to four times to be able to even consider that, so I think it’s a ways off in terms of actual planning. I think one of the things that you know we’ve been focused on is really thinking about our debt maturity stack, and so that is one of the things that we’ve done that is more permanent and I think will hold us in good stead as we think about managing our cash flow. When you’re not looking at having quite as much in commercial paper, which is so short term and so much more subject to a crisis like this, obviously stretching out our maturities will be helpful, but I think we want to be strong investment grade, we want to continue to be in that range, but we also will obviously be working hard to generate that excess cash flow to consider what to do with it. We like a mix of dividends, of a modest dividend and share repurchase for the flexibility and for the modest ongoing return to the shareholders, and I suspect that we will continue to like that; but exactly where we want to peg the leverage, I think will absolutely depend on the pace of this recovery and the timing of it.

Okay, thank you. Appreciate that.

Let me throw one thing in on this, if I can. What Leeny said is exactly right - there’s obviously been a fair amount of conversation in policy circles about whether repurchasing stock is somehow a sign of bad behavior by corporate America or by businesses around the world. In the context of Marriott, we have been buying back stock for decades - 40 years, 45 years maybe, something like that, and it is not because we are uninterested in growing our business or investing in the economy or in our people but because the business produces cash and in the fullness of time, we often find that we do not have attractive enough investments to use all of the capacity. As a consequence, we believe it’s our shareholders money and should be returned to shareholders, either through dividends or share repurchases. While Leeny’s comments about let’s take this one step at a time and see how the recovery and EBITDA comes back, and we’ll continue to monitor this in terms of appropriate debt ratios and the like, and the maturity ladder of the debt that we have, all of those things are extremely important. I do think we will get back fairly quickly, in fact, towards a place where we have excess financial resources that belong to our shareholders and that through dividends and share repurchases, we will continue to give it back to them.

Okay, good. Thanks. I just wanted to ask you too, just circling back on the SVC, assuming those rooms do come out of the system, I assume that that lifts a lot of territorial restrictions, and just given that it is a big chunk, and you sort of talked about this on your opening remarks, but what would be the strategy, I guess, to replace rooms in those markets sooner rather than later? I’m not really familiar where the hotels specifically are, but would you expect to have a very focused conversation with developers or even conversion opportunities in those markets to replace your presence there faster, sooner rather than later?

Our development team has already looked at that list and they are obviously going to be focused on the markets where they are convinced hotels will make good economic sense, and we’ll be talking to the appropriate partners in those markets to see whether or not we can add something there quickly. Now, they will be new builds, so obviously it--and we are in a pandemic, so it’s not like they will be opening in the first quarter of 2021, but I suspect that we’ll move fairly quickly.

And without getting too far into conversations, we’ve already received some phone calls on that very topic from some of our partners, so I think you can expect there will be some near term opportunities.

Okay. Just sort of on that, are developers--do you have just a sense in general of how a developer is able to access financing now, or what sort of changes are you seeing?

I think obviously you’ve got the reality that our large multi-unit partners and our lenders are assessing the situation and trying to figure out the health of their own assets, whether it’s the loans or the hotels they own. That is in some cases requiring that they take a bit of a pause, but at the same time these are in many cases folks who are thinking over the longer term and who do have access to capital to get things going, so again as you’ve seen, we’ve clearly had a drop in signings, we’ve had lenders clearly waiting on the sidelines, but it’s not to say that all activity has stopped. Certainly in some of our larger diversified owners, they’ve got the ability to continue to move forward, looking at pieces of land and starting the process in talking to us and putting deals together, so the conversations certainly get going. I think as you’ve seen, certainly on the financing front, kind of putting pen to paper and getting committed capital on some deal has slowed, but the conversations absolutely continue. You know, the business has had downturns before, it’s a cyclical business, and will again, so I think this I sometimes when there can be some great opportunity, but to really see things pick up in a meaningful way will take that there’s more resolution around the COVID situation.

Okay, thank you very much. Appreciate it.

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

Hi, good morning. Thanks for taking my question. Just a quick question on the reimbursed costs. It looks like you were profitable on that line in Q3, but you’re talking about making a 25% cost saving in there. What will actually happen to the costs you save in there? Does that benefit the owners? Are you going to be able to cut their fees or will you reinvest that in marketing, or does Marriott benefit somehow from that?

Right, well we benefit from it indirectly. We benefit from the standpoint that obviously we need to make sure that what we charge for our programs and services is competitive in a variety of REVPAR scenarios, and as you know, many, many of our charges are actually based on hotel level revenues, so they’re a percent of sales, so we’ve got to make sure that our costs also flex with those changes. First and foremost, ultimately on the reimbursements, it is a net neutral goal. What you’re trying to do over time is to match your costs to your revenues, but also make sure that what you’re charging the properties is competitive. So you’re right that you see it’s positive, but again that’s overwhelmingly due to loyalty, and I talked before earlier, that really does flex a bit depending on what’s going on with redemption buy-in. We do basically manage it over time to be neutral, as well as all the other programs and services that we charge the hotels for.

Okay, so just to clarify, in future years the costs you’ll need to spend there will go down by 25%, but you should be able to recover the revenues you make in that line--

I was going to say, since so many of the charges that we’re charging them flex with revenues, I’ve got to reduce my costs by that 25%, because remember I can’t charge them as much. So when we talk about many of those costs that are above property related to programs and services, that is a function of knowing that as you think about, for example, next year, we’re likely to enter into the year not meaningfully different from where we are now, unless there’s some unbelievable piece of news. So again, we’re just making sure that our cost structure matches what we by contract are able to charge the owners, so that 25% savings is really designed to match what we’re charging the owners, but also to try to find ways, as I said in my comments, to actually reduce the rate that we’re charging for programs and services, which will then show up in higher hotel profits over time, which should make us more competitive as a manager and franchisor. Does that address your question?

That makes sense. If I can also ask one very quick clarification - on the front of your release today, you talk about a number of hotels that you’ve opened from other brands. Does that include from independents as well or is it just from alternative brands operators?

It’s from independents as well.

Yes, it’s from any - independent or other brand.

Makes sense, okay. Thank you very much.

At this time, we have reached our allotted time for questions. I would like to turn it back over to Mr. Sorenson for closing remarks.

All right, well thank you all very much for your time and attention this morning. I was thinking as the questions were asked by so many of you, how much we miss you. It’s great to hear your voices.

So true!

We hope you’re all navigating through this time well. We obviously can’t wait, for so many reasons, to see you in person again soon, and between now and then, we wish you nothing but the best. Obviously if there are questions that we didn’t get to this morning, feel free to call the team and we’ll be in touch and make sure you’ve got the information you need to have. But thank you all, be well.

Thank you. This concludes today’s conference call. You may now disconnect.