Hyatt Hotels Corp (H) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Hyatt Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the call over to Brad O'Bryan, Treasurer and Senior Vice President of Investor Relations. Please go ahead.

Thank you, Denise. Good morning, everyone, and thank you for joining us for Hyatt's Third Quarter 2020 Earnings Conference Call. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer.

Before we get started, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the earnings release that we issued yesterday, along with comments on this call, are made only as of today and will not be updated as actual events unfold.

In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in yesterday's earnings release. An archive of this call will be available on our website for 90 days.

With that, I'll turn the call over to Mark.

Thank you, Brad. Good morning and welcome to Hyatt's third quarter 2020 earnings call. I want to begin today by recognizing every member of Hyatt family around the world. As we all know, this is an incredibly challenging period we are living through and one that is expected to last far longer than any of us could have imagined. I continue to be inspired by my colleagues every day. Their embodiment of our purpose and the excellence in ingenuity with which they are engaging to maximize our opportunities are remarkable.

Our purpose of caring for people so they can be their best defines why we exist and has long been fundamental to who we are as an organization, and it is vital during interactions with guests, customers, hotel owners, travel advisers and with each other.

In addition, the powerful way in which our teams around the world have put their skills into practice with excellence, creativity and agility in reimagining our business has been stunning to see and highly effective. Our teams have successfully created safe and fulfilling guest experiences, and as a result, have maximized our operating results in this low demand environment. It is clearly evident that we have the right team of people around the world to lead us through these challenging times, and we intend to build upon and leverage the strength of our brands as we recover and drive industry-leading growth and expanded profitability in the future.

I'd like to now provide some color on what we are seeing in our business and how we're thinking about further recovery over time. Leisure travel has been the primary source of demand and continues to drive the recovery to date. So let me start there.

During our second quarter call, we discussed the leisure-driven occupancy levels we were seeing through the first half of the summer as the strict lockdowns experienced during the second quarter began to be relaxed. We continued to see increasing demand through the remainder of the summer and into September. The strongest demand we've seen in the U.S. since the pandemic began was during the Labor Day holiday. We experienced continued strength through September and October, with modest increases in average occupancy levels over the period driven heavily by weekend business where occupancy percentages were running in the low 40s, while mid-week occupancy percentages were running in the high 20s.

We've seen booking activity continue to show small improvements since Labor Day. And it's noteworthy that TSA data for October 18 showed over 1 million travelers in a single day for the first time since March 16 this year. That said, we are mindful of the recent increases in COVID-19 cases in the U.S. and Europe, and the resulting increase in restrictions being put into place in many jurisdictions. We expect these enhanced restrictions to have a negative impact on travel in the near term, and this could result in flat or perhaps reduced fourth quarter demand compared to the third quarter.

Leisure demand continues to be concentrated in drive-to leisure destinations. We have also seen significant outperformance by our select-service brands as compared with our full-service brands. On average, our open Hyatt Place and Hyatt House hotels ran occupancy levels of approximately 46%, which was well ahead of the roughly 30% occupancy levels at our open full-service hotels.

We're pleased with the relative performance of our select-service hotels as they are gaining share with an increase of over 1,000 basis points compared to already strong RevPAR index levels in the U.S. during 2019.

We're seeing similar or even greater increases in international select-service hotels. These brands have consistently proven to be preferred by guests in the upscale segment, and this has continued to hold true through to the early stages of recovery this year.

Shifting to Greater China. Occupancies in most areas of Greater China, excluding Hong Kong, Macao and Taiwan, have reached pre-COVID levels as the rebound in domestic travel has fully replaced inbound travelers. We also continue to drive very strong RevPAR index results in China, a continuation of our second quarter performance. The strength of our brands, combined with the operating excellence of our teams, has led to continued outperformance versus the competition with an over 900 basis point increase in RevPAR index across Greater China.

Travel demand in China also continued to show strength beyond the end of the third quarter. During the Golden Week holiday from October 1 through October 8, over 45% of the population travel, and we realized a 17% increase in RevPAR and a more than 35% increase in spend on food and beverage as compared to the same period in 2019.

Leisure transient demand continues to lead the recovery in Greater China, but we are also seeing some meaningful recovery in both transient business travel and group business. As a percentage of realized demand in Greater China during the quarter, group business was at similar levels to 2019 and business transient was only off approximately 200 basis points.

Notably, on the group business front, we continue to host new product launches for car manufacturers as well as luxury goods companies with extraordinary new programming that leverages our deep strength in banqueting and events. We view the China experience as an example of the strong desire of people have to travel and gather, and the type of demand you might see to -- that you might see -- that you might expect to see elsewhere once travel restrictions lift and fear around the virus ceases to be such a limiting factor to travel.

With respect to ASPAC markets outside of Greater China, we're seeing continued improvement in demand in South Korea, which increased Q3 RevPAR levels by over 25% compared to the second quarter, and in Japan, which has started to show some improvement off of lower second quarter levels, with RevPAR increasing approximately 20% quarter-over-quarter.

The majority of markets in the ASPAC segment, however, continue at low levels of activity given border closures and travel restrictions that remain in place.

I'd like to now cover some forward-looking demand factors that we are paying close attention to. As stated, drive-to leisure has been and will continue to be the primary source of demand that leads the recovery for the foreseeable future. Business transient and group business, however, will both be necessary ingredients in achieving full recovery and in supporting better rate realization.

We continue to see near-in group business cancellations consistent with what we saw last quarter and have now seen meaningful cancellations in the first quarter of 2021 group business. While the impact on second quarter 2021 business isn't nearly as significant yet, we are starting to see cancellations and believe we may experience additional attrition over the coming months.

Large group business demand is heavily linked to confidence around widespread vaccine availability, effective therapies and scalable rapid testing solutions. We're cautiously optimistic about recovery in business travel in the second half of 2021, and we are encouraged by the advances in rapid low-cost testing.

We've seen events in Southeast Asia facilitated by testing protocols, and travel authorities in the U.S. and Europe continue to advance the procedures that would be put into place for bilateral market travel without quarantine requirements. Having said this, we're prepared for the first half of 2021 to be challenging even as new solutions are launched because it will take time for confidence to build.

Group business on the books for the full year of 2021 at this point is down about 40% from where we were last year heading into 2020. While large-group business has essentially disappeared, we're having some success with targeted small-group business, including bubble programs for customers in professional sports, entertainment, emergency response workers and universities. Our teams have reimagined our approach to group business with shifts towards regional meetings and cross-property cross-market hybrid solutions, and we've had some success with industries such as restaurant franchise groups, pharmaceutical companies, construction and certain manufacturing businesses. Our teams are working with customers to design new hybrid solutions and exploring potential rapid testing protocols for 2021 events.

We are concurrently developing promotional offers and programs to attract business that is more social or leisure-oriented to fill in weekday gaps left by corporate and association business.

With respect to business transient demand, we're hearing mixed messages from customers depending on the nature of their business and the impact the pandemic is having on them. A limited number of our customers are seeing increases in business activity and expecting business-related travel to increase early in 2021, but many of our largest customers, such as professional services and consulting companies, are suggesting a slower return to normalized travel levels with continued limitations on travel through the first half of 2021.

The one thing we have learned since the beginning of this COVID-19 experience is that predictions made beyond the very near term are unreliable as the human experience continues to evolve in ways that require continuous learning and adaptation.

Touching on our owned and leased hotel outlook. We had just over 80% of our owned and leased and joint venture hotels open as of the end of the third quarter, and we expect overall demand for the majority of these hotels to continue to face pressure well into next year. Our teams have done an excellent job reimagining our operating model to drive impressive results despite overall third quarter RevPAR levels that were lower than 2019 levels by more than 80%.

Demand in some of our drive-to resort and leisure destinations, such as Lake Tahoe, Nevada, Lost Pines outside of Austin, Texas and Huntington Beach, California, was quite strong. However, the majority of our owned hotels are urban, business and group-oriented properties, and they continue to face significant headwinds. As we look forward, we expect we'll have about 5 of our owned and leased and joint venture hotels closed for the foreseeable future given conditions in particularly challenging markets such as New York City.

I'd like to now discuss our continued progress in driving long-term growth. Third quarter, we delivered net rooms growth of 6% on the heels of 5.8% net rooms growth for the second quarter. While there has been disruption in the development cycle with likely implications for future periods, I'm pleased to say that we've overcome a number of challenges to drive 2 straight quarters of strong growth. Consistent with my comments last quarter, we expect our full year net rooms' growth to be above 4%.

Our third quarter openings included 3 conversions contributing 30 basis points to our net rooms' growth. The conversions include the Hana-Maui Resort, which joined our destination brand and becomes our third resort on the island of Maui. The other conversions during the quarter were the 300 room Hyatt Regency Lanzhou, located along China's Yellow River and the 400-room Hyatt Regency Doha. We continue to see meaningful conversion opportunities and expect to complete additional conversions in the coming quarters.

The third quarter also marked the openings of 18 additional Hyatt Place or Hyatt House hotels, including Hyatt Place Boston/Seaport. This 297-room hotel is conveniently located in the heart of the Seaport District, overlooking Boston's harbor walk and is the result of a joint development effort with an important development partner and owner of ours. Other notable openings during the third quarter include our reentry into New Zealand, with the opening of the Park Hyatt Auckland as well as the introduction of our second Andaz hotel in China with the opening of the Andaz Xiamen.

While not included in our third quarter openings, I'd also highlight our recent openings of the Hyatt Centric Center City Philadelphia, Grand Hyatt Nashville and Hyatt Regency West Hanoi, all opened during the month of October. The 332-room Hyatt Centric in Philadelphia is located in one of the city's most desirable neighborhoods, a block off of Rittenhouse Square and represents an important addition to this fast-growing lifestyle brand.

The 591-room Grand Hyatt Nashville opens as the cornerstone of the 18-acre Nashville yards development in the heart of Downtown Nashville, with 77,000 square feet of event and function space, a world-class spa and multiple food and beverage outlets, including one of the highest outdoor rooftop lounges in Nashville, along with the continental restaurant, a -- an award-winning -- by the award-winning Chef, Sean Brock.

Finally, the 519-room Hyatt Regency West Hanoi is a conversion of an existing branded hotel and represents the first representation in Vietnam's Capital City.

We maintained our pipeline at 101,000 rooms after opening more than 4,300 rooms in the third quarter, representing an increase of approximately 10% in our pipeline from the third quarter of 2019. We continue to see full-service growth opportunities globally, including both newbuilds and conversions.

As I mentioned last quarter, we've seen very limited new development activity for select service hotels in the Americas due largely to financing limitations and underwriting challenges. We are, however, starting to see an uptick in discussions in this space and believe significant demand for these development opportunities will return once capital availability improves for new development.

I also want to highlight that our third quarter pipeline additions include 13 UrCove signings with an expectation that as many as 5 of these hotels will open in China during the fourth quarter of this year. In fact, 3 of these hotels were opened during October.

You may recall our announcement a bit over a year ago regarding our new joint venture with Homeinns to develop the UrCove brand designed to cater to the underserved upper-midscale segment in China. Homeinns operates a larger -- a large number of hotels in China, and the venture is expected to rapidly develop UrCove offerings around the country targeted at China's growing middle class, with many of the openings coming by way of conversions of existing properties. We are excited to have officially launched this new brand and believe it will provide significant opportunities to engage with an expanded and growing customer base in China.

I'll conclude my prepared remarks this morning by saying that we were encouraged by continued improvement in leisure demand during the third quarter and believe that our reimagination of operations has yielded optimized operating results in this low demand environment.

We're particularly pleased with our performance in Greater China and the share gains we've captured both in China and our select-service hotels here in the U.S. We believe the remainder of the fourth quarter could be challenging due to the impact of the current surge in COVID-19 cases we see in multiple markets, and we expect that economic recovery will continue to be uneven and weigh on results into the first half of 2021. Having said this, we remain confident in the enduring desire of people to travel and in the ability of our teams and brands to drive preference when we begin to see and experience tailwinds from a return of confidence to travel globally.

As Joan will describe to you, the strength of our balance sheet and effective management of our cash flow positions us well to navigate the uncertain timing and pace of recovery with confidence.

Meanwhile, we continue to execute on our long-term growth strategy. Another strong quarter of net rooms' growth and continued new construction and conversion activity speaks to the strength of our brands and the effectiveness of our development teams in leveraging that strength to identify opportunities to build on those brands and expand our global distribution.

Finally, and most important, is the fact that the Hyatt family continues to live our purpose and drive the kind of performance that is not only sustaining us through this challenging period but positioning us for enhanced strength and profitability as we achieve full recovery over the coming years.

I'll now turn it over to Joan to provide additional detail on our operating results. Joan, over to you.

Thank you, Mark, and good morning, everyone.

Late yesterday, we reported a third quarter net loss attributable to Hyatt of $161 million and a diluted loss per share of $1.59. Adjusted EBITDA for the quarter was negative $48 million, with a reported system-wide RevPAR decline of approximately 72% in constant dollars. As was the case in the second quarter, our reported system-wide RevPAR declines are impacted by both the inclusion of closed hotels in the calculation and by our chain-scale composition, which includes significant exposure to upper upscale and luxury properties and to top 25 markets in the U.S. that have been weaker than other markets since this pandemic began.

While we had 92% of our hotels or 88% of our rooms open as of September 30, the impact of closed hotels on our third quarter reported system-wide RevPAR result was about 800 basis points. Our system-wide RevPAR in the third quarter was down 64% from last year, excluding closed hotels.

I'd like to now provide a few additional details on our operating results for the quarter. Our management and franchising adjusted EBITDA showed significant improvement over second quarter levels, driving profitable results, which more than offset corporate and other adjusted EBITDA losses. Our management and franchise fee revenue decreased by 70% compared to 2019 levels despite a 72% reduction in system-wide REVPAR. Fee revenues were helped by contribution from new hotels opened over the past year and by incentive fees driven almost entirely from Greater China. Mark mentioned earlier that China and select service were our primary areas of strength during the quarter, and they collectively made up about 55% of our total third quarter management and franchise fee revenue.

Our owned and leased segment RevPAR decreased 83% compared to 2019. With 13% of our owned and leased segment hotels representing 22% of the rooms closed as of the end of the third quarter, the impact of closed hotels on our reported RevPAR decrease was 1,300 basis points, and therefore, RevPAR decreased 70% relative to 2019 levels, excluding those closed hotels.

Owned and leased adjusted EBITDA for the quarter was a loss of $56 million, about half of which was driven by closed hotels during the quarter. The quarterly loss was better than our expectations due to strong performance from resort hotels in the segment. We also realized some benefit from certain government subsidies that may not continue into the fourth quarter. The impact on demand from the increasing spread of the virus, combined with the reduction of certain benefits realized during the third quarter, could weigh on fourth quarter results for the owned and leased segment.

Finally, I want to comment on our occupancy progression for all hotels globally and breakeven levels. Mark mentioned the improvements we've seen in transient demand over the quarter. For the month of September, 84% of our open select-service hotels were running occupancies in excess of 30%, and approximately 32% of our full-service hotels were running occupancy levels in excess of 40%. I cite those thresholds in reference to our previously disclosed historical hotel EBITDA breakeven levels of 40% to 45% for full-service hotels and about 10 points lower for select service hotels. Our cost savings measures and operational efficiencies have pushed breakeven level down to the bottom of those ranges.

I'd now like to provide an update on our liquidity. As a reminder, during our second quarter call, I reviewed the steps we had taken during the quarter to secure additional liquidity and the positive results we have seen in our cash burn versus our original expectations.

During the third quarter, we secured additional liquidity through the issuance of $750 million in short-term prepayable bonds. We issued the bonds under favorable market conditions that allowed for efficient execution and pricing. The bonds have a 2-year maturity and are prepayable at par any time beginning with the first anniversary of issuance. The proceeds from this bond offering fortify an already strong liquidity position as we navigate uncertainty in the profile of the recovery.

During the third quarter, our monthly cash burn, excluding severance payments and other onetime costs, decreased from our second quarter cash burn. Our operating cash burn improved meaningfully, partially offset by some incremental working capital support for third-party owners due in large part to the extension of certain system services fee concessions to the end of 2020.

Over the second half of 2020, I'd note that timing of certain payments related to annual insurance premiums and property taxes for our owned hotel portfolio as well as some incremental investments supporting new deal growth are expected to lead to uneven monthly cash burn results. Notwithstanding variability and monthly cash burn due to timing, our overall trend on cash burn has improved and is expected to average no more than $60 million to $65 million per month based on third quarter demand levels.

As of September 30, our total liquidity inclusive of cash, cash equivalents and short-term investments, combined with borrowing capacity, was approximately $3.6 billion, with the only near-term debt maturity being $250 million of senior notes due in the third quarter of 2021. We believe our existing liquidity, excluding proceeds from the $750 million short-term bond issuance, which has a maturity inside of our cash burn runway, supports our ability to operate a third quarter 2020 demand levels for more than 36 months.

While we believe third quarter demand levels could persist over the near term, we continue to view these conditions as temporary and expect improvement in travel restrictions -- when travel restrictions are lifted and demand increases, and therefore, expect our monthly burn rate to continue to improve over the recovery period.

Looking forward, I would reiterate that visibility remains extremely low in this environment, but I'd like to share some color on a couple of items as we look ahead to 2021. As we communicated earlier this year, we've reduced capital expenditure significantly and expect a low level of outflow for the remainder of the year. Looking forward to 2021, we presently expect total capital expenditures of approximately $100 million.

Shifting to SG&A. We've previously disclosed the significant steps taken to reduce our SG&A this year, and those steps included headcount reductions and reductions in variable costs. Looking forward to 2021, we expect to maintain reduced resource levels and cost containment discipline through the recovery. As a result, based on our current outlook, we believe 2021 adjusted SG&A, excluding bad debt expense, will reflect a reduction of approximately 25% from our original 2020 adjusted SG&A guidance of $320 million.

Finally, I'd like to briefly comment on earnings sensitivity by reminding you our previously communicated earnings sensitivity levels. Our earnings sensitivity illustrated that a 1% change in RevPAR levels using 2019 RevPAR as a baseline results in an impact of approximately $10 million to $15 million in adjusted EBITDA. This guideline should generally continue to hold true at today's demand levels, with the earnings sensitivity being at the high end of that range in the near term.

We look forward to sharing more color on 2021 during our fourth quarter earnings call.

I will conclude my prepared remarks by saying that we're pleased with our third quarter performance led by the momentum of leisure demand and overall financial management discipline that resulted in strong operating results and better cash preservation despite difficult conditions. While we expect economic recovery to remain hard fought over the coming quarters, we've secured additional liquidity and believe we are very well positioned to leverage our strong brands and the capabilities and creativity of our talented teams around the world to navigate what will likely be a volatile period of recovery.

Thank you. And with that, I'll turn it back to Denise for Q&A.

(Operator Instructions) Your first question comes from Stephen Grambling with Goldman Sachs.

Mark, you alluded to some of this in your opening remarks, but what does the experience, I guess, when you put it all together in Mainland China, tell you about the potential path of business transient and group recovery in other parts of the world as COVID cases ultimately come under control and/or vaccinations become more widespread?

Thanks, Stephen. First of all, it's extremely encouraging. You see activity amongst our customer base, which is very consumer-focused. I mentioned new product launches, which have really proven to be an important piece of group business that we realized in this past quarter, especially.

And what we're seeing is a remarkable evolution of the constraints that people live under with respect to how they gather. And part of that has to do with the fact that their whole approach has been reduce the caseload to virtually 0 or close to 0 and then leverage the opening and accelerate that. I think most of the rest of the world is now contending with a different approach, which is not actually reducing it to -- the caseload to 0 at the inception, but rather, trying to isolate and manage through surges.

At this moment in time, those surges are pretty widespread. So I -- the way I look at it is ultimately, the vaccine -- a widely distributed vaccine will make a huge difference. But in the meantime, we're seeing or we're spending a lot of time on looking at how we can use rapid tested platform -- platforms to basically create highly assured bubbles, environments where all the people that you interact with when you come into a venue have been tested -- have been tested, by the way, over a several day period. And we effectively can guarantee that nobody is infectious as you walk into that space. And I think that's going to make a big difference with respect to leisure group travel, weddings and other gatherings, but also very importantly, business.

So I guess what I would tell you is the demand has been stunning to see. We said earlier that the total demand is actually back to 2019 levels, actually overcoming the absolute absence, effectively, no inbound traffic from international destinations. So I look at it and I think that it's a wonderful indicator that once we get to a point where people can actually have real confidence in stepping into an office, if you're going back to the office, which I think is important to business transient travel, or into a meeting space, I think it will make a big, big difference, and we'll see a significant inflection point.

That's great. And as an unrelated follow-up, what are you seeing in the asset disposition and acquisition, Mark, that might inform your strategy that you had outlined at the Analyst Day?

Yes. So we -- first of all, just to be very clear because I want to reiterate this, we said that we would fulfill our $1.5 billion sell-down by March of 2022, and we remain steadfast and absolute on that commitment. So that's just by way of a reminder. But as I look at the market right now, it's -- there is no market. There's not a lot of price discovery going on. There are individual transactions that have occurred. The discounts that I've seen at least range sort of from maybe 10% to 30% off of where values might have been back in 2019.

I've said this before, and I'll just reiterate that our portfolio includes assets that have unique value attributes, either because of the type of asset it is or the location that's in, that -- and those assets retain value and attract interest no matter what the economic environment happens to be. So it's a more durable kind of marketplace. And this is no different. So we have had inquiries with respect to some of our assets. We are not in a position where we feel like we need to rush to dispositions. We've got a very strong capital base and lots of options with respect to how we manage this. So we continue to be disciplined about value realization but very encouraged that we -- the same premise that gave us confidence about the value of our asset base before remains true today.

Your next question comes from Shaun Kelley with Bank of America.

To Mark and Joan, I feel like some of the commentary we heard about what we're expecting to see for the balance of Q4 was maybe a little bit more cautious or conservative than what we've heard from other hoteliers out there thus far during earnings season. So I just kind of wanted to see if you could dig into that a little bit. Specifically, are you seeing any actual evidence of sort of second wave impacts thus far as it relates to maybe travel cancellations or near-term policy changes? Do you think it could just be given certain urban exposures that Hyatt specifically has? Or is this just broader caution on your part given what you expect to occur?

Shaun, it's Mark. I'll start and turn it over to Joan about sort of how we're seeing demand and so forth. But you put your finger on it. I mean, if all I did was look at the data that we have realized to date, we would have no caution in our tone with respect to what we're seeing. But that's really not very helpful. Because unless you're asleep, you'd see the caseloads are increasing daily and to new records in a large number of states in the United States and in Europe. So we're just anticipating that, that progression, which is upon us. We know the virology and the epidemiology of this virus, this is taking hold and will continue to be an issue for the near term. And there are now some reports about where -- when the inflection point might occur, which could be like -- I've seen some reports that predict that by Thanksgiving will peak out and start to see decline again. It's really hard to say.

All I can tell you is that based on what we are seeing in terms of the virus progression, we, looking forward, have to anticipate that, that's going to impact demand in some way, shape or form. Have we seen evidence of it so far? No. Are we anticipating that we should actually be clear about the fact that what we see is likely going to have impact? Yes. So that's really how I would characterize it.

Joan, do you want to add?

Yes. I guess what I would add to that, Shaun, is I -- whenever I get this question, I continue to reiterate how low visibility is. I mean, we're measuring the booking window in days. And while that's increased by a day or 2, lately, it's not really meaningful.

One thing I would comment is that there are some areas that are opening, and we're seeing some growing bookings for Hawaii and the Caribbean for the festive period. So that is encouraging, but it also remains to be seen how they manage the travel and the -- any disruptions that may result as a result of testing or any cases over the next couple of months.

As -- we made some comments about demand sort of sustaining through the quarter. July was probably the lowest period of occupancy in the quarter and then grew in August and September in most parts around the world. And in October, we saw a similar continuation. So the quarter had a 72% decline on a reported basis, including all hotels. And October was at 70%. So we're seeing continuation of demand, and we're watching closely that short booking curve and looking ahead to the period -- these regions that are opening up and are hopeful that we continue to see this continued momentum.

And just as a quick follow-up, Joan, I think in your prepared remarks, you mentioned as it relates to the cash burn, some potential owner concessions that maybe now extending to the end of the year. Could you just explain a little bit more what those might be entailing or what some of the owners are asking for? I imagine this is someone on the full-service side, and these might be lumpy or unique circumstances, but just any color on sort of what -- what's going on at the owner level would be helpful.

Sure. I'll take you back to some comments that we made earlier this year on the onset of the demand levels decreasing materially. We took action at that time to reduce the system services that we provide to our hotels because of the demand levels that we were seeing, and we also reduced the fees that we charge to owners. This is something that we did to support them through this period. And obviously, with the lower levels of demand, it was appropriate on both sides.

We've chosen, in the third quarter, to extend some of those concessions. And we did that purposely to help support our owners through the remainder of the year. But we also made an intentional decision to continue to incur some costs in excess of the fees that we would earn. And those are primarily related to revenue-generating activities, such as sales and marketing, to help support the hotels through the recovery period.

So these amounts, these costs in excess of the revenue is about $5 million to $10 million a month, and it's all included in the cash burn estimates that I provided of $60 million to $65 million a month. So that's what I was referencing with respect to our cash burn.

And while those numbers are a little higher than we had previously anticipated, they're being offset by operating improvements relative to our cash burn results.

Your next question comes from Michael Bellisario with Baird.

Just a first quick housekeeping question. Can you maybe help us understand the big step-up sequentially quarter-over-quarter in the short-term investments on your balance sheet?

I think it's really a cash management issue, but do you have any further...

Yes. I think it's more a classification issue of some shifting between cash and cash equivalents and short-term investments. So there's no meaningful change there to highlight.

Just think of it as part and parcel of cash management, though.

Right.

Got it. Understood. And then just back to your comment on the 5 hotels. You mentioned that might be permanently closed. What's the relative size of those properties? And then how should we think about the kind of relative earnings contribution on a pre-COVID basis?

Yes. So first of all, we did not say, because we don't anticipate that these are permanent closures. But I would say for the foreseeable future -- and they are concentrated. So New York, we have 2, the Grand Hyatt and the Park Hyatt in New York. And we've got a couple of small properties in -- and for your reference, the Grand Hyatt is about 1,300 rooms, and the Park Hyatt's about 200 rooms.

And the other largest hotel that is currently closed and will likely stay closed for the -- for at least the foreseeable future is the Hyatt Regency in Long Beach, which is about 500 rooms. We've got other hotels that are currently closed, another 4 properties, Hyatt Regency in Jersey City, which is -- we don't have a date that we've established for reopening, but that might be -- again, it's a New York area phenomenon, and that might be a bit longer before we make plans to reopen there. A couple of Hyatt Places in Latin America, relatively small. And then we have the JV in Europe at Park Hyatt Milan, which is closed currently, probably not for a very extended period of time, but we don't have an opening date at this point. So I hope that gives you some perspective.

Just recognize one thing, and that is Europe, right now, is very fluid. The -- you saw -- I'm sure you've tracked and followed the restrictions that the French government has put into place, that Germany has put into place in the U.K. And so we're paying really close attention to that. Because in some measure, some of those restraints -- constraints and restrictions, rather, are going to have an impact on hotel operations, not just restaurants. And so we could see properties that are currently open actually being closed again. I think that's a temporary phenomenon. But I -- it really is going to be dependent on local market restrictions. So just think of Europe as basically in flux at the moment that we have to continue to be responsive to.

Your next question comes from Vincent Ciepiel with Cleveland Research.

I was hoping you could fill us in a little bit on how your distribution strategy has been evolving through the COVID era? I know you had made some progress in terms of driving more direct business pre-COVID and seeing increased occupancy from loyalty members. Just curious if your strategy has changed at all and where you think you'll be 6, 12 months down the road.

Thanks for the question. Strategy has not changed, but circumstances certainly have. So as we look at the type of business that now represents over 2/3 of our room nights realized in the third quarter, that is leisure transient business, up from less than 50% a year ago, that increment is a lot of -- I would describe it as demand recovery. We're out in search of where we can actually attract customers and guests from channels and markets that we wouldn't necessarily have leaned on in the past.

Overall, our internal channels are relatively stable, basically about flat year-over-year. And our loyalty penetration or activity is off a bit, and that's primarily because a lot of our loyalty members are core business travelers, and their business travel has really been reduced to very little. And our strategic sort of utilization of other channels, in some cases, wholesale, but mostly OTA, has really been designed for trying to maximize short-term demand into particular markets.

So overall, I would say that the name of the game has been discovery, go out and discover where we can attract demand. The fact that the early part of this recovery was very dominated by people driving to their destinations changed the way in which we went to market.

We also have had some success, as I mentioned, in working with sports leagues and universities, in particular. And we're going to continue to design unique opportunities, unique programming for those kinds of customers. So overall, strategy has not changed. The circumstances have led us to be responsive in a very different way than we were a year ago.

Great. And second, I wanted to dig into a specific channel, the demand group. I think you alluded to next year, running down 40%, more driven by 1Q than anything else. As you think about the potential for a vaccine to come through, any indications that there's some pent-up demand for group occurring as you think -- even further in the second half '21, 2022, and a lot of these associations with annual or semiannual and you could go a long time before actually having an event, so any possibility that you could see a wave of pent-up demand for group at your large group-oriented hotels for 2022?

Yes. And our expectation -- right now, the profile of 2021 is very much the tale of 2 halves. The first half is significantly down from prior years. So -- and the second half of the year is currently down from a cancellations perspective in the mid-single digits or something like that. So very, very different 2 halves of the year.

What I would say is we -- as I mentioned earlier, the one thing we've learned is that any predictions past the very near term are unreliable. So we're not treating that as something that we can take to the bank. But we do have some belief that with a combination of testing regimens, some therapeutics, but also some approved vaccines will change the profile and allow us to get back to fulfilling on that demand that's currently on the books for the second half.

But heading into 2022, we have every expectation that we will see significant pent-up demand realized through -- and you put your finger on it, it's going to be led by associations at that point. Just recognize one thing, and that is a lot of the association business that we historically have served are for national association gatherings of some scale. Those are not meetings that you can throw together in a couple of months' time. They require a tremendous amount of advanced planning and getting dates set aside so that you can maximize the attendance.

So while I would say that pent-up demand will be there in acute, the actual pacing of when we are able to realize that revenue might be a bit more extended because of the lead time for planning.

Your next question comes from Jared Shojaian with Wolfe Research.

So just going back to some of the commentary on dispositions. I don't know if there's been a formal update, but can you tell us where you stand with the hospital Grand Hyatt New York sale, particularly now following the COVID environment?

Sure. So we had previously reported that we entered into an agreement with a couple of developers in New York on a redevelopment project. And we explained at that time that the redevelopment time line was an extended time line because there are a number of approvals and entitlements that need to be processed. And what's true is that the principal COVID impacts to date have been delays in process, but also, I think there's a sorting out of how people are thinking about what the office environment in New York is currently and what it's going to look like in the future.

But I would say, primarily, it's around actually putting -- getting a project that can meet with all of the approval requirements and the entitlements to a fully approved status, which could take us more than a year from where we are right now. So that's the -- it's pending, that process.

And the reason why I'm not overly focused on the particular reactions or even speculation about what New York office markets might look like in the future is because this project is a very, very large-scale project that will take a number of years to construct. And so you're not really trying to hit a window of some kind with respect to short-term dynamics. It's really a much longer-term core set of assumptions about what the market's going to look like.

I would just add one thing, and that is the reason why this makes so much sense on the site is because it's going to end up -- it sits on top of once the Long Island railroad extension is brought into Grand Central Station, it will be the most important transportation hub in New York City, period. And so in terms of people being able to get in and to where they're going; and b, actually, once you get off -- step off the train to be in -- almost practically speaking, in the building in which you're going to have a meeting or go to work, it remains the most attractive place you can imagine citing office in the future. So we still have confidence that there's going to be a market for it.

I think the elections have had some -- have created some disruption. But mostly, it's been just city processing and being able to work through the process itself.

Okay. And then just an unrelated follow-up. I think we can all speculate in terms of what the permanent effects will be from COVID and business travel and all of that, but what are you hearing from your corporate customers? I mean, is there a view that once people are back in the office, it's travel again? And also, if you could just give us an update on how corporate rate negotiations have been progressing.

Sure. Frankly, it's what I mentioned earlier, it's mixed messages. So some of our corporate customers are saying as soon as they are past the inflection point of having more people in the office, there's going to be a great return near term to travel. Some of our bigger customers in the professional services and consulting space would say, yes, probably not until later next year, a somewhat slower return to demand or travel.

And I'll just reiterate what I said earlier. I think any prognostication or prediction about what is going to apply late next year into 2022 is super unreliable. I think I've had a number of discussions with people who run very large, large by way of employee base and large by way of enterprise size, companies. And the #1 thing that they're talking about now is everyone has been extending the productivity virtues of COVID-19, but not enough time has been spent on the damage done to the social network and the professional relationships at a personal level, which is really important and essential to loyalty to a given company as an employer and culture. So a lot of these companies have invested enormous amounts in culture development and enhancing and nurturing their culture as a means of differentially competing for talent. A lot of that is manifested in those interpersonal relationships and interactions. So the concern that's growing. Now it's been -- not been discussed very much because everyone is hyper-focused on productivity, so to speak, but there's a damage or a cost of this whole thing, which is now very prominently on people's minds.

And by the way, it might look different. Like, we've talked to some of our key customers who, for example, they've done more of a -- reducing their office footprint to go to more of a hoteling concept, but now they don't have sufficient meeting space to bring colleagues together, but they now see a need to because more people are working remotely. So we're working with them to set up a way where they can use meeting space in our local hotels to bring their local teams -- local -- people who live locally even if they're working on client matters outside of that local market. So I think the type of demand is going to really evolve.

With respect to rate negotiations, I would describe it as basically holding steady. Most of the things -- most of the rate negotiations, which are -- there's a small percentage, that if concluded are basically flat to last year in terms of rate. But I think the big dynamic that's evolved, which we're very supportive of, is that a large number of our customers, and we have designed a dynamic pricing model, which allows us to evolve pricing based on then current demand, which I think is a -- probably a more practical approach to how you would manage this over time, especially as we come out of this lull in demand and allows, I think, for better revenue management as demand recovers and we start to see compression in the markets.

Your last question comes from Thomas Allen with Morgan Stanley.

Just on the unit growth, you've been putting up really impressive 6% growth in the past 2 quarters. I just wanted to understand why you would expect it to potentially decline to 4%. And last quarter, you talked to 4% to 4.5%. This quarter, you talked to over 4%. Does that suggest embarrassment? Or am I parsing your words too much?

I didn't quite -- does that suggest -- what did you say?

Just like is there a downgrade from your expectations last quarter when you said 4% to 4.5% over 4% now? I don't want to be parsing your words too much, but just wanted to check.

No, no, no. It's a really important question because I want to explain the dynamics here. So you're -- what you're identifying is correct as an issue. The key -- it's math.

So the key issue is that we have consistently reported pipeline, first of all. Let me just digress for a moment and talk about pipeline, then I'll come back to net rooms growth. On signed contracts, we don't talk about approvals for future development or anything like that. It's all signed. So anything that we report as pipeline is locked and loaded for future development and includes an assessment by us that the project's going to get financed. So I just want to be really clear that -- when we -- when you're looking at our pipeline numbers, they are cleaned down and validated in that way.

The second thing I would say is with respect to the NRG, it's math. So it's a trailing 12-month number that we've reported consistently as a trailing 12-month number. In the fourth quarter of 2019, we had a huge quarter of net rooms growth, 7,400 rooms or thereabouts. And while we will have a very robust fourth quarter this year, it will not meet that -- it will not match that number. So that's the first dynamic that brings the math into a lower level than the 6% that we've been running at.

The second point that I would make is to remind you that in the first quarter of this year, we terminated the Ocean Resort in Atlantic City, which was 1,400 rooms, which is about 70 basis points of net rooms growth. So we're going to have that as the first quarter, if you will, of our trailing 12-month period once we report in the fourth quarter.

So I think I'm very encouraged by what I'm seeing on the new development -- new openings front. We've been able to maintain new openings in the second and third quarter, which has allowed us to maintain continued net rooms growth, especially this past quarter was a big quarter for us in terms of openings, and conversions continue to be an important part of this whole equation.

So in 2019, for example, I think our conversions amounted to more than 25% of our net rooms growth, and we're on track to exceed that this year. So I think if that continues to evolve, I'm encouraged and confident about where we're headed for net rooms' growth for this year. But again, by virtue of the math that I just described, it's going to be at a lower level and...

That makes sense.

In the last 2 quarters, okay.

Okay. And then just following up on it. Just in 2021, last quarter, you said about -- it felt like about 100 basis points of growth was shifted into 2021. Any additional color on 2021?

I don't know -- I can't be specific about how I would render it in basis points of growth at this point. What I would say is to us, based on what we see right now, we believe that 2020 is clearly a trough in our net rooms growth progression because we've got a large number of properties in our pipeline that are under construction with 2021 targeted opening dates. Can they slip? Yes.

We've not seen -- I mean, we did see in the middle of the year some construction delays because of COVID-19, but we haven't seen any since then. So construction projects have continued to progress a pace. So it's really hard for me to imagine anything but a positive progression into next year and the year after and so forth.

I think you would have heard me say in the script that we are seeing a lull or a lower level of actual signings for select service hotels in the United States right now. And my own observation about that is that, that is primarily a financing issue. That might create some drag in 2023, let's say, but not material. And I stand by what I said, which is our current outlook and belief is that this is -- this 2020 level of net rooms growth is going to be a trough for us.

There are no further questions at this time. I'll turn the call back over to Brad O'Bryan for closing remarks.

All right. Thanks, Denise, and thank you to everyone for taking the time to join us today. Take care, and we look forward to speaking to you again soon.

This concludes today's conference call. You may now disconnect.