Hedgeye - MARRIOTT ANALYST DAY PART 4

Marriott Mgmt Commentary + Q&A

Kevin Kimball: Executive VP, Global Business Finance

Base Fees estimated to growth to $770MM under the 7% revpar case
- $90-95MM coming from new units
- $635MM -$710 coming from existing (560-563MM in 2010)
Franchise fees estimated to growth to $590MM (base case)
- $80-85MM coming from new rooms
Incentive fees were $145MM in 2007 vs. $43MM in 2009
- In 2007, House Margins were $52/room vs. only $30/room in 2009 on RevPOR of $206 and $168, respectively
- Under the base case (7%): RevPOR = $207 with Net House profit margins increasing to $51MM; in which case, total incentive fees would increase to $110MM
- When owners invest more money in the hotel (renovations/ etc) hurdle is increased
- Newly owned hotels take 2-3% to earn and owners priority
In 2010, only 5% of their NA limited service hotels are expected to pay owner’s priority
- Because they are in large portfolios where results are pooled before paying an owner’s priority
- More supply coming online
- Required capex investments by owners
- Expect that in base case scenario 21% of their limited service hotels will pay fees
International incentive fees:
- 57% paying in 2010 (58% in 09, 61% in 2007)
- Expect by 2013 – 64% will pay under base case
So worldwide incentive fees:
- 25% paying in 2010 (flat to 2009)
- 43% expected to pay by 2013 (base)
NA incentive fees:
- $65MM in 2010
- By 2013, those same hotel earnings in 2010 are expected to generate $90-150MM in fees and additional hotels that aren’t currently paying are expected to contribute $15-65MM of fees
Total International incentive fees of $110MM in 2010 are expected to grow to $180-225MM by 2013
- 135-160MM from hotels currently paying fees
- $5-15MM from hotel not yet paying fees but open
- $40-50MM from hotels opening from 2010-2013
Total worldwide incentive fees of $173-177MM in 2010 are expected to grow to $285-440MM by 2013
- $225-310MM from hotels currently paying fees
- $20-80MM from hotel not yet paying fees but open
- $40-50MM from hotels opening from 2010-2013
2013E split of incentive fees base $345MM:
- NA FS: 36%
- NA LS: 7%
- International: 57%
In North America in 2010:
- 10% are recording incentive fees
- Of the hotels that aren’t
  - 5% need < 10% increase in House Profit margins
  - 3% need < 20% increase HPM
  - 10% need < 30% increase in HPM
  - 70% need > 30% increase in HPM to earn fees
In North America by 2013 (base case):
- 29% are recording Incentive fees
- Of the hotels that aren’t
  - 15% need < 10% increase in House Profit margins
  - 9% need < 20% increase HPM
  - 7% need < 30% increase in HPM
  - 38% need > 30% increase in HPM to earn fees
Owned, leased, corporate housing revenues and other expected to increase at a 1-6% CAGR from $1,025 in 2010E to $1070-$1205MM in 2013
- Net of expense growth expected to go from $90MM to $145-$230MM
Owned and Lease only (almost all leased):
- $820MM in 2010 of revenues and loss of $15MM in 2010 (over $750MM from leased which lost $20MM)
- Expected to grow revenues to $840-$975MM by 2013 and net of expenses: $15-$100MM
Branding fees, corporate housing and other:
- $205MM of revenues ($75MM or so of branding fees) in 2010 and $105MM net of expenses
- By 2013 expect $230MM of revenues and $130MM of net of expenses around $85-90MM from branding fees
G&A: 16-18% of revenues or $765MM in 2013

Carolyn Handlon: EVP & Global treasurer

Adjusted EBITDA of $1.54-$1.94BN by 2013
Total debt of $4.5BN by 2013 under base case (~700MM of timeshare related)
Think that they can do a bank deal around 4%
Other balance sheet highlights 2013:
- Contract acquisition costs: $990MM
- Equity & Cost investments: $285MM
- Notes receivable: $1,775
- Sr Mezz/other non securitized: $760MM
- Loans to timeshare owners: $150MM
- Loans timeshare owners securitized: $865MM
FCF from 2011-2013 of $1.6-$2.1BN:
- $3.6-4.1BN of cash from ops
- $300-700MM from capital recycling
- Investment spending: 2.3-2.7BN

Carl Berquist: CFO

Use of FCF:
- Management and franchise contract growth
- Select real estate development/property acquisitions
- Strategic opportunities in key markets
- Other ROI enhancing investments
- Maintain IG rating
- Return cash to shareholders
Investment spending – how they will spend $2.3-2.7BN?
- New units: 73%
  - Mezz, key money, sliver equity
- Refreshing/repositioning hotels: 5%
  - Loan programs for franchisees to help owners renovate properties
- Systems/ Corporate: 11%
  - Technology investments
  - Backoffice investments
- Existing units: 11%
  - Room expansions
  - Repositioning owned and leased hotels
  - Purchasing 2-3 hotels/year
How will they invest?
- 55% will be in capex
- 25% note advancements
- 17% contract acquisition costs
- 3% in equity and cost method investments
How did they invest in 2006-2008?
- 60% was in capex
- 6% note advancements
- 11% contract acquisition costs
- 2% in equity and cost method investments
- 21% in timeshare
They expect timeshare to be cash flow generative – no net investment: from $625-675MM of FCF
Cash flow:
- FCF of 1.6-2.1BN
- They will issue common stock & other (stock comp) : $500-900MM
- Net debt issuance: $1.2-2.3BN
- Gives them: $3.3-5.3BN for stock buybacks
- Which means that they can reduce their share count from 378 to 349-320 by 2013
Expect to generate a return on invested capital of 21-28% and EPS growth CAGR of 20-36%
- and think that there is upside from even better REVPAR or the incremental tentative 22,000 rooms that they can potentially add to their system

Q&A

Assume that at the midpoint of the share buyback accounts for $0.05 of the buyback
Assume 2.5-3% GDP growth for their 7% RevPAR forecast (+/- 2% for low end and high end of their forecast for GDP)
$500-900MM is their stock compensation plan
Timeshare is not going to consume any capital above the cash that they generate from sales
The share counts post buyback were weighted for 2013
Don’t know why they add back the cost of their timeshare financing to calculate their cash flow

MARRIOTT ANALYST DAY PART 4 - MANAGEMENT