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MAR 4Q2010 conference call notes 


Timeshare spin-off  

  • "Marriott International expects to spin off its timeshare operations and development business as a new independent company through a special tax-free dividend to Marriott International shareholders in late 2011."
  • "The new company will focus on the timeshare business as the exclusive developer and operator of timeshare, fractional and related products under the Marriott brand and the exclusive developer of fractional and related products under the Ritz-Carlton brand. After the split, Marriott International will concentrate on the lodging management and franchise business. Marriott will also receive franchise fees from the timeshare company’s use of the Marriott and Ritz-Carlton brands."
  • "The new timeshare company will be positioned to expand faster over time while Marriott International will further advance its longstanding strategy of separating real estate from management and franchise operations. With two public companies, shareholders will be able to pursue investment goals in either or both companies rather than one combined organization."
  • "After the special dividend, the Marriott family is expected to hold approximately 21 percent of the outstanding common stock of each company"

4Q results

  • The quarter was littered with numerous one time charges:
    • $84MM impairment charge related to a revenue management software investment
      • "The software is designed to manage and price group rooms and catering business at North American full-service hotels and will be a significant competitive advantage... rollout began in the fourth quarter of 2010 and the company expects it will be implemented at nearly 500 hotels by mid-2013 with more properties to follow. Marriott funded the nearly $270 million total system cost as it was developed, expecting to recover the cost from individual hotel properties over time. However, due to the significant
        impact of the recent recession on hotel owner profitability and the long-term nature of its
        relationships with its owners and franchisees, in the fourth quarter Marriott agreed to absorb a
        portion of the cost. As a result, the company recorded the $84 million impairment charge on the
        investment in the fourth quarter to reflect the expected levels of cost recovery."
    • $27MM of impairment charges related to a golf course land parcel for sale
    • $11MM reversal of a liability recorded as part of the Timeshare impairment charge in 3Q09
    • $85MM non-cash benefit in the provision of income taxes resulting from an IRS settlement related to the treatment of funds received from foreign subsidiaries
  • Comparable systemwide WW RevPAR of 8.1% came in a touch above the high end of company guidance
  • “We were also encouraged by trends in our North American group business. Fourth quarter catering revenue for the Marriott Hotels & Resorts brand increased 4 percent and group room revenue rose 3 percent. Near term group bookings for that brand are also picking up. Revenue for group rooms booked in the 2010 fourth quarter for stays in 2011 increased 21 percent year over-year, including 11 percent higher room rates."
  • 35 new properties (8,571 rooms) were added to MAR's system while 8 properties (1,973) exited the system

2011 outlook

  • “While 2010 was a terrific year for the company, we are even more optimistic and enthusiastic about the future. Demand and pricing continue to strengthen....With continuing room rate momentum, premier service quality, and global expansion, we expect an outstanding 2011.”
    • WW systemwide REVPAR: +6-8%
    • ~35,000 room additions to the system
  • 1Q11:
    • Comparable systemwide RevPAR: 6-8% in NA, 9-11% Internationally, 7-9% WW
    • Fee Revenue: $280-$290MM
    • Owned, leased, corporate housing & other, net of direct expenses: $20-$25MM
    • G&A: $155-$160MM
    • Gains: $5MM
    • Net interest expense: $35MM
    • Equity in earnings (losses): -$5MM
    • EPS: $0.24-$0.28
    • Timeshare contract sales: $140-$150MM
    • Timeshare sales and segment revenues, net of direct expenses: $35-$40MM
    • Interest expense associated with securitized notes: $20-$25MM
  • 2011 (doesn't assume spin-off occurs in 2011):
    • Comparable systemwide RevPAR: 6-8% WW
    • Fee Revenue: $1,310-$1,340MM
    • Owned, leased, corporate housing & other, net of direct expenses: $115-$125MM
    • G&A: $690-$700MM
    • Gains: $10MM
    • Net interest expense: $150MM
    • Equity in earnings (losses): -$10MM
    • EPS: $1.35-$1.45
    • Tax rate: 34%
    • Timeshare contract sales: Flat with 2010
    • Timeshare sales and segment revenues, net of direct expenses: $200-$210MM


  • 2010 was a stellar year for MAR. They resumed share repurchased in the 4th Q
  • The spin-off of the timeshare platform is a way for the business to grow faster. They believe that the two businesses appeal to different investors.
    • Probably because their existing shareholders wouldn't be thrilled for them to grow their timeshare business and less so because there are people that love the timeshare business (at least not public investors)
    • While the business is still rich with inventory, there will be good investment opportunities that they would like to pursue
    • New company will have exclusive rights to the Marriott and Ritz Carlton name - for which they will pay MAR a franchisee fee. However, they will be free to pursue additional brands.
    • Don't expect the timeshare company to be investment grade in the near-term, they do expect to continue to securitize notes as a source of capital and funding
  • Continue to press retail rates higher. Nearly 90% of their hotels have raised rates in the 4Q.
  • They are 2/3rds of the way done with corporate rate negotiations with rates up in the high single digit range and their customers tell them that they will travel more in 2011
  • 35% of their pipeline rooms are under construction and nearly 20% are expecting conversion
  • For timeshare, lower rental income will depress results in the 1Q but should improve going forward
  • Assume $500-$700MM of capex in 2011
    • $50MM of maintenance
    • most of the guided amount is already committed
    • Fairfield rollout in India and Brazil (10's of MM's of dollars)
  • Will return cash to shareholders if opportunities do not present themselves...most likely through share repurchase
  • Form 10 with the new deal details will come out late in the 2Q2011
  • Acquired Seville in Miami and Burners in London which will be converted to Edition - those were the 2 largest investments they made in 2010
  • As they expand more internationally they need to invest more in infrastructure (service centers and overhead)
  • Will need an IRS letter ruling but are confident that they will get it.
  • SG&A split for timeshare is in the schedules.  New company will obviously need additional overhead to run as an independent public company
  • Timeshare throws off about $200MM of FCF and they have a long runway of inventory until they decide to accelerate growth
    • Warehouse facility to fund notes in btw securitizations
    • R/C
    • Securitizations
    • Point program will help them match development spend with cash flow. Expect to be FCF positive for a few years.
  • Marriott International will generate a lot of cash but it is not their goal to become debt free.  They will likely continue to put investment grade leverage on the business
  • Will the finance income be impacted?
    • Don't expect to have a material impact there
    • That can certainly be a risk if the new entity has a higher borrowing cost. However, it shouldn't manifest until growth accelerates.
  • Expect group business to be up about 10% YoY in 2010.  Group vs. transient mix - Marriott brand would be about 40% in 2011.  2/3rds of their group business was on the books already at YE 2010 for 2011.
  • Don't want to give people the impression that they are low-balling with their 2011 guidance.
  • Doesn't necessarily think that limited service will continue to grow faster than full service.
  • They are not restricted to buyback stock prior to the F-10 since they have already announced it
  • Marriott.com is their cheapest distribution channel. Beyond that they are happy to sell rooms in any way that their customers want to buy them
  • Some OTA negotiations will start later this year
  • The health of the new company is a consideration of setting fees for MAR. Plus they want their incentives to be aligned.
  • HPT negotiations are going well but its premature to comment on it yet.  Nothing in the guidance as to how that will get resolved.