MAR SPIN-OFF DOMINATES EARNINGS

Q4 was decent but not breathtaking. We don’t view the timeshare spin-off negatively but it’s hard to imagine that the multiple at this point was being held back.

 

 

While earnings were just in-line, MAR's announcement of a spin-off of its timeshare business will surely dominate investors thoughts and focus this quarter.  The timeshare business clearly is not a favorite amongst investors but it’s unclear that MAR’s multiple gets punished for it either.  We’re not sure separating the companies creates much incremental value.  The deal seems to be perceived positively though and should provide the shares a boost.  Separated, the two companies may be able to grow the timeshare business at a faster rate which would benefit MAR through fees.  That would be the primary benefit of the spin-off, in our view. 

 

4Q Detail

  • While MAR’s revenues came in $7MM above our estimate but reported $325MM of EBITDA which missed our mark mostly due to higher SG&A and lower timeshare results
  • Total fee revenues came in $3MM above our estimate of $386MM and $9MM above the high end of company guidance. The beat vs. our estimate was driven by higher incentive fees
    • Managed system-wide rooms grew 1.7% YoY (vs. our estimate of 1.5%)
    • Franchised system-wide rooms grew 5.6% YoY (vs. our estimate of 6.6%)
    • Base management fees were in-line with our estimate while franchise fees were $1MM lower than we estimated
    • Incentive fees were $4MM higher than our estimate
  • Owned, leased, corporate housing and other revenues of $342MM were $14MM light of our estimate but profits of $41MM (vs. guidance of $40MM) were $2MM better given the branding fees in the quarter and liability reversal related to a hotel that closed in the quarter.
    • The top line miss vs. our number seems to be related to lower F&B and other revenues which appear to have declined YoY
    • Branding fees were $10MM higher YoY; we’ll have to wait for the company to clarify whether this is a one-time increase or an on-going one.  This increase represents a 53% YoY lift at basically 100% margins so it’s very material to the results of the “Owned, leased, corporate housing, and other” business
    • There was also a one-time $4MM benefit to margins from the reversal of a liability related to a closed hotel
    • The company made no comments regarding termination fees in the quarter, but we do know that termination fees increased $12MM YoY, so we suspect that there was a nice increase in termination fees in the quarter as well.  These are also 100% margin fees.
    • Therefore, we suspect that if you strip out the branding fees and termination fees, the owned and leased business results would have been quite disappointing.
  • Timeshare sales and service revenue of $372MM was $18MM above our estimate.
    • Contract sales of $197MM were $2MM above our estimate and above the midpoint of company guidance
    • Timeshare sales and service revenue net of expenses totaled $43MM - $2MM below the low end of company guidance and $5MM below our estimate.  In our preview, we also included expected gains from note sales in our estimate of timeshare and services net results so the total miss vs. our estimate was $10MM (including the gains)


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