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MAR 4Q11 CONF CALL NOTES

MAR 4Q11 CONF CALL NOTES

 


“We are bullish about the long-term growth prospects for both Marriott and the global lodging industry. With a growing middle class and rapid economic growth in many emerging markets, global demand is increasing steadily. In the U.S., supply growth remains modest. As a result, we expect revenue per available room to continue to improve in most markets. Marriott is well positioned to benefit from these global macro trends. We expect 2012 to be an exciting year.”

 

- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International

 

 

CONF CALL NOTES

  • Group revenue pace for 2012 is up 9%
  • 80% of their special corporate rates are negotiated and running up at a single digit pace
  • Their 2012 analyst meeting will be in China in June
  • In Latin America, have plans to add 50 green hotels in the coming years
  • In Europe, 30% of their lodging demand comes outside of Europe.  The Olympics in London this summer should help results.  9% of their fee revenue in 2011 came from Europe.
  • Middle East is still weak - particulary Egypt for them.  2012 should at least benefit from easy comps. Only 2% of their fees came from this region.
  • Obama simplified the visa process to help travel into the US.  Should be particularly good for guests coming from Brazil and China.
  • Their adjusted results were $0.04 ahead of their guidance, mostly due a lower tax rate due one time items.  Lower incentive fees were offset by better owned/ leased results.
  • NY RevPAR growth was moderated by new supply and competitor discounting
  • DC RevPAR increased moderately, tempered by weak government business
  • Philadelphia was very strong helped by the completion of renovations
  • Large group hotels remain somewhat encumbered by past booked business.  For smaller hotels, group business was up in the high teens rate.  Expect group business to continue to strengthen. 
  • Room demand from financials industry slowed but was still up in 4Q, but was made up by strength in other industries
  • 300 properties paid incentive fees in 2011
  • 40% of their WW pipeline rooms are under construction and 10% are pending conversion
  • Over 50% of their newly signed rooms in 2011 were international
  • Made strides to grow their luxury properties.  Spending $800MM on developing Edition branded hotels in Miami, London & NY. Will eventually recycle this capital.
  • Prior peak earnings occurred in 2007 - ex timeshare their earnings would have been $1.50 and they expect to exceed that in 2012
  • 1Q12 International statistics will only include Jan & Feb - and therefore they won't get the benefit from easier comps until 2Q
  • $400-$450MM of cash tax benefits are expected to be generated from the spin
    • $115-125MM  benefit in 2012
    • $80MM in 2011
  • Feel that they are appropriately leveraged at this time

 

Q&A

  •  Why did fee revenue guidance decrease? 
    • Budget refinement around currency - stronger dollar than what they assumed before.  YoY impact to fees from currency was $10MM.
    • Fewer high incentive fee markets in NY and DC ended with lower fees in 2011 and had carryover into 2012
    • Weaker European market also impacted incentive fees as well
    • Timing of entry of fee income from new units entering their system
  • Is the sensitivity to 1% of RevPAR the same on the way up vs. down because of incentive fees?
    • It's roughly the same - although for incentive fees there is more sensitivity to moves up in fees although not at the 1-2% level
  •  Group revenue pace is up 9% in 2012 and rates are up about 3%?
    • The 9% increase is really from higher room nights, not rate
    • Just looking at the bookings done in 2011, for 2012 was up 3% in rate. So the group rates will improve throughout the year as more new business is booked at higher rates.
    • Roughly 70% of the group business for 2012 is booked
  • IMF fees:
    • DC is 1/3 US incentive fees and US was 1/3 of total IMF fees (so about 10% of total)
    • NY is about 5-7% of incentive fees
  • Middle East - saw a 25% decline in 2011.  ME was only 2% of their total fees last year
  • Expect stronger growth after 1Q12 vs. rest of the year.  Quarters 2 & 4 have better group bookings.  The 1Q comps are toughest for international as well. 
  • F&B was up 4% in the quarter
  • Why are IMF's taking longer to recover this cycle vs. last year?
    • RevPAR is still 10% below where it was in 2007
    • Also 65% of their incentive fees are from overseas but in 2007 it was only 35% so there was more sensitivity to RevPAR growth because of the structure of their contracts.  They have several big portfolios where incentive fees are calculated on a portfolio basis and those are still a whiles away, but the increase there would be material.
  • Why invest in Edition? 
    • Feel like they have the best partner with Ian Shrager and that there is demand for 'designed' hotels
    • They bought London, Miami, and NY buildings - 'A' locations in 'A' markets. They were expensive to be sure. $165MM for the Clock Tower. But they feel highly confident that they will be able to profitably recycle those hotels.  Partners take considerable comfort with their participation in the space.
    • They only invested $400MM in 2011 in development
    • While they are investing a lot, it's not 'alarming'
  • Most of the capital expenditures at the low end of their guidance range has been identified
  • There is some recycling of capital of roughly $100MM (loans) that they assume will occur in 2012
  • They want to stay investment grade, BBB. So they are anticipating an increase of debt in 2012
  • Assume modestly positive (2-3%) RevPAR growth in Europe.  Assumes that this is the biggest risk for them in their model.  But Europe is so small that it wouldn't make a big difference in their model even if Europe came in lower. They were looking at dynamics in individual markets - Olypimics, conferences, etc. 
  • They feel more confident in the US economy vs. last time they reported. They also continue to see good performance out of Asia despite difficult comps. 
  • No change in the message about returning cash to shareholders
  • Feel great about the way 2011 ended for group bookings- with smaller hotels in high teens and the +1000 room hotels lower
    • Their sales transformation is showing positive signs
    • Cyclicality is starting to move in their favor with the lag in group business hurting them during the earlier part of the cycle
  • Expect that RevPAR in Asia will be in the high single digits for 2012.  China, relatively lower #s in Jan due to the shift for CNY, but expect high single digits for the year. Japan is going to get easier comps.  Korea is good.  Thailand should have easy comps assuming no floods.  India is harder to be bullish on with the high inflation there. 
  • At ALIS, there was a little more optimism.  Well-capitalized franchisees are still getting deals done, but not at prior year's leverage.  In some cases they are providing credit enhancements. Full service in the US - it's still hard to get financing to get those deals done.  They are seeing a lot more conversions in the US than construction.  There is a lot of conversation about what will happen with the coming CMBS maturities
  • Think that they will see 1BN international travelers in 2012 (crossing borders), which is a massive number that is continuing to grow.  China is seeing huge growth.  The US has lost 5 points of travel share - singularly because its hard to get into the US - getting visas.  Chinese are required to go to an interview with one of the 5 consulates in China.  In Brazil its the same. Sometimes it takes months to get an interview. 
  • Share count at quarter end was 334MM diluted
  • Think that they would need to get back to 2007 RevPAR in 2013 or so.  But that wouldn't get them back to peak IMF fees in the US since there has been new capital invested in those properties and cost inflation.

HIGHLIGHTS FROM THE RELEASE

  • Excluding timeshare, Adjusted EPS was $0.46.  
  • WW comparable systemwide RevPAR increased 5.9% or 6.3% in actual dollars
    • International comparable RevPAR increased 4.1% (5.9% in actual dollars)
    • NA comparable RevPAR increased 6.4% 
  • "We opened 210 properties with nearly 32,000 rooms during the year, including 80 hotels flying our new AC Hotels by Marriott flag in Europe. With great momentum in international markets, the growth rate for our hotel rooms outside the U.S. was higher than within the U.S. The Autograph Collection made its debut in Europe adding nine properties, including the four spectacular Boscolo hotels"
  • "Our hotel development pipeline increased to over 110,000 rooms as we signed new management and franchise agreements for more than 320 hotels with over 50,000 rooms in 2011, most for hotels yet to open."
  • In 4Q, 40 new properties (6,925 rooms) were added to the system and 9 were removed (1,946 rooms)
  • "Incentive fees declined 1 percent reflecting lower incentive fees in the Middle East and continued weakness in the greater Washington, DC market. In the fourth quarter, 27 percent of worldwide company-managed hotels earned incentive management fees"
  • "Worldwide comparable company-operated house profit margins increased 60 basis points...reflecting higher occupancy, rate increases and strong productivity. House profit margins for comparable company-operated properties outside North America increased 20 basis points and North American comparable company-operated house profit margins increased 100basis points from the year-ago quarter."
  • "Owned, leased, corporate housing and other revenue, net of direct expenses, increased $15
    million...largely due to higher credit card and residential branding fee revenues and improved operating results at owned and leased hotels."
  • 6.9MM shares were repurchased in the quarter for $200MM. "On February 10, 2012, the board of directors increased the company’s authorization to repurchase shares by 35 million shares to yield a total share authorization of 40.5 million shares."
  • 1Q12 Outlook:
    • WW Comparable systemwide RevPAR (constant $): 5% to 6% 
      • NA: 5% to 6%
      • International: 4% to 5%
    • Total fee revenue: $295-305MM
    • Owned, leased, corporate housing and other gross margin: $20-25MM
    • SG&A: $150-155MM
    • Gains & other: $2MM
    • Net interest expense: $25MM
    • Equity in earnings: loss of $5MM
    • EPS: $0.26 to $0.30
  • 2012 Outlook:
    • WW Comparable systemwide RevPAR (constant $): 5% to 7% 
    • "Assuming a strong U.S. dollar and modest fee revenue growth in hotels in Washington, DC"
    • Total fee revenue: $1,410-1,450MM (8-11% growth)
    • Owned, leased, corporate housing and other gross margin: $130-140MM
    • Impact of 1% change in RevPAR:
      • Fees: $20MM
      • Owned, leased, corporated housing and other, net: $5MM
    • SG&A: $660-670MM (+3-4%)
    • Gains & other: $10MM
    • Net interest expense: $105MM
    • Equity in earnings: loss of $5MM
    • EBITDA: $1,090 - $1,150MM (+10-16%)
    • EPS: $1.52 to $1.64
    • Capex of $550-$750MM (Maintenance: $50-100MM)
    • "Assuming additional investment opportunities do not appear, roughly $1 billion could be returned to shareholders through share repurchases and dividends."

INITIAL CLAIMS: THE GHOST OF LEHMAN

***The following analysis is being provided courtesy of our Financials team, led by Josh Steiner. Please email sales@hedgeye.com if you would like to receive their work on the sector as well as their research on U.S. housing.***

 

 

The Ghost of Lehman

The ghost of Lehman Brothers continues to provide a data tailwind on this series, but that tailwind should turn headwind within a couple of weeks. For reference, after Lehman collapsed in September, 2008, the parabolic increase in jobless claims rippled through the government's seasonal adjustment factors, which mistook fundamentals for seasonality. Consequently, future years (2010 and 2011) have seen the ghost of the Brothers Lehman manifest in all sorts of government data reported on a seasonally adjusted basis. You can observe this plainly by eyeballing the late 2008 and early 2009 data in the chart below and then looking at the same time periods over the next two years. 

 

We think it's no coincidence that the market's behavior has rolled from positive to negative in the March/April timeframe in each of the last two years. While we think there's still considerable room to run on our bullish thesis, we're cognizant that this tailwind will turn headwind in the intermediate term.

 

The Data

The headline initial claims number fell 10k WoW to 348k (down 13k after a 3k upward revision to last week’s data).  Rolling claims fell 1.75k to 365k. On a non-seasonally-adjusted basis, reported claims fell 39k WoW to 362k. We continue to think that claims below 375-400k have the ability to lower the unemployment rate, which promotes a virtuous cycle as confidence and sentiment respond. 

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 1

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 2

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 3

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 4

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 5

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky


INITIAL CLAIMS: THE GHOST OF LEHMAN

The Ghost of Lehman

The ghost of Lehman Brothers continues to provide a data tailwind on this series, but that tailwind should turn headwind within a couple of weeks. For reference, after Lehman collapsed in September, 2008, the parabolic increase in jobless claims rippled through the government's seasonal adjustment factors, which mistook fundamentals for seasonality. Consequently, future years (2010 and 2011) have seen the ghost of the Brothers Lehman manifest in all sorts of government data reported on a seasonally adjusted basis. You can observe this plainly by eyeballing the late 2008 and early 2009 data in the chart below and then looking at the same time periods over the next two years. 

 

We think it's no coincidence that the market's behavior has rolled from positive to negative in the March/April timeframe in each of the last two years. While we think there's still considerable room to run on our bullish thesis, we're cognizant that this tailwind will turn headwind in the intermediate term.

 

The Data

The headline initial claims number fell 10k WoW to 348k (down 13k after a 3k upward revision to last week’s data).  Rolling claims fell 1.75k to 365k. On a non-seasonally-adjusted basis, reported claims fell 39k WoW to 362k. We continue to think that claims below 375-400k have the ability to lower the unemployment rate, which promotes a virtuous cycle as confidence and sentiment respond. 

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - Rolling

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - Raw

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - NSA chart

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - S P chart

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - Fed and Claims

 

2-10 Spread

The 2-10 spread tightened 7 bps versus last week to 165 bps as of yesterday.  The ten-year bond yield decreased 6 bps to 193 bps.

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 2 10

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - 2 10 QoQ

 

Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 

 

INITIAL CLAIMS: THE GHOST OF LEHMAN - Subsector performance

 

Joshua Steiner, CFA

 

Allison Kaptur

 

Robert Belsky

 

Having trouble viewing the charts in this email?  Please click the link below to view in your browser.   

 


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THE HBM: PEET, PFCB, BOBE, EAT

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Consumer

 

For the week ended 2/11, initial jobless claims came in at 348k versus expectations of 365k and 361k the week prior (revised from 358k).

 

THE HBM: PEET, PFCB, BOBE, EAT - initial claims

 

 

Comments from CEO Keith McCullough

 

Consensus still focused on Greece and Rating Agency noise as Global Growth Slows – amazing:

  1. CHINA – after seeing its 1st y/y decline in Export growth in 2yrs (JAN -0.5%), this morning the Chinese reported a y/y decline in Foreign Direct Investment of -0.3% y/y. Chinese govt guys called it “grim” (see Bloomberg article) – volumes on the NYSE aren’t the only thing in the world that have slowed to a halt
  2. SPAIN – the Spaniards are selling as much pig paper as they can (34% of their YTD needs) before someone figures out that Growth Slowing is what is going to crush their citizenry next. This morning’s debt auction finally came in at a higher yield (2015 bonds at 3.33% vs 2.86% last) and the IBEX is the 1st major European mkt to snap my immediate-term TRADE line of 8653 (down -2.1% leading decliners in Europe).
  3. COPPER – breaking my mo mo line of 3.88/lb support was one of the many Growth Slowing signals that had me short SPY at 1355 yesterday. This morning, copper = down -1.1% and 10yr UST yields are straight down to 1.91% as well.

Japanese Yen down hard too. We’ll likely buy/cover on red today, but not because Global Growth isn’t slowing as inflation expectations accelerate.

 

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: PEET, PFCB, BOBE, EAT - subsector

 

 

QUICK SERVICE

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

PEET: Peet’s Coffee traded down on accelerating volume on disappointing earnings yesterday. 

 

 

CASUAL DINING

 

PFCB: P.F. Chang’s 4Q11 earnings hit the tape this morning. EPS came in at $0.30 ex-items versus $0.45 consensus. Comps at the Bistro came in at -2.4% versus -2.8% consensus.  Pei Wei comps came in at -1.9% versus -2.7% consensus.  The stock traded down on the print but is now up 4% in premarket trading.  On the call, management is providing some positive commentary on the company’s outlook.  We will have a more detailed post up later today.

 

THE HBM: PEET, PFCB, BOBE, EAT - bistro pod1

 

THE HBM: PEET, PFCB, BOBE, EAT - peiwei pod1

 

THE HBM: PEET, PFCB, BOBE, EAT - pfcb pod2

 

 

BOBE: Bob Evans reported strong EPS of $0.69 versus $0.60 expectations on Tuesday and followed it up with a positive conference call yesterday, sending the stock higher.  The company improved food and labor costs at both Bob Evans and Mimi’s Café. 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

BOBE: Bob Evans Farms’ stock increased by 6.2% on accelerating volume.

 

EAT: Brinker management was in NYC yesterday and must have had some positive things to say.

 

PFCB: P.F. Chang’s eked out a small gain yesterday ahead of the print this morning.  As we wrote above, initial reaction to the print was negative but the bid is above $36 as we approach the opening bell.

 

THE HBM: PEET, PFCB, BOBE, EAT - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Feeling Certain

This note was originally published at 8am on February 02, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You know far less about yourself than you feel you do.”

-Daniel Kahneman (Thinking, Fast and Slow)

 

Since last Thursday, when I made the call to go to 91% Cash (selling my US Dollar and US Equity positions down to 0%), I’ve re-invested 12% of that Cash (on red) in the Hedgeye Asset Allocation Model, dropping my Cash position back down to 79%.

 

After I write something like that, you should feel something. ‘Who is this guy? That’s not what I do? I love this guy. He can’t do that. I think he played hockey, etc.’

 

I don’t know what you are feeling right now. All I know is that the more I think I know about risk management, the less I know. As a result, the best path forward is to Embrace Uncertainty, keep moving, and banging out the early morning reps.

 

Back to the Global Macro Grind

 

People on Old Wall Street are funny. Yesterday, at Bloomberg’s China Conference, our rising star Asia analyst, Darius Dale, commented “this is really weird – I just spent the whole day listening to American investors tell me everything that they know about China.”

 

Where were the people from China?

 

I don’t know. What I do know is that there are highly intelligent people in this business that tend to think they know a lot more about what they don’t know than they actually do.

 

This, of course, isn’t new. In Chapter 4 of “Thinking, Fast and Slow”, The Associative Machine, Kahneman takes a step back to remind us that David Hume boiled this down to 3 principles of associative thinking in 1748: “resemblance, contiguity in time and place, and causality.” (page 52)

 

In other words, since most Perma-Bulls have been blown up by bubbles in the last 4 years, China must be a bubble. It resembles a bubble, right? We’re all here at the China Conference telling one another it’s a bubble, right? And notwithstanding any correlation math, we can all agree that credit bubbles cause bubbles, right?

 

Right, right.

 

So, after Gary Shilling’s consensus headline coming out of the Bloomberg Conference was “China Headed for Hard Landing”, Chinese stocks closed up another +2% last night (we’re up +16% on our CAF position since buying it on December 29th, 2011) and the Hang Seng moved to +12.5% YTD!

 

I’m Feeling Certain now that something hard landed somewhere last night, on a Chinese short sellers head.

 

Does that mean we run out and buy more China this morning? Of course not. It’s just a simple reminder that if some US centric investors don’t know what they don’t know about their own Macro market moves, how on God’s good earth do investors trust that they can pin the tail on the donkey on a 12 hour plane ride from Newark?

 

Back to our positioning in the Hedgeye Asset Allocation Model – here it is as of last night’s US market close:

  1. Cash = 79%
  2. International Equities = 9% (China – CAF)
  3. Fixed Income = 6% (Long-term Treasuries – TLT)
  4. US Equities = 6% (Energy – XLE)
  5. Commodities = 0%
  6. International FX = 0%

Feeling Certain about any of these asset allocations or Hedgeye Porfolio  LONG/SHORT positions we take is very hard to do. Feeling Certain that you can flip a switch from expecting Global Growth Acceleration to Deceleration in February is even harder to do.

 

With hindsight being crystal clear, the only thing I am certain about is how my model has worked over the last 4 years:

  1. When Inflation Expectations start to rise, people confuse commodity and stock market inflations with real-growth
  2. As real Growth Expectations start to fall, Gold, Treasuries, and Volatility start to rise
  3. As inflation expectations rise and growth expectations fall, confusion in markets starts to breed contempt

Confusion is as confusion does. The US stock market went down for 4 straight days after we made the move to 91% Cash last Thursday. After 1 up day in the last 5, the Perma-Bulls are back. But are they? How can you be perma bullish or bearish about anything after the last decade of getting paid to feel certain about everything?

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), Copper, EUR/USD, Shanghai Composite, and the SP500 are now $1709-1771, $110.68-111.89, $3.75-3.83, $1.30-1.32, 2278-2334, and 1317-1326, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Feeling Certain - Chart of the Day

 

Feeling Certain - Virtual Portfolio


MAR: DELIVERS A SOLID Q AND GUIDANCE

This quarter wasn’t expected to be a huge catalyst but after the HST disappointment, MAR looks relatively good.

 

 

As many of you know, MAR has been our favorite stock for the last few months and we see nothing in last night’s release to change our positive view.  The quarter was messy and confusing – as we expected – and not necessarily comparable to estimates.  However, guidance was solid which may move the stock in a positive direction today.  Following the HST disappointment, expectations were ratcheted down.  Going forward, we expect solid RevPAR growth for the industry and MAR.  While we are not totally sold on this recovery from a Macro perspective, MAR’s almost pure fee business provides a level of protection from economic volatility.  While the valuation has improved, we don’t believe the multiple yet reflects the strength of MAR’s cash rich, fee-based business model.

 

The conference call starts at 10am EST but here are some takeaways in the meantime:

  • Managed and franchised room growth was a little better than we expected
    • Managed rooms were 1,185 higher than we estimated (0.4%)
    • Franchised rooms were 839 (0.3%) higher than we estimated
  • Absolute RevPAR was about 1% higher than we estimated but the numbers aren’t exactly comparable
  • Reported WW System wide RevPAR was at the midpoint of company guidance (5-7%)
  • Fee revenue of $416MM missed – mostly on the incentive fee line
    • Guidance: $420-$430MM
    • Consensus: $426MM
    • HE estimate: $429MM
    • $9MM of the shortfall in fee revenue (vs. HE & Street) was from incentive fees
    • The street wasn’t adjusting for the shift in timeshare fee accounting from Management to Franchise fees so their numbers aren’t really comparable.  Versus our numbers, the rest of the shortfall came from lower base management fees ($4MM)
  • Results from owned, leased, corporate housing and other were better than expected due to a combination of stronger owned/leased results and higher branding fees
    • MAR reported $56MM of segment results vs.
      • Guidance: $50MM
      • Consensus: $59MM
      • HE estimate: $52MM
    • They did not provide a breakout of branding fees so it’s hard to comment on margins on the own/leased portfolio
  • Not much to say on Timeshare other than:
    • Street numbers aren’t comparable since MAR reported a partial quarter and didn’t provide the typical historical disclosure
    • The partial revenues that they did report were lower than our numbers as were the partial segment results.  $17MM of the miss vs. our EBITDA estimate for the quarter was attributed to timeshare segment results
  • SG&A was $25MM higher than we estimated.  We thought that the SG&A attributed to timeshare was $25MM (based on prior disclosure) and that the clean 4Q10 number, including timeshare, was $240MM (excluding charges).  We assumed only a partial removal of SG&A for the quarter.  The clean number of $219MM looks lower than what we would have projected.  This obviously accounted for a large part of the discrepancy in numbers for us and probably consensus too.
  • Guidance thoughts
    • 1Q12 and full year RevPAR outlook looks fine – in-line
    • Fee guidance is in the range of consensus ($1,438MM) and in-line with our $1,428MM estimate
    • Owned, leased, corporate housing and other guidance is below consensus of $158MM and below our estimate of $154MM
    • EPS guidance is better than our estimate of $1.49 and in-line with street estimates of $1.59

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