Hedgeye - 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."