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Should be good enough – for now.

We continue to think RevPAR growth will moderate, potentially more than expected by the Street.  We are not positive on Lodging stocks and would fade any boost from the MAR Q3 beat.  Here are our detailed thoughts.

 

Marriott 3Q12 Review

  • Bottom line:  Results in the Q were solid but not as good as the headline appears.  The big EBITDA beat was largely driven by much lower SG&A.  Operating income of $213MM was $23MM above the high end of MAR’s guidance.  SG&A was $23MM below company guidance.  The balance of the performance was aided by:
    • $2MM higher deferred fees on the Courtyard sale ($7MM actual fees; they guided $5MM)
    • $2MM higher incentive fees
    • $6MM better branding fees (we have very little visibility but we did suspect that they were sandbagging guidance on this line item)
    • Some of the above got offset on the bottom line by higher taxes and lower gains
  • 4Q Guidance is mostly in-line but a bit weaker:
    • RevPAR is weakish
    • SG&A lower than expected but in-line with their guidance
    • Owned, leased, corporate and other unchanged
    • EPS guidance of 55 cents vs prior implied guidance of 58 cents
  • General observations:
    • Total system-wide room count was lighter than we estimated by 0.6% or 3,600 rooms
      • Managed hotel rooms were down 0.8% YoY vs. our estimate of +0.1%; falling short of the our estimate by 2.4k rooms
      • Franchised hotel rooms grew 3.6% vs. our estimate of 3.9%; or 1k rooms below our estimate
  • Absolute RevPAR came in stronger than we estimated for almost every brand aside from Renaissance and Fairfield
  • Owned, leased, corporate housing and other revenue was weaker than we estimated but margins were better than our estimate and above company guidance of $20MM
    • Revenues were $29MM below our estimate and down 21% YoY.  $33MM of the shortfall vs. our estimate is likely due to the exclusion of the revenues from the Courtyard JV which the company did not disclose. 
    • Margins were not impacted by the revenue shortfall given that in the 3Q, margins in this category, excluding termination and branding fees, are typically negative.   This quarter, excluding termination and branding fees, margins for this bucket were a loss of $2MM.
    • The better than guided results in the category were driven by stronger branding fees of $27MM  and $1MM of termination fees in the quarter
  • Fee revenue came in $4MM above our estimate and on the lower of the company guidance of $315-325MM
    • Upside was driven by $2MM of higher deferred fees on the Courtyard JV and $2MM of higher incentive fees
    • Base fees as a % of room revenues were 4.7%, excluding the deferred fees, down 10bps YoY
  • SG&A came in $23MM below MAR’s guidance.  According to the release, there was a favorable litigation settlement in the quarter, offset by higher legal expenses, resulting in $5MM net benefit.  We’re not sure that higher legal expenses should be an offset unless they are one-time or unusual.   If we take the release at face value, then SG&A would have decreased 4% YoY, which is below recent trends: Adjusted SG&A increased 8% in 2011, 4% in 1Q12, and 6% in 2Q12.  Guidance for 4Q also implies at least a 4% YoY decrease in expenses
  • Tax expense was higher than we estimated at 35.6%