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In line quarter with guidance midpoint slightly below the Street. We think guidance is conservative.

“We were delighted with our 2012 results.  While this year is off to a strong start, we are providing a somewhat broader and more conservative range for 2013 REVPAR growth due to the potential effect on the travel industry of the impending federal budget sequestration.”

- Arne M. Sorenson, president and chief executive officer of Marriott International

CONF CALL NOTES

  • Encouraged by recent trends
  • Mexico has seen a resurgence in demand
  • ME is benefiting from eocnomic growth and easy comps
  • Asia is trending up 5% YoY and China should improve as the year progresses
  • Europe continues to struggle but less concern about things falling off a cliff
  • North American financing for limited service construction has eased but maintains challenging for full service builds
  • In the first year of conversion to MAR brands, hotels see an average of 10% increase in RevPAR
  • Group RevPAR increased nearly 10% at their smaller hotels. 
  • Over a 5 year period, they are investing $500MM to jump start the EDITION brand with the goal of recycling their investment as soon as possible by selling the assets and taking back management contracts
  • Greater Lobby initiative will be rolled out throughout the MARRIOT brand later this year
  • Special Corporate was 15% of their full-service managed hotel room nights
  • Group business revenue pace was up 6%.  Hotel booking window continues to lengthen.
  • NA represented 75% of their WW fee revenue in 2012
  • Believe that business in most markets will improve as the year progresses due to easier comps and growth in China. Expect Indonesia and Thailand to remain strong throughout the year. India continues to add Fairfield and Courtyard projects.  Just signed a deal that will double their prescence in Thailand by 2017.  19% of their fee revenue came from Asia. Expect to open a hotel every 2 weeks in China.
  • Europe:  Expect flattish RevPAR growth for 1Q and 2013.  8% of their WW fee revenue.
  • ME&A:  mid-single increase in RevPAR, with double digit RevPAR growth in the 1Q. Represent 3% of their fee revenue
  • Nearly 50% of their 2013 openings will be in the US.  Non-US rooms represent 70% of their pipeline. Increased their development staff by 10% in 2012.
  • Continue to lobby for looser visa restrictions to encourage tourism
  • 20% of their room growth came from conversion of other brands
  • Better than expected fee revenue contributed to MAR exceeding their guidance
  • F&B revenue growth was modest reflecting the impact of Sandy on East Coast convention and meeting business
  • Saw weakening demand in London 
  • Brazil weakened and Panama also suffered from new supply
  • Indonesia and Thailand saw double digit RevPAR growth
  • NA incentive fees increased 32% due to strong performance in Boston and NY
  • Sale of the corporate housing business and shedding of 5 leased hotels impacted their owned & leased revenues
  • Incentive fee growth will likely be constrained by Europe and Asia growth in 2013
  • 1Q of 2013 will include 93 days 
  • Expect to recycle capital in 2013.  Expect to return $MM of capital to shareholders in 2013.

Q&A

  • Inaugural impact from DC was a 80bps benefit on their January RevPAR 
  • Group is generally a positive story. Revenue put in on the books in the Q for the next 12 months was up 8%
  • Their capex # is gross - should be lower when you factor in recycling.  1/3 is capex the rest is key money and mezz loans. $200-225MM on their EDITION hotels.
  • Share repurchase is built into their model.  Build in a steady state share repurchase plan throughout the year.  It only produces a penny or so of accretion throughout the year.
  • Special Corporate negotiations came in about 50bps lower than they anticipated. It doesn't give them much concern- it can be explained by anxiety over the fiscal cliff and economic uncertainty in the 4Q when some of the negotiations took place. 
  • Fear of sequestration is singularly driving the low end of their range
  • Their ability to exit some unprofitable leases allowed them to return some extra cash to shareholders 
  • Full service hotels in the US continue to pay more incentive fees.  It's not likely that the select service hotels pay any meaningful incentive fees.  However, on the Asia and M&E front, there should be meaningful growth in incentive fees.  Europe is a slower story.
  • London EDITION will open mid-year 2013. They are hopeful to sell the hotel in 2013.  The Miami EDITION is scheduled to open in late 2013 and it's possible that it slips to 2014. They are pleased with the response they are getting on the 23 residential units.  While they will be collecting deposits on the units shortly, they won't be able to close on the units until the hotel opens in late 2013/ early 2014.
  • Concern on sequestration is not just the government business (12% of the DC area business and 5% nationally) but also on the broader economy and the consumer potentially.
  • In October, they were a little less frightened by the fiscal cliff then when they got to December... things got bleakest in December not in early October. They were hopeful that they government would find a more comprehensive solution rather than the deal that was put in place which resolved very little. There has been zero progress on addressing the debt ceiling issues.  
  • Their level of cash is at historical lows.  They usually like to stay about $100MM. As long as they have access to the CP market and that is backed by the RC which isn't drawn...so they feel ok with their cash cushion.
  • Their guidance doesn't suggest that sequestration will have a 100bps on RevPAR. They are saying that we are 10 days away from something potentially negative happening in the economy and hence having a negative impact on their business. Therefore, they just broadened their guidance range. They do know that some government agencies are already pulling back on their travel budget. However, sequestration has not really started yet. Government business is and has been already weak lately.  They government groups will no longer order lunch for their attendees for meetings over the last year / 18 months.
  • Buyback? Don't think that their long term buyback and dividend policy will be impacted by their view on sequestration
  • Is their pipeline heavily scewed towards franchised? Most of their international units that opened were managed. However, they also had a bunch of units exiting the system so they ended up with more net franchised growth.  In 2013 & beyond, they should have good managed growth. But most of the growth in their system will be franchised.
  • Reported #s in Q4 include Sandy impact - they include the downtown NY hotels that they have, which were closed for a month as a result of Sandy. 
  • Slower pace for F&B spending? Sandy certainly had an impact in 4Q because some groups canceled. They were stronger in the West and South in 4Q.  Generally F&B doesn't give them enormous concern going forward. F&B is growing and should continue to grow in 2013.
  • Hopeful that they will see China build throughout the course of 2013.  There is some sense of stability early in the year. Too early to say though.  Did see their development openings slow in 2012 but they don't think that they lost any projects though. Do have easy comps since they started with 10% in early 2012 and ended around 3% RevPAR growth.  In the South (Sanya & Guangoa) will continue to see a significant amount of supply growth. Over time, supply will be absorbed but in the short term it will put pressure on RevPAR in those markets.
  • Terms for limited service lending is better but still requires guarantees from the builder and lower LTV's than historically.  That is supported for CMBS. Financing isn't really available for new construction full service unless it's subsidized by the city or for mixed use developments. There is more financing for M&A deals.
  • Impact from payroll taxes and higher fuel costs? No, they are not seeing any impact from the consumer. Weekend business has actually been stronger than their weekday business.
  • How much of their anticipated group room nights are booked for 2013 - about 70% for the MAR brand - which has remained pretty constant
  • Sees no new pressure from OTAs (North America contribution has been small)

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EPS of $0.56 and Adjusted EBITDA of $358MM
  • MAR repurchased 6.9MM shares for $257MM during 4Q. On February 15, 2013, the board of directors increased the company’s authorization to repurchase shares by 25 million shares to yield a total share authorization of 34.2 million shares.
  • North American comparable systemwide REVPAR rose 5.9%
  • Worldwide comparable systemwide REVPAR rose 5.2% (constant currency)
  • Pipeline of hotels under construction, awaiting conversion or approved for development increased to nearly 130,000 rooms, including almost 59,000 rooms outside North America 
  • Marriott added 37 new properties (13,982 rooms) to its worldwide lodging portfolio in the 2012 fourth quarter.  Six properties (1,398 rooms) exited the system during the quarter.
  • In January 2013, North American comparable company-operated REVPAR rose 8%.
  • 4Q incentive management fees increased...included a $3 million favorable impact of the recognition of previously deferred fees. 
  • In 4Q, 30% of worldwide company-managed hotels earned incentive management fees compared to 27% in the year-ago quarter. For full year 2012, 33% of worldwide company-managed hotels earned incentive management fees compared to 29% in 2011.
  • Improved results at owned and leased hotels and higher credit card branding fees were largely offset by lower termination and residential branding fees year-over-year.
  • Fourth quarter 2012 expenses reflected routine increases in compensation and other expenses, as well as unfavorable foreign exchange. These were largely offset by a $6 million reversal of guarantee reserves for two hotels, as well as lower legal and bad debt expenses.
  • The company anticipates adding approximately 30,000 to 35,000 rooms worldwide for the full year 2013. The company also expects approximately 10,000 rooms will leave the system during the year.

MAR 4Q 2012 CONF CALL NOTES - mar222