Given the preannouncement on September 23rd, there shouldn’t be any big surprises on MAR’s 3Q09 call.
We expect MAR's 3Q results to be somewhat messy given the $760MM of impairment charges related to the timeshare business. We all know that the leisure business is elastic; the real question is whether the corporate segment of the business is showing any signs of life. We don’t think so.
On September 23rd, in addition to announcing a restructuring of their timeshare business, MAR also gave an update on its 3Q09 NA comparable system wide RevPAR performance which is now expected to be down 19%. The results for 3Q are a little better than the expected 20-23% decline MAR guided us to in July, with the better-than-expected performance driven by leisure demand. This comes as little surprise to us since MAR alluded to this on their last call, CCL reiterated the same comments on its earnings call several weeks ago and we know that leisure demand is elastic.
“Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.”
-Arne Sorenson; July 16, 2009
The real issue for MAR and most of our lodging companies is that any real recovery will rely on the health of corporate travel, which is where the majority of their business is sourced. With unemployment still rising and approaching 10%, albeit at a slower pace of increase, we don’t see any immediate rebound in the cards for corporate lodging demand. However, given the cyclical nature of the lodging group, as long as people continue to believe a market recovery is around the corner, lodging stocks can continue to perform.
Excluding extraordinary charges, our numbers are at the top end of MAR’s guidance and a little ahead of consensus. We think MAR will print $0.14 EPS (guidance: $0.09-$0.14, Street: $0.12) and $162MM in adjusted EBITDA (Street: $159MM) tomorrow. Timeshare is always a wild card, especially this quarter with all of the charges, but we expect total fee income to come in at $220MM and owned and leased income to come in at $7MM.
Marriott should benefit from a weak dollar in 4Q and in 2010 if exchange rates stay where they are. However, we are still moderately below the street and MAR’s guidance for 4Q09 and below the street for 2010. Marriott typically gives preliminary guidance for the following year in 3Q.
We expect MAR to elaborate and give an update in its new timeshare strategy announced on September 23rd. As a reminder, below is a “Youtube” of MAR’s new timeshare strategy.
"Today's announcement reflects the significant decline in demand for luxury residential real estate over the last year. It also reflects the relative strength and deeper market of the traditional timeshare business which, while impacted by the weak economy, has proved to be more resilient. For all aspects of this business, our goal remains to drive cash flow. We expect the timeshare segment to produce positive cash flow in 2009, higher levels of cash flow in 2010, and improving profitability."
- “Marriott expects to reduce residential prices, convert certain proposed projects to other uses, and sell some undeveloped land. Going forward, while Marriott expects to continue to license and manage luxury residential projects developed by others as part of its lodging business, it does not expect its timeshare segment to pursue new Marriott-funded residential development projects.”
- “Demand for luxury fractional units remains constrained by the weak economy and the significant supply of luxury residential real estate on the market. As a result, the company has decided to reduce prices of existing fractional units to accelerate sales and cash flow, prompting the third quarter charge. The company will sell a portion of its fractional inventory as part of the new portfolio membership program in Ritz-Carlton Destination Club ("RCDC")”
- “Traditional U.S. timeshare business, recent successful marketing promotions included volume discounts and other purchase incentives. The company expects to continue targeted short-term promotions”
- “Company's four European timeshare and fractional resorts continue to experience low demand. As a result, the company plans to continue promotional pricing and marketing incentives, while reducing overhead to accelerate sales and cash flow. The company is currently not pursuing additional development in Europe.”
- Unfortunately we aren’t yet seeing more corporate travelers and business meetings returning to our hotels. Instead, our mix of business remains skewed towards price sensitive, leisure travelers.
- With occupancy levels stabilizing in the low to mid 60’s, pricing has become a greater challenge. Everyone is price sensitive today, not just vacationers. We expect pricing power to return only as occupancy recovers.
- Outside North America we are starting to see more significant RevPar declines with the economic downturn affecting most markets.
- We have eased brand standards where it makes sense and deferred scheduled renovations to help owners.
- On the development front, we opened more than 8,000 rooms during the quarter and have 110,000 rooms in the pipeline
- Going forward... it gets harder and harder to maintain those margins because it is a rate driven drop. In addition, comps get more difficult because we actually started in the second quarter, but more so in the third quarter, cutting and controlling costs out in the field. I wouldn’t give up and say there is nothing there but it is going to get more difficult going forward.
- Right now we have a very short booking. The meeting planners bookers are sitting on the sidelines waiting to see if they can get a better deal, hoping for better pricing, and so there is a very short window right now.
Balance sheet commentary:
- We continue to aggressively manage our balance sheet and we are committed to our investment grade credit rating.
- Through continued reductions in our investment spending and substantial cash flow from our fee based model, we expect to be able to continue to reduce debt in 2010, further improving our leverage ratios.