The quarter was very messy and riddled with charges as expected. However, it looks like clean EPS came in at $0.15, beating the street and company guidance as well as our $0.14 estimate. Stronger leisure demand and solid cost controls contributed to the better than expected results. Earlier this morning we put out a quick review. Below are more details on the quarter.
- Full service room growth was lower than we expected, however, limited service growth more than made up for the difference. Limited service room growth actually accelerated in 3Q09 vs 1H09.
- Total managed rooms were 1,200 light of our estimate while franchised rooms grew by 1.8% more than our estimated growth rate of 8.4%
- ADR declines were a higher percentage of the RevPAR decline compared to our projections and chain scale results.
- There was a notable sequential improvement in occupancy (declines), especially for the Ritz brand and the full-service brands
- The FX drag on international RevPAR was 6.6%, highly correlating with the 6.2% y-o-y strengthening of the dollar vs Euro
Total Fee income:
- Base management fees were exactly in line with our estimate but franchise fees were $5MM better, driven primarily by more room additions in the quarter
- Incentive fees were also $7MM better than our estimate
Owned, leased and other:
- Owned, leased and other revenues of $226MM were $19MM above our estimate
- $6MM of the beat was due to termination fees
- $15MM was due to better F&B performance, which makes sense given that occupancy performed better than we expected for the full service hotels. Food and beverage outperforms RevPAR over the next few quarters as occupancy flattens out
- Assuming branding fees were in the same $19MM range as previous quarters, gross margins ex-termination fees and branding fees on “owned & leased” are about -$17MM. Since there is a lot of other stuff in “Owned, leased & other”, we would caution investors on extrapolating too much from the margin changes of this bucket
- Contract sales declined 42%, coming in 6MM lower than our estimate. Fractional sales were also weaker
- Development revenues of $138MM declined 48%, missing our estimate of $172MM by $34MM, while finance revenues came in $3MM better
- Timeshare results were 4MM below our estimate of $13MM due to lower JV equity earnings and lower timeshare sales & services, net results. Base fees were in line
- As a reminder, in 2010 the adoption of FASB 166 & 167 will require MAR to consolidate its existing portfolio of non-recourse securitized loans. This accounting change won’t change risk or cash flow from timeshare but will inflate liabilities & debt balance while benefitting pre-tax earnings by an estimated $30-40MM