MARRIOTT 3Q09 REVIEW

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.

RevPAR Details:

  • 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

Timeshare Details:

  • 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