• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

MAR 1Q2010 CONF CALL "NOTES"

“In the first quarter we welcomed increasing numbers of business guests to our hotels as travelers got back to work in most markets around the world. While first quarter room rates were generally lower than last year, as occupancy levels continue to improve, we see higher room rates on the horizon. With stronger demand and meaningful unit growth, fee revenue and earnings per share exceeded our expectations. 2010 is shaping up to be a good year."

- J.W. Marriott, Jr., chairman and chief executive officer of Marriott International

HIGHLIGHTS FROM THE RELEASE

  • Corporate room nights for the Marriott brand in North America rose 16% in 1Q2010 as business demand strengthened dramatically. 
  • 23% of company-managed hotels earned incentive management fees compared to 25% in 1Q09. Approximately 60% of incentive management fees came from hotels outside North America compared to 54% a year ago.
  • Owned, leased, corporate housing and other revenue, net of direct expenses, declined $1 million in the 2010 first quarter to $12 million, primarily reflecting the impact of lower operating results in owned and leased hotels partially offset by $4 million of termination fees.  
  • Timeshare development revenue, net of expense, benefited from stronger demand, higher closing efficiency, favorable reportability and lower marketing and sales costs.

 

CONF CALL

  • RevPAR for MAR branded was -8.5%, -3.1% and 7.1% in Jan, Feb, and March, respectively.  Ritz results were even better.
  • In March (Period 3) corporate room nights rose 21% and premium room nights increased 28%
  • Weekend room nights increased over 6%
  • Room rates declined only 3% in the 3rd period - due to better mix of premium product and more corporate travel
  • Internationally March results increased 10% (included in their 2Q results)
  • Stronger RevPAR results in China reflected maturing of their hotels and strong domestic demand
  • Middle East constant dollar RevPAR fell 8% in March.  Egypt RevPAR grew 12% in the quarter. Caribbean, like NA, had a stronger March. 
  • Ritz Carlton RevPAR was up 17% in March
  • Last year's cancellation fees negatively impacted margin comparisons on the owned/leased side
  • Booking window is still very short and projecting is very difficult
  • Expect average rates to start showing positive growth soon
  • Contract sales in timeshare - excluding cancellation - showed 10% growth. Closing efficiency rose to nearly 11% from 7% last year.  Rental business RevPAR rose meaningfully as well.
  • Timeshare is benefiting from stronger rental revenue, contract sales, and lower G&A
  • Signed 6,000 rooms in the quarter and 1,000 where canceled from the pipeline.  Autograph has 5 more open projects now.  They have another half a dozen that are in conversion talks.
  • Little debt is available for new construction and they don't expect to see meaningful credit availability.  Supply growth should continue to slow
  • Expect their pipeline to be slightly higher at year end then YE 2009
  • In Period 3, group booking rose for the first time in a while as attendance expectations continued to rise. Improved mix should also help pricing.  They are increasing rates in select markets.
  • G&A for 2Q2010 should total $150MM - a 10% increase y-o-y
  • 2010 securitization will likely be smaller than present years given that 50% of customers are paying cash.  Only 1 sale is expected in 2010
  • Expect higher than normal stock exercises this year given that $5MM options are expiring so there should be more form 4 filings (ie share count will rise)
  • For next quarter, they will publish their earnings release on July 15th and hold their call on the 16th to allow more time to digest the results. Will also hold an analyst day on Oct 27th in NY at the Marriott Marquis

 

Q&A

  • Looking at April - they are just slightly below on rate for Ritz - expect to be rate positive "soon" in the second quarter
  • Estimate that FY rate is still down from 09, but that occupancy is up sufficiently 
  • Their sliver investments are primarily driven by conversions.  As transactions pick up in the space, so should their sliver investments. Anticipate total investments of $300MM in "sliver/equity" investments
  • Incentive fees - in many cases hotels won't be paying fees in until 2011/2012 
  • Will they restart share repurchase or accelerate timeshare development?
    • Still rich with timeshare inventory - so there is little need to invest there in the foreseeable future
    • Will have to wait and see on share repurchasing
    • They are more excited about deploying capital to grow their business
  • Their numbers will still be down mid teens from peak in 2007
  • Generically, they are not seeing a return of cost buildup in their hotels yet
  • There was zero management executive compensation in 2009 - which will get accrued throughout the year. 
  • Openings of newly constructed hotels in the US will be down materially in US but still high internationally.  NA growth will depend on conversion activity (hence their $300MM of sliver money on the sidelines)
  • Group revenue pace is tracking down 2%: room nights are up 1.7% but ADRs are down 3%. Group revenues should be up over next few quarters - up nights down rates still.  New group business should be at higher rates - but there is a lag there. 
  • The more RevPAR moves, it will start to relieve some pressure on their partners - but there will be a number of distressed issues in their owner base either way
  • Incentive fees will grow with RevPAR growth, growth in units, and growth where hotels are already payers... only lag is getting hotels that aren't paying above the watermark
  • Timeshare - 75-80% of their sales are traditional timeshare segments. 45-50% of those customers are current owners or referrals.  Still doing some discounting but are moving prices up where the opportunities exist.  Rental programs of Villas have also moved up by 9% as well.  They are not incentivizing people to use their financing as they did in the past - currently it's in the 40-45% range
  • ROIC is what they look at a lot to measure the business. Timeshare ROIC's aren't acceptable and hence they aren't investing there - and rather they are liquidating for now.  They have a lot of time to decide what they want to do with the timeshare business from an investment standpoint
  • Impact of new healthcare legislation for MAR.  They have some young employees that choose to be uninsured - eventually they will have to get insured - and the cost of that isn't that high - 10's of MM vs. hundreds. Beyond that, there are open questions around open enrollment about double coverage for married employees and making sure that their healthiest employees don't seek healthcare coverage elsewhere
  • ADR growth is driven by mix shift and actually raising of rates in certain locations - NYC, DC, Boston, Amsterdam, London, etc (usual suspects)
  • How is occupancy impacting costs? First it's adding hours, but it will add FTE's in the future. Hope to be able to maintain hours per occupied room.  Think that there shouldn't be much management growth as they add occupancy
  • 1/3rd of the increase in fee guidance was driven by better incentive fees - they expect incentive fees to be up 5-10% for the year
  • Delta made a comment that the level of business travel is back to 2007 levels...
    • Don't think that they are back to peak but they are getting there... 
  • How much occupancy gains can they get before seeing cost creep up?
    • Assume as occupied rooms grow, so will variable labor
  • Too early to tell what the impact is of the Icelandic volcano impact?
    • Initially, it's positive as people are stuck, away from home, but new demand is usually impacted until people resume travel
    • It's typical net net negative