MAR: GOOD BUT NOT GREAT

Reported a solid quarter and issued smart guidance; smart, as in very conservative Q3 but reasonable full year.

 

 

Not surprisingly, MAR reported solid Q2 results and bumped up 2010 guidance.  MAR remains attractively valued, particularly on a relative basis, and is certainly the most defensive of the lodging names. 

 

They beat our EPS estimate by a penny and beat the Street by $0.02.  Adjusted EBITDA of $278MM was $3MM above our estimate and 7% ahead of the consensus.  On the surface it may look like the beat was driven by stronger RevPAR and room openings.  Not to take anything away from Marriott, but looking under the hood that’s not exactly correct.  

 

By our math, the beat came from higher termination fees on the owned, leased, corporate housing and other, higher incentive fees, lower timeshare costs, and lower SG&A.  At least the first three items are lower multiple drivers of value.  Even so, 3Q guidance of $0.18-0.22 seems awfully low given the revised RevPAR guidance and upwardly revised room growth.  Even if we use MAR’s seemingly high $155MM SG&A guidance, it seems that they should easily beat the top end of their range.  Consensus heading into the release was $0.22.

 

 

The Details:

 

Owned, leased, corporate housing and other revenue of $255MM was $6MM below our estimate but gross margin was only $1MM below our estimate.

  • Termination fees net of property closing costs were $6MM this quarter; that’s pure margin but low to no multiple revenue.  We typically estimate $2MM of termination fees per Q.
  • Assuming that branding fees were stable in the $19MM range implies that F&B and other revenue only increased 1% YoY, which is somewhat disappointing given the pickup in occupancy and improved corporate travel.

Fee income of $287MM was $1MM ahead of our estimate.  However, Management and Franchise fees were lower than our estimate with Incentive fees making up the difference.  We believe Incentive fees are less valuable.

  • Management fees grew 7.9% YoY, which is below the aggregate of the room managed, room base growth and RevPAR growth.
  • Incentive fees came in $6MM above our estimate.
  • Franchise fees were $2MM below our estimate.

Timeshare results managed to beat our estimates and management guidance despite weak contract sales given the difficult YoY comparisons, which included 25 year anniversary promotions.  Timeshare before SG&A was $8MM better than our estimate.

  • Some of the lower contract sales were offset by the fact that MAR was able to recognize a higher percentage of sales.  Last year MAR had to defer recognition of 14% of contract sales, while this quarter they were able to recognize 92% of contract sales.
  • Finance income was a little lower then our estimate due to a lower loan balance ($987 down from $1046MM last Q).
  • Timeshare sales and services, net margins, were 21.6%, in line with 1Q2010 margins and a nice improvement over 2009 margins.
  • SG&A declined another 6% on top of a 36% decline last year.

SG&A came in $8MM below management guidance.  Oddly, the guidance for Q3 is $13MM higher than the actual Q2 quarter.  As a reminder, 3Q2009 included $15MM of unfavorable impact associated with deferred comp compared with 2008 and $5MM of certain litigation expenses.  At the time, MAR claimed that $130MM was a normalized number.  MAR’s $155MM guidance implies 19% YoY growth which, again, seems way too high.


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