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Our takeaway from the call is that despite their bullishness, they have little visibility on 2011.

 

 

“We are having an outstanding year. Corporate and leisure demand continues to strengthen, and we are
leading the U.S. industry in pushing retail price increases.... We expect 2011 to be even better than 2010 as demand and pricing continue to strengthen. We are currently forecasting 2011 systemwide worldwide REVPAR to increase 6 to 8 percent."

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

HIGHLIGHTS FROM THE RELEASE

  • RevPAR commentary:
    • NA systemwide: +7.2% percent with ADR up almost 2%
    • International systemwide: +12% on a constant dollar basis (8.5% in local dollars)
      • Asia Pacific:+20% with China was especially strong
  • Cosmopolitan Hotel in Las Vegas will open in December with 3,000 as part of the Autograph Collection
  • "For the Marriott Hotels and Resorts brand in North America, nearly 90 percent of hotels raised corporate retail rates in the quarter and, overall, such retail rates rose 9 percent."
  • 32 new properties (5,056 rooms) entered the MAR system, while 3 properties with 667 rooms exited the system in the 3rd quarter
  • Pipeline: 95,000 rooms / 975 properties
  • "Worldwide comparable company-operated house profit margins increased 90 basis points... House profit
    margins for comparable company-operated properties outside North America increased 170 basis
    points and North American comparable company-operated house profit margins increased 30
    basis points from the year-ago quarter. Excluding the impact of cancellation and attrition fees in
    the 2009 quarter, North American comparable company-operated house profit margins increased
    60 basis points year-over-year."
  • Comparisons on owned, leased, corporate housing and other revenue, net of direct expenses, were negatively impacted because 3Q09 had $6MM of cancellation fees.

CONF CALL NOTES

  • The business traveler is back
  • There is no indication in their business of a double dip. The recovery in lodging is broad.
  • Supply growth is estimated at 2% in 2010 and forecasted at just 0.4% in 2011
  • Waived minimum hour requirements to get health insurance for their employees
  • Discounted rate room nights were reduced by 16% in the quarter and replaced with corporate guests who paid $57 more per night on average. 
  • Pricing in their limited service hotels is lagging but showing signs of improvement
  • Group nights were up 6% in the quarter and 30% of room nights were booked within 3 months.  Group booking pace is now ahead YoY by 1%.
  • For bookings made in the 3Q for 2011, arrivals ADRs were up 4%
  • Special corporate room nights were up 27%
  • Saw particular RevPAR strength in Germany, China and the UK
  • Expect to double their presence in China over the next 3 years and triple their presence in India over the next 5 years
  • 70% of their full service pipeline is in international markets and 7,000 rooms in their pipeline are awaiting conversion
  • Have another 4 hotels signed/approved for conversion to Autograph; Marriott rewards members already make up 40% of the Autograph guests
  • 40% of contract sales in the quarter were to new customers
  • Timeshare rental revenue increased 8% YoY and recorded a $15MM benefit to the loyalty program due to projected lower redemptions
  • Expect this business to generate $175MM in cash this year and even more in 2011
  • Expect to see a material increase in the year for the year bookings. Expect a large increase in ADR due to mix improvement and higher rates charge.

Q&A

  • Margins for timeshare given that the point system is supposed to have better margins?
    • Not sure yet.  They think that the point system will make their product more attractive to their customers
  • Don't have a budget for 2011 yet
  • Helping fund some lobby renovations for the Courtyard brand?
    • The cost is included in their capex estimate. In some cases they are providing mezzanine loans or credit enhancements - total cost is in the 10's of MM's not 100's
  • Government per diem's may go down YoY in 2011 - how will that impact them?
    • Think that in high demand markets, the government business will get squeezed out of mix
    • Thinks that weakness here will be offset by strength in corporate
  • Reason for the AC JV?
    • Their growth has been anemic in Spain and think that having a good partner in that market is really important
  • Lower RevPAR numbers for Renaissance are related to their heavy group mix
  • See tremendous strength in the Ritz brand this fall
  • The 9,500 room JV with AC isn't included in their pipeline numbers. The earnings impact from this venture in 2011 won't be "terribly significant"
  • They are starting to build some cash reserves and will be looking to put that cash to work - so they will be looking to begin share repurchases again
  • RevPAR will be the largest driver of base and management room growth, followed by unit growth (should be about 4% net with system deletions at around 1% of their system - which is around 6,000 rooms)
  • Anticipating at least a 20% increase in incentive fees in 2011 ("or better")
  • Why aren't they seeing a bigger flow through in their owned, leased, corporate housing and other net business?
    • Well, there are a lot of other things in there
    • Do expect some margin expansion in their owned and leased business
  • Brand expansion into the BRIC cities are a focus of growth for them
  • More detail on the high single digit corporate rate increase?
    • They are still very early in the process - so they don't have any detail
    • Part of the high single digit rate increase comes from rate increases but part comes from mix change
  • Expect that most of the 6-8% RevPAR guidance for 2011 to come from rate increase
  • Comp growth will be the largest driver of G&A growth. Expect to do some incremental brand investment.
  • Nights on the books for 2011 are actually lower than where they were for 2010 at this point in the year, but short in bookings are stronger.
    • AKA they have no visibility
    • Revenue on the books for 2011 is actually down 2% from what they had on the books this time in 2010.  Although when they started the year they made up 16% - meaning that at the beginning of the year their booking on the books were 16% below and now they are flat.
  • Lending is improving - but only slightly
    • Leverage ratios are still a lot lower and the terms are still short
    • There are a lot of personal guarantees required ("bad boy guarantees")
  • Capex of $500MM in 2010 and expect a little more spend next year if the opportunities materialize
  • Think that supply growth will remain anemic for a few years
  • Part of the strong incentive fee growth is due to the international system growth where hotels start paying fees on day 1
  • Management's answer to the question about lower guidance was deceptive - "fine tuning" ... hmm let's just close our eyes and pretend we didn't lower the top end range of guidance - we just fine tuned it. But they do admit that the gains benefit them by a few cents for the year
  • In Q3 fee growth was negatively impacted by lower transfer fees, FX  and new signings
  • They aren't grouping down but they are driving rate... (i.e. group will not decrease as a % of mix). Their budget is banking on being able to push through rate increases
  • We liked this question:  what gives them confidence that they can get high single digit rate growth despite the economy deterioriating this quarter?
    • THEY DON'T ITS WISHFUL THINKING... THEY HAVE NO VISIBILITY ASIDE FROM THE REAR VIEW MIRROR - they said themselves that the booking window is short
    • Ugh... and because rate increases are fair... fair is what you can get
      • Ok we all know how this conversation goes... remember last time you asked your boss for a big bonus because you thought it was only "fair"
  • The more modest your expectations are for the economic outlook in 2011 your opinion of RevPAR will certainly be impacted... and their guidance is clearly based on more bullish views of GDP growth for 2011 than ours and consensus.