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Q3 was good but not great.  Q4 EPS guidance is a little disappointing.  But 2011 top line will be fantastic?

Despite the whispers of a big beat this quarter, MAR’s 3Q results and 4Q guidance was simply in line with consensus.  In fact, management lowered the high end of guidance across a number of line items.  The bulls will point to 6-8% RevPAR guidance for 2011 which is nice but a bird in the hand is worth two in the bush.  The bird in the hand is the near term while lofty RevPAR expectations for next year are clearly “in the bush”. 

We continue to think MAR is posturing for its ongoing corporate rate negotiations.  Thus, 2011 RevPAR guidance is on the aggressive side in our opinion and conference call commentary regarding the status of negotiations will likewise be bullish.  However, as we wrote about yesterday in our note, "WE'VE GOT A BRIDGE TO SELL YOU," we think corporate pushback is stronger than expected and the lodging companies may not have as much leverage as investors have been led to believe.  RevPAR visibility is not high enough to be so bullish, in our opinion.

As we’ve written about, we think there is empirical evidence to show that absolute seasonally adjusted RevPAR has been slowing since July.  The April to July period was above RevPAR trend, in our opinion, which will make RevPAR comparisons very difficult in Q2 and Q3 of 2011 and could actually go negative in some months.  We think 3-4% RevPAR growth is more likely than 6-8% and as such, we remain below the Street in our EPS estimates beginning in Q2 2011.

Tidbits and Takeaways from 3Q2010:

  • There was a deceleration of room growth across almost all brands
  • Occupancy growth is decelerating as comps get harder.  The real question is whether ADR will pick up where occupancy growth left off to continue the 8%ish trend.
  • Owned, leased, corporate housing and other revenue, net of direct expenses of $7MM came in $3MM below MAR’s $10MM guidance.
    • Even if we remove the $6MM of cancellation fees that benefited 3Q09, revenues would have been flat YoY
    • We estimate that owned and leased room revenues should have been up around 6% given the relatively flat YoY room count and the increase in RevPAR.  Therefore, if branding fees were flat around $19MM, this implies that food & beverage & other revenues declined almost 5% YoY at these properties.
  • Total fee revenue came in at the high end of guidance
    • Incentive fee growth slowed to 23.5% from over 30% last quarter, although to be fair the company indicated that growth would be a little less in the 3Q than in the 2Q.
    • Only 23% of hotels paid incentive fees vs. 25% in 2Q2010 and 20% in 3Q09.
  • Timeshare segment results of $37MM, which investors care about the least, happened to come in above MAR’s guidance and our expectations.  The outperformance came purely from better margins.  Top line was actually disappointing in our opinion.
    • Contract sales were down 7% YoY, sales & service revenue was down 5%, and base fee revenue was flat
    • However, timeshare sales and services, net margin was 25% - which was almost 400bps stronger than what MAR reported in 1H2010
  • Below the line items also helped the quarter.
    • As we expected, G&A came in lower than management’s guidance of $155MM – we modeled $150MM the actual number was $149MM.
    • Reported net interest expense of$37MM was $3MM lower than MAR’s guidance
    • Tax rate was 35% vs. guidance of 36%, adding another $1MM
    • The 3 items above added $10MM to MAR’s net income vs. their guidance.  These items were slightly offset by lower gains and equity earnings coming in at the low end of MAR’s guidance.
  • Bottom line:
    • Total revenues came in $44MM lower than our estimate. Actually, revenues were a little lower across every business.  However, timeshare margins were materially better, so operating income was only $14Mm lower than we estimated.  Lower G&A also helped.

Thoughts on 4Q/FY guidance

  • How does MAR’s FY 2010 guidance stack up to what they gave us last time?
    • MAR took up the low end of EBITDA guidance for FY2010 by $5MM but lowered the high end by $20MM
    • Gross room openings will now be 30,000 vs. prior guidance of at least 30,000
    • Timeshare GM guidance was reduced by $4MM at the low end of the guidance range to $201MM and by $9MM at the high end of the range to $206MM
    • MAR took up the low end of total fee guidance by $6MM while reducing the high end of the guidance range by $4MM
    • G&A guidance was reduced by $1-6MM
    • MAR took up the low end of their operating income guidance by $3MM but lowered the high end by $17MM
    • Guidance for gains and other income increased by $12MM
    • EPS guidance is now $1.09 to $1.12 compared to $1.05 - $1.13
  • So basically, most of the business’s top end results are projected to be below the prior high end of expectations, but the gain on the timeshare note sale is expected to be higher, G&A a little lower, and tax rate a little lower.
  • We’re not blown away by the guidance