Marriott Profit Rises, But Outlook Weak

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The FINANCIAL — Marriott International, Inc. on October 28 reported third quarter 2015 results.

Third quarter 2015 net income totaled $210 million, a 9 percent increase over 2014 third quarter net income.  Diluted earnings per share (EPS) in the third quarter totaled $0.78, a 20 percent increase from diluted EPS in the year-ago quarter.  On July 29, 2015, the company forecasted third quarter diluted EPS of $0.72 to $0.76, according to Marriott.

Arne M. Sorenson, president and chief executive officer of Marriott International, said, “Our company posted solid performance in the third quarter.  North American systemwide RevPAR rose over 4 percent despite the impact of unfavorable holiday shifts on our group business compared to the year-ago quarter.  Our hotels are full with occupancy at nearly 78 percent allowing us to continue to raise rates and reduce lower-rated business to drive RevPAR.

“Our global development pipeline continues to increase, reaching more than 260,000 rooms at the end of the quarter as owner and franchisees continue to choose our brands.  Combined, our pipeline and open rooms exceed one million rooms worldwide.  Recently unveiled in the U.S., Moxy and AC Hotels have a combined five hotels open and 82 hotels signed or approved domestically.  Our newest brand, Delta Hotels, expects to open its first U.S. property later this year, a conversion from a competitor’s brand.

“Our asset-light business model continues to deliver significant profit growth with modest capital requirements, yielding outstanding return to shareholders.  For the full year 2015, we expect to return more than $2.25 billion to shareholders through dividends and share repurchases, a record which would bring our total return to shareholders to nearly $8 billion over the last 5 years.  Over the last 12 months, our return on invested capital has totaled 47 percent.

“For 2016, we expect systemwide constant dollar RevPAR will increase 4 to 6 percent in North America, outside North America and worldwide.  Our group bookings for our North American full-service hotels for 2016 are up more than 7 percent with about 75 percent of expected group business volume booked thus far. 

“Given our strong development pipeline, we anticipate our number of rooms will increase 7 to 8 percent, gross, in 2015, including the 9,600 rooms from the Delta acquisition, accelerating to 8 percent, gross, in 2016.  Nearly 40 percent of our more than 260,000 room pipeline is already under construction.”

For the 2015 third quarter, RevPAR for worldwide comparable systemwide properties increased 4.5 percent (a 2.2 percent increase using actual dollars).

In North America, comparable systemwide RevPAR increased 4.2 percent (a 3.7 percent increase using actual dollars) in the third quarter of 2015, including a 4.2 percent increase (a 3.6 percent increase in actual dollars) in average daily rate.  RevPAR for comparable systemwide North American full-service hotels (including Marriott Hotels, The Ritz-Carlton, Renaissance Hotels, Gaylord Hotels and Autograph Collection Hotels) increased 3.7 percent (a 3.0 percent increase in actual dollars) with a 3.2 percent increase (a 2.5 percent increase in actual dollars) in average daily rate.  RevPAR for comparable systemwide North American limited-service hotels (including Courtyard, Residence Inn, SpringHill Suites, TownePlace Suites and Fairfield Inn & Suites) increased 4.6 percent (a 4.1 percent increase in actual dollars) in the third quarter with a 4.8 percent increase (a 4.3 percent increase in actual dollars) in average daily rate.

International comparable systemwide RevPAR rose 6.2 percent (a 4.0 percent decline using actual dollars) in the third quarter.  International RevPAR growth was helped during the quarter by the earlier start of Ramadan and very strong demand in Europe.

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Marriott added 68 new properties (10,253 rooms) to its worldwide lodging portfolio in the 2015 third quarter, including Mandapa, A Ritz-Carlton Reserve in Indonesia and The Hotel Lucerne, Autograph Collection in Switzerland.  Twenty-one properties (2,596 rooms) exited the system during the quarter.  At quarter-end, the company’s lodging system encompassed 4,364 properties and timeshare resorts for a total of 750,000 rooms.

The company’s worldwide development pipeline totaled 1,591 properties with more than 260,000 rooms at quarter-end, including nearly 600 properties with roughly 95,000 rooms under construction and over 100 properties with approximately 20,000 rooms approved for development, but not yet subject to signed contracts. 

MARRIOTT REVENUES totaled approximately $3.6 billion in the 2015 third quarter compared to revenues of nearly $3.5 billion for the third quarter of 2014.  Base management and franchise fees totaled $397 million compared to $381 million in the year-ago quarter, an increase of 4 percent.  The year-over-year increase largely reflects higher RevPAR and new unit growth partially offset by $4 million of unfavorable foreign exchange.  In addition, the company recognized $2 million of deferred base management fees related to the performance of a limited-service portfolio and $8 million of relicensing fees.  In the year-ago quarter, the company recognized $6 million of deferred base management fees related to the performance of a limited-service portfolio, $9 million of deferred base management fees related to an owner’s sale of a Courtyard portfolio and $9 million of relicensing fees.

Third quarter worldwide incentive management fees totaled $68 million, a 1 percent increase compared to the year-ago quarter primarily due to higher managed hotel RevPAR and house profit margins largely offset by $4 million of unfavorable foreign exchange.  In the 2015 third quarter, 64 percent of worldwide company-managed hotels earned incentive management fees compared to 56 percent in the year-ago quarter.

On July 29, the company estimated total fee revenue for the third quarter would total $470 million to $480 million.  Actual total fee revenue of $465 million in the quarter was modestly lower than estimated reflecting lower than expected RevPAR growth, particularly in North America and the Middle East and Africa region, renovations, and delays in new unit openings.

Worldwide comparable company-operated house profit margins increased 50 basis points in the third quarter with higher room rates, improved productivity, and lower food and utility costs.  House profit margins for comparable company-operated properties outside North America increased 60 basis points and North American comparable company-operated house profit margins increased 40 basis points from the year-ago quarter.

OWNED, LEASED, AND OTHER REVENUE, NET OF DIRECT EXPENSES, totaled $54 million, compared to $55 million in the year-ago quarter.  The year-over-year decrease largely reflects lower termination fees and lower results from one North American full-service hotel under renovation largely offset by higher credit card branding fees and lower pre-opening costs.

DEPRECIATION, AMORTIZATION, and OTHER expenses totaled $31 million in the 2015 third quarter compared to $33 million in the year-ago quarter.

GENERAL, ADMINISTRATIVE, and OTHER expenses for the 2015 third quarter totaled $149 million compared to $172 million in the year-ago quarter.  Expenses declined in the quarter largely due to lower compensation expense, lower legal costs and net favorable foreign exchange largely due to the devaluation of the Venezuelan Bolivar in the year-ago quarter.

On July 29, the company estimated general, administrative, and other expenses for the third quarter would total approximately $165 million.  Actual expenses in the quarter were lower than expected largely due to general admin savings and lower transition expenses relating to the Delta acquisition, as well as timing.

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INTEREST EXPENSE, NET increased $17 million in the third quarter.  Interest expense for the third quarter increased $14 million largely due to lower capitalized interest expense and higher interest expense associated with a new debt issuance.  Interest income declined $3 million largely due to a year-over-year decrease in loans receivable.

EQUITY IN EARNINGS decreased $4 million in the third quarter to $8 million.  Results decreased largely due to deferred tax true-ups due to tax law changes recorded in the year-ago quarter partially offset by an adjustment of liabilities in an International joint venture in the third quarter of 2015.

On July 29, the company estimated equity in earnings for the third quarter would total approximately $0 million.  Actual results in the quarter were above the estimate largely due to the adjustment mentioned above.

Provision for Income Taxes

The provision for income taxes in the 2014 third quarter included a $6 million non-recurring tax charge.

Adjusted Earnings before Interest Expense, Taxes, Depreciation and Amortization (EBITDA)

For the third quarter, adjusted EBITDA totaled $431 million, a 10 percent increase over third quarter 2014 adjusted EBITDA of $393 million.  See page A-8 for the adjusted EBITDA calculation.

BALANCE SHEET

At quarter-end, total debt was $4,304 million and cash balances totaled $95 million, compared to $3,781 million in debt and $104 million of cash at year-end 2014.

COMMON STOCK

Weighted average fully diluted shares outstanding used to calculate diluted EPS totaled 267.3 million in the 2015 third quarter, compared to 295.4 million in the year-ago quarter.

The company repurchased 9.8 million shares of common stock in the third quarter at a cost of $702 million.  To date in 2015, the company has repurchased 25.1 million shares for $1.9 billion. 

OUTLOOK

For the 2015 fourth quarter, the company expects worldwide comparable systemwide RevPAR to increase 4 to 6 percent on a constant dollar basis.  Outside North America, the company expects comparable systemwide constant dollar RevPAR to increase 3 to 5 percent.  Compared to the fourth quarter RevPAR guidance provided on July 29, today’s fourth quarter outlook for our international regions assumes more moderate RevPAR growth in the Asia Pacific and Middle East and Africa regions.  For North America, the company expects comparable systemwide RevPAR will increase 5 to 7 percent on a constant dollar basis.  Based on early fourth quarter transient RevPAR trends, North American RevPAR is likely to increase at the low end of the guided range.

The company anticipates gross room additions of approximately 7 to 8 percent, or 6 to 7 percent, net, worldwide for the full year 2015, including the 9,600 rooms from the acquisition of the Delta brand.

The company assumes full year 2015 fee revenue could total $1,876 million to $1,886 million, growth of 9 to 10 percent over 2014 fee revenue of $1,719 million. 

The company anticipates worldwide incentive management fees alone will increase at a mid to high single-digit rate for full year 2015.

For 2015, the company anticipates general, administrative and other expenses will total approximately $621 million, a 6 percent decline compared to 2014 expenses of $659 million. 

Given these assumptions, 2015 full year diluted EPS could total $3.12 to $3.16, a 23 to 24 percent increase year-over-year.  

 

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