Executives
Carl T. Berquist - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Analysts
Kevin Milota - JP Morgan Chase & Co, Research Division
Marriott International, Inc. (MAR) J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum March 7, 2013 5:15 PM ET
Kevin Milota - JP Morgan Chase & Co, Research Division
All right. Well, welcome everybody. We're excited to have with us this afternoon, Betsy Dahm, Investor Relations Officer, right in the front row; and Carl Berquist, Chief Financial Officer for Marriott International. You made sequestration a very common word following your earnings conference call.
Carl T. Berquist
Correct. At least, we know how to pronounce it now.
Kevin Milota - JP Morgan Chase & Co, Research Division
I know we're sort of a short time into continued planned activity in -- out of Washington, D.C. How are you feeling about that potential impact from sequestration has very kind of increased anxiety levels in a sort of broad way?
Carl T. Berquist
Yes. No, I think when we were sitting down to do our guidance in February, we'd looked out over the U.S. economy -- as well as around the world, but we looked at the U.S. economy and we said, "Things are looking pretty good." Growth, 2%, 2.5%. RevPAR is pretty strong in January. I think we mentioned it was 8% in January. And supply is probably at an all-time low at 1% for '13. So that glass was looking really half full. And so you sit there and say, "Well, we had talked in October of a range around 5% to 7%." But there was this sequestration sitting out there at that time. We didn't know what was going to happen, had a really good feel that they weren't going to solve it by March 1. And that we thought, well, we should put maybe an ounce of conservatism into our range. And so we decided to drop the bottom of the range 1 point just to widen it. And so instead of a midpoint of 6%, you're now the midpoint of 5.5%. It was more -- it wasn't more scientific than that, it was more to just get an ounce of conservatism into that range. It's still early. One thing came true, they didn't solve it. And so they're moving forward, but it's only been 6, 7 days. And I guess, the other thing I would say is, it's less about government business, because government business is 5% of our total room nights, not a big thing. And you yield government business out, it's not a big part of the business. It's more about would it slow down the economy. And I think, really, as you look at it, if that did occur, it would occur over time now. So we'll wait and see just like everybody else. Hopefully, it'll -- the economy will grow right through it and things will go fine.
Kevin Milota - JP Morgan Chase & Co, Research Division
We always pay attention to the New York City market and look at that as having characteristics of being a leading market. And what we're seeing so far, year-to-date, is New York City REVPAR is on fire. I don't know what it is after today's news or yesterday's news that came out, but it's still up in the teens. What's driving New York City REVPAR? Is it easier comparisons? Is it just international travel? Is it finally getting pricing?
Carl T. Berquist
Yes, I think it's probably all of the above. New York has always been a dynamic market, continues to be. A lot of supply is coming on, mostly limited service-type branded supply, a lot of it's us. And -- but that supply is getting absorbed. It probably has the effect of holding down rate a little bit. But clearly, occupancy is being absorbed, and those hotels are filling up. I think New York will continue to be a dynamic market. Right now, there's not much full-service construction anywhere in the nation except for New York, and that's because developers can get their returns in New York, and that's why it's getting done there. So I think New York will be a great market. It continues to be, always has been. Every now and then, it will dip down because it has absorbed something. The other thing you have is Sandy. You still have some occupancy in there from Sandy that caused some compression in the city and pushed some stuff out.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great. Excellent. Can you talk about your outlook for the group business? I know you talked about it on the recent earnings conference call. But can you talk about pace, pricing?
Carl T. Berquist
Sure. As of year end, our group pace was running about 6%, probably a little more rate than occupancy in that. We feel like we've got about 65%, 70% of our group on the books for '13 right now, which is where you want to be, that leaves about 30% to be booked in the year, for the year. As you look at that in the year, for the year bookings, with occupancy near peak levels, you'll get more pricing in there. An example of that is in the fourth quarter, our group bookings were up 8% from the fourth quarter a year earlier. 6% of that 8% was rate. So you're seeing the advantages of that peak occupancy come in, with more rate than occupancy in these growths. You're seeing the window lengthen a little bit. It's not lengthening a lot, but it's lengthening a little bit, which means those groups are saying, "I need to book it now or I'm not going to get those dates I want out there because of the occupancy strengthened." So we're feeling good about group.
Kevin Milota - JP Morgan Chase & Co, Research Division
Okay, great. With respect to corporate rates, that's been 15% of the room nights at the, I guess, the Marriott brand. Can you talk about what you're seeing there? If you look at it, adjusting for mix or not adjusting for mix, how does the price fare?
Carl T. Berquist
Yes, I guess, we're probably -- well, at year end, we're about 85% done, we're probably pretty much done right now with the corporates -- special corporate negotiations. We came in probably just north of 5%. We were hoping to be maybe a point or 2 higher, but you had the whole fiscal cliff thing at the year end kind of inhibited that a little bit. But we feel good about where we came out. North of 5% is a pretty good rate increase. But the good news was is we talked to our major customers, they indicated they're going to be traveling more in '13 than '12, that their budgets for travel were up. And that's a good sign. Like you said, it's about 11% to 15%, depending on the brand of our total transient mix or total mix. And it's good to see that there's going to be a little more volume.
Kevin Milota - JP Morgan Chase & Co, Research Division
And we always look at your development pipeline as sort of the lifeblood of the company and we've seen some good trends there. Can you talk about which markets are really driving this sequential increases in the development pipeline? Maybe just talk about by geography. If you're growing 30,000, 35,000 rooms gross this year, how much of it is domestic, how much of it is Asia, how much of it is international growth [ph] ?
Carl T. Berquist
Sure. So if you look at our pipeline, our pipeline has 130,000 rooms in it. And that kind of breaks down 78,000 rooms of select service and limited service. And then, 52,000, if my math is right, full-service. And when you kind of look at that limited service, that 78,000, the majority of that, probably 80%, 85%, is in the U.S., and most of that is franchised. Our owner/developers in the U.S. that -- I mean, owner/operators in the U.S., are able to get financing, they're area able to grow. Most of this growth is in tertiary, secondary markets, places where there's new demand being created, like the Montana oilfields, Pennsylvania gas, things like that, or where older properties are being taken out, they're replacing them. But we're seeing great penetration in that select service market in the U.S. When you look at the full service in the pipeline, I believe the number is 70% of that is under construction right now. And when you look at where is that, I'd say the majority, or close to the majority, is in Asia Pacific. We've got about 16% of it in the U.S, but the majority is in Asia Pacific. We're seeing great growth there. In fact, an interesting statistic, I think we'll open a new hotel in Asia Pacific, 1 to 2 hotels in Asia Pacific every month for the next couple of years. So we're seeing great growth there. Those hotels are all under construction, so they will be delivered. When you look at the Middle East, Middle East/Africa, what we're really excited about there is Sub-Sahara Africa. This is an area where a lot of money is going into from Russia and China for their natural resources. And they need infrastructure, that infrastructure is being built. We have 3 hotels that will open in Sub-Sahara Africa in the next -- I think in '14, it's in the pipeline. That will be our first hotels -- first Marriott's there, so we're pretty excited about that. In Europe, Europe is more of a conversion game, that we're seeing in Western Europe, and we're seeing especially with the Autograph brand. As you know, we started the Autograph brand just 3 years ago, and today, we have 40 of them, 24 in the United States, 16 in Europe, and we have another 7 in Europe in our pipeline. Great opportunity for us, great opportunity for the Autograph owner, so it's kind of like a win-win. And then not in our pipeline in Europe, but we just announced, was MOXY. Our new -- we're taking our first entry into the economy space. It's a brand-new brand. We're starting it with a development partner, IKEA hotel development, together with one of our franchisees that's in Europe, existing franchisee. We've been working on this for a couple of years. It's an all-franchised brand. It'll be a three-star brand, competing against ibis and Holiday Inn Express, Hampton, those. A number of sites have already been identified, and we think we'll have up to 50 in 5 years, probably 150 in 10 years.
Kevin Milota - JP Morgan Chase & Co, Research Division
And will this involve much in the way of Marriott capital?
Carl T. Berquist
No, it'd be immaterial for Marriott capital. But it'll be our brand. We own the brand.
Kevin Milota - JP Morgan Chase & Co, Research Division
Got it. You're investing, I guess, just under $1 billion in the EDITION brand. You have properties in various degrees of construction: London, Miami, New York. Can you talk about their contribution to the pipeline? And how you think, timing wise, for maybe monetizing or recycling your investment there?
Carl T. Berquist
Sure, sure. We'll invest, probably, in those 3 properties you mentioned, about $900 million in total. About $250 million of that will be in 2013. They're in various stages of completion. London will be finished and opened probably by June of this year. Miami, which is on South Beach, probably first quarter of '14. And then the Clock Tower in New York City will be probably early '15, to give you kind of timing. We'll recycle those hotels, sell those hotels shortly after they open, anywhere from 6 months -- 3, 6 months, maybe after that, and recycle that capital. As we looked at that brand, we concluded to really get it going, we needed to put our own money in the game. Three iconic sites. The London site is the old Berners Hotel right off Oxford Street. Fee simple real estate in London, you can't get much better than that. The Seville, which is on Miami Beach, will be beautiful. We also have 26 residences that are for sale as part of that, which are dynamic views right on the beach. And then Clock Tower, for those who don't know it, it's on 23rd and Madison, I guess, right around there. The old iconic building. Prudential, I guess it was, Insurance owned that building. But very excited about the 3 of them. But by putting our money at -- on the table and developing. We now have 4 other management contracts, and these projects are in various stages of design and build around the world. And we've got another half dozen LOIs we're talking to. So as we suspected, once we went out there and showed we were serious about the brand and we were going to do it, then the others started coming.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great. You've developed EDITION, AC Hotels, MOXY as of 2 days ago. So you have been adding to the brand portfolio. Is there much right now in the way of potential brand acquisitions?
Carl T. Berquist
Yes, I think there is. I think, of course, I've been out of the office for 2 days, so I don't know what we did yesterday. But I think there is. When you kind of look at our brand portfolio, we've got like 18 brands. But you've got global brands that you can take around the world, the Ritz-Carltons, the Marriotts, the Renaissance. And these are global brands, powerful brands. And I don't think we need another global brand. We can cover the world with our global brand. But you also need niche brands to fill in or to grow, rapidly grow, in different parts of the world, that are designed and good for that part of the world. I think of AC Hotels, which is a European design, does well in Europe. It's a lifestyle brand, 4-star lifestyle brand, does extremely well there. You could probably export the brand to South America, it'd do well, and maybe a little bit to the U.S., but probably not take it to Asia or the Middle East or something like that. MOXY, we're going to start out to be a European brand. We'll see where it goes. We were fortunate, there's more opportunistic Gaylord. We picked up the Gaylord brand, fantastic 4 hotels, 8,000 rooms, it's a great deal for us. Hopefully, a great deal for Ryman. But you're not going to take that to Europe or the Middle East or Asia, unlikely. That's going to be a U.S. brand. So I think as we grow, and you think of our growth of 4% to 5% growth of gross rooms, to get to those kind of numbers, when you have 650,000, 700,000 rooms, it's hard to do 1 room at a time. And to really get that presence, you can use the strength of your balance sheet, the strength of your systems to grab one of these niche brands, tie in your global machines, your reservations, marriott.com, Marriott Rewards, all those powerful machines, and lift them up right where they're at and then expand them right there. So I think you'll see more, not less.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great. Can you talk about capital return, capital allocation? Just piecing together your components of guidance that you gave a few weeks ago. You talked about returning up to $1 billion of capital through dividends and buybacks. What would cause a potential acceleration in capital return or potential deceleration of capital return? And how do you approach capital allocation at this point going forward?
Carl T. Berquist
Well, as we kind of look at it from a philosophy standpoint, our philosophy relative to capital investment is we believe the best use of capital is to grow our business. And the best way to create shareholder value is to grow Marriott, grow bigger, profitably, grow profitably bigger. And that's the best way to create shareholder value. But we're very disciplined on how we do that. We're going to make sure we get the right returns and that they're risk-adjusted returns. So as a result, our model, as you know, creates a tremendous amount of cash. We get paid our fees every month in cash. So we don't need working capital. We don't need those kinds of things. And so as a result, if you kind of look at EBITDA, which is the driver, we'll spend about $600 million to $800 million this year on capital, if that goes down, that's more available. But if it goes up, if we see something opportunistic, we might spend more than that, that will pull it down. We're a BBB company, investment-grade. That gets us into the commercial paper markets, it's where want to be. So we try to stay at a 3, 3 1/4 debt to EBITDA -- adjusted debt to adjusted EBITDA. So as EBITDA grows, that creates debt capacity for that. So those are kind of the moving things. So if you kind of think about it, if we see an opportunity like Gaylord, Gaylord we invested $210 million. I mean, we'd do that all day long for a deal like that. But that wasn't in the original numbers. We'll be opportunistic. On the other hand, if there's things that aren't going to happen that we won't spend, we won't spend, then we'll give it back to the shareholders.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great. We kind of look at your operating leverage to a positive lodging cycle via the incentive management fees. I believe you peaked at $360 million of incentive management fees.
Carl T. Berquist
$370 million. Yes, some time ago.
Kevin Milota - JP Morgan Chase & Co, Research Division
The number of managed hotels now is about 20% higher than your peak of absolute incentive management fee dollars. How do you look at the next few years, the trigger points to where you claw back hotels that maybe aren't...
Carl T. Berquist
How to get back in the money for the hotels?
Kevin Milota - JP Morgan Chase & Co, Research Division
Right..
Carl T. Berquist
Yes. Well, it's -- I wish I could have a simple formula because that -- I'd print it on a card and hand it out, because everybody wants to know how it works. But I think there's 2 dynamics that have changed since we hit that $370 million peak in 2007. One, which is very positive, is our growth internationally. So in Asia Pacific and the Middle East, where we're growing, as I mentioned before, we receive incentive management fees on first dollar earned, there's no owner's priority. It's a lower number, 8% to 10%, but first dollar earned. So as soon as we open a hotel, basically, we're in the money. And so what you'll see, as we have those growth in rooms outside the U.S., in Asia Pacific, Middle East, you're going to see an acceleration of incentive fees for those hotels. The other side of that coin are those hotels in the U.S. that were paying in 2007. They have to earn through an owner's priority. When the recession hit, profits fell below those owner's priority. The other thing that happened is for 6 years, you had basically a deterioration in margins because your costs continued to go up a little bit, but your revenue, your REVPAR is just getting back now to where it was in 2007. So you're going to have to get that margin expansion back to get those hotels back into the money. How long that will take? That's really a hotel-by-hotel basis. And then the other thing that's out there is on the select service side, their portfolios. And they're affected differently on how they get back in the money. And on top of that, we did the Courtyard Refreshing Business, that increased the owner's priority for that. So win-win. In fact, food and beverage profits at those Courtyard's is up 50% as a result of that new bistro. But we've got to earn through that additional thing. So it'll take a little longer for those. I think at the China Investor Conference we had, we're projecting by '14 we'll be back at that $370 million level. But it will be more international, less domestic.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great, which means there's more upside than...
Carl T. Berquist
A lot more upside because those domestics will come through once they earn though that, and the international will keep growing.
Kevin Milota - JP Morgan Chase & Co, Research Division
Great. Now I'll turn it over to any of your questions in the audience. Or I can continue to ask Carl questions. There's one here.
Unknown Analyst
Just going back to the new brands that you were talking about, how big do they need to be to be able to grow that [indiscernible]?
Carl T. Berquist
That's a good question. The new brands we have, how big do they have to be to be relevant? I think, as we look at adding new brands, we look at a level as -- where the competition is that we're competing against and the distribution, the distribution is powerful. So if you're going to have a brand that's just going to be in a locality, it's all about the distribution in that locality. So take AC Hotels. AC is an extremely powerful brand in Spain and Italy because of its distribution, there's over -- close to 100 hotels there. But if I went to the U.S. and asked about AC, more likely than not, nobody's heard about it. So if you brought it to the U.S., you would have to do it in a manner that you would want to get the same kind of distribution, to make it relevant to that distribution. Same with something like MOXY. When we talked about MOXY, it's going to start in Europe, you wouldn't want to roll that out across the whole world because you'd dilute down the distribution. You want to keep it tight there. But once you get to a certain size, like Courtyard, there's 900 Courtyards, you're now in a position where you can go global with a brand like that because you have enough distribution. On the other hand, you get something like Gaylord, there's only 4 Gaylord hotels. But everybody that wants to use a Gaylord Hotel knows about the Gaylord hotels, because they're big, convention-type hotels. So those big groups that move around are well aware of it. So that distribution doesn't have to be as broad.
Kevin Milota - JP Morgan Chase & Co, Research Division
Yes.
Unknown Analyst
Are there brands that you'd consider disposing of at this point? I mean, longer term, are there some brands [indiscernible] might happen soon [indiscernible]?
Carl T. Berquist
That's a good question as to whether or not we'd dispose of any brands. All the brand leaders at Marriott are probably listening real close right now. No, all the brands we have now are fine. I mean, we like it. We did dispose of one of our -- ExecuStay recently, which was executive apartments in the U.S., mainly because we couldn't grow it. We just concluded that we needed the distribution to make it work and we couldn't get the distribution, plus it was a highly leveraged model that wasn't working for us. So that's an example of one. But I would tell you, of all the brands we have, they're all doing great and every one of them is growing. So we're pretty pleased with them.
Kevin Milota - JP Morgan Chase & Co, Research Division
How can you grow Gaylord's footprint? Is it just hard, given its relative size?
Carl T. Berquist
Yes, Gaylord is something that, from a footprint standpoint, you're probably not going to grow. I mean, would there be another Gaylord or 2 more? Yes, that's possible. But I think that model, that is a big plant [ph] , that is a very expensive, big plant [ph] . And so you've got to be in the right place and have the right market relative to it. So I think, will you get to 10? I don't know. Would there be 1 or 2 others? Sure. But I think the thing with Gaylord is more growing the base that use Gaylord, and moving them around the different Gaylords around the nation.
Kevin Milota - JP Morgan Chase & Co, Research Division
Additional questions? Great. Thank you, Carl. Appreciate it.
Carl T. Berquist
Okay. Thank you, everybody. Thank you, Kev.
Kevin Milota - JP Morgan Chase & Co, Research Division
Thank you.
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