Marriott International, Inc. (MAR) Q4 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Starwood Hotels & Resorts Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's Fourth Quarter 2012 Earnings Call. Joining me today are Frits van Paasschen, our CEO; and Vasant Prabhu, our Vice Chairman and CFO. Before we begin, I'd like to remind you that our discussions during this conference call will include forward-looking statements, actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements that are made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood's annual report on Form 10-K and in our other SEC filings. You can find a reconciliation of the non-GAAP financial measures discussed in today's call on our website at www.starwoodhotels.com. With that, I'm pleased to turn the call over to Frits for his comments.

Thanks, Stephen, and thank you, all, for joining us. For my prepared remarks today, I'll cover 4 main topics: First, a recap of our results for Q4 and for the year 2012; second, our outlook for 2013 and beyond; and third, some color on the SPG Delta partnership we just announced; and fourth, the upcoming relocation of our senior team to Dubai and the Emirates for the month of March. I know many of you are also interested in hearing about our capital allocation plans. I will touch on that topic briefly, but rest assured, Vasant will go into more depth in his comments as well. I'll turn now to the results that we announced today. If there were a key word to describe the business climate in Q4 and indeed, for most of 2012, that keyword would've been uncertainty, uncertainty about U.S. election results and the ensuing fiscal cliff, uncertainty about the government transition in China and lingering uncertainty about Europe. This uncertainty led us in our last call to say that we did not expect an uptick in travel in Q4. And in fact, the trends we've talked about then continued through the end of the year. Our occupancies remained strong, thanks to long-term drivers of travel. But our sense is customers were holding back in wait-and-see mode until the uncertainties passed. This showed up in a deceleration in REVPAR growth in Q4. And yet, despite the deceleration, we posted Q4 EBITDA results at the high end of our expectations. For the full year, EBITDA came in at $1.063 billion, and as always, that's not including Bal Harbour. This was well within the baseline range we shared with you at the beginning of the year. In fact, if you take into account $10 million in EBITDA from hotels…

Thank you, Frits, and good morning. Despite the uncertainty and the second half slowdown in global REVPAR growth, we were able to deliver 2012 EBITDA in the middle range we gave you at the start of last year. While REVPAR came in at the low end of our range, good cost control at owned hotels and our SG&A helped offset the revenue shortfall. Once again, we delivered double-digit fee growth and another year of 4-plus percent room growth. Even after opening 69 hotels, our pipeline continue to expand to 300 hotels and 100,000 rooms, concentrated in the high-value, luxury and upper upscale segments and high-growth emerging markets. We generated $800 million in operating cash flow before capital expenditures, $460 million from Bal Harbour condo sales and over $500 million from asset sales. We deployed $370 million of this cash in our core business to renovate owned hotels, enhance our technology infrastructure and grow our pipeline. We reduce debt by over $900 million and returned $560 million to shareholders through dividends and buybacks. Frits recapped 2012 results, so I'll focus my comments on business trends around the globe, our outlook for 2013 and how we plan to deploy our cash. Through 2012, REVPAR growth slowed from 6.4% in Q1 and 6.9% in Q2 to 4.7% in Q3 and 4.1% in Q4. We do not believe that this slowdown was driven by structural demand supply factors but rather, by specific concerns, which are now abating. In China, the once-in-a-decade leadership transition resulted in a fall, which caused REVPAR growth to drop from high to the low single digits. The slowdown in Chinese growth impacted related markets like Australia, Brazil and other parts of Asia. In the U.S., uncertainty created by the presidential election, followed by the fiscal cliff negotiations, also caused businesses…

Thank you, Vasant. We'd now like to open up the call to your questions. [Operator Instructions] Sylvia, can we have the first question, please?

Your first question comes from Shaun Kelly from Bank of America.

It seems like the forecast really relies a lot on kind of the outlook in China, and so Vasant, the data that you gave, the 6% number for January, could you just help us understand maybe how that improved across the quarter, in the fourth quarter and what you're kind of -- just what you're seeing on the ground there a little bit more maybe in terms of occupancy versus rates, so we can understand some of the supply and demand dynamics there?

Sure. I'll say a few things, and I'm sure Frits might want to add. We did start to see an uptick almost as soon as the leadership transition was sort of announced. You should understand that this transition really happens with some 2 big events, the Chinese Communist Party has in March. So we always expected that it takes a few months to ripple through. So there's changes in multiple levels and big policy announcements that are going to happen in March. There's no question that we are seeing a resumption of the usual travel activity. As these things have become clearer, there's still some caution on the F&B side, you may have read some of that in the press. But overall, as our people talk to customers and we look at trends, our expectation is that the trend actually begins to be better post March when the new leadership effectively, at all level, takes over. In terms of supply and demand imbalances, they're working themselves out. There's only a couple of places where we would say that there's another few months left. Guangzhou is one where there's quite a few openings; Hainan is as much a function of the airport becoming larger to accommodate more people coming in. But places like Shangzen that have a little bit of overcapacity are better now, Shenyang is better now. So overall, it's playing out in almost every respect as we had expected.

Yes, Shaun, I don't have a lot to add to Vasant's answer other than to reiterate that because you have the Chinese New Year's coming up and then some of the important government transition events in March, the first quarter of this year, the one we're in right now, is likely to be the one that's the most tricky in terms of the rest of the year. So the fact that we see 6% in January from our perspective is quite encouraging. And I think again, along the lines of what Vasant said, the slowdown and I should be careful here, the deceleration that we saw in growth in the fourth quarter has reversed itself nicely and that puts us, we believe, in a good position for the rest of the year.

Yes and the only other thing to highlight is as you know, as you get to the second half, I mean, you do benefit from easier comparison. So to the extent that anyone cares about the 2-year run rate, we'll take the run rate we have today. That would suggest a very strong second half, but we'll wait and see.

Your next question comes from Ryan Meliker from MLV & Co. Ryan Meliker - McNicoll, Lewis & Vlak LLC, Research Division: I just had a couple of quick questions for you. I was hoping you might be able to give us some color on -- if you can give us any indication regarding REVPAR penetration for your properties in North America? Obviously, REVPAR growth slowed and I know last quarter, you talked about group bookings kind of coming to a -- holding up a little bit. But it looks like your North American regular U.S. REVPAR growth came in below the upper upscale average in the quarter and certainly, below the U.S. industry average. Any color on what's going on in the U.S. and whether you expect to outperform or underperform current expectations for the U.S.?

Yes, Ryan, this is Frits. Just looking back on the fourth quarter and the year, any difference that we see between the overall industry numbers and our performance, we can easily attribute to the geographic mix of our properties. So if you look at our concentration in places like Phoenix and New York and Canada, which were generally slower than the rest of the market, that pretty much explains -- in fact, it explains almost entirely the difference between the overall aggregate number for the industry and ours for the quarter. At least, we continue to be very encouraged by rate negotiations, by group booking pace and by the strength of our brands. As an overall bellwether, the strength of Sheraton, and its momentum in North America, continues well in addition. So overall, I don't think there's an issue here beyond geographic mix.

Your next question comes from Joe Greff from JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: I was hoping you could just give us a sense, from your point of view, of the asset sales transaction market in the U.S. and globally? Obviously, a number of us on this call were in Los Angeles a few weeks ago for the Atlas conference and we spoke to a number of brokers. But from your point of view, can you just talk about the appetite of the potential buyer and whether or not that buyer universe [ph] Is broadening out beyond where it was for most of 2012?

Yes, Joe, I think as you heard at Atlas and as we've heard from other parts of the world, we do believe that we're entering a window of opportunity here where there is more liquidity in the asset market, no question about it. There's certainly more money coming in, that is willing to offer debt in terms of structured deals in the U.S. The biggest buyer base in the U.S., we think will remain the public REITs. Many of whom have been in the market issuing stock lately. And there is a significant amount of private money from the Middle East and Asia and in for certain assets from Latin America. So we are certainly keen to step up the pace of asset sales. We will be in the market very actively. All the indications are that it will be a more robust asset sale market this year than it was last year. So our goal is to move as fast as we can down the track of finishing our asset sales program. Frits, you wanted to add?

Yes, again along the lines of what Vasant said, the underlying factor is whether they're revaluations or where we are in the cycle, interest rates all point to a steady growth in the interest among hotel buyers. And on that basis, we would hope that we would have a pickup in the rate of asset sales in 2013. But I will caveat that by saying, given the number of hotels we have to sell and the size of the transactions that might be accompanied with that, this is still pretty lumpy. So it's not as though we were selling in small quantities and therefore, we could predict more tightly sort of what that would be. I think the factors would point to a pickup for this year, coming up over last year.

Your next question comes from Joshua Attie from Citi.

As you mentioned, the balance sheet is in great shape and it's only going to get better as earnings grow and more cash comes in from asset sales. What are your thoughts in moving to a quarterly dividend versus an annual one, which some people might view as more of a special, despite the fact that you pay consistently every year?

Yes, it's certainly something that we would consider. We have obviously -- we will discuss this with our Board to the extent that we're going to move to a quarterly profile, we'll let you know. But Josh, I mean, we don't -- we view this dividend as very sustainable and very much a part of our long-term policy. Nobody should think of it as a special dividend. And I do believe as you said, it makes sense to consider a quarterly payout. So we'll keep you posted as we have those kinds of discussions internally.

Your next question comes from Steven Kent from Goldman Sachs.

Could you just talk a little bit more about group rates and conference rates? And the reason I'm asking is a few years ago, you were rolling off a lot of corporate and conference -- conference and group rates that were artificially low. Is there still more to that or is that phenomena dissipated? And you mentioned earlier that your corporate rates are in the mid-single digits, is that where we should really expect for the next few years or are you seeing resistance from corporates, just broadly?

Yes. So Steve, this is Frits. I'll answer your group question, first. To your point, given the length of time that most of group meetings are booked, yes, we're past the point where there's a lot of overhang from win rates were, as you put it, artificially low coming out of the crisis or during the crisis for that matter. In terms of corporate rates, again, simple math here but mid-single digits increase in rates, plus growing trends in volume and occupancy, we think is a pretty good story in an environment where supply is set to grow at less than 1% again this year, which as you know, is well below the historic average of 2% and has been, by the way, now for the better part of a decade. To make a prediction going forward as to what the point estimate is for rates or even the range, I'm not sure I'm ready to do that right now. But as we've been saying for some time now, the supply-demand dynamics of a steadily growing, if not, picking up U.S. economy, and tight supply additions, which we can pretty much anticipate now based on construction volumes for at least the next 3 years, we'd tell you that there is a good run still of room rate increases and you can plug in your own GDP growth number to decide exactly where to plug that.

Your next question comes from David Loeb from Baird. David Loeb - Robert W. Baird & Co. Incorporated, Research Division: This is sort of a follow-up to Joe's question. You're clearly -- the owned hotels are now -- owned hotel EBITDA is tilting much more towards international. Are your targeting selling international markets more aggressively? Can you talk a little bit about the financing backdrop in those markets? And then finally, would you consider selling any of the 4 largest EBITDA contributors, which I believe, are Sydney, the large Toronto hotel in Montréal and the Venetian?

Yes, David. So I think to your point, what we've done over the last 3 or 4 years and the way we've described it is what we've called a rifle shot approach to selling assets, which is identifying particular types of buyers, typically REITs or sovereign wealth funds or high net-worth individuals in different parts of the globe, and sold them assets that makes sense for that. And I would say that the one distinction, even today, with a pickup in asset sales. And what was at play before the crisis is we still haven't seen the really frothy, multiple-property volumes picking up. So we may still be in the mode of selling individual assets. Clearly, we'd love to pick up from there. In terms of targeting international, it really comes down to the same logic which says, if we see demand for particular assets in markets, we would be sellers. And to be clear, whether it's the 4 largest EBITDA-producing properties or any other hotel in our system, our goal is to be an asset-light company. And to that end, there really isn't a property on our list that we would deem as unsellable. So in that sense, yes, we would consider selling any of those 4.

Your next question comes from Harry Curtis from Nomura.

Just as a follow-up to your earlier comments, Frits. As you speak to your CEO peers, can you give us a sense what their body language is on business travel for the next year or 2?

Yes. Look, I would say, and having spent some time speaking with our customers both here and North America but also in travels around the world, pretty much with the exception of some of the financial institutions, demand from professional services from tech companies, from global companies, law firms, all of those folks are telling us yet again in 2013, they're likely to travel more than they did last year and that their business books are full to the point of forcing them to do that. And one of the things that we've spoken to a number of times on these calls is the fact that particularly, as you have global companies based in the mature and developed markets, where there is an economic growth and they're in search of growth in the emerging markets, they're getting people out and traveling. So my own sense is whether it's talking to CEOs or travel planners or other folks who have significant travel budgets, is that their constraint in terms of their activity is not a limitation on travel expense, it's on finding good people and getting after opportunities. And that, of course, is great news for us.

Next question comes from Robin Farley from UBS.

You talked about corporate negotiated rates ending up this year in the mid single-digit range. Is that -- it seems like you maybe last time talked about high digit range and I'm just wanted to get your call on why that changed? And then also, if you have any comments on Q4? Your European REVPAR seemed underperformed kind of the region average and if you have any color around that.

Yes, on corporate negotiated rates, mid-single digits is sort of where it is today. Yes, it's a little lower than where we were earlier, sort of middle of last year in terms of what we would have liked to get. Certainly, this is a function of the industry dynamic. But also, the time in which these negotiations are going on certainly, was a time of a certain amount of anxiety in different parts of the world. We do have some flexibility on how we manage these rates going forward. These rates are based on availability of rooms, et cetera. Occupancy, as you heard, are at peaks. If we are more days, mid-week when we are close to sell out, there is flexibility in terms of what the rates you can realize. So we could realize a better than mid-single-digit rate during the year based on the supply-demand dynamics. In terms of Q4 in Europe, again, like Q1, Q4 is not hugely representative of our European business in terms of what's going to happen for the rest of the year. Those of you who follow us know that the second and third quarters is the most important quarters in Europe. It was -- we did see a little bit of a downtick in some parts of Europe but overall, it hangs in that sort of the low single-digit level. As we said earlier, January and February and most of the first quarter doesn't tell you much about the trend and we are not expecting Europe to do much this year. As we said, the REVPAR will be potentially below the low end of the range we have given you for the company as a whole.

And Vasant also, some of the renovations that we had in Europe [indiscernible] the other explaining factor there for Europe.

Yes. And that will help us this year because last year was a very big year for renovations in Europe. Gritti Palace was shut down, the Maria Christina was shut down, the Alfonso XIII was open for part of the year. So those coming back should help us, especially in the owned hotels side and also, overall REVPAR.

Your next question comes from Felicia Hendrix from Barclays.

Vasant, you gave us some color in your prepared remarks on group bookings. You said that they'll come back slowly and steadily this year. Obviously, the group business took a hit with the fiscal cliff concerns at the end of the year, and my assumption is that we're seeing a lag in group now in the first quarter. But so, as you're thinking about the full year, I'm just wondering if you can give us some more color on the pace of improvement you expect to see as group recovers through the year? And then also, if you could give us some early thoughts on what you're seeing for group business in 2013.

Yes, I mean, I'm sure, Frits will add something to this but in our view on this whole cycle, which maybe you heard from others, too, is that just like us, companies are being very cautious about adding back cost. So this hasn't been a cycle where people have gone back to doing things exactly the way they do it -- did it in the past when it comes to large group meetings and making commitments and all that. So the group business as you saw, is coming back, but it's coming back sort of in the slow and steady mode, which is fine by us because makes it more sustainable. And frankly, American corporations being cautious about costs and cautious about their balance sheets, makes this recovery more sustainable in the long run, especially when you combine that with all the low supply we have. So we are happy with the mid-single digits we're seeing. We like what we're seeing in leads. We like what we're seeing in booking windows. So -- and really, group is really only a reasonable -- it's a good leading indicator only in North America because outside the U.S., it's a smaller part of the business and it also gets booked much closer in. The other part of your question was around 20 -- the future years. Here again, the only data that's reliable is North American and it looks fine. I don't think there's anything we would highlight on that. I don't know, Frits, if you want to add anything to this.

Yes. Look, I think you covered it, Vasant. The point about -- as you look outside of the U.S. and see that the group business, by and large, is less important as a percentage of total revenue, means that as our footprint grows around the world and as our percentage of rooms outside of the U.S. increases, it makes the group business slightly less important for us today than it was 5 years ago and certainly, will be less important on that basis 5 years from now. In terms of the U.S. itself, as Vasant pointed out, even though there's been steady growth and a continued recovery in the U.S., I think there is a decent amount of uncertainty as we referred to. And look, the trends in business is easy to turn on and off if you're running a company, managing expenses. Committing to group business means having confidence on what's going to be happening 12 to 24 months out. And our sense is that people see near-term opportunity and a basis for getting out and traveling but for all the reasons that we keep hearing about, there is some reluctance to put as much down on the group business and make that commitment as there would've been prior to the crisis. What we're seeing now has been a continuing theme since we emerged from 2009.

Your next question comes from Jeff Donnelly from Wells Fargo.

Moving first [ph] -- second Josh's call for maybe considering a quarterly dividend. Frits, I think maybe the frothiness that you are seeing out there around portfolio transactions, it seems to reside with nontraditional companies announcing these REIT spinoffs. And I'm sure it isn't lost on you because there's a pretty bit valuation disparity between the hotel REITs and the brands. Is a REIT spinoff a feasible avenue for you guys in your owned portfolio? I mean, could that make sense for you? And I guess maybe as a follow-up, if I could just squeak it in is, do you have an updated perspective on even spinning off the Timeshare business?

So the answer to that last part is no updated perspective and no current plans. In terms of the spinning off a REIT, look, we maintain our commitment to being an asset-light company for all the reasons that we've talked about at great length, that being the extraordinary characteristics from an investor perspective of the fee business. Spinning off a REIT would be one avenue to more quickly realizing a business structure for ourselves along those lines. I think the thing to keep in mind, though, is when you spin off a REIT, you have to deal with an IPO discount, you have to deal with incremental SG&A to support that. And by and large, as we've looked at the REIT spin off as a vehicle for getting to asset-light, it's been less effective, from our own perspective, than the kinds of sales that we've been able to make over time. But in this period of never say never, we continue to look at a variety of different avenues, and we have a number of hotels and portfolio of hotels that are ready and available for sale and to be marketed and we'll continue to look at whichever vehicle makes the most sense.

Your final question comes from the line of Will Marks from JMP Securities.

I guess, we'll keep on the subject of the owned portfolio one more time. You gave us a figure, I don't know if it's been a year but on the value of the owned portfolio but you've sold some assets since then. Any update on that figure? And/or you mentioned the 16 multiple on what you -- for the last 10 you sold I believe, would that figure be applicable to the remainder of the portfolio?

So we don't today have an updated value either on a multiple basis or a per key basis, that may be something we go back and speak to in one of our future calls. In terms of overall multiples, it's such an interesting mix of properties and supply and demand characteristics. I wouldn't put a number on that either. I mean clearly, we've been good at getting multiples on average that exceed our own corporate valuation and clearly, we would seek to continue to do that. But it will depend on each individual deal. Vasant, you may want...

No, I think the only thing I would say is without giving you -- a, our views haven't changed in terms of the value of the hotels that we have left. We have tried to be balanced in what we sold in that we've sold some, what you might call, great hotels and some not so great hotels. So what we've sold is not that out of sync with what we have. We still have many, many great hotels as you know. As you know, many of these big, good, international hotels. The only thing I would point is, there's no reason to believe the value is lower for the simple reason that despite all the sales our EBITDA is higher than it was. So it is higher next year meaningfully than it was last year. Therefore, if you believe the multiple is what it was, it's worth more.

Well, thanks Frits and Vasant, I want to thank all of you for joining us today for our Fourth Quarter Earnings Call. We appreciate your interest in Starwood Hotels & Resorts. If you have any other questions, feel free to reach out to us. Take care.

Ladies and gentlemen, this concludes today's Starwood Hotels & Resorts Fourth Quarter 2012 Earnings Conference Call. You may now disconnect.