Profit slip for Marriott, upbeat prospects

Marriott has posted a 5.4 percent drop in third quarter earnings on flat revenue, but the company still beat Wall Street estimates. It also expects a rosy outlook for Q4 and 2007

The world’s largest hotel company by revenue, reported net income of $141 million, compared with third quarter of 2005. The higher earnings for 2006 was the result of share. Revenue was $2.7 billion, roughly the same as in the 2005 third quarter.

Full statement

Marriott International, Inc. (NYSE: MAR) today reported net income of $141 million and diluted earnings per share of $0.33 during the third quarter.

Adjusted income from continuing operations for the quarter rose 12 percent to $144 million, and adjusted diluted earnings from continuing operations per share jumped 21 percent to $0.34. Adjusted results for both years exclude the impact of the company’s synthetic fuel business. The 2005 adjusted results also exclude the impact of a $17 million pre-tax impairment charge ($0.02 per share after-tax) related to an investment in a leveraged lease aircraft.


J.W. Marriott, Jr., Marriott International’s chairman and chief executive officer, said, “We are pleased with the continued strong growth in the third quarter. Across our system, the vibrancy of many important markets and sustained demand of key customers delivered great revenue growth. And with strong meeting and business travel coupled with healthy holiday travel bookings to the Caribbean and other resort destinations, we are optimistic about our fourth quarter performance.”

“We are not resting on our success, but are building greater strength as we grow the distribution of our brands and aggressively reinvent and renovate our hotels. We continue to deploy exciting, innovative tools to strengthen our relationships with customers and to drive bottom-line growth. As new lodging industry supply growth remains limited, our future looks brighter than ever.”

In the 2006 third quarter (12 week period from June 17, 2006 to September 8, 2006), REVPAR for the company’s comparable worldwide systemwide properties increased 9.4 percent (9.0 percent using constant dollars). Systemwide comparable North American REVPAR increased 8.6 percent in the quarter, largely driven by room rate improvement. Particularly strong results came from markets along the East and West Coasts, as well as Chicago.

REVPAR at the company’s comparable systemwide North American full-service hotels (including Marriott Hotels & Resorts, The Ritz-Carlton, and Renaissance Hotels & Resorts) increased 8.6 percent during the quarter. North American systemwide REVPAR for the company’s comparable select-service and extended- stay brands (including Courtyard, Fairfield Inn, Residence Inn, TownePlace Suites, and SpringHill Suites) rose 8.7 percent.

In the 2006 third quarter, international company-operated comparable REVPAR jumped 14.0 percent (11.3 percent using constant dollars) driven by higher room rates. Continental Europe showed strong REVPAR gains with company-operated hotels in Germany posting 22.4 percent REVPAR increases over the year ago quarter due to the World Cup and a strengthening economic climate.

House profit margins for both North American and worldwide comparable company-operated properties increased 210 basis points during the quarter. Higher room rates and continued cost efficiency improvements drove margins. Property-level EBITDA margins for comparable North American company-operated properties, calculated as if wholly owned, rose 200 basis points.

In the third quarter, Marriott added 38 new properties (6,281 rooms) to its worldwide lodging portfolio, including the 150-room Paris Courtyard Colombes, a new Courtyard prototype for Europe, and the 500-room Renaissance Schaumburg Hotel & Convention Center, a signature property featuring the latest technological, architectural and savvy service innovations which will soon be rolled out to other properties. Twelve properties (2,792 rooms) exited the system, including six Fairfield Inn properties (735 rooms). At quarter-end, the company’s lodging group encompassed 2,815 hotels and timeshare resorts for a total of 510,506 rooms.

Marriott’s worldwide pipeline of hotels under construction, awaiting conversion or approved for development rose to over 85,000 rooms, up from 60,000 rooms in the year ago quarter and 80,000 rooms at the end of the 2006 second quarter, representing the largest pipeline in the company’s history. Full service hotels (Marriott, Renaissance and Ritz-Carlton) represent 35 percent of the pipeline and over 60 percent of those hotels will be located outside North America.

MARRIOTT REVENUES totaled $2.7 billion and were flat versus the year-ago quarter as lodging revenue growth offset a $92 million decline in synthetic fuel revenues. Base management and franchise fees rose 15 percent to $213 million as a result of REVPAR improvement and unit growth. Incentive fees increased 63 percent to $49 million, reflecting both REVPAR improvement and strong food and beverage and spa profits. Incentive fees include $10 million and $6 million for the third quarters of 2006 and 2005, respectively, that were calculated based on prior period earnings but not earned and due until the periods in which they were recognized. In the 2006 third quarter, 50 percent of the company’s managed properties paid incentive fees, compared to 44 percent in the year ago quarter.

Owned, leased, corporate housing and other revenue was up slightly versus the year ago quarter primarily reflecting termination fees totaling $13 million and higher revenues associated with the stronger demand environment. Offsetting those increases were lower rent associated with land sold in late 2005 and lower revenue resulting from the sale of 10 properties since the end of the 2005 third quarter.

Revenue from timeshare sales and services declined 5 percent in the third quarter, largely due to projects in the early stages of development that did not reach revenue reporting thresholds. Timeshare sales and services, net of direct expenses, increased by $13 million. Third quarter timeshare results include the reversal of a contingency reserve established several years ago related to marketing incentives totaling $15 million.

Overall timeshare contract sales increased 3 percent during the quarter reflecting the delay of sales starts at one of its joint venture projects. However, a large Hawaiian project has seen significant increases in reservations, which will become contract sales as local jurisdictional requirements are met. Demand for other resorts continues to be strong, particularly in St. Kitts and Maui.

General and administrative expenses for the third quarter were flat at $149 million and included $10 million associated with the new accounting rules requiring the expensing of all share-based compensation. In the third quarter 2005, the company recorded a $6 million charge associated with the settlement of litigation.

SYNTHETIC FUEL operations had a $0.01 loss per share during the 2006 third quarter, compared to earnings per share of $0.07 in the year ago quarter. Lower synthetic fuel earnings reflected the suspension of production in April 2006 and the impact of revising the estimated phase out of the 2006 tax credits from 38 percent to 51 percent due to higher oil prices. Excluding the impact of synthetic fuel operations, the effective tax rate was approximately 34.8 percent in the third quarter of 2006. The company expects the tax rate for 2006, excluding synthetic fuel operations, to approximate 35 percent.

GAINS AND OTHER INCOME totaled $13 million (or $10 million excluding synthetic fuel) and included $4 million of net gains on the sale of real estate, a gain of $3 million from the sale of an interest in one joint venture and $3 million of preferred returns from joint venture investments.

INTEREST EXPENSE increased $5 million to $29 million, primarily due to higher interest rates.

INTEREST INCOME totaled $11 million during the quarter, down from $13 million in the year ago quarter, primarily driven by loan repayments in the last year. Interest income in 2006 reflected $3 million of income associated with a previously impaired loan. The $17 million provision for loan losses in the year ago quarter related to a non-cash pre-tax charge associated with the impairment of an aircraft leveraged lease receivable.

EQUITY IN EARNINGS/(LOSSES) reflect Marriott’s share of income or losses in equity joint venture investments. In the third quarter of 2005, several hotels in which the company had an equity investment were sold and $15 million of equity earnings were recognized.

At the end of the 2006 third quarter, total debt was $1,636 million and cash balances totaled $136 million, compared to $1,737 million in total debt and $203 million of cash at the end of 2005.

The company repurchased 12.4 million shares of common stock in the third quarter of 2006 at a cost of $451 million. Year-to-date, through October 4, 2006, the company repurchased 31.6 million shares of common stock at a cost of $1.1 billion and the remaining share repurchase authorization as of that date totaled 44.2 million shares.


The company expects REVPAR to increase 7.5 to 8.5 percent in the fourth quarter, with 225 to 250 basis points of margin improvement. Under these assumptions, the company expects total fee revenue for the fourth quarter to total approximately $370 million to $380 million, an increase of 13 to 16 percent.

Timeshare sales and services revenues, net of expenses, should total $115 million to $120 million in the fourth quarter. Included in that estimate is roughly $35 million of gains related to a timeshare mortgage note sale transaction the company expects to complete in the fourth quarter. Beginning in 2006, those gains are included in timeshare sales and services revenue. Even excluding those gains, the company expects timeshare sales and services revenue, net of expenses, to increase substantially over the year ago quarter as several projects achieve higher reportability thresholds. With strong customer interest in the company’s new projects, Marriott expects contract sales (including joint venture sales) to increase roughly 20 percent in 2006 fourth quarter.

General, administrative and other expenses are expected to increase approximately 10 to 12 percent in the fourth quarter to $215 million to $220 million from $196 million. This guidance includes an estimated $12 million pre-tax impact of FAS No. 123(R), which requires the expensing of all share- based compensation (including stock options), for the quarter.

Given the items above, the company estimates that lodging operating income will total $310 million to $335 million in the fourth quarter.

The company expects lodging gains and other income to total approximately $10 million in the fourth quarter, excluding mortgage note sale gains which will be included in timeshare sales and services revenue.

Net interest expense is expected to total $25 million to $30 million, an increase of $2 million to $7 million, primarily driven by higher interest rates.

The company expects investment spending in 2006 to total approximately $900 million, including $50 million for maintenance capital spending, $375 million for capital expenditures and acquisitions, $100 million for timeshare development, $100 million in new mezzanine financing and mortgage loans for hotels developed by owners and franchisees, and approximately $275 million in equity and other investments (including timeshare equity investments).


The company expects REVPAR to increase 7 to 8 percent with 150 to 200 basis points in margin improvement. Total fee revenue is estimated to range from $1,360 million to $1,380 million with diluted earnings per share from continuing operations of $1.78 to $1.88 excluding Synfuel.

Under the above assumptions, the company currently estimates the following results for the fourth quarter, full year 2006 and full year 2007. The table below reflects timeshare note sale gains included in timeshare sales and services, net of direct expenses.