OnÊSeptember 23, 2016, Marriott completed its acquisition of Starwood Hotels & Resorts Worldwide (Starwood).Ê The discussion in the first section below reflects reported results for the third quarter in accordance with the US generally accepted accounting principles (GAAP).Ê To further assist investors, the company is also providing (a) adjusted results that exclude merger-related adjustments; and (b) combined financials and selected performance information for 2016 that assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed onÊJanuary 1, 2015, but use the estimated fair value of assets and liabilities as of the actual closing date of the acquisition. ÊCombined results also reflect other adjustments as described below.Ê Throughout this press release, the business associated with brands that were in Marriott’s portfolio before the Starwood acquisition is referred to as ÒLegacy-MarriottÓ, while the Starwood business and brands that the company acquired are referred to as ÒLegacy-Starwood.Ó
Branding fees from credit cards and residential sales are reported in the Franchise fees line on the income statement.Ê Prior to the first quarter of 2017, those fees were reported in Owned, leased and other revenue.ÊÊ Reported results for the 2016 periods on pages A-1 and A-2 and combined results on pages A-3 and A-4 have been reclassified to conform to the current reporting.
Arne M. Sorenson, president and chief executive officer of Marriott International, said, ÒIn the third quarter, many of our hotels were rocked by destructive hurricanes in theÊCaribbean,ÊTexas, andÊFloridaÊand the earthquakes in Mexico.Ê Our hotels in these markets continue to serve aid workers and emergency personnel, as well as guests displaced by property damage.Ê We are very proud of our associates who delivered great hospitality during this challenging time.
ÒThe business related to the hurricane response increased North American lodging demand modestly in the third quarter, even as business transient and group demand were in line with expectations.Ê Outside North America, strong leisure demand inÊAsiaÊandÊEuropeÊdrove RevPAR above our guidance.
ÒOwners and franchisees remain attracted to our terrific brands and strong hotel economics.Ê New project signings and approvals added 36,000 rooms to our development pipeline in the third quarter, increasing it to a record 450,000 rooms by the quarter-end, equal to 36 percent of our current distribution.Ê More than half of those rooms under development are located outsideÊNorth America and 40 percent should fly one of Marriott’s luxury or upper upscale flags.
ÒIt’s been just over a year since the completion of the Starwood acquisition.Ê We are pleased with our progress on the integration.Ê Our properties and general and administrative functions have already realized meaningful cost savings.Ê From the date of the acquisition through last week, we have recycled assets totaling more thanÊ$1.1 billionÊof ourÊ$1.5 billionÊgoal.Ê Year-to-date throughÊNovember 7, we have already returnedÊ$2.7 billionÊto shareholders through dividends and share repurchase and believe we could return nearlyÊ$3.5 billionÊin 2017.
ÒFor 2018, we expect comparable systemwide RevPAR on a constant dollar basis will increase 1 to 3 percent worldwide and 3 to 5 percent outsideÊNorth America, while RevPAR inÊNorth AmericaÊshould be flat to up 2 percent.Ê Group revenue pace for our North American full-service hotels is up nearly 2 percent.
ÒWe anticipate our number of rooms will increase roughly 7 percent, gross, in 2018, while rooms deletions should total 1 to 1.5 percent during the year.Ó
Third Quarter 2017 GAAP Ð financial results as reported
Marriott reported net income totaledÊ$392 millionÊin the 2017 third quarter, a 460 percent increase over 2016 third quarter net income ofÊ$70 million.Ê Reported diluted earnings per share (EPS) wasÊ$1.04Êin the quarter, a 300 percent increase from diluted EPS ofÊ$0.26Êin the year-ago quarter.
Base management and franchise fees totaledÊ$695 millionÊin the 2017 third quarter, compared toÊ$470 millionÊin the year-ago quarter.Ê The year-over-year increase in these fees is primarily attributable to the Starwood acquisition, higher RevPAR, unit growth and higher branding fees.
Third quarter worldwide incentive management fees increased toÊ$136 million, compared toÊ$81 millionÊin the year-ago quarter.Ê The year-over-year increase was largely attributable to the Starwood acquisition.
Owned, leased, and other revenue, net of direct expenses, totaledÊ$96 millionÊin the 2017 third quarter, compared toÊ$45 millionÊin the year-ago quarter.Ê The year-over-year increase is primarily attributable to the Starwood acquisition, partially offset by lower results inÊBrazilÊdue to the Olympics in the year-ago quarter.
Depreciation, amortization, and other expenses totaledÊ$68 millionÊin the third quarter, compared toÊ$36 millionÊin the year-ago quarter.Ê The year-over-year increase is primarily attributable to the Starwood acquisition.
General, administrative, and other expenses for the 2017 third quarter totaledÊ$199 million, compared toÊ$161 millionÊin the year-ago quarter. ÊThe year-over-year increase is primarily attributable to the Starwood acquisition, inclusive of general administrative cost savings from combined company synergies.
Interest expense, net, totaledÊ$64 millionÊin the third quarter compared toÊ$46 millionÊin the year-ago quarter.Ê The increase largely reflects a higher commercial paper balance, higher Senior Note balances due to debt assumed in the Starwood acquisition, which the company subsequently exchanged for new Marriott Senior Notes, partially offset by the maturity of Series I Senior Notes.
Equity in earnings for the 2017 third quarter totaledÊ$6 million, compared toÊ$3 millionÊin the year-ago quarter.Ê The year-over-year increase is primarily attributable to the Starwood acquisition.
The provision for income taxes totaledÊ$188 millionÊin the third quarter, a 32.4 percent effective tax rate, compared toÊ$61 millionÊin the year-ago quarter, a 46.6 percent effective tax rate.Ê The provision for the third quarter of 2017 includes aÊ$6 millionÊtax benefit resulting from the adoption of Accounting Standards Update 2016-09 (ÒASU 2016-09Ó), which changes the GAAP reporting of excess tax benefits associated with employee stock-based compensation.Ê In the third quarter of 2016, income before taxes includedÊ$237 millionÊof merger-related costs, most of which were incurred in jurisdictions with lower tax rates.
For the third quarter, adjusted EBITDA totaledÊ$831 million, a 64 percent increase over third quarter 2016 adjusted EBITDA ofÊ$506 million.Ê See page A-12 for the adjusted EBITDA calculation.
Third quarter 2017 financial results as adjusted compared to third quarter 2016 combined financial results
This information is being presented to allow shareholders to more easily compare the 2017 third quarter adjusted results with the combined results for the third quarter of 2016.Ê The combined results assume Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed onÊJanuary 1, 2015, but use the estimated fair value of assets and liabilities as of the actual closing date of the acquisition.
Combined results for the 2016 third quarter discussed in this section make the following assumptions: (1) removes merger-related adjustments; (2) adjusts income taxes to reflect the company’s combined 2016 effective tax rate of 32.5 percent; (3) adjusts weighted average shares outstanding to include shares issued to Starwood shareholders; and (4) adjusts debt to reflect borrowing on the Credit Facility and issuance of Series Q and R Notes onÊJanuary 1, 2015.Ê Adjusted results for the 2017 third quarter exclude merger-related adjustments.Ê See page A-3 for the calculation of adjusted results, as well as combined results for the year-ago quarter.
Third quarter 2017 adjusted net income totaledÊ$413 million, a 20 percent increase over 2016 third quarter combined net income ofÊ$344 million.Ê Adjusted net income for the third quarter of 2017 excludesÊ$22 millionÊ($21 millionÊafter-tax) of merger-related adjustments.Ê Adjusted diluted EPS in the third quarter totaledÊ$1.10, a 26 percent increase from combined diluted EPS ofÊ$0.87Êin the year-ago quarter.
Base management and franchise fees totaledÊ$695 millionÊin the third quarter of 2017, an 8 percent increase over combined base management and franchise fees ofÊ$644 millionÊin the year-ago quarter.Ê The year-over-year increase largely reflects higher RevPAR, unit growth and an increase in branding fees.
Third quarter incentive management fees increased toÊ$136 million, compared to combined fees ofÊ$127 millionÊin the 2016 third quarter.Ê The year-over-year increase was largely due to higher net house profit at many properties outsideÊNorth America.
Adjusted owned, leased, and other revenue, net of direct expenses, totaledÊ$94 million, compared to combined revenue, net of direct expenses ofÊ$116 millionÊin the year-ago quarter. ÊThe adjusted year-over-year decrease largely reflects the impact of hotels previously sold and lower results inÊBrazilÊandÊNew York, partially offset by stronger results at other owned and leased hotels andÊ$9 millionÊof favorable purchase accounting revisions.Ê Combined revenue, net of expenses, for the third quarter of 2016 includedÊ$15 millionÊof results from hotels subsequently sold.
Adjusted depreciation, amortization, and other expenses for the 2017 third quarter totaledÊ$70 million, compared to combined expenses ofÊ$81 millionÊin the year-ago quarter. ÊThe year-over-year decrease was largely due to hotels previously sold or properties moved to assets held for sale.
Adjusted general, administrative, and other expenses for the 2017 third quarter totaledÊ$201 million, compared to combined expenses ofÊ$237 millionÊin the year-ago quarter. ÊThe decrease in expenses year-over-year was largely due to general and administrative cost savings andÊ$4 millionÊof favorable purchase accounting revisions.
Interest expense, net, totaledÊ$64 millionÊin the third quarter, compared to the combined net expense ofÊ$69 millionÊin the year-ago quarter.Ê The decrease was largely due to the maturity of Series I Senior Notes.
The adjusted provision for income taxes totaledÊ$189 millionÊin the third quarter, a 31.4 percent effective rate, compared to the combined provision for taxes ofÊ$166 millionÊin the 2016 third quarter, a 32.5 percent effective rate.Ê The adjusted provision for the third quarter of 2017 includes aÊ$5 million tax benefit resulting from the adoption of ASU 2016-09.
For the third quarter, adjusted EBITDA totaledÊ$831 million, a 7 percent increase over third quarter 2016 combined adjusted EBITDA ofÊ$775 million.Ê Combined adjusted EBITDA for the third quarter of 2016 includedÊ$15 millionÊof results from hotels subsequently sold.Ê See page ÊA-12 for the adjusted EBITDA and combined adjusted EBITDA calculations.
Third quarter 2017 financial results as adjusted compared toÊAugust 7, 2017Êguidance
OnÊAugust 7, 2017, the company estimated total fee revenue for the third quarter would beÊ$810 million to $825 million.Ê Actual total fee revenue ofÊ$831 millionÊin the quarter was higher than estimated, largely reflecting RevPAR at the high end of the guidance range, better than expected branding fees, favorable foreign exchange andÊ$3 millionÊof previously deferred incentive management fees.
Marriott estimated owned, leased, and other revenue, net of direct expenses, for the third quarter would total approximatelyÊ$75 million.Ê Actual adjusted results ofÊ$94 millionÊin the quarter were higher than estimated, largely due toÊ$9 millionÊof favorable purchase accounting revisions,Ê$4 million of termination fees and better than expected results at hotels inÊCanada.
The company estimated general, administrative, and other expenses for the third quarter would total approximatelyÊ$215 million to $220 million.Ê Actual adjusted expenses ofÊ$201 millionÊin the quarter were lower than expected largely due to aÊ$6 millionÊstate tax incentive,Ê$4 millionÊof favorable purchase accounting revisions, and timing.
The company estimated interest expense, net, for the third quarter would total approximatelyÊ$60 million.Ê The actual net expense ofÊ$64 millionÊin the quarter was higher than expected, largely due toÊ$3 millionÊof unfavorable purchase accounting revisions.
The company estimated gains and other income for the third quarter would total approximatelyÊ$0 million.Ê Actual gains ofÊ$6 millionÊin the quarter were higher than expected, largely due to a settlement with tax authorities related to the sale of Starwood properties in 2008.
Selected performance information
Combined information for the 2016 third quarter presented in this section assumes Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed onÊJanuary 1, 2015.
The company added 138 new properties (22,772 rooms) to its worldwide lodging portfolio during the 2017 third quarter, including The St. Regis, Astana inÊKazakhstan, the Bulgari Hotel Beijing, and the Weligama Bay Marriott Resort & Spa, the company’s first hotel in Sri Lanka.Ê Twenty-seven properties (4,700 rooms) exited the system during the quarter.Ê At quarter-end, Marriott’s lodging system encompassed 6,401 properties and timeshare resorts with more than 1,239,000 rooms.
At quarter-end, the company’s worldwide development pipeline totaled 2,622 properties with approximately 450,000 rooms, including 975 properties with more than 175,000 rooms under construction and 222 properties with 41,000 rooms approved for development, but not yet subject to signed contracts.
In the 2017 third quarter, worldwide comparable systemwide constant dollar RevPAR increased 2.1 percent (a 2.4 percent increase using actual dollars). ÊNorth American comparable systemwide constant dollar RevPAR increased 0.4 percent (a 0.6 percent increase using actual dollars), and international comparable systemwide constant dollar RevPAR increased 6.7 percent (a 7.8 percent increase using actual dollars) for the same period.Ê These RevPAR growth statistics compare the third quarter of 2017 to combined comparable systemwide RevPAR for the third quarter of 2016.
In the 2017 third quarter, 64 percent of worldwide company-managed hotels earned incentive management fees.Ê In North America, 55 percent of company-managed hotels earned incentive management fees in the quarter, while 72 percent of company-managed hotels outsideÊNorth AmericaÊearned incentive management fees.Ê In addition, the company earned 64 percent of its incentive management fees in the 2017 third quarter at properties outsideÊNorth America.
Worldwide comparable company-operated house profit margins increased 40 basis points in the third quarter, largely due to higher RevPAR, solid cost controls and synergies from the Starwood acquisition.Ê House profit margins for comparable company-operated properties outsideÊNorth AmericaÊrose 130 basis points, while North American comparable company-operated house profit margins declined 20 basis points in the third quarter.Ê These house profit margin statistics compare the third quarter of 2017 to combined comparable company-operated house profit margins for the third quarter of 2016.
Balance sheet
At quarter-end, Marriott’s total debt wasÊ$8,669 millionÊand cash balances totaledÊ$508 million, compared toÊ$8,506 millionÊin debt andÊ$858 millionÊof cash at year-end 2016.
Marriott common stock
Weighted average fully diluted shares outstanding used to calculate reported diluted EPS totaled 376.6 million in the 2017 third quarter, compared to 270.5 million shares in the year-ago quarter.Ê Weighted average fully diluted shares outstanding used to calculate combined diluted EPS totaled 394.4 million in the 2016 third quarter.
The company repurchased 7.8 million shares of common stock in the third quarter at a cost ofÊ$800 millionÊat an average price ofÊ$103.01.Ê Year-to-date throughÊNovember 7, the company has repurchased 23.9 million shares forÊ$2.4 billionÊat an average price ofÊ$98.17.
Outlook
The following outlook for the fourth quarter and full year 2017 does not include merger-related adjustments, which the company cannot accurately forecast, but could total roughlyÊ$150 millionÊon a full-year basis.
Branding fees from credit cards and residential sales are reported in the Franchise fees line on the income statement.Ê Prior to the first quarter of 2017, those fees were reported in Owned, leased and other revenue.ÊÊ In 2016, combined fees from credit cards and residential sales totaledÊ$60 millionÊin the fourth quarter andÊ$210 millionÊfor the full year.Ê Application fees, relicensing fees and timeshare royalties will continue to be included in the Franchise fees line.Ê Comparisons to prior year combined results throughout this Outlook section reflect this change in reporting.Ê OnÊFebruary 15, 2017, the company issued further schedules setting forth combined quarterly and full year combined financial information for both 2015 and 2016 that reflect this change in presentation, and included those schedules in a Form 8-K filed on that date.Ê Those schedules are available on Marriott’s Investor Relations website atÊhttp://www.marriott.com/investor.
For the 2017 fourth quarter, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 2 to 3 percent in North America.Ê The company’s guidance for fourth quarter RevPAR growth inÊNorth AmericaÊreflects the shift of the Jewish holidays, which occurred in the third quarter of 2017 compared to the fourth quarter of 2016.Ê The company expects fourth quarter comparable systemwide RevPAR on a constant dollar basis will increase 3 to 5 percent outsideÊNorth AmericaÊand 2 to 3 percent worldwide.
Marriott expects fourth quarter 2017 owned, leased, and other revenue, net of direct expenses, could total approximatelyÊ$90 million.Ê This estimate reflects the negative impact of hotels previously sold, including the Sheraton Centre Toronto.
The company anticipates general, administrative, and other expenses for the fourth quarter will totalÊ$240 million to $245 million.Ê Compared to the expense estimates the company provided onÊAugust 7, these estimates reflect expenses delayed from the third quarter.
Marriott expects fourth quarter 2017 adjusted EBITDA could totalÊ$762 million to $777 million.Ê This estimate reflects the negative impact of hotels previously sold.Ê See page A-13 for the adjusted EBITDA calculation.
For the full year 2017, Marriott expects comparable systemwide RevPAR on a constant dollar basis for the combined company will increase 1 to 2 percent inÊNorth America, roughly 5 percent outsideÊNorth AmericaÊand 2 to 3 percent worldwide.
Marriott anticipates gross room additions of nearly 7 percent and room deletions of 1 to 1.5 percent for full year 2017.
The company assumes full year 2017 total fee revenue will totalÊ$3,287 million to $3,297 million.Ê Compared to the total fee revenue estimates the company provided onÊAugust 7, these fee revenue estimates reflect the outperformance in the third quarter, higher worldwide RevPAR guidance and higher branding and relicensing fees.
Marriott expects full year 2017 owned, leased, and other revenue, net of direct expenses, could total approximatelyÊ$367 million. ÊThis estimate reflects the negative impact of hotels previously sold.Ê Compared to the owned, leased and other revenue, net of direct expenses, estimates the company provided onÊAugust 7, these estimates reflect the outperformance in the third quarter, partially offset by the impact of the sale of the Sheraton Centre Toronto.
Marriott expects full year 2017 adjusted EBITDA could totalÊ$3,177 million to $3,192 million.Ê This estimate reflects the negative impact of hotels previously sold.Ê See page A-14 for the adjusted EBITDA calculation.
1Beginning in the first quarter of 2017, the company reports credit card and residential branding fees in Franchise fees revenue.Ê Prior to first quarter of 2017, those fees were reported in Owned, leased and other revenue.Ê Combined credit card and residential branding fees totaledÊ$60 millionÊin the Fourth Quarter of 2016 andÊ$210 millionÊfor Full Year 2016.
Ê2Net of interest income
Ê 3Guidance for Full Year 2017 EPS includes theÊ$0.13Êexpected favorable impact from the adoption of ASU 2016-09.
Ê 4The tax rate guidance for Full Year 2017 includes theÊ$51 millionÊbenefit from the adoption of ASU 2016-09, but does not include the impact of merger-related adjustments that have been or may be made.Ê ÊWithout the benefit from adoption of ASU 2016-09, the anticipated tax rate for Full Year 2017 would be 33.0 percent.
The company expects investment spending in 2017 will total approximatelyÊ$550 million to $650 million, including approximatelyÊ$175 millionÊfor maintenance capital.Ê Investment spending also includes other capital expenditures (including property acquisitions), new mezzanine financing and mortgage notes, contract acquisition costs, and equity and other investments.Ê Assuming this level of investment spending and no additional asset sales, nearlyÊ$3.5 billionÊcould be returned to shareholders through share repurchases and dividends in 2017.
The company plans to continue to disclose adjusted results and EBITDA that exclude merger-related costs and charges arising from the Starwood acquisition.
Marriott International, Inc. will conduct its quarterly earnings review for the investment community and news media onÊWednesday, November 8, 2017ÊatÊ10:00 a.m. Eastern TimeÊ(ET).Ê The conference call will be webcast simultaneously via Marriott’s investor relations website atÊhttp://www.marriott.com/investor, click the ÒRecent and Upcoming EventsÓ tab and click on the quarterly conference call link.Ê A replay will be available at that same website untilÊNovember 8, 2018.
The telephone dial-in number for the conference call is 706-679-3455 and the conference ID is 86389048.Ê A telephone replay of the conference call will be available fromÊ1:30 p.m. ET,ÊWednesday, November 8, 2017ÊuntilÊ11:00 p.m. ET,ÊWednesday, November 15, 2017.Ê To access the replay, call 404-537-3406.Ê The conference ID for the recording is 86389048.
