ON SEPTEMBER 23, 2016, Marriott completed its acquisition of Starwood Hotels & Resorts Worldwide (Starwood). The discussion in the first section below reflects reported results for the third quarter as calculated in accordance with US generally accepted accounting principles (GAAP). To further assist investors, the company is also providing (a) adjusted results that exclude Starwood results from September 23 to September 30, 2016, as well as merger-related costs; and (b) selected pro forma information for the third quarter that assumes Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015, but uses the estimated fair value of assets and liabilities as of the actual closing date of the acquisition.
Arne M. Sorenson, president and chief executive officer of Marriott International, said, “We were thrilled to close the acquisition of Starwood in late September. We are enthusiastically engaged in welcoming Starwood’s associates around the world into the Marriott family and are working diligently on integrating the companies and realizing revenue and cost synergies as quickly as possible.
“We’ve already had a big win on the integration front. The day the acquisition closed, we offered status match to our more than 85 million combined loyalty members, along with the ability to transfer and redeem points between Marriott Rewards, which includes The Ritz-Carlton Rewards, and Starwood Preferred Guest, the industry’s leading loyalty programs. In mid-October, we also announced an industry-first benefit for members of our co-brand credit cards, letting members earn bonus points for stays at hotels across all 30 brands. In just a few short weeks after closing, our most loyal guests are already reaping the most important benefits of the merger and they are telling us they love it.
“Looking forward to 2017, we expect system wide constant dollar RevPAR for the combined portfolio will be flat to up 2 percent in North America, outside North America and worldwide. Our group booking pace at company-operated North American full-service hotels for 2017 is up 2 percent with about 70 percent of 2017 expected group business volume booked thus far. While special corporate rate negotiations are still underway, we expect room rates for comparable customers will increase at a mid-single digit rate in most markets.
“The Marriott and Starwood development teams continued their great work in the quarter, delivering a combined global pipeline of nearly 420,000 rooms, over half of which are outside North America. Given this strong development pipeline, we anticipate 6 percent worldwide net room additions in 2017.
“We remain committed to our asset-light strategy, which should deliver meaningful management and franchise fees in 2017. On a pro forma basis assuming the Starwood acquisition and Starwood’s sale of its timeshare business had closed on January 1, 2015, Marriott anticipates earning more than $2.8 billion in fee revenue for full year 2016. In addition, as part of that asset-light strategy, we are working toward generating more than $1.5 billion from asset sales over the next two years, in transactions where we expect to retain long-term operating agreements. Based on our preliminary estimates for the combined company, we believe we are already within our targeted leverage range of 3 to 3.25x adjusted debt to adjusted EBITDAR, excluding merger-related costs and charges. Given our continued strong, sustainable cash flow, we expect to resume share repurchases in the 2016 fourth quarter.”
Marriott International GAAP – Financial Results As Reported
Marriott reported net income totalled $70 million in the third quarter, a 67 percent decrease over 2015 third quarter net income of $210 million. Reported diluted earnings per share (EPS) was $0.26 in the quarter, a 67 percent decrease from diluted EPS in the year-ago quarter.
Marriott revenues totalled more than $3.9 billion in the 2016 third quarter, compared to revenues of approximately $3.6 billion for the third quarter of 2015. Revenues for the third quarter of 2016 include $168 million related to the eight days of Starwood’s results in the quarter.
Base management and franchise fees totalled $430 million in the 2016 third quarter, compared to $397 million in the year-ago quarter. The year-over-year increase in fees largely reflects $16 million related to the eight days of Starwood’s results in the quarter, higher RevPAR and unit growth, partially offset by $7 million of unfavourable foreign exchange and $3 million of lower relicensing fees.
Third quarter worldwide incentive management fees increased 19 percent to $81 million, primarily due to $4 million related to the eight days of Starwood’s results in the quarter, higher RevPAR and house profit margins, as well as increased international distribution, partially offset by $2 million of unfavourable foreign exchange.
Owned, leased, and other revenue, net of direct expenses, totalled $85 million in the 2016 third quarter, compared to $54 million in the year-ago quarter. The year-over-year increase largely reflects $12 million related to the eight days of Starwood’s results in the quarter, improved results at several leased properties, including recently renovated hotels, the results for two recently opened owned properties in Rio de Janeiro and $4 million of higher residential and credit card branding fees.
Depreciation, amortization, and other expenses totalled $36 million in the third quarter compared to $31 million in the year-ago quarter. The year-over-year increase largely reflects $4 million related to the eight days of Starwood’s results.
Merger-related costs and charges totalled $228 million in the third quarter compared to none in the year-ago quarter. Included in the merger-related costs and charges are $186 million of severance and retention costs, $24 million of integration costs and $18 million of transaction costs.
General, administrative, and other expenses for the 2016 third quarter totalled $161 million compared to $149 million in the year-ago quarter. The increase in expenses year-over-year was largely due to $7 million of expenses related to the eight days of Starwood’s results in the quarter and higher routine administrative costs.
Gains and other income increased to $3 million in the 2016 third quarter. The year-over-year increase was largely due to a distribution related to the sale of a hotel in an investment fund.
Interest expense, net totalled $46 million in the third quarter, an $8 million increase over the year-ago quarter, largely due to $9 million of interest expense related to the debt raised for the Starwood acquisition and $1 million related to the eight days of Starwood results, partially offset by interest earned on a larger portfolio of loans.
Equity in earnings totalled $3 million in the third quarter, compared to $8 million in the year-ago quarter. The year-over-year decrease was largely due to the favourable adjustment of liabilities in an International joint venture in the third quarter of 2015, partially offset by $1 million related to the eight days of Starwood results in the quarter.
Legacy-Marriott Only – Financial Results as Adjusted
The adjusted financial results presented in this section relate only to the results of Marriott excluding the impact of the Starwood acquisition (referred to as the Legacy-Marriott business). This information is being presented to allow shareholders to more easily compare the results of the Legacy-Marriott business with the reported results for the third quarter of 2015. All of the adjusted results discussed in this section exclude Starwood results from September 23 to September 30, 2016 and merger-related costs.
Third quarter 2016 adjusted net income totalled $235 million, a 12 percent increase over 2015 third quarter net income of $210 million. Adjusted net income for the third quarter of 2016 excludes $237 million ($179 million after-tax) of merger-related costs and $20 million ($14 million after-tax) of Starwood results. Adjusted diluted EPS in the third quarter totalled $0.91, a 17 percent increase from diluted EPS in the year-ago quarter.
Adjusted revenues totalled nearly $3.8 billion in the 2016 third quarter compared to reported revenues of approximately $3.6 billion for the third quarter of 2015.
Adjusted base management and franchise fees totalled $414 million compared to reported fees of $397 million in the year-ago quarter. The year-over-year increase in adjusted fees largely reflects higher RevPAR and unit growth, partially offset by $7 million of unfavourable foreign exchange and $3 million of lower relicensing fees.
Third quarter adjusted worldwide incentive management fees increased 13 percent to $77 million, primarily due to higher RevPAR and house profit margins, as well as increased international distribution, partially offset by $2 million of unfavourable foreign exchange. In the third quarter, 63 percent of Legacy-Marriott worldwide company-managed hotels earned incentive management fees compared to 64 percent in the year-ago quarter.
On July 27, the company estimated total fee revenue for the third quarter would total $495 million to $500 million, not including the impact of the Starwood acquisition. Actual adjusted total fee revenue of $491 million in the quarter was modestly lower than estimated, reflecting RevPAR below the guidance range, as well as lower than expected relicensing and application fees.
Adjusted owned, leased, and other revenue, net of direct expenses, totalled $73 million, compared to $54 million in the year-ago quarter. The adjusted year-over-year increase largely reflects improved results at several leased properties, including recently renovated hotels, the results for two recently opened owned properties in Rio de Janeiro and $4 million of higher residential and credit card branding fees.
Adjusted general, administrative, and other expenses for the 2016 third quarter totalled $154 million compared to $149 million in the year-ago quarter. The increase in adjusted expenses year-over-year was largely due to higher routine administrative costs.
On July 27, Marriott estimated general, administrative, and other expenses for the third quarter would total approximately $160 million, not including the impact of the Starwood acquisition. Adjusted general, administrative, and other expenses in the quarter were lower than expected largely due to solid cost controls and delays in filling open positions.
Adjusted gains and other income increased $4 million in the third quarter of 2016 compared to the year-ago quarter. The adjusted year-over-year increase was largely due to a distribution related to the sale of a hotel in an investment fund.
Adjusted equity in earnings totalled $2 million in the third quarter compared to $8 million in the year-ago quarter. The adjusted year-over-year decrease was largely due to the favourable adjustment of liabilities in an International joint venture in the third quarter of 2015.
For the third quarter, adjusted EBITDA totalled $474 million, a 10 percent increase over third quarter 2015 adjusted EBITDA of $431 million. See page A-15 for the adjusted EBITDA calculation.
Selected Pro Forma Financial Information
Pro forma information presented in this section reflects the combined company assuming Marriott’s acquisition of Starwood and Starwood’s sale of its timeshare business had been completed on January 1, 2015, but using the estimated fair value of assets and liabilities as of the actual closing date of the acquisition.
On a pro forma basis, the company added 102 new properties (17,627 rooms) to its worldwide lodging portfolio during the three months ended September 30, 2016 and 10 properties (1,778 rooms) exited the system.
Legacy-Marriott brands added 82 new properties (12,155 rooms) during the three months ended September 30, 2016, including the Kigali Marriott Hotel in Rwanda, the Domes Noruz Chania, an Autograph Collection hotel in Greece and the Playa Largo Resort & Spa, an Autograph Collection hotel in Florida. Six properties (911 rooms) exited the system.
Legacy-Starwood brands (Starwood’s brands before Marriott’s acquisition) added 20 new properties (5,472 rooms) during the three months ended September 30, 2016, including The Westin Jakarta, the Aloft Riyadh and The Prince Gallery Tokyo Kioicho, a Luxury Collection Hotel. Four properties (867 rooms) exited the system.
The company’s worldwide development pipeline totalled 2,454 properties with nearly 420,000 rooms at quarter-end, including 881 properties with roughly 160,000 rooms under construction and 297 properties with more than 46,000 rooms approved for development, but not yet subject to signed contracts.
Legacy-Marriott’s worldwide development pipeline totalled 1,809 properties with nearly 290,000 rooms at quarter-end, including 629 properties with roughly 106,000 rooms under construction and 236 properties with more than 34,000 rooms approved for development, but not yet subject to signed contracts.
Using Marriott pipeline methodology, Legacy-Starwood’s worldwide development pipeline totalled 645 properties with nearly 130,000 rooms at quarter-end, including 252 properties with more than 54,000 rooms under construction and 61 properties with roughly 12,000 rooms approved for development, but not yet subject to signed contracts.
For the three months ended September 30, 2016, combined Marriott and Starwood worldwide comparable pro forma systemwide constant dollar RevPAR increased 2.2 percent. Combined North American comparable pro forma systemwide constant dollar RevPAR increased 2.6 percent, and combined international comparable pro forma systemwide constant dollar RevPAR increased 1.1 percent for the same period, as shown on page A-14.
For the three months ended September 30, 2016, Legacy-Marriott worldwide comparable systemwide constant dollar RevPAR increased 2.5 percent (a 1.8 percent increase in actual dollars). Legacy-Marriott North American comparable pro forma systemwide constant dollar RevPAR increased 2.4 percent (a 2.3 percent increase in actual dollars), and Legacy-Marriott international comparable pro forma systemwide constant dollar RevPAR increased 2.9 percent (a 0.2 percent decline in actual dollars) for the same period.
Using Marriott’s methodology for determining comparability, for the three months ended September 30, 2016, Legacy-Starwood worldwide comparable systemwide constant dollar RevPAR increased 1.5 percent (a 0.8 percent increase in actual dollars). Legacy-Starwood North American comparable pro forma systemwide constant dollar RevPAR increased 3.1 percent (a 3.0 percent increase in actual dollars), and Legacy-Starwood international comparable pro forma systemwide constant dollar RevPAR decreased 0.6 percent (a 2.2 percent decrease in actual dollars) for the same period.
OUTLOOK
Unless otherwise stated, the following outlook for the fourth quarter is for the combined company and does not include merger-related costs.
For the combined company, Marriott anticipates pro forma gross room additions of 6 percent, or 5 percent, net, for full year 2016.
For the 2016 fourth quarter, Marriott expects comparable systemwide RevPAR on a constant dollar basis will be flat to up 1 percent in North America and worldwide. Outside North America, the company expects comparable systemwide RevPAR on a constant dollar basis will be roughly flat.
The company assumes fourth quarter total fee revenue could total $695 million to $705 million, growth of 1 to 2 percent over pro forma fourth quarter 2015 total fee revenue of $688 million. See page A-16 for pro forma financial measures.
Marriott expects fourth quarter 2016 owned, leased, and other revenue, net of direct expenses could total $150 million to $155 million, a 7 to 10 percent decrease compared to pro forma fourth quarter 2015 results, largely due to lower termination fees and the sale of five owned hotels in previous months. See page A-16 for pro forma financial measures.
For the 2016 fourth quarter, the company anticipates depreciation, amortization, and other expenses will total $70 million to $75 million, a 5 to 11 percent decline compared to pro forma 2015 fourth quarter expenses of $79 million. The company also expects general, administrative, and other expenses will total $235 million to $240 million in the 2016 fourth quarter, a 16 to 18 percent decline compared to pro forma 2015 fourth quarter expenses of $287 million.
Marriott expects fourth quarter 2016 operating income could total $530 million to $555 million, a 9 to 14 percent increase compared to pro forma fourth quarter 2015 operating income of $488 million.
