Marriott International, Inc.
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good morning. My name is Bridget, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marriott International First Quarter 2013 Earnings Conference Call. [Operator Instructions] And now, I would like to turn the call over to President and Chief Executive Officer, Arne Sorenson. Mr. Sorenson, you may begin your conference.

[Arne M. Sorenson:]

Thanks, Bridget. Good morning, everyone. Welcome to our first quarter 2013 earnings conference call. Joining me today are Carl Berquist, Executive Vice President and Chief Financial Officer; Laura Paugh, Senior Vice President, Investor Relations; and Betsy Dahm, Senior Director, Investor Relations. As always, before we get into the discussion of our results, let me first remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties, as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the press release that we issued last night, along with our comments today, are effective only today, May 2, 2013, and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks on our website at www.marriott.com/investor. Our financial results in the first quarter were terrific. Transient business was very strong, particularly nonqualified or retail-rated business, as we eliminated discounts, pushed business into higher-rated categories and raised rates. Leisure business during weekends and spring break was robust, especially at our Florida and Caribbean resorts and luxury ski getaways. We saw 2007-level occupancies at most of our brands. For our company-operated Marriott Hotels & Resorts brand, transient REVPAR increased 8% with strong demand in Miami, Houston and San Francisco. In contrast, Marriott group revenue in the first quarter was significantly impacted by the shift in the Easter holiday. First quarter group REVPAR was up only 1%, but including the month of April, year-to-date group REVPAR is expected to increase roughly 6%. While transient business was strong, government business declined in the quarter. Systemwide across North America, we estimate shrinking government business, both transient and group, reduced our first quarter REVPAR growth by 60 to 70 basis points. Last year, government-related business made up about 5% of room nights across our North American system. In light of the fact that a quarter ago we highlighted the potential negative impact of the sequester on our business in 2013, let me take a few minutes to address a few government issues. First, the 60- to 70-basis-point impact to our Q1 REVPAR from declining government business is likely to be more than just the impact of the sequester itself. Government has been under pressure to cut spending for some time, and this impact reflects the total impact of decline in government group and transient volumes from last year. We expect continuing negative impact to our REVPAR throughout 2013. While the world seems to have moved on from the sequester, we continue to believe that better results will flow to our economy if a thoughtful bipartisan budget deal can be crafted to replace the blunt instrument of the sequester. Second, we've been pleased to see the momentum building for immigration reform in the administration and on the Hill. The time is right. In terms of fairness and economic impact, the benefits of immigration reform are obvious. Third, we were pleased to see this morning the President's nomination of Penny Pritzker as Commerce Secretary and Michael Froman as U.S. Trade Rep. These are important government positions and deserve to be occupied by talented, energetic leaders like these nominees. We want to especially congratulate Penny Pritzker. We know she knows the lodging industry. We think both these nominees are good candidates, and we urge quick confirmation by the Senate. Remember, travel is trade. Now let's get back to our results in the first quarter. For company-operated Marriott Hotels, association group business was very strong in the quarter. Typically booked years in advance, first quarter association group attendance exceeded our expectations, and association bookings for 2014 and beyond were very strong. Long-term corporate demand was also healthy. Corporate group bookings made in the first quarter for full year 2014 were up 22%. In fact, in the last 12 months, our 2014 revenue booking pace increased from minus 4% to plus 5% in part due to strong corporate and association demand. To be sure, while long-term demand is very robust, we are seeing less short-term corporate group business in our hotels. Why? We believe today's "In the year, for the year" corporate customers are feeling a bit uncertain and cautious likely due to government austerity, higher taxes on the consumer and stubbornly high unemployment. We are watching this trend carefully but also note that we've seen few corporate cancellations, little attrition, and our funnel of new but unsigned group bookings remains healthy. And as I said, long-term corporate bookings are strong. For all group customers, booking pace for the remainder of 2013 for the Marriott brand, as an example, is up 4%. Outside North America, systemwide comparable REVPAR rose 4% on a constant currency basis. REVPAR growth in the Middle East was double digits. The UAE was a bright spot, attracting cold weather-weary Europeans in the first quarter. REVPAR in the Caribbean and Latin America increased over 7%, led by Mexico, which was up nearly 16%. Our resorts in Puerto Rico, Aruba and the Cayman Islands, REVPAR also saw double-digit growth. In Asia, constant dollar systemwide REVPAR increased 3% with very strong REVPAR growth in Thailand and in Indonesia, weak economic conditions in Europe, slightly reduced systemwide constant dollar REVPAR in the region, while REVPAR in the U.K. declined about 5%, reflecting weak demand and tough comparisons to last year's run-up to the Olympics. Comparisons will get easier in the U.K. when we get to the fourth quarter. Around the world, our Ritz-Carlton hotels had an outstanding quarter. North American REVPAR increased 9%, and outside North America, constant dollar REVPAR was up 11% as strong luxury demand hit limited luxury supply. A favorable mix of transient room nights as well as price increases continue to move room rates higher. Our development pipeline of Ritz-Carlton hotels stands at 31 hotels today, implying more than a 35% growth over today's worldwide Ritz-Carlton system. And virtually all of our Ritz-Carlton pipeline is outside the United States. We've made significant progress on the integration of the Gaylord brand. As of the end of the first quarter, the brand had conditioned to -- transitioned to our rewards program, adopted our property management and revenue management systems and joined our global sales organization. The improvements in operating efficiency remain a work in progress, but we see considerable opportunity to leverage Marriott's scale. We are still rolling out the Marriott procurement program, as an example. Turning to development. Lending is gradually loosening for new limited-service hotel development in the United States but only for worthy projects. At the same time, hotel supply growth in the North America and Europe remains very low. At quarter end, our worldwide hotel development pipeline hit a new record, more than 135,000 rooms with more than 62,000 rooms under construction. Measured by number of hotels, we are clearly taking share. Based on STR hotel pipeline data, our new hotels under development, as a percentage of our current hotel portfolio, shows faster growth in each of the United States, Asia and the Middle East regions that are significant public competitors. And our development pipelines in CALA, Latin America and Europe are highly competitive. I just got back from the grand opening of the new Marriott in Whitefield, a suburb of Bangalore, India. From meeting the associates there, I know the Marriott culture is alive and well even 9,000 miles from our headquarters. Today, we have 18 hotels in India representing 5 brands, with more than 45 hotels in our development pipeline. India is a microcosm of what we are doing in markets around the world, combining strong global brands with local sensibility. As we enter emerging markets, we typically establish a beachhead with luxury and upper-upscale hotels. But to achieve scale and long-term growth, a strong market presence with a broad brand portfolio is crucial. We are introducing Fairfield in India, Fairfield in Brazil, Courtyard in Mexico, Courtyard in China and the MOXY brand in Europe to achieve that scale with designs that reflect our high global standards while appealing to local guests. 30 years ago, we demonstrated the power of customer segmentation in the hotel industry when we introduced Courtyard. Segmentation was phenomenally successful in the U.S., and we are confident that approach will be even more successful around the world. We have strong, differentiated brands and tremendous economies of scale. But success is never final. We want to be more consumer driven, closer to the customer around the world, more attuned to the next-generation traveler and much faster to market. In recent years, we announced new lobby designs, restaurant concepts, group meeting offerings and even new brands. In fact, later this year, you'll hear us talk more about the coming changes in the Marriott brand. You'll also hear us talk more about brand introductions in new countries. So stay tuned. We believe the investment case for Marriott is clear. Expanding our share of rooms in an environment of modest supply growth, increasing global travel and high occupancy rates all imply a long period of strong room rate increases, margin expansion and fee growth, particularly incentive fee growth. Our business model should allow for investors to reap that growing profitability with high returns on investment. To further discuss the first quarter numbers and to update our outlook, here's Carl.

[Carl T. Berquist:]

Thanks, Arne. As I'm sure you're all aware, this is our first quarter under our new fiscal calendar. Thank you for your patience as we make this important transition. And special thanks to the many finance associates here at Marriott that continue to make this transition from a 13-period year to a calendar year so successful. They are doing a fantastic job. Well, for the first quarter 2013, diluted earnings per share totaled $0.43, ahead of our guidance of $0.37 to $0.42. We beat the midpoint of our first quarter EPS guidance by about $0.03. Roughly $0.02 came from better-than-expected fees, particularly incentive fees in North American full-service hotels. $0.02 came from better-than-expected branding fees and termination fees, $0.01 from better-than-expected taxes, and these were offset by $0.02 in higher G&A. Our guidance beat was not related to the change in the fiscal calendar. Total fee revenue reached $370 million, including incentive fees of $66 million. We estimate roughly $6 million of the incentive fee improvement in the quarter was associated with our longer first quarter. Incentive fees exceeded our expectations largely due to strong performance among our full-service hotels in the U.S., particularly in New York and Florida. Worldwide, 1/3 of managed hotels paid incentive fees in the quarter compared to 29% in the year ago quarter. In North America alone, approximately 1/3 of the full-service managed hotels paid incentive fees compared to 1/4 in the prior year. House profit margins at company-operated hotels in North America increased 170 basis points. These margins are not adjusted for the shifting fiscal calendar, so they're not comparable to our calendar quarter REVPAR stat. But we were pleased with the performance. In fact, we expect roughly 150 basis points of margin improvement for the full year. Owned, leased and other revenue, net of expenses, totaled $36 million in the quarter. We estimate the longer fiscal quarter had minimal impact here. Branding fees from our credit card and residential real estate sales totaled $25 million in the quarter compared to $16 million in the prior year. Leased hotel results were down slightly, reflecting softer results in London and the costs associated with a lease termination. Compared to our expectations, we outperformed in part due to $3 million of termination fees and some timing. General and administrative expenses totaled $180 million in the first quarter compared to $147 million in the prior year. We estimate approximately $15 million of the year-over-year increase was associated with the longer fiscal quarter; $2 million of the increase was due to our revised estimate for compensation paid in 2013 but associated with 2012; $3 million came from unfavorable foreign exchange, including the currency devaluation in Venezuela; and about $3 million came from an increase in amortization of fee money largely due to the Gaylord transaction. Our higher overhead costs in the first quarter also reflected our organization's rapid growth outside the U.S. and spending on new hotel development. For Marriott International, our adjusted operating profit margin, excluding the impact of reimbursed costs, increased to 38% in the first quarter from 34% in the 2012 quarter. We repurchased over 5 million shares during the quarter and over 8 million shares through the end of April. Looking ahead, we expect second quarter REVPAR to increase 5% to 7% in North America as we benefit from a shifting Easter holiday, strong seasonal occupancy and further room rate improvement. Outside North America, we anticipate REVPAR will increase 2% to 4% and, given trends in Europe and Asia, probably at the lower end of that range. Asia Pacific REVPAR should grow at a low single-digit rate, reflecting weak trends in Seoul and Beijing. We expect flattish REVPAR growth in Europe, low single-digit REVPAR growth in CALA and high single-digit REVPAR growth in the Middle East. For you modelers, we estimate the shift in fiscal calendar will add approximately $20 million to second quarter operating income. All in all, we expect second quarter operating income will total $275 million to $295 million, and diluted EPS will total $0.55 to $0.59. For full year 2013, we expect worldwide systemwide REVPAR to increase 4% to 7%. Fee revenue could increase 8% to 12%. We expect owned, leased and other revenue, net of direct expenses, will decline 9% to 15% for full year 2013. As we discussed last quarter, our leased hotels in Europe face a weakened economy, and our leased hotel in London also has a tough comparison to last year's Olympics. We will also be renovating 2 leased properties in 2013, which will be disruptive to the results. And we expect lower year-over-year termination and residential branding fees and higher preopening costs. We expect our general and administrative expenses will total $675 million to $685 million in 2013. The increase from our prior full year guidance is largely due to first quarter performance. All in all, we expect fully diluted EPS will total $1.93 to $2.08 in 2013, a 12% to 21% increase from 2012. Excluding the impact of the $25 million after-tax gain on the sale of our Courtyard joint venture in 2012, this is an 18% to 27% increase year-over-year. Compared to our prior 2013 guidance, we picked up about $0.02 per share on better fee revenue and $0.01 from our owned, leased and other line. Higher G&A costs is -- higher G&A is offset by lower interest expense and a favorable tax rate. Our cash flow is very strong. For full year 2013, we expect EBITDA to total roughly $1.2 billion, investment spending could total $600 million to $800 million, including about $100 million in maintenance spending. We will remain disciplined in our approach to capital investments and repurchases and expect to recycle capital. In fact, we expect to return $800 million to $1 billion to shareholders through share repurchases and dividends this year. We appreciate your interest in Marriott. [Operator Instructions] We know there is considerable sell-side coverage and even more buy-side interest in Marriott, so expect to stay as long as you want to answer your question. Bridget, we'll take questions now.

[Operator:]

[Operator Instructions] And your first question comes from the line of Ryan Meliker from MLV & Co.

[Ryan Meliker:]

I just had -- I think a lot of you -- a lot of your color up front was really helpful in terms of understanding how numbers flowed in the quarter. I had a little bit of a bigger picture question, though, I was hoping you guys might answer for me. I guess you guys have done a lot of transformation across your select-service brands, really bringing up the quality of the product. And I guess it's not just you guys, it's probably a lot of your competitors, too. I'm just wondering what you're hearing from most of your big clients in terms of the disparity in product offering between a Courtyard and, say, a traditional Marriott. Are you moving away from the traditional Marriott that's a -- group focused, under 400 rooms and trying to shift those more towards Courtyards or SpringHills or even Fairfields or even more upper end to the Autograph Collections or EDITION, et cetera? I just want to get some color in terms of how the development, particularly in the U.S., is unfolding given what seems to be a little bit of a shift in the customer base where they seem to be more open to staying at your select-service properties.

[Arne M. Sorenson:]

Yes, the -- it's a good question, Ryan. The -- we've talked -- part of the problem is we've talked more about Courtyard, as an example, than we have about our full-service brands in part because particularly when you look at the managed portfolio of Courtyard, we're -- we have probably close to 300 Courtyards we manage. Average age, I would guess, is 20 years, maybe a little over 20 years. The first-generation Courtyards were built and they were nearly identical. And so we could look at those as a portfolio and roll out renovation essentially that would be nearly uniform from hotel to hotel and could be done in a programmatic basis. In fact, we had 70 Courtyards under renovation in the first quarter of '13, and we're fast approaching the -- a point where every Courtyard in the United States will have a new, refreshing business lobby. And increasingly, we're getting rooms renovations rolled off that portfolio, too. At the same time, there is a lot going on in the core Marriott brands with -- Host is our biggest owner. Host has done a really fine job in many of their Marriott hotels to make sure that they're renovated and up to snuff. But in part because the brand is made up of a less uniform group of hotels, in other words they weren't built in groups of 50 or 75 but often were built one at a time, there's less of a programmatic renovation that's under way. We are not moving away from the core Marriott brand, but I think we'll intensify some of the communications and programmatic renovation work that we anticipate over the course of the next few quarters, and we'll communicate with you more much about -- much more about that as the year goes along.

[Operator:]

And your next question comes from the line of Robin Farley with UBS.

[Robin M. Farley:]

I'm trying to think about what the takeaway should be on your commentary on North America because your guidance actually was raised a bit at the bottom end, so a little bit more optimistic. But I guess I'm trying to square that with your comments getting -- your comments about sort of the closer-in [ph] business on the corporate side being a little bit softer. So I wonder if you could just kind of help square that.

[Arne M. Sorenson:]

Yes, I think thematically, the guidance we're offering now is essentially the same as the guidance we offered a quarter ago. We have brought up the lower end by 0.5 point, but I think that's mostly a function of the number we actually delivered in the first quarter. So as we look at the balance of the year, we looked at the low end of that range that we had a quarter ago, and to get to that low end would require a really kind of pitiful performance between now and the end of the year, which we just don't think is likely. Obviously, we're also hoping that, that doesn't happen. And so I wouldn't view that 0.5 point lift of the bottom end as being a sign of a meaningfully different view today than we had a quarter ago. I think we would say today, as I think we've said a quarter ago, that what we see is a steady, broad recovery in the economy and as it impacts the lodging business with demand growth and increasingly powerful shift to rate growth. And that is the strongest bit of tailwinds that we've got impacting our business. The caution is this is not a recovery which has got a sort of free-for-all robustness. I think generally, we see our corporate clients spending, not cutting back, getting back on the road but not necessarily throwing all caution to the wind and saying, we're going to do whatever we want to do and not be thoughtful about the risks, which are still apparent in the economy particularly because of high unemployment and Europe and some of those sorts of issues. So it's a steady and broad recovery, but it's got an element of caution to it. And I think on balance, that is the same view that we had a quarter ago.

[Robin M. Farley:]

And so your outlook's not really expecting anything? I mean, I assume you're expecting continued kind of softness in the short term corporate group?

[Arne M. Sorenson:]

Well, again, the biggest point here is that the recovery is steady and it is broad, and we expect that to continue to come. If you find the places where there are a bit of proof of the caution, we would say it was probably around short-term group bookings in Q1. And as we comb through our data, the bookings that were actually made in February for the near term were soft. But during the same month of February, when you look at total bookings that we made for the next 12 months and then for 2014 and the next 12 months after the next 12 months, they were actually up from the prior year. And so that tells us that we've got a recovery which continues to have strength. But again, it's not a free-for-all recovery.

[Operator:]

And your next question comes from the line of Joel Simkins with Credit Suisse.

[Joel H. Simkins:]

A couple of quick questions here. Obviously, you stepped up the leverage a little bit on the balance sheet given some of the buyback activity. Ultimately, where do you continue to feel comfortable with from a leverage perspective? And then what sort of tells you to exceed sort of the $800 million or, let's say, come to the high end of $800 million to $1 billion in capital return for 2013?

[Carl T. Berquist:]

I think we'll continue to manage our cash flows to a 3- to 3.25-type leverage ratio that we've talked about before. We don't see a need or any reason to go beyond that or under that. That's working pretty well and given where the economy is. As far as -- so we'll stay in that same neighborhood. And that's a defined term relative to adjusted EBITDA with adjusted debt. As it relates to the $800 million to $1 billion return to shareholders, we continue to look at that. A lot of items that could occur, depending on how much we recycle in 2013, will drive if that number goes up some, as well as if opportunistic investments come up that we didn't see when we had the $600 million to $800 million that we talked about of capital investment but also have an effect on that number. But right now, as we look out for the rest of the year, the $800 million to $1 billion looks like it's still a good number.

[Joel H. Simkins:]

And if I may, one quick follow-up. You mentioned earlier some new brands. So I'm just curious what kind of traction you're seeing with EDITION right now. I sit across the street from one that's being constructed here in New York, so I see that going up on a daily basis. Just curious where that's tracking at this point.

[Arne M. Sorenson:]

It's a beautiful building, isn't it?

[Joel H. Simkins:]

Yes.

[Arne M. Sorenson:]

Thank you. Actually, the EDITION is building momentum. We will open in London, I suspect, right after Labor Day. Miami will open early next year and New York probably late next year. But beyond those 3 deals that we're doing on balance sheet, I think we've got a pipeline now of about a dozen. So the balance would be made up of third-party deals. Heavy mix in Asia, but we're seeing folks excited about the projects that we're doing and impressed by the commitment we've made at the brand, and we've got some good optimism about its future.

[Operator:]

And your next question comes from the line of Nikhil Bhalla from FBR.

[Nikhil Bhalla:]

I had questions about just the government impact. So it seems like per -- what the government is directing all the federal agencies, they want the level of cutbacks to kind of hold until 2016 over and above, I think -- the base that they it set was 2010. I mean, how do you see that playing out over the next couple of years? Is this going to be a headwind that's going to be there for 2014 and 2015?

[Arne M. Sorenson:]

Well, Lord knows. I mean, I think the optimistic view would be that 2013 will limp through with respect to government business at about the kind of pace we're doing now. And obviously, that is clipping a bit the kind of REVPAR growth that I think would be posted otherwise. The good news, I suppose, in that is government business has already declined to a point where it's becoming less and less significant. And if they don't continue to cut from these levels, which I have been hopeful would be the case, we should see that by the time we get into 2014 and beyond. The comparisons are much easier, and there's no reason to believe the government business couldn't at least be flat, if not marginally positive. But at the same time, I think we would confess that we don't really know. We've got -- the nearest news is that maybe the debt ceiling date might be slipping into late summer or early fall. That would be about the time when budgets typically would be focused on and looked at. And we're congenitally [ph] optimistic that maybe we'll get to a point where we get something that's balanced and long term in its focus and I think optimistic that it shouldn't continue to hurt us at more than it's hurt us already.

[Nikhil Bhalla:]

Got it. And just on booking pace, it's about 4% right now for the rest of the year. I think it was more like 6% as of the last call. Looking at your 2Q guidance, it doesn't seem like you're seeing any softness on -- in 2Q. Is the concern more on the back half of the year?

[Arne M. Sorenson:]

Well, it's -- probably, Q3 is the relatively weaker time for the group business generally. You're talking about bulk of the summer being in that quarter. I think we'd be a bit more bullish about Q2 and about Q4 because of that kind of seasonality. But again, we talked about how group business was only up 1% in the first quarter. But if you include April and, as a consequence, get through that Easter comparison, it looks like about 6% for the first 4 months of the year. And all things considered, that's not bad.

[Operator:]

And your next question comes from the line of Steve Kent with Goldman Sachs.

[Steven E. Kent:]

Just to continue that line of questioning on booking pace, I think the part I'm struggling the most is -- with is -- your booking pace for 2014, where it looks like things are pretty strong, up 5%. And I don't understand why corporate confidence would be high for 2014 but not high for 2013, which is closer. Is it because it's off of a much smaller base in 2014 that you -- that the numbers look bigger?

[Arne M. Sorenson:]

Well, it's a good question. I -- no, I don't think it's fundamentally because it's a lower base. It's a bit lower, but it's not dramatically lower. By this point for 2014, we'll probably have 40%, 45% of the group business on the books, I would think. And so we're building that book. And obviously, by the time we get to the end of the year, we should be something closer to 70%. Actually, we could be 50-ish now, maybe low 50s for the total business for '14 that's already on the books. And so I don't think it's that so much. But your -- yes, Steve, your question is a good one. Our guess is that again, we don't have corporations which are frightened about the future. We think they are growing. They're growing profits, and they're back in business in many respects. And probably, the longer-term bookings both, A, require more time to confirm the space, so there's a bigger risk if they don't book. And secondly, they're probably among the more important meetings that corporate groups hold, corporate clients hold, and the shorter-term stuff has probably got a bit more of a discretionary element to it. And so that -- in that discretionary area, the bit of caution which is still out there, the bit of uncertainty that's -- whether it's coming from Europe or high unemployment, whatever, that probably is having a bit more impact on the short term than the long term.

[Operator:]

And your next question comes from the line of Chris Agnew from MKM Partners.

[Christopher Agnew:]

Question on China. You called out, I believe, a low end of 2% to 4% growth. And given the government transition and easier comps in the second half, I guess I'm a little bit surprised. So 2-part question, if I may. First, maybe an update on your thoughts on the government transition in general. And then second, more -- and a little bit more specifically because we're hearing the government are encouraging officials to be low key and more austere. Any sense if this is temporary phenomena and more of a structural and permanent change?

[Arne M. Sorenson:]

Yes. So China continues to be a favored market of ours. We think the long-term prospects for China are fabulous, and maybe an indication of that is we've got as many hotels and many hotel rooms under construction today in our development pipeline for China as we have already opened. And I think we signed 10 full-service hotels in China in the first quarter alone. And we see, particularly on these secondary cities, a clear need and a clear commitment to see that they're developed in a way that allows them to grow and be as compelling places for people to live as the Shanghais and Beijings of the world, and all that should be really helpful to us long term. I think in the short term, we've got 2 things going on. One is the transition of government and the government's focus on some continued austerity around government spending, particularly. And that is continuing and has continued now long enough after the announcement of the government transition that I think our expectations would be it'll be sticky and it'll stick around for a while. The other thing that's happening is we've got easier and easier comparisons as the year goes along. And I won't remember this exactly off the top of my head, but I think first quarter of '12, REVPAR growth in China was about 10%, 10% or 11%, something like that. And by the fourth quarter, we were in the 3% or 4% range. And it was essentially a straight line down. So the comparisons for the second quarter will still be reasonably tough. By the time we get to the fourth quarter, it will be meaningfully easier certainly than in Q1. And then, of course, you've got other little issues around the edge, little -- I shouldn't say little because that probably minimizes them more than they should be. But obviously, in January, we had lots of global press about pollution in Beijing, and Beijing was meaningfully weaker than Shanghai was. I think the pollution was a piece of that, and I think the focus of government on Beijing and its austerity was probably a piece of that. We're watching carefully to see what happens with the bird flu stories and whether that has an impact. There's thus far a few anecdotes, but we don't really think it's showing up in REVPAR numbers in a material way. But we'll watch all that. I think still long term, the story is a really exciting one for China.

[Operator:]

And your next question comes from the line of Joshua Attie from Citi.

[Joshua Attie:]

Yes, of the owned and leased profits of $36 million in the quarter, almost 80% of that, it seemed, was credit card, residential branding, and termination income. And I know there's a lot of variability quarter-to-quarter with some of those, but can you give us a sense for what the components of that owned and leased profit line item should be on a longer term or on an annual basis? I guess how much of it is recurring leased hotel profits and credit card fees versus more lumpy items because the quality is obviously different?

[Carl T. Berquist:]

Sure. If you look at that line -- and I think we gave some detail in our 10-K or 10-Q. I don't have the numbers right here in front of me, but probably the credit card branding fees are pretty stable year in and year out, growing based on volume of that but not real choppy, whereas the residential branding fees, we get paid those fees on the closing of the residential, primarily The Ritz-Carlton-branded residential. So that is choppy and will -- depending on timing of when the residential closed and how many are in the pipeline, so to speak, that will continue to be choppy. I think this quarter and probably for the rest of the year, a lot of our leased hotels are located in Europe. And with Europe's current economic situation, our leased profits that are coming out of there are pretty anemic right now. And then on top of that, you have London, as I talked about, where you have very tough comps. And then on top of that, we have a couple of leased hotels, one in Europe, one in the Caribbean, that are very big hotels, but they're going to have significant renovations. So that's going to make it a little choppy as well as we go through the rest of this year.

[Arne M. Sorenson:]

I think one thing to keep in mind on the owned-leased portfolio of hotels is the largest number of hotels there are leased hotels. And so you get -- depending on coverage of the lease payments, you can get sort of 0 net profit contribution or you can go up, obviously, meaningfully from that. So you've got...

[Carl T. Berquist:]

Highly leveraged.

[Arne M. Sorenson:]

You -- it's pretty highly leveraged numbers, yes.

[Joshua Attie:]

And the $3 million termination fee, I know it's small in the context of the company, but was that a hotel that was important to the system? Or can you maybe just give us some detail on what that was?

[Carl T. Berquist:]

Actually, it was -- there are 2 different ones in there. So it's not that big. And the bigger part of the 2 was a second payment, a continued payment we got from something that closed in a prior year.

[Operator:]

And your next question comes from the line of Felicia Hendrix with Barclays.

[Felicia R. Hendrix:]

I have a question on your incentive fees, which were very nice in the quarter. Not to get ahead of ourselves here, but if we look back historically -- and this is going to be a number of years back, but last time you were in kind of that kind of high 20s range and started to ramp. Within a few quarters, you ramped to 30 and then 40 and then on. I know we're in a different environment now -- and I'm talking percentages. I know we're in a totally different environment now than we were then, but can you just help us think through maybe, particularly in North America, on the incentive fee business side of things where owners are in terms of their hurdles?

[Carl T. Berquist:]

Sure. Well, good news was that we were up on incentive fees and came from North America full-service hotels. When we look where it's at, with New York with -- resorts did extremely well. Remember in the first quarter, the resorts had 2 holidays. They had the year end as well as Easter. So we benefited from that. I think that what we're going to see is it's probably going to be choppy as we go through the year because the growth isn't as accelerated, as Arne mentioned earlier. However, we are getting a lot of the growth in REVPAR from rate, and that's helping margins at the hotel. You saw in the first quarter margin improved 170 basis points. So I don't think we're going to see the acceleration that you're referring to that we saw in the past, but I think it'll continue to grow. Keep in mind when you're looking at the percentages of hotels you still have all those select-service properties that we talked about in the past that dilute that number down a little bit.

[Felicia R. Hendrix:]

Arne, I believe it was -- yes, it was this week. This week has been a blur. A competitor announced the cloud-based property and rate management system for its franchise-based and other independent brands and potentially larger chains. Just -- I'm sure you noticed that announcement. And given your large franchise network, I'm just wondering if this announcement interested you as a company. Is this a technology you would be interested in replicating? And how do you view this announcement competitively?

[Arne M. Sorenson:]

You're just trying to prove how little I know about technology, Felicia, aren't you?

[Felicia R. Hendrix:]

Well, someone there must.

[Arne M. Sorenson:]

Yes. We obviously have been paying attention to this flurry of earnings releases from our industry this week and haven't looked at it in detail. I'm not sure that what they're doing has any particular application in our system. We do have obviously a number of systems that support our properties, including the property management system, which we are working and are well advanced with our owners and franchisees on moving forward with the next evolution of the property management system that we have in place. And of course, we've got reservations platforms and other things, which become much more proprietary the more you get close to the actual booking of the rooms. So we'll keep our ears open, but I don't think that it's a new, relevant fact for us.

[Felicia R. Hendrix:]

And would new franchisees to the Marriott system be allowed to have the choice to use your systems versus someone else's?

[Arne M. Sorenson:]

In most significant -- with respect to most significant systems, the answer is no.

[Operator:]

And your next question comes from the line of Shaun Kelley with Bank of America.

[Shaun C. Kelley:]

Just maybe I'll start with a follow-up on the question on incentive fees. So Carl, could you just give us a sense of is -- like, has your outlook for that at all changed because the language, at least in the release, was a little bit more optimistic? So is that a little bit better in terms of full year than you probably had thought at the beginning of the year?

[Carl T. Berquist:]

We're thinking -- well, I -- we're probably thinking mid-teens growth for the full year. It will be up in the U.S. We'll get more. Europe will be down a little bit, we think. So when everything all averages out, we're thinking probably mid-teens growth this year.

[Shaun C. Kelley:]

Okay. It's not really dramatically different from probably where you were last quarter then, right?

[Carl T. Berquist:]

More like fine tuning.

[Shaun C. Kelley:]

Got it. And then the second question. Arne, in the prepared remarks, I didn't catch much on EDITION, but I know you're getting closer to opening at least one of the owned hotels. Could you talk a little bit about the opportunity to, I guess, push forward that brand and then secondarily to maybe recycle a little capital out of those hotels? And is that in the kind of the outlook for the $800 million to $1 billion of cash flow for this year?

[Arne M. Sorenson:]

Yes, I mentioned a few minutes ago how the nearing of opening of these 3 hotels that we're doing on balance sheet and the commitment that we've made through those 3 hotels has impacted the development pipeline. And I think there's lots of good stuff happening for EDITION globally. These 3 hotels are leading it, but there are good things that are following behind it. So all of that we're encouraged by. I think as we get closer to opening of London, we get to a place where we can start to talk more specifically about the prospects for recycling. We obviously intend to sell all 3 of these assets for internal planning purposes and even more so for external expectations. We don't think it's wise to expect that there will be recycling of that capital until after they open because before they open, you have not just the ramp risk, but you've got construction risk and other things which make a sale practically much more difficult. But the 3 that we've got are in great cities with tremendous momentum. You look at the capital, globally interested in owning fee real estate in London, and that's really comforting to us. You look at the way Miami is growing as a clear capital not only of a part of the region of the United States but really much of Latin America, and we feel great about that. And New York is, in many respects, a lot like London. It's a global safe haven for real estate, and what we've got there is an iconic building. So we feel good about the likelihood of recycling all of those but wouldn't expect -- wouldn't want you to expect that necessarily, we will be getting meaningful amounts of that capital back in, in 2013.

[Operator:]

And your next question comes from the line of Patrick Scholes with SunTrust.

[Charles Patrick Scholes:]

Thank you for the good color on group playing out over the next couple of quarters. I'm curious how you see business travel demand playing out in the next couple of months. Part of the reason I ask is I hear from my hotel contacts that while May looks decent, July looks very strong, June looks a bit softer now, and we're trying to figure out why this may be. I'm wondering if that's what you're seeing as well.

[Arne M. Sorenson:]

Well, you’re trying to read tea leaves, I think. I mean, business transient travel books days on average before it occurs. And so we've got -- of course, as compulsive as we are, we have transient and group revenue forecasts not just for every month but potentially for every week and every month. And what I look at shows June to be modestly lighter than May, but you're talking about being within essentially a point of each other, and our accuracy is much less than that when we're talking about being that far out. So I think the best news on transient is the strength that we had in the first quarter, and I think it shows that, that's a powerful indication of the breadth and strength of the economic recovery that we've talked about before.

[Operator:]

And your next question comes from the line of Harry Curtis with Nomura.

[Harry C. Curtis:]

Arne, as you speak to your customers, do you get any sense that -- a sense top line growth just generally in the country has slowed that they're wanting to just get more of their people on the road to drive their top line? Is that a catalyst behind the additional corporate demand?

[Arne M. Sorenson:]

I think generally, the strength in transient is proof of that. In other words, our corporate customers are back on the road, and they're doing business. But I don't think -- maybe this is a little bit negative sounding. I don't think in the last quarter or 2 they have said, materially different way, okay, we want to ramp up dramatically the spending that you're doing. I think instead, they are continuing with something that they've been growing on the last few years. And at the same time, the -- well, we put comments about the short-term group bookings, I think, are the bit of a cautionary sign that they're going to be mindful about the spending. So they're not cutting, they are growing, but they're not growing with a sort of reckless abandon.

[Harry C. Curtis:]

And a follow-up for Carl. Carl, after you back out the maintenance CapEx, your investment spending is estimated in the range of $500 million to $700 million. If you could give us some detail of what that entails. It always sort of falls into the same buckets. And if you could give us a sense of more precisely where is that money going.

[Carl T. Berquist:]

Well, a chunk of it, $100 million or $200 million, about that, is going on the 3 EDITIONS that we're building. They're well on the way. It might even be higher than that this year. We spent about $85 million on investing activities during the first quarter. As I look at it, a big chunk of that was the construction costs. We're looking out and doing some loans this year. Not really identified yet, but we just see the cap stack and deals we're talking about might have some loans. And then the rest is probably -- you also have a big chunk of key money that just because of the volume of new deals that we're signing, you're getting an increase in the amount of key money commitments that we're making.

[Operator:]

And your next question comes from the line of Thomas Allen with Morgan Stanley.

[Thomas Allen:]

Just on MOXY. I know you said you were going to outline some new brands in the months to come. But as you already talked -- or you already announced this one, can you just give us some thoughts around it? How big of a market opportunity do you see for it? And what are you going to do differently than other brands that are already in that segment of the market?

[Arne M. Sorenson:]

Yes. The economy segment in Europe, we think, is 2 million rooms, about 40% of the total European lodging market. Prior to the announcement of MOXY, we did not have an entrant in that space. We announced it with, we think, one of the best partners or sets of partners we could have, both an operating partner we've done a number of deals with in the past and Inter IKEA, which is essentially the real estate arm affiliated but not directly tied to the IKEA retail business. And they come at it with incredible passion for it and, in some respects -- many respects, led us into this space. And so we come with a partner that we think has the prospect to get us not just the first 50 of these hotels but maybe a few multiples of that. And so we'll come out immediately with, I think, with good strength. There are interesting things which are happening on the margins in the economy space in Europe. But much of the economy business in Europe is made up of hotels that find a way to tell you every place you turn that you're in an economy product. In other words, they're not great experiences. And what we've got with hotel MOXY and the design that we've come up with, I think, will be very different than that. It will offer great value, but it will offer it in a way that really doesn't beat you up with a sense that you've got less. So we're really excited about it. And we're excited to be -- have an entrant in what is probably the biggest segment of the European lodging business.

[Operator:]

And your next question comes from the line of Joseph Greff with JPMorgan.

[Joseph Greff:]

Carl, you mentioned that you'd expect within your guidance is embedded a mid-teens growth rate and incentive management fees versus last year. When you look at the North American side of things, how does that growth rate look?

[Carl T. Berquist:]

I don't have it by continent right here in front of me, Joe, but I would say, as I mentioned earlier, we think North America will overperform as we continue to grow and REVPAR grows, especially from rate. But that will be somewhat offset by a little bit of the REVPAR slowdown in Asia as well as Europe. So I don't have the percentages in front of me, I apologize, but I would say that it all balances out to the 15. But we would expect North America to be the stronger of the continents out there.

[Joseph Greff:]

Great. And then of the $500 million to $700 million of nonmaintenance CapEx investment spending, how much of that has been identified and committed to at this point?

[Carl T. Berquist:]

Well, I would say most of it has at this point. It hasn't been necessarily committed, but it's been identified.

[Operator:]

And your next question comes from the line of David Loeb with Baird.

[David Loeb:]

Most of my questions were answered, but I want to follow up on one that Harry asked. Carl, you talked a little bit about key money and loans. Can you just talk a little more broadly about competitive trends and development financing, what you have to do to incent owners to either convert or build your brands, both in the U.S. and overseas?

[Carl T. Berquist:]

Sure. I think as you look around the world, and we've talked about this in the past, in Asia, the Middle East, we really don't need to invest a lot of money, or periodically we will but relative to things. As you get into the U.S. and the European markets, there the competitive environment is such that we do make investments in the contracts. On any one contract, it's not a material number. But given the volume that we're doing is where you see it growing. I think in larger deals, whether it's big hotels or what have you, then we may help with the cap stack or put in a guarantee to be competitive. But in each of those cases, we look at that relative to the return to Marriott and our investment, making sure that, if it's in the case of a loan, that we can recycle it, get a good return. If it's key money, we obviously look at it relative to the contract we're getting. So a good example is the opportunistic thing we did with Gaylord. We put in what's equivalent of a couple of hundred million dollars of key money that's getting amortized. But clearly, that -- those contracts and that brand that we're getting far outweigh -- the value of those far outweigh that investment. So that's kind of the way we look at it. I don't think the trends have changed. Haven't seen a situation where we have to put more and more money in. I think it's more about what comes on to the market and then the competitive nature of it.

[Arne M. Sorenson:]

Yes, it is still very much the minority deal that gets key money.

[Carl T. Berquist:]

Yes.

[Arne M. Sorenson:]

So the bulk of our growth in the United States in terms of number of new rooms or number of new hotels would be still the limited-service franchise brands. And by and large, those are not brands that we need to incentivize in any way. We have done some credit enhancing for senior debt for a few new-build projects. They tend to be urban, they tend to be managed.

[Carl T. Berquist:]

Bigger.

[Arne M. Sorenson:]

And they tend to be bigger limited-service hotels. But the bulk of those, there's no financial participation from Marriott. And in truth, there's -- we're talking about a handful of full-service hotels in the United States, not more than that. Then certainly still, I would think what, 60% or 70% or 80% of the hotels come in with no financial participation from Marriott whatsoever.

[David Loeb:]

Great. And on the change to the calendar year, I just want to say thank you. I know it was expensive and complicated and a lot of work for you guys and bumpy for all of us just in the transition period, but I think in the long run well worthwhile.

[Carl T. Berquist:]

Much appreciated. Our finance team did a great job, and they appreciate that comment.

[Operator:]

And your next question comes from the line of Bob LaFleur with Cantor.

[Robert A. LaFleur:]

A quick question on the balance sheet and a related cash flow question. Debt was up a little bit in the quarter, but I think you had a bond come due. How did you finance the higher debt levels? Was a commercial paper on the line? And then the second sort of semi-related question is could you just walk us through the rough math again and refresh our memories on how you get to the $800 million to $1 billion in available cash to send back to shareholders with the guidance you've given us for the operating numbers?

[Carl T. Berquist:]

Sure. On the debt, we had a maturity in the first quarter, and that was paid off. We had, in effect, prefunded that. If you remember last year, late last year, we did a couple of bond offerings in 2012, one of which was really just taking advantage of low interest rates and prefunding the maturity that was in February. The debt you see on the balance sheet is primarily commercial paper. We're just using commercial paper. The rates are extremely favorable right now, and so we continue to finance the business with that commercial paper.

[Robert A. LaFleur:]

So the credit line is still about 0 balance then?

[Carl T. Berquist:]

Yes. Yes, you're talking about our revolver?

[Robert A. LaFleur:]

Yes.

[Carl T. Berquist:]

Yes, we haven't drawn on the revolver. We use that just as a backup for the commercial paper. So our revolver is $1,750,000,000. And as of right now, there's nothing outstanding on it. When you look at reconciliation, I'm going to go real high level here, but you can -- we can probably get you more after we file the Q here today. We're looking at net income in a range of $600 million to $650 million. We talked about the investment spending of $600 million to $800 million. We'll probably recycle about $100 million during the year of various things, whether they be note collections or sell some assets we have. Our depreciation runs around $150 million to $160 million. We'll generate about $100 million in cash tax savings, and then we'll get about another $100 million from working capital benefits, some changes in Marriott Rewards. And then because of the growth in EBITDA, we'll -- our borrowing capacity will go up, and that will generate anywhere from $250 million to $350 million. And then a couple of other things. We'll pay some dividends, issue some stock on the employee compensation plan. And if my math is right and you go through all those things, you'll get somewhere around $600 million to $800 million.

[Operator:]

And your next question comes from the line of Jeffrey Donnelly with Wells Fargo.

[Jeffrey J. Donnelly:]

Arne, we all hear about supply growth at historically low levels here in the U.S., at least on a national level. But it feels like we're seeing signs of new construction or conversions to hotels in most cities. Do you think that purely urban supply growth is returning to its historical pace and it's really the, let's say, the suburban markets that are suffering in regards to new construction?

[Arne M. Sorenson:]

Your question suggests that we're seeing higher supply growth in the cities and less in the suburbs?

[Jeffrey J. Donnelly:]

Yes. Or just -- or have the cities maybe returned to a more normalized pace, what they're typically used to delivering?

[Arne M. Sorenson:]

No, I don't think so. I mean, I was -- I went back and fiddled with our pipeline. You've got Smith Travel and Lodging Econometrics and a few others that look -- try and look at industry data, which we obviously take a look at, but looking at our own data as -- what we understand best. So we have 22,000 more rooms. Little -- a little bit more than that in our pipeline now than we did at the end of the first quarter of '12. And I sort of quickly was looking for what was that -- what are the major drivers of that. And basically, I get about 6 -- about 2/3 of it is growth outside the United States. Of the growth in the United States, 80% of it is limited-service product. And that would be mostly suburban and/or secondary/tertiary cities, not urban core. The full-service rooms that are sort of the add, if you will, to our pipeline in the U.S. is a grand total of about 1,500 rooms, and 2/3 of that is one urban convention center hotel. So there's essentially, other than a few of these convention center hotels, which depend on cities wanting them to happen and providing some financial support, we still see essentially 0 full-service development under way. And on the limited-service side, I think it is still very much a suburban phenomenon. I do think it's very much a low supply -- and that's our pipeline, of course. That's not openings. So that, in a sense, gives you a good picture of what we expect to open in the next 12 to 18 months, something like that.

[Jeffrey J. Donnelly:]

That's great color. And I guess maybe as a follow-up because you mentioned the convention center hotels. It feels like municipalities are getting a little more aggressive with incentives to create jobs and broaden their own tax base. Have you guys seen more municipalities reaching out to you guys? And now that you've had a little time with the Gaylord brand, do you think there's an opportunity to add more units around the country?

[Arne M. Sorenson:]

Our teams are probably in discussions -- are about half a dozen maybe convention center hotels that have some level of city or regional support. I almost certainly would guess that, that is more than would have been the case in 2009 when we were in the depths of the recession but probably not quantitatively very different from a normal -- sort of normal environment. There is some regularity in cities looking to either have a convention center for the first time or more likely say, "You know what? We've had this convention center for 15 or 20 years and we're no longer competitive. And therefore, we've got to figure out how to put us back on the rotation for the big association and group meetings." And so we're seeing some of that. Nashville will open its brand-new convention center here momentarily. It's a big box, beautiful building. And they will end up with a few hotels that open downtown Nashville that relate to that convention center. But that'd be one example. And again, I don't think it's materially different than what we'd see in normal economic times.

[Operator:]

And your next question comes from the line of Ian Rennardson with Jefferies.

[Ian Rennardson:]

Going back to the share buyback, do you have a share price at which you would not be buying shares back or are you ambivalent to your share price in this sense?

[Carl T. Berquist:]

Obviously, we take into consideration a lot of variables, and we do look at what we believe to be the intrinsic value of the company as we look at what we're buying and at what price we're buying. So a lot goes into that. But one of the big things is returning value to shareholders as well.

[Operator:]

And your next question comes from the line of Bill Crow with Raymond James.

[William A. Crow:]

Arne, instead of focusing on REVPAR, let's look at expenses and looking out to 2014 where you have ObamaCare, you've got higher real estate taxes, labor costs on the rise, theoretically at least a full year of higher property taxes -- property insurance. Is that -- how big a threat as you think about that for next year? And many of those costs are borne by the owners, but that does impact your ability to get the incentive management fees. So just kind of give us your thought process. I mean, I know there's a lot of questions out there on these subjects, but what is your thought from an expense perspective next year?

[Arne M. Sorenson:]

Well, I love that you asked, Bill. I mean, we delivered 160, 170 basis points in margins in the U.S. in Q1, 170. Well, one cautionary comment there, that's a hard number to translate from our prior 3 -- 3 of '13 period, first quarter in '12 to a 3 months of -- 12-month quarter in '13. But we don't think it's far off of what the state-to-state margin improvement is. And that is kudos to our operating team that are focused on essentially all elements of the P&L and making sure that we're doing as well as we can to drive through efficiencies in -- above-property and on-property expenses. When you look into 2014, certainly ObamaCare is the biggest new potential wrinkle in the cost profile. There is still a lot of work to be done before we'll have real clarity about what we think the costs are going to be. Our estimates today for the managed portfolio in the United States is about $60 million to $100 million. And that would be oh, I don't know, maybe about 0.5 point, so a 50-basis-point impact on margins. These are really rough numbers, though, Bill, so be careful about that. And obviously, these are system costs that will ultimately be borne by the hotel. We will pick up a share of that through incentive fees for the managed portfolio. We don't know what the number would be for the franchise portfolio, but in terms of number of rooms, the franchise portfolio is about the same as the managed portfolio in the United States. So that -- the numbers could be around the same order of magnitude. And we're just going to do everything we can to watch that and manage it. I suspect that it will not all hit in '14, that, one way or another, we'll see that some of this gets gradually implemented, and it'll probably more like a 2-year rolling impact than a 1-year rolling impact. And we'll have to see what happens with underlying medical cost growth during the same period of time because obviously, we have been seeing certainly above-inflation growth in medical costs for many, many years. And if you could see a few points of that curve bend, then the net impact would be less significant than that $60 million to $100 million. I'm not sure that...

[William A. Crow:]

If you've got...

[Arne M. Sorenson:]

Oh, go ahead.

[William A. Crow:]

Sorry, go ahead.

[Arne M. Sorenson:]

No, go ahead, Bill.

[William A. Crow:]

I was just wondering, does your gut tell you that the pace of operating expense increase will accelerate in '14 so we'll have to do a little better top line growth or rely more heavily on rate growth to offset that? Is that a fair way of thinking about it?

[Arne M. Sorenson:]

Yes, maybe modestly. I mean, with each passing year of the recovery, you end up with a greater risk that you're going to see some pressure on not just medical costs but on wages. And personally, I think we're more likely to see inflation go up than vice versa and that we'll have some modest impact. On the other hand, with each passing year, more of the REVPAR growth comes from rate. And obviously, REVPAR coming through rate is better for margins than REVPAR coming through occupancy. And I think it's way too early to be giving guidance for '14 and '15, but I think our expectations would be that we will, net-net, see margin growth above 100 basis points in each of those years, hopefully well above.

[William A. Crow:]

One final question.

[Arne M. Sorenson:]

Go ahead.

[William A. Crow:]

One final question. How many hotels that were paying incentive management fees last year are not paying this year?

[Arne M. Sorenson:]

You're just trying to stump us. We'll have to check on that…

[Laura E. Paugh:]

I'll -- we'll check it and I'll chat with you offline.

[William A. Crow:]

Yes. I assume it would be mostly European based, but it's just...

[Arne M. Sorenson:]

I don't think it's probably very many.

[Laura E. Paugh:]

I don't think there's very many.

[Arne M. Sorenson:]

Certainly, if you focus on the U.S., I suspect it would be pretty unusual...

[Laura E. Paugh:]

Yes, it would be an unusual situation.

[Carl T. Berquist:]

Maybe it went into renovations or something.

[Laura E. Paugh:]

Yes.

[Arne M. Sorenson:]

Yes.

[Carl T. Berquist:]

It would be the odd man out.

[Operator:]

And your final question comes from the line of Ian Weissman with ISI Group.

[Ian C. Weissman:]

There's a lot of focus, when people talk about group business, the focus on the gateway cities, coastal cities. Just given your outsized presence in between the coasts and maybe even just secondary markets, can you talk about the trends that you're seeing and the improvement potentially in those markets relative to gateway cities?

[Arne M. Sorenson:]

It's interesting. Well, I'll give you a couple of things. I'm not sure if it'll answer your answer your question exactly, Ian, or not. But if you look at Smith Travel for Q1, top 25 markets in the U.S. posted REVPAR growth about 3 points higher than all other markets in the United States. That's a reasonably good gap between -- and obviously, top 25 are not all coastal markets. Chicago would certainly be in there. I suspect Houston and Dallas are both in there. Denver is probably in there. But it probably -- I have to go check that list. It probably would not have included Indianapolis, as an example, or some other meaningful Midwestern cities. And so you get that gap, and you could say, well what's driving that. And I think you've got a few things. I think one is economic growth in the West -- on the West Coast is probably strongest. REVPAR for us in the West is probably -- as a region as a whole, has been very steady and strong. And so the economic growth is probably a little bit stronger. B, I suspect that those coastal markets are disproportionately dependent on transient business, not group business. And transient is stronger. I mean, you can hear our 8% transient growth in Q1 compared to about a 1% group growth in Q1. That's a pretty big gap between those 2. And at the same time, I think you look at markets like Nashville and Indianapolis, 2 that I've mentioned, those cities are doing well, and I think they're investing. Indianapolis has done a really fabulous job investing in the infrastructure downtown. They have created a great place for meetings, and I think the volume that they're getting because of that is quite strong. Nashville, the demand is good. Our team in Nashville is really excited about the future. And so I think there is every reason to believe that where the infrastructure is developed right, these cities can compete and can compete well. Does that answer your question, Ian?

[Ian C. Weissman:]

Okay, that [indiscernible]. Yes, it does.

[Arne M. Sorenson:]

Okay. All right, thank you all very much. Bridget, you have anybody else in the queue? You said last question.

[Operator:]

And there are no questions.

[Arne M. Sorenson:]

All right. We appreciate all of your time and your interest in Marriott. I look forward to welcoming you into our hotels soon.

[Carl T. Berquist:]

Bye-bye.

[Operator:]

Thank you. This does conclude today's conference call. You may now disconnect.