Marriott International, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good morning. My name is Christy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Marriott International Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the call over to Carl Berquist, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

[Carl T. Berquist:]

Thanks, Christy. Good morning, everyone. Welcome to our third quarter 2013 earnings conference call. Joining me today are Arne Sorenson, President and Chief Executive 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, October 31, 2013, and will not be updated as actual events unfold. You can find the reconciliation of non-GAAP financial measures referred to in our remarks on our website at www.marriott.com/investor. We were pleased with our third quarter results. Diluted earnings per share totaled $0.52, above our guidance of $0.42 to $0.46. Some of the improvement compared to our expectations was due to timing, including $0.01 we picked up in fees, $0.02 for termination and branding fees on the owned, leased and other line and $0.01 improvement in G&A. Not due the timing, we had $0.01 of outperformance due to strong results at some of our owned and leased hotels and a favorable $0.03 due to true-ups of our foreign tax provisions and a lower-than-expected tax rate. Third quarter worldwide system-wide REVPAR was strong, rising nearly 5% in the third quarter on a constant dollar basis. For company-operated Marriott Hotels in North America, transient REVPAR increased 7%, with group REVPAR rising 3%. Transient business benefited from improving mix as high-rated retail business was very strong, and our group business was better than expected due to strong attendance at group events. Across our system in North America, leisure demand was extraordinary. Third quarter REVPAR from leisure guests increased 9% for the Marriott brand, 10% for Courtyard and 12% for Ritz-Carlton. In the quarter, we saw double-digit REVPAR improvement in San Francisco, Houston, Miami and Atlanta. Strong overall demand not only drove occupancies higher, it also enabled us to replace low-rated segments such as government travelers with higher-rated customers in many markets. Only in Washington, D.C. did we see a meaningful impact from weak government demand. REVPAR in Downtown D.C. declined about 0.5%, while REVPAR at our hotels across the Greater Washington market declined 6%. Given our significant Washington distribution, the Greater D.C. market alone reduced our North American system-wide REVPAR by about 70 basis points in the quarter. Outside North America, including our luxury brands, third quarter system-wide constant dollar REVPAR rose about 3%. In Europe, strong performance in Eastern Europe offset declines in London, enabling us to raise REVPAR 2%. Excluding the London market and the impact of last year's Olympics, European REVPAR increased 4%. Unrest in Egypt reduced REVPAR in the Middle East by 3%. In the Caribbean and Latin America region, favorable leisure demand drove REVPAR up 7% as greater numbers of groups and leisure travelers enjoyed the resorts in Cancún. And in the Asia Pacific region, strong results in Indonesia, Thailand and Japan drove REVPAR up nearly 5%. Excluding Greater China, performance was even stronger, with constant dollar REVPAR up 8%. Total fee revenue was $378 million in the quarter compared to $319 million in the year-ago quarter. We estimate about $37 million of the year-over-year fee revenue improvement was associated with the longer fiscal quarter. Incentive fees were strong in Boston and New York, but were flattish in many international markets and retreated a bit in D.C. You may recall that we booked $7 million in deferred base fees in the year-ago quarter associated with the sale of our Courtyard joint venture. Nearly 25% of our full-service managed hotels paid incentive fees in the quarter, compared to 19% in the prior year. Worldwide, nearly 1/3 of managed hotels paid incentive fees in the quarter, compared to 28% in the third quarter of '12. Worldwide house profit margins at company-operated hotels increased 110 basis points as room rates moved higher. These margins are not adjusted for the shifting fiscal calendar, so they're not comparable to our calendar quarter REVPAR stats, but we were pleased with the performance. We expect roughly 100 basis points of margin improvement for the full year. Turning back to the P&L, owned, leased and other revenue net of expenses totaled $34 million in the quarter, compared to $26 million in the prior year. We estimate the longer fiscal quarter increased results by approximately $2 million. We enjoyed better results at our leased hotels in the U.S. and higher termination fees. Somewhat offsetting this performance, profits from our leased hotel in London declined roughly $3 million due to the tough comparisons to last year's Olympics and preopening costs, which totaled about $2 million, largely associated with our new EDITION hotel. General and administrative expenses totaled $167 million in the third quarter compared to $132 million in the prior year. The longer fiscal quarter added an estimated $12 million of higher costs, and routine administrative costs increased about $8 million. Operating income totaled $245 million in the third quarter. And our adjusted operating profit margin, excluding the impact of reimbursed costs, was 41%. Unit growth was strong in the quarter. We opened nearly 6,600 rooms and deleted about 2,200 rooms. Nearly 40% of those room openings were conversions from other brands. We are on pace to grow our system by nearly 30,000 rooms in 2013, and we expect to delete about 10,000 rooms. This quarter we've modified how we report our development pipeline as a result of the change in an approach at Smith Travel. You can see more detail about this change on Page A-4 of the press release. Essentially, under our new pipeline definition, we are only reporting signed and binding contracts, including signed contracts for conversion. We are no longer including accrued but unsigned projects in our pipeline and are no longer including a hedge. In the third quarter, our pipeline increased to over 144,000 rooms, with over half of the rooms under construction or awaiting conversion. We applaud Smith Travel for encouraging this approach to ensure comparability and consistency of information cross the industry. We'll be surprised if everyone in the industry doesn't join in this effort to improve the integrity of your and Smith Travel industry's supply forecast. While we aren't including approved deals in the pipeline, to help you better understand the deals on the horizon, we will still provide the number of rooms that have successfully gone through our approval process but are not yet under contract. While not yet signed, many of these projects are well underway, have been approved after an evaluation of the local market and reached an agreement in principle with the proposed owner or operator. The number of approved rooms had doubled in the third quarter, from roughly 15,000 rooms last quarter to more than 31,000 rooms this quarter. We expect to enter into contracts on many of these rooms over the next 3 to 6 months. Turning to the fourth quarter. We expect North America REVPAR to increase 4.5% to 5.5%. Excluding the impact of Washington, D.C. government shutdown, we believe our North America REVPAR would be about 100 basis points higher in the fourth quarter. North America group revenue pace for the Marriott brand for the fourth quarter is up nearly 7%, due to a strong short-term booking. The timing of holidays in the fourth quarter is favorable with Hanukkah and Thanksgiving Day falling in the same low-travel week. Outside the U.S., we expect fourth quarter constant dollar REVPAR for our entire brand portfolio to increase 1% to 2%. In the Asia Pacific region, we expect low single-digit REVPAR growth despite China government austerity and new supply. In Europe, REVPAR growth should improve as comparisons get easier in the U.K. The Caribbean and Latin America should see continued strong leisure demand and increased REVPAR at the middle -- mid single-digit rate, while constant dollar REVPAR in the Middle East will likely remain challenged. For full year '13, our new forecast reflects some fine-tuning of our REVPAR and G&A outline. On the incentive fee line, we expect very strong performance at our hotels in New York, Boston, San Antonio and New Orleans. And we expect more hotels globally will be paying incentive fees during the year. Despite the October government shutdown and modest REVPAR growth in many of the international markets, unit growth and higher REVPAR should increase our incentive fees by about 10% for the full year 2013. We expect earnings per share to total $0.47 to $0.50 for the fourth quarter and $1.98 to $2.01 for the full year. Excluding the gain on the sale of our Courtyard joint venture last year, we expect earnings per share to increase 21% to 23% for 2013 and EBITDA to total nearly $1.2 billion. To talk more about our 2014 outlook, let me turn it over to Arne.

[Arne M. Sorenson:]

Thanks, Carl. Good morning to everyone. We're pleased with our strong third quarter performance and look forward to 2014. Our budget process is just beginning, so we aren't prepared to offer EPS guidance yet, but there is much we do know. Occupancy rates at our hotels are nearly at record levels in North America, well ahead of industry averages. In the third quarter, we aggressively yielded out low-rated business and saw gains in both REVPAR and room rate share in the U.S. for our largest brands

[Operator:]

[Operator Instructions] And your first question comes from Jeff Donnelly of Wells Fargo.

[Jeffrey J. Donnelly:]

Arne, since you just mentioned it, as it relates to the sale of the EDITION hotels, can you talk about how the valuation was determined for those properties? And was that a function of construction costs, or was it based on a multiple of forecast earnings performance?

[Arne M. Sorenson:]

Well, obviously, the buyer had to get comfortable that the price was fair, and so they certainly looked at forecasted returns on the assets. But fundamentally, it was driven by our estimated cost of completion all in, including soft cost and hard cost for the 3 hotels.

[Jeffrey J. Donnelly:]

Is there any sort of clawback in the purchase price if performance fell short or...

[Arne M. Sorenson:]

Essentially, no. I mean, the -- it's a long-term management contract. Our risk is really fundamentally about whether it costs us more or less to get these hotels completed and opened than we estimated. We bear the construction risk around cost, which in some respects is purely about cost and in some respects is about timing and how long that capital is tied up in the projects. But that's our fundamental risk. There are, of course, performance termination provisions and others in the contracts, but they're reasonably standard.

[Operator:]

Your next question comes from Harry Curtis of Nomura.

[Harry C. Curtis:]

You probably are going to guess that this question is coming. Share repo, I was surprised that you only bought 3.2 million shares with the stock in the low 40s, given that your net debt is up only about $100 million since the end of last year and you've got proceeds coming from the sale of EDITION. So why less aggressive? Why not be a little bit more market -- sensitive to the market prices, I guess, what I'm asking.

[Carl T. Berquist:]

Yes, it's a good question, Harry. While -- as we look at share repurchase, we a lot of things into consideration. Our anticipated capital spending and, as Arne mentioned in his remarks, we've actually -- our estimate now is about, on the top end, about $100 million less than what we were expecting. As you look at the EDITION transaction, we are still only under an LOI right now, letter of intent. We're confident that we'll get this deal done, but it's not done yet. But hopefully, by the end of the year, we could get that signed, but it's not done yet. And then we looked at other transactions. As Arne mentioned, we bought the Charlotte Marriott hotel during the quarter. So we evaluated everything. And as we look out right now for the full year 2013, we're looking at returning about $1 billion to shareholders, which is a little higher if you think about the $800 million to $1 billion we talked about before in the form of dividends and share repurchase.

[Arne M. Sorenson:]

Harry, we've talked for years about targeting our debt to EBITDA at about 3x to 3.25x adjusted debt to adjusted EBITDA, taking into account lease exposure and guarantee exposure and the like. And that's about where we ended the third quarter, in that range. We may pine for the days when the stock was that cheap and we'll miss the opportunity to do it again, but we think to spend the money before we receive it and drive those leverage ratios higher than the target.

[Harry C. Curtis:]

Okay, understood. I just wanted to register the comment that the market has an opportunity to give, and I had hoped that you would take greater advantage of it, that's all.

[Arne M. Sorenson:]

Yes. Thank you for that.

[Operator:]

Your next question comes from Felicia Hendrix of Barclays.

[Felicia R. Hendrix:]

Arne, as you think about next year and you gave us some color on your REVPAR outlook for 2014, thank you for that. There is a potential that we have a similar government debacle in the first quarter, as we just had. So I'm wondering if that was contemplated in your outlook.

[Arne M. Sorenson:]

No, it's really not. I mean, you can hear we've got about 1 point of REVPAR impact estimated for the fourth quarter of '13. And in fairness, there's still some guess work on that. We would guess that October, hopefully, will contain most of the impact. But you had meaningful disruption particularly around government travel and travel which is loosely connected to government. So across from our offices here is the Marriott Suites. The GM told me very early in the government shutdown that NIH groups had canceled. These are folks obviously working on studying for cures for cancer and that sort of thing, so not the thing you think of immediately when you think about government shutdowns. We'll have to see how that builds. I am hopeful, but it's hard to be confident that we will avoid another government crisis in January or February. Obviously, if we had a government shutdown and the longer it lasts, the less good news there is in that. But that is really not factored into our numbers.

[Felicia R. Hendrix:]

Okay. And then just as a follow-up on your group outlook, I thought it was encouraging that you said that your -- in the quarter for the quarter bookings were strong in the quarter. Do you have any sense if that trend will continue? I know it's so short a term, so it's hard to have visibility. But maybe your sales people are telling you something encouraging.

[Arne M. Sorenson:]

Well, if you look back of the last 6 or 7 quarters, what we see is business booked in the quarter for future periods, up in all but a couple of those quarters. Qs 1 and 2 this year were down very modestly. So not significant, but they were down. And obviously, to be up 14% in Q3 is a positive inflection point. I think it looks more like the quarters we saw in 2012. And hopefully, it gets us back sort of to the trend line that ought to continue.

[Operator:]

Your next question comes from David Loeb of Baird.

[David Loeb:]

Arne, Carl, can you give us a little bit of an idea about the value of the condos at the Miami EDITION? And in all of these EDITION asset sales, is there any -- are any of the proceeds shared with Schrager, or is that surely on the licensing side?

[Arne M. Sorenson:]

The rough order of magnitude, the condos in Miami are about $100 million in estimated proceeds from buyers. We have about 60% of the square footage that is under contract to be sold already, including one which I think defines the largest residential sale in Miami ever. And the pricing has been about $3,000 a foot, so it's been very attractive to date. Having said that, I think when you -- when the dust all settles and we collect the proceeds from our buyer of the hotels and the proceeds from the residential, our best guess is we're going to essentially recoup our invested capital. And we're not looking at either the residential or hotel side as to drive meaningful booked gains.

[David Loeb:]

Okay. And on...

[Arne M. Sorenson:]

And the Schrager piece, by and large, Ian's involvement with us is as a fee earner, not as a capital investor in the hotels, and he will generally not be getting any percentage of capital return, if you will.

[Operator:]

Your next question comes from Ryan Meliker of MLV.

[Ryan Meliker:]

Just a quick question. In your guidance, you talked about the fact that you've got higher development costs in the fourth quarter to drive unit growth. I guess I'm looking at, if I look at the managed system, it looks like from a managed system standpoint, room counts have been declining I guess over the past 7 quarters or so. Looks like, excluding the Gaylord acquisition, you're down about 3,000 rooms. We know managed rooms generate more fees per room than franchised. So help me understand what's going on in the managed system. Are you being forced to spend more to either maintain contracts, to get new contracts than you have in the past? Are you losing more contracts than you have in the past? Are you pushing properties out that don't meet the standards? Just help me understand what's going on in the managed system. Obviously, franchised is going really well, but on...

[Arne M. Sorenson:]

So it's really a -- it's a tale of 2 worlds in some respects. I think the managed portfolio has been growing the least or maybe even declining in the United States for the longest period of time. And generally, outside the United States, the managed portfolio is and certainly will continue to grow. When you look in the United States, the fee levels are actually not that different. Franchise fees tend to be a higher percentage of rooms' revenues than management fees, at least for base management fees. And so when you look over time, the base and incentive fees are roughly equivalent to the franchise fees. But I think the biggest driver for this is -- I guess I'd identify 2 issues off the top of the -- on top of my head. But one would be that there is a fabulous development in the expertise and quality of our franchise partners, which has been a steady evolution over 20 years or so. They run excellent hotels. And I think as a consequence, there is -- has been an increasing share of capital interested in investing in hotel real estate in the United States, which prefers franchise to the managed formula. I think the second thing that we're seeing is, in the United States, as some of our hotels age, that we're seeing the ability to either we kick them out of our system. So in the quarter, we lost 2,200 hotels, I think?

[Carl T. Berquist:]

2,200 rooms.

[Arne M. Sorenson:]

2,200 rooms, excuse me. That would be a problem. We lost 2,200 rooms. I would say about 60%, 65% of those rooms left the system because of product quality. We really didn't want those rooms in the system. And because 20 years ago or 15 years ago or 25 years ago, whenever those hotels entered our system, we were much more predominantly managed. We are tending to lose, because of age and quality issues, more managed hotels than we're losing franchise hotels, which obviously has an impact in that number. And to some extent, to the extent those hotels can be saved, they often require new capital to come in, a new owner to come in and say, "We're going to substantially reinvent this hotel and bring it up to current standards." And again, because there's a lot of capital interested in the franchise model, we are seeing that often, those projects convert from managed to franchise. Net-net, that's all reasonably good news, because it means the capital is coming in, the hotel is getting reinvented. And it's representing the bands -- our brands really well, and we continue to earn essentially comparable fees what we've done in the past. And if they don't, we're culling the system of the weaker hotels, which obviously is in our interest to do.

[Ryan Meliker:]

So I think that makes a lot of sense. So just tell me, as we think out to 2014 and beyond and you've given some color on where your system is going to be growing, should we assume that the trends that we've seen over the past couple of years persist where managed rooms stay relatively flat? Franchise is driving the vast majority of your growth? And then as you think about international, if the domestic market is so different than the international market, are there risks some of the stronger operators domestically? I know interstate and affiliation with Jin Jing have looked in China. Are you seeing larger third-party operators start to pop up in China and really trying to push the franchise model?

[Arne M. Sorenson:]

Well, it's a big world out there. I mean, I think today, I don't think we franchise a single hotel in China. Let's see, I'll double check this while we're talking. But we I believe we manage every single one. And I suspect it will be some number of years before there's meaningful franchise involvement in that market. That is a question ultimately of what companies are set up with institutional expertise to run good hotels. And we'd be happy to see that evolve particularly as we think about expanding in the mid-market in China. So far, our growth has been very much on the high end. And I think franchise partners confirm there's not a single franchise with some in the China. I think when you look forward in the United States, we are committed to continuing to grow the managed portfolio, but I think we'll continue to see that the franchise portfolio grows faster than the managed portfolio. We do know that we'll have -- you take that Marriott Marquis in Washington, D.C. as an example. That's roughly 1,000 rooms that will be managed, which will be opening roughly at the beginning of the second quarter next year. And I think we'll continue to see that we add occasionally big urban or a high end resort destinations which are Marriott managed. And hopefully we'll see that those numbers grow the managed system in the United States as we go forward.

[Carl T. Berquist:]

I think the area where we'll see franchise growing at rapid pace is in our select-service brand, where most of those that are coming on, are coming on as franchise property.

[Operator:]

Your next question comes from Joel Simkins of Crédit Suisse.

[Joel H. Simkins:]

In terms of the domestic incentive fees, can you just remind us what percentage have paid out a fee in the third quarter? And also as we think about just the overall backdrop of increase of hotel profitability, should this start to be viewed as a step function increase into 2014?

[Arne M. Sorenson:]

The...

[Carl T. Berquist:]

Total domestic paying fees in the quarter was 16% compared to 12% in the prior year.

[Arne M. Sorenson:]

That's percentage of all managed hotels in the United States. And recall that when you look at numbers of hotels, we've got portfolios like that Courtyard portfolio, which we've talked about many times in the past, which is about 120 hotels. Not one of them is paying incentive fees. It's actually their -- a pooled formula.

[Carl T. Berquist:]

100 [ph].

[Arne M. Sorenson:]

So we'll go from 0 to 100% at some point in time. But until we do, that's a big number that will keep the total percentage down. I think as we go forward, we expect that 2013, when the dust settles on the year, we will post nominally higher REVPAR than 2007 for most of our brands and most hotels. That's nominal. So we've had 6 years worth of wage and health care benefits and other cost growth, which means our hotel-level margins are still lower than they were in 2007. And it will probably be still another couple of years before we get back to margins, which are comparable to what we had in 2007. That would get us back to the same dollar level of incentive fees if no incremental capital had been invested in those hotels. And we know that, for example with that Courtyard portfolio, we've got new capital that's been invested and that capital, under the U.S. incentive fees formulas that prevailed, will deserve its return before we start to get incentive fees. All of that tells us that we'd expect to get back to the same dollars of incentive fees in the United States as we had in 2007. It's probably still a bit beyond that couple-year target for margins. And is it a linear function between now and that time 3 or 4 years from now or a step function? We'll have to see how that evolves. I would think the portfolio is big enough that, that's probably more linear than it is a dramatic shift in any particular year.

[Carl T. Berquist:]

I think the only thing I would add there is as sad as you look at the portfolio, with all the growth outside the U.S., the incentive fee growth from international properties will continue to accelerate during that time period. So although you ultimately get back to the nominal dollars that Arne was talking about domestically, you'll also substantially increase the incentive fees from the international growth during that time period. Where in fact, we see over the next couple of years, the international incentive fees being larger than the domestic fees as a percentage.

[Operator:]

Your next question comes from Joseph Greff of JPMorgan.

[Joseph Greff:]

Your prior comments dovetail nicely with my question. Looking at your commentary about Asia Pacific growing mid-single digit constant dollar in 2014, what would that translate into Asia Pacific year-over-year in incentive management fee growth? What's the operating leverage there? Just to get a sense of that.

[Arne M. Sorenson:]

That's good question. I'm not sure we can give you that answer. The mid-single -- sort of low-single-digit growth would imply incentive fees on the same-hotel basis growing at only about the same percentage as revenues. So if you said REVPAR was growing 3%, margins are probably flattish. And as a consequence, you get incentive fees on a same-store basis up about the same as REVPAR numbers. And then in addition to that because of the way the international incentive fees work, which is we tend to get paid our share from the first dollar of profits, the new unit growth should almost immediately start to drive incremental incentive fee performance. And our new unit growth in Asia will be faster than our average unit growth for the company as a whole. We're probably talking about high-single-digits unit growth in Asia. And so that may drive something like 10% to 15% I suppose all-in incentive fee growth in some of those Asian markets, even on a 3-ish kind of REVPAR growth.

[Joseph Greff:]

Excellent. And then just going back to definitely a more positive group commentary than just a quarter ago. When you look at the mix of the group that's booking at a much faster pace, is that still a -- is there still a wide divergence between sort of the smaller group and the larger groups?

[Arne M. Sorenson:]

I think the smaller the group, probably the stronger. But we're seeing improvements really in all segments. I think what we've seen this year -- across our system, we know that we're taking significant group share. So our group business has meaningfully outperformed group business with the industry as a whole. Where we see the strongest performance is in our core hotels. So that's full-service hotels, but full-service hotels that are between 250 and 400 to 500 rooms. And they have obviously on average groups that are a bit smaller than the hotels, which are 1,000 to 2,000 rooms. A piece of that is also probably about the markets that they're in, because those core hotels are going to be maybe a little bit less long-haul markets, a little bit less national-driven group markets and a little bit more regional markets and that -- and probably a bit more corporate business as opposed to association business. And that's where the relative strength is, but the improvement is a generally across the group spectrum.

[Operator:]

Your next question comes from Shaun Kelley of Bank of America.

[Shaun C. Kelley:]

Arne, in your prepared remarks, you mentioned operating leverage a couple times, which I think is kind of a new addition to the script. Could you talk a little bit more about maybe some of the drivers on that in 2014? Specifically, I think you said, kind of core administrative costs up 5% this year, which still, given kind of the tepid economic growth that we're seeing out there, seems a little high, so to me at least. So I was just kind of wondering, do you think that number is lower? Or is it more on lapping some of the growth initiatives that you're doing in the new brands in international development that starts to bring the SG&A growth down.

[Arne M. Sorenson:]

Yes, I agree with your comments. I mean, I think the core 5% growth that we're estimating for 2013, we're saying that, that core admin growth, we expect to grow more slowly than that in 2014. And we are committed to driving some operating leverage through our P&L in addition to the hotel P&Ls that we manage and hope that we can do that in 2014. We have made a very deliberate effort in 2012 and in 2013 to invest in growth. And you heard us talk a lot about that this morning in the prepared remarks, a significant chunk particularly when you look at 2013 has been the investments we've made in growing our development pipeline. That's both investing in new brand platforms like MOXY and AC Hotels in the United States and Fairfield in India. It's also about investing in our development team, and they are going to have a spectacular year this year. So they're going to do well from a compensation perspective, and we're thrilled to be able to pay them that for the production that they've delivered. I think more in '12 than in '13, but it has -- it continues in '13, we've also invested in our teams around world. So a few years back, we were not staffed with senior continent-based presidents and integrated teams around the world. We have them now. We think they are delivering benefits in both way they're driving REVPAR index performance in their existing portfolios around the world and the way that there delivering growth. I -- we're optimistic that those kinds of investments are a bit more of a step function made in '12 and '13 and will not require us to continue to increase on that sort of steady basis going forward. And so that we should get more G&A leverage in '14 and beyond.

[Shaun C. Kelley:]

That's helpful. And then I guess just -- as the follow-up there, so when you think about our -- the growth component of those investments, there are things on the horizon that you are still looking at to kind of complement the brand portfolio and whatnot? Or is 2014 a year in which you can really kind of focus on what you -- focus on what we have in driving the performance, because you got all the kind of pieces in place?

[Arne M. Sorenson:]

Well, we continue to look always at things. You've all heard me say this before, but when asked these kinds of questions 5 years ago, about whether we were completing our brand lineup, I would have said, in fact, did say that I thought we were reasonably complete and I wouldn't see us adding a whole lot more. That's what I thought at the time notwithstanding that we've added AC Hotels, we've added Gaylord, we've added the Autograph, we've added MOXY. And I am optimistic that we'll continue to add brands. I don't think it will be 2 or 3 a year, which seems to be what we've done recently. But I suspect we'll continue to add some regional or local brands as we go forward to make sure we're getting as much of that global growth as we can. We're always going to be driven by whether or not those investments we think give us not just better returns from the customer capital, but really give us new platforms that allow us to get to a place where we can grow by adding units essentially with no capital investment or very, very slight capital investment.

[Operator:]

Your next question comes from Robin Farley of UBS.

[Robin M. Farley:]

Looking at your REVPAR guidance for 2014, it's a little bit lower growth rate than some other guidance out there, despite the fact that you have greater exposure to the North American markets, which is performing better than the international markets in terms of REVPAR growth. So while I -- of course I would not ask you to comment anyone else's guidance. Is there anything in your assumptions -- it sounds like you mentioned that a potential shutdown is not in there. Is there a mix impact or something that makes it maybe not totally comparable, where the recent mix impact that is meeting some of your REVPAR growth?

[Arne M. Sorenson:]

So it is almost impossible to comment on somebody else's forecast for 2014. We've seen some of the notes that many of you published the last 12 hours or so speculating on this. Some of it ascribes the difference to our greater D.C. distribution and/or our greater reliance on group. Some of you have ascribed it to maybe we're a bit more conservative than some others who are in the industry. It's hard to really say what went into the calculus that somebody else did. We've looked...

[Robin M. Farley:]

I know, if I didn't say [indiscernible] I was saying specifically, I realized that you wouldn't comment on that. It's really more your assumption.

[Arne M. Sorenson:]

Yes, and so we've done the best we can, looking at group business on the books, looking at where we think transient rates are going to continue to move, and looking at how we can continue to shift more and more of that transient business towards higher-rated segments in the hotels, which we expect we'll do. We think we'll probably continue to see that our special corporate account shrinks in terms of volume contribution to the U.S. hotels as we try and yield out some of the weaker accounts and push them more towards rack rating that greater business. But 4 to 6 is the best indication we can give you now.

[Robin M. Farley:]

So just to clarify, is there any mix impact that is negative in that forecast?

[Arne M. Sorenson:]

No, I don't think so. In fact, there is some implied positive mix impact in there. I don't think it's dramatic. And as you can tell from our prepared remarks, we expect that most of that REVPAR growth is going to be rate driven.

[Operator:]

Your next question comes from Nikhil Bhalla of FBR.

[Nikhil Bhalla:]

Just focusing a little bit on the trends by the select service and the full-service segments. If you look at year-to-date, your full-service segments are outperforming the select service, which wasn't the case so much last year, I think. And then select-service tends to have more transient type of business, and full service obviously has a group mix, which as we know has been kind of the lagging part of the business. Could you give us some sense of what the dynamics are? Why is it that full services hotels now outperform the select-service hotels?

[Arne M. Sorenson:]

Well, I can say if you look at the year-to-date figures -- excuse me, look at the 3-month figures for -- excluding Ritz-Carlton. We've got full service up in the United States by 5.3% and limited service by 4.9%. Not a dramatic difference between the 2. And on the year-to-date numbers, again, excluding luxury, it's 5.4 system-wide full service compared to 4.6 for limited service. And I think you got a couple of things going on there. One is the group mix is growing less quickly than transient. And so that means full service is on average a little less frothy than it would be if it were simply looking at transient only. I think the second is you get, in the limited-service portfolio particularly, a relatively broader distribution in markets other than the top 25 markets in the United States. And the top 25 are still driving outsized REVPAR growth. Obviously, not all 25 are the same. Washington is quite weak but you look at San Francisco, you look at Houston, you look at Chicago year-to-date, you look at a number of these cities and they're performing extremely well. And the full-service portfolio will be skewed more to those higher-performing markets.

[Nikhil Bhalla:]

Got it. So that explains that. And just one follow-up question on the group base for 2014. If you were to go back and look same time last year for 2013, I think you had said something about group pace being up 7%. So I mean, is the interpretation correct that maybe your group base for 2014 isn't shaping exactly at the same stance level as it was same time last year looking into 2014 or is that not the right way to look at things?

[Arne M. Sorenson:]

Well, I don't remember off the top of my head what we said at the end of the third quarter in 2012. We can pull that out as we talk. But if you're right, obviously, it means we have relatively less on the books today for '14 than we did then for '13. Having said that, '13 obviously got hit in the year for the year bookings because of really 2 government crises that took place, the sequestration early and then the government shutdown later in the year. And hopefully, we won't have those same threats going forward. I think the better news is that we've increased from the 2% to the 4% or 4.5% is really where we sit for the Marriott brand, up today, compared to just about the 2% we were up a quarter ago.

[Operator:]

Your next question comes from Smedes Rose of Evercore.

[Smedes Rose:]

I think most have been asked and answered. I just wanted to ask you, just back on your group outlook, last quarter, you mentioned that you are seeing a lot of corporate caution. In it sounds like that's changed a lot now. And just wondering, when you talk your folks that are booking the group meetings, is that more a function of timing that we're just that much closer to '14? Or do you feel like kind of corporate America has changed its tune a little bit, I guess, in terms of booking these meetings?

[Arne M. Sorenson:]

It's a good question. I think it's probably a little bit of both, but maybe more the inevitability of timing than it is a throw caution to the wind, that kind of attitude. So we've seen improvements to be sure. We're gratified by that, but I don't think we should overstate it. I think we still got companies broadly out there, who are a bit fearful about the status of the government and what's happening with government and a bit more cautious than they would be if the recovery, economic recovery were even stronger. You can see that a little bit in the F&B revenue growth in the quarter, which is not as strong as rooms growth, it was up about 3% compared to the plus 5-ish on the REVPAR. And so I think that's sign that people are still being deliberate about making these decisions. But again, incrementally better than it was a quarter ago.

[Smedes Rose:]

And then I just want to ask you. I think this is first time or maybe at least haven't noticed before when you break out rooms awaiting conversion as a piece of your overall pipeline. Is it typically running at around that percentage? I think maybe 5%. Or is this elevated in this environment, or kind of maybe just a commentary around that?

[Arne M. Sorenson:]

I don't know if this the first time we've done that or not. I think often we've talked about the number of rooms we've opened that are conversions from other branded hotels. I think we've been helped. We've always done well converting other hotels to our brands because of what we offer in terms of REVPAR premium and in cost leverage, particularly around the cost of our reservations platform, marriott.com and the like. I think the addition of the Autograph brand has accelerated that meaningfully, where we are -- that is overwhelmingly a brand which we see existing hotels join and convert to. And I think we continue to see the Autograph momentum built.

[Carl T. Berquist:]

I think the other thing on conversions, they're not in the pipeline that long as compared to other types of hotels, given that once the hotel decides to convert, it's sometimes just months while they're in there before they actually come out of the pipeline and they're open with the brand.

[Operator:]

Your next question comes from Patrick Scholes of SunTrust.

[Charles Patrick Scholes:]

I'm wondering if you can break out -- when you talk about group revenue pace for 2014 and what's happened also in the third quarter, how does that break out by occupancy and rate growth? And then secondly, what was the group booking pace for the Gaylord brand?

[Arne M. Sorenson:]

Yes, we won't give it to you for the Gaylord brand. You'll have to wait for Gaylord's conference call to get that. The -- but the 4, plus 4% or plus 4.5% for next year is overwhelmingly volume, not rate. So I would think rate is up very modestly, 1-ish or 0 to 1, something like that. And the most of that we've got it in the books there is driven by volume. There's good news and bad news in that. The bad news is obvious, which is it would be even more profitable to have higher rate on that business which is on the books. The good news though is it suggests a greater compression in the hotels, which should aid to pricing both transient business and the group business that has yet to be booked, which is about 40% of the total group business we would expect to stay in 2014.

[Operator:]

Your next question comes from Steven Kent of Goldman Sachs.

[Steven E. Kent:]

In fact, this morning, I was watching you on CNBC. And you mentioned that in China, some of your developers are having trouble getting financing, and I was wondering if you could talk about that a little bit more. And then Carl, could you just go through again the issue was with the lower tax rate in the third quarter, and what that means for the full year?

[Arne M. Sorenson:]

First.

[Carl T. Berquist:]

I'll do the tax first for you, Steve. We had 2 things in the tax rate. One was, as we filed the international tax returns, you have true-ups to bring the accruals in line with the actual tax due. And we recorded a benefit as a result of that, about $7 million. That's a onetime item. In addition, we've been able to manage our tax rate down a little bit. So historically, several years ago, we were in the 33%, 34% area. And we are now starting to run closer to 32.5% in that area. For the full year this year, we will probably 31.8% or 31.9%. That's just because that blends in all these items for an effective rate. But for our future run rate, I think we've been able to trim about 0.5 point off, maybe a little more on a go-forward basis as we strategize our mix of international, domestic taxes.

[Arne M. Sorenson:]

A big chunk of that, beyond Carl and his team's great work, is a higher growth of the international portfolio which tends to come in at lower effective tax rate than the domestic business does. I don't remember, Steve, I may have said something. It's always a bit frightening to go on those channels and not know which you're talking about. But don't really remember talking about difficulty for our owners in getting financing in China.

[Carl T. Berquist:]

In India.

[Arne M. Sorenson:]

Oh I may have something said about India. That's right. Carl's reminded me. India is a difficult market. I did talk about India because there you've got interest rates which continue to be up in the mid-teens for our real estate partners there. It's very expensive debt. And I think we'd anticipate that the new deals coming into the pipeline in India, particularly at the luxury end, are going to slow a bit here over the next year or 2. We probably will see Fairfield continue to perform well, maybe Courtyard performed well. But India is a complicated place for a financing perspective at the moment.

[Operator:]

Your next question comes from Bill Crow of the Raymond James.

[William A. Crow:]

First topic, Arne, is as we think about 2014, would you be surprised for even disappointed if you didn't return at least another billion dollars to shareholders? And to what extent with the share price have an influence your decision?

[Arne M. Sorenson:]

Well, let's see. It's -- the team is giving me evil eyes here because we don't have a budget yet and as a consequence, it's really hard to give you much more in terms of the dollars that we would anticipate returning to shareholders. But the model is working extremely well. You can see the cash that the engine is producing from fee business around the world, and that will continue to grow next year. And we ought to see that not only should we be hopefully close on the sale of the London EDITION this year but hopefully, we'll get Miami out the door next year as it opens. New York will be interesting. It could be late '14. I think probably the best guess is that it will probably be early '15. But all of that would be good news as well. And so I would expect that we are to continue to deliver healthy capital back to our shareholders through dividends or share repurchases. In the fullness of time which I would interpret to include a full year, when you look at a full year, stock price is not a huge factor. Stock price will be a factor in the shorter-term way. So if we're looking at an individual quarter or over maybe even a couple of quarters and we see the stock running aggressively, we're probably less likely to chase it. But fundamentally, what we're doing is returning capital to shareholders and keeping the leverage levels at a position where we think our cost of capital is ideal. And I suspect we'll continue to do that even as the stock price continues to appreciate. And there are folks who obviously asked after 2007, we got into the depths of 2009. Don't you regret the purchases you made in 2006, 2007? And of course, it's hard to say no, because when you sit and look at it from 2009 when the stock, I think it hit a low of about $11 if I remember right. You'd love to be able to have all those dollars you spend in prior year so you could snap up as much of it is you can. But we're not really in a position, I think, where we can be that much smarter than the market. And so while we will pay attention to the stock price, fundamentally, what we're talking about doing is returning the excess cash to shareholders on a relatively current basis.

[William A. Crow:]

Fair enough. The second topic quickly here, on group, any trend changes on cancellation and attrition? That's point one. And point two is we're hearing that there is increased activity in both Aurora and suburban Phoenix of Gaylord development. Can you give us any update on those 2 properties?

[Arne M. Sorenson:]

There's no real change in the trend lines on attritions or cancellations. Obviously, in the Washington market, you got the whole government shutdown and the impact of that. We’ll have to dissect that for you when the dust settles, which presumably we'll talk about a quarter from now. But I think generally, we see again, positive building trends in the group space. We don't have much to say on Aurora or Mesa. I think Aurora is a bit farther along, it is something that the state and the local government would very much like to see happen if a deal can be put together on economic terms. We'd obviously love to see it happen. The hotel owners Downtown Denver don't love the notion of a big hotel opening in Aurora, and so you hear some noise around that occasionally. But we have good partners who are working particularly on the Aurora project to see if we can get a deal put together that makes sense, and we're hopeful about it. But it's certainly way too soon to be even assessing on that.

[Carl T. Berquist:]

And that we will not build that on our balance sheet.

[Operator:]

Your final question comes from Ian Rennardson of Jefferies.

[Ian Rennardson:]

I was wondering about the shape of REVPAR over the quarter. Was it pretty steady? Or was it like some of the other people that reported stronger in July and August and weaker in September?

[Arne M. Sorenson:]

Yes, I think like others and certainly when you think about the United States, generally, stronger in July and August and bit weaker in September. I think a piece of that is the threat of the government shutdown, which became more apparent in September. And would not ascribe a deteriorating trend line from a calendar perspective because of that. All right. Christy, anybody else in the queue?

[Operator:]

We have no further questions.

[Arne M. Sorenson:]

All right. Thank you all, very much, for your time and attention today, and we appreciate your interest in Marriott and look forward to welcoming you into our hotels, get on the road.