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Press Release: Fitch Ratings
May 19, 2004
NEW YORK, NY -- Fitch Ratings has initiated a senior unsecured rating of 'BBB' on Marriott International (MAR),
along with a commercial paper rating of 'F2'. Ratings reflect MAR's diversified portfolio of leading brands (by
geography and segment), relatively stable business model that performed well during the recent lodging downturn,
healthy new unit growth, strong cash flow generation which exceeds capital and investment spending, leading position
in the timeshare business, and improving lodging fundamentals. Ratings concerns include MAR's significant contingent
exposure, capital risk associated with real estate investments and loans, hotel operating risk due to sliver equity
and incentive management fees, heavy share repurchase activity, complexity of joint ventures, off-balance sheet
liabilities and the synthetic fuel business, and uncertainty surrounding the strength and longevity of the current
rebound in travel. The Rating Outlook is Stable.
Throughout the current downturn, MAR has maintained a steady operating track record, with relative top-line stability
and moderate margin contraction. MAR hotels typically command RevPAR premiums as compared to its competitive sets,
while continued productivity improvements and cost cutting efforts at its franchised and managed properties have
helped offset the impact of lower average room rates, higher wage, insurance and utility costs, and lower telephone
profits. MAR also benefits from state of the art frequent stay programs and yield management systems, particularly
in a difficult operating environment. These strengths have been instrumental in attracting development capital
to MAR brands. Since fiscal year-end (FYE) 1999, MAR has increased its unit base by 25% despite depressed industry
conditions. This is in contrast to the majority of asset-intensive hotel operators (HLT, HOT) who experienced more
limited unit growth during the downturn.
With 98% of its rooms either managed or franchised, MAR operates under a distinctly different orientation than
its closest peers, Hilton, and Starwood, which are more leveraged to owned real estate. MAR derives its lodging
income primarily from base management and franchise fees, which are calculated as a percentage of revenues. Base
fees provide a relatively stable income stream, with downside protection against declining hotel-level profitability
(in contrast to hotel owners who must endure the volatility of a fixed cost structure). Nonetheless, hotel operating
risk is not absent from MAR's business model. MAR is exposed to hotel operating risk via incentive fees, which
are calculated on hotel profitability. Incentive management fees have dramatically declined in recent years due
to weak industry conditions, cost pressures, and more rigid hurdle rates in contracts signed after 1998. Since
FYE 2000, the contribution of incentive fees to lodging fee revenue has declined to 15% at FYE 2003 from 35%. Although
there may be some rebound in incentive fees with improvement in the lodging environment, the timing and extent
of their potential contribution to future profitability is unknown. As such, MAR has become increasingly reliant
on unit expansion and timeshare revenues for earnings growth.
MAR is a leader in the timeshare business with 49 resorts with 8,360 units and $2 billion in assets deployed. MAR
expects this segment to reach 27% of operating income by 2006 versus 21% in 2003. Income is generated through the
development, marketing and servicing of timeshare developments, as well as the financing of timeshare loan to owners.
Invested capital in this segment has risen significantly over the past four years and cash flow has remained negative.
MAR expects cash flow to turn positive as more developments mature over the next several years; however, a downturn
in the real estate market could impact asset values and potential returns. MAR has also stated that it is diversifying
risk through greater joint-venture activity and disbursement of development risk.
MAR securitizes its timeshare loans on a continual basis as part of its strategy of recycling cash out of the assets,
which effectively takes them off-balance sheet. Fitch's analysis incorporates these assets on a managed receivables
basis, as MAR would likely support the structure in some manner in order to assure access to this source of funding,
or alternatively, would bring funding on-balance sheet. Delinquencies and loss experience have not been an issue
to date, however in the event of a decline in the real estate market, higher interest rates, and deteriorating
consumer credit patterns, portfolio quality issues could arise.
Hotel room unit expansion has been supported by MAR's strategy of investing directly in hotel properties via sliver
equity or mezzanine financing, or indirectly, through financial guarantees and loan commitments, in order to secure
management contracts. This strategy has become increasingly important over the last several years due to lower
level of institutional funds available for hotel development. On the positive side, this drives unit growth with
limited investment (relative to hotel ownership), and spreads the risk among a large, diverse group of hotel/timeshare
projects. On the downside, this strategy adds capital risk and contingent exposure to MAR. Contingent liabilities
range from loan commitments (which have declined significantly over the past several years) to guarantees of debt
service and operating profits. Fitch evaluates the various types of contingent exposure, and adjusts leverage figures
accordingly. Loan losses during the recent lodging downturn have been very moderate, although the extent of any
contract renegotiations is not known. Total capital at risk through these investments has been rising, although
it has been declining on a per-room basis.
The most significant exposure is found in MAR's Courtyard By Marriott (CBM) joint venture which represents roughly
24% of the company's equity investments ($110 million), approximately 18% of loans outstanding ($215 million) and
carries $685 million in unconsolidated debt. CBM has been significantly impacted by the decline in lodging demand
over the last several years, and is currently running at a negative equity position. In 2003, fixed charge coverage
fell below 1.0 times (x) and the JV has had to access certain capital reserves and defer rental/management fees
and interest income. MAR's loan to CBM has not been categorized as impaired, and as a result, deferred interest
and rental payments of $31 million in 2003 have been included in MAR's income statement per GAAP. Deferred payments
resulted in an increase in the loan balance to CBM by $31 million in 2003. CBM expects to defer these payments
for at least the first half of 2004. If performance at CBM does not rebound meaningfully with improvement in the
external environment, there is some risk that MAR will ultimately have to consider these assets impaired and write
down its investments, or provide financial support to the entity.
MAR has a number of off-balance sheet liabilities and contingencies, some portion of which Fitch incorporates into
an adjusted debt figure. Included in adjusted debt are: (1) recourse operating lease exposure (2) guarantees in
an amount that represents a continuing component of Marriott's operating model (roughly half of Marriott's total
outstanding guarantees of $1.2 billion), (3) loan commitments (4) outstanding off-balance sheet timeshare securitizations
and (5) MAR's share of unconsolidated joint venture debt for 50%-owned entities. The majority of the joint-venture
debt is represented by CBN, and is non-recourse.
Actual funding and loss risks under these off-balance sheet liabilities are limited in a number of ways. Guarantees
are typically secured by first or second mortgages or a pledge of the partnership interests and are structured
with maximum terms, annual caps and burn-off provisions. When a guarantee is actually funded, MAR is reimbursed
from the property cash flows by contract and is frequently reimbursed ahead of a return on the equity capital.
Structural protections and diversity of exposure make it highly unlikely that a significant portion of the contingent
obligations would have to be funded, particularly over a short time frame. These obligations have remained roughly
flat over the last two years and Fitch will continue to monitor this trend. With respect to loans and timeshare
receivables, comfort is drawn from the strong historical performance of the respective portfolios and limited write-offs.
MAR's liquidity remains strong, with $1.9 billion in available borrowings under its $1.5 billion revolving credit
facility due July 2006 and a $500 million facility that expires August 2006, plus cash of $229 million. Less than
$600 million in debt comes due within one to three years. Over the next several years, Fitch expects internally
generated cash flow combined with asset sale and note sale proceeds to be sufficient to satisfy intermediate term
funding requirements. Further debt reduction appears unlikely given MAR's stated acquisition ambitions, likely
share repurchase activity and dividends. However, based on management's stated priority of maintaining its investment
grade profile, Fitch believes that discretionary cash flow deployment will be applied in a manner consistent with
stable credit measures and risk levels.
This rating was initiated by Fitch Ratings as a service to users of its ratings and is based primarily on public
information. A report will be available shortly on the Fitch Ratings web site at 'www.fitchratings.com'.
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Contact:
Fitch Ratings, Chicago
Mark Oline, 312-368-2073
Fitch Ratings, New York
Patricia Wright, 212-908-0326
Brian Bertsch, 212-908-0549 (Media Relations)
Source: Fitch Ratings