Marriott International, Inc. (MAR) Q3 2007 Earnings Report, Transcript and Summary

Felicia Hendrix - Lehman BrothersJoe Greff - Bear StearnsSteve Kent - Goldman SachsHarry Curtis – JP MorganDavid Katz - CIBC World MarketsCeleste Brown - Morgan StanleyBill Crow - Raymond JamesWilliam Truelove - UBSSmedes Rose - KBWJeff Donnelly - WachoviaDavid Richter - AVP InvestmentsMichael Millman - Soleil Securities

Welcome to today's Marriott International third quarter 2007 earnings conference. Just as a reminder, today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Mr. Arne Sorenson. Please go ahead, sir. Arne Sorenson: Thank you, Sara. Good morning, everyone. Welcome to our third quarter 2007 earnings conference call. Joining me today are Laura Paugh, SVP Investor Relations, Carl Berquist, EVP Financial Information and Enterprise Risk Management; and Donna Blackman, VP, Investor Relations. Before I 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 this morning along with our comments today are effective only today, October 4, 2007, and will not be updated as actual events unfold. You can find a reconciliation of non-GAAP financial measures referred to in our remarks at our website at www.marriott.com/investor. Our results in the third quarter were outstanding. Transient business was very strong, including both corporate and leisure, weekend and weekday. U.S. transient business benefited from the weak dollar. Year-to-date room nights booked for non-U.S. guests staying at our U.S. hotels was up over 4%, including 6.5% more travelers from Great Britain, a trend we expect will continue to benefit New York and other U.S. gateway destinations. Despite some of the news out there about economic uncertainty, we've found that our best transient customers are on the road, including even those of you in the financial services sector. We're now finalizing negotiations with large corporate customers for next year's pricing, while property level negotiations with large corporate customers are just beginning. We'll have more for you in the fourth quarter report, but right now we expect special 2008 corporate rates to increase in the 6% to 8% range. Group REVPAR in the third quarter rose almost 4%. It was a bit softer in Chicago and Orlando reflecting fewer citywide and more competition for near-term group meetings. Looking forward, group revenue on the books for the fourth quarter is up about 5%. In strong markets like Boston, San Diego, San Francisco and New York there is really no room for near-term group pick-up as the hotels are already booked with groups in the fourth quarter. In many cases they have chosen also to turn groups away in favor of higher rate transient business. We continue to have a robust development pipeline. At the end of the third quarter, we had approximately 115,000 rooms either approved for development or under construction. Of those, more than 36,000 are full service hotel rooms and more than half of those are located outside the United States. Asia continues to offer great development opportunities. In China, where just last week Bill Marriott designated our 3,000th hotel -- the 588 room JW Marriott Beijing which opens later this year -- the company operates more than 30 hotels and we expect to open another 20 by 2010. We also anticipate increasing our distribution there to more than 100 hotels over the next six years. In India, we have six hotels and 18 more scheduled to open by 2010. We have 11 hotel projects in the pipeline in Thailand, five of which are conversions. Some of our new hotels under development include a residential component. In White Plains, New York the 123 room Westchester Ritz Carlton opens next month. Its 185 residences are priced at $800,000 to $10 million each and the project has already sold 94% of the first tower for more than $260 million. Today Ritz Carlton has 23 residential projects in sales, most with little or no capital investment. Returns to us are largely branding fees and ongoing management fees. Not included in our pipeline yet is a project we are working on in Las Vegas. We have a very broad convention hotel network, and Las Vegas is an important, high demand group market where we are not adequately represented. Still in its formative stages, we control a site of about 15 acres across the street from the Las Vegas convention center. We expect it will contain approximately 3,500 hotel rooms, half a million square feet of meeting space and a 75,000 square foot casino. The proximity of the site to the convention center plays very well to our strong suit -- business meetings and conferences. While we have invested about $230 million to-date, we're working with possible partners on the project and do not plan to build it on our balance sheet, nor do we expect to ultimately manage the casino. Construction should begin in about a year or so with completion 30 to 36 months thereafter. The elephant in the room is the current state of capital markets and how that is impacting our hotel business. Typically financing for our select service hotels, which are by and large smaller and by and large come from local banks, and construction loans are arranged far in advance of breaking ground so it may be several months before we see any measurable impact on new limit service applications. For larger deals, we haven't seen much deal slippage due to the debt markets yet. However, we believe lenders are becoming more selective and underwriting criteria are likely to become somewhat more conservative, which should constrain supply growth in the U.S. One area where the capital markets will probably have an impact is on relicensing fees. Since 2003 over half of our franchised hotels have changed hands. Relicensing fees were about $11 million in 2006 and we estimate they will total nearly $20 million in 2007. With a more challenging financing environment, we estimate relicensing fees should total only about $5 million in 2008. Our timeshare sales and services revenue net of direct expenses was about $5 million to $10 million ahead of our guidance in the third quarter. In the year-ago quarter we booked a $15 million reversal of a contingency reserve related to marketing incentives. The 2007 out-performance was largely due to strong financing profits during the quarter. We'll give back much of this profit upside in the fourth quarter and we'll talk more about that in a minute. Year-over-year delinquencies and prepayments are down and financing propensity is up. Credit scores of newly originated loans during the third quarter averaged 745. Timeshare reported revenue was constrained by a few soft projects including Orlando where inventory is nearing sellout, Newport Coast where sales have been relatively soft all year, and Lake Tahoe where forest fires kept customers away during the quarter. Compared to last year, overall contract sales were roughly flat in the third quarter. Sales were strong at our new Marco Island Resort on Florida's Southern Gulf Coast as well as at other resorts in Florida, Thailand and Spain. Offsetting that strength, contract sales were soft in Aruba and we had tough comparison to last year's sale of residences in San Francisco. Compared to expectations, third quarter contract sales were a bit slower at our projects in Kapalua and Kauai. Registration delays for the new Kauai slowed early marketing efforts, but have now been resolved. In addition, we have changed our marketing approach, which we believe will reap much stronger results in 2008. Formerly a joint venture project, Kauai is now a fully-owned resort, which we believe over time will enable us to not only drive revenues faster, but allow us to earn more as well. To date we already have $34 million in sale reservations that don't yet qualify as contract sales. In Kapalua, an archaeological find on the site delayed construction this year and in turn slowed our sales pace this quarter. This is a terrific project and we anticipate strong results in 2008 and beyond. Out of nearly 40 locations worldwide, we have four projects including Kapalua where we sell both fractional and residential product. Not surprisingly, we have seen some slowing sales of the resort residences sold by our timeshare division. Unlike other residential developers, our product is exclusive and rare and built in phases, so we do not have significant inventory. Very few of our customers have been refused mortgages, so while our sales pace may slow a bit, we are very optimistic about the long-term prospects for this business. The fractional sales, where we have product available to sell, is selling roughly on pace as expected. Our owned leased corporate housing and other revenue net of direct expenses declined in the third quarter due to fewer owned hotels operating during the quarter and lower termination fees. G&A was $15 million higher than last year due to planned increases as increases as well as the impact of a lower dollar. G&A was better than forecasted but much of the out-performance was timing related vis-a-vis the fourth quarter. Gains in other income reflected the sale of six hotels for about $400 million during the quarter. Our interest expense was up, primarily due to higher commercial paper balances related to our share repurchases as well as the ESOP settlement discussed last quarter. While our tax rate is always a bit involved, this quarter it was more complicated than usual. We recognized the impact of lower German tax rates on some deferred tax assets and we adjusted our rate for a shifting mix of taxable income between countries. Excluding the impact of our synthetic fuel business, a higher than expected tax rate probably hurt us by about $0.04 per share in the third quarter. We believe the fourth quarter rate will be down to around 36% excluding syn fuel, and the 2008 rate should be 35% to 36%. Looking forward, a one half point change in the tax rate in 2008 probably impacted EPS by roughly $0.02 per share. To summarize, compared to the midpoint of our guidance, fee revenue and our time share business both outperformed by about $0.01. G&A contributed about $0.01 and better than expected gains added $0.03. Our higher tax rate cost us about $0.04, leaving the $0.02 out performance on the bottom line. Now let's look at our outlook. We believe there is still significant growth left in the current lodging cycle, albeit at a slower pace than in the past. The last lodging cycle lasted about a decade. We are only about four years into the current cycle that began in 2003. With North American lodging supply expecting to increase about 2% in 2008, we expect another good year for our industry. We expect fourth quarter 2007 North American company-operated REVPAR to increase 6% to 8% over the year-ago quarter and house profit margins to increase 150 to 200 basis points. We expect worldwide REVPAR for the fourth quarter to increase 6% to 8%, but the impact of foreign exchange is likely to take that number higher. For the year 2008, we estimate North American REVPAR will increase 5% to 7% and house profit margins will improve another 50 to 100 basis points. Worldwide company-operated REVPAR is expected to increase 5% to 7% on a constant dollar basis. While we have not yet completed our bottom-up budgeting process, we would expect our full-service hotels to grow REVPAR at a faster clip than our more moderately priced, limited service portfolio. In any event, we will be fine tuning these estimates over the next few months. What gives us confidence in this outlook? Fourth quarter group revenue bookings are up by almost 5%. Special corporate rates are strong, transient bookings for the next few weeks are strong, and 2008 group bookings are stronger. While we've seen no evidence of economic weakness, ours is a cyclical industry and as we've often pointed out, our business trends tend to move with corporate profitability and business spending. We expect to open nearly 30,000 rooms in 2007 and remove 11,000 rooms from our system. In 2008 we expect to open about 30,000 rooms with roughly 5,000 rooms expected to exit the system. Profits from our owned hotels continue to decline with our asset sales success, and at the end of 2007 we expect to own very few hotel assets. On the P&L the owned, leased, corporate housing and other line also reflects branding fees associated with our residential business, including an estimated $10 million to $15 million in 2007 and approximately $20 million in 2008. For the timeshare business, we expect timeshare contract sales to decline roughly 15% in the fourth quarter of 2007. Our new Marco Island project is expected to show strong sales, but overall we have a tough comparison to 2006 fourth quarter contract sales. Last year we moved over $150 million from reservations to contract sales at Kapalua when we achieved final government approvals. For the fourth quarter, our guidance for timeshare sales and services revenue net of direct expenses is roughly $10 million lower than our earlier guidance, largely due to lower than expected contract sales and modest construction delays at some properties that should delay revenue recognition. To be sure, we're a bit more cautious about our fractional and resort residential sales given the real estate market, yet we continue to be bullish about the long-term prospects of our timeshare business. Our guidance includes a roughly $40 million gain from the sale of our timeshare mortgage notes in the fourth quarter, a transaction that we have considerable confidence will take place and will take place on time. With strong brand recognition and a loyal buy and hold investor base, we are confident of the market demand for our timeshare paper. For 2008, we expect timeshare contract sales to increase more than 15% reflecting additional available inventory. Some of those contract sales should also become financially reportable. As a result, timeshare sales and services revenue net of direct expense is expected to total $340 million to $360 million in 2008. Turning to general and administrative and other expenses, our fourth quarter estimate reflects some timing versus the third quarter and a big year-end modeling noise. We stepped up spending this year for brand initiatives such as our Great Room as well as for new hotel development, especially outside North America. Given we have virtually no hotel assets available to be sold in 2008, our estimate for gains is understandably dramatically lower than in 2007. We expect interest expense to rise a bit in 2008 as we continue to repurchase shares. We expect to repurchase approximately $1.6 billion in stock in 2007 and approximately $1.25 billion to $1.5 billion in stock in 2008. In short, we believe our strong fourth quarter will cap a terrific year. Excluding synthetic fuel, our earnings in the quarter are expected to total $0.61 to $0.63, a 17% to 21% growth rate; pretty impressive when you consider that in the 2006 fourth quarter we earned about $0.02 more in gains and termination fees than we expect in the 2007 quarter. In 2008 as we bid farewell to our synthetic fuel business, we are estimating EPS of $2.10 to $2.25. That's a roughly 11% to 19% growth rate over 2007 earnings. With the tremendous success we've had in selling assets in recent years, today the wagon is just about empty so in comparing our results to 2007, one should consider that our gains line is about $0.10 per share lower in 2008 than in 2007. Excluding gains, ESOP and synthetic fuels our growth range should be in the 18% to 25% range for 2008. We are growing the business above the line where it really counts, and higher share repurchases are just the icing on the cake. We recognize that we probably give more near term earnings guidance than the typical company, but don't be mistaken; our focus is on the long term, so we thought we would take the opportunity today to update you on some work we just completed looking a bit further out. In this economic climate it is very difficult to precisely estimate REVPAR for the next quarter or the next year. It's impossible to estimate REVPAR longer term, yet providing a longer term understanding of how the business works and how it responds to the economic environment should be valuable to longer-term investors. We presented a three-year outlook at our Paris analyst meeting just one year ago. As part of our routine long range planning process, we updated our plan this summer and not surprisingly the growth rates are very much on track. As the management and franchise company with the finest brands in the world, new hotels, maturing hotels, and significant past and forecasted share repurchases, we can produce solid growth in either strong or moderating REVPAR environments. If you recall in Paris, we assumed REVPAR growth at 4%, 6% or 8% compounded through 2009 which yielded fee revenue growth of 11%, 13% or 16% and EPS growth of 15%, 20%, or 25%. For this year's exercise we looked at 2010 and assumed REVPAR growth of 3%, 5% or 7%, a slightly more conservative assumption compared to a year ago since we were dropping the very strong 2007 and adding 2010 to the analysis. This is intended not to guide, but to provide investors with a sensitivity analysis to generate their own views. Compared to our Paris analyst meeting, we have a very similar rooms growth outlook, about 85,000 to 100,000 new rooms opening over three years in the years 2008 through 2010. Given our range of REVPAR assumptions we estimate our fee revenue would increase 9% to 14% compounded through 2010. In terms of sensitivity during the period, we believe that 1 point of REVPAR is worth approximately $20 million to $25 million of pretax earnings annually. For our timeshare business we also remained very bullish on the long term. With outstanding projects under development, we expect that the timeshare segment will grow by 10% to 15% and represent some 21% to 24% of our EBIT by 2010. Projects under development represent nearly $8 billion of expected future revenue. Thinking about our Paris meeting, you may ask how we can estimate 16% to 26% EPS growth compounding from 2008 to 2010, assuming a more modest REVPAR assumption than we offered in Paris for the period 2007 to 2009. Some analysts think about the hotel business as having a natural limit of profitability related to the business cycle. I can't tell you how many times we've been asked how far we are from peak earnings, margins or REVPAR. That may be a valid analysis for a single asset, for a REIT or a private real estate investor, but we are a management company driving unit growth, management fee revenue and cash flow. There is no upside limit on our profitability. Actually we maintain considerable expansion opportunities beyond 2010 both domestically and internationally. In addition to rooms expansion and REVPAR, share repurchases made over the past several years impact not only the year of the repurchase; in fact the lower share count enhances growing EPS for every year thereafter at an accelerating pace. Additional repurchases planned for the future further enhance the accretive impact. We expect to generate enough cash flow to repurchase $4.5 billion to $5 billion of additional shares from 2008 through 2010. This is all possible due to the significant cash flow generating characteristics of our business and can still be accomplished while maintaining our commitment to a strong BBB credit rating. For the past couple of quarters, we've been asked about economic trends, tipping points and the state of the lodging industry. We all know that the economic cycle has not been repealed, but based on everything we're seeing we're not calling an inflection point in lodging. Our industry is performing well, and we continue to build a strong company with proven management and an impressive portfolio of great brands that follows sustainable business practices and has dedicated associates committed to delivering superior results over the long term. I would like to close today by noting that today is the 50th anniversary of the first man made space satellite Sputnik, which arguably launched the space age. After Sputnik's launch, a San Francisco newspaper man coined the term beatnik for members of the then “beat generation”. Arguably the most famous beatnik was Jack Kerouac who wrote a kind of travelogue that's been called one of the most celebrated novels of the English language, On the Road. Many members of the beatnik generation are now loyal Marriott Rewards members and Marriott timeshare owners. Let's all follow their lead and get on the road. Sara, if you'd open it up for questions.

Your first question comes from Felicia Hendrix - Lehman Brothers. Felicia Hendrix - Lehman Brothers: Just a quick question, some of it you explained a little bit but I wanted to get back to the point that your flow through from REVPAR to EPS is a bit different than I had expected. Some of it might be from the relicensing, although that's not really that big. I am just wondering if you can talk me through what your incentive fee expectations might be for '08? Arne Sorenson: I should start this since you're the first question out of the box, Felicia, just reiterating something we said in the prepared remarks. We have not yet performed our 2008 budget, so we're giving, as we do typically at this time of year, our first look at next year on a full year basis really based on a bit more of a top-down approach than a bottom-up approach. Having said that, I think as you pointed out, the relicensing fees may be about $15 million down year over year from 2007 to 2008. Relicensing fees show up in our franchise fee line, and that will clip by about 1 percentage point, I suppose, the year-over-year growth in the total fee category. Incentive fees, I think roughly if you look at consensus estimates, we would expect they're about right in terms of the incentive fee number. Felicia Hendrix - Lehman Brothers: I don't want to be nitpicky, but I am going to be, so I apologize in advance, this is my last question. You seemed pretty bullish about the business. Your REVPAR guidance for the fourth quarter, the low end was just taken down a little bit. Clearly, it sounds like the fourth quarter you are positive on. I was wondering if there is anything we should read into that? Arne Sorenson: No, there really isn't. Our single point number is very much in the mid-point of the 6% to 8% range we're giving. You have profoundly, all of you, influenced us the last couple of quarters about the caution of making sure we don't miss the headline REVPAR number, and we want to make sure while we might hit between 7% or 8%, it is close enough to the midpoint at this point we feel it is better to be in the 6% to 8% range.

Your next question comes from Joe Greff - Bear Stearns. Joe Greff - Bear Stearns: Just a quick follow-up on what's implied in the full year '07 guidance. Which range do you see yourselves generating incentive management fees? What is that year end number tally? Arne Sorenson: Full year management fee growth is about 30% from 2006. Joe Greff - Bear Stearns: Then maybe you could talk about it for '08, just in terms of your expectations in terms of the amount of timeshare mortgage note sales that's incorporated into your guidance? Arne Sorenson: $250 million. You're asking fourth quarter or 2008? Joe Greff - Bear Stearns: Full year 2008. Arne Sorenson: I am sorry. The fourth quarter is about $250 million. Next year would be roughly two times that. It might be a little bigger than two times that, but that ought to be about the right ballpark. So in other words, the same amount in the second quarter and fourth quarter of 2008. Carl Berquist: We're describing there the principal to be sold. Arne Sorenson: Face amount of the notes.

Your next question comes from Steve Kent – Goldman Sachs. Steve Kent - Goldman Sachs: On timeshare, could you talk about current activity, whether you're seeing any slowdown or acceleration in number of tours, percentage of people purchasing? And then it sounded like you felt very confident about the securitization process on timeshare in the fourth quarter. Do you have any sense yet, I know it is early, as to what kind of pricing, whether you'll have to over-collateralize that or make any changes relative to last year? Arne Sorenson: Let me start with the second question first. Obviously we're not in the market pricing that deal yet. It is a deal that I suspect will close in the first couple of weeks of November. We'll be in the market fairly shortly. Credit markets seem to us to be firming almost on a daily basis, and so we are optimistic that we could see some improvement from what we're hearing from market participants today. Having said that, I think our working assumption today is our spreads will be maybe 30 basis points wider than our second quarter deal. That is not enormous, although the spreads on the second quarter deal were probably in total only about 40 basis points. So relative to where it was before, it is a pretty significant broadening and that has an impact on the profit to us on the deal of a couple million bucks, a deal the size we're talking about. We don't think beyond the widening of the spreads there will be any real impact, so no changes to the collateralization approach or any of the other structural attributes of the deal. To your first question, how is the timeshare business, this is interesting. The timeshare business, again it is basic but it is important to remind folks that for us includes a few different products. The traditional timeshare product, one week typically Marriott branded, that business is very strong, continues to perk along just dandy where we have product and where there aren't individual market issues, we're getting good conversion rates and tour flow, efficiencies are steady with where they've been. Propensity to finance has come up but so have credit ratings and defaults have actually come down. So all of that is a good and satisfying story. Fractional is the next piece, and this is usually Ritz Carlton branded. We have a few that are Marriott Grand Residences branded. That is performing quite well too, although to be fair we have less of that product available to sell than we do of the timeshare, and so the statistics we're pulling out of the system are a little thinner which I think is part of what's going on here. Lastly we've got some residential product, and if we're selling fractional as well that will show up in our timeshare segment business. If we're a fee-earner only and there is no fractional and the residences are connected with the hotel a la Westchester which we described in our remarks, that won't show up in our franchise segment but will show up in our G&A and other line branding fees. But really what we're finding is the residences are selling well in urban markets, so primary home stuff. They're selling in resort markets, we don't have a lot of resort product in sales, but they're selling in resort products a bit slower than we would have anticipated a year ago. By the way, just let me clarify. I misspoke. The branding fees for projects like Westchester show up in owned, leased and other.

Your next question comes from Harry Curtis - JP Morgan. Harry Curtis - JP Morgan: We've just come off a period where your house profit margins have been increasing 100 to 150 basis points, perhaps even a little more; yet your outlook for '08 is up 50 to 100 with about the same REVPAR. Can you walk me through the higher costs that you're assuming to get there? Arne Sorenson: Well it is partly higher costs, but really what we've done this year, we think we'll be 150 to 200. Toot our horn a little bit -- we will post record hotel level house profit margins this is year. I don't think any of our competitors are anywhere close to that. One of the ways we have done that is with tremendous focus by our operating team on cross-efficiencies at all levels coming out of global systems like reservations and yield management and those sorts of things and also very much on the property level, both with management staffing, procurement, and all sorts of other tools, some incremental shared services, various tools we have used to drive those margins. That is helping us significantly this year, particularly with the limited service managed portfolio, Courtyard and Residence Inn. It helped us significantly with full service last year and into the first part of this year. That work is mostly done and so as we look into 2008, we will not have the benefit of those systematic changes that we think we can drive, which means it is going to be much more simply the difference between REVPAR growth and cost growth. I think on the individual cost line, there is nothing that is terribly surprising there; wages probably up in the 3.5% to 4% range, health benefits up probably more like the 6% to 7% range. Lord knows about utilities. I suspect we've got them up 4% or 5% for next year in our model, but obviously only time will tell on that. It is really the tougher comparisons of the initiatives that we've had underway the last couple of years. Carl Berquist: Also remember that the numbers we're quoting are for comparable hotels and so in addition to the numbers we've quoted we'll also get the benefit from new unit additions and from the maturing of hotels that have opened in the last year or two.

Your next question comes from David Katz - CIBC World Markets. David Katz - CIBC World Markets: Sorry if I missed it, but we're looking at G&A in your full year '08 outlook. Had you mentioned why that's up to the degree that it is? It was a little bit higher than what we had in our model. Arne Sorenson: Full year 2008 or full year 2007. David Katz - CIBC World Markets: 2008. Arne Sorenson: Actually, I don't have all of your models in front of me but I didn't think we were that far off from where you were on G&A. I suspect if there is a difference it is probably some of our brand initiatives spending and that sort of thing. We have deliberately accelerated the spending we're putting into some of the product initiatives that we think are important, including the Great Room which is really bringing life back into the lobbies, and some service initiatives. Probably a piece of it would be development G&A with the rollout of the new boutique business with Ian Schrager and some international growth. We're putting a bit more dollars into development than we probably anticipated a year ago, but I don't think our numbers are much different than generally where you all are on G&A. David Katz - CIBC World Markets: Since you mentioned it, the boutique initiative; is there any update that's worth sharing or able to be shared at this point? Arne Sorenson: The appetite from our partners has been absolutely fabulous. We've got maybe five or so hotels that have signed letters of intent today and a couple of dozen which are active leads. We're just really gratified by the quick response we've seen from the market and having a great time with Ian as a new partner and looking forward to what we can accomplish in the space with him and with the new brand. We don't have any announcements to make yet, but hopefully we'll have some fairly soon. David Katz - CIBC World Markets: Your investment spending for 2008, 750 to 850. I assume that that excludes maintenance and should we be thinking maintenance is still 60? That's a bit lower than what you've had the last couple years. Can we talk about what's in there if you haven't already? Arne Sorenson: I think that does include maintenance spending, and it would be broadly in the $50 million to $100 million range. Again, we haven't done our budget, so on that point it is not a terribly significant number, probably relying on a run rate. Carl Berquist: The big difference between '08 and '07 is that '07 has about $200 million worth of land in Las Vegas.

Your next question comes from Celeste Brown - Morgan Stanley. Celeste Brown - Morgan Stanley: Two questions for you. I know you said you're pretty comfortable with your forecast for next year, but as we think about the risk in terms of downside to REVPAR and how that would translate to margins, is it safe to say there is a one-to-one correlation? So if REVPAR is 100 basis points lower than the bottom end of your range, your margins would shift down 100 basis points, you can start to see margin compression? Arne Sorenson: Say that again? You're saying if we go south from 5 to 4? What are you saying? Celeste Brown - Morgan Stanley: At 4% is there zero margin improvement based on what you know today? Arne Sorenson: I think when you get to 4% you're probably getting to breakeven margin, give or take half a point. Can we run breakeven at 3.5%? Maybe. It is going to depend a little bit on the quality of the hotel. Carl Berquist: You mean the same margins as the prior year? Arne Sorenson: The same margins as the prior year. Absolutely, yes. Carl Berquist: So you won't have margin expansion. Arne Sorenson: Our guess is you need 3.5 to 4 points, something like that, to keep margins even with the year before. I think when you're above that in the 5% to 7% range, it is not science exactly, but the 50 to 100 basis point margin range for 2008 roughly corresponds to that 5% to 7% REVPAR growth. Carl Berquist: Of course on the sensitivity, we gave you $20 million to $25 million as our sensitivity for 1 point of REVPAR given where we're at today. Celeste Brown - Morgan Stanley: In relation to your group business, you talked about it being up 5% on revenue for the fourth quarter. All year, you and your competitors have been talking about very strong groups for the fourth quarter, supporting your views on REVPAR which has come true. Clearly it has improved quite a bit. Is the 5% in line with what you were expecting earlier in the year or is it a little bit lighter than your earlier expectations? Arne Sorenson: Maybe it is a point lighter, a point or two lighter at worst. Remember, as you get closer towards the end of the year, your group room night volume on average is going to start to level out, right? Unless you've actually deliberately decided to group up the portfolio -- which we have not done -- by the time you get to the end of the year, it is really only the rate that's driving the group revenue increase because your room nights are about the same. So when we're up 10% at the first of the year, it means we've booked more group business earlier and stronger and it is good confirmation that the group demand is there. But ultimately as we get closer to the end of the year that will start to moderate almost by definition. Celeste Brown - Morgan Stanley: So going from 6% or whatever it was to 5%, is that coming from cancellations or just a better view of what your business looks like? Arne Sorenson: It is a better view. There have been, in some markets, a little bit of disappointment. We mentioned Chicago and Orlando in the prepared remarks. Orlando there's a big new group hotel that's having some impact on the market as a whole. There are a couple of other instances which are really not in any way connected to the economy but decisions we've made. In New York, for example, at the Marriott Marquis we have deliberately chosen to group down, if you will, and put more higher-rated transient business on the books. It is a big hotel for us and that hotel by itself has a little bit of impact on the group business on the books because of that decision. Generally group business is solid, not as strong as transient has been, but nothing at this point to be overly concerned about.

Your next question comes from Bill Crow - Raymond James.

You talk about grouping up and grouping down your hotels. Given the economic outlook at this point, do you have a greater proclivity to think about grouping up in '08? Arne Sorenson: I suspect as we get into the budget process -- and again this is driven market by market -- we'll have more of those conversations than we had a year ago, but I don't think we have a general sense that that's a broad directive that we will put out. Carl Berquist: It is going to be very dependent on the individual hotel and the market that they're in. But you're looking at the special corporate rates that are so strong going into '08, it is hard-pressed to make that kind of call.

Arne, you mentioned in your remarks about supply growth next year approximating 2%. From what you're seeing and trends within your own pipeline, do you think the risk to the 2% is higher or lower at this point? Arne Sorenson: Is risk better or worse? Is risk up or down?

Do you think it is more likely that we exceed the 2% growth or we miss 2% growth for next year, based on what you're seeing in trends in the financing markets and your own pipeline? Arne Sorenson: Well, I think a lot depends on what happens with the financing markets. I think if they continue to recover 2% is about right. I don't think we see any substantial risk of being well above that, even if the credit markets recover, we wouldn't expect they're going to get back into the kind of state they were in three to six months ago. Even if they were, it takes a long time before certainly full service hotels come into being. A couple of points here. One is, we don't by ourselves try and track industry supply growth at large. We obviously pay a great deal of attention to our development pipeline and what's happening in the markets we're competing in, but we're not out there surveying building permit offices and doing the other things that some of the statisticians are doing to look at supply numbers. When you look at our development pipeline, you can see this in the openings numbers we're giving you. We expect to open next year about the same number of rooms as we opened in 2007, maybe a little bit more, a few thousand rooms in the United States, but essentially the same kind of pace we've seen in the past, so if there is a different supply dynamic for the industry next year, it is probably not coming from us. I think one of the things to pay attention to when our competitors come out and report is, are you opening a lot more hotels in the U.S. next year? If collectively you hear increases there that are meaningful, that would be the thing that would drive the supply growth versus this year.

Are your partners coming to you and saying because of the financing market we need more mezzanine help from Marriott or are you finding yourself investing more growing your own portfolio at this point? Arne Sorenson: Generally, no. Again, we're back-to-school, if you will, or back to work really only for about a month, and so it is still very early in this process. The limited service/supply or limited service development pipeline by and large there is not occasion for us to participate in those deals in any market, and there is very little conversation around that. Full service projects, there are a couple of deals that have seen their financing close during the month of September, and generally the debt was available, the spreads were probably 50 to 75 basis points wider than I suppose we would have assumed in June or July, but those deals seem to be getting done, but there are still very, very few so we would be a bit reticent to draw big conclusions from what we've seen so far.

One final quick question. Your 2010 not guidance, but your direction, what percentage of managed hotels do you assume are paying incentive management fees? Are we back up to the 70%, 75% level? Arne Sorenson: We would be in the 70% level basically, maybe plus a point or two.

Your next question comes from William Truelove - UBS. William Truelove - UBS: In terms of timeshare, I know you say everything is going just dandy, but obviously the GAAP earnings and the volatility hits to your earnings on a quarterly basis offsets the stability with your business model of being a manager franchiser. Are you guys planning on looking at different ways to either have more stable earnings out of the timeshare revenues or providing more quarterly guidance rather than just an annual and the one quarter outlook? Is there a way you can give us over the next four quarters this is going to be what happens in the revenues given what's going to be sold and what you can recognize on a GAAP basis? Arne Sorenson: Let's see. You want quarterly forecast through 2010, and we can't do that, obviously. I appreciate your frustration, Will. The timeshare business has gotten to be a tougher one to forecast than it was in the past. Part of that is accounting related, but it is not entirely accounting related. I think to some extent as we have gotten some bigger projects like San Francisco last year and we have got a tough comparison because of that project in the third quarter and a tough comparison because of Kapalua's contract sales in the fourth quarter last year. Because some of these projects are getting bigger and a little bit more concentrated, it is easier to see them slip by a quarter or two or three, and there is not much we can do to guarantee to you that we know exactly when that stuff is going to hit. There probably is no way to structure the business to insulate us from a bit of that. Having said that, we hear your comments. I think Laura and I are planning to see if we can set up a specific timeshare analyst day which hopefully we can get off in the first quarter sometime with Steve Weiss and the rest of our leadership down there and we can drag you a little further into this and make sure you understand everything we can help you understand. Around that event, we ought to have some conversation about what we can do in the world of the feasible to give you better guidance around this part of our business.

Your next question comes from Smedes Rose - KBW. Smedes Rose - KBW: Can you tell me what was the share count at the end of the quarter -- not the average, but at the end? Carl Berquist: We'll get it for you. Smedes Rose - KBW: Arne, on your second quarter call you talked a little bit about group pacing into 2008. You mentioned it about the fourth quarter, but could you maybe update just for 2008 are you still at high single-digits increase in the amount of revenues on the books versus this same time last year? Arne Sorenson: We're right about 10% versus the same time last year for 2007. Smedes Rose - KBW: And then the other thing, for this development in Las Vegas I guess it's a few years off, but would you look at the total investment there to be around $1 billion? I realize it is not on your balance sheet, but is that the scope of the investment and are you guys actively courting investment partners at this point? Arne Sorenson: Smedes, I am sorry. I got distracted trying to come up with your share number while you were asking. Smedes Rose - KBW: For Las Vegas it is several years out, but would you look for the total scope of the investment of that project to be around $1 billion and are you actively courting partners there? Would you expect to own some sort of equity minority position in the property or maybe just a little more color around that? Arne Sorenson: The $1 billion is probably off significantly, either when you look at the size of the project as a whole which we would expect to be dramatically bigger than that, $2.5 billion maybe; and hopefully dramatically high when you think about the kind of capital Marriott may have involved in it with our partners. We would anticipate dramatically less investment and would be striving to get as near towards our model of a management company only as we possibly could. We are actively talking to potential partners. I would not invite you or anybody else to think that we will finalize something with a partner in the next few months because before we finalize anything we're going to have to make sure we've got realistic cost estimates and designs and returns and much of the next nine to 12 months will really be spent designing this thing, costing it, making sure we understand how it will perform. As we get more certainty around that, we think the odds increase that we will finalize a deal with a partner. Carl Berquist: In answer to your share question, at quarter end common shares outstanding were 368 million, and if you looked at the diluted shares, the dilution during the quarter was about 20 million shares on average.

Your next question comes from Jeff Donnelly - Wachovia. Jeff Donnelly - Wachovia: Arne, if I can just ask a follow-up on timeshare, not to beat a dead horse, but I am trying to get my arms around what is sold versus what is reportable in your 2008 forecast. I know you don't have full budgets for next year, but are you able to quantify at this point at least in your forecast, the disparity between GAAP and cash revenues or earnings next year in timeshare? Arne Sorenson: Can we, yes. Can we do it on this call? I don't think we're ready for that. I know that in our multi-year planning -- and this should not be viewed as a 2008 number only -- generally the business for us is cash flow positive. So in most years as we look at a multi-year plan, we're generating more in net proceeds than we're investing in our business going forward. I am not sure that's an answer to your question and I hesitate to get into more detail on the cash flow for 2008 until we're through our budgeting process. Jeff Donnelly - Wachovia: That's fair. A question about your interest expense for 2008. It is a little bit higher than we had expected. Can you talk about how you anticipate funding your 2008 share repurchases broadly and what your interest rate assumptions are for next year? Arne Sorenson: As we reported, we're just shy of $3 billion of debt as we speak today. We brought those debt levels up significantly, obviously, in the last four or five quarters with investing in growth as well as a share repurchase program. I think as we look into next year we will be more significantly relying on cash flow from operations to fund a likely share repurchase program, and so if you think about $1.25 billion to $1.5 billion for next year, most of that I suspect will come from operating cash flow. While we might see our debt levels go up modestly, they're not going to go up significantly from this point going forward, meaning there are not a lot of new financing assumptions if you will in 2008 versus today. I think we'll do a bond deal or two, I suppose, between now and the end of next year and the balance would be commercial paper financing as we've done in the past. Jeff Donnelly - Wachovia: Pertaining to your G&A for 2007, I think at the end of Q2 you guys guided to about $700 million for this year, and now you're roughly about $20 million higher than that. Is that increase largely due to currency movements as you said, because I know there was a $15 million bump that I think you mentioned was a planned expenditure. Arne Sorenson: No, the majority is not due to the impact of weaker dollar. A portion of that is, and really there when we've got G&A expenses outside the U.S. that we're obligated to pay in Euros or pounds or something else to overseas staff when we translate that back into the U.S., it obviously becomes more expensive. That's probably less than a quarter of that change. I think the balance of that change is driven by some initiative spending and the like, and we referred to modeling noise in our comment. I think we probably just were too optimistic in the run rate on our G&A when we guided you about a quarter ago.

Your next question comes from David Richter - AVP Investments. David Richter - AVP Investments: Your '08 REVPAR guidance says 5% to 7%. Is it safe to assume that the full-service stuff does the high-end of that and the limited service stuff does the low end? Arne Sorenson: I think the full-service would be towards the high, I think that's fair.

Your next question comes from Michael Millman - Soleil Securities. Michael Millman - Soleil Securities: I think I missed a previous answer to a question on timeshare which was the number of tours, the change in yield, and any change in VPG or volume per guest. Also, can you talk about why you don't use points if you're thinking of using points, which might reduce some of the variability since you would be able to have a more steady flow? Arne Sorenson: You're talking about selling points instead of deeded units? Michael Millman - Soleil Securities: Exactly, yes. Arne Sorenson: We have looked at points in the past. We're actually selling a points project in the Asia Pacific region now which we like in that market. But we like it really not because of a difference in volatility. In fact, we would not see it as being less volatile from an accounting perspective, but because it allows customers to buy less than a week, in effect. and sort of ramp up in smaller increments than the typical U.S. customer would do. In the U.S. obviously our shortest period -- not without exception but almost without exception -- is a one-week product. We have lots of customers who reload and buy more than one week, and end up with multiple weeks, and that seems to work very, very well. In Asia we think folks are more likely to start out buy two or three days worth of points and I can reload in smaller increments, and we think that's the real advantage; not really very helpful from an accounting volatility sense. Michael Millman - Soleil Securities: Wouldn't it be helpful at least on a contract basis? Arne Sorenson: I don't think so, no. There are some significant administrative issues also that are quite important, and we like the dynamic of selling a deeded, sort of forever product, to our buyers. While it is not a real estate purchase, it feels like a real concrete thing that really resonates with our buyers and it works extremely well. While we've looked at it regularly, we see very little compelling reason to move towards that model, certainly in the United States. I did not communicate the statistics about volume per guest or closing efficiencies or tour flow. Generally they're running consistent with what we've seen over the last period of time. Tours are steady, the number of folks who visit who ultimately buy that percentage is staying pretty solid the way it has been the last year to year-and-a-half, and volume per guest is coming up with pricing. Pricing is probably up by week, I don't know, 4% or 5% I suppose from last year, and that would be driving the volume per guest up about the same amount. Michael Millman - Soleil Securities: What is the yield number? Arne Sorenson: It varies a little bit by product type and by resort, the typical time share one would be in the 15% to 20% of folks who show up at the resort, ultimately buy.

Your next question comes from Felicia Hendrix - Lehman Brothers. Felicia Hendrix - Lehman Brothers: Arne, I have a quick question. I know we should wrap it up. Earlier when you were talking about the timeshare you said that some of the residential product was selling a little slower, strong in urban markets and the resort markets a bit slower. Wondering what you're seeing at the Ritz residences at Vail? Arne Sorenson: I don't know that we've started taking contract sales on those residences yet. We'll have to get back to you on that, Felicia. I know that's a project we have coming on fairly quickly, and it may be that they started and I just don't know about it. Felicia Hendrix - Lehman Brothers: It is my understanding they have. I just wanted to correlate what you were saying with the resort markets with that. If you would get back to me, that would be great. Arne Sorenson: You bet. Sara, thank you very much for hosting us this morning. I want to thank all of you for your time and your interest, and thanks very much for your business.