Ladies and gentlemen, thank you for standing by and welcome to Marriott International's Third Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your question, following the presentation. [Operator Instructions] Thank you. I will now turn the call over to Arne Sorenson, President and Chief Executive Officer. Please go ahead sir.

Good morning, everyone. Welcome to our third quarter 2019 earnings conference call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer; Laura Paugh, Senior Vice President of Investor Relations; and Betsy Dahm, Senior Director, Investor Relations. I should note 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 November 5, 2019 and will not be updated as actual events unfold. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks at www.marriott.com/investor. So let's get started. We were pleased with our results in the third quarter. Our global system-wide RevPAR rose 1.5% consistent with our guidance. Our global RevPAR index increased 210 basis points in the quarter with strength in the U.S., Asia Pacific and the Caribbean and Latin America. In the U.S. alone RevPAR index increased nearly 200 basis points in the quarter with U.S. transient index up 250 basis points. Marriott Bonvoy is on a roll. Global room revenue for Marriott Bonvoy members is up 12% year-to-date over the last nine months members contributed 52% of system-wide room nights, a 320 basis point increase year-over-year. In the U.S. alone members represented 58% of booked room nights in the nine months. Year-to-date loyalty point redemptions are up over 20%, driving better results at resorts and leisure destinations around the world. Social media feedback about the program has become decidedly favorable. In a recent survey of…

Thank you, Arne. Our third quarter financial performance was solid. Adjusted diluted earnings per share totaled $1.47. While RevPAR growth and individual P&L line items were quite close to guidance, we were about $0.02 shy of the midpoint. Roughly $0.01 came from slightly higher-than-expected tax rate and a bit over $0.01 came from weaker-than-expected hotel performance in Hong Kong. Global system-wide constant dollar RevPAR rose 1.5% in the third quarter year-over-year. For North America alone RevPAR increased 1.3%. RevPAR growth exceeded our expectations in D.C., Houston and Hawaii on strong citywide and transient demand. On the other hand, New York City RevPAR continues to cope with both higher hotel supply and lower demand. RevPAR growth in Orlando and South Florida was constrained by death concern about Hurricane Dorian. RevPAR for our comparable hotels in the largest 25 markets increased 0.9% in the quarter. For group business in North America comparable hotel RevPAR rose 2%. Group cancellations remained modest and attendance at group meetings were strong. Transient RevPAR was up slightly year-over-year reflecting steady corporate demand and stronger demand from leisure travelers. In the Asia Pacific region system-wide constant dollar RevPAR increased nearly 2% in the third quarter constrained by events in Hong Kong and trade war impact on tertiary markets in China. Excluding Hong Kong, RevPAR in the Asia Pacific region increased nearly 3%. Larger markets in China were strong particularly Beijing, Shanghai and Guangzhou. Leisure demand for our hotels in China is growing and outbound room nights sold to mainland Chinese travelers in the region increased by 9% in the quarter with large numbers traveling to Japan, Thailand, South Korea and Malaysia. In Europe system-wide constant dollar RevPAR rose 2% in the third quarter compared to the prior year, 4% excluding the impact of the World Cup in Russia…

Thank you. [Operator Instructions] Our first question comes from the line of Harry Curtis of Instinet. Harry, your line is open.

You're open, Harry.

Can you hear me? How is that?

Now we got you.

Hey, Harry.

All right. All right. Technology problem here. Yes. Laura, you've been a great resource and partner over the years. Thank you very much.

Thank you, Harry. Great working in with you.

I appreciate that. So just a couple of quick questions. First, Arne, you were talking about corporate negotiated rates and in that process, are you guys getting any sense of the -- if whether or not the political environment is holding back travel budgets or investment by your customers? And what would it take to improve that sentiment?

Yes. I don't -- there is a little bit more apprehension, I suppose, and that we pick up. I'm not certain so much in the special rate negotiations directly as it is in just the conversations we're having with senior members of the American business community. I think that apprehension is a little bit about politics, but the way you framed it, maybe makes it almost sound a little bit too general. I think it is more focused on the trade dynamic probably than politics generally. And, of course, we've got every day news about whether or not we're nearing a trade deal. I think, if we get to a trade deal, obviously, that will be meaningful even if it's a relatively small deal. But having said that, while apprehension is a bit higher, I think, absolute performance of the U.S. economy is still quite robust. It may not be reflecting the kind of growth we'd like to see on a year-over-year basis. But whether you're looking at our industry or the economy more broadly, I think you see obviously low unemployment in our industry, you see high occupancy, you see absolute performance that is fairly meaningful. And so I think we would characterize this and you can sort of sense it in what we said to expect in terms of year-over-year increases in revenue coming from those special corporate accounts. But it feels like a cautious but steady move into 2020 from 2019, expecting a bit more of the same as opposed to something declining.

Very good. And my second question, shifting gears, relates to the connection, if there is any, between the growth in Bonvoy members and correlation to credit card fees, growth in credit card fees. And as we -- you've shown a terrific increase in the number of your members. Is there -- or would you expect there to be some correlation to growth in credit card fees to a similar degree in 2020 and beyond.

Well, obviously, we had a gonzo year in 2018, when you looked at the way the credit card made contributions to us compared to before. And, of course, that was because we had renegotiated deals with both of our credit card partners. And we're in market with new limited time offers and other things that we're moving that quite robustly. Growth rates in 2019, by comparison, have been maybe a tad better than growth in total lodging fees, but not dramatically different. We have, of course, have got internal discussions underway where we're looking at what we might budget for 2020. It's a little too early to talk about that in any sort of particular ranges, but we think there is more opportunity for these credit cards as the program gets that much more powerful. Our penetration of total Bonvoy members is very light. Our penetration of the heavy travelers is obviously more significant. But I think we'll look for opportunities to grow that contribution in 2020 and probably in a number of years beyond that.

Very good. Thanks very much, everyone.

You bet.

Your next question comes from the line of David Katz of Jefferies.

Hi. Good morning everyone.

Good morning.

Laura I just want to thank you for being patient in explaining to me synfuel, timeshare and any other detail. And for being the best caller-backer of all time.

Thank you, Dave.

All the best. I wanted to just go back Arne to a comment you made in your opening remarks about margins being up 150 basis points versus 2007. Obviously, we're comparing a different business today, but I have sort of gone back and looked at what the incentive fees were and trying to compare that on a -- some kind of a per room basis. I got about halfway through that analysis and it became my turn. Help me sort of compare what the incentive fee generation is today and how we would put that in context for where you think we are in the cycle versus that 2007. I just found that comment interesting and would love to elaborate on it a little bit more.

Yes. So a couple of things. I'll repeat a couple of things I said in the prepared remarks. So we have calculated -- obviously we're talking here about hotel-level margin performance which is really about managed hotels and principally until a comment coming up is about North America. And two things. One is we've tried to calculate what margin performance is driven by RevPAR and then what margin performance is driven by implement assets we've been able to implement because of the Starwood transaction. And that difference is about 220 basis points in North America. So, we think about 220 basis points or two full points of GOP margin has been delivered because of that. In part because, of that we end up with nominal GOP gross operating profit at the hotel level up 150 basis points from the peak in 2007. Now that's an average number. It covers a lot of variables across different markets in the United States. We know that New York for example with both substantial cost growth which has experienced in the last decade not just in wages and benefits but also in property taxes and compounded with some supply growth. We have seen more pressure there on house profit margins compared to peak than we have in some other markets. Now when it, gets to incentive fees this becomes a global story of course. And what we've seen is a continued meaningful shift from U.S. derived fees to international derived fees. And while it would be an oversimplification to say that all international IMF is less risky than domestic IMF certainly on average terms it is significantly more stable through the cycles than the American IMFs are. Why? Because typically in the United States you would have an owner's priority. And until you fill that owner's priority bucket we get nothing, where in much of the rest of the world, the incentive management fee formula gives us a share of profits from the first get-go.

So just a couple of more things to add to that David that you may find helpful which is the switch from kind of what used to be two-thirds North America total incentive fees to now one-third which will -- absolutely we expect to be the case in 2019 that only one-third of the incentive fees are coming from North America. One of the interesting things when you look at Q3 is that actually the percentage of international hotels earning incentive fees increased from 73% to 75%, while not surprisingly in the U.S. they declined from 52% to 41%. So all of this again points to Arne's theme about the predominance of owner's priorities in our North America managed hotels while outside the U.S. it's much more that on dollar one of profits we earn an incentive fee albeit a lower percentage of overall profit.

Super helpful. Thank you very much.

Your next question comes from the line of Robin Farley of UBS.

Great. Two questions or one question one follow-up. First is just looking at removals in the system this quarter it looks like the lowest rate in a couple of years. And just wondering if that was just a timing issue or if there's sort of a change in either properties in the system that are willing to make reinvestments? Or are you more lenient with not forcing some removals. So I just wanted to get some color there. And then I do have a follow-up as well. Thanks.

Okay. Great. Thanks Robin. No, you hit the nail on the head in terms of that we are expecting a lower rate of deletion from the system this year certainly than last year which approached 2% and was disproportionately related to the legacy Starwood Hotel portfolio. And this year we are looking at that being much closer to 1%. We've been giving guidance for the year of 1% to 1.5%, but as we've moved through the year and continue to have conversations with owners, we're continuing to see that many of these hotels are staying in our system. It is not a function of u0s being more lenient relative to the kind of investment required for these hotels as we've talked to you there's been tremendous investment for example in the Sheridan portfolio as many of those hotels are either undergoing renovation or we've got agreements for them to undergo renovation. I think we are thinking this early in the budget process as we look at 2020 and it's really too early to say anything more than a fairly stable historic rate that would be 1% to 1.5%. Obviously, of course, it will be great if it turns out lower, but we do think for this year it is going to end up towards that lower range.

Okay. Great. And then just as a follow-up you talked a little bit already about incentive management fees. Just thinking about 2020 next year and you've only given the RevPAR guidance. Is it – should we be thinking about maybe fee growth not being at the same level as this year's 5% just given that if expenses continue to go up in North America just the issues that you highlighted in this quarter with incentive management fee Hong Kong where it sounds like RevPAR really expected to decline next year? And then expenses in North America we saw the pressure on North American property margins this year house margins this year. Does it seem like the expectation for fee growth next year would be lower than this year's growth rate?

I think it'd be too early to conclude that. I mean, let's be mindful of the fact we are heavily into the budget process right now, but we're not completed yet. And of course we've got a sense, which we've shared with you this morning of a RevPAR range which we think is germane to the way we think about 2020. But the teams around the world are working to sort of run that through each of their businesses and individual hotels for that matter just to where it pulls together and settles. But I would think that lodging fee growth there's every reason to believe it will be positive and should be broadly comparable to what we experienced in 2019.

As you know, we had a couple of oddball items like FX and changes in termination fees and shifts in residential branding fees that impacted. And all of those things will need to be taken into consideration as we look at next year. But the fundamental model of RevPAR and unit growth would get you certainly to something that looks quite similar to this year on that part alone.

Okay. Great. Thank you very much.

You bet.

Your next question comes from the line of Smedes Rose of Citi.

Hi. Thank you.

Good morning.

I wanted to just ask a little bit about just the Sheraton and the Westin brands if you look at the year-to-date performance at least measured by RevPAR I mean, they're struggling versus what you've seen at the Marriott brand specifically. And is there anything that you would expect to be doing differently or something that's underway maybe that will help kind of close the performance gap in terms of percentage changes as you move forward? Or any thoughts since you acquired these brands?

Yeah. It's a good question and it does – it's a logical question given the RevPAR numbers by brand that we share in the press release. I think one of the things that we were most gratified by in Q3 we obviously talked about [Audio Gap]. But we saw index growth in both legacy Starwood and legacy-Marriott portfolios. And that is a pretty powerful sign that we think this experiment is working well. And it's going to work well we think for both portfolios if you look at it that way. I think what Sheraton and Westin are probably quite different in this regard. Westin is impacted by the law of small numbers to some extent more than Sheraton is. So the smaller the portfolio the more you've got some variability based on geography alone that can often have an impact to the reported RevPAR numbers. Sheraton obviously is a bigger brand. You still have some geographic differences there that are relevant. I think the other thing we've got is we've got a good amount of renovation activity underway in the Sheraton brand which does have an impact on the margins on the way RevPAR is posted in any given quarter. That might be short-term pain, but clearly it is long term very much to our advantage. But again, I think the – if you put a point out and said, well, how does Sheraton repositioning going in? We're really actually quite encouraged. The – a piece of that is implied by Leeny's comments about relatively lower deletions from the system. I think what we're seeing from our ownership community generally is a positive support for where we're taking the brand and an acknowledgment that that means capital needs to be brought in and those brands – those hotels need to be brought up to the kind of standards we're setting for the brand going forward.

Okay. Thanks. And then can I just follow up quickly? You're continuing to expand your all-inclusive presence. From a valuation perspective it looks, I mean, that was just pretty – clearly pretty compelling and I'd imagine there's a lot of synergies there. But I wanted to ask it's a big sort of concentration in Barbados. Not as big as – it's not the biggest destination for U.S. tourists as it is for European. And I mean, I guess kind of what is your goal here? Is this just sort of set up a platform for other folks to come to you now and sort of say, we want to be a part of this? Or kind of what's the endgame ultimately?

Yeah. I mean, the – obviously, all-inclusive has grown very steadily over the course of the last couple of decades I suppose and we've watched it develop. It is almost by definition a purely leisure brand. I mean, there are certainly some hotels that are getting some group business that is not leisure but it is heavily a leisure play. We are really encouraged by the Bonvoy strength which we've talked about this morning, which really in some respects is about recognizing business travelers by giving them the kind of experiences they want, when they're taking their leisure trips. And with lifestyle and luxury and resort portfolio that we've got in our hotel portfolio, we've already got tremendous things to offer there. But we can see that in the all-inclusive space there's another thing that we would like to be able to offer which is a connection with the loyalty program for an all-inclusive stay which many, many travelers like to have. I think the bet we're making with Elegant is not as concentrated as it might seem. Well it's a handful of hotels in that market. It's only about 700 rooms total. So we're not in any way concerned about our ability to continue both to market that in the UK, which has been the strongest source market for those hotels, but increasingly open that market up to American travelers who will find the paradise of Barbados I think as attractive as many of the other markets in the region. And then I think we'll continue to move. I think the theory has been well-recognized for a number of years and that is -- isn't it obvious that hotel loyalty programs should be able to deliver good cost-effective volumes all-inclusive hotels. And I don't know that anybody has really proven that yet. Obviously some of our hotel competitors are already in with a handful of all-inclusive hotels, but I think it's still early for all of us. And we want to make sure that we get in there that we use our management team to both learn the differences in this business, but to also be able to make sure we can deliver our customer to these kinds of hotels. And I think we'll be able to do that.

All right. Thanks. And Laura best of luck on your next adventure.

Thanks, Smedes.

Your next question comes from the line of Joseph Greff of JPMorgan.

Good morning, everybody and Laura, I just want to add you will be missed. So thank you for all your help over the years.

Thanks, Joe.

Arne, you talked about construction delays earlier in the call. Can you talk about how much of it is related to operating expenses or construction costs and finding labor versus owners just maybe cooling things a little bit in light of macro uncertainty? And then how much confidence do you have in terms of that there's a plateau in the delay of some of these new openings as you look out to 2020?

So in fairness a good question, Joe. The -- obviously we're disappointed by this too and a quarter ago and probably two quarters ago too. We were asked about net unit growth in 2020 or in the years ahead compared to 2019. And based on the multiyear planning that we've done much of which we've shared with you when we do analyst meeting and also just based on the obvious which is that the pipeline in aggregate size is very big and we've been signing high-quality deals every year. And while every year is not a record we have been in many respects surprised to the upside about how the new projects are coming into the pipeline. And that continues well into 2019 even with the sort of apprehension in the market. So all of those things caused us to be not just hopeful, but to have some factual underpinning thinking that we were going to see unit growth step up in 2020 and years beyond from the levels we're today. And obviously, we've given you our first look at 2020 this morning or in our release last night. And I have said we now expect it to be roughly comparable negative growth rates next year as this year, which I know is disappointing to folks. We're still early in the process so we should mention that. We don't -- we've not finalized our budget plan. I think that as we've said in the past and every quarter we go through the entire portfolio pipeline. And we add new units based on signings that have been done we subtract units when they open and we subtract a few that are killed every quarter. The number that we've canceled this last category is really not moving. So we're not seeing the…

Excellent. Great. Thank you. And then for my follow-up, it looks like based on your disclosures in the press release that the buyback activity moderated somewhat meaningfully quarter to-date. And I know the capital return commentary is left intact. If you could just help us understand; one, am I interpreting that correctly? And two maybe what drove this sort of slowdown in 4Q-to-date buyback activity.

Sure Joe, happy to. As you can imagine kind of in between every month we're constantly assessing the cash that we need for investment, the timing of that investment, as well as the timing of asset dispositions and just the general flow of cash from operations. And the reality is, we got bit a bit by the timing of both our commitment on Elegant and on Union Square and not really wanting to count on cash in the door until it actually showed up. So there isn't really any message at all relative to the timing of quarter to-date. And if you look at our first three quarters they are actually quite even except for Q1, where we were a bit more accelerated in Q1, because as you remember we started off the year with a leverage ratio that was really down towards the lower end of our 3.0 to 3.5. So as we talked about, it's the same expectation for overall level of capital return to shareholders as it was last time. And generally, the new CapEx that we've talked about is offset by the disposition that we had last week.

Great. Thank you.

Thank you.

Your next question comes from the line of Anthony Powell of Barclays.

Hi, good morning guys. The acceleration of the RevPAR index gain was pretty meaningful in the quarter. Was that driven more by the sales momentum you talked about or by better customer engagement with Bonvoy?

It was driven by both, but I think the Bonvoy piece is probably the broadest in its extent. That is very much a global phenomenon where penetration from the loyalty program went up meaningfully in essentially every market around the world. Our group sales at the same time which is a function of the sales force obviously is stronger than the transient categories of business, but by a point or so not dramatically and certainly not capable of explaining all of that index growth, if you will for the quarter.

Got it. And you mentioned that the loyalty redemptions were up 20% in the quarter. Was some of that growth due to the fact that customers may be pulling forward some bookings ahead of changes like peak and off-peak redemptions and penetrate upper comps in the future?

Yes. The redemptions have been high this year. I think a big chunk of it is simply the stability of the program now and the ability of customers from legacy SPG and legacy Marriott rewards to experiment with a broader portfolio. And that's been very interesting to see and there's some obvious examples. Starwood for example had the Great Chica Collection in Italy principally. But Southern Europe glorious hotels and suddenly that's opened up to a huge number of legacy Marriott Rewards members. And they say, these are places that we want to try and experiment with. I think there is probably some on-sale aspect also that moved that. I think some of the bookings that could have been made through the first part of 2019 probably not into the middle of 2019 allowed some of the highest category hotels to be -- and this is not about peak/off-peak pricing, but it's about the former highest category hotels. They were on sale a little bit based on the way the minutia of those formula work. And I think you have some extraordinarily sophisticated folks who watch these loyalty programs and thought this is a good time to reserve some of those redemption stays for that kind of hotel. But I suspect, we will see pretty robust redemption activity as a steady state aspect of a loyalty program going forward.

Got it. Did the mix of redemptions in the system increased significantly this year? Or was it kind of similar to prior years in terms of overall?

Well all redemptions are up, but they're up not just in luxury and upper upscale, but they're also up in the select service space.

And there's meaningful crossover which is great to see. So you've got former Marriott Rewards members going to legacy Starwood hotels and vice versa in meaningful nights.

Thank you.

Your next question comes from the line of Thomas Allen of Morgan Stanley.

Hey good morning. You were very active on the transaction front so just a couple of questions on that. Do you expect to do any more single-asset transaction in the near term? And then when you think bigger picture are you returning to your historical practice of doing a larger bolt-on transaction or small to medium-sized bolt-on transaction every year? And then, how are you thinking about larger-scale M&A like Starwood? Thank you.

I mean I'm going to say something general, and then Leeny will jump in here, and give you something that's more precise. But, we have, obviously, the capacity given our size to make some modest investments in positioning the company for accelerated growth going forward. And so, the deals we've announced, for example, in the last four to six weeks really proved that out. They are about positioning us well for the all-inclusive space, which we've talked about already this morning and making sure what we do what we want to do for the W brand, particularly in North America where we want to make sure that we invest in the strength of that brand, which has been a juggernaut for Starwood for many years; but do that in a market like New York where it is really important that we have a flagship that we feel great about. And so, both of those opportunities stepped up. We, of course, looked at them in the context of how does that individual deal value for us long-term. What's the strategy for it? But more than that we look at it in the context of are we strengthening the platform for us to grow in the future. Leeny, I don't know what should add to that.

Yeah. No, the only thing is to your basic question, the answer is no. We're not changing the business model, whatsoever, relative to the asset-light business model. We actually own 14 hotels today, which is the same that we owned a quarter ago as we bought one and resold one. And as Arne said, it's seven hotels on for Elegant, but they total only a small number of rooms. So, it continues to be the same which is that we are opportunistic whether it’d be bolt-on or whether it’d be single-asset purchases. They're very much done from a strategic lens, but also with a view that we are not moving at all from our asset-light model.

Helpful, thanks for the color. And then, just a quick one. You highlighted in the prepared remarks that in 2019 you expect to earn $30 million from fees from Hong Kong. What was that in 2018? And do you have guarantees on those hotels? And so, just help us think about like the potential volatility in that number would be great. Thank you.

So, as we talked about, first of all, the break is that it's $30 million, which is kind of probably 65-35 between base fees -- base in franchise fees versus incentive fees. What we talked about is them being down $3 million in Q3 and $5 million in Q4. My guess is they were expected to be up a little bit this year. So, that's going to say on a net basis that they're probably down, I don't know, $5-ish million for the year this year. And then, obviously as we go forward, we'll have to see what next year brings. We don't have any meaningful sort of guarantees that would remotely be something that would kind of give you pause. We do have a JV, the Sheraton Hong Kong JV, which was impacted in Q3, and we'll be -- expect impacts into Q4 from those JV earnings. But again, these are all relatively small amounts when you're looking at only 12 hotels overall.

Thank you.

Your next question comes from the line of Amanda Graham of Goldman Sachs.

This is Steven Grambling, so maybe that's me. Thanks for getting me in. Thank you, Laura for all of your insight and humor. Maybe that was one last thing to mess with me.

I promise. She didn’t. But I promise you she didn’t do that.

First on David's first question on house margins, how much of the improvement has been driven solely by RevPAR in the economic expansion versus benefits to owners through increased sale credit card negotiations OTA renegotiations, et cetera?

Well, so the 220 basis points is all the latter, okay? That's an effort to calculate the margin, cumulative margin impact since we closed the Starwood deal, excluding the impact from RevPAR. And if you take that number and the 150 basis points, the absolute improvement in margins versus 2007, it would suggest that 100% of it -- a bit more than 100% of that difference is driven by the deal that we've done and the steps we've been able to take since then. Does that answer your question, Steve.

Yeah, that does. That's perfect. And then second on Thomas' question about capital intensity. Is there a rule of thumb to think about for the combined CapEx software investment contract acquisition costs? As we move forward, given the increase over the past two years, seems like we should be moving to a more normalized level?

That's a good question. I mean I think the capital spending we do -- we've talked quite a bit this morning about some of the unusual deals. So, let's ignore it first, because that's been talked about.

Yes. The normal $650 million to $750 million that we've talked about on an annual basis and that we talked about at the security analyst meeting is still the appropriate number for what we think for ongoing organic growth of our business of which roughly, call it, $225 million is normal maintenance CapEx for our corporate systems as well as for our owned leased hotels. So, the rest is as you know there's a good chunk of key money and then bps that are either for equity investing as well as for loans and guarantees. And again as we talked about today for example in this year if you're talking about roughly $1 billion to $1.1 billion, we would expect as much as $600 million of that could be should be recycled over time.

Helpful. Thanks so much.

Your next question comes from the line of Patrick Scholes of SunTrust.

Hi, good morning.

Good morning.

Laura, thank you again. Certainly thank you for taking and promptly answering my many obscure questions over these years.

It's been fun Patrick.

Thank you. Arne a question for you on that strong group pace for next year. How much of that strength do you see is driven by political conventions and the like?

I don't think much. I'm not sure I actually know for a certainty. But certainly over time a presidential election year is not a great year for Washington D.C., for example, all other things being equal because by and large the politicians are out on the hustings as opposed to hanging out in Washington. And so we obviously have a substantial presence including group hotels in Washington. I don't know what their bookings are for next year, but I would guess that it is sort of less than average. And I think when you look at the rest of the country, of course, you'll have two conventions in two individual cities which will be good for that. But I think overwhelmingly what we're talking about is corporate and association business. It's not about the political environment.

Okay. Thank you for your color on that.

Okay.

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

Hi, good morning everybody and Laura I wanted to pass along my congratulations as well. And I'm sure I think 11 years ago we were talking about incentive management fees. So, I feel like it's an appropriate time to ask about incentive management fees. So, I just wanted to kind of dig in a little bit. Arne, I think you gave some color earlier in the Q&A about just sort of the breakdown in mix between domestic today versus where it was previously in international. As we look at what was kind of provided at the Securities Analyst Day though and we think about like the environment that we're in it does feel like we're sort of running below the level of targets where we thought maybe a 1% RevPAR environment we might be able to get to let's call it mid-single-digit type IMF growth and it feels harder and harder to kind of hit that. So, just could you break that down a little bit more? Is there a specific area that you think is kind of either trending below what you thought or missing expectation? Is it just across the board that there's a little bit more leverage in the model than you kind of thought there was? Or just kind of how you break that down for us.

So, maybe we should decide right now that we'll invite Laura back in a decade and we can talk about incentive management fees and what would that be 2029 or something like that. The -- and one context-setting comment before answering your question, obviously, the incentive fees are skewed towards -- by definition they are always on managed hotels not franchised hotels. And they skew towards more significant markets think of the top 25 in the United States or very well-established resort destinations. And they skew towards upper-upscale and luxury hotels all around the world. And it is those hotels which deliver disproportionately higher fees per room to us than our competitors or others in the industry will experience from the brands that they've got. So, while there is a bit more volatility in incentive management fees for obvious reasons, they come from the bottom line not the topline. They are in every instance fees we would just as soon be earning because they are economically additive to us and because they are strategically additive to us because those hotels make an extraordinary amount of difference. Leeny and Laura and Betsy and I were talking this morning actually I think if you go back and look at the securities analyst meeting and the 1% scenario, we're performing right in line with that at least in terms of total fees. There may be some variability in which of the three fee lines is contributing to that, but broadly we're within the range of what we've talked about. And so there's nothing here that we're going to be able to say to you this morning that gives you tremendously more clarity than what you know to be the obvious which is that when you're in a low year-over-year RevPAR environment with expenses growing at meaningfully faster rate than RevPAR is that that's going to have an impact to Marriott and its incentive fees just the way it's going to have an impact to the owner and their contribution from that hotel. Now, there are some things which exacerbated here a little bit one way or another. Hong Kong we've talked about at length this morning would have had a disproportionate impact in Q3 albeit modest. I suspect the impact in Q4 will be more significant than in Q3 because the performance there is going to be that much worse in Q4. And then you go around the rest of the world and you'll see different performance in different markets. New York, we've talked about too New York will be a place where because of anemic RevPAR growth or modest declines even in RevPAR. And cost increases the incentive fee contribution from the hotels that are in incentive fees in New York will be disproportionately weaker than they would be in other markets around the world.

The only thing I'd add to that is that when we look at 2019's expected full year fees, we actually at this point would expect that international incentive fees will go up year-over-year. They won't go up a lot but they will go up. And that represents two things. First of all the different quality of the incentive fees as we've talked about earlier much less of an owner's priority characteristic. And number two, in general, our managed footprint is growing faster outside the U.S. than it's growing inside the U.S. So again, when you look at those security analysts' forecast or expect models that we put out earlier this year, one of the things to remember is that we are expecting unit growth outside the U.S. to be faster than inside the U.S., which again has this difference in the characteristics over the incentive fees.

Great. Thanks, everyone.

Your next question comes from the line of Jared Shojaian of Wolfe Research.

Hi, everybody. Thanks for taking my question. Arne it's good to hear from you. I'm glad all is trending as we've hoped so far. And Laura just echo everyone's comments. It's been fantastic. Congrats and best wishes to you.

Thanks Jared.

In the 2020, 0% to 2% RevPAR guidance, can you parse out the impact from group business transient and leisure transient? And if I just take your group commentary, which seems really strong and your special corporate rates being up low single-digits, it would seem like leisure is not as strong. So correct me if I'm wrong on that.

Yes. You're testing us a little bit given we have not done our budgets yet for next year. I mean I think it's -- I think you're going to infer from what we've said that group may be the strongest contributor if you will to that 0% to 2% range that we gave for next year. I think it would be far too soon to suggest that that implies that leisure transient is meaningfully weaker than business transient. Obviously, we're going to see the way the year actually evolves but we're also going to see the way the completion of our budget season evolves. And again -- but behind that average of 0% to 2%, you're going to see some markets that are lower than that 0% and some markets that are higher than the 2% based upon market dynamics, which may have something to do with convention centers or group booking pace for that individual market or the strength of the sort of local drivers of those economies as opposed to some other economies. So I would -- while group I think will be among the strongest segments for us. I don't think it means that the others are necessarily going to be down.

Okay. Thank you. And just a follow-up on that. I mean, if I look around at other travel industries, leisure travel in general I think still seems to be quite strong. You've got the theme of experiences. You've got the boomers retiring. That seems to be a little in contrast to some of the things we're seeing on the hotel side. Do you think some of the -- I guess call it leisure softness maybe not as strong as what we're seeing with group and the like? Do you think any of that could be related to I guess home rental starting to gain a little bit of a bigger share of the hotel pie here in recent years?

Yes. I don't -- and that's one reason I answered your first question the way I did is we don't see leisure has been weak. We see -- and again I'm probably talking a little bit about the American situation at this point but probably we can expand it to some other parts of the world as well. I think that the -- what we see is our leisure customer is out on the road and they are staying with us and they're taking their vacations. Yes of course, some are doing home rentals when they travel as well. That is I think particularly more relevant for those that are most cost-sensitive, not for those who are most interested in a great experience if you will. And of course that's one of the reasons we've decided to get into this space ourselves to deliver something which is more predictable as a great experience and more tied for travelers who are interested in more than just the cheapest rate that they can possibly get. But I think leisure remains strong. We -- I met with some senior folks coming out of China not so long ago. And I think if you look at China outbound travel which is often leisure, the global numbers are still quite respectable. Arrivals in Europe from China of course are much stronger than arrivals in the United States are from China and there are a number of reasons for that. But I would characterize really the leisure customer generally as being quite healthy.

Okay. Thank you very much.

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

Good morning. Laura, I jumped on your bandwagon but I've been on it for 20 years now and thanks for the ride. Arne, strength and wisdom to the doctors. My question -- first question really has to do with incentive management fees go back to that topic. What is the mark-to-market on an expiring management fee? In other words, those that were signed 20 years ago or 25 or 30 years ago we know the economics were really good at Marriott. But as they mature, as they expire what does that change? What's the delta?

That's a good question Bill. I mean, I don't think that's terribly germane to what we're experiencing today, okay? So the performance in our global incentive fee line is not being driven by a mark-to-market of a significant number of managed hotels for example. So I would suggest this question be viewed a little bit more abstractly than that. And there I think it's going to vary a little bit by part of the world. Leeny mentioned that about two-thirds of our incentive fees now are coming from outside the United States. Those contracts are -- they're not all uniform, of course, but we're signing brand new hotels coming into our system with incentive fee formulas and real contributions from them about similar to many of the hotels we signed a decade ago, which are in. And so I don't think there's a meaningful mark-to-market risk there long term. I think if you look in the United States or to some extent in Europe, there are some above market deals that we did a long time ago. Sometimes they were assets that we controlled and sold. And as those mature, I suspect that owners will try and reduce incentive fees there. Now to be fair, owners will always try and reduce the net level of fees that they're paying, not just incentive fees but the top line fees as well. And the negotiations there really are about what, kind of, value do your brands and does your loyalty program deliver and what are they worth. And a long-winded way of saying, of course, if some of those contracts were terminated today and start all over again, I suspect that they would start with a similar formula for incentive fees but probably with a starting point, which is lower than what they're achieving today.

All right. And my follow-up quickly and if I missed it I apologize. But could you talk about capital return for 2020 given some of the other comments you made about trends being similar next year to this year? Any reason to suspect that you won't return $3 billion or so in capital?

Yeah, I think from a model standpoint that you're right, the fundamentals in many respects when you think about EBITDA growth and the kind of RevPAR and unit growth numbers that we've talked about that makes sense. But a couple of caveats for you Bill. First of all, we haven't gotten into the detailed planning that we're thinking about whether it's cash taxes or net working capital and the loyalty program and all that. So for the moment let's assume, we're talking kind of more of the same. And the only comment I would make is to remember that we started out this year really at the lower end of our classic 3.0 to 3.5 times leverage ratio. And we did take advantage of that in the early part of the year. So that, kind of, kick we won't have the advantage of next year. But otherwise I would say that your general thesis is correct.

All right. Thank you all.

You bet.

Thank you.

Your next question comes from the line of Wes Golladay of RBC Capital Markets.

Hi, everyone. Just had a quick question on the new OTA agreement. You mentioned that you have better control of the inventory with third parties. How meaningful is this and will show up more in the RevPAR line item? Or will there be any cost savings associated with it?

Yeah. The -- probably the most significant thing we've done with the OTAs themselves is something we've been doing not just in the brand-new agreements but probably started a bit over a year ago. And then as we have been more aggressive in essentially dialing back the business we'll take from OTAs when we project will be at high occupancies. We've had that right for a few years. We didn't use it as aggressively as we're using it now. And we've talked about that in some of the last number of quarterly calls. It conceivably had a modest negative impact to RevPAR growth year-over-year. But we think factoring in the lower costs associated with the business that came in when we turned those dials down to zero net-net it drove profitability for the hotels. And that will be something that we will continue to -- a tool we'll continue to use. The other thing, which we disclosed of course is that with Expedia, we did a -- we found a place where actually our alignment with them could be much greater and that was in the wholesale space. Wholesale is another, kind of, third party if you will that is both an expensive channel and sometimes a channel, which makes pricing integrity challenged because wholesale inventory can end up out there being passed from one intermediary to another and we don't often know where it's sold. And in talking that through with Expedia we thought well they can bring their technological prowess to bear and we can put some discipline in the wholesale market, which should make that both easier to manage from an integrity perspective. And reduce the cost of that business that comes into our system through the wholesale channel. So, that we're excited about. Obviously, we're -- it's early days in that, but the teams of both Marriott and Expedia are working aggressively. And we think there will be some good outcomes from that.

Okay. And then, just a quick follow-up, and that would be obviously, conversions will accelerate in a downturn. But right now we're seeing a low RevPAR growth environment. You're also driving down the OTA commissions meaningfully lower. And you're having more increased direct bookings. So, could we see an acceleration over the next few years, in a low-growth environment? Or would we have to still wait for the downturn for the conversions to accelerate?

I think conversions are quite healthy, even today as we speak. And partly that is, the things that you've just mentioned. It is also about some of the soft brands that, we've used with luxury collection Autograph and Tribute all performing quite well. We are in a position where we can go out and both offer the top and bottom-line financial benefits. But also have some flexibility on the kind of product we take, that we wouldn't necessarily be the case, if we had only the hard brands. I think when we get to a weaker economic environment. We will see that some of the hotels that don't really have good pipes of customers, connected to them. They'll also have an incremental reason if you will, that they don't have today which should be helpful then.

Thank you.

You bet.

Your next question comes from the line of Kevin Kopelman of Cowen and Company.

Hello. Thanks a lot. And, first of all, Arne, best of luck on the upcoming procedure.

Thank you.

And Laura thanks for all your help and congrats. So I just wanted to follow-up on signings really quickly. So, could you talk about what approvals and signings were in Q3? And then, maybe clarify your comment about approaching record signings this year. Are you almost there already in early November? Or is that expected closer to year-end? And how would you kind of generally characterize the outlook for new signings, going forward, as it stands today?

Yeah. A couple of preliminary comments, developer our developers are the best in the industry by far. But they are a special breed. And they love to do things at -- in the fourth quarter of the year. And so until the bell is rung at the end of the year, you never really know where you're going to end up. We are -- if you look at, signings through Q3, we're marginally ahead of last year. And again, I think you could say, in the context of a -- that's global comment. But in the context of the uncertainties that are out there about the economy, or about geopolitics, or about other things that's a pretty stunning level of success. We can't say at this point where we're going to end up the year. But there's a lot that the team is working on. And they'll scramble to work it through. One funny thing, the select service team in the United States as they get into December, they've got this big bell that sits on the table. And they ring the bell every time they sign a contract. And that bell is ringing all the time in the last couple of weeks of the year. They delivered one of those big bells into my office last December just, to sort of let me share in the fun if you will. But we'll keep working through the end of the year. And obviously, we'll report when we get into January about, where the dust settled on signings, generally all good news.

Excellent, thanks, Arne.

You bet.

Your final question will come from the line of Ari Klein of BMO Capital Markets.

Hi. Thank you. Maybe just following up on the conversion side of things, can you just talk about in some of the markets that have been a little bit tougher for you? Have you seen conversions increase in those markets?

You're talking about markets in which RevPAR has been softer?

Yeah, yeah.

Yeah. Yeah. I mean, I don't -- I'm not sure I can do that justice off the cuff. I do think if you look at one of the highest supply growth environments in the world is the UAE to include Dubai. And if you look back a couple of years, I would guess that, in Dubai we had done essentially zero conversions. And in the last year or so, we've done a handful of conversions. And I think in a sense that may prove a little bit of this theory that we were talking about before, which is where businesses under the most pressure in that instance, it's mostly about supply growth not about demand weakening. But RevPAR has been negative for the industry in Dubai. Not for us necessarily in every quarter, but has been negative for the last -- much in the last couple of years I suppose in Dubai. And as a consequence, we're seeing a bit better conversion activity there than has ever been the case in the past. That would be an example. I can't give you stats for sort of a group of markets like that if you will.

Okay, great, yeah thanks for the color. I appreciate it.

Yeah. All right, Laura, will you bring us home?

So my last comment there's no better job in the world in investor relations. And no better company in the world than Marriott to do it in. The corporate culture here isn't just about taking care of the customer. It's also about taking care of all of you. There's a real commitment here to get it right for all of you, with straightforward accurate and fulsome disclosures and candid assessments of business trends. Fortunately it takes a team of people to make that happen and they are terrific. You've met some of them that have joined me on road shows and conferences over the years. And many of them are listening to this call. So my message to all of my colleagues is thank you for making us look smart for so long. And keep up the good work. For the investors and sell-side analysts on the call, I am going to miss you. And I've really enjoyed working with you. I hope all of you come to the holiday party on December 5. We're going to have a terrific time.

Thank you, Laura.

All right.

Thank you, Laura.

Thank you everybody.

Thank you for participating in Marriott International's Third Quarter 2019 Earnings Conference Call. You may now disconnect.