Marriott International Inc (MAR) — Q4 2018 Earnings Call Transcript

Good morning. Welcome to our fourth quarter 2018 earnings conference call. Joining me today are Leeny Oberg, Executive Vice President and Chief Financial Officer; Laura Paugh, Senior Vice President, Investor Relations; and Betsy Dahm, Senior Director, Investor Relations. I want to 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 various risks and uncertainties as outlined in our SEC filings, which could lead to future results differing significantly from those expressed in or implied by our comments. Forward-looking statements in the press release we issued yesterday, as well as our comments today, are effective only today and will not be updated as events unfold. In our discussion, we will review 2018 results compared to 2017, adjusted for merger-related costs and charges, cost reimbursement revenue, and reimbursed expenses. Additionally, the 2017 fourth quarter does not include the Avendra gain and the provisional tax charge from recent tax reform, while the fourth quarter of 2018 excludes adjustments to the provisional tax charge from recent tax reform. Naturally, comparisons to our prior year reported GAAP results can be found in the press release, which also includes the reconciliation of non-GAAP financial measures on our website. We've achieved significant milestones since acquiring Starwood in late 2016. We have recently unified all three loyalty programs into our newly branded Marriott Bonvoy program. Our operations and disciplined teams are fully established. We've generated substantial value by combining sales organizations, enhancing cost efficiencies, and negotiating new co-branded credit card agreements. Furthermore, we've saved over $250 million in corporate G&A. Today, we genuinely feel like one company. These integration efforts involved extraordinary planning and execution from our team, and I am immensely proud of their achievements. In such a significant transformation, it would be surprising not to face some challenges. In late November, we revealed a data security incident involving the Legacy-Starwood reservation database. After our public announcement on November 30, we initiated a broad guest outreach effort. As we addressed customer issues, the number of calls through our dedicated call centers dropped from over 40,000 in December to fewer than 6,000 calls in January and less than 3,000 calls in February. It was reassuring to hear Stephen Squeri, CEO of American Express, mention in January that his firm has not observed any notable rise in credit card fraud due to this incident. Our forensic review is now complete, and as we indicated in January, the number of affected guest records is lower than we initially estimated. We have stopped using the Legacy-Starwood reservation system and have implemented further security measures on the Marriott network. We do not anticipate any significant impact on RevPAR from this incident. Our Board of Directors has been deeply involved in this matter. All of us are committed to learning from this experience, enhancing our information security systems, and improving our response capabilities to threats. Now, let's discuss 2018. Membership in Marriott Bonvoy reached nearly 125 million members by the end of 2018, making it the largest and most valuable travel program in the hotel industry. We have been adding approximately 1.5 million members monthly. Our members are highly engaged, with reward redemptions rising 8% year-over-year and room nights sold to members increasing 6%, both reaching record highs. Marriott Bonvoy members accounted for roughly half of our room nights in 2018. Our hotels continue to provide the excellent service our guests expect. We now offer keyless entry at over 1,400 hotels, and mobile check-in and checkout are available at nearly all hotels. Our Enhanced Reservation System or ERS has been rolled out to over 800 hotels as of year-end and is expected to be available in over 2,000 hotels by the end of 2019. ERS allows guests to select rooms based on various characteristics, including bed type, view, high or low floor, and it provides more photographs and hotel descriptions. In 2018, worldwide full-service RevPAR increased by 2.6%, and property-level house profit margins for our company-operated hotels grew by 40 basis points despite labor costs rising approximately 4%. We captured cost savings at properties, benefited from procurement improvements, and enhanced productivity. We reduced discounting at Legacy-Starwood hotels and increased the proportion of bookings from our digital channels. In fact, in 2018, our direct digital room nights worldwide rose by 11%, reaching 28% of all bookings, while the OTA share of bookings remained stable. We believe our loyalty program's costs are the lowest in the hotel sector while offering the highest value to guests. Although charge-out rate savings from our loyalty program vary by brand, on average, since the Starwood acquisition, the charge-out rate of our overall loyalty program has decreased by about 50 to 60 basis points, benefiting from integration synergies and new co-brand credit card agreements. The decline in loyalty costs should also help hotel margins in 2019, as charge-out rates decreased most significantly late in 2018. Over 100 hotels exited the Marriott system in 2018, which enhanced our overall system quality. The deletion rate for Legacy-Marriott products was 1.3% of total rooms, while the rate for Legacy-Starwood products was 2.5%. Despite this, we increased our overall rooms distribution by nearly 5% net. The RevPAR index and fees per room of the deleted hotels were, on average, significantly lower than those of our comparably branded hotels. We expect overall deletions to return to a more normal rate of 1% to 1.5% of rooms in 2019, resulting in net system growth of approximately 5.5%. In terms of development, we signed agreements for a record 125,000 rooms in 2018, nearly 10% of our existing portfolio. More importantly, the net present value of the signed deals reached record highs. Our pipeline has increased for the 26th consecutive quarter to an all-time high of 478,000 rooms, with 214,000 of those rooms currently under construction. At year-end, our market share of worldwide open rooms stood at 7%, while our market share in STR's worldwide under construction pipeline was a leading 20%. In North America, our market share of open rooms was 15%, and our share of STR's under construction pipeline was 36%. We transitioned Starwood Hotels to Marriott systems late in the year, shifting 11 brands comprising roughly 1,500 managed and franchised Starwood Hotels onto Marriott's platforms across various systems for reservations, revenue management, and sales and catering. This was a complex task involving many people, processes, and technology. While we continue fine-tuning and training, this significant step is now behind us. Now, turning to the fourth quarter, Marriott's worldwide system-wide comparable RevPAR increased by 1.3% on a constant dollar basis, while North America RevPAR rose by 0.2%. North American system-wide RevPAR growth was affected by a robust industry demand environment and labor strikes. Looking ahead to the first quarter of 2019, we expect system-wide North America RevPAR to increase by 1% to 2%, with favorable timing for Easter group business anticipated to be stronger in March. Notably, North America RevPAR saw a 50 basis point increase in January, despite the government shutdown and some ongoing impacts from the strikes, particularly in Hawaii. For the full year of 2019, we still expect North America system-wide RevPAR to rise by 1% to 3%. We are anticipating a low single-digit increase in group business for the year. Special corporate rate negotiations are nearly finished, with rates for comparable customers also climbing at a low single-digit rate. In 2018, our North America region represented 68% of our hotel-based fees. In the Asia Pacific region, constant dollar system-wide RevPAR increased by more than 5% in the fourth quarter, aligning with our expectations. RevPAR growth in India and major cities in China remained robust, while new supply constrained RevPAR growth on Hainan Island and moderating manufacturing demand slowed growth in Southern China markets. Food and beverage sales in China were subdued, reflecting cautious corporate spending. Conversely, outbound leisure demand from China remained strong, driving significant demand in leisure markets across the Pacific Rim. For the first quarter and full year of 2019, we anticipate RevPAR in the Asia Pacific region to increase by a mid-single-digit rate, bolstered by ongoing strength in India and most major markets in China. Hotels in Japan should benefit from heightened attendance for the 35th anniversary of Tokyo Disneyland. In 2018, our Asia Pacific region accounted for 15% of our hotel-based fees. In Europe, fourth quarter RevPAR rose by over 5%, buoyed by strong demand from U.S. travelers in London. Hotel demand in Centre City Paris moderated due to yellow vest political protests and the resulting closure of tourist attractions. Demand in Barcelona was robust, benefiting from easy comparisons to last year's Catalonian political matters. Looking ahead, barring any business disruptions from Brexit, we expect European RevPAR to grow at a mid-single-digit rate for both the first quarter and full year of 2019. Last year, our Europe region represented 9% of our hotel-based fees. RevPAR in the Caribbean and Latin America region increased by nearly 7% in the fourth quarter compared to the previous year. Strong RevPAR growth at resort hotels in the Caribbean, especially in Aruba and Grand Cayman, was supported by a lack of new supply in the region and robust holiday demand. In South America, RevPAR was enhanced by the G20 meeting and currency devaluations in Argentina and Brazil. We expect RevPAR in the region to increase at a low single-digit rate for both the first quarter and full year of 2019 as Caribbean hotels continue to reopen following the 2017 hurricanes. Our CALA region represented 4% of hotel-based fees in 2018. In the Middle East and Africa, fourth quarter RevPAR fell by over 5%. However, RevPAR in Egypt saw a sharp increase due to strong tourist demand. The ongoing sanctions on Qatar and oversupply, along with higher VAT in the UAE and Saudi Arabia, have continued to hinder overall regional RevPAR growth. Given the political climate in the Middle East, we anticipate a low single-digit decline in RevPAR in the first quarter and flat performance for the full year of 2019. In 2018, MEA accounted for 4% of our hotel-based fees. In addition to the topics I've discussed, our achievements in 2018 on other fronts also enhance our confidence in the future. We will elaborate more on these at the analyst meeting later this month. Our homesharing pilot in Europe generated notable interest from our loyalty members and provided valuable insights. We've made significant progress in transforming the Sheraton brand with new designs, improved guest satisfaction, and enhanced margins. We introduced new co-branded credit cards and achieved record branding fees. Additionally, we surpassed our expected bookings on our new Ritz-Carlton yacht. We believe that all these accomplishments, supported by our industry-leading brands and the most powerful loyalty program in travel, alongside our long-standing commitment to service excellence, will continue to drive Marriott's success. With an efficient cost structure, we aim to deliver leading profitability for our owners and franchisees. I would like to thank the Marriott Associates, whose diligent efforts made all of this possible, and, of course, our many guests who have remained loyal and patient throughout the transition. Now, to delve deeper into the quarter, I would like to hand the call over to Leeny.

Thank you, Arne. For the fourth quarter of 2018, adjusted diluted earnings per share totaled $1.44, roughly $0.05 ahead of the midpoint of our guidance of $1.37 to $1.41. On the fee line, we picked up about $0.01 of outperformance, largely due to better-than-expected credit card branding fees and fees from new units. G&A was $0.01 better-than-expected and the tax line yielded about $0.03 of outperformance, partially due to discrete tax items. Compared to the prior year, base fees increased 1%. The favorable impact of unit additions and RevPAR growth was largely offset by the impact of properties that converted to franchise as well as hotel deletions during the year. Franchise fees increased 13% in the quarter, reflecting unit growth, including properties converting to franchise, growth in credit card branding fees and higher RevPAR. Nonproperty franchise fees, including application fees, relicensing fees and fees from our timeshare credit card and residential businesses, together totaled over $140 million in the quarter, 24% higher than the prior year. Credit card branding fees alone increased 44% in the quarter to reach over $100 million for the quarter and $380 million for the full year 2018. Incentive fees declined 4% year-over-year in the fourth quarter, largely due to a $7 million impact from the labor strikes, as well as difficult comparisons in the Middle East and unfavorable foreign exchange. Incentive fees were helped by new unit growth and higher net house profit at most hotels. Owned, leased and other revenue, net of expenses, totaled $88 million in the fourth quarter compared to $89 million in the year-ago quarter. Since the beginning of 2017 fourth quarter, we've sold 7 owned hotels in nearly all cases retaining long-term management agreements. Compared to the prior year, these asset sales reduced our fourth quarter 2018 owned, leased results by $14 million. Termination fees are also included on the owned, leased line. These fees totaled $15 million in the quarter compared to $4 million in the year-ago quarter. Depreciation and amortization increased to $62 million in the quarter compared to $53 million in the prior year. The increase was largely due to a $7 million favorable adjustment related to Legacy-Starwood IT systems in the 2017 quarter. General and administrative expenses totaled $242 million in the fourth quarter, a 10% decline from the year-ago quarter, largely reflecting continued cost reductions due to the Starwood integration. Partially offsetting these cost savings was a $7 million expense associated with our supplemental investment in the workforce. Fourth quarter adjusted EBITDA increased 10% over adjusted EBITDA in the prior year. Compared to the prior year, fourth quarter 2018 adjusted EBITDA was negatively impacted by $12 million from sold hotels. Fourth quarter expenses associated with the data security incident that we disclosed on November 30 totaled $28 million pretax, offset by approximately $25 million of insurance recoveries as of year-end. The net of these amounts is either in reimbursed expenses line or the merger-related costs and charges line. Therefore, these expenses did not impact adjusted EPS or adjusted EBITDA results. The timing of the expenses associated with the data security incident may differ from the timing of the recognition of insurance recoveries. In the fourth quarter, we identified certain immaterial errors related to our accounting for our loyalty program, which resulted in the understatement of cost reimbursement revenue, net of reimbursed expenses, in the first 3 quarters of 2018. Our 10-K, which should be filed later today, will include revised GAAP quarterly amounts, reflecting the corrections of these errors, the impact of which is a $99 million increase to previously reported net income for the first 3 quarters of 2018 combined. In our 10-K, we will report a material weakness in internal control over financial reporting related to loyalty program accounting. We remain committed to maintaining effective internal controls and are in the process of instituting a remediation plan. These accounting adjustments were limited to the cost reimbursement revenue and reimbursed expenses lines on our P&L and the related tax impact. The adjustments are noncash and do not impact our previously reported adjusted EPS or adjusted EBITDA amounts. For full year 2019, we expect fee revenue will increase 5% to 7% to reach $3.83 billion to $3.91 billion. We expect to achieve this despite $15 million to $20 million of unfavorable foreign exchange headwinds, low single-digit growth in incentive fees and lost fees from terminated properties in 2018. We expect credit card branding fees alone will total $410 million to $420 million as a result of continued growth in the number of new cardholders and higher average spend. In 2019, owned, leased and other revenue, net of direct expenses, should total $280 million to $290 million compared to $329 million in 2018. We expect termination fees will be roughly $20 million, or $45 million to $50 million lower than 2018. During the first quarter of 2019, we closed on the purchase of the remaining 40% joint venture interest in AC Hotels, resulting in the company owning all of this highly successful and fast-growing global brand. We entered into our original AC joint venture agreement in 2011. Since then, we've almost tripled the distribution to 265 AC Hotels opened or under development around the world. As a result of our purchase of the remaining interest, our joint venture earnings will be a bit lower in 2019, while fees and G&A will reflect our 100% ownership of the brand. We estimate general and administrative expenses will total $910 million to $920 million in 2019, a 1% to 2% decline from 2018 levels. Recall that full year 2018 G&A included a $51 million expense for our supplemental workforce investment. Because of our outstanding capital recycling in 2018, our 2018 adjusted diluted EPS included $0.65 per share of after-tax gains on the sale of owned and joint venture assets. 2018 results also reflected an effective tax rate of 19%, reflecting the benefit from windfall tax and some discrete items. For full year 2019, we expect adjusted diluted EPS will total $5.87 to $6.10, a 2% to 5% decline from the 2018 adjusted diluted EPS of $6.21, reflecting a more typical effective tax rate of 23% for the year and no further asset sales. To summarize, compared to our adjusted EPS for 2018, our EPS estimate for 2019 assumes higher fees and lower G&A, offset by lower year-over-year termination fees, lower gains, a higher tax rate and higher foreign exchange headwinds. We expect adjusted EBITDA will total roughly $3.62 billion to $3.72 billion, or 4% to 7% over 2018 levels. Our 2019 adjusted EBITDA will also face the headwinds from lower termination fees and foreign exchange. While we are hopeful we will sell additional assets in 2019, our guidance assumes no asset sales and no net expense from the data security incident. We remain disciplined in our approach to capital investment and share repurchase. We returned nearly $3.4 billion to shareholders through dividends and share repurchases through year-end 2018. This reflected the company's strong operating cash flow, the benefit of $650 million of asset recycling, including joint venture sales of 2 hotels as well as loyalty program cash inflows. Our recent share repurchases have been modestly lower than we expected as we suspended share repurchases for a time while we worked through the data security incident and the loyalty accounting matter. Speaking of the loyalty program, it generated several hundred million dollars of cash in 2018, more than is typical in most years. This was in part due to a large one-time cash payment received from the credit card companies upon signing of our co-branded credit card agreements. In 2019, we expect the loyalty program will likely be closer to cash flow neutral due to the timing of marketing and related costs associated with the launch of Marriott Bonvoy and higher redemptions. 2019 investment spending can total $500 million to $700 million, including about $225 million in maintenance CapEx spending. We've already recycled nearly $1.9 billion of assets since closing the Starwood acquisition, including $650 million in 2018. Thus far in 2019, we have repurchased 2.4 million shares for $300 million. For the full year, assuming no asset sales, we expect we will return at least $3 billion to shareholders through dividends and share repurchases. Our debt ratio on December 31 was within our targeted credit standard of 3 to 3.5 adjusted debt to combined adjusted EBITDAR. You will recall that our capital allocation strategy is built around our commitment to maintain a solid investment-grade credit rating. We've targeted this rating in recognition of the value of financial flexibility in a cyclical business. We also strive to maintain the right balance between minimizing our cost of debt and having sufficient leverage to enhance returns. We know you're always eager for more information. We hope you can join us on March 18, 2019, at the New York Marriott Marquis for our Security Analyst Meeting, where we will spend more time looking at our future opportunities. Please be sure to register for the conference with Investor Relations if you'll be coming.

I'd like to start with the core SG&A. There are many variables involved with the integration, the new launch of Marriott Bonvoy, and other investments you are making. When we analyze the data and exclude the employee investment, we estimate a growth rate in SG&A of around 4% to 4.5%. I'm curious if you could provide a longer-term perspective. Is that growth rate appropriate for the business moving forward, or is it somewhat inflated due to these other factors as we consider the long-term model?

Yes, no, it's a good question and thanks. I think it's one of the reasons we wanted to make sure to mention the purchase of the AC joint venture. If you think about that going from being our equity line to now being fully consolidated, we're going to be adding between $5 million to $10 million of G&A that comes from moving the geography of that line item into our G&A. So actually, you need to remove a full point of the growth that comes from just that change in and of itself. But certainly, as we think about the long-term growth in G&A, we do continue to think that we will see additional operating leverage in the business as we move forward. And we look forward to talking to you more about it when we talk about our longer-term horizon at the Security Analyst Day.

Shaun, I'd jump in here for a second. The specific hypotheticals you raised are really not in that number in the sense that the cyber event, which obviously will continue to cost us some dollars, we think, will go mostly in the transaction cost, integration cost and reimbursed expenses buckets and will not be in that core G&A number. And, obviously, what we do with respect to sales force and the like would likely be treated very much the same way. But to be fair, while we are focused on making sure we continue to drive efficiencies in the business, we are continuing to invest for the future. And we've got exciting growth taking place across many aspects of the business, and that does require some investments. I think we will continue to be able to grow our G&A expenses at a meaningfully lower pace than we can grow our top line.

So Arne, can you just talk broadly about the demand environment and what you're seeing right now? I think the last call, you called out some demand softness in September quarter on RevPAR. Obviously, it came in a little bit lighter for various reasons. Can you talk about that, how that's progressed and really so far year-to-date now that we're through, I think, a lot of the government shutdown and some of the one-time things that we experienced in January, maybe you can just talk a little bit about how that's trended.

Yes. There’s quite a bit to address here, so I will briefly discuss both the fourth quarter and our outlook for 2019. My focus will primarily be on North America. The fourth quarter was indeed lighter than we expected, with a system-wide RevPAR growth of 0.2%. We have thoroughly analyzed these numbers to extract as much insight as possible. One clear factor affecting our performance was the strikes we experienced in multiple cities across the United States, notably impacting significant hotels in markets like Boston, San Francisco, and Honolulu. These strikes resulted in a loss of 0.5 points in RevPAR index for Q4, which is quite substantial. Fortunately, this issue is largely resolved, and while there may be some residual effects in Hawaii affecting future bookings, we expect a swift rebound now that the strikes are behind us. Additionally, we believe we effectively accounted for the impact of the cyber announcement on November 30. Customer behavior after this announcement showed no significant change. Beyond these factors, we considered other potential impacts on the fourth quarter, including our strategy of reducing inventory from less preferred channels. This approach may have contributed to the quarter's performance as it did in the past. We also faced lower commissions for group bookings, which likely had its most significant impact in Q4. Furthermore, we experienced considerable integration efforts while moving Starwood Hotels onto Marriott's revenue systems, which involved substantial training and adjustments. In looking ahead to 2019, I find myself somewhat more optimistic than I was a quarter ago, especially since we have completed our budget and are aware of the softer fourth quarter we just experienced. We anticipate a steady-state expectation for the U.S. market in 2019. Historically, adjusted seasonally, we observed regular quarterly RevPAR growth near 2% in 2017 and 2018. For 2019, we expect a similar 2% growth, making us feel positive about the year ahead, perhaps even slightly more optimistic than last quarter.

That's really helpful. And then, I guess, just shifting to unit growth. As we look at units beyond 2019, I imagine you'll dig more into this at the Analyst Day. But what's the right way to think about this over the longer term? I guess, really, 2 components, you've got the growth side and you've got the exits. On the growth side, how are you thinking about that 7%? And the pipeline showed another nice sequential increase this quarter. So is it possible that you could go beyond the 7%? And then, I guess, on the exit side, is 1% to 1.5% the right way to think about that over the longer term? Or do you think you have some room to improve on that?

So we'll take you through a model of this at the analyst conference and give you a considerable level of detail about it. I think a couple of things are reasonably obvious here. One is, we'll continue to see some deletion behavior. We have obviously been in the business for a long time, and we want to see some number of hotels leave our system every year because of the importance of product quality. We think 1% to 1.5% is probably the right sort of steady-state assumption for now. But again, we'll take you through why that makes sense when we're together in March. In terms of future years' gross new openings, I think the most comforting thing here, I'm not going to give you another percentage other than what we've talked about this morning, is that 478,000-room pipeline is, as of the end of the year, net of all activity, all activity to include the incoming new deals, the openings that have opened into the system in 2018, but also the deals that we have called because they look less likely to open. And all of that, we still have, whatever it was, our 25th straight quarter, I can't remember precisely the number...

26th.

26th straight quarter of pipeline growth. And we have a high level of predictability that those hotels are going to open into our system over the next number of years. And so I think that kind of superficial look tells you there's some good news in that number. But again, we'll take you through the model when we're together in March.

I think the only other thing I'd add is one of the things I think we've been particularly gratified by is that as we see these rooms coming onto the pipeline, is the NPV point that Arne mentioned earlier, which is that the value of the deals that we're adding and the strength of the contracts continues to be what we want to see for the long-term growth of cash flow for the company.

You started the call with some very positive data points on customer engagement with the loyalty program. Could you maybe focus that commentary on Legacy-Starwood loyalty members and Legacy-Starwood properties? Are those customers as engaged with the new program as your Legacy-Marriott customers? And are your Starwood properties seeing a similar increase in redemptions?

Yes, that’s a great question. We will go into more detail about this when we meet in March, and I hope to see you there. The changes for the legacy SPG members at the end of 2018 were significantly greater than those for the Legacy-Marriott rewards members. We transferred around 4 billion customer records from both the Legacy-Starwood and Legacy-Marriott systems in late August, which we refer to as LD1. While the transition went fairly well, there were some discrepancies in the data that led to increased call volume and longer wait times, particularly affecting SPG members. We've been addressing these issues as they arise. The positive news is that despite some complaints from SPG customers about the changes, they remain very passionate about the program and feel a sense of co-ownership. This is not just due to their history and tradition but also because of the enhanced portfolio of luxury lifestyle and resort properties that we now offer together. Customers continue to show strong engagement and redemption behavior, indicating the value of this combined portfolio. For those who may be frustrated, we are committed to resolving these issues and believe that our plans will succeed as intended.

Got it. Do you see any negative RevPAR index impact in the fourth quarter due to some of those changes you mentioned for the Starwood brands?

Yes. These are the efforts we've made that reflect in those numbers. The commentary I provided regarding the strike indicates a 50 basis points impact on the entire portfolio, specifically for Starwood and Marriott combined in North America during the fourth quarter. This impact is largely driven by Starwood Hotels, which are more unionized. In cities like Boston, San Francisco, and Hawaii, most of the hotels affected were Starwood Hotels. That's a key point to consider. On the other hand, we have closely examined share of wallet data, albeit challenging to obtain, and we have analyzed behavior patterns of SPG members. While this data isn't entirely clear, it doesn't raise red flags. It appears we are not losing volume from Legacy SPG members, despite some frustrations we are working to resolve. Although not all issues are completely settled, a significant portion has been addressed. Call wait times have returned to normal levels and the data issues are being resolved one by one, overall making good progress.

I wanted to ask a bit more about your comments on lifestyle and luxury hotels. You are clearly experiencing significant growth, and customers will be eager to redeem their points. In terms of your capital expenditure guidance and plans for adding properties, particularly in the soft brand collections, are you currently placing more emphasis on resorts than before? Do you believe that enhancing this area is essential for your overall portfolio, or is the current balance satisfactory?

Well...

I want to mention one thing first, and then Arne can elaborate more widely. From a capital expenditure perspective, the figures we discussed, ranging from $500 million to $700 million, do not account for any specific asset purchases or additions to the balance sheet. However, it does include the capital expenditure projects we are undertaking for the Sheraton in Phoenix, which we estimate to be around $40 million, and that is reflected in our capital expenditure figures. But when it comes to including a fundamental asset purchase, those are not factored into our numbers.

Yes, I think, correct me if I'm wrong, but I think our pipeline includes something like 400 luxury hotels across the globe. And it is, far and away, the biggest pipeline in the luxury space in the industry. And so we know we've got exciting openings, which are coming down the pike and which will further strengthen our leadership in this space. We obviously want to see those units continue to come into the system. We are overwhelmingly going to depend on our organic growth and organic partners to drive those deals. But we've got a lot of good news, which is baked into the pipeline and coming down the pike.

I wanted to ask about the international side; you've lowered your RevPAR outlook slightly compared to last quarter. Are you seeing somewhat weaker numbers, or are you simply being more cautious internationally based on what we've observed since your last report?

I believe it's probably a combination of factors. Over the course of 2018, China weakened each quarter, which isn't surprising. Recently, there seems to be some easing between China and the U.S. regarding trade tensions, and feedback from our team and customers in China feels more optimistic than it did a month ago. When examining individual markets in China, some areas show positive signs. For example, Hainan, which is similar to Florida in the U.S., has seen disappointing RevPAR due to supply and other factors, despite having many full-service and luxury hotels. Meanwhile, major cities like Beijing and Shanghai continue to perform well. While we are more cautious compared to the start of 2018, we remain optimistic about China's market and growth opportunities. In Europe, we are monitoring Brexit developments and have noted the impact of the yellow vest protests in Paris, which began affecting leisure travel in December after a strong fourth quarter. These events have led us to lower our expectations somewhat, and although we've gone through the budgeting process in the fourth quarter, it's not a drastic change, just a more conservative approach.

I'm wondering how you think about the mix in growth rates or declines for ADR versus occupancy for North America for this year. Just looking at Smith Travel sort of back of the envelope, it would appear through January and February for you folks, you're negative 1% to maybe negative 1.5% in occupancy. How do you see the rest of the year shaping up in the ADR occupancy mix?

I believe that the growth will be almost entirely driven by rates. I'm trying to find our January numbers, but if you take our midpoint of 2% for North America, it seems that this will primarily come from rate changes. Supply in the United States continues to rise at almost 2%. It might be around 1.8% or 1.9%, which suggests that demand needs to increase within that range to maintain flat occupancy. This pattern is what we've observed in the past few quarters and likely what we will experience this year.

Yes, so we typically talk about this as international and North America. So just broadly, as you know, over time, we switched meaningfully from being heavier in North America to being heavier in international. So now actually, you see that we are almost not quite 2/3 from international IMFs. And obviously, Asia Pacific, with its typical contract format, is going to have a big share of those international IMFs.

My question relates to the North American limited-service segment, I guess, for the second quarter in a row, you posted a RevPAR decline. Can you talk about what you think has been going on there? And then as you think about 2019, how that segment performs? Would you expect it to perform outside or below the lower end of your full year '19 range?

Thank you for the question, Joe. If you examine the quarterly RevPAR numbers by brand from our press release, it illustrates your inquiry. For instance, in Q4, the managed Courtyard experienced a 1% decline in RevPAR, while the system-wide figure was down 0.2%. This suggests that the franchise portfolio likely saw a slight increase. The average of these two figures results in a minor negative trend. Several factors may be influencing this. Firstly, supply growth in the U.S. industry is around 1.9%, primarily concentrated in this segment or slightly below. Some of this growth is from our own supply, but competitors are also expanding in upscale and upper mid-scale categories, which adds to the supply dynamics and can significantly impact the market. Secondly, the managed Courtyard portfolio, mainly consisting of older hotels built in the mid to late '80s, faces competition from newer hotels that are significantly younger. While these established Courtyards perform well, they must compete against properties that are a quarter of a century more modern. We are collaborating with our partners to ensure these hotels receive the necessary investments to compete effectively. If that isn’t feasible, we may need to consider removing them from the system. Both factors are contributing to the trends we are seeing, and while it varies by brand, Courtyard and Residence Inn, having been established the longest, exhibit more of these dynamics. In contrast, newer brands like AC and Aloft do not face this issue as much.

We are optimistic about the possibility of additional asset sales. Currently, we do not have any forecasts in our model. We own 14 hotels, seven of which are Legacy-Starwood properties, including the Sheraton Grand Phoenix, primarily located in the Americas, with three in CALA and North America. We also have seven Legacy-Marriott hotels. The market for hotel transactions remains robust. As we have mentioned previously, some Starwood assets were straightforward to handle, while others presented more complexities, including labor issues, ground leases, or challenges related to economic conditions and weather events, particularly in Rio. Given this context, we remain hopeful for asset sales this year, but we do not have specific updates to share at this time.

I wanted to ask about credit card fees, which drove some nice upside. Just thinking about what the long-term growth rate is. I guess your guidance is for about 10% this year. Is that driven more by spend or by new sign-ups? Just thinking about how much that growth rate would be sustainable once you have the rebranded credit card out there for a while.

So we will talk more about this at the security analyst conference, so I'm only going to talk a little bit about it today, but we will be talking about that then. Generally, it is a combination of both. Obviously, the credit card spend has to do with what's going on in the economy and general consumer appetite for spending on the cobranded cards. And when you have new cardholders sign up, there's a bit of a ramp-up if you think about it as they get up to having a normal amount of cardholder spend. So a little bit similar to a hotel opening. So it really is a combination of both.

I have a follow-up question regarding the pipeline issue, and I understand you will provide more details at the Analyst Day. Your pipeline continues to expand, but it appears that the total number of new signings peaked in 2016 based on your releases. Considering the acceleration and unit growth you are forecasting for 2019, will this be mainly attributed to compensating for the higher deletions from last year? Additionally, were there any property openings that did not make it by December 31, which could lead to a higher number of openings in 2019 than initially expected? I'm curious about the longer-term unit growth as well.

So a couple of things going on is remember, in 2016, you were looking at the combination of kind of pre- and post-merger signings. So as you remember, we ended up needing to take a number of those deals out of the pipeline as we moved through '17 and '18 to make sure that we had the right numbers of what we really thought were going to be opening hotels. So from that standpoint, it's not necessarily a perfect comparison. But we definitely do see room openings continue to grow as we move into '19 and '20 with the fact that we've got, as you've heard us talk before, about delays in construction occurring rather than actually those hotels falling out of the pipeline. So I think we do feel good about seeing continued accelerated growth of our gross room openings as we move into '19.

I really enjoyed seeing the Bonvoy commercials during the Oscars. Could you share some insights into the strategy behind that campaign and any success metrics you’ve observed?

Yes, that's a good question. I don't know that we've got metrics to give you yet except for eyeballs. And I'm actually less interested in eyeballs than I am in what it does to drive business. Obviously, the name is just out there. I think actually technically, it leaked before we announced it, and you could find some chatter about the Bonvoy name even before the year ended. And we then did announce it, but the sort of public launch, if you will, really coincided with the Oscars last weekend, which is something we've been working to get ready for for some time. And it's obvious that what's happening here, we've got, most substantively, we are bringing these 2 powerful loyalty programs into one. And no longer will customers have to go through the step of having to transfer points from one program to another in order to redeem in the other program. No longer will they have to think about whether they're meeting their Elite night requirements by getting enough nights concentrated in one program or another. It's now much simpler. It's one number and the breadth of choice for earning and the breadth of choice for redeeming is simple for them to grab. And that's the singularly most powerful piece of what is happening in this space. Now to do that, we've got to make sure that people have a brand handle to call this program by something. And we, for obvious reasons, decided not to just make it Marriott Rewards and we've decided not to just make it SPG, but we wanted to come up with something which sort of set us up to explore something new and a bit more powerful. And Bonvoy is what came out of that. We had a great deal of fun internally and with a few smart external advisers coming up with that name. And one of the funnest parts of our business, whether it's a new name for a brand, for a hotel chain or a new brand for a loyalty program is just getting together and feeling those words and trying to think about how they inspire and connect with folks. And while there will always be some folks who say, 'Why did you pick that name?' I think generally, the response so far has been quite positive, albeit I think a big part of that is just we're glad we're finally at one program and we're really looking forward to using them. We will spend a significant amount of money this year. I can't tell you what it is in dollar terms, but compared to certainly what we've done in years past, we'll spend a significant amount of money promoting the program, getting it out there, making sure people know what it is called and know the value that's associated with it. And of course, that is set up and underway, so I'm excited about it.

Just back to the topic of market share. I think last year, you mentioned loyalty was over 50% of business. And if I heard you correctly, I think you just said just shy of 50% in '18. Could you maybe help us reconcile that difference in what you're seeing with customer behavior and booking patterns?

Yes, we mentioned about 50%. I don't have the exact figure in front of me, but the program is performing exceptionally well in many aspects. Additionally, I didn't mention earlier that our share decline in Q4 was primarily due to strikes. We're pleased to report that in January, our share significantly improved across the combined Marriott and Starwood portfolio. It's a reminder for us to consider the RevPAR index in a longer-term perspective. Overall in 2018, our RevPAR index grew modestly across both portfolios combined. If our loyalty program continues to perform as we expect, we should see that index continue to rise, and we'll also see growth in the program alongside the system. There are complexities in determining the percentage of room nights attributed to the program. For example, in large group settings, where we have a stronger focus compared to the industry, some groups have low loyalty penetration, which impacts those numbers. There are also technical considerations regarding whether a guest's first-night stay after signing up for the program counts as a program stay. However, we're seeing that our loyalty system is growing at least as fast as our room system, if not slightly faster. Consequently, we believe we will continue to see increased contributions from the loyalty program to our hotels on a comparable basis.

Arne, you previously mentioned some interesting statistics regarding a significantly higher number of loyalty point redemptions at a smaller selection of high-end properties. How has that influenced your thoughts on enhancing the loyalty program and positioning the portfolio moving forward? Do you anticipate any capacity issues if you don't expand in those high-end properties?

Yes. I mean, I think you can almost think of this as a bit of a barbell. You think of this almost as a bit of a barbell. The program is big, obviously, with 125 million members, and think about at 50% of all room nights, how many room nights that is being delivered by members of our loyalty program across the system of over 1.3 million hotel rooms. It is a big program, and not every one of those members is identical. They are, however, all advantaged by greater opportunities through a bigger portfolio to earn points, and they are all advantaged by a bigger portfolio from which to select their redemption options. And for the prototypical road warriors who are collecting significant amounts of points, who may be staying in higher-end hotels where they collect those points, the luxury resort lifestyle portfolio is hugely attractive. But for many, the ability to stay free in a Courtyard hotel in a Midwestern market, which is near family where they're going to spend a week in the summer or where they're going for the holidays and to be able to do that for free is also a huge and really important benefit. And so we saw in 2018 a significant increase, I think, 8% increase in total redemption behavior across both portfolios. And there were meaningful growth rates at both the high end and, if you will, in the select-service hotels as well. Because I think you see that play out. Generally, I think again, the breadth of choice on both earning points and redeeming points is a huge advantage, and we want to make sure we continue to drive that breadth of choice.

What we've learned over the years is that every cycle is different. What we have seen in other cycles, and it doesn't necessarily play out this way, is a sort of a plethora of brands entering the system or entering the mix. You obviously have a lot and we've seen others launching quite a few brands. What are you seeing? Or are there any concerns that you would help us alleviate or highlight for us in terms of just the population of brands, which seems to be growing quite quickly?

It's a good question. I would encourage you to focus less on the number of brands being launched and more on the actual supply growth. We've discussed this previously. I don't know of any downturn in the lodging business due to supply alone. While supply may contribute somewhat to the situation, it has consistently been demand, particularly a decline in demand, that has driven these changes over my 22 years of experience. It's fundamentally linked to GDP performance. Other metrics correlate with GDP as well, but the key factor is the health of the economy. That's what I would prioritize when considering the current cycle. The growth of supply is what matters, and we've previously noted that it's at average levels now. We haven't experienced the peak supply seen in the last two growth cycles, which may suggest that if we encounter a weakening demand environment, the impact might not be as severe as before. However, my primary focus remains on demand. Regarding brands, our ownership of 30 brands does give us a specific perspective. The most significant brand is Marriott Bonvoy, as it connects us with our customers across the entire portfolio. Each brand has its own product and service characteristics, setting customer expectations about what they are booking. But the Bonvoy branding is the most critical aspect. Having 35 brands instead of 30 wouldn’t change things significantly. We're not announcing the launch of five new brands this morning, nor are we suggesting that's on the horizon. Overall, portfolio branding is paramount, and having more options in terms of geography, price, and design enhances our offerings. Thank you for your time and interest this morning. We truly appreciate your support and look forward to welcoming you to our hotels. See you in March.