Marriott International Inc (MAR) — Q3 2019 Earnings Call Transcript

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 Bonvoy members, by an eight to one margin, respondents said they preferred the new Marriott Bonvoy loyalty program over either Marriott Rewards or SPG. Over the last nine months, Marriott Bonvoy membership increased by 12 million members to reach 137 million members, with nearly 40% of that increase coming from China, including a meaningful contribution from our Alibaba joint venture. Earlier this year, we launched Homes and Villas by Marriott International, our home rental business, with a growing number of premium homes and villas. Today we offer 5,000 homes in 190 markets across the U.S., Europe and the Caribbean and Latin America. In the third quarter, over 95% of our home rentals were booked by Marriott Bonvoy members and nearly 30% of the home rentals were paid for with point redemptions. In another move popular with Bonvoy members, we recently announced our entry into the all-inclusive hotel business. After signing new management agreements for five new build, all-inclusive resorts located in Mexico and the Dominican Republic. Last month we announced our offer to acquire Elegant Hotels, which owns and operates seven hotels in Barbados, which would jump-start our all-inclusive offering. We expect this acquisition will be completed by year-end 2019, subject to approval by Elegant's shareholders and satisfaction of other conditions. Our guests are increasingly booking online. Our direct digital channels leveraged the popularity of Marriott Bonvoy and offered the lowest cost per reservation. Those channels, marriott.com and Marriott Mobile, accounted for 32% of our room nights booked in the third quarter, over 400 basis points higher year-over-year. Also in the quarter, the percentage of room nights booked through OTAs declined nearly 100 basis points. Incidentally, earlier this year, we signed new agreements with Booking.com and Expedia, which we expect will result in better economics for our owners and give us enhanced control over how our products are presented by third-party sites. Our sales organization had a great quarter. For North America, new group business booked in the quarter for comparable hotels in all future periods increased 6% year-over-year. New revenue bookings made in the third quarter for 2020 increased 6% and new revenue bookings for 2021 rose 10%. We have opened many of our group sales offices during evenings and weekends to serve our customers at their convenience and to take advantage of the strong demand for our products. While our booking pace is down modestly for the fourth quarter 2019 due to the timing of holidays, booking pace for comparable hotels for 2020 is up at a mid-single-digit rate year-over-year. About two-thirds of the group business expected for the year is already booked. In the third quarter, we opened nearly 18,000 rooms more than any competitor worldwide. Our development pipeline increased to a record 495,000 rooms, 5% higher than the year-ago quarter, including 214,000 rooms under construction. Nearly 40% of the rooms in our pipeline are high-value upper upscale and luxury rooms in high RevPAR markets. In 2019, we expect our room count will increase 5% to 5.25% net, reflecting increasing construction delays, offset by lower-than-expected room deletions. For 2020, we expect similar net room growth. We continue to experience construction delays in North America, particularly in the top 25 markets as well as in the Middle East and Europe. Permitting issues are also contributing to groundbreaking delays, which impact openings for 2020, but signings are strong. In fact, 2019 room signings are approaching record 2018 levels. The vast majority of 2020 openings are already under construction. So, let's talk about 2020 RevPAR growth. Estimates for U.S. GDP growth point to a slower pace of economic growth in 2020, with lodging supply growth continuing at about 2%. This implies continuing, moderating RevPAR growth for the U.S. industry. At the same time, as I mentioned, our group revenue on the books in North America is quite strong, with booking pace up at a mid-single-digit rate. We are negotiating 2020 special corporate rates right now. And while only a few negotiations are complete, we expect 2020 special corporate rates will rise at a low single-digit rate. Recently announced U.S. government per diems, weighted by our market distribution, are set to rise 1.4% for the government's upcoming fiscal year. Today, we are seeing good demand from both business and leisure transient customers, reflecting preference for our brands and our loyalty program. But given the meaningful unknowns in the economy, we are estimating North America RevPAR growth in 2020 will increase around the midpoint of our 0% to 2% global RevPAR guide. For our Asia Pacific region, we are modeling 2020 RevPAR growth at a low single-digit rate, reflecting strong growth in Beijing, South China Markets, India, and Japan. Double-digit growth in room supply in Indonesia, Malaysia, and the Maldives may constrain RevPAR growth in those countries next year. Recent events in Hong Kong make that market quite difficult to forecast. Our Hong Kong RevPAR declined 27% in the third quarter, albeit with a meaningful improvement in RevPAR index as we outperformed the industry. We expect RevPAR at our Hong Kong hotels will decline roughly 40% in the fourth quarter. For the full year 2020, we are assuming a mid-single-digit RevPAR decline in the city. Obviously, any estimate for Hong Kong RevPAR performance is somewhat speculative. So, while we hope comparisons will ease in the second half of 2020, we are only making a modeling assumption. For next year, we expect Europe RevPAR will grow at a low single-digit rate, constrained by new supply in Germany and the U.K. RevPAR in the Middle East and Africa should be flat to up slightly in 2020 with continued supply growth in the Middle East and improving demand in Africa. In the Caribbean and Latin America region, RevPAR should increase at a low single-digit rate next year, reflecting more modest economic growth and political uncertainty in some markets. At the same time, the region will benefit from newly comp luxury hotels in Panama and Costa Rica. As you know, our business model is focused on managing and franchising the finest lodging brands. Our past results have demonstrated how this allowed us to perform well throughout economic cycles. Investors favor our business model because of this stability, but we are much more than this. We have the deepest hotel brand offering and broadest property distribution in the world, which contributes to our most valuable loyalty program. Worldwide loyalty penetration has been increasing all year and we believe there is further upside. Owners benefit from our strong RevPAR premiums and great economies of scale, particularly since our acquisition of Starwood. In North America, we have faced slowing industry RevPAR growth and rising wages for some time. Yet savings from our greater scale and implementation of best practices since 2016 have contributed 220 basis points of house profit margin lift at our managed hotels in North America. Today, the house profit margins for the Marriott Hotels brand in North America, for example, are 150 basis points higher than at the last cyclical peak in 2007. Strong economic results for owners contribute to owner preference for our brands, increasing market share and our growing pipeline. While we have a 7% share of worldwide open rooms, we have nearly a 20% share of worldwide rooms under construction. We look for investment opportunities to leverage our distribution and our loyalty program, enhance our brands, and drive shareholder value. We've announced two such opportunities just recently. Our acquisition of Elegant Hotels, once complete, will firmly establish our all-inclusive presence, and our purchase and reinvention of the W Hotel Union Square should enhance the value of the W Hotel brand. Our successful sale of the St. Regis New York and the 10 other hotels we have sold over the past three years demonstrates strong owner demand for our brands and our commitment to our management and franchise strategy. In total, we've monetized over $2.2 billion of assets since the acquisition of Starwood. To be sure, roughly 7% of our total fees are incentive fees from North American hotels. These incentive fees are subject to an owner priority return and admittedly vary more with RevPAR than basic franchise fees, but the downside is limited. Further, the long-term value to shareholders from these properties is meaningful as these are among our most prized and valuable hotels to our guests. As you can tell, I feel very good about Marriott's prospects today and appreciate the company's compelling value. On a more personal note, I'm also appreciative of your many kind words of support. I've completed chemo, radiation, and immunotherapy over the last six months. The next step is surgery. I've been working throughout and I'm still getting in my morning runs. I'm sorry, I'll have to miss our upcoming holiday party in New York, but expect to be with you on the next earnings call in February and look forward to seeing many of you in person in 2020. Before handing this over to Leeny, let me pause a moment to recognize Laura Paugh. Sadly, this is her last quarterly earnings call. Laura was by my side for my first quarterly earnings call in October of 1998. She was already a veteran IR professional then and she has only gotten better and better in the 21 years; we have sat next to each other for these calls. Laura, thank you. If I may be so bold, thank you from all of us at Marriott and from all of us in the industry. If we analyze our stock and the other securities in the hospitality industry, you're simply the best.

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 concerns 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 was 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 impacts 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, and 4% excluding the impact of the World Cup in Russia last year. Europe continues to benefit from the strong dollar. Room nights sold to U.S. travelers increased 13% in the quarter with particularly strong loyalty redemption demand in Italy, Greece, and Spain. London posted another strong quarter with RevPAR up 6% on strong U.S. and Middle Eastern demand. In the Middle East and Africa region, system-wide constant dollar RevPAR rose 2% in the third quarter with strong results in Saudi Arabia, Qatar, and Egypt offset by weak performance in Dubai. In our Caribbean and Latin America region, RevPAR rose 3% in the quarter with strong performance in Brazil. Our hotels in the Caribbean benefited from strong leisure demand and Mexico showed better results than in recent quarters. Gross fee revenues totaled $955 million in the third quarter consistent with our guidance and increased 2% over the prior year, reflecting unit growth and higher RevPAR. Residential branding fees declined $15 million reflecting the uneven timing of residential projects from year to year. We continue to have a deep pipeline of residential projects under development. While total fees met our expectations in the quarter, incentive fees declined a bit more than we expected largely due to RevPAR and margin weakness in the Asia Pacific region. Arne discussed third quarter RevPAR performance for the Hong Kong market. Total fees from our Hong Kong hotels declined $3 million during the third quarter compared to the prior year and we estimate such fees could decline by $5 million in the fourth quarter. Currently for the full year 2019, we expect our dozen hotels in Hong Kong will contribute roughly $30 million in total fees. Owned leased and other revenue net of expenses totaled $67 million in the third quarter, a $15 million decline from the prior year largely due to lower termination fees. Results also reflected lower results in New York City and the impact of renovation at the Sheraton Grand Phoenix. Termination fees totaled $11 million in the quarter compared to $23 million in the prior year. Our adjusted EBITDA in the third quarter was flat year-over-year reflecting $15 million lower residential branding fees, $12 million lower termination fees, and $17 million lower incentive fees offset by rooms and RevPAR growth. Our third quarter adjusted tax rate was a bit higher-than-expected due to a slightly different geographic mix of business. Compared to the prior year, our 2019 third quarter adjusted tax provision was higher, mainly due to prior year tax benefits from dispositions. Let's talk about the fourth quarter. For North America, we expect fourth quarter RevPAR will increase by 0% to 1% year-over-year. Shifting holidays and other calendar anomalies should constrain RevPAR growth in the fourth quarter, but we should also benefit from favorable comparisons to last year's strikes. For the Asia Pacific region, many economists expect China's economy will continue to weaken in the fourth quarter, which could further pressure RevPAR in China's secondary markets. With ongoing weakness in Hong Kong, overall Asia Pacific RevPAR in the fourth quarter could be flat to down modestly. Excluding Hong Kong, we expect RevPAR in the Asia Pacific region will increase at a low single-digit growth rate. We expect fourth quarter RevPAR in Europe will continue to grow at a low to mid single-digit rate with strong results in Venice, London, and Moscow. Middle East and Africa RevPAR should decline at a low single-digit rate in the fourth quarter reflecting continued supply pressure in the UAE, while RevPAR in the Caribbean and Latin America should increase at a low single-digit rate benefiting from strong citywide events in Santiago in Rio de Janeiro and a strong holiday season in Aruba and Grand Cayman. For the fourth quarter 2019, we believe gross fee revenue will total $960 million to $970 million, up 5% to 7% over the prior year's quarter due to RevPAR and unit growth. This is at least roughly $20 million lower than our last guidance at the midpoint, largely due to more modest RevPAR growth, the fee impact of events in Hong Kong, and unfavorable foreign exchange. We expect total incentive fees will be flattish in the fourth quarter. While incentive fees will be constrained by the RevPAR environment, fourth quarter IMF will also be helped by comparisons to last year's strikes and international unit growth. We continue to believe credit card fees could total $400 million to $410 million for the full year 2019. Owned leased and other revenue net of direct expenses could total $85 million in the fourth quarter compared to $88 million in the prior year's fourth quarter, reflecting $5 million to $10 million lower termination fees. Fourth quarter 2019 owned leased results also reflect the sale of the St. Regis New York and the purchase of the W Union Square. G&A should total $250 million to $255 million in the fourth quarter, 3% to 5% over the prior year and consistent with our prior fourth quarter guidance. With these expectations, adjusted EBITDA in the fourth quarter should total $898 million to $913 million, a 4% to 6% increase over the prior year's quarter. We expect our adjusted tax rate in the fourth quarter will be 25%, an increase over the prior year due to higher favorable discrete items in the prior year. Our effective tax rate for the fourth quarter is also a bit higher than our last guidance. These assumptions yield $1.44 to $1.47 diluted earnings per share for the fourth quarter, flat to up modestly from the year-ago quarter. For the full year 2019, we expect adjusted EBITDA will total $3.572 billion to $3.587 billion, a 3% increase over the prior year. And diluted earnings per share will total $5.87 to $5.90. Our full year diluted earnings per share guidance includes the impact of gains on sales of assets totaling $0.02 per share in 2019 compared to $0.65 per share in 2018. Our 2019 earnings guidance does not reflect a gain on the sale of the St. Regis New York, which we expect will be significant. As always, our 2019 guidance does not include merger-related costs or reimbursed revenues and expenses or additional asset sales. Total investment spending for 2019 could total $1 billion to $1.1 billion, including roughly $225 million of maintenance spending, an estimated $199 million for Elegant Hotels' equity and debt, and the purchase of the W New York - Union Square for $206 million. We expect $550 million to $600 million of this total investment spending should be reimbursed for recycle over time. We sold the St. Regis New York last week for $310 million subject to a long-term management agreement. Year-to-date, we've repurchased 14.2 million shares for $1.83 billion. And we expect cash return to shareholders through share repurchases and dividends will approach $3 billion in 2019. This assumes no asset sales in 2019 beyond those already completed. Our balance sheet remains in great shape. At September 30, our debt ratio was within our targeted credit standard of 3.0 to 3.5 times adjusted debt to adjusted EBITDAR. So before we take your questions, I want to also thank Laura for her innumerable contributions to Marriott. Personally, I want to thank her for her incredible mentorship to me over the years. It’s hard for all of us to imagine life at Marriott without her guidance, her steady pen, and her wit, but we'll try hard to make her proud.

Can you hear me? How is that?

Now we got you.

Hey, Harry.

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 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 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, there seems to be a bit more apprehension in the conversations we're having with senior members of the American business community. This apprehension appears to be more related to the trade dynamic rather than politics in general. There's ongoing news about the possibility of reaching a trade deal, and I believe that achieving even a small deal would be significant. Despite this increased apprehension, the U.S. economy remains quite strong. The growth may not be what we would like to see year-over-year, but indicators like low unemployment in our industry and high occupancy rates suggest solid performance. We anticipate year-over-year revenue increases from special corporate accounts and expect a cautious but steady approach moving into 2020, similar to 2019 rather than a decline.

Very good. My second question relates to whether there is a connection between the growth in Bonvoy members and the increase in credit card fees. You've demonstrated an impressive rise in your member numbers. Should we anticipate that the growth in credit card fees will correlate to a similar extent 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, 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.

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. I want to reiterate some points I made in my prepared remarks. We're specifically discussing hotel-level margin performance, focusing mainly on managed hotels in North America. We've attempted to analyze the margin performance influenced by RevPAR and the impact of assets we've been able to implement due to the Starwood transaction. This difference amounts to about 220 basis points in North America, indicating that two full points of GOP margin have been achieved as a result. Additionally, we see that nominal gross operating profit at the hotel level has increased by 150 basis points from the peak in 2007. This figure is an average that encompasses various market conditions across the United States. For instance, in New York, we have observed significant cost increases over the last decade—not only in wages and benefits but also in property taxes—coupled with some growth in supply, leading to greater pressure on house profit margins compared to the peak, in contrast to other markets. When we address incentive fees, this situation becomes a global narrative. We have noticed a significant transition from U.S.-generated fees to international fees. While it's overly simplistic to claim that all international incentive management fees are less risky than domestic ones, they generally tend to be more stable throughout economic cycles than American incentive management fees. This is largely because, in the U.S., there is typically an owner's priority that must be fulfilled before we receive anything, whereas in many other regions, the incentive management fee structure allows us to share in profits from the outset.

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.

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 us 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.

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 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 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 if you put a point out and said, well, how does Sheraton repositioning going in? We're really actually quite encouraged. 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 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 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 to be 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 for 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 customers 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.

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? We appreciate the question, Joe. We're also disappointed with the current situation. A quarter ago and even two quarters ago, we discussed net unit growth for 2020 compared to 2019. Based on our long-term planning, much of which we have shared during analyst meetings, and considering the substantial size of our pipeline, we have been signing quality deals consistently each year. Although not every year has been a record, we have been pleasantly surprised by the influx of new projects into the pipeline, which continues to be positive even with market apprehensions. This led us to believe we would see unit growth increase in 2020 and beyond, from our current levels. As we announced this morning, we now anticipate negative growth rates next year similar to this year, which we understand is disappointing. It's important to note that we are still early in this process and have not finalized our budget. Each quarter, we assess our entire portfolio pipeline, adding new units from signed deals and subtracting those that open or are canceled. The number of canceled deals has remained steady, so the worst-case scenario of deals being scrapped is not what we're facing. Instead, we're experiencing delays for a variety of reasons. This includes the increased mix of upper-upscale and luxury projects in our pipeline, which often involve longer permitting and construction times. High construction costs persist in many global markets, while owners are also managing these challenges amid favorable debt financing conditions. Additionally, there is general economic apprehension affecting some owners. They may still plan to move forward with their projects, but they might do so at a more cautious pace than if they were fully confident in the current market dynamics. We observe that this trend is not just an American issue; it's becoming evident globally, with similar patterns in the Middle East and Europe alongside the U.S.

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.

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. There have been high redemptions this year. A significant part of this is due to the stability of the program, allowing customers from legacy SPG and legacy Marriott Rewards to explore a wider range of options. For instance, Starwood had the Great Chica Collection in Italy, along with many wonderful hotels in Southern Europe, which are now accessible to a vast number of legacy Marriott Rewards members. They are eager to try these new offerings. There may also be some promotional aspects influencing this trend. Some bookings that might have occurred earlier in 2019 were likely pushed into the middle of the year, which allowed for higher category hotels to be more accessible, not just in terms of peak or off-peak pricing, but also concerning the previously highest category hotels being available at reduced rates due to specific pricing dynamics. Many knowledgeable individuals monitoring these loyalty programs recognized this as a great opportunity to secure redemption stays at these hotels. I anticipate that we will continue to see strong redemption activity consistently as a fundamental feature of the loyalty program going forward.

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.

Thank you.

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 pushing us a bit since we haven't finalized our budgets for next year. I believe you can gather from our comments that group business may be the strongest contributor to the 0% to 2% range we mentioned for next year. It’s too early to claim that leisure transient is significantly weaker than business transient. We'll see how the year unfolds, as well as how our budget season wraps up. However, beneath the average of 0% to 2%, some markets will perform below that 0% and others will exceed the 2% based on local market dynamics, which could be influenced by factors like convention centers or the pace of group bookings in that specific area, as well as the strengths of local economies compared to others. While I believe that group will be one of our strongest segments, it doesn’t necessarily indicate that the other segments will decline.