Marriott International

Ladies and gentlemen, thank you for standing by and welcome to the Marriott International's second quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to turn the conference over to your speaker today, Jackie Burka. Please go ahead.

Thank you. Good morning, everyone, and welcome to Marriott's second quarter 2021 earnings call. On the call with me today are Tony Capuano, our Chief Executive Officer, Leni Oberg, our Executive Vice President and Chief Financial Officer, and Betsy Dahm, our Vice President of Investor Relations. I will remind everyone that many of our comments today are not historical facts and are considered forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our SDC filings, which could cause future results to differ materially from those expressed in or implied by our comments. Statements in our comments and the press release we issued earlier today are effective only today and will not be updated as actual events unfold. Please also note that, unless otherwise stated, our REVPAR occupancy and average daily rate comments reflect system-wide constant currency results for comparable hotels and include hotels temporarily closed due to COVID-19. REVPAR occupancy and ADR comparisons between 2021 and 2019 reflect properties that are defined as comparable as of June 30, 2021, even if they were not open and operating for the full year 2019 or they did not meet all the other criteria for comparable in 2019. You can find our earnings release and reconciliations of all non-GAAP financial measures referred to in our remarks today on our investor relations website. And now I will turn the call over to Tony.

Thank you, Jackie, and good morning, everyone. I am very pleased with our second quarter results and the accelerating pace of the global recovery. The tremendous... Overall improvement we saw in both occupancy and rate in the quarter demonstrate a basic premise. People love to travel and to stay at our hotels. Demand grew steadily throughout the second quarter. Worldwide occupancy gained six percentage points in the month of June compared to May and topped 55%. Average daily rate in June was down only 13% from June two years ago. As a result, Global REVPAR has risen meaningfully and swiftly from the depths of the pandemic when REVPAR was down 90% to down just 38% in June compared to the same month in 2019. Recovery timelines vary by region, given uneven vaccination trends, virus caseloads, and travel restrictions. Yet we remain encouraged by the incredible resilience of travel demands. demonstrated by the rapid return of guests in areas where rules have been eased and people feel they can travel safely. This can be seen most keenly in mainland China, the first major market where Revpar has recovered to pre-pandemic levels. Revpar in the second quarter was driven by very strong demand, resulting in ADR exceeding 2019 levels. Occupancy reached 71% in April and 68% in May, before dipping to roughly 60% in June due to small COVID outbreaks and strict lockdowns in certain markets. Demand recovered quickly once the restrictions were lifted, as we've seen throughout the last year. July REVPAR is again expected to exceed 2019 levels. Perhaps most encouragingly, in April, for the first time since the pandemic began, leisure transient, business transient, and group room nights in mainland China were all ahead of 2019 levels. This is especially impressive given the absence of international arrivals due to stringent border restrictions. The U.S. and Canada accounts for roughly two-thirds of our rooms. And in this region, lodging demand grew impressively during the quarter, led by increasingly strong leisure demand as the number of vaccinated people continued to rise. U.S. leisure room nights in the second quarter were 15% higher than in the second quarter of 2019, though we are seeing more blending of trip purpose with the more flexible work-from-home or anywhere trend. Total U.S. occupancy reached over 63% in June, with ADR down just 11% versus June of 2019. Our strong momentum has continued into the first three and a half weeks of July, with U.S. occupancy reaching 67% and ADR down only 2% compared to July of 2019. July REVPAR for this period was down around 16% versus July of 2019. The US is also seeing increasing signs of recovery in both special corporate and group demand. While special corporate booking levels in the first three and a half weeks of July are still down around 45% compared to the same period in 19, we are optimistic that we've turned a corner. US special corporate bookings rose 23% in June over May, and then rose another 27% in the first three and a half weeks of July, as compared to the first three and a half weeks of June, with improvement widespread across industries and lengthening booking windows. Many of our corporate customers are telling us they are beginning to get back on the road this summer, and we expect to see a step up in business travel post-Labor Day as children go back to in-person learning and workers increasingly return to the office. Group bookings in the U.S. have also gained momentum. U.S. group bookings made for all future dates were down 29% in June compared to those made in June of 19, a large improvement from down 56% in March of 21 versus March of 19. And for the first time since the pandemic started, group bookings made in the month of June for any time in 2021 exceeded in-year bookings made in the same month of 2019. At the end of the second quarter, group revenue pace versus 19 was down 31% for the fourth quarter of this year. improving to down 21% for the first quarter of 22, and then down 12% for the second quarter of 22. However, it's still early, and we expect bookings made closer to the event date will increase group revenue in the books for these time periods. Most importantly, our sales team is holding on to average daily rate. ADR for group bookings is almost flat for the fourth quarter and 3% higher for full year 2022 compared to the same periods in 2019. In other regions of the world, demand in the second quarter improved over the first quarter in the Middle East and Africa, in the Caribbean and Latin America, and in Europe. Middle East Africa is benefiting from relatively high vaccination rates in many countries in the Middle East. Occupancy strengthened to 47% in June, largely driven by staycations in the UAE and quarantine business. Occupancy in Caribbean and Latin America improved meaningfully during the quarter, rising to 45% in June. While urban destinations continue to struggle, given slow vaccination rates and high COVID case counts, Many of our resort properties in the Caribbean and Mexico are flourishing, as they benefit from easing international travel restrictions and their close proximity to the US. Europe's recovery is still lagging, given its heavy reliance on international guests, slower border reopenings, and shifting restrictions that change on short notice. Yet, with the EU easing many travel restrictions beginning in May, and an increasing number of hotels reopening, occupancy doubled in just three months, reaching 31% in June. The recovery in Asia Pacific, excluding China, stalled in the second quarter, as countries such as Japan, India, South Korea, and Australia imposed strict lockdowns in response to sharp rises in Delta variant cases and low vaccination rates. Encouragingly, the recovery is now picking up steam again as caseloads in some countries like India have started to decline. Shifting to the development front, our pipeline stood at nearly 478,000 rooms at the end of the second quarter. Openings were strong with nearly 25,000 rooms added to our system during the quarter and deal signings were also healthy. Additionally, less than 2% of rooms fell out of the pipeline, one of the lowest levels we've seen in the last three years. We are very pleased with our momentum around conversions as well. Conversions accounted for 26% of rooms added in the first half of this year and have been a meaningful contributor to signings. We continue to have the largest pipeline of global rooms under construction. We are also seeing great momentum around our branded residential business, with a record 18 residential properties expected to open during the year. For the full year, we expect that gross rooms growth will accelerate to approximately 6%. And with more visibility into anticipated full-year deletions, we now expect 2021 net rooms growth to be towards the higher end of our previous expectation of 3% to 3.5%. As a reminder, this estimate includes the 100 basis point headwind from the 88 service properties trust hotels that left our system earlier this year. We are pleased with the continued progress on replacing those hotels with new product. We are now in conversations for 80% of those locations with signed or approved deals for nearly 20%. We continue to enhance and expand Marriott Envoy into an immersive travel platform that includes multiple products and offerings that enable us to provide value to our members beyond hotel stays. The program grew to over 153 million members at the end of the quarter. Homes and Villas by Marriott International, or HVMI, which currently has around 35,000 whole home listings, has been an attractive offering and tool for engaging with members throughout the pandemic. With nearly 40% of listings in markets where we don't have distribution, HVMI is expanding the number of destination options for our guests. Over 90% of HVMI room nights in the quarter were booked by Bonvoy members. Our co-branded credit card holders were very active in the second quarter with global card spending surpassing the same period in 2019. Global card acquisitions were also strong, reaching 2019 levels. Our recent credit card launches in South Korea and Mexico have seen strong initial interest from consumers in those markets. The South Korean card issuer, Shinhan Financial Group, touted the launch of our card as one of the most successful premium card launches they have ever had. Our total co-brand credit card fees in the second quarter surpassed those in the same quarter of 2019 for the first time since the pandemic began. We've also been very pleased with our successful Uber collaboration in the U.S., The number of members linking their accounts to date has far exceeded our expectations. Activated accounts were already averaging six transactions in just the first 10 weeks, demonstrating our ability to drive real engagement with our Marriott Bonvoy members beyond the hotel stay. We're always working on innovative ways to enhance our guests' full travel experience. Just last week, we became the first major hotel company to provide US-based customers with the opportunity to purchase travel insurance. Guests can now buy travel insurance when they make a reservation through Marriott's website or mobile app by linking to approved products sold by Alliance partners. As part of this distribution agreement, Marriott will earn commissions from Alliance. In another effort to connect with Bonvoy members beyond the hotel stay, we are piloting a program that allows members to earn and redeem points at food and beverage outlets in select hotels, even if the member is not staying in the hotel. The program is currently in over 200 outlets in Asia Pacific and the Middle East, with expansion to over 500 outlets expected by the end of the year. We also remain keenly focused on engaging with another key constituency, our owner and franchisee community. We have worked closely with them throughout the pandemic to help lower costs significantly. With the meaningful improvement in demand, profitability for many hotel owners accelerated in the second quarter. As the recovery continues, we are aligning with our owners and franchisees to balance two important goals as we think about our path forward, maximizing hotel-level cash flow and driving great guest experiences, as Lene will discuss in more detail. We are also working to address the labor challenges we are seeing, mainly in the U.S., in markets such as southern Florida, Texas, and Arizona, where demand has rebounded quickly. To that end, we are increasing our social and targeted marketing of Marriott as a best employer with career advancement opportunities, as well as holding job fairs to reach qualified candidates. Hiring tools, including one-time sign-on bonuses and temporary incentives, sometimes in combination with base salary adjustments in select markets, are also being successfully employed. Before I turn the call over to Lene, I want to thank our amazing team of associates around the world. I have spent time in Los Angeles, Miami, and New York over the last couple weeks as I've been getting back on the road again. It has been wonderful to visit our hotels and to meet with so many of our associates and see firsthand their passion and resilience. These have been challenging times, but we are looking forward with optimism. While the timeline is uncertain, I am confident that our business will fully recover and continue to grow from there. Lene?

Thank you, Tony. Our second quarter results reflected the strong pace of the global recovery and the incredible resilience of our business model. Worldwide occupancy came in at 51%, a significant increase of 13 percentage points over the first quarter of this year. We also saw meaningful improvement in our average daily rate decline versus pre-pandemic levels with ADR down 17% in the quarter compared to the second quarter of 2019. We're optimistic that rate recovery will occur faster than in prior downturns when ADR gains lagged occupancy gains. It's been very encouraging to see that in mainland China, ADR has come back in tandem with demand. Elsewhere, ADR has also been particularly strong in areas where occupancy has rebounded quickly. In Aruba, Puerto Rico, and Mexico, over half of our 28 luxury and upper upscale comparable resorts saw record high ADRs for the month of June. In the rest of the U.S., robust demand across our 34 comparable luxury resorts drove ADR for those hotels up more than 40% above June 2019 levels. Demand in Greece rose quickly after travel restrictions were eased in April, leading to a 20% premium in ADR for the quarter versus the same period in 2019. Global REVPAR declined 44% compared to the second quarter of 2019, a more than 15 percentage point improvement compared to the first quarter REVPAR decline versus the 2019 first quarter. We recorded gross fee revenues of $642 million in the second quarter. Our non-REVPAR related fees again proved to be quite resilient, totaling $160 million in the second quarter. These fees have now fully recovered to second quarter of 2019 levels. Our residential branding fees were strong again this quarter at $14 million. Incentive management fees, or IMFs, totaled $55 million in the quarter. Almost half of our IMFs were earned in Asia Pacific, mostly from hotels in mainland China. Around 30% of our IMFs were earned in the US and Canada region, with a number of US luxury hotels generating more incentive fees than in the second quarter of 2019. Second quarter G&A and other expense was 18% lower than in the second quarter of 2019, primarily as a result of our significant restructuring activities undertaken last year. We had a tax benefit of $41 million in the quarter due to releasing $118 million of reserves related to the favorable resolution of pre-acquisition Starwood tax audits. We continue to believe that going forward, our core tax rate will be around 22% to 24% absent any legislative changes to corporate tax rates. Adjusted EBITDA in the second quarter was $558 million, which included $22 million of German government support for certain of our leased and joint venture hotels. I also want to highlight the sale of the Punta Mita St. Regis in the quarter. a joint venture in which we held a minority interest. It's encouraging to see transactions like this occurring, and we expect to receive a total of at least $36 million in after-tax cash proceeds from the sale. We will continue to operate the hotel under a long-term management agreement. At the hotel level, our numerous cost reduction and productivity enhancement efforts have significantly lowered break-even occupancy levels around the world. even further than we anticipated when the pandemic got underway. As a result of these efforts, as well as the strong recovery progress, the financial condition of many of our owners and franchisees continues to strengthen, as does our accounts receivable collections performance. Over 95% of our managed comp hotels in mainland China had positive gross operating profits, or GOP, in the second quarter. Our GOP margin for managed comp hotels in this region expanded over 200 basis points versus margins in the second quarter of 2019. The strong margin expansion exemplifies the beneficial impact of our recent cost reduction and productivity enhancement efforts, given operations have fully come back in mainland China with their recovery and demand. These results also reflect our strong top-line performance, driven by meaningful share gains in the region thanks to our strong distribution, especially in the valuable luxury space, our popular brands, and our powerful loyalty platform. In the U.S., the number of managed hotels with positive GOP improved significantly in the quarter as demand increased. Approximately 90% reported positive GOP in the second quarter. up from about 60% just one quarter ago. As occupancies increase, we are working closely with our hotel owners around the world to balance maximizing hotel profitability while also driving guest satisfaction. We're being thoughtful about how and whether to bring back costs, programs, and amenities that were reduced or eliminated as we navigated the depths of the pandemic. For example, we've already reinstated accountability for our intent to recommend scores with accountable brand standard audits resuming next year. We also introduced a new set of renovation rules which will allow for additional deferrals of some renovations as well as reduced scopes for certain properties. We're considering how best to evolve housekeeping brand standards across each of our hotel brand tiers while ensuring guest expectations are met. We do believe that once business has fully recovered and operations are fully back, there will be permanent areas of margin improvement, primarily related to our productivity enhancements and the increased use of contactless technologies, such as mobile check-in and mobile key. As we look ahead to the rest of the year, while we are keeping a close eye on variant strains, we're optimistic about the continued global recovery. Our momentum has continued into July, and we expect an uptick in business travel this fall. We expect that when improved ease of international travel occurs, that will also fuel further recovery in lodging demand. While there's still too much uncertainty to be able to give specific REVPAR or earnings guidance, I'd like to provide color on specific items where we do have some visibility. Starting with the top line, at current REVPAR levels, we still expect the sensitivity of a one-point change in full-year 2021 REVPAR versus 2019 could be 35 to 40 million of fees. As we've seen, the relationship is not linear given the variability of IMF. We expect our non-REVPAR-related fees to continue to benefit from strong co-brand credit card fees and robust fees from our branded resident sales. We still expect full-year G&A to be roughly $800 million, significantly lower than in 2019, and interest expense is still anticipated to be around $430 million. Full-year cash taxes are now expected to be $325 to $350 million. A key component of cash flow is the loyalty program. With the acceleration of leisure demand, we've continued to see redemption nights pick up nicely, especially in our resort destinations. We remain focused on carefully controlling Bonvoy program administrative costs, and we still anticipate that full-year cash flows from the loyalty program could be positive before factoring in the reduced payments we will receive from the credit card companies. After factoring in these reduced payments, which are expected to effectively repay around one-third of the total $920 million we received in 2020, we continue to expect that cash flows from loyalty overall could be modestly negative. With better visibility in our continued disciplined approach to investment spending, we're lowering the top end of our full year investment spending expectation and narrowing the range to $575 to $625 million. Total investment spending includes capital and technology expenditures, loan advances, contract acquisition costs, and other investing activities. We're focused on bringing our credit statistics back in line with our historically strong investment grade levels. Our leverage ratios continue to improve as Marriott's asset light business model is showing its resilient cash flow characteristics. We expect continued improvements in cash flow generation as the recovery progresses. I also want to add my appreciation for our incredible team of global associates who have worked tirelessly throughout the pandemic. They truly exemplify the Marriott spirit to serve and take care culture. In closing, we could not be more pleased with our progress in the quarter, and we look forward to the continued return of guests to our 7,800 hotels around the world. We're happy to take your questions. Operator?

If you would like to ask an audio question, please press star 1 on your telephone keypad. Again, that's star 1 to ask an audio question. Your first question comes from the line of Sean Kelly with BLA.

Hi, good morning, everyone. Good morning. Good morning, Tony. I was wondering if we could just talk a little bit about the development environment. I was just hoping you'd give us a little bit more color. Obviously, it looks like the NUG increase was primarily driven by reduction in deletions, but maybe help us look out a little further, 22, 23 percent, How are the conversations going, and how do you think, excluding the SVC component, the outlook changes versus maybe 90 days ago?

Of course. Thanks, Sean. As we mentioned in the prepared remarks, we are increasingly confident in our ability to deliver at the top end of our range in 21. I think when we look at factors like The number of rooms we have under construction, more than 200,000 rooms. The lowest fallout we've seen from the pipeline in about three years. The accelerated pace of conversions. We're increasingly optimistic that we can get back to a mid-single digit net unit growth pace. But as you've seen with some of the data coming out of STR around the slowdown in U.S. construction starts. The reality is the impact of those reduced construction starts will make it challenging for us to get back to that mid-single-digit level over the next year or two.

Tony, just as the follow-up to Mid-single digit being more of a medium-term target, but just for the next year or two, construction starts probably limiting maybe a little bit below that range. Is that the way to think about it?

Yeah, I think that's right. I think we're guiding to about 3.5% net unit growth, excluding the impact of SVC in 2021. and then 22 and 23 will be the years that we think will be impacted by that drop in construction start activity in the U.S.

Thank you very much.

Of course.

Sean, just one follow-up, and that's that we do believe that while we are constrained by these lower construction starts that the industry has seen in the U.S., that we are going to be able to offset some of this through conversions, and we're really pleased with the pace of conversion signings and the conversations that we're seeing on that front. Hard to be specific at this point about exactly where that leaves us, but that, again, as Tony said, we're confident about getting back to the mid-single-digit rooms growth rate.

Thank you. Your next question comes from the line of Joe Greif with J.P. Morgan.

Good morning, everybody. Good morning. You touched on this a little bit in terms of the labor challenges and labor costs going up. So when we look at the QQ results and we're looking at your reported results, is there a lag in sort of the operating cost structure, particularly with labor relative to the revenue recovery? Is the exit rate coming out? Of the QQ and cost structure, is that something that's more significant than the reported results because of potential lag?

Well, as you know, that's going to overwhelmingly show up in IMF, Joe, from a standpoint of kind of the way the quarters operating profit works at the hotels. So, and as you might imagine with owner's priorities in the U.S., we didn't have a very high percentage of hotels earning incentive fees yet. The biggest growth in incentive fees was in Asia Pacific, and frankly, the labor cost pressures are much, much lower there. So honestly, I don't think that there is a meaningful impact at all relative to the really rapid increase in occupancy that then necessitated that we get our employment levels in the hotels up as quickly as possible. And as you said, I think there is a little bit of a lag there, but I don't think it had any sort of impact on the profits for the quarter.

Great. Thank you. And then you mentioned, I think, group PACE for the first quarter and second quarter of next year, but maybe you gave it and I missed it, but did you talk about full year 2022 PACE?

Yes, sorry Joe, we talked a bit about 22 pace and I think there's a couple encouraging things. When we look at booking pace, we continue to see volumes increasing pretty measurably into 22. and maybe just as encouraging, if not more encouraging, is the pace of ADR growth that we're seeing for 22 bookings. In fact, if you look at group bookings in 22 and beyond, ADR is actually about 3% ahead of what we were booking back in 20 for the following year. So the ADR pricing power that we're seeing in group in 22 and beyond is very encouraging.

Thank you very much.

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

Thanks. Just, you know, you've seen some really encouraging trends out of China. Can you talk about the pluses and minuses of using China as a comp? How does your China business differ from your global business?

So, Thomas, it's a good question, and I'll say a couple things. I think one of the things that is the most consistent in greater China and the U.S. is the reality that the overwhelming percentage of travelers that stay at our hotels are in those two regions are domestic. And so we're seeing, obviously, you're seeing some of the same trends in the U.S. that we saw earlier in mainland China, which is that when people feel comfortable to travel, the demand picks up really, really quickly, albeit with leisure being the strongest And clearly that is quite helpful for the hotel's occupancy levels because they're not traveling outside their country. But I will say that I think the trends have been remarkably similar in terms of the pace of ADR recovery at the same time. And I think the other thing that I'll point out that is interesting is that in mainland China you do see markets When they do have a pop in some COVID cases, they do shut down demand very quickly because the cities are closed down. We haven't obviously seen that same impact in the U.S. because, you know, the population is more varied in terms of kind of the travel and transportation. the way cities are shut down or not shut down. So in that regard, it's perhaps been a little bit more fluid in the U.S., but we have seen really terrific similarities in these markets where the occupancy is so much based on domestic travel. I think the other thing I'll point out is that the F&B recovery in greater China, I think does, um, point out the real strength of our, um, hotel brands there. And that I think has been really impressive as well.

Thanks. And just a quick followup. Um, you mentioned that part was done 16% in July versus 2019. Is that us only, or is that global? And if it's one of them, can you give us the other two? That's that's us only.

Yeah.

Do you have the global number?

We don't have global numbers yet. No, we don't. And that was just for the first three and a half weeks. Just to be clear, that wasn't for the month of July. As you know, this is all in real time that we're pulling this together. So we don't have all those numbers quite yet. And, again, as we said, that was for the U.S.

Appreciate all the color. Thank you.

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

Thanks. I have a question about margins, but first if I could just clarify Tony's comment about guidance for this year for unit growth at 3.5%. I thought I heard him say excluding the service properties. But you meant including that, right?

Yeah, sorry, that's right. So excluding the impact of SVC, our guidance would be 4% to 4.5%, and we'd guide to the high end of that. If you account for the impact of those 88 SVC hotels, it would be 3% to 3.5%, and we're guiding towards the high end of that range. That's correct. Sorry if I misspoke.

Oh, thanks. I just wanted to clarify that. And is the sort of higher end of the three and a half range from fewer removals, is it a timing factor? Or in other words, were there properties that sort of were not maybe in compliance with brand standards that came back into compliance and won't be removed in 2021? Or is it just that some of the removals are sort of pushed into 2022?

No, I think really, Robin, it's a byproduct of as the year advances, we have more and more visibility on both fronts in terms of the timing of the individual openings and the status of projects potentially going out of the system.

Okay, great. Thanks. And then the margin clarification or question, Lena, you mentioned the 200 base points ahead of 2019. I think it was in Greater China. And I think when you've talked about potential for margin improvement in the U.S., you've maybe sort of said, you know, you wouldn't necessarily expect a big increase or big change in the margin when REVPAR is recovered. Is that still the case? In other words, should we think about some of the sort of 200 basis points of margin in the example you used in China? Is that kind of temporary maybe because brand standards change? aren't what they were in 2019? I'm just trying to square that with previous comments. Thank you. Sure.

A couple things. First of all, I was speaking about mainland China. I think the interesting thing is that with RESPAR back to essentially similar levels to 2019, we are producing GOP margins that are 200 basis points better. I think that shows you some of the work that we've been able to do on the cost management side and productivity enhancement side that would tell you that those are kind of good margins to think about going forward. I think in the U.S., Robin, the interesting thing here is that we've got a lot of those similar productivity and cost enhancements that we've done here, which would lead you to some similar sort of conclusions. I think the thing you have to think about is how quickly do labor costs and benefit costs increase. So as we talked about before, if ADR recovers really quickly and you've got these productivity and cost enhancements in place, you've probably got a similar opportunity in the U.S., for those similar kinds of numbers that we talked about in mainland China. But again, a lot of this depends on how quickly it all comes back in the U.S. and also what's going on with wage rates and benefit costs.

Okay, great. Thank you very much.

Your next question comes from the line of Samita Rose with Citi. Hi, Samita.

Hi, how are you? I'm just hoping you give a little more color on the composition of the group improvement you're seeing in 2022, maybe any changes on a regional basis, maybe potentially away from larger, higher-cost cities, or if you're seeing anything just in terms of the kind of corporations. Do they tend to be smaller? Is it larger? Maybe just some color on what you're seeing on any kind of forward.

Sure. So as you know, group is a complex group of subsets of types of groups where we're seeing really significant acceleration is on social. In fact, in many ways, social group demand is largely back to pre-pandemic levels. We are not seeing rapid recovery in citywide yet, the sort of big box convention hotels citywide that we enjoyed pre-pandemic. And then the fall, I think, will be quite telling as we look for more conventional corporate group demand to return. The only other comment I might make, Smeeds, is that We are seeing in-the-year, for-the-year group bookings stronger than what we've typically experienced in a pre-pandemic environment.

Okay, thank you. And can I just ask, just to kind of follow up on the question about margin, you know, as you guys make decisions around housekeeping, will that be kind of the key driver for potential margin improvement for owners as well? you know, possibly elimination or significant reduction in housekeeping? Or are there other items on the table that would be, you know, very important towards potentially driving margin expansion at the property level?

Smedes, you can expect us to continue to try to strike the right balance. between the expectations of our guests as they get back on the road and the financial realities that our owners and franchisees face will continue to be guided by guest preference. And it is quite interesting when you read some of the verbatims that we hear from our guests, some of our guests that are dipping their toes back into travel, are still a bit hesitant about having housekeepers in the room, and they appreciate the choice of housekeeping at their discretion. Others are vaccinated and feeling encouraged about the safety of travel, and they would prefer a more conventional housekeeping solution. And so I think whether it's housekeeping protocols, whether it's food and beverage service, we'll continue to evaluate and evolve those service levels by market and by quality tier around the world. Great.

Thank you.

You're welcome.

Your next question comes from the line of Steph Gramlin with Goldman Sachs.

Hey, Stephen.

Morning. How are you?

Great. So you mentioned a number of things about the Bonvoy brand extensions and creating value there as well as the strength of non-REBPAR related fees, including the credit card fees. How do you think about the growth of this segment going forward and how closely it's tied or not tied to kind of the core business, whether that's net unit growth or REBPAR going forward?

So just, you know, broadly speaking, the non-REVPAR fees, Stephen, are made up of kind of a variety of things. But the biggest chunk of them that make up, again, when you think about it going back to 2019, call it, you know, $579 million, the biggest chunk is obviously the credit cards. And that is going to overwhelmingly relate to both the number of cardholders and the amount they spend on their co-brand cards. And as we talked about today, their spending has actually gone back to 2019 levels, and you saw the similar thing happen to our co-brand fees. So I think both the power of Bonvoy combined with kind of general level of consumer spend and health of the economy, particularly obviously the U.S. fees are overwhelmingly driven by the U.S. cardholders is how you should think about that. I think you're going to continue to see outsized growth in our residential branding fees, although they are obviously meaningfully smaller. Timeshare fees is much more of a stable number because, as you know, those are overwhelmingly fixed. So I think the biggest driver is really how you think about consumer credit card spend on our co-brand cards.

So I guess as a follow-up, is there an opportunity to monetize or generate credit card fees or other types of fees in the international markets where it hasn't been as much of a contributor?

Yes. No, they are. They're meaningfully smaller depending on kind of the economic structure of the credit card business in those various countries, and obviously the U.S. is a very, very large market. So, yes, we are, and we expect to continue to see increases in our international credit card co-brand card fees. And as we talked about in this insurance, travel insurance business that we're entering into, we should also be able to benefit there as well, but I would not expect them to be meaningful in terms of Marriott's overall earning stream.

Great. And if I can sneak one other follow up on just on the IMFs, you referenced that only a few North America properties are kind of above that under priority level. Is there any kind of level of occupancy recovery or specific markets that we really need to see to start seeing those start to be earned again?

Well, you know, honestly, they range all over the map. You know, just to give you a sense, when you go back to 2019, we basically were in a position where our full-service hotels, about half of them were earning incentive fees. And overall for the U.S., it was, call it, 56% when you take in our limited service. And there, you obviously had occupancies up into the 70s. But otherwise, I will say it's a big mishmash depending on the specifics. The counter to that is, as we described in Greater China, where we're at 77% earning in the year-to-date numbers for IMF. And back in 19, it was at 86. So you can see that they behave much more in line with base fees. while in the U.S., you really have a ways to go before we get back to earning meaningful incentive fees from the U.S.

That's super helpful. Thanks so much.

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

Good morning, David. Hi. Good morning, everyone.

I wanted to take a little longer-term look, Lini, and wonder what would have to happen and how you might be thinking about getting back into the capital returns game and whether we'd have a shot at maybe recommending a dividend by the end of the year and how you might be thinking about the setup for these items next year, which is sort of what we're used to with Marriott.

Sure. Absolutely. I think... As you pointed out, David, we're seeing tremendous progress. Our credit ratios are absolutely improving literally month by month, and we're really pleased with the progress. First and foremost, we want to get our credit ratios back in line with being a strong investment-grade credit. That is the first priority, and we are well on our way. And so I do think we're going to be talking about capital returns sooner rather than later. As you know, David, so much of this is around the pace of continued global vaccination rates as well as restrictions on travel and consumers' comfort with travel, both domestically and internationally. as well as people returning to their offices, et cetera. So as we said, we can't predict and give you REVPAR and earnings outlooks in specifics, but if we continue to see really strong progress like we have been seeing, we could absolutely imagine that we're talking about capital return, you know, later on in 22. Exactly, you know, when we're able to count on that and have a discussion with our board on that topic remains to be seen. But you certainly can envision a scenario that assuming things continue to progress, that that is the case.

If I can follow that up, three to three and a half times was usually the target. Is there any, you know, qualification around that? that we should be thinking about today?

No, except to say that we, again, would want to feel like we are squarely staying there, i.e., that the market is, that the lodging recovery has stabilized, that things have gotten to a position where reaching that three to three and a half is something that we, for for C being very solid going forward. But I think that other than that, no additional constraints.

Got it. Thank you so much. Goodbye. Sure.

Your next question comes from the line of Richard Clark with Bernstein.

Hi. Good morning. Thanks for taking my question. Just want to ask a quick question on the gap between your gross and net unit growth. I think you've done about 19,900 exits in the first half. And if I look at the gap between your net and unit growth, that would imply you need to do about 15 or a bit more than 15,000 exits in the second half. That's about double what you did in the second half of 2019 and actually even ahead of the exits you had in the second half of 2020. So is there anything particular that's coming out there? Is it just conservative or anything you could mention on that?

No, you know, I mean, I think we continue to expect to see deletions for the full year in that one to one and a half percent rate. They, you know, excluding the impact of SVC, obviously, in terms of baseline deletions. They tend to ebb and flow a little bit from quarter to quarter, but on a full year basis, we are increasingly comfortable with that guidance of one to one and a half percent deletions, excluding SVC.

Okay, that makes sense. So are you saying that the deletions in Q2, the sort of 2,000 or so, 2,500 exits, that's a particularly low number, and there might be a bit of a catch-up from that in the second half?

Yeah, they are really quite variable during the year. You could have one quarter with 7,000. You could have one quarter with 1,000. So it's really... It varies, and we do look at this region by region very carefully in looking at expirations and how things are going. So it continues to be, as Tony said, it continues to be our best estimate at this point. It is clearly better than where we were earlier in the year because, again, we had a wider range that we were considering, and we have been able to firm up that range so that we feel better. to say that we will be in the space that says we'd be at the top end of that 3% to 3.5% range. And I should add, part of the comfort around that is with the openings as well, that we have greater visibility on the openings, and we're extremely pleased with the openings in the second quarter and year-to-date.

Wonderful. Thank you very much. Thank you.

Your next question comes from the line of Dori Keaston with Wells Fargo.

Good morning.

Thanks, everyone.

Hey, Lainey. Given the trend that you've seen in new signings, the opening schedule, when would you expect to see the pipeline resume quarter-over-quarter growth? I think in the last downturn, you saw about six quarters of compression.

Again, I might give a different version of the answer I just gave on deletions. The pipeline tends to ebb and flow a little bit. Some of the indicators we look at development committee volume, for instance, and we are starting to see an acceleration in our volume of deals, particularly in June and July, in our biggest markets, specifically in the U.S. and Canada and in China, and I think that is encouraging for us. The other thing is, remember, More than 25% of our volume right now is in conversions, and because of the quick turn on those conversions, often those get signed and opened and never even make their way into the pipeline. And so that adds to some of the quarter-to-quarter variability as well.

Okay, and can you just remind us what the difference is in fees between a Between me and your pipeline, that's luxury versus select service on average.

Sorry, the difference in fees, you said?

Yeah, like the long-term expectations of what a risk can own for you guys versus a residence in.

Sure. I mean, setting aside the fact that there can be pretty wide variations from market to market, the rule of thumb we've shared in the past is that a luxury hotel's stabilized annual fees could be as much as 10 times the annual fees of a select service hotel like a Fairfield is.

Okay. Thanks, Tony.

You're welcome. Thank you.

Your next question comes from the line of Michael Belisario with Beard.

Good morning, Michael. Good morning.

Thanks. Good morning, everyone. Just a two-part question. I wanted to focus on Bonvoy. I'm not sure you mentioned it. What was the occupancy contribution during the quarter? And then the bigger picture question, maybe just how are you thinking about further broadening the platform and value proposition for guests? Is there any – renewed interest in travel adjacencies, partnerships, or any other brand holes in the portfolio, excuse me, the brand portfolio that you're seeing really just kind of what are your plans to add more value for customers as everyone seems to be fighting for a greater share of everyone's travel wall today?

Great. Well, let me try to take both of those, and Leni may chime in as well. On your first question, Envoy penetration continues to recover. In Q2, we were almost 50%, 49.5% to be precise. That was a significant increase. We went as low as about 43% at the bottom of the pandemic, but it's still a couple points shy of where we were pre-pandemic at about 52%. But the pace of penetration recovery, I think, is quite encouraging. And then on your second question, I think we continue to look for opportunities to make the program stickier, to engage with our customers even as they start to get back into travel. And we tried to give you a few examples. I think the new travel insurance program is an example. The Uber partnership I think is a terrific example. The new branded credit cards are a good example. And then just the number of app downloads that we're seeing with the Marriott Bonvoy app. I think all of those point to our efforts and the success of those efforts in trying to grow engagement among our Bonvoy members.

Helpful. Thank you. Of course. Thank you.

Your next question comes from the line of Vince Sepio. with Cleveland Research.

Good morning. Good morning, Vince. Good morning. Thanks for taking my question. A lot of mine have been answered, but one thing that I'm trying to get a little bit more clarity on as it relates to your perspective, the trajectory of U.S. REVPAR. I think you mentioned the first few weeks of July down only 16, ADR impressive only down two. Sounds like leisure is really contributing nicely to that, and just curious how you're thinking about the handoff through the second half from leisure into more corporate and group and just how sustainable that July run rate is?

Well, certainly the fall is going to be fascinating to watch as more and more schools open for in-person learning, as more and more companies get back to the office. I think the data that is perhaps most telling from our perspective is some of the statistics we shared with you on special corporate bookings. As we mentioned, those bookings rose 23% in June as we compare to May. And then, again, it's just the first three and a half weeks of July, but we saw another 27% increase in those first three and a half weeks of July versus the same three and a half weeks in June. And so the... magnitude and the steadiness of the growth in special corporate bookings, I think is quite encouraging. And then you've heard us talk about this before. This blending of trip purpose continues to be a real and measurable phenomenon. And we think it's good for our business. And we think it'll continue well beyond the end of the pandemic. With all that said, we will continue to be vigilant as we watch the pace of vaccinations around the world, the effectiveness of those vaccinations relative to the Delta variant, and monitor the impacts of that on our business.

Great. And one follow-up, if I may, with that ADR number in July, I think the recovery in ADR has been progressing really nicely and probably better than a lot of folks thought going into this year. Curious, what do you attribute that progress in ADR to, and how sustainable do you think that is through the second half?

Well, we certainly look at the pace at which demand is recovering and the amount of pent-up demand is maybe best illustrated by the pricing power we're seeing in rates. We knew we'd have that in leisure, but it's really encouraging to see that pricing power extend to both business transient and group. And in China, obviously, we've seen ADR come back at the same time. And so you throw all of that in the blender, it's really encouraging, and I think it's just driven by the sheer volume of demand.

The only other thing I'll add to that is the reality that so much of this depends on macroeconomic factors. And so as consumer confidence and consumer spending and general economic growth continue, that will be an important part of being able to continue to see this growth in demand. And that has also... always had an impact on how companies do their group bookings, do their business trips, et cetera, and that is another element of this price power. Thanks.

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

Good morning, Bill.

Good morning.

Thanks. Good morning. First, a clarification. I think it was Smeeds that asked about 2022 group segmentation and I think your answer was about it was largely social with little evidence of city wives coming back. Was that really more about 2021 or is that still 2022?

We'll get Jackie to get back to you with super specific, but I think the reality, Bill, overall, if you're still seeing big chunks of association, corporate, and government knights in 2022, but at the margin where we're seeing the strongest kind of in the period for the period demand is in both the smaller and medium-sized groups as well as the social groups, where in many cases they've put off having events for a year and now coming forward. But, again, when we think about the big chunks of business, we've still got – I mean, I'm sure you've heard from Gaylord about their bookings. There's still a wide swath across all the big segments of group business for 2022. The other thing to point out is that we still are – in a position where the room nights that are the current pace for group is still down for 22. It's just down a lot less than it used to be, and that it also we're seeing strong rate, where rate is actually up compared to 19. And with each progressing quarter, you see those nights improve as you move farther and farther away from Q3, Q4, of 2021, where there's still obviously some concern around these variants.

Thanks for that clarification. Well, my question that I really wanted to address was housekeeping and, you know, how are the guest requests for nightly housekeeping trending? We had heard from someone else that they had doubled over the last, you know, three to six months. where the guests are proactively asking for that. And then I guess the second part of that is simply, should we expect that the guest-facing experience at luxury and upper-upscale hotels will be very similar to where it was eventually in 2019, and therefore the best opportunity for margin improvement on the housekeeping side might be at select service hotels? Is that a fair way to think about it?

Okay, so there's a few questions embedded in there. I think on your first question, the... The housekeeping protocols will really continue to be driven by guest preference and will likely vary as you kind of move up and down the quality tiers. On your second point, I think I tend to agree with you that in the luxury and upper upscale tier, I think that the guest expectations should be much more similar to what they saw in a pre-pandemic environment. And then on your third question, I'm not sure I necessarily agree with that for the simple reason that what's driving margin. Certainly there's the cost side, but there is the top line piece as well. And while it's a single data point, We saw over Fourth of July weekend U.S. resort ADR up about 10%. But if you carved out just the luxury tier, Jack, you'll have to keep me honest here, but I think we were up close to 35% in ADR. And so at that sort of premium in rate, you should expect some meaningful margin improvement, even if you're back to pre-pandemic service levels.

Yeah, perfect. I appreciate it. Thank you for the time.

Of course. Thank you.

Our final question comes from the line of Patrick Scholes with Truist.

Good morning, Patrick. Good morning. Um, one of the more controversial topics right now are, is, um, you know, what percentage, if any of business travel may be permanently lost and certainly a New York times article yesterday, uh, growing more fuel on that fire. I'm, uh, I'm wondering what your thoughts are around that question. Thank you.

Well, again, we've shared a bunch of data points with you today that I think underpin our optimism about the return of business transient demand. I do think going forward, this blending of trip purpose that you've heard me talk about, we continue to think it's great for our business and our industry, and we continue to think it's here to stay for quite a while. We are optimistic about the return of business travel. We talk to about 700 corporate travel managers every month, and we are hearing anecdotally from our customers, particularly those that are in customer service businesses, law firms, accounting firms, consulting firms, that it is critical to their business that they be on the road and in person with their customers. If anything, going forward, I do think it may be a bit more difficult to determine precisely, looking at a guest walking through the lobby, exactly what their trip purpose is. You know, we're not asking you at the front desk, are you here for business, are you here for leisure, or both. But I do think you'll see a lengthening of stay as a result of this blending of trip purposes. And in fact... That length of stay is measurable, and we continue to see that through the second quarter of this year.

Okay. Thank you for the call. Of course. Thanks, Patrick.

At this time, there are no further questions. I would like to turn the floor back to management for any additional or closing remarks.

Great.

Well, again, thank you all for your participation and interest this morning. I hope you hear our optimism about the pace of recovery we're seeing in many markets around the world. We're excited ourselves to be back on the road. We hope you're getting out there as well, and we look forward to seeing you in our hotels in the weeks and months ahead. Thanks, and have a great day.

Thank you for participating in today's conference call. You may now disconnect your lines at this time and have a wonderful day.