萬豪國際 (MAR) 2005 Q2 法說會逐字稿

Good day and welcome to the Marriott International second-quarter 2005 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Executive Vice President, Chief Financial Officer and President of Continental European Lodging, Mr. Arne Sorenson.

Please go ahead, sir.

Thank you Jessica, good morning everyone.

Welcome to our second-quarter 2005 earnings conference call.

Joining me today are Laura Paugh, Senior Vice President, Investor Relations;

Donna Blackmon (ph), Senior Director Investor Relations and Carl Berquist, Executive Vice President, Financial Information and Enterprise Risk Management.

Before I get into the discussion of our results, let me first remind everyone that many of my 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 feature results to differ materially from those expressed in or implied by our comments.

Forward-looking statements in the press release that we issued earlier this morning along with my comments today are effective only today, July 14, 2005, and will not the updated as actual events unfold.

You can find a reconciliation of non-GAAP financial measures referred to in our remarks and our web site at www.Marriott.com/investor.

Our second quarter was outstanding.

It has been a long time since we have seen demand so strong in so many places and average pricing move up so quickly.

We are today more excited about our products than ever.

People want to travel for both business and pleasure and it is clear that we have the product and the locations they want to visit.

Obviously we're delighted about the operating environment, but it is our quality brands and our financial strategy that sets us apart from our competitors.

Over the last five to seven years largely due to the strength of our brands and business model, Marriott was able to invest in its business, repurchase stock and reduce debt, all simultaneously.

In 2004 and the first half of 2005, many of those business investments came back, specifically $1.2 billion in loan repayments and asset sales.

Even though the investments have been recycled, we retain the cash flow and upside from meaningful long-term management agreements on very attractive hotels and we continue to find excellent investment opportunities.

In June of this year as part of the CTF transaction, we invested $374 million in CTF hotels, extended the term of the management contracts for 13 of those hotels and accelerated reinvestment in the Renaissance brands.

In May, we invested approximately $170 million in a joint venture with Whitbread (ph), increasing our fee stream and opening up development opportunities in the United Kingdom.

Like our prior investments, we expect to monetize our investments in CTF and Whitbread over the next year or so.

Next, we invested nearly $30 million in owner incentives to accelerate implementation this year of new bedding at over 600,000 beds worldwide.

This is proving to be a winning investment too.

We are already seeing improvements in customer satisfaction scores.

And finally year-to-date, we have repurchased nearly 14 million shares of Marriott stock returning over $870 million to our shareholders.

Some of these investments have second-quarter P&L implications.

In the second quarter, Marriott's lodging operating income totaled $77 million, reflecting the impact of a $29 million charge for our bedding incentives, a $94 million charge associated with our CTF transaction primarily due to the non-cash write-off of our old management contracts.

As we have discussed, the accounting rules required us to write off our investment in the old contracts obtained with the Renaissance acquisition even though they were replaced with longer contracts and better terms.

Excluding the impact of CTF, bedding and synthetic fuel investments from both years, EPS rose 37% from the year-ago quarter.

In North America, company-operated comparable RevPAR rose 10% with 8.5% of the improvement coming from higher average daily rate.

On a calendar quarter basis, North American RevPAR improved 11.5%.

As expected during the quarter, economic conditions in the middle of the country continued to improve.

Last year in the second quarter, RevPAR in the Midwest region grew only 3%.

This quarter, the region increased RevPAR 8% with particular strength in St. Louis, Minneapolis and Detroit.

Transient revenue in our North American full-service brands increased 12% in the second quarter of 2005.

Manhattan results were extraordinary with RevPAR up 19% and average rates exceeding the rates charged at the peak of the last cycle in 2000.

The city continues to be a popular destination for international tourism.

While Manhattan showed some amazing demand trends, other markets were also strong.

Transient revenue was strong in San Francisco, San Diego, Seattle, San Antonio, St. Louis, Fort Lauderdale, L.A., Miami, Washington, Philadelphia, (indiscernible) deployed (ph) nearly everywhere.

Cross-sale revenue increased 7% in the second quarter.

Over 450,000 room nights were sold by referring guests from a sold-out property to one that still had availability.

Our wide distribution of locations and brands made this possible.

Transient demand continues to improve.

In many high transient demand markets, properties will reduce in their available group blocks (ph) to keep space available for transient guests in higher corporate rates.

Special corporate rate negotiations for 2006 are just about to begin.

In last year's negotiations, we did not offer special rates to corporate customers who weren't able to provide a meaningful volume of business.

This year, we're planning to shift more business to higher-rated categories.

For high-volume customers, we will continue to offer attractive pricing, but 2006 special corporate rates are likely to be 7 to 9% higher than those in 2005.

Group revenue from comparable domestic full-service hotels increased 8% with rates up 5% during the quarter.

Future bookings are up modestly, in part reflecting our desired shift to transient business.

Recently made group bookings showed very strong pricing.

Groups booking in 2005 for 2006 meetings are receiving rates 8% head of 2005 levels.

For groups booking in the year for the year, room rates are up 10%.

For groups that booked in the quarter for the quarter, room rates rose roughly 17%.

Yet these impressive gains still improved over group business.

We estimate that 55 to 60% of our expected 2005 group room nights were booked in the difficult years of 2001 and 2002, 2003 and 2004.

As we replace this older, less lucrative business with the stronger demand we're seeing today, group RevPAR should continue to improve over the next two years.

Our food and beverage business also strengthened during the quarter.

For our company-managed hotels, property level F&B revenue increased 8% during the quarter.

For group business on the books in the second half of the year, catering revenue is expected to increase 12%.

We also saw improvement in other ancillary sources, such as from spas and golf.

Outside the U.S., economic conditions varied greatly from one region to another.

Central Europe, especially Germany, remains soft.

Managed hotel revenue in Germany declined 9% on a constant dollar basis.

Our comparable hotels in the United Kingdom increased RevPAR over 5% in constant dollars, largely due to strong domestic business.

Last week, tragic bombings and resulting transportation challenges provided a jolt in London, but in the lodging business triggered only a few cancellations.

Occupancy at our largest hotels in London is already back to summer season norms.

Longer-term, we congratulate London and we are delighted that it was named as the site of the 2012 Summer Olympic Games.

We are the leading full-service brand in the United Kingdom and we hope to serve you at one of our hotels in London in 2012 and of course many times between now and then.

Demand in the Middle East is very strong, especially in Cairo and Dubai, and our Red Sea resorts are increasingly attractive to European vacationers.

Asia also remains strong, led by China where RevPAR was up 23% during the quarter on a constant dollar basis largely due to strong room rate improvement.

Chinese outbound travel is also growing.

Chinese travelers are driving RevPAR higher in Hong Kong and Australia and Chinese business travelers are appearing in growing numbers in places such as New York, Brazil and Argentina.

Now let's talk about margins.

With the dramatic topline growth from our managed hotels, operating margins are improving, yet operating costs also continue to rise, especially in North America.

The most significant cost in our hotels is labor, making up about one-half of the operating costs of a full-service hotel.

During the quarter, hourly wages rose 4% and health care expenses rose 9%.

Another significant cost item -- seat (ph), light and power -- continue to be challenging.

In the Washington D.C. market, deregulation of the local electric utility allowed prices to rise 20% while the average increase in the rest of the U.S. was approximately 8% during the quarter.

Despite the impact of cost increases, North American house profit margins rose 120 basis points.

On a property level EBITDA basis, assuming the hotels were company-owned, margins of our managed North American hotels would have increased 150 basis points.

From the Marriott brand alone in North America, house profit margins rose 142 basis points and property level EBITDA margins rose roughly 180 basis points.

With improvements in house profit, incentive management fees increased dramatically during the quarter.

With a favorable impact from renovations and strong seasonal RevPAR, even the Courtyard joint venture reported $3 million in incentive fees.

Later this year, we will likely reverse the $3 million in Courtyard IMF due to lower seasonality, netting a zero IMF for the full year.

Results are expected to be stronger in the next year and the venture is expected to pay incentive fees in 2006 for the first time in five years.

Outside of North America, house profit per available room rose 20% during the quarter and house profit margins improved 290 basis points.

Incentive fees earned at our hotels outside North America are more sensitive to changes in house profit margins than domestic hotels since international hotels frequently have no owner's priority.

Incentive fees at our international hotels rose 50% during the second quarter.

Worldwide, approximately 42% of our managed hotels booked incentive fees in the second quarter including the Courtyard joint venture.

Excluding the 120 hotels in the venture, 29% of our managed hotels booked incentive fees.

For the full year 2005, we continue to expect approximately 35% of all managed properties will pay incentive fees.

Base fees increased 16% during the quarter, reflecting the improvement in managed hotel RevPAR and unit expansions.

Franchise fees also reflected improvement in RevPAR and unit expansion but were offset in part by the sale of our franchise Ramada business and the conversion of our Whitbread franchised hotels to management contracts.

Time-share interval sales and services revenue increased 19% due to several projects achieving reportability thresholds, including Las Vegas, Hawaii, Hilton Head and the Newport Coast.

Our time-share segment saw its operating profit leap 57% from year-ago levels.

Time-share contract sales, including sales made by our time-share joint venture projects, declined 1% during the second quarter reflecting 11% higher contract sales from our Marriott Vacation Club brand, but fewer Ritz-Carlton fractional weeks sold.

Ritz-Carlton projects in St. Thomas and Bachelor Gulch, Colorado are at or nearing sellout but will be replaced by a new Ritz-Carlton fractional project in 2006.

Total G&A and other expenses increased to $284 million during the quarter, including $29 million from our bedding program.

We expect additional bedding expense, albeit a small amount, in the third quarter.

Currently we estimate nearly 90% of the hotels will have the new bedding by year-end 2005 and all will be complete by year-end 2006.

We also recorded a $94 million charge primarily related to our investment in the old CTF management contracts.

Again, our new management contracts were longer and more valuable than the old agreements, but because the old agreements were terminated accounting rules required Marriott to write off its 1997 investment.

Second quarter G&A also included a $12 million expense for a cure (ph) payment required to maintain a management agreement on a hotel in Hawaii.

Many management agreements are subject to performance tests based on trailing operating profit and RevPAR index, although property-level performance rarely triggers these provisions.

In this unusual case, the owner of the hotel purchased the property in early 2001 at the peak of the last cycle and signed a management agreement.

The performance test thresholds were high, reflecting the substantial purchase price.

We chose to make a cure payment in the second quarter given the substantial value associated with the management contract and the likelihood of additional development opportunities at the site.

Finally, G&A also included a $6 million expense related to guarantees at two hotels.

Both properties also opened at the peak of the cycle in 2001 and 2002 respectively, so the guaranteed commitment reflected the high costs and optimistic forecast and performance from that rosy period.

Fortunately, we have no further P&L exposure under either of these guarantees.

Revenues from owned, leased corporate housing and other declined 1% during the quarter as we closed the Shelbourne Hotel in Dublin for renovation.

Revenues were also impacted by the conversion of a large portion of our corporate apartments business to franchise agreements.

Somewhat offsetting the decline in revenues was a $10 million termination payment we received from the owner of a hotel in conjunction with the termination of our management agreement on that property.

Gains and other income during the quarter totaled $63 million, including $8 million in net earnout payments associated with our synthetic fuel business, a $29 million gain from the sale of our time-share notes and $26 million of gains primarily from loan-lease financings.

These financings included loans at Grand Lakes, the Courtyard joint venture; the South Beach Ritz-Carlton and the Desert Ranch JW Marriott Resort and Spa.

In addition to these gains, Marriott received cash proceeds of $437 million from these four refinancings alone.

Our synthetic fuel business produced $0.19 per share in EPS in the second quarter.

We received a very high allocation of tax credits as part of an agreement with our joint venture partner.

While we expect to discontinue our synthetic fuel business when the tax credit program expires at the end of 2007, today it remains a meaningful source of cash flow for the Company.

A few weeks ago, the IRS concluded that three of our synthetic fuel facilities met the placed in service requirements under section 29.

Our partner who had the right until June 30 to return its ownership interest in those facilities to us chose to stick with the investment for the time being and our allocation of credits has returned to the roughly 50% level.

Our partner will have the right to ask us to redeem its approximately 50% interest in the three facilities again later this year.

In the event our partner exercises this right, we will have the flexibility to reduce production and/or sell an interest to another party.

During the quarter, we opened nearly 6000 new rooms around the world.

At quarter end, our worldwide pipeline of rooms yet to open totaled about 370 hotels and approximately 60,000 rooms.

Compared to last quarter, the increase in our pipeline is primarily due to new franchise Courtyards, Fairfield Inns and SpringHill Suites in suburban North America.

Despite the continued evolution of the competitive market, franchisees continue to tell us that at their price points, Courtyard and Residence Inns remain their first choice development product for select service and extended-stay lodging.

Overall, nearly 40% of the rooms in our development pipeline are high-value full-service rooms and over half of those are outside the U.S. 55% of our pipeline is already under construction or is pending conversion from other brands.

Now, let's turn to our outlook for the remainder of 2005.

For the full year, we continue to expect system-wide North American RevPAR growth of 8 to 10%.

With our strong pipeline of hotels under development or pending conversions, we remain confident in our ability to open 25 to 35 new rooms in the year.

Given anticipated RevPAR growth and unit expansion in 2005, we expect combined base management and franchise fees should increase at a low double-digit rate.

Incentive management fees are expected to total 190 million to 200 million for the full year.

Time-share interval sales and service revenue net of direct expenses is expected to total 261 to 267 million for the full year, reflecting strong financially reportable revenue.

Overall, we expect lodging operating income could total about 710 million to 720 million in 2005, including the impact of our bedding initiative and the CTF charge.

Excluding bedding and the CTF charge, lodging operating income therefore is expected to grow roughly 45 to 50% from last year's levels.

We will continue to focus on recycling capital by selling assets as conditions warrant.

For the full year, we don't expect gains to be as meaningful as they have been in the last few years, but we expect they will total 106 to $113 million in 2005 excluding the synthetic fuel business.

The other result of our successful cash flow recycling is much lower interest income.

All in all, we expect a combination of interest income, interest expense and loan loss provisions to total a $45 to $50 million expense in 2005 compared to an income item of 55 million in 2004, roughly a $100 million swing in one year.

Given these assumptions and those outlined in the press release, we believe earnings-per-share for the full year 2005 should total between $2.68 and $2.78 a share.

This estimate includes the $0.26 charge from the CTF transaction, roughly $0.10 of EPS expense for the bedding incentives and $0.49 to $0.51 in EPS from synthetic fuels.

In the third quarter, we are also maintaining our forecasted systemwide North American RevPAR grow at 7% to 9% with 80% to 85% of improvement coming from room rate growth.

Domestic house profit margins are expected to increase 150 to 200 basis points in the third quarter.

Outside the U.S., we're expecting similar RevPAR improvement and somewhat higher house profit margin improvement similar to the second quarter.

Hotel renovation activity is accelerating worldwide.

In 2004, nearly 250 managed hotels were renovated.

In 2005, over 325 managed hotels have or will be renovated.

Part of the increase in renovation activity is due to the extraordinary number of hotels that have changed ownership.

For example, over the past 18 months, over 40% of our managed Courtyards and Residence Inn hotels have flipped to new owners.

Typically, a renovation or a property improvement program is included in the economics of such a transaction.

As a result, a record 25% of managed Courtyard hotels and 20% of Residence Inns across the U.S. will be undergoing renovation in the second half of 2005.

Most of these properties will remain in our comp (ph) set since only a few rooms of each hotels will be out of service at any one time.

Several full-service hotels are also beginning substantial renovations in the third quarter and a few of these will become non-comparable.

Of course, the renovation activity could have P&L implications for the third quarter.

Some renovating hotels that pay incentive fees will earn lower fees during the quarter and some property improvements will increase owner priorities, delaying our receipt of future incentive fees somewhat.

As a result of all of this, we expect incentive fees to increase at a bit lower rate in the third quarter at roughly 20% year-over-year.

Outstanding performance, but obviously a bit lower than in the first two quarters of the year.

While our renovations might be somewhat disruptive in the near-term, the longer-term results are very exciting.

For our Courtyard brand alone, we've already completed renovations on over 100 properties with 95 properties complete for at least four months.

For these stabilized hotels for the last three months ending in May, RevPAR index is up over 5% to 133% and the hotels show improvement in customer satisfaction and intent to return.

Combined with growing base and franchise fees, we expect total fees in the third quarter of $215 to $220 million.

Time-share interval sales and service revenue net of direct expenses is expected to grow to $62 to $66 million as buildings are complete and the business transforms deferred revenue in the financially reportable revenue.

With the loans repaid over the last 12 months, we expect substantially lower interest income in the third quarter.

Our general and administrative expenses in the second quarter reflect transaction costs associated with the Whitbread Hotels becoming managed hotels as well as higher costs for our M&A area.

With a large number of asset sales and loan repayments during the quarter, gains are likely to be better for the full year than we anticipated last quarter, but interest income continues to decline.

In total, EPS should increase to $0.61 to $0.65 with approximately $0.12 coming from synthetic fuel.

For the fourth quarter, we expect earnings per share should total $0.87 to $0.93 with approximately $0.12 coming from synthetic fuel.

In summary, we've increased our 2005 earnings expectations by a few pennies per share in the second half compared to our prior guidance, largely due to our temporary ownership interest in the CTF hotels.

If we are successful in selling the CTF hotels prior to year-end, you might see profits on the owned leased line of the P&L a bit lighter that our forecast, but management fees should partially offset that loss.

Otherwise, we are essentially forecasting the same RevPAR margins and total fees for 2005 and our EPS expectation is roughly unchanged from our prior guidance.

The more relevant issue at this stage surrounds the return of capital.

This is proving to be the best year we've ever experienced in terms of capital recycling.

We have been using a lot of that recycled cash to repurchase stock. 2005 is already a record year for share repurchases and we anticipate remaining aggressive buyers of our stock in the second half of 2005.

Mark Twain once advised -- always do right; this will gratify some people and astonish the rest.

We believe we are following the right strategy, emphasizing the highest quality brands, managing and franchising hotels and recycling capital.

As we think about the strong performance so far in 2005, we can admit to being only gratified, not astonished.

Jessica, we will be happy to take questions from the participants at this time.

(Operator Instructions).

Steve Kent, Goldman Sachs.

Good morning.

Just two questions, Arne.

First on -- what is your sensitivity at this point to an additional point of RevPAR?

I think you mentioned 85% of the RevPAR (multiple speakers) (technical difficulty).

Excuse me?

Steve, I don't know where that came from.

With 85% of the rate coming from -- RevPAR coming from rate, should we assume almost all of that now is coming to profit to the hotel?

And how should we start to think about this, just from a sense of (indiscernible) perspective?

And then the second thing is, you're really getting some very bullish comments about corporate rate negotiations, and your expectations both on group bookings and on corporate rate.

Are you seeing any pushback from corporates?

What are you seeing sort of the competition reaction to that, if you can comment on it?

And are you asking for a greater commitment from the corporates to -- or you know, the number of room nights, and are they willing to do that?

A lot of questions, Steve.

Let me try and make sure I tackle them all.

Let's see -- group rate pricing and special corporate pricing for next year is obviously very, very early.

So we're coming out with some predictions or comments about where we think we're going, but well in advance of the conclusion of many of those negotiations.

Is there pushback?

Always, there is pushback in both negotiations for price and then group business, which is happening daily and then sort of the annual corporate negotiations and to be sure there's a strong dialogue with our primary customers about fairness in pricing and last (ph) room availability and other aspects that go into providing lodging services to their employees.

But in this environment that we're in, we are seeing great optimism about our ability to move rates.

And in our prepared remarks, we're really talking about how it has seldom been the case that we have seen average rates move up so fast.

That obviously is because of strong demand and because of what other participants in the lodging industry are doing.

And so weak expect to continue to see great pricing power going forward and that's going to be helpful to us obviously as we recycle through that group business that was booked in earlier years when business was not quite as strong.

Let's see, what else did you ask?

Sensitivity to RevPAR.

Sensitivity to RevPAR.

Let's -- I'm going to give you a bit of a swag here, I think.

In 2000, I think at the point of RevPAR we thought was worth broadly $15 to $20 million pretax.

We think at the depths of the market at the point of RevPAR, it was probably worth only 6 to 7 million pretax.

And as we step up the incentive fee learning curve again, which we're obviously seeing -- we saw in 2004 and we're seeing in a significant way in 2005, we will start to see that sensitivity go back from the trough towards that peak number and ultimately beyond because of the growth in our system.

2005, we'll probably in the $10 to $12 million range on a full-year basis and pretax contribution from a point of RevPAR.

Okay, thanks.

You bet.

Harry Curtis, J.P. Morgan.

Good morning.

Arne, would you give us a sense -- in your press release, you mentioned that you're going to be -- you will have mezzanine loans of about $150 million in 2005.

Can you give us a better sense in the full year what your repayments will look like from the beginning of '05 to the end of '05?

What is that net number likely to look like?

I'm actually not quite sure what you're 150 refers to, but I will answer the question that (multiple speakers).

That's the incremental funding of mezzanine loans.

I think we will see probably very close to $600 million worth of our loans paid off this year.

And so I think we ended 2004 with about $900 million of loans on our balance sheet which were made on lodging projects primarily.

And we should end the year around 400 or so.

Think about it as basically 600 million being paid off and 100 million being funded (multiple speakers) that's actually 500.

And the other piece of this was -- what is the average interest rate that you were receiving on those loans?

Probably just over 10% -- 10, 11, 12% -- something in that range.

Very good, thank you very much.

William Greene, Morgan Stanley.

Hi.

Arne, can you talk at all about what you can do on the cost side, whether it's productivity or how you could offset some of these?

Because I would have thought with the rate environment as a strong as it is, that you would have seen better flow-through at the property level.

We are doing a lot of different things.

I think probably around labor, the biggest is productivity.

We had some productivity improvement in the quarter, not dramatic.

And obviously, the productivity gains have been quite steady over the last few years.

But we have a lot of focus on that.

I think when we look at our margins during the second quarter, we really are just a hair shy of the 150 basis point forecast.

Now we report actual results of 120 of cost (ph) profit margins, but that was impacted by relatively lower margins in the Courtyard (indiscernible) in brands.

Part of that is the impact of renovations and relatively lower margins in the Renaissance brand, which was impacted by the -- similarly the last quarter before the CTF transaction, which is obviously a big part of that North American portfolio.

And when adjusted for that, we think Renaissance and MHR and Ritz-Carlton were all just shy of a 150 basis point margin increase versus last year, which is about what we've expected.

Now as we go forward, we will stay quite focused on negotiations on health care, insurance programs, we will stay quite focused on benefits, quite focused on productivity and hope against hope for some relief on things like energy costs.

And then beyond that, it's quite fundamental stuff on procurement, which continues to be a source of improvement on margins.

And hopefully as we see more and more volume move to Marriott.com, which is the cheapest way for us to get a room in our system, we will see some lift in margins from that.

It's worth mentioning also that if you go back and look at the change in margins since the peak year for the industry in the year 2000, Marriott house profit margins only fell about 600 basis points, which was much less than what the industry reported.

We put in a lot of productivity improvement through, over the last six years.

So I think as margins come back, there is likely to be less upside for us on margins given that there was less downside in the first place.

And how far you from peak now?

Well, we're probably 400 basis points, 450 basis points.

Yes, that's right.

As we speak.

You can find considerable data around that in the slides that we provided during the security analyst meeting a couple of weeks ago.

And then the last question just on G&A -- with all the moving parts, Arne, what do you think is a steady-state run rate for that, say, ex-all of these charges and what not?

We're doing everything in our power to hold that to a 3 to 5% rate growth.

Okay, thanks for your help.

William Truelove, UBS.

Great quarter, guys.

First question is -- on the synfuel situation, you did $0.19 here in the second quarter.

I think you provided guidance at the end of the first quarter to be around $0.12 or so.

What sort of changed between the time we had the first quarter call to between $0.19 now?

The biggest change was that the IRS took a long time to ultimately come out formally and say we were right.

And until they did that, we ended up with virtually 100% of the credits from the four synthetic fuel facilities.

Singularly, that was the biggest single impact.

They obviously have since come out and cleared up the situation in terms of the place and service date, but that didn't happen until actually shortly after our quarter closed, and we will now see the shift of those credits back to the 50-50 arrangement with our partner.

Okay, great.

And since the CTF transaction, how much now of your earnings come out of Europe at this point?

That's a good question.

I would guess it's not going to be a dramatic shift.

The European assets that were associated with the CTF transaction are only about -- the ones we'll keep long-term are, I don't know, 12 to 15 hotels on the continent which are primarily leased hotels and the profit contribution to us will be more than it was before, but not dramatically different.

So we will probably still -- if you include the United Kingdom and the Middle East and the continent, we'll probably still -- 7 or 8% I suppose of pretax coming out of that market.

Great.

And finally, with only 5 million shares left on your share repurchase authorization, when is your next Board meeting?

Early August.

Early August, great.

Thank you so much, good quarter.

Jeff Donnelly, Wachovia Securities.

Good morning, folks.

Two questions.

Actually first, I guess a follow-up to one of the first questions asked.

Your RevPAR growth and contribution from rates seem to the running stronger than you expected, so I expect this should help highlight the leverage in your IMF fee revenue.

How much of the improvement in your full year guidance for core lodging operating profit came from an increased IMF revenue expectation for '05, and where do you see IMF fees (indiscernible) revenue for the full year?

Well, we talked about in our prepared remarks, we think there will be about 190 to 200 million incentive management fees for the full year.

I think when we look at this forecast against the last forecast, the general characterization we would give to it is that it's not a dramatically different forecast than we gave you three months ago.

We think we're at sort of higher end of the prior guidance we gave you in terms of our fees, but we're sort of sticking with a really dramatic strong RevPAR growth we've forecasted and fee growth that we forecasted a quarter ago.

There has been some impact, I think the CTF transaction singularly is probably the most important because of the acquisition of a number of those hotels that we will hold almost certainly for the balance of the year.

We have probably $3 or $4 million per quarter in Q3 and Q4 of decline in management fees, primarily based but a little incentive fee impact that will instead show up in our owned and leased line.

And when adjust for that, you will see that our fee forecasts are really at the higher end of the guidance we gave before.

But it's not a different world in terms of the guidance we're giving you today than we did three months ago.

Okay.

Because I think in the first quarter, you guys had said that your IMF would be 200 to 210 million. (indiscernible) just shifting between line items, if you will?

Yes, exactly.

Okay.

And then a second question.

You have been active on those portfolios, be it CTF or Whitbread.

Do you anticipate closing more of those types of transactions in 2005?

Are you talking about acquisitions as opposed to recycling the capital from those two deals?

Correct -- portfolio acquisition (indiscernible) spinning off of real estate.

Those two transactions are coincident in terms of the timing but were both quite unusual transactions with existing partners in our were system.

And I would not expect that those transactions will be replicated in 2005 or even in the next few years.

That is not to say that there may not be some other transactions that we participate in over the balance of this year and beyond.

We obviously kick an awful lot of tires and tried to make any predictions about whether any of those will close.

But we continue to look very aggressively at opportunities in the market today.

Great, thanks.

(Operator Instructions) Joe Greff, Bear Stearns.

Good afternoon, guys.

How are you?

Most of the questions have been asked and answered.

If you could just run through what your guidance incorporates in terms of a diluted share count for the back half the year.

And I guess it would also be helpful for us in trying to decipher how much share repurchase you have in back half of the year, what their diluted share count is as of today, including some of the stuff that you bought back I guess so far this month?

Yes.

The share count in Q2 we reported today I think was 234, right?

That's an average number (MULTIPLE SPEAKERS).

That's an average number for the quarter.

You'll see in the Q that we file next week hopefully some more information about the precise timing when we fold that in, those shares in.

If memory serves, I think we were relatively more active in the middle of the quarter and the first period and the last period of the quarter were relatively lighter.

And so the impact -- the full quarter impact of the activity we've already done should drive another, oh I don't know, million or two reduction in the total share count in Q3.

And obviously to some extent, the fully diluted share count is going to depend on what happens with the stock price, because that drives the share repurchase program.

But I think on a full year basis, we would expect the number to be about what it was in Q2.

Great, thank you.

We're not going to give you any forecast for what we're going to buy in the market in Q3 and Q4, but you should know I think it's relevant to this whole area.

We don't think that in the year of purchases of stock are very significant in moving EPS in that year.

The EPS accretion that is relevant is probably more in next year and the years beyond.

Bill Crow, Raymond James.

Good morning, guys.

Arne, you talked about what I would view as fairly dramatic turnover in your ownership base.

Is that unprecedented as far as what you have seen in the history?

And what do you think is driving that?

Do you think those former owners are just getting out of the business so they're buying other things or are they developing -- what are they doing?

Well, it's -- there's an unprecedented I don't know.

It's probably at as high a level as it has ever been, I would guess, if not unprecedented.

And it's being driven by a circuit of capital in the market.

There are enormous pools of capital interested in investing in lodging products today.

My own view is that's because asset values in our industry were much more resilient through the tough market we've been through the last three or four years than folks anticipated.

And when you add to that pretty bullish expectations I think that many investors in the market have about our industry and still historically low interest rates, it combines for a very interesting investment alternative for folks that are having trouble putting their money to work.

And that is why the money is chasing deals.

I think we have other participants that had been in investments for some period of time, may have hoped for an earlier opportunity to cycle through their investments but really couldn't do it the last couple of years and are finding this an opportune time to take some money off the table.

How long it continues, Lord knows.

I don't think we have any real forecast in that.

I would say that the statistics we use, we're really focused on Courtyard and Residence Inn where we have seen incredible turnover in terms of the number of managed units.

When you look at the core full-service and luxury hotels, I think even with the trend of a very high volume of transactions, you still have growth by good institutional owners like Host Marriott and the other public REITs that continue to grow, and I think you end up with some real stability in that part of the market.

Okay, thank you.

You bet.

(Operator Instructions) Jay Cogan, Banc of America Securities.

I had a couple of questions with respect to the special corporate rates.

I just wanted to kind of add a few to what has already been asked.

Can you remind us what percentage of your total systemwide revenues, whether it be in North America or worldwide, relates to special corporate rates, and what was the percentage increase in '05, or what does it look to be in terms of those rate increases '05 versus '04?

Let's see.

Historically I think for the Marriott brand, the special corporate rates globally were about 10 to 12% of their business.

In the lower demand environment of the last few years, in many markets the special corporate percentage increased by two or three points, I would guess from that sort of 10 to 12% range.

As we speak, we're seeing the special corporate volume really because of availability and because of managing various segments of the business I think start to move back down.

We don't know for certain where it will end up, but I would guess it's a pretty fair expectation that will be back down in the 10 to 12% range.

What were the corporate rates 2005 versus 2004?

Again, they're probably a little less available than they would have been anticipated when they were negotiated, but I would say probably in the 5% range.

5% range.

So basically, if you're RevPAR guidance for the year is thinking about 8 to 10% and it sounds like about three-quarters of that still is rate-based, I mean a fairly predictive about where rates could be on a kind of go-forward basis, or is that just a one-year phenomenon in '05?

I'm not sure if I completely track you.

I think --.

Well, if rates were up 5% on a special corporate basis in 2005 and your full-year guidance sounds like it was between 6 to 8% in terms of rates, I'm just wondering how predictive that part of the business is to the whole pie in terms of rate growth.

You're saying you're (technical difficulty) 7 to 9, what we should really (indiscernible) from that?

Jessica, I don't know where that beeping is coming from, but if you'll do your best, that would be great.

The rates are (technical difficulty) sorry, folks.

The special corporate business is really a negotiated rate for transient business.

And so that transient business is getting booked at the hotels in a relatively short window.

So there is a level of predictability to it.

We know that to the extent it books where it's going to price.

But it is subject to all the vicissitudes that any transient business is.

So it can rise or fall depending on what's happening in the market.

I'm not sure if that answers your question, but I think as we look forward, we expect, what, when you combine the impact of what's happening in the group area when you look at strong transient demand, we ought to continue to see a heavy majority of RevPAR growth for the balance of the year that's rate-driven.

I think you'd be more likely to see special corporate rates not as a leading indicator of pricing, but rather a lagging one.

That's understandable.

I can totally see that, and that's fair and helpful.

Thank you.

Thank you.

That concludes the question-and-answer session today.

At this time, I would like to turn the call back over to Mr. Sorenson.

Please go ahead.

Thank you all very much for your time this morning.

We wish you a lovely balance to your summer and thank you for traveling and visiting us in all of our hotels.

We appreciate your time.

That concludes today's presentation.

Thank you and have a good day.