NEW YORK--()--Fitch Ratings has affirmed Marriott International Inc.'s (Marriott) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook remains Stable. A full list of rating actions follows at the end of the release.
Positive Industry Fundamentals
Lodging demand trends remain strong, although growth is beginning to slightly moderate. The affirmation reflects the recovery continuing to mature in 2013 with a conservative base care scenario of 4.5% U.S. RevPAR growth. U.S. RevPAR grew 6.8% in 2012, according to Smith Travel. Fitch expects Marriott to grow in line with, or slightly better than, the industry average. A majority of the RevPAR improvement will be driven by Average Daily Rate (ADR) increases as Fitch believes occupancy levels are near peak levels.
Low expected supply growth will also contribute to greater pricing power for Marriott and other lodging operators. Fitch believes that supply growth has reached a trough, with supply growing at 0.5% in 2012. However, Fitch expects U.S. supply growth will remain below 1% in 2013 and well below its long-term historical average of 2% in 2014.
The ratings incorporate Fitch's current macroeconomic outlook, including annual U.S. GDP growth of 2.2% and 2.3% in 2013 and 2014, with world economic growth at 2% and 2.9% over the same time frame. Fitch recognizes the cyclical nature of the lodging industry and the potential for heightened global macroeconomic risk, but believes that Marriott is in a good position to withstand negative downward pressure outside of Fitch's current expectations.
Leverage Below Target Levels
Fitch expects management to remain committed to credit metrics in line with a 'BBB' rating. Adjusted for the $350 million senior notes issued in the fourth quarter of 2012 (4Q'12), Fitch calculates pro forma 3Q'12 lease-adjusted leverage of 2.9x.
As expected, the company has focused its capital allocation policies on growth initiatives and shareholder-friendly activities. The company bought back $880 million of shares through Sept. 7, 2012. It also increased its investment spending in 2012, mostly driven by the Gaylord acquisition and increased capex related to new hotel construction and improvements to existing hotels. Fitch expects the company to maintain capital allocation policies within Fitch's target lease-adjusted leverage level of 3.0x, so a shift in financial policies above this range would be considered outside of current ratings.
However, there is room in the rating for cyclical weakness or a leveraging transaction that temporarily brings credit metrics outside of the leverage target, as long as Fitch forecasts a return to lease-adjusted leverage of 3.0x or below within roughly 12-18 months.
For a discussion and reconciliation of adjusted credit metrics and contingency risk for U.S. Lodging C-Corps, refer to Fitch's report, 'Inn the Footnotes,' dated Jan. 7, 2011 (link below).
Continued Focus on a Capital-Efficient Model
The ratings consider Marriott's long-term focus on a capital-efficient, asset-light, recurring-fee business model. Fitch estimates that roughly 90% of Marriott's profit (revenue net of direct costs) is now generated from management or franchise fees.
This past year Marriott acquired the Gaylord brand and management company for $210 million. Ryman Hospitality Properties (f.k.a. Gaylord Entertainment Company) continues to own the existing hotels and Marriott manages the properties under long-term agreements. As noted in Fitch's rating comment dated May 31, 2012, the transaction fits in well with Marriott's long-term business model.
Additionally, Marriott completed the spinoff of its timeshare division, Marriott Vacations Worldwide Corp, in November 2011. This was another example of the company increasing its capital efficiency by eliminating a business that requires a high level of development spending and capital investment.
Marriott's liquidity position is supported by its revolving facility availability of $1.3 billion (less letters of credit and commercial paper outstanding) and cash balance of $105 million at third-quarter 2012. Fitch expects the company to generate free cash flow of roughly $300 million-$400 million in 2013 and 2014, despite the potential for increased investment spending, providing some financial flexibility for continued share repurchase activity.
Given the company's current leverage profile, Fitch does not expect any near-term debt reduction, so the ratings consider that Marriott will look to refinance its 2013 maturity coming due in February. The company has $400 million in senior notes due February 2013; $300 million in senior notes due 2015, 2016, and 2017; $600 million in senior notes due 2019; and $350 million in senior notes due 2022. The company also had $441 million in CP outstanding as of 3Q'12.
Marriott's 'F2' short-term IDR and commercial paper ratings reflect the company's 'BBB' long-term IDR, strong cash flow generation and liquidity profile. Further, the short-term and long-term IDRs are supported by the company's capital recycling business model, which provides solid financial flexibility with respect to discretionary capital outlays.
--If Marriott explicitly guides to a more conservative policy with a stated leverage target below 3.0x then a positive rating action would be considered. At this point, Fitch believes it is unlikely given the potential growth opportunities in the lodging industry over the next few years and the company's historical financial policies.
--Fitch expects management to support its balance sheet at a level commensurate with a 'BBB' rating. If management changed its financial policy and chose to manage leverage at a level higher than 3.0x then a negative rating action would be considered.
--In the event of a significant downturn, the company could maintain its current rating if it pulled back on investment spending and share repurchases and reduced its CP balance. A negative rating action would be considered if the company chose not to adjust its capital allocation in a downturn scenario.
--Marriott's 'F2' short-term rating is supported by its back-up liquidity coverage from its RCF and sufficient internally generated sources of liquidity to amply cover near-term debt service. If these liquidity measures deteriorate over time, there could be pressure on the 'F2' rating.
Fitch has affirmed Marriott's ratings as follows:
--IDR at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--$1.75 billion senior unsecured credit facility at 'BBB';
--$2.2 billion of senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps' (Jan. 7, 2011);
--'2013 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Dec. 18, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Inn the Footnotes: Comparison of Adjusted Credit Metrics and Contingency Risk for U.S. Lodging C-Corps
2013 Outlook: Cross-Sector Lodging & Timeshare ￢ﾀﾔ The Penthouse View
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates