Marriott International Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 3, 2022

Key Takeaways

  • RevPAR Recovery: Q3 RevPAR rose nearly 2% above 2019 levels with global occupancy at 69% and ADR 10% higher, marking the first quarter above pre-pandemic performance.
  • Bonvoy & Credit Cards: Marriott Bonvoy membership reached 173 million with record penetration (60% U.S., 53% global) and co-brand card sign-ups and spending exceeding expectations.
  • Development Pipeline: The global pipeline expanded for the fourth consecutive quarter to over 502,000 rooms, with conversions comprising 21% of signings and U.S. new construction starts at the highest level since the pandemic began.
  • City Express Acquisition: Agreement to acquire 152 City Express hotels (17,000 rooms) in the CALA region is expected to lift 2022 gross room growth to ~5.5% and net growth to ~4% if closed by year-end.
  • Greater China Lag: Q3 RevPAR in Greater China remained 23% below 2019 levels due to ongoing strict zero-COVID policies, delaying regional recovery and reducing expected openings.
AI Generated. May Contain Errors.
Earnings Conference Call
Marriott International Q3 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to today's Marriott International Third Quarter 2022 Earnings. At this time, all participants are in a listen only mode. Later, there will be an opportunity to ask questions during the question and answer session. Please note this call may be recorded. It is now my pleasure to turn today's program over to Jackie Berca, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, everyone, and welcome to Marriott's 3rd quarter 2022 earnings call. On the call with me today are Tony Cappuano, our Chief Executive Officer Lieny Oberth, our Chief Financial Officer and Executive Vice President, Business Operations 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 SEC filings, which could cause future results to differ materially from those expressed in or implied by our comments.

Speaker 1

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 temporary closed due to COVID-nineteen, RevPAR occupancy and ADR comparisons between 20222019 reflect properties that are defined as comparable as of September 30, 2022, 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. Additionally, unless otherwise stated, all comparisons to pre pandemic for 2019 are comparing the same time period in each year. 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

Speaker 2

the call over to Tony. Thanks, Jackie, and thank you all for joining us this morning. We had an outstanding 3rd quarter. Quarter rose above 2019 levels for the first time since the pandemic began, up nearly 2%. RevPAR compared to 2019 improved sequentially from the Q2 in every region around the world.

Speaker 2

Global occupancy rose to 69%, while ADR outpaced 2019 by a remarkable 10%. Compared to pre pandemic levels, worldwide RevPAR in September reached a new monthly high watermark, Increasing more than 4% or nearly 7%, excluding Greater China. During the quarter, Leisure demand remains strong, well above 2019 levels. In the U. S.

Speaker 2

And Canada, full service group revenue for the quarter showed pacing up 4%, but is likely to improve further given the strong last minute group bookings that we've seen all year. The trend towards last minute bookings has led to meaningful compression and pricing power, helping group ADR for new bookings rise each quarter this year. At our managed hotels in the U. S, ADR for in the year, 4 year group bookings made in the 3rd quarter rose 17% Compared to same year bookings made in the 2019 Q3, a significant jump from the 6% increase we saw in the Q1. ADR for group bookings made in the Q3 for 2023 outpaced 2019 Q3 bookings For events in 2000 by 24%.

Speaker 2

Business transient demand also continued to improve during the quarter, although it still lags 2019 levels. 3rd quarter business transient room nights in the U. S. And Canada were 11% below 2019. We are currently in the midst of our special corporate negotiations for 2023 and are very pleased with how they are progressing.

Speaker 2

After 2 years of holding rates steady, the early results look positive for at least high single digit year over year rate growth. 3rd quarter day of the week trends continue to suggest that travelers are combining leisure and business trips. In fact, the average length of a transient business trip has increased meaningfully and year to date is up more than 15% compared to 2019. With borders reopened in most countries around the world, rising cross border travel helped Spurred demand during the quarter, especially in Europe and in the Caribbean and Latin America or CALA region. Cross border guests accounted for 15% of our global room nights in the Q3, an uptick from 12% in the Q1 of this year.

Speaker 2

In 2019, 18% of travel to our properties was from cross border guests. So we anticipate Additional upside from international travel, especially from Greater China, once stringent travel restrictions are relaxed. Given rapidly rising interest rates and growing concerns about a possible global recession, we are closely monitoring Consumer and macroeconomic trends. There is no doubt that the hospitality industry is impacted by economic cycles And with transient booking windows averaging only about 3 weeks, trends could change relatively quickly. However, We have yet to see signs of a slowdown in global lodging demand.

Speaker 2

In fact, we've seen just the opposite. Booking trends remain very healthy. Given sustained high levels of employment, consumer trends prioritizing experiences versus goods, pent up travel demand and a high level of consumer savings, travel spending has been incredibly resilient. In October, demand remained strong across our regions with the exception of Greater China where trends are still low. Our powerful Marriott Bonvoy program grew to 173,000,000 members at the end of the 3rd quarter.

Speaker 2

The program achieved record penetration levels in the quarter, reaching 60% in the U. S. And Canada and 53% globally. Members also continue to engage with our co brand credit cards, which had another solid quarter. After recently making Significant enhancements by adding new benefits to many of our U.

Speaker 2

S. Cards, sign ups have well exceeded expectations. This led to record new cardholder acquisitions as well as record spending for the 1st 9 months of this year. We also introduced 2 mid tier cards at the end of September, which should help drive strong growth going forward. While much smaller fee contributors than our U.

Speaker 2

S. Co brand cards, we have similarly seen record growth Internationally this year in new card members and total card spend. This has been particularly driven by China, We've had great traction after launching our first cards there in July. Our Bonvoy members have been increasingly interacting with the platform through our direct Digital channels, which helps boost owner and franchisee profitability. Since 2019, our share of room nights booked through direct digital channels Has increased more than 5 percentage points to 38%, while our distribution through OTAs has risen by less than a percentage point to 12%.

Speaker 2

The power of Bonvoy in our direct channels has also been evident in our latest offering, the Ritz Carlton Yacht, Which made its inaugural voyage from Barcelona last month. Remarkably, around 2 thirds of all the bookings for this incredible brand extension Have been through direct channels, which is many times above the rates most cruise companies experience. Additionally, Bonvoy members account for more than half of the yacht bookings. We look forward to more ships joining the portfolio in the future. Shifting to the development front, our pipeline grew for the Q4 in a row, totaling more than 502,000 rooms by the end of the 3rd quarter.

Speaker 2

Siding activity in the quarter remains healthy in most regions of the world. Our development team continues to be laser focused on conversions, A particularly bright spot in the development story. Conversions represented 21% of room signings and 27% of room openings in the quarter. We are very enthusiastic about the level of conversations on conversions, including for multi unit conversion opportunities. Outside of Greater China, we were pleased to see new construction starts pick up nicely in the Q3.

Speaker 2

While not yet back To 2019 levels, new construction starts in the U. S. Reached the highest quarterly level since the pandemic began. For full year 2022, we now expect gross rooms growth of approximately 4.5% Compared to our prior expectation of closer to 5%. The change is primarily a result of fewer expected openings in Greater China As the lockdowns there have extended construction timelines.

Speaker 2

The good news is that we have not seen deals in Greater China Or in any of our regions falling out of the pipeline at a higher than usual rate. With just 2 months left in the year, we now expect deletions at the bottom end Our prior guidance, deletions could be about 1.5% for 2022 or 1% excluding the 50 basis point impact From our exit from Russia. So our net rooms growth for 2022 is likely to be around 3% Or 3.5% before factoring in the deletions in Russia. We're always looking at opportunities that help broaden the offering for our guests as well as our owners and franchisees. Last month, we announced our agreement to acquire the City Express brand portfolio, Which is currently comprised of 152 hotels with over 17,000 rooms in the Calla region.

Speaker 2

We are quite bullish on the moderately priced mid scale space, which has meaningful growth potential. Upon closing this transaction, We will immediately gain a significant foothold in this high growth segment in CALA, while also becoming the largest hotel company in the region. We are incredibly excited about the opportunity to expand in this segment in Kala as well as other locations around the world. If the transaction closes before year end, our 2022 gross rooms growth could be around 5.5% And our net rooms growth could be approximately 4%. We really look forward to working with the City Express team.

Speaker 2

We expect solid rooms growth going forward given the attractiveness of our portfolio of global brands, our powerful loyalty program, Our momentum around conversions and our industry leading pipeline, while the exact timing will depend on how new construction starts trend from here, We remain confident that over the next several years, we will return to our pre pandemic mid single digit net rooms growth. Now before I turn it over to Leeny, I just want to recognize and thank our associates around the world for their continued commitment, Passion and resilience. Leeny?

Speaker 3

Thank you, Tony. We had excellent financial performance again this quarter, driven by continued momentum in global RevPAR growth. In the U. S. And Canada, 3rd quarter RevPAR was 3.5% Above pre pandemic levels, with ADR surpassing 2019 by more than 10%.

Speaker 3

RevPAR for all market types, primary, secondary and tertiary and all brand types from luxury through extended stay Hasmore fully recovered for the first time. With the exception of Asia Pacific, our international regions posted incredibly strong RevPAR growth As restrictions across most countries fully lifted, Europe, in particular, benefited from a large increase in U. S. Leisure demand, thanks to the Compared to 2019, 3rd quarter RevPAR rose 6% in Europe, Nearly 19% in the Middle East and Africa and nearly 18% in CALO. RevPAR is still lagging behind 2019 levels in Greater China and in our Asia Pacific, excluding China or APAC regions.

Speaker 3

Greater China improved the most in the quarter with RevPAR 23% below 2019, 30 percentage points better than a quarter ago. However, the recovery there remains uneven given China's renewed commitment to its strict zero COVID policy. The good news is that we continue to see that when a market reopens for domestic travel after a lockdown, lodging demand Rebounds very quickly. In APAC, South Korea joined India and Australia in crossing the full recovery mark, But this was offset by Japan's borders remaining closed until the end of the quarter. 3rd quarter RevPAR in APAC was 14% below pre pandemic levels, an 8 percentage point improvement from a quarter ago.

Speaker 3

As we move through the Q4, APAC is benefiting from a recovery in Air Lift and Japan's now open borders. 3 quarter 3rd quarter total gross fees of $1,100,000,000 rose 11% compared to 2019, Exceeding the top end of our guidance, growth was driven by RevPAR improvement and room additions, as well as another quarter Strong non RevPAR related fees. Those fees totaled $192,000,000 in the 3rd quarter, largely aided by ongoing growth in our co brand credit card fees, which rose 22% year over year. The strength of our industry leading luxury portfolio also contributed significantly to fee growth in the quarter. Gross fees from our luxury properties were up 13% versus the same quarter in 2019, Even with Greater China's weaker performance, while our luxury properties account for 21% of our managed rooms, They contributed 34% of our total incentive management fees in the 3rd quarter.

Speaker 3

3rd quarter Adjusted EBITDA also exceeded the high end of our guidance, outpacing the same quarter in 2019 by 9%. With the strong U. S. Dollar, foreign exchange net of hedging negatively impacted adjusted EBITDA by $22,000,000 in the quarter, some of which was included in our guidance a quarter ago. This negative currency translation was more than made up for by the positive impact from increased U.

Speaker 3

S. Leisure Travel Abroad. We estimate that net of our hedges, the 100 basis point change in the U. S. Dollar Could affect full year 2022 adjusted EBITDA by less than $10,000,000 G and A and other expenses totaled 2 $15,000,000 in the Q3, better than our guidance, largely reflecting lower than expected administrative costs and bad debt.

Speaker 3

At the hotel level, we remain focused on containing operating costs for our owners and franchisees, while also delivering superior service to our guests. With ADR 15% above 2019 and our significant productivity enhancements, 3rd quarter profit margins at our U. S. And Canada managed hotels were 2 full percentage points above 2019 levels Despite meaningful wage and benefit inflation, wage and benefit growth, while still high, Let me now turn to our Q4 and full year 2022 guidance, the details of which are in our press release. As we head into the end of the year, we're very pleased with the strong continued momentum in our business.

Speaker 3

Group and transient bookings are showing further gains against 2019. In both the U. S. And Canada and internationally, We expect 4th quarter RevPAR compared to pre pandemic levels to accelerate from the 3rd quarter, even with anticipated Weaker demand in Greater China. Compared to 2019, 4th quarter resPAR could increase 4% to 6% in the U.

Speaker 3

S. And Canada, be down 2% to flat internationally and increase 2% to 4% globally. Worldwide Q4 RevPAR could increase 27% to 29% over Q4 2021. We're still working through our 2023 budgets and recognize that there is heightened macro uncertainty. That said, we currently think 2023 global RevPAR could increase nicely year over year, driven by gains in both the U.

Speaker 3

S. And Canada and internationally. Each quarter could see growth compared to this year Particularly strong growth in the Q1 due to the easier comparison given the impact of the omicron variant in early 2022. For full year 2022, we're now anticipating G and A expenses of $880,000,000 to $890,000,000 Slightly better than our prior guidance, primarily due to lower bad debt expense. We're also raising our full year adjusted EBITDA guidance and We now expect adjusted EBITDA of around $3,790,000,000 at the midpoint of the range, which is 6% higher than our prior full peak year in 2019.

Speaker 3

Due to the timing Some capital expenditures for owned leased hotels and corporate systems as well as key money payments. We now expect Full year investment spending of closer to $500,000,000 assuming the CitiExpress transaction does not close in 2022. Strong spending on our credit cards is expected to result in loyalty being a slight source of cash for the full year Divided by operating activities was $1,900,000,000 a significant increase of nearly $1,200,000,000 compared to the 1st 3 quarters of last year, a strong reminder of the power of our asset light business model. At the end of the quarter, our leverage ratio was excellent at the low end of investment grade targets. With our solid financial results and cash flow generation, We have already returned $1,900,000,000 to shareholders through buybacks and dividends through October 31st, And we now expect to return more than $2,700,000,000 to shareholders this year.

Speaker 3

In closing, we're incredibly proud of How well our business is performing and how resilient our business has proven to be. Tony and I are now happy to take your questions. Operator?

Operator

We'll take our first question from Shaun Kelley with Bank of America. Your line is open.

Speaker 4

Hi, good morning, everyone. Thanks for taking my question.

Speaker 3

Good morning, good morning, Sean.

Speaker 4

Tony, probably wanted to start with you if we could. One thing that's been a bit of a theme and You hit on it as well through your commentary, which is how strong the development environment has held up. And I'm wondering if you could unpack that for us a little bit just given we continue to hear about rising financing costs, a little bit more stress in some of the commercial real estate That contrasts pretty greatly with what you kind of implied in your comments about just how well your signings are going and your activity is going. So can you help us square that up a little bit and just talk about what you're seeing on the ground.

Speaker 2

Of course. So on the signing side, we continue to see Strong development committee volume. We continue to see strong franchise application volume In most markets around the world, the constriction we're seeing in the debt markets for new construction, particularly here in the U. S, It is lengthening the cycle even a bit longer in terms of getting shovels in the ground. But we're quite encouraged about The consistency we've seen in the volume of under construction projects in our pipeline, in fact, we were looking at it over the last few days.

Speaker 2

As you saw in our release, we continue to have a little over 200,000 rooms under construction. It's actually the 20th Great quarter where we've had more than 200,000 rooms under construction globally. The Market in China is most certainly where we're seeing the most challenges. Disproportionate share Of our projects in the pipeline in China, in fact, about 60% are in the luxury and upper up Scale tier principally in primary markets, which are well, the combination of those quality tiers and Those markets cause those projects to be the most significant fee generators, but they are more complex development projects And it takes a little longer for them to get open in a market like China. But broadly, we continue to See really powerful interest in our portfolio of brands and we're maybe most encouraged by the volume both of signings and openings In the conversion tier.

Speaker 4

That's great. And then maybe as my follow-up, Leeny, You mentioned, I believe, as you're looking out to 2023 RevPAR that it could increase nicely and you said each quarter Positive versus this year. Could you just talk a little bit about, again, very high level assumptions behind that? I know No one's got a crystal ball here, but just how do you kind of how do you consider the macro when you think about that outlook and maybe some of the pluses or

Speaker 3

Yes, sure. Thanks, Sean. As you say, there's obviously continues to be A fair amount of uncertainty about the possible recession given the Fed's Continued rise in rates and economic headwinds that do continue But I think we've got some things in our business that really do lead us to confidence about 2023, Although we are not predicting per se a recession, we clearly believe there does continue to be pent up Travel demand, particularly in parts of the world where the borders are just opening, we're also seeing Just generally a desire for travel and services as compared to goods, Which we do see strongly in leisure. Also see, as we think about Kind of the overall macro environment that there is pent up savings for the consumer. So we'll have to see.

Speaker 3

But again, from where we sit right now and as we look into the booking trends moving To 2023, we continue to see strength across all the business segments, Sean. And then the last I would say is, the reality is our booking window is still short. So at roughly 3 weeks For transient bookings, things could change relatively quickly. But for the signs that we see right Now, we feel good about 2023. Obviously, Q1 is a particularly hopeful item given we had omicron In the Q1 of 2022.

Speaker 4

Thank you very much.

Operator

Our next question will come from Joe Greff with JPMorgan. Your line is open.

Speaker 5

Good morning, everybody. I was hoping you could talk about 2023 group business on the books For next year and maybe talk about it maybe a little bit differently than maybe how you've talked about it in the past. I was just wondering how much of group For 2023 is on the books from share as a percentage of what you anticipate the total to be? And then maybe you can just talk about In segments in terms of when that was booked, so to get a sense of pricing, how much of 'twenty three Group was booked in 'twenty two, How much of it was booked in 'twenty one? How much of it was booked prior to 'twenty one?

Speaker 5

And obviously, how much would you anticipate in the year, 4th year, Just given the relative strength of group of late. Thank you.

Speaker 2

Yes, of course. So Let me start macro and then I'll try to get a little more precise in reference to your specific question. 2023 group revenue on the book is currently pacing down about 11% Relative to 'nineteen, although candidly, you heard Leeny's comments about the short booking window On transient, similarly short booking window on group. And so I don't know that looking at that down 11% is particularly relevant. Even for Q4 this year, we're up 4% and we think that will likely improve through the quarter given The strength of short term bookings and the trade that many of our customers are making for flexibility and they're willing to pay a higher rate.

Speaker 2

When I look deeper into what's on the books for 2023, room nights are down in the high teens. ADR is actually up close to about 10%. And then I think your second question was really about when that Business is being booked. I guess I'll try to give you some 2022 data that is hopefully indicative of the trends we're seeing. About 50% of the group business we've seen year to date in 2022 was booked in the year for the year.

Speaker 2

That's about double what we saw pre pandemic where typically we'd see about 25% of our total group volume Being booked in the year or 4th year.

Speaker 5

Great. Thank you. And then, Leeny, we heard your comments obviously about Broad expectations for 2023 RevPAR growth. How do you think non RevPAR related fees Perform relative to that RevPAR growth expectation. Would you expect it to be similar?

Speaker 5

Would you expect it to be plus or minus? How do you think about that?

Speaker 3

So we're in the middle of our budget process, Joe. So we obviously aren't getting to where we're talking about specifics on RevPAR growth of 23 over 22. I think what we've seen this year is credit card fees, Frankly, being up over 20% year to date this year and I think for the full year, obviously, our guidance implies the same. So I think you'll continue to see growth in the cardholders and then growth in But whether it matches exactly RevPAR, we're not in a position to say specifically. Obviously, when you look at compared to 'nineteen, those credit card fees have grown meaningfully more than hotel related fees because Of COVID and the steady growth in cardholders and credit card spend each and every year as we've moved through 2019.

Speaker 3

But Again, broadly speaking, we are looking at growth of non RevPAR fees in 2023, both Credit cardholders as well as spend, but the relative rate of growth compared to RevPAR, we will get Closer to as we move through the budget process, but we're looking for healthy growth in both.

Speaker 5

Thank you very much, guys.

Operator

And our next question will come from Robin Farley with UBS. Your line is open.

Speaker 6

Great. Thanks. I was curious about the acquisition that you made in October, and you talked about expanding in the midscale segment In the CALA region with Bakkt brand, do you have thoughts about the midscale segment in the U. S? Not necessarily with that brand, In some other brands that maybe we don't know about yet.

Speaker 2

Yes, of course. So As we mentioned in the release on the acquisition, and I think I at least touched on this in my prepared remarks, The acquisition initially is focused on the CALA region. We are equally excited about the growth prospects for midscale across CALA And what this transaction does for us in terms of further strengthening our footprint across this really important region. As with many acquisitions that we've done over the years, once we close, once we start rolling in CALA, we will, of course, evaluate the Applicability of this platform as to whether it makes sense to roll out some or all of the sub brands under the CitiExpress banner into other markets around the world. But right now, we're focused on getting the transaction closed.

Speaker 6

But in general, is the midscale segment in the U. S. Something, whether it's that brand or not, That you kind of have your sights set on?

Speaker 2

Well, as you know, we are not in the mid scale segment in the U. S. Certainly, this acquisition gives us the opportunity to evaluate whether it makes sense to enter mid scale in any other market inclusive of the U. S.

Speaker 6

And then just one follow-up on the your comments about the pipeline growth in rooms under construction. And you mentioned that it's been a very steady sort of rooms under construction in the last few quarters. You're steadily above The 200,000 unit rate, is there can you give us a little bit of insight into sort of new construction starts in the U. S? Only because sort of the broader U.

Speaker 6

S. Market seems to be slowing number of new construction starts in the So just wondering how that sort of incremental hotel starts looks?

Speaker 2

Of course. So again, Greater China, which is quite a volatile environment, we're pretty encouraged about what we're seeing Around the world in terms of new construction starts, we are certainly not back to the peak of 2019. But as I mentioned earlier, new construction starts in the U. S. And Canada reached the highest quarterly level we've seen since the start of the pandemic.

Speaker 6

Okay. All right. Thank you.

Speaker 2

Of course.

Operator

And our next question will come from Smedes Rose with Citi. Your line is open.

Speaker 7

Hi, thanks. I wanted to ask a little bit Net unit growth as well going forward just a bit probably remains difficult for developers to kind of access capital. And then just wondering, do you See Marriott providing more of a backstop to developers either through loan guarantees or just direct financing?

Speaker 2

Sure, of course. So as both Leni and I referenced, the availability of debt, Particularly for new construction, here in our biggest market, is a bit challenging. The good news is the pipeline continues We continue to see fallout from the pipeline below our historical averages. As has always been the case in constricted debt markets, brand affiliation, Track record of the developer strength of the sponsorship are what are the factors that capture the construction debt that is in fact Available. And so we see signs that the strength of our brands continue to capture a disproportionate share of what's out there.

Speaker 2

A quarter or so ago, we announced closing on the financing for a $1,200,000,000 Gaylord Pacific Hotel In Chula Vista, California, this quarter, we announced the closing on financing for a new Ritz Carlton Reserve in Papagayo in Costa Rica. So we do feel like we are grabbing meaningful share of the dollars that are out there. And I'm sorry, Smedes, what The second part of your question, oh, on key money. Well, I was just thinking about the backstop.

Speaker 3

Yes.

Speaker 2

Maybe I'll take a high level shot at this and Leeny can jump in with some more color. I don't See our tried and true philosophical approach to investment in projects changing even in this environment. Certainly, the competitive environment gets more competitive by the day, but we will use the They are applying the same disciplined lens that we've applied in the past. And among the long list of reasons, we'll continue to take that approach. Over the years, when you look at the projects where we've leveraged the company's balance sheet to get to accelerate growth, Those are projects that tend to generate outsized fee volumes.

Speaker 3

The only thing I'd add is that we are not seeing That we are increasing our financing support or investment support in a meaningful way for deals. I think at the end of the day, the first mortgage loans that projects are looking for do not typically come from Marriott and that has not Changed. In terms of debt service guarantees, operating profit guarantees and key money, I would say we continue to see them in the same

Operator

And our next question comes from Patrick Scholes with Truist Securities. Your line is open.

Speaker 8

Hi, good morning, everyone. Good morning. I know you sort of touched on this and made some implications for next year. When we think about the right net unit growth to model for next year, a number of considerations. Number 1, You did see your pipeline tick up a bit from 2Q, but then again, the trajectory of year over year Quarterly growth has been going down.

Speaker 8

Is it a fair assumption when we think about the organic number to use, use that similar to This year is 3% for next year at this point? Thank you.

Speaker 2

Thank you, Patrick. Again, some of the murkiness that's out there causes us to be reluctant to give you a hard number. What I will tell you is we are encouraged by deal volume. We are encouraged by the volume of under construction projects. And maybe most notably, Get constricted environment, we are particularly enthusiastic about the volume of conversion deals we're approving and signing, The volume of conversion deals that we're opening and the volume of conversion discussions we're having both on individual projects and multi unit

Operator

And our next question will come from David Katz with Jefferies. Your line is open.

Speaker 9

Hi, good morning everyone. Thanks for taking my question. Good morning. I wanted to ask about IMFs. The release says 2 thirds of them are international.

Speaker 9

Can you just add a little color on what percentage of North American hotels are Earning them today and any qualitative commentary about how that curve might roll out into the future would be helpful.

Speaker 3

Yes, sure. So, let's talk about a couple of things. First of all, just from the dollar size, David, we were at $35,000,000 of IMFs or about a third from the U. S. And Canada, and that is pretty similar to what it was in Q3 'nineteen, it was 39.

Speaker 3

Now it was 26% of overall hotels in U. S. And Canada earning incentive fees in Q3 and 56% in 'nineteen, but it's important to break out Full service from limited service, because the reality is that we had a large portfolio back in 'nineteen of managed Limited service hotels, which as you know, left our system over a year ago. So if you actually look at full service, We're actually at a slightly higher percentage of hotels earning IMFs in full service than we were in 'nineteen. And again, as we talked about before in my comments that you saw, house profit margins at our full service hotels, Up 200 basis points compared to 'nineteen with our strong RevPAR performance and really strong efforts on the cost containment So we feel good about what's going on.

Speaker 3

We've talked about hoped for Expected growth in RevPAR in 2023, both U. S. And internationally, which should bode well for Continued progress on incentive fees, obviously, wage and benefit growth It's something we're keeping an eye on, which has moderated a bit, although it still reflects the fact that we're in an And then the last thing I'll say is we've continued to see improvement in the large urban Where we've got a number of managed full service hotels in the U. S, and we've seen nice progress as we moved into Q3 In some of those urban markets and we expect them to continue on as we move into 2023 with that recovery.

Speaker 9

Understood. Thank you for that. And as my follow-up, the discussions happened during COVID early on about The fee structures and the interactions between owners and yourselves around contracts and service delivery, etcetera. And interestingly, it came up with in a couple of places from investors recently about what's changed. Now that, At least for most of us, COVID is kind of in the rearview mirror.

Speaker 9

Can you just talk about how that's different and how that's manifesting itself in the numbers?

Speaker 3

So fundamentally, the fee structures have not changed. So I would say, while we did things that on a temporary basis, like Helped on the reducing reimbursable costs and helping with extensions on accounts Receivable, they were all really overwhelmingly temporary things. And then also if you remember, 85% of the things that we charge are based on top line revenues of the hotels. So they Flex as the revenues go up and down, which is helpful to the hotel owners. I think you see things like what we've talked about on Our direct digital bookings, things like that, which do help the hotel margins by coming through that channel Rather than coming through the OTAs, as an example, all the productivity efforts that We've done to help improve our productivity per room.

Speaker 3

We've obviously Work very hard to make sure that we can make the most out of every revenue dollar that comes through the hotels. But as far as structural Changes in the contracts, there's nothing really to look for there. And the only things

Speaker 2

I would add, We obviously have brought back all of our quality metrics, so our QA audits, our brand standards. You might think that the owners would balk at that. I think quite the contrary. They care deeply about their neighbors within the portfolio and continue to encourage us To bring back and enforce those standards. And then similarly, we obviously gave our owners and franchisees A measure of relief on renovation cycle at the very bottom of the trough of the pandemic.

Speaker 2

We're bringing those requirements back, But with some pragmatic perspective on hotels that are doing a terrific job on service as evidenced By those quality metrics and giving them the ability to selectively extend some of those renovation cycles.

Speaker 9

Understood. Thank you very much.

Speaker 3

Thank you. Thank you.

Operator

Our next question will come from Phil Crow with Raymond James. Your line is

Speaker 10

open. Hey, good morning. Thank you. Tony, we view hotel demand It's kind of a lagging economic indicator, maybe 3 or 6 months. I'm curious whether you agree with that.

Speaker 10

And if What is the best, whether it's a consumer view or other economic data points to try and judge the macro Change that may be afoot?

Speaker 2

Yes, it's a good question. I would revert Maybe refer back to some comments that both Leni and I have made this morning about this extraordinarily short booking window. So probably not as much of a lagging indicator as we might have experienced pre pandemic. While we are encouraged and optimistic by the forward looking data we see, I think Leeny said it best. We also recognize that we work in an industry that is cyclical and subject to economic cycles.

Speaker 2

And because of that short booking window, trends can change quickly. However, even if, in fact, we are in a recession We fall into a recession. I think the company and travel more broadly are positioned a bit differently. Whitney, maybe you want to

Speaker 3

Yes, I think we definitely see that we could perform relatively better than we have in prior recessions. You've definitely got unemployment rates right now that are truly at historic lows. And while certainly What is happening with interest rates would be expected over time to influence that. We are A far cry from the 9.5% that we were in the Great Recession. And similarly, when you think about pent up Savings and the desire for people to take and do travel, to not Soon that they can put it off, that they really don't want to postpone it and that there is still both business and Leisure trips that families and consumers want to make.

Speaker 3

And while consumer health is something that we will be watching extremely closely. For the moment, there does look to be some extra room there that could help as we go into a potential reception.

Speaker 10

That's helpful. If I could just ask my follow-up question. We understand that owners meetings recently, the topic of consistency of brand has kind of come up. Is there some complaints about not removing enough rooms from the system? You talked about a net unit growth, a low number of removals.

Speaker 10

Should we expect that to go up over the next couple of years as you get back to kind of enforcing capital spending?

Speaker 2

So maybe I'll take the first part and Lieny can take the second. As I mentioned earlier, The vast majority of our owners are quite pleased that we've brought back our quality metrics and quality requirements. They care, As you point out meaningfully about the quality of the overall portfolio, while there may be some pockets of Tration, I think there's also a broad understanding that it was appropriate to suspend those processes during The depths of the pandemic and that it will take us a bit now that they are reinstated to get back to Having enough empirical data to be a little firmer on enforcement.

Speaker 3

The only part that I would add is that for The owners who did do some renovations during COVID, I think, the results that they're seeing are powerful, I think our good incentive for other owners to do the same, we did, as Tony mentioned, we did give Owners a bit of a pass in the heart of COVID to help everybody manage through the pandemic. But I think as we are Coming out of it, I think the entire industry recognizes the importance of having both product and service up to where Our consumers, our guests expect them to be given the prices that people are paying. So we do expect there to be additional renovations Frankly, probably a pickup in renovations now that we're largely through that impact And believe that the returns on those renovations will be strong. For the time being, we certainly Continue to see that our we expect our dilution rate to stay in this 1% to 1.5% Rate that we've talked about for several years, we will as we get into the New Year Refine that a bit as we go through the entire budget process, but I think that that sort of range should be your

Speaker 10

Perfect. Thank you.

Operator

And our next question will come from Brandt Montour with Barclays. Your line is open.

Speaker 7

Hey, good morning, everybody. Thanks for taking my question. Good morning. So maybe good morning. So when you think about corporate transient recovery and specifically focusing on your largest The larger corporates in the U.

Speaker 7

S, what is the tone that you kind of get back from them when you talk to them about how they're planning for Obviously, we know that near term, you're seeing good trends, but we hear and see headlines regarding, especially in tech, Some larger companies pulling back on expenses and things like that. I'm just curious how you feel about Some of that, some of those things.

Speaker 2

Sure. So, at a macro level, we are again encouraged by the Sequential quarter over quarter improvement in business transient. You'll recall that in the U. S. And Canada, BT was down almost 25 In the Q1, that dropped to 13% in Q2 and just down 11% in Q3.

Speaker 2

As we've discussed in the past, small and medium sized companies, which are about 60% Elshos BT room nights are fully recovered. And in fact, in Q3, their room nights were up about 10%. When you pivot to the larger companies, your comments are right. Special which tends to be a lot of those big companies, their room nights were down about 17% in the quarter. And when you start to look at the specific tiers within Special Corporate, you brought up Teck as an example, they were down about 23% in the quarter.

Speaker 2

Trying to respond more qualitatively in terms of what we're hearing from them, I think it's really embedded in the short booking window. They absolutely talk about the value of face to face Interaction with each other, with their customers, with their clients, but they are also again much like our group customers, I'm willing to trade a bit of pricing for flexibility. And then the last thing I would say to try to address your question, We are relatively early in the special corporate rate negotiations. But what we're seeing in terms of the pricing And our growing confidence that we're going to end up at least with high single digit year over year rates It's pretty encouraging as well.

Speaker 7

Great. Thanks for that, Tony. I appreciate it. And then On conversion activity, which you guys did talk about and hoping to ask it in a slightly different way, but just given the sort of countercyclicality Of that activity in past cycles and sort of one would think maybe that we were sort of at the tail end of conversion activity that was Elevated because of COVID, but maybe that there is some a pickup, there could be a pickup of conversion activity If we went into another if we went into a recession, is that how you think about it at this point?

Speaker 2

It's not. It's not. I think the reality is A couple factors are in play here that give us even more confidence about the runway we have for conversions. I think number 1 for Marion, we've never had a better stack of conversion friendly brands And across multiple quality tiers, which is really encouraging for us. Number 2, we talked a bit about the constriction in the debt markets.

Speaker 2

There is meaningfully not meaningfully, relatively more debt available for existing assets than there is new construction, But the same lenses from the lender's perspective apply brand affiliation track record. And so in order to source The debt that is available for existing assets, I think you see existing owners and buyers of assets thinking longer and harder about brand affiliation. And then I think 3rd, I mentioned this in response to one of the earlier questions. The uptick we've seen in multiunit conversion discussions It's a little different than what we've seen at the tail end of other cycles.

Speaker 7

Perfect. Thanks so much, everyone.

Speaker 8

You're welcome.

Operator

And our final question will come Duane Pfennigwerth with Evercore ISI. Your line is open.

Speaker 11

Hey, thank you so much. Nice to speak with you. On the business transient commentary, Wach, I think you said down 11%. I wondered if you could provide some regional color. Where would you mark that recovery across the geographies that you touch?

Speaker 11

And then just as we think about the shape of that recovery curve, We've seen some nice sequential improvement here, but should we be thinking about a plateau through early next year when we have New sort of budget cycles or are there regions where you still think sort of sequential improvement into 4Q on BT is on the table?

Speaker 3

Sure. So let's talk we're going to reference back to Tony's comments about where roughly 60% of our BT In Q3 was from small and medium sized companies. And that frankly is sprinkled all over the country. So that's going to be everywhere from New York to Tulsa to Smaller markets that are at limited service hotels rather than the larger Special corporate accounts obviously are more headquartered in the urban large cities. The thing I will say is we have continued to see progress as we moved along.

Speaker 3

When you think of, for example, you think of New York City, which has moved Quite nicely during the year, with the improvement in BT, where they were down 29% In Q1, New York City was actually 3% higher in Q3 than 2019. So I think you will You to see the progress, the trends in BT are similar both internationally as well as in the U. S. I do think as we move into 2023, a lot of this will depend on the state of the economy. So kind of having a prediction about exactly where BT will go, it is Tough to pinpoint.

Speaker 3

We do look for continued improvement and think it will ultimately get back to where it was, but the exact timing of that, Hard to say. And then the last thing I'll point out is just the reality that we have seen it moderate in terms of its rate of Improvement as we've moved into Q3 and I would expect to see that moderation continue.

Speaker 11

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

And it appears we have no further questions at this I'll turn the program back to Tony Cappellano for any closing remarks.

Speaker 2

Great. Well, thank you all again for joining us this morning. Thanks for your Continued interest in Marriott. Get back on the road, and we look forward to seeing you in our hotels in the coming weeks months. Have a great day.

Speaker 6

Thank you.

Operator

This does conclude today's program. Thank you for your participation and you may disconnect at any

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