Introduction:

The hospitality industry in the past few years has been disrupted by a few phenomena such as global lockdown and the rise of Airbnb. However, despite all these challenges the appeal of hotels to leisure and business travelers has not wavered. The strong branding that these hotels have built out and their transition into an “asset-light” business model where the pressure to constantly build out new hotels is shifted from management to property owners, helped to drive the hospitality industry.

Market:

Airbnb would unlikely overtake hotels as they present a few issues for both property owners and renters. For property owners, the large cost of home insurance, rising labor cost to clean and maintain apartments, and property tax. For renters, there is the issue of hidden cameras, safety, and varying quality of their experience. Airbnb on its own is also facing potential bans due to its ability to drive up rental prices in neighbourhoods. (SOURCE).

Revenue:

MAR has a few revenue streams such as “Base Management and Incentive Management Fees”, “Franchise and Royalty Fees”, “Owned and Hotel Leased Revenue”, “Cost Reimbursement”, and “Others”.

Base Management and Incentive Management
Marriott helps to manage properties under the Marriott brand for other property owners, earning a cut of their revenue.

Franchise and Royalty Fees
Marriott franchises their brand out to property owners and earns a royalty fee.

When forecasting Managed and Franchised Properties, given that inflation is at an elevated level investors are less willing to take on a loan to purchase property which affects the overall number of properties under MAR. I assume it would take another 2 years for the interest rate environment to stabilize. I also assume that there would be a significant rise in the total number of properties for 3 years in response to how demand was muted for the past 3 years due to COVID-19.

When forecasting the Room/Property, given that inflation is at an elevated rate I assumed that the property purchased is smaller in size. However, when the interest rate environment stabilized in my forecast, I forecasted the Room/Property to taper back up to the historic average.

When forecasting Annual Revenue Per Available Room (RevPAR), I forecasted it as the historical average, tapering it downwards to grow at the perpetual inflation rate.

Owned and Hotel Leased
Marriott’s property that they directly own.

When forecasting Company Property, given that MAR is aggressively pivoting towards being “asset-light” and has been reducing its number of company properties over time, to avoid being overly granular I assumed that MAR’s total properties remained constant throughout my forecast.

When forecasting Annual RevPAR, I forecasted it as the historical average, tapering it downwards to grow at the perpetual inflation rate.

Cost Reimbursement
Marriott incurs certain costs on behalf of their managed, leased, and licensed properties. These reimbursements are not done with the intent of profiting. Hence, I decided not to include cost reimbursement in my DCF.

Cost:

COGS

When forecasting COGS, I took into account the total number of employees (SOURCE), Room/Employee, and Cost/Employee.

When forecasting Room/Employee, I assumed it grew slightly higher for MAR to maintain its quality standards.

When forecasting Cost/Employee, I forecasted it at slightly higher than % of the perpetual inflation rate, for MAR to be able to attract talent.

Others

When forecasting Others, I forecasted it as a % of historic averages.

CapEX and D&A:

CapEX

“Full year investment spending could total $1 billion to $1.2 billion.” – 2023 Q4 Earnings Conference. For 2024. Marriott also expects their CapEX to be 800-900M in 2025.

When forecasting CapEX, as CapEX includes “contract acquisition cost”. I followed management’s forecast and assumed that management maintains %earnings reinvested for 2 additional years beyond 2025 to accommodate for when interest rates fall and there is a higher need to convert property owners to become MAR franchisees.

D&A

When forecasting D&A, I forecasted it as a % of historic averages.

Change in NWC:

Marriott does not explicitly state the individual component in their NWC and just lists a nominal figure for change in NWC.

WACC:

RFR (1M Avg) = 4.45%
Beta (SOURCE) = 1.62
Stable Market ERP (SOURCE) = 4.60%
COE = 11.90%

MAR is rated “BBB” (SOURCE)
COD (1M Avg) = 5.74%
Marginal Tax Rate = 21.00%
AT-COD = 4.53%

Stock Price (5D Avg) = $240.96
Shares O/S = 289.49M
Market Value of Equity = 69755.51M
Weighted Average Maturity of Debt = 5 Years
FY23 Interest Expense = 565M
Market Value of Debt = 11992.10M

%Debt = 14.67%
%Equity = 85.33%
%WACC = 10.82%

Conclusion:

Ultimately, in my base case, I value MAR at $215.67 per share. I believe that MAR is slightly overvalued as Investors were optimistic of a potential rate cut which would greatly boost MAR’s top line. This optimism stemmed back to last year June when the FEDs penciled in 3 rate cuts for 2024. Even though recent news suggests that 3 rate cuts are increasingly difficult. However, the stock price continues to be elevated as there is some leftover optimism for MAR from last year and a recent shift in investors’ perception that high-interest rates are here for an extended period which forces them to go ahead with their property plans. However, I’m cautious about how strong the rally will be for MAR when interest rates do eventually let up or how long that will take.

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