Fitch Affirms Marriott's IDR at 'BBB'; Outlook Stable

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.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's positive near- to intermediate-term view towards lodging industry fundamentals. Strong corporate and leisure transient demand and limited new supply support Fitch's base case scenario of 6% U.S. industry-wide RevPAR growth in 2015.

Fitch expects Marriott's system-wide RevPAR to grow at a rate similar to our industry wide 6% projection for the U.S. The company has guided for a range of 5% - 7% systemwide RevPAR growth in 2015 in North America and 4% - 6% overseas.

Marriott had $150 million of cash and $789 million of availability under its revolving credit facility (total capacity of $2 billion less $1.21 billion of CP outstanding) that supported its liquidity position at Sept. 30, 2014. Fitch expects Marriott to generate free cash flow of roughly $400-$500 million in 2015 and 2016. Despite the potential for increased investment spending, this should provide financial flexibility for continued share repurchase activity.

The 'F2' short-term IDR and CP ratings reflect Marriott'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.

Favorable Industry Fundamentals and Outlook

Fitch expects U.S. lodging revenue per available room (RevPAR) to increase by 6% during 2015, through a combination of an approximate 1% occupancy gain and 5% average daily rate (ADR) growth. Accelerating U.S. GDP and employment growth, and low levels of new supply (Fitch estimates 1.1%) set the table for the 5th consecutive year of mid-single digit industry RevPAR growth.

Select measures that have traditionally foreshadowed RevPAR declines, such as the index of leading economic indicators, hotel occupancies and hotel REIT share prices suggest it is unlikely that industry RevPAR will decline during the next one to three years. In addition, consumer confidence, interest rates and air passenger enplanements are trending positively. These metrics (along with GDP and employment) have historically correlated to hotel demand.

Fitch sees an unanticipated decline in the U.S. economy as the principal risk to lodging fundamentals, outside of exogenous event risk that could cause a reduction in travel, such as a military conflict or health epidemic. Fitch is also watching closely for signs that the strengthening U.S. dollar is hurting inbound international visitation, as well trends in advance group bookings for the second half of 2015, which companies telegraphed to be generally weak, during the third quarter 2014 earnings season.

Fitch expects Marriott's system-wide RevPAR to increase within a range of 5%-7% during 2015 on a constant currency basis with U.S., the Middle East and parts of Asia showing relative strength and Europe and Latin America generally lagging.

Financial Policy Adherence

Fitch expects Marriott's leverage to remain at, or moderately below, our 3.0x target for the 'BBB' rating category. The company has consistently communicated publicly and adhered to its leverage target of 3.0x - 3.25x. Importantly, its target has not changed despite the additional measures the company has taken to reduce the capital intensity of its business. The latter includes the company's spin-off of its vacation ownership business in 2011 and continued reductions in the income contribution from owned and leased hotels, which now comprises a small share of Marriott's earnings.

Fitch believes that Marriott has adequate financial flexibility to maintain its 'BBB' rating through an industry downturn where RevPAR declines by approximately 15% on a cumulative basis. Marriott's rating could face pressure in a more severe downturn if its leverage exceeds 4.0x and the company does not quickly begin to lower its leverage back towards its 3.0x target.

Growth Underscores Brand Competitiveness

Fitch expects Marriott to grow its worldwide rooms system at an average annual rate of approximately 6% through 2017. Domestic rooms growth should outpace international due to mixed market trends abroad.

Fitch views Marriott's disproportionate share of the U.S. lodging development pipeline as an affirmation of the quality and competitiveness of Marriott's brands, evidenced by their attractiveness to hotel owners/franchisees. The company has the largest pipeline of affiliated, confirmed, rooms under all phases of development, representing 21.4% of total rooms under development at Dec. 31, 2014, according to STR Global.

Marriot's domestic hotel rooms system totaled 522,054 rooms at the end of December, making it the second largest domestic brand system with a 10.5% share of the domestic market by rooms, behind Hilton's 10.8%, according to STR Global.

Mixed Management and Franchise Investment Trends

Fitch expects Marriott's management and franchise (M&F) investments to increase moderately over the rating horizon, due to heightened competition for affiliation agreements. Investments will likely be focused in the U.S. These types of arrangements are less common outside of the U.S.

Specifically, Fitch expects Marriott to selectively use its strong reputation and balance sheet to support its franchise and management fee growth through on and off balance sheet investments, loans and guarantees.

The episodic nature of these opportunities challenges predicting their timing and magnitude. However, Fitch anticipates that Marriott will follow its historical measured pace, balancing new investments with repayments and extinguishments of prior activities. Recent trends in the company's activities have been mixed in this regard, but generally suggest greater competition for M&F agreements.

Marriott spent $47 million on contract acquisition costs (a.k.a 'key money') during the nine months ending Sept. 30, 2014, which compares to $36 million during the same period in 2013. Other notable M&F activity includes a $100 million mezzanine loan the company made on its balance sheet to secure a long-term franchise agreement at the Atlantis in Bermuda, adding 3,400 rooms to the system.

Off-balance sheet, the company also entered into a 'put option' agreement with the construction loan lenders for the to-be-developed Times Square EDITION hotel in New York City. The agreement grants the right to the lenders, upon an unsecured event of default by the hotel owner, to require Marriott to purchase the hotel component of the mixed use project for $315 million (or $696,000/key) during the first two years after opening.

Fitch views the put option and the Atlantis mezzanine loan as attractive risk-adjusted investments to further its EDITION and Autograph brands, respectively. Moreover, Fitch considers it unlikely that Marriott will be required to fulfill its obligation under the put agreement.

Lower maximum liabilities under its primary obligor guarantees and the sale of select owned hotel investments made for brand development purposes help balance the company's recent M&F Investments.

The maximum potential amount of Marriott's future guarantee fundings under which it is the primary obligor was $144 million at the end of last September, down from $197 million during the comparable 2013 period. However, the company carried a $53 million liability on its balance sheet for these guarantees compared to $51 million at Sept. 30, 2014.

The company agreed to sell its three owned EDITION- branded hotels during 2014 for $815 million. The Abu Dhabi Investment Authority agreed to purchase the three hotels in January 2014, with staggered closes to occur as each newly developed hotel commences operations. The last property is expected to close during 2H'15, corresponding with the opening of the New York EDITION. The company also sold its interest in the Renaissance Barcelona during 1Q'14 for $106 million ($62 million, net of debt).

Returning Capital to Shareholders

Fitch's base case assumption is that the company repurchases between $1 billion and $1.5 billion per year through 2017 and that it grows its common dividend by 5% - 10% per year. Fitch remains comfortable with the level of Marriott's share repurchases and dividend increases given our cash flow outlook for the company over the rating horizon and our expectation that Marriott will moderate these activities when the cycle turns down.

Marriott purchased 16.5 million shares of its common stock year-to-date through Sept. 30, 2014, at an average price of $57.97 per share. The company had 22.8 million shares remaining under its repurchase authorizations.

Marriott's Board of Directors boosted the company's common dividend to $0.20 per share during 2Q'14 from $0.17 per share.

Solid Liquidity Profile

Marriott's $150 million cash balance and $789 million availability on its revolver as of 3Q 2014 underpin the company's solid liquidity position. The company also generated $621 million of free cash flow in the LTM period ending Sept. 30, 2014.

During the third quarter of 2013, Marriott recast its multicurrency revolving credit agreement. The new credit facility allows for $2 billion of borrowings versus $1.750 billion previously and the term to expiration was extended by two years to July 2018.

The company has $1.2 billion of CP outstanding. Following the issuance of $400 million Series N Notes, Fitch expects Marriott to use the proceeds to pay down a portion of CP outstanding. Marriott's $316 million 5.81% Series G notes mature in 2015. Marriott has the ability to use its CP program to fund the redemption (temporarily).

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.

Fitch affirmed the rating for Marriott RHG Acquisition B.V. (RHG) as detailed below. Based in Amsterdam, Netherlands, RHG is a wholly-owned subsidiary of Marriott that is an authorized borrower under its credit facility and commercial paper (CP) program. CP issued by RHG is fully and unconditionally guaranteed by Marriott.

RATING SENSITIVITES

--Fitch would consider taking a positive rating action if Marriott explicitly guides to a more conservative policy that includes a stated leverage target below 3.0x. At this point, however, Fitch believes it is unlikely given the potential growth opportunities in the lodging industry over the next few years and Marriott's historical financial policies.

--Fitch expects management to support its balance sheet at a level commensurate with a 'BBB' rating. If management changes its financial policy and opts to maintain leverage at a level higher than 3.0x, Fitch would consider taking a negative rating action.

--In the event of a significant downturn, Marriott could maintain its current rating if it pulled back on investment spending and share repurchases and reduced its CP balance. A negative rating action could take place if Marriott chose not to adjust its capital allocation in a downturn scenario.

--A negative rating action could also occur if the lodging industry experiences a more severe downturn than Fitch's stress case scenarios, which contemplates cumulative industry-wide RevPAR declines of between 13-15%. Fitch believes RevPAR declines would be somewhat less severe than the 20% declines experienced in 2008 - 2009, partly due to the more benign supply growth environment relative to the last recessions.

--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:

Marriott International, Inc.

--IDR at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2';

--$2 billion senior unsecured credit facility at 'BBB';

--$2.8 billion senior unsecured notes at 'BBB'.

Marriott RHG Acquisition B.V.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2015 Outlook: U.S. Lodging (Cycle Maturing, But Supply-Demand Balance Remains Attractive)' (Dec. 16, 2014);

--'C-Corps Still Positive On China, Concede Softening (What U.S. Lodging C-Corps and REITs are Saying)' (Dec. 11, 2014);

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Fitch Affirms Marriott's IDR at 'BBB'; Outlook Stable' (Jan. 17, 2014);

--'2014 Outlook: Cross-Sector Lodging & Timeshare - The Penthouse View' (Dec. 13, 2013).

Applicable Criteria and Related Research:

2015 Outlook: U.S. Lodging (Cycle Maturing, But Supply-Demand Balance Remains Attractive)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818268

C-Corps Still Positive on China, Concede Softening (What U.S. Lodging C-Corps and REITs Are Saying)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=829468

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

2014 Outlook: Cross-Sector Lodging & Timeshare (The Penthouse View)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726600

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978622

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.