Ladies and gentlemen, thank you for standing by. And welcome to the Marriott International’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker today, Jackie Burka. Please go ahead.

Thank you. Good morning, everyone. And welcome to Marriott’s second quarter 2021 earnings call. On the call with me today are Tony Capuano, our Chief Executive Officer; Leeny Oberg, our Executive Vice President and Chief Financial Officer; 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. 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 ADR comments reflect system-wide constant currency results for comparable hotels and include hotels temporarily closed due to COVID-19. RevPAR, occupancy and ADR comparisons between 2021 and 2019 reflect properties that are defined as comparable as of June 30, 2021, 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. 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 the call over to Tony.

Thanks, Jackie, and good morning, everyone. I am very pleased with our second quarter results and the accelerating pace of the global recovery. The tremendous overall improvement we saw in both occupancy and rate in the quarter demonstrates a basic premise. People love to travel and to stay in our hotels. Demand grew steadily throughout the second quarter. Worldwide occupancy gained 6 percentage points in the month of June compared to May and topped 55%. Average daily rate in June was down only 13% from June two years ago. As a result, global RevPAR has risen meaningfully and swiftly from the depths of the pandemic when RevPAR was down 90% to down just 38% in June compared to the same month in 2019. Recovery timelines vary by region, given uneven vaccination trends, virus case loads and travel restrictions. Yet we remain encouraged by the incredible resilience of travel demand, demonstrated by the rapid return of guests in areas where rules have been eased and people feel they can travel safely. This can be seen most keenly in Mainland China, the first major market where RevPAR has recovered to pre-pandemic levels. RevPAR in the second quarter was driven by very strong demand, resulting in ADR exceeding 2019 levels. Occupancy reached 71% in April and 68% in May, before dipping to roughly 60% in June due to small COVID outbreaks and strict lockdowns in certain markets. Demand recovered quickly once the restrictions were lifted, as we have seen throughout the last year, and July RevPAR is again expected to exceed 2019 levels. Perhaps most encouragingly, in April, for the first time since the pandemic began, leisure transient, business transient and group room nights in Mainland China were all ahead of 2019 levels. This is especially impressive given the absence of international arrivals due to stringent border restrictions. The U.S. and Canada accounts for roughly two-thirds of our rooms, and in this region, lodging demand grew impressively during the quarter, led by increasingly strong leisure demand, as the number of vaccinated people continued to rise. U.S. leisure room nights in the second quarter were 15% higher than in the second quarter of 2019, though we are seeing more blending of trip purpose, with the more flexible work-from-home or anywhere trend. Total U.S. occupancy reached over 63% in June, with ADR down just 11% versus June of 2019. Our strong momentum has continued into the first three and a half weeks of July, with U.S. occupancy reaching 67% and ADR down only 2% compared to July of 2019. July RevPAR for this period was down around 16% versus July of 2019. The U.S. is also seeing increasing signs of recovery in both special corporate and group demand. While special corporate booking levels in the first three and a half weeks of July are still down around 45% compared to the same period in 2019, we are optimistic that we have turned a corner. U.S. special corporate bookings rose 23% in June over May and then rose another 27% in the first three and a half weeks of July, as compared to the first three and a half weeks of June, with improvement widespread across industries and lengthening booking windows. Many of our corporate customers are telling us they are beginning to get back on the road this summer and we expect to see a step up in business travel post-Labor Day, as children go back to in-person learning and workers increasingly return to the office. Group bookings in the U.S. have also gained momentum. U.S. group bookings made for all future dates were down 29% in June compared to those made in June of 2019, a large improvement from down 56% in March of 2021 versus March of 2019. And for the first time since the pandemic started, group bookings made in the month of June or any time in 2021 exceeded in-the-year bookings made in the same month of 2019. At the end of the second quarter, group revenue pace versus 2019 was down 31% for the fourth quarter of this year, improving to down 21% for the first quarter of 2022 and then down 12% for the second quarter of 2022. However, it’s still early, and we expect bookings made closer to the event date will increase group revenue on the books for these time periods. Most importantly, our sales team is holding on to average daily rate. ADR for group bookings is almost flat for the fourth quarter and 3% higher for the full year 2022 compared to the same periods in 2019. In other regions of the world, demand in the second quarter improved over the first quarter in the Middle East and Africa, in the Caribbean and Latin America, and in Europe. Middle East, Africa is benefiting from relatively high vaccination rates in many countries in the Middle East. Occupancy strengthened to 47% in June, largely driven by staycations in the UAE and quarantine business. Occupancy in the Caribbean and Latin America improved meaningfully during the quarter, rising to 45% in June, while urban destinations continue to struggle, given slow vaccination rates and high COVID case counts. Many of our resort properties in the Caribbean and Mexico are flourishing as they benefit from easing international travel restrictions and their close proximity to the U.S. Europe’s recovery is still lagging, given its heavy reliance on international guests, slower border reopenings and shifting restrictions that change on short notice. Yet, with the EU easing many travel restrictions beginning in May and an increasing number of hotels reopening, occupancy doubled in just three months, reaching 31% in June. The recovery in Asia-Pacific, excluding China, stalled in the second quarter as countries such as Japan, India, South Korea and Australia imposed strict lockdowns in response to sharp rises in Delta variant cases and low vaccination rates. Encouragingly, the recovery is now picking up steam again as caseloads in some countries like India have started to decline. Shifting to the development front, our pipeline stood at nearly 478,000 rooms at the end of the second quarter. Openings were strong, with nearly 25,000 rooms added to our system during the quarter and deal signings were also healthy. Additionally, less than 2% of rooms fell out of the pipeline, one of the lowest levels we have seen in the last three years. We are very pleased with our momentum around conversions as well. Conversions accounted for 26% of rooms added in the first half of this year and have been a meaningful contributor to signings. We continue to have the largest pipeline of global rooms under construction. We are also seeing great momentum around our branded residential business, with a record 18 residential properties expected to open during the year. For the full year, we expect that gross rooms growth will accelerate to approximately 6% and with more visibility into anticipated full year deletions, we now expect 2021 net rooms growth to be towards the higher end of our previous expectation of 3% to 3.5%. As a reminder, this estimate includes the 100-basis-point headwind from the 88 Service Properties Trust hotels that left our system earlier this year. We are pleased with the continued progress on replacing those hotels with new products. We are now in conversations for 80% of those locations, with signed or approved deals for nearly 20%. We continue to enhance and expand Marriott Bonvoy into an immersive travel platform that includes multiple products and offerings that enable us to provide value to our members beyond hotel stays. The program grew to over 153 million members at the end of the quarter. Homes & Villas by Marriott International, which currently has around 35,000 whole home listings, has been an attractive offering and tool for engaging with members throughout the pandemic. With nearly 40% of listings in markets where we don’t have distribution, HVMI is expanding the number of destination options for our guests. Over 90% of HVMI room nights in the quarter were booked by Bonvoy members. Our co-branded credit card holders were very active in the second quarter, with global card spending surpassing the same period in 2019. Global card acquisitions were also strong, reaching 2019 levels. Our recent credit card launches in South Korea and Mexico have seen strong initial interest from consumers in those markets. The South Korean card issuer, Shinhan Financial Group, touted the launch of our card as one of the most successful premium card launches they have ever had. Our total co-brand credit card fees in the second quarter surpassed those in the same quarter of 2019 for the first time since the pandemic began. We have also been very pleased with our successful Uber collaboration in the U.S. The number of members linking their accounts to date has far exceeded our expectations. Activated accounts were already averaging six transactions in just the first 10 weeks, demonstrating our ability to drive real engagement with our Marriott Bonvoy members beyond the hotel stay. We are always working on innovative ways to enhance our guests’ full travel experience. Just last week, we became the first major hotel company to provide U.S.-based customers with the opportunity to purchase travel insurance. Guests can now buy travel insurance when they make a reservation through Marriott’s website or mobile app by linking to approved products sold by Alliance partners. As part of this distribution agreement, Marriott will earn commissions from Alliance. In another effort to connect with Bonvoy members beyond the hotel stay, we are piloting a program that allows members to earn and redeem points at food and beverage outlets in select hotels, even if the member is not staying in the hotel. The program is currently in over 200 outlets in Asia-Pacific and the Middle East, with expansion to over 500 outlets expected by the end of the year. We also remain keenly focused on engaging with another key constituency, our owner and franchisee community. We have worked closely with them throughout the pandemic to help lower costs significantly. With some meaningful improvement in demand, profitability for many hotel owners accelerated in the second quarter. As the recovery continues, we are aligning with our owners and franchisees to balance two important goals as we think about our path forward, maximizing hotel-level cash flow and driving great guest experiences, as Leeny will discuss in more detail. We are also working to address the labor challenges we are seeing, mainly in the U.S., in markets such as Southern Florida, Texas, and Arizona, where demand has rebounded quickly. To that end, we are increasing our social and targeted marketing of Marriott as a best employer with career advancement opportunities, as well as holding job fairs to reach qualified candidates. Hiring tools, including one-time sign-on bonuses and temporary incentives, sometimes in combination with base salary adjustments in select markets are also being successfully employed. Before I turn the call over to Leeny, I want to thank our amazing team of associates around the world. I have spent time in Los Angeles, Miami, and New York over the last couple of weeks as I have been getting back on the road again. It has been wonderful to visit our hotels and to meet with so many of our associates and see firsthand their passion and resilience. These have been challenging times, but we are looking forward with optimism. While the timeline is uncertain, I am confident that our business will fully recover and continue to grow from there.

Thank you, Tony. Our second quarter results reflected the strong pace of the global recovery and the incredible resilience of our business model. Worldwide occupancy came in at 51%, a significant increase of 13 percentage points over the first quarter of this year. We also saw a meaningful improvement in our average daily rate decline versus pre-pandemic levels, with ADR down 17% in the quarter compared to the second quarter of 2019. We are optimistic that rate recovery will occur faster than in prior downturns, when ADR gains lagged occupancy gains. It has been very encouraging to see that in Mainland China ADR has come back in tandem with demand. Elsewhere, ADR has also been particularly strong in areas where occupancy has rebounded quickly, in Aruba, Puerto Rico and Mexico, over half of our 28 luxury and upper upscale comparable resorts saw record high ADRs for the month of June. In the rest of the U.S., robust demand across our 34 comparable luxury resorts drove ADR for those hotels, up more than 40% above June 2019 levels. Demand in Greece rose quickly after travel restrictions were eased in April, leading to a 20% premium in ADR for the quarter versus the same period in 2019. Global RevPAR declined 44% compared to the second quarter of 2019, a more than 15-percentage-point improvement compared to the first quarter RevPAR decline versus the 2019 first quarter. We recorded gross fee revenues of $642 million in the second quarter. Our non-RevPAR related fees again proved to be quite resilient, totaling $160 million in the second quarter; these fees have now fully recovered to second quarter of 2019 levels. Our residential branding fees were strong again this quarter at $14 million. Incentive management fees or IMFs totaled $55 million in the quarter. Almost half of our IMFs were earned in Asia-Pacific, mostly from hotels in Mainland China. Around 30% of our IMFs were earned in the U.S. and Canada region, with a number of U.S. luxury hotels generating more incentive fees than in the second quarter of 2019. Second quarter G&A and other expense was 18% lower than in the second quarter of 2019, primarily as a result of our significant restructuring activities undertaken last year. We had a tax benefit of $41 million in the quarter due to releasing $118 million of reserves related to the favorable resolution of pre-acquisition Starwood tax audit. We continue to believe that going forward our core tax rate will be around 22% to 24%, absent any legislative changes to corporate tax rates. Adjusted EBITDA in the second quarter was $558 million, which included $22 million of German Government support for certain of our leased and joint venture hotels. I also want to highlight the sale of the Prince Anita St. Regis in the quarter, a joint venture in which we held a minority interest. It’s encouraging to see transactions like this occurring, and we expect to receive a total of at least $36 million in after-tax cash proceeds from the sale. We will continue to operate the hotel under a long-term management agreement. At the hotel level, our numerous cost reduction and productivity enhancement efforts have significantly lowered breakeven occupancy levels around the world even further than we anticipated when the pandemic got underway. As a result of these efforts, as well as the strong recovery progress, the financial condition of many of our owners and franchisees continues to strengthen, as does our accounts receivable collections performance. Over 95% of our managed comp hotels in Mainland China had positive gross operating profit or GOP in the second quarter. Our GOP margin for managed comp hotels in this region expanded over 200 basis points versus margins in the second quarter of 2019. The strong margin expansion exemplifies the beneficial impact of our recent cost reduction and productivity enhancement efforts, given operations have fully come back in Mainland China with the recovery in demand. These results also reflect our strong topline performance, driven by meaningful share gains in the region, thanks to our strong distribution, especially in the valuable luxury space, our popular brands and our powerful loyalty platform. In the U.S., the number of managed hotels with positive GOP improved significantly in the quarter as demand increased. Approximately 90% reported positive GOP in the second quarter, up from about 60% just one quarter ago. As occupancies increase, we are working closely with our hotel owners around the world to balance maximizing hotel profitability while also driving guest satisfaction. We are being thoughtful about how and whether to bring back costs, programs and amenities that were reduced or eliminated as we navigated the depth of the pandemic. For example, we have already reinstated accountability for our intent to recommend scores with accountable brand standard audits resuming next year. We also introduced a new set of renovation rules, which will allow for additional deferrals of some renovations as well as reduced scopes for certain properties. We are considering how best to evolve housekeeping brand standards across each of our hotel brand tiers while ensuring guest expectations are met. We do believe that once business has fully recovered and operations are fully back, there will be permanent areas of margin improvement, primarily related to our productivity enhancements and the increased use of contactless technologies such as mobile check-in and mobile key. As we look ahead to the rest of the year, while we are keeping a close eye on variant strains, we are optimistic about the continued global recovery. Our momentum has continued into July, and we expect an uptick in business travel this fall. We expect that when the improved ease of international travel occurs that will also fuel further recovery in lodging demand. While there’s still too much uncertainty to be able to give specific RevPAR or earnings guidance, I’d like to provide color on specific items where we do have some visibility. Starting with the topline, at current RevPAR levels, we still expect the sensitivity of a 1-point change in full year 2021 RevPAR versus 2019 to be $35 million to $40 million of fees. As we have seen, the relationship is not linear given the variability of IMF. We expect our non-RevPAR related fees to continue to benefit from strong co-brand credit card fees and robust fees from our branded resident sales. We still expect full year G&A to be roughly $800 million, significantly lower than in 2019 and interest expense is still anticipated to be around $430 million. Full year cash taxes are now expected to be $325 million to $350 million. A key component of cash flow is the loyalty program. With an acceleration of leisure demand, we have continued to see redemption nights pick up nicely, especially in our resort destinations. We remain focused on carefully controlling Bonvoy program administrative costs and we still anticipate that full year cash flows from the loyalty program could be positive before factoring in the reduced payments we will receive from the credit card companies. After factoring in these reduced payments, which are expected to effectively repay around one-third of the total $920 million we received in 2020, we continue to expect that cash flows from loyalty overall could be modestly negative. With better visibility and our continued disciplined approach to investment spending, we are lowering the top end of our full year investment spending expectation and narrowing the range to $575 million to $625 million. Total investment spending includes capital and technology expenditures, loan advances, contract acquisition costs and other investing activities. We are focused on bringing our credit statistics back in line with our historically strong investment-grade levels. Our leverage ratios continue to improve, as Marriott’s asset-light business model is showing its resilient cash flow characteristics. We expect continued improvements in cash flow generation as the recovery progresses. I also want to add my appreciation for our incredible team of global associates who have worked tirelessly throughout the pandemic. They truly exemplify the Marriott spirit to serve and take care culture. In closing, we could not be more pleased with our progress in the quarter and we look forward to the continued return of guests to our 7,800 hotels around the world. We are happy to take your questions.

Your first question comes from Shaun Kelley with BoA.

Hi. Good morning, everyone. I was…

Good morning.

Good morning, Tony. I was wondering if we could just talk a little bit about the development environment. I was just hoping you can give us a little bit more color, obviously, it looks like the NUG increase was primarily driven by reduction in deletions. But maybe help us look out a little further, 2022, 2023. How are the conversations going and how do you think excluding the SBC component, the outlook has looked or changes versus maybe 90 days ago?

Of course. Thanks, Shaun. As we mentioned in the prepared remarks, we are increasingly confident in our ability to deliver at the top end of our range in 2021. I think, when we look at factors like the number of rooms we have under construction, more than 200,000 rooms, the lowest fallout we have seen from the pipeline in about three years, the accelerated pace of conversions, we are increasingly optimistic that we can get back to a mid single-digit net unit growth pace. But as you have seen with some of the data coming out of STR around the slowdown in U.S. construction starts, the reality is the impact of those reduced construction starts will make it challenging for us to get back to that mid single-digit level over the next year or two.

Tony, just as the follow-up to mid single-digit being more of a medium-term target, but just for the next year or two construction starts probably limiting maybe a little bit below that range. Is that the way to think about it?

Yeah. I think that’s right. I think we are guiding to about 3.5% net unit growth, excluding the impact of SVC in 2021, and then 2022 and 2023 will be the years that we think will be impacted by that drop in construction start activity in the U.S.

Thank you very much.

Of course.

Your next question…

Shaun, just one follow-up and that’s that we do believe that, while we are constrained by these lower construction starts that the industry has seen in the U.S., that we are going to be able to offset some of this through conversions and we are really pleased with the pace of conversion signings and the conversations that we are seeing on that front. Hard to be specific at this point about exactly where that leaves us, but that, again, as Tony said, we are confident about getting back to the mid single-digit rooms growth rate.

Thank you.

Your next question comes from the line of Joe Greff with JPMorgan.

Hi. Good morning, everybody.

Good morning.

You mentioned the labor challenges and increasing labor costs. Looking at the second quarter results, is there a delay in the operating cost structure, especially concerning labor in relation to the revenue recovery? Is the exit rate from the second quarter in terms of cost structure more significant than what was reported, possibly due to additional factors?

Well, as you know, that’s going to overwhelmingly show up in IMF, Joe, from a standpoint of kind of the way that the quarter’s operating profit works at the hotels. So, and as you might imagine, with owners’ priorities in the U.S., we didn’t have a very high percentage of hotels earning incentive fees yet. The biggest growth in incentive fees was in Asia-Pacific, and frankly, the labor cost pressures are much, much lower there. So, honestly, I don’t think that there is a meaningful impact at all relative to the really rapid increase in occupancy that then necessitated that we get our employment levels in the hotels up as quickly as possible, and as you said, I think, there is a little bit of a lag there. But I don’t think it had any sort of impact on the profits for the quarter.

Great. Thank you. And then, you mentioned, a group pace for the first quarter and second quarter of maybe you gave it and I missed it, but did you talk about full year 2022 pace?

Yes, we discussed the pace for 2022, and there are a couple of encouraging aspects. When we examine the booking pace, we are seeing a significant increase in volumes leading into 2022. Even more encouraging is the growth in average daily rate, or ADR, for 2022 bookings. In fact, when looking at group bookings for 2022 and beyond, the ADR is approximately 3% higher than what we were booking in 2020 for the following year. This pricing strength in group bookings for 2022 and beyond is very positive.

Thank you very much.

Your next question comes from the line of Thomas Allen with Morgan Stanley.

Thanks. Just you have seen some really encouraging trends out of China. Can you just talk about the pluses and minuses of using China as a comp, like how does your China business differ from kind of your global business? Thanks.

It's a great question, Thomas. I want to share a few thoughts. One of the most consistent aspects in Greater China and the U.S. is that a large majority of travelers at our hotels in these regions are domestic. We're definitely seeing some trends in the U.S. that mirror what we observed earlier in Mainland China. When people feel safe to travel, demand rises very quickly, especially in leisure, which significantly benefits hotel occupancy since travelers are not leaving their countries. The pace of ADR recovery has also been notably similar. Another interesting point is that in Mainland China, markets tend to shut down demand swiftly when there’s an uptick in COVID cases due to city closures. We haven't experienced the same effect in the U.S., given the more diverse population and differing approaches to city closures. Thus, the situation in the U.S. has been a bit more fluid. However, there are many remarkable similarities in these markets driven by domestic travel. Additionally, the recovery of food and beverage in Greater China highlights the strength of our hotel brands there, which has been quite impressive.

Thanks again. Just a quick follow-up, you mentioned RevPAR was down 16% in July versus 2019. Is that U.S. only or is that global, and if it’s one of them, can you give us the other two?

Yes.

That’s U.S. only.

Yeah.

Do you have a global number?

We don’t have.

Yeah.

No. We don’t. And that was just for the first three and a half weeks. Just to be clear, that wasn’t for the month of July. As you know, this is all in real-time that we are pulling this together. So we don’t have all those numbers quite yet, and again, as we said, that was for the U.S.

I appreciate all the color. Thank you.

Your next question comes from the line of Robin Farley with UBS.

Thanks. I have a question about margins, but first, if I could just clarify Tony’s comment about guidance for this year for unit growth at 3.5%. I thought I heard him say excluding the Service Properties Trust, but you meant including that, right?

Yeah. Sorry. That’s right. So excluding the impact of our SVC, our guidance would be 4% to 4.5% and we guide to the high end of that. If you would account for the impact of those 88 SVC hotels, it would be 3% to 3.5% and we are guiding towards the high end of that range. That’s correct. Sorry if I misspoke.

I just wanted to clarify that. Is the higher end of the 3% to 3.5% range due to fewer removals? Is that a timing factor, or were there properties that were not in compliance with brand standards but have come back into compliance and won’t be removed in 2021? Or are some removals just pushed into 2022?

No. I think really, Robin, it’s a byproduct of as the year advances, we have more and more visibility on both fronts, in terms of the timing of the individual openings and the status of projects potentially going out of the system.

Thanks for the clarification. Leeny, you mentioned that margins are 200 basis points ahead of 2019, particularly in Greater China. When discussing potential margin improvement in the U.S., it seems you indicated that you wouldn’t anticipate a significant increase in margin even when RevPAR recovers. Is that still accurate? In other words, should we view the 200 basis points of margin you referenced in China as potentially temporary, possibly due to brand standards not being what they were in 2019? I'm trying to understand this better.

Sure. So a couple of things. First of all, I was speaking about Mainland China, and there, I think, the interesting thing is that, with RevPAR back to essentially similar levels in 2019, we are producing GOP margins that are 200 basis points better. So I think that shows you some of the work that we have been able to do on the cost management side and productivity enhancement side that would tell you that those are kind of good margins to think about going forward. I think in the U.S., Robin, the interesting thing here is that we have got a lot of those similar productivity and cost enhancements that we have done here, which would lead you to some similar sort of conclusions. I think the thing you have to think about is how quickly do labor costs and benefit cost increase. So as we talked about before, if ADR recovers really quickly, and you have got these productivity and cost enhancements in place, you have probably got a similar opportunity in the U.S. for those similar kinds of numbers that we talked about in Mainland China. But, again, a lot of this depends on how quickly it all comes back in the U.S. and also what’s going on with wage rates and benefit costs.

Okay. Great. Thank you very much.

Your next question comes from the line of Smedes Rose with Citi.

Hi, Smedes.

Hi. How are you? I was just hoping you could give a little more color on the kind of the composition of the group improvement you are seeing in 2022, maybe any changes on a regional basis, maybe potentially away from larger, higher cost cities or if you are seeing anything just in terms of the kind of corporations or they tend to be smaller, is it larger? Maybe just some color on what you are seeing on any kind of forward bookings?

Sure. So as you know, group is a complex group of subsets of types of groups. Where we are seeing really significant acceleration is on social. In fact, in many ways, social group demand is largely back to pre-pandemic levels. We are not seeing rapid recovery in city-wide yet, the sort of big-box convention hotel city wides that we enjoyed pre-pandemic. And then the fall, I think, will be quite telling as we look for more conventional corporate group demand to return. The only other comment I might make…

Okay.

… Smedes is that, we are seeing in the year for the year group bookings stronger than what we have typically experienced in a pre-pandemic environment.

Okay. Thank you.

You are welcome.

And can I just ask just to kind of follow-up on the question about margin. As you guys make decisions around housekeeping, would that be kind of the key driver for potential margin improvement for owners, is possibly the elimination or significant reduction in housekeeping or are there other items on the table that would be very important towards potentially driving margin expansion at the property level?

Smedes, you can expect us to continue to try to strike the right balance between the expectations of our guests as they get back on the road and the financial realities that our owners and franchisees face. We will continue to be guided by guest preference and it is quite interesting when you read some of the verbatims that we hear from our guests. Some of our guests that are dipping their toes back into travel are still a bit hesitant about having housekeepers in the room and they appreciate the choice of housekeeping at their discretion. Others are vaccinated and feeling encouraged about the safety of travel and they would prefer a more conventional housekeeping solution. And so, I think, whether it’s housekeeping protocols, whether it’s food and beverage service, we will continue to evaluate and evolve those service levels by market and by quality tier around the world.

Okay. Thank you.

You are welcome.

Your next question comes from the line of Stephen Grambling with Goldman Sachs.

Hey, Tony and Leeny.

Good morning.

Hi, Stephen.

Good morning. How are you?

Great.

Great.

You mentioned the Bonvoy brand extensions and the value they create, along with the strength of non-RevPAR related fees, including credit card fees. How do you view the growth of this segment in the future and its connection to the core business, whether through net unit growth or RevPAR?

Broadly speaking, non-RevPAR fees consist of various components, with the largest portion being the credit card fees. This is primarily influenced by both the number of cardholders and their spending on co-brand cards. As we mentioned earlier, their spending has returned to 2019 levels, reflecting a similar trend in our co-brand fees. The strength of the Bonvoy brand, along with the overall consumer spending and economic health in the U.S., drives these fees significantly since most cardholders are based in the U.S. We expect to see continued robust growth in our residential branding fees, although they are relatively smaller. In contrast, timeshare fees tend to remain stable, as they are primarily fixed. Therefore, the main factor to consider is consumer spending on our co-brand credit cards.

So, I guess, as a follow-up, is there an opportunity to monetize or generate credit card fees or other types of fees in the international markets where it hasn’t been as much of a contributor?

Yes. The fees in those various countries are significantly smaller based on the economic structure of their credit card businesses. The U.S. is a very large market. We do expect to see increases in our international credit card co-brand card fees. Additionally, in the travel insurance business we're entering, we anticipate benefits there as well. However, I do not expect these to have a significant impact on Marriott’s overall earnings.

Great. And if I can sneak one other follow-up on just on the IMF, you referenced that only a few North America kind of above that under priority level. Is there any kind of level of occupancy recovery or specific markets that we really need to see to start seeing those starts to be earned again?

Well, honestly, they range all over the map. Just to give you a sense, when you go back to 2019, we basically were in a position where our full service hotels about half of them were earning incentive fees, and overall, for the U.S., it was, call it, 56% when you take in our limited service and there you obviously had occupancies up into the 70s. But, otherwise, I will say it’s a big mishmash depending on the specifics. The counter to that is as we described in Greater China, where we are at 77% earning in the year-to-date numbers for IMF and back in 2019, it was at 86%. So you can see that they behave much more in line with base fees, while in the U.S., you really have a ways to go before we back to earning meaningful incentive fees from the U.S.

That’s super helpful. Thanks so much.

Your next question comes from the line of David Katz with Jefferies.

Good morning, David.

Hi. Good morning, everyone. I wanted to take a little longer term look, Leeny, and wonder what would have to happen and how you might be thinking about getting back into the capital returns game and whether we would have a shot at maybe recommending a dividend by the end of the year and how you might be thinking about the setup for these items next year, which is sort of what we are used to with Marriott?

Sure. Absolutely. I think, as you pointed out, David, we are seeing tremendous progress. Our credit ratios are absolutely improving literally month-by-month and we are really pleased with the progress. First and foremost, we want to get our credit ratios back in line with being a strong investment-grade credit. That is the first priority and we are well on our way and so I do think we are going to be talking about capital return sooner rather than later. As you know, David, so much of this is around the pace of continued global vaccination rates, as well as restrictions on travel and consumers’ comfort with travel, both domestically and internationally, as well as people returning to their offices, et cetera. So as we said, we can’t predict and give you RevPAR and earnings outlooks in specifics. But if we continue to see really strong progress like we have been seeing, we could absolutely imagine that we are talking about capital return later on in 2022. Exactly when we are able to count on that and have a discussion with our Board on that topic remains to be seen. But you certainly can envision a scenario that, assuming things continue to progress, if that is the case.

If I can follow that up, three 3 times to 3.5 times was usually a target. Is there any qualification around that that we should be thinking about today?

No. I would like to emphasize that we want to ensure we are firmly positioned, meaning that the lodging recovery has stabilized and we foresee reaching the 3 to 3.5 times target being very solid moving forward. Other than that, there are no additional constraints.

Got it. Thank you so much. Good luck.

Sure.

Your next question comes from the line of Richard Clarke with Bernstein.

Hi. Good morning. Thanks for taking my question.

Good morning.

I would like to ask about the difference between your gross and net unit growth. You reported approximately 19,900 exits in the first half, and based on the gap in your net unit growth, it seems you would need about 15,000 exits in the second half. This amount is roughly double what you achieved in the second half of 2019 and even exceeds the number of exits from the second half of 2020. Is there anything specific that you can share about this? Is it simply a conservative estimate or is there more to it?

We still expect to see deletions for the full year at a rate of 1% to 1.5%. Excluding the impact of SVC, baseline deletions tend to vary slightly from quarter to quarter. However, for the full year, we are becoming increasingly confident in our guidance of 1% to 1.5% deletions, excluding SVC.

Okay. That makes sense. So are you saying that the deletions in Q2, the sort of 2,000 or so 2,500 exits, that’s a particularly low number and there might be a bit of a catch-up from that in the second half?

They are quite variable throughout the year. One quarter could see 7,000, while another could have 1,000. It really fluctuates, and we examine this region by region very carefully, considering expirations and overall trends. As Tony mentioned, this continues to be our best estimate at this time. It's definitely an improvement from earlier in the year when we had a broader range to consider, and we have been able to narrow it down, allowing us to confidently say we will be at the top end of the 3% to 3.5% range. I should also mention that part of our confidence comes from having better visibility on openings, and we are very pleased with the openings in the second quarter as well as year-to-date.

Wonderful. Thank you very much.

Thank you.

Your next question comes from the line of Dori Kesten with Wells Fargo.

Thanks for…

Good morning.

Hi, Dori.

Hey, Leeny. Given the trends that you have seen in new signings in opening schedule, when would you expect to see the pipeline resume quarter-over-quarter growth? I think in the last downturn you saw about six quarters of compression?

Yeah. Again, I might give a different version of the answer I just gave on deletions. The pipeline tends to ebb and flow a little bit. Some of the indicators we look at, development committee volume for instance and we are starting to see an acceleration in our volume of deals, particularly in June and July in our biggest markets, specifically in the U.S. and Canada and in China, and I think that is encouraging for us. The other thing is, remember, more than 25% of our volume right now is in conversions and because of the quick turn on those conversions, often those get signed and opened and never even make their way into the pipeline. And so that adds to some of the quarter-to-quarter variability as well.

Could you remind us about the difference in fees between your luxury pipeline and your flex service on average?

Sorry. The difference in fees, you said?

Yeah. What are the long-term expectations of what a risk can deliver for you compared to a residence?

Sure. I mean, setting aside the fact that there can be pretty wide variations from market-to-market, the rule of thumb we have shared in the past is that a luxury hotel stabilized annual fees could be as much as 10 times the annual fees of a select-service hotel like a Fairfield Inn.

Okay. Thanks, Tony.

You are welcome. Thank you.

Your next question comes from the line of Michael Bellisario with Baird.

Good morning, Michael.

Good morning.

Thanks. Good morning, everyone. I have a two-part question focusing on Bonvoy. First, what was the occupancy contribution during the quarter? Second, how are you planning to further enhance the platform and value proposition for guests? Is there renewed interest in travel partnerships or any gaps in the brand portfolio that you are noticing? What are your plans to increase value and capture a larger share of everyone's travel spending today?

Great. Well, let me try to take both of those and Leeny may chime in as well. On your first question, Bonvoy penetration continues to recover. In Q2, we were almost 50%, 49.5% to be precise. That was a significant increase. We went as low as about 43% at the bottom of the pandemic. But it’s still a couple of points shy of where we were pre-pandemic at about 52%. But the pace of penetration recovery, I think, is quite encouraging. And then on your second question, I think, we continue to look for opportunities to make the program stickier to engage with our customers even as they start to get back into travel and we tried to give you a few examples. I think the new travel insurance program is an example. The Uber partnership, I think, is a terrific example. The new branded credit cards are a good example. And then just the number of app downloads that we are seeing with the Marriott Bonvoy app. I think all of those point to our efforts and the, excuse me, the success of those efforts in trying to grow engagement among our Bonvoy members.

Helpful. Thank you.

Of course. Thank you.

Your next question comes from the line of Vince Ciepiel with Cleveland Research.

Good morning.

Good morning, Vince.

Good morning. Thanks for taking my question. A lot of mine have been answered, but one thing I am trying to get a little bit more clarity on, as it relates to your perspective, the trajectory of U.S. RevPAR. I think you mentioned in the first few weeks of July down only 16, ADR impressive only down 2. It sounds like leisure is really contributing nicely to that. I am just curious how you are thinking about the handoff through the second half from leisure into more corporate and group, and just how sustainable that July run rate is?

Well, certainly, the fall is going to be fascinating to watch, as more and more schools open for in-person learning, as more and more companies get back to the office. I think the data that is perhaps most telling from our perspective is some of the statistics we shared with you on special corporate bookings. As we mentioned, those bookings rose 23% in June as we compare to May. And then again, it’s just the first three and a half weeks of July, but we saw another 27% increase in those first three and a half weeks of July versus the same three and a half weeks in June. And so the magnitude and the steadiness of the growth in special corporate bookings I think is quite encouraging. And then you have heard us talk about this before, this blending of trip purpose continues to be a real and measurable phenomenon and we think it’s good for our business and we think it will continue well beyond the end of the pandemic. With all that said, we will continue to be vigilant as we watch the pace of vaccinations around the world, the effectiveness of those vaccinations relative to the Delta variant and monitor the impacts of that on our business.

Great. And one follow-up, if I may, with that ADR number in July, I think the recovery in ADR has been progressing really nicely and probably better than a lot of folks thought going into this year. Curious what do you attribute that progress in ADR to and how sustainable do you think that is through the second half?

Well, we certainly look at the pace at which demand is recovering and the amount of pent-up demand is maybe best illustrated by the pricing power we are seeing in rate. We knew we would have that in leisure, but it’s really encouraging to see that pricing power extend to both business transient and group. And in China, obviously, we have seen ADR come back at the same time and so you throw all that in the blender, it’s really encouraging, and I think, it’s just driven by the sheer volume of demand.

The only other thing I will add is that much of this relies on macroeconomic factors. As consumer confidence, spending, and overall economic growth continue, this will be crucial for sustaining growth in demand. This also consistently influences how companies approach group bookings and business trips, which is another aspect of our pricing power.

Thanks.

Your next question comes from the line of Bill Crow with Raymond James.

Good morning, Bill.

Hi. Good morning. Thanks.

Hi, Bill.

Good morning. First, I would like to clarify something. I believe Smedes asked about group segmentation for 2022, and your response seemed to focus on 2021. Was that primarily in relation to 2021, or does it still pertain to 2022?

We will have Jackie provide you with more specific details. However, the overall situation is that in 2022, we are still seeing significant numbers in associations, corporate, and government nights. The strongest demand during this period is coming from smaller and medium-sized groups, as well as social groups, many of which postponed their events for a year and are now moving forward. When considering the larger segments of business, we have still received positive feedback from Gaylord regarding their bookings, indicating strong activity across all major group business sectors for 2022. Additionally, it's important to highlight that while the current pace for group room nights is still down for 2022, it's experiencing a much smaller decline than before. Moreover, we are witnessing strong rate increases compared to 2019, and with each passing quarter, we expect to see improvements in room nights as we distance ourselves from the concerns related to the variants observed in Q3 of 2021.

Thank you for the clarification. My main question is about housekeeping and the trends in guest requests for nightly housekeeping. We heard from another source that these requests have doubled over the past three to six months, with guests actively asking for it. Additionally, should we anticipate that the guest experience in luxury and upper upscale hotels will eventually resemble the state it was in during 2019? If so, does that suggest that the best opportunities for margin improvement in housekeeping might be found in select service hotels? Is that a reasonable way to look at it?

There are a few questions in your remarks. Regarding your first question, the housekeeping protocols will continue to be influenced by guest preferences and will likely change as you move through different quality tiers. As for your second point, I agree that in the luxury and upper upscale tiers, guest expectations should closely resemble what they were in a pre-pandemic setting. In response to your third question, I don't completely agree for the straightforward reason that several factors drive margin. While costs are one aspect, the topline revenue plays a role as well. For instance, during the 4th of July weekend, U.S. resort average daily rate (ADR) increased by approximately 10%. When focusing specifically on the luxury tier, I believe we saw an ADR increase of nearly 35%. Given this premium rate, you can anticipate significant margin improvement even if service levels return to what they were before the pandemic.

Yeah. Perfect. Appreciate it. Thank you for your time.

Of course. Thank you.

Our final question comes from the line of Patrick Scholes with Truist.

Good morning, Patrick.

Good morning. One of the more debated topics right now is whether any percentage of business travel may be permanently lost, and a New York Times article yesterday has intensified that discussion. I would like to know your thoughts on this issue. Thank you.

Well, again, we have shared a bunch of data points with you today that I think underpin our optimism about the return of business transient demand. I do think going forward this blending of trip purpose that you have heard me talk about, we continue to think it’s great for our business and our industry and we continue to think it’s here to stay for quite a while. We are optimistic about the return of business travel. We talk to about 700 corporate travel managers every month and we are hearing anecdotally from our customers, particularly those that are in customer service businesses, law firms, accounting firms, consulting firms, that it is critical to their business that they would be on the road and in-person with their customers. If anything going forward I do think it may be a bit more difficult to determine precisely looking at a guest walking through the lobby exactly what their trip purpose is. We are not asking you at the front desk are you here for business, are you here for leisure or both. But I do think you will see a lengthening of stay as a result of this blending of trip purposes. And in fact, that length of stay is measurable and we continue to see that through the second quarter of this year.

Okay. Thank you for the color.

Of course. Thanks, Patrick.

At this time, there are no further questions. I would like to turn the floor back to management for any additional or closing remarks.

Great. Well, again, thank you all for your participation and interest this morning. I hope you hear our optimism about the pace of recovery we are seeing in many markets around the world. We are excited ourselves to be back on the road. We hope you are getting out there as well and we look forward to seeing you in our hotels in the weeks and months ahead. Thanks and have a great day.

Thank you for participating in today’s conference call. You may now disconnect your lines at this time and have a wonderful day.