Earnings Call Transcript - MAR Q2 2023

Operator, Operator

Good day, everyone, and welcome to today's Marriott International Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session period. Please note, this call may be recorded. I will be standing by should you need any assistance. It is now my pleasure to turn today's call over to Jackie McConagha, Senior Vice President of Investor Relations. Please go ahead.

Jackie McConagha, Senior Vice President of Investor Relations

Thank you. Hello, and welcome to Marriott's second quarter 2023 earnings call. On the call with me today are Tony Capuano, our President and Chief Executive Officer; Leeny Oberg, our Chief Financial Officer and Executive Vice President, Development; and Betsy Dahm, our Vice President of Investor Relations. Before we begin, I would like to 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. Please also note that, unless otherwise stated, our RevPAR, occupancy, and average daily rate comments reflect system-wide constant currency results for comparable hotels. 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. 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. Now, I will turn the call over to Tony.

Tony Capuano, President and CEO

Thanks, Jackie, and thank you all for joining us today. Our terrific second quarter results demonstrate the strength of global lodging demand and the success of our growth strategies. I've experienced a robust demand for lodging firsthand as I've been on the road a lot this year and have had the privilege of visiting every one of our regions. It has been wonderful to spend time with our team of hard-working and dedicated associates at properties around the world and to see how quickly global travel has rebounded. Second quarter worldwide RevPAR rose 13.5% versus the 2022 quarter, led by another quarter of meaningful recovery in Greater China. Less than two quarters after travel restrictions were lifted, RevPAR in Greater China has now surpassed 2019 levels, primarily due to the surge in domestic demand. Worldwide occupancy in the quarter reached 72%, five percentage points higher than the year-ago quarter. With our unwavering focus on maximizing revenues, global ADR grew 6% year-over-year. Global leisure demand and ADR remained robust. Second quarter leisure transient room nights and ADR each increased 5% year-over-year, yielding 10% revenue growth. In the US and Canada, leisure revenues rose 1% above last year's sensational second quarter. Demand in this market has been stabilizing on a year-over-year basis with travelers from the region increasingly taking vacations overseas now that pandemic-related travel restrictions are behind us. Leisure room nights from US and Canadian travelers jumped 90% in Asia Pacific and over 20% in Europe compared to the same period last year. The group segment had another great quarter with revenues in the US and Canada growing 10% year-over-year, driven by both rate and occupancy. Group revenues are expected to remain strong going forward. At the end of June, group revenue for the back half of 2023 was pacing up 11% to last year. Meeting planners are beginning to book further out, a trend we're also seeing with transient customers. Group revenue for full year 2024 was pacing up 14% year-over-year at the end of the quarter, an improvement from up 9% just three months prior. Recovery in business transient demand remained slow but steady with demand from our top corporate accounts progressing modestly in the quarter. In the US and Canada, ADR again rose nicely compared to 2022, thanks to high single-digit special corporate rate increases. This led to business transient revenues rising 12% year-over-year. Overall, cross-border travel demand also rose again in the quarter, primarily driven by an increase in international visitors to the Asia-Pacific region. The percent of total room nights from cross-border guests is now roughly one percentage point below 2019 levels of approximately 20%. Prior to the pandemic, international visitors accounted for nearly one-quarter of room nights in Greater China. With the region's international airlift still only around 40% of 2019 capacity at the end of the second quarter, we believe there is still meaningful growth opportunity in and from Greater China. We remain keenly focused on strengthening our powerful Marriott Bonvoy loyalty program, which has over 186 million members. To further build engagement, we continued to enrich the platform with an enhanced booking experience, more choices for customers, and complementary products that drive more value and capture share of wallet, such as our co-branded credit cards and travel insurance. Our international credit cards had a record quarter, driving global card acquisitions up 25% and global card spend up 10% versus the year-ago quarter. We are increasingly leveraging technology to enhance the guest experience, to drive profitability for our owners, and to simplify processes for our associates. As we've mentioned previously, we are in the process of a major global transformation of our digital and core technology. We will be launching new reservations, loyalty, and property management platforms over the next several years and look forward to the numerous capabilities these new systems will offer our key constituents. As we focus on paths for growth, we are adding new offerings and experiences in segments where we believe there is strong consumer interest beyond our current brands. A great example is our recent announcement of an exclusive 20-year strategic license agreement with MGM Resorts International and the creation of MGM Collection with Marriott Bonvoy. The collection, which will launch beginning in October, encompasses 17 resorts with 40,000 rooms. This deal will provide us with significant presence in Las Vegas, one of the most popular destinations in the country with fantastic properties like Bellagio, the MGM Grand, and ARIA, as well as additional distribution in five other key US cities. Beyond just hotels, our strategic agreement with MGM will also give our members access to more sports, music, culinary and entertainment experiences. We also recently announced our plans for a new affordable mid-scale extended stay offering in the US and Canada. Our deep experience and leading position in extended-stay lodging, coupled with the recent trends toward increased work flexibility and longer stay travel, make us very optimistic about our growth potential. While it is still early days, initial interest from the development community has been extraordinary. We are working on several hundred deals and hope to have our first deal signed by the end of this year. In the Caribbean and Latin America, we're very excited about the recent addition of City Express to our brand lineup. These mid-scale properties have started to join our distribution channels, and we are thrilled with the noticeable uplift in conversion rates, ADR, and bookings so far. Our development team remains focused on driving conversions, especially multiunit opportunities, and interest from owners remains robust. In the first half of this year, conversions accounted for 21% of our organic room additions, including MGM, and conversions represented 63% of our organic signings through June. The MGM rooms entering our system beginning this fall will boost our room distribution in 2023 by 2.4%. With more than half the year behind us, we have refined our full year net rooms growth expectations to 6.4% to 6.7%. Driving valuable global growth is a top company priority, and we are very pleased with the strong rate at which we expect our industry-leading system to grow this year. We look forward to sharing more about many key aspects of our business, including our broad global portfolio of over 30 brands, their exciting growth prospects all over the world, Marriott Bonvoy, the brand that brings it all together, our technology transformation, and our multiyear financial model at our Investor Day on September 27. Now I'll hand the call over to Leeny to discuss our second quarter financial results in more detail as well as our updated outlook for 2023.

Leeny Oberg, CFO

Thank you, Tony. Our strong second quarter results reflected solid demand and ADR growth around the world, with Greater China RevPAR more than doubling, international RevPAR rose an impressive 39% over the 2022 second quarter. Occupancy for our international regions reached 68%, a 12 percentage point improvement versus the prior year quarter and ADR increased 14%. RevPAR in the U.S. and Canada grew 6% versus the year-ago quarter. Occupancy reached 74%, up 1 percentage point, while ADR increased 4%. While demand from both business and leisure guests remained strong, growth rates are stabilizing as we return to more normalized year-over-year comparisons. Total company's gross fee revenues totaled $1.25 billion, rising 16%, led by meaningful growth in incentive management fees or IMF. IMF totaled $193 million in the quarter, with fees in Greater China up significantly, given the strong recovery in that region. Impressively, our IMF in the first half of 2023 was 19% higher than peak IMF in the first half of 2018. Our owned, leased and other revenue net of direct expenses grew 24% despite lower termination fees, largely due to improved performance at our owned and leased hotels. Our strong IMF and owned, leased performance demonstrate our operating team's terrific work at driving profitability. Corporate G&A rose to 4%, well above the rate of top-line growth with the strong operating leverage inherent in our business; adjusted EBITDA reached a record $1.2 billion, up an impressive 20% year-over-year. On the development front, we're closely monitoring the financing environment, which remains tight around the world. While the US and Europe are facing the most lending challenges, even in these markets, financing has not come to a standstill. Over the past few months, many owners in these regions have been able to secure financing and begin construction. In most of our other regions, there's much less dependence on debt financing for new deals, so hotel construction generally continues apace. Properties in our industry-leading 547,000 room pipeline that are already under construction continue to move forward, and we've not seen the number of deals leaving the pipeline increase. Global fallout in the quarter was 1.3%, below our historic quarterly average of just over 2%. Now let's talk about our 2023 outlook, the full details of which are in our earnings release. With the better than expected second quarter results and robust global booking trends, especially internationally, we're raising our full year guidance. While there is still a level of macroeconomic uncertainty, as we look into the third quarter, the consumer is generally holding up well, and our forward bookings remain solid. In the US, it now seems more likely that the US economy could have a soft landing. Our updated guidance range assumes relatively steady global economic conditions throughout the remainder of 2023 with continued resilience of travel demand. Growth is expected to remain higher internationally than in the US and Canada, where we're seeing a return to more normal seasonal patterns and year-over-year RevPAR growth is stabilizing. For the full year, we now expect 7% to 9% RevPAR growth in the US and Canada. We're raising our expectation for international RevPAR growth to 28% to 30%, leading to an expected 12% to 14% increase in global RevPAR. Total fees for the full year could rise between 16% and 18% with the non-RevPAR related component increasing 4% to 7%. Non-RevPAR related fees are expected to benefit from higher credit card fees resulting from growth in average spend and in the number of cardholders. We still expect 2023 G&A expenses of $915 million to $935 million, an annual increase of 3% to 5%, but still below 2019 levels. Compared to 2022, full-year adjusted EBITDA could increase between 18% and 21% and adjusted EPS could rise 25% to 29%. Our powerful asset-light business model continues to generate a large amount of cash. In the first half of this year, our net cash provided by operating activities surpassed $1.5 billion, nearly 50% higher than the same period last year. We've returned $2.3 billion to shareholders through June. With the increase in our adjusted EBITDA forecast, we now expect to return between $4.1 billion and $4.5 billion to shareholders in 2023. This assumes full-year investment spending of $900 million to $1 billion, which includes the $100 million spent on the acquisition of the City Express brand portfolio. With our major technology transformation, we will also have elevated technology spending this year and over the next few years, though this investment is overwhelmingly expected to be reimbursed over time. Our capital allocation philosophy has not changed. We're committed to our investment-grade rating, investing in growth that is accretive to shareholder value, while returning excess capital to shareholders through a combination of a modest cash dividend and share repurchases. Thank you for your interest in Marriott, and Tony and I are now happy to answer your questions.

Operator, Operator

We will take our first question from Stephen Grambling with Morgan Stanley. Please go ahead.

Stephen Grambling, Analyst

Hey, thanks for taking the questions. Maybe to start off, just on the non-RevPAR related fees. You gave some color on that in the quarter. But I guess what are your expectations for the remainder of the year? And can you just remind us on how those contracts were structured in terms of length of term, is there an opportunity to renegotiate those coming up?

Leeny Oberg, CFO

Yes. No, we've got several years left on them, Stephen, and are really pleased with the continued growth in the credit card fees, and frankly, really particularly pleased with adding so many new countries. So I think when you look at credit card fees for the year, I think, broadly speaking, a double-digit growth rate is right. Now for total non-RevPAR fees, we've talked about a 4% to 7% growth in non-RevPAR fees because of the lumpiness of things like residential fees. And the reality, as you remember, our timeshare fees are overwhelmingly a flat payment that goes up only slightly. So overall, I think we're looking at 4% to 7%. But again, on the credit card side, we continue to see really strong growth.

Stephen Grambling, Analyst

Great. And then as a follow-up, it's unrelated. Just on the technology investment. Obviously, a lot of talk about AI recently across all industries. How are you generally thinking about the tech investment with an eye on positioning yourself toward leveraging these types of new technologies?

Tony Capuano, President and CEO

Sure, Stephen, I'll try and take that one. I think, obviously, AI has already incorporated into how we think about running our business. It has been for a while. We continue to look for opportunities to leverage evolving technologies like AI to remove friction for our guests, to create capacity for our associates. But we do it in a way that is mindful of how rapidly the technology is evolving and mindful of some of the real important considerations around facets of evolving technology like privacy.

Stephen Grambling, Analyst

Great. Thanks so much.

Leeny Oberg, CFO

Stephen, the only thing I'll add is the reality that at the end of the day, we do believe that it is the person-to-person and the experiential part of our business that makes it so unique. So being able to use generational AI in a way that enhances that service, we see as a real benefit, but never to take away from the fundamental people-to-people part of our business.

Stephen Grambling, Analyst

Right. Before, during, and after the stay.

Leeny Oberg, CFO

Right.

Stephen Grambling, Analyst

Thank you.

Tony Capuano, President and CEO

Thanks, Steve.

Operator, Operator

We'll take our next question from Shaun Kelley with Bank of America. Please go ahead.

Shaun Kelley, Analyst

Hi, good morning, everyone. Good morning, Tony and Leeny.

Leeny Oberg, CFO

Good morning.

Shaun Kelley, Analyst

So we continue to get a lot of questions from investors on the net unit growth side of the equation, and I appreciate all the color that you gave. So maybe we could just dig in a little further. It looks like at the very high end of the range of what you provided previously, you trimmed that very modestly, excluding sort of the deal with MGM. So could you talk about just that change, and more broadly, what you're seeing in the environment? And then I think the second part of the follow-up would be, as we look a little further out, and I don't want to steal too much thunder from the Analyst Day, but what are the preconditions necessary to think that maybe this year could actually be close to the trough? What would have to go right to see, let's call it, core growth ex City Express and ex MGM actually improve in 2024 or beyond?

Tony Capuano, President and CEO

Sure. Shaun, let me start and then I'm sure Leeny will chime in. On your first question, you're right, there is a very modest kind of a 20 bps adjustment at the high end to the guidance. We are delighted with the impact of this terrific MGM deal to so meaningfully increase our guidance for net unit growth for 2023. That little tweak at the high end really is reflective of kind of normal ins and outs. On the plus side, we've seen a little lower deletions to the system than we had visibility into a quarter ago. And then we've seen a handful of projects that we still are confident will open, but we've seen the timing of a handful of those openings slip into early 2024. And it's those ins and outs that led to that modest tweak to the high end of the guidance. On your second question, I would suggest to you that last year was probably the bottom of the trough. The numbers we've seen, particularly on the conversion front, are leading strong growth towards that mid-single-digit unit growth that you've become accustomed to in your time covering Marriott. I think in terms of continued improvement. You'll hear a little more about this from Leeny. I think the biggest thing we're hoping for now is continued relief from the constriction we see in the debt markets in the US and Europe for new construction. We're seeing powerful interest on the conversion side. We're seeing no shortage of developer interest or availability of the equity. I think the one impediment we're seeing is it's not an absolute absence of debt, but we're not seeing the free-flowing debt we saw a few quarters ago.

Leeny Oberg, CFO

So Shaun, the only other thing that I would add is the reality that you've heard us talk more and more about multiunit conversions, which does make things a little bit lumpier on the rooms growth. If you remember, when we added a big slug of all-inclusive rooms a couple of years ago, when you look at the MGM deal that we recently announced, I take your point that M&A would be looked at separately. But I do think on the conversion side, you should continue to see us chasing these lovely multi-unit conversion opportunities that can bounce the numbers around a little bit, but definitely give us confidence in our mid-single-digit net rooms growth number as we look forward.

Shaun Kelley, Analyst

Great. Thank you very much and congrats on the MGM deal.

Tony Capuano, President and CEO

Thanks, Shaun.

Operator, Operator

And we will take our next question from Joe Greff with JPMorgan. Please go ahead.

Joe Greff, Analyst

Good morning, everybody.

Leeny Oberg, CFO

Hey, Joe.

Tony Capuano, President and CEO

Hi, Joe.

Joe Greff, Analyst

I have two questions. One, what's embedded in your full year fee guidance for incentive management fees? It looked like in the 2Q IMF per managed room was up nice 13% over 2019. How does what you have incorporated in full year guidance for IMF, how does that compare on a per-room management basis to 2019, both domestically and internationally?

Leeny Oberg, CFO

We can analyze the per room statistics. The current system is 11% larger than it was in 2019, which shifts the relevance of comparisons. Regarding the anticipated IMF for the full year, our current reports indicate we expect it to surpass our 2019 peak significantly, provided the trends align with our guidance. In the second quarter, 62% of hotels have earned incentive fees compared to 72% in 2019, showing we are making progress. In Asia Pacific, the figure stands at around 85% for both years, reflecting a different structure there. As our growth in that region has been substantial, the behavior of incentive management fees is more akin to base fees, suggesting continued strong growth. In Q2, 41% of our results came from the US and Canada, while 30% originated in Asia Pacific, indicating we are nearing our pre-pandemic incentive fee proportions. Looking ahead, we believe IMF will be higher than our previous peak for the remainder of the year.

Joe Greff, Analyst

Thank you for your question. I would like to discuss the MGM deal we recently announced. Can you explain the economic structure and how it benefits you? I understand it works in a couple of ways, including what you contribute to MGM's portfolio and how you receive approximately one-third from the Marriott system as new clients direct to your global properties. If we consider that you are providing 5% to 10% of MGM's occupied room nights annually, what potential indirect fees could arise from that? It would be helpful to have an idea of the fee scale, even though it may differ from the typical franchise and licensing fee per room.

Tony Capuano, President and CEO

We won’t delve into the specifics of the deal's economics, but I can share that the transaction is structured more like a traditional franchise deal. We are compensated based on room revenue from their US portfolio of 17 resorts, rather than just a loyalty agreement. It resembles a franchise agreement more closely. We refer to it as a strategic licensing agreement because it offers a broader scope than our previous arrangement with the Cosmopolitan, which was a straightforward franchise. This new arrangement allows us to expand our offerings significantly for our 186 million Bonvoy members, providing them access to a wealth of content from MGM, while also connecting them with MGM Rewards members. We label it a strategic licensing agreement due to its complexities, but in terms of the financial structure, it should be viewed more as a typical franchise arrangement.

Joe Greff, Analyst

Great. Thank you.

Tony Capuano, President and CEO

You're welcome.

Operator, Operator

We'll take our next question from Richard Clarke with Bernstein. Please go ahead.

Richard Clarke, Analyst

Good morning. Thanks for taking my question. I just got a question on the remaining occupancy slice you've got to get back. Your occupancy today is still sitting about 4% lower than it was in 2019. How much confidence you can get the rest of that back? And is there any need to cut prices to get that back in? Is there any price elasticity you need to drive to get the remaining bit of occupancy back in the system?

Leeny Oberg, CFO

So, I will address your question about the remaining occupancy that needs to be recovered. Your current occupancy is approximately 4% lower than it was in 2019. I would like to discuss our confidence in retrieving that occupancy and whether we need to adjust prices to achieve it. Additionally, I want to explore any price elasticity necessary to regain the remaining occupancy in the system.

Tony Capuano, President and CEO

No, I was just going to say, yes, you're right, Richard. We're still down about three points on a global basis. But we see some real opportunities for growth. As I mentioned in my prepared remarks, we continue to see steady recovery on the business transient side, which gives us some optimism. And we continue to see continued recovery on cross-border travel, which gives us another layer of optimism. And then I would say, third, as I mentioned, in Greater China, which is our second-largest market, you've still only got about a 40% recovery of cross-border airline capacity. And so in terms of inbound and outbound international travel related to China, we think there's some real opportunity for occupancy recovery there as well. And then, lastly, you've heard us talk about this the last couple of quarters, but we continue to see in the data real legs to this phenomenon of blended trip purpose and we think that's going to continue to drive occupancy, particularly in the days of the week that historically we considered shoulder days.

Richard Clarke, Analyst

Maybe just as a follow-up to that, your kind of composite US and Canada luxury RevPAR down year-on-year in the quarter. I mean, how much are you putting that down to the international travel moving overseas from the U.S. or is there some overall price moderation going on within luxury properties there?

Leeny Oberg, CFO

I'll begin, Tony, and feel free to join in. A couple of points to note. We believe that last year in Q2, there were significantly fewer travel options available. There were consistent restrictions on international travel which had an effect. This year, we've seen a considerable increase in Americans traveling to Europe and other global destinations, which impacted our results. Additionally, in the U.S., we observed a strengthening in metropolitan areas regarding luxury travel. These areas generally have lower RevPAR compared to resorts, contributing to a shift in our mix. As you may have noticed, rates in the U.S. and Canada remained relatively stable in Q2, especially compared to last year’s extraordinary luxury rates. It's worth noting that luxury rates in the U.S. and Canada have outpaced inflation when compared to 2019, and this trend continues. Meanwhile, other segments are gradually aligning with inflation-adjusted rates, evident by the 4% increase in ADR during the second quarter. As stated in our prepared remarks, we are witnessing a normalization process. There’s a more seasonal travel pattern developing, characterized by a robust mix of leisure, business transient, and group travel, all of which we believe will support pricing in our industry moving forward.

Richard Clarke, Analyst

Thanks very much.

Operator, Operator

Thank you. We'll take our next question from David Katz with Jefferies.

David Katz, Analyst

Hi. Good morning, everyone. Thanks for taking my questions. I wanted to just focus on the capital returns for a bit, which had a significant bump, and again, my sense is that this is something you'll discuss in the analyst meeting. But can you help us just look out a little bit and assume that the business momentum continues? And maybe just help us calibrate how you think about the growth in that capital return if we can make our own assumptions about where the business would go.

Leeny Oberg, CFO

Sure. Thanks for the question. You're right, the adjusted EBITDA and strong cash flow kind of move upward in our guidance has given us a view to increase our expected capital returns this year. And just in basic math, the midpoint of our EBITDA moved up approximately roughly $150 million, about half of it outperformance in Q2 and about half of it increased guidance in the back half of the year. And if you just kind of simply take that and lever it, it's pretty straightforward about how you see the increased capital returns. But I do want to go back to our first kind of the most important thing, which is that we first want to invest in our business to grow. And we want to do that in a way that provides returns that are attractive for our shareholders and do it in ways that kind of meet our strategic objectives. So that is always first on the list and then a consideration of how we see the business moving forward. We do have a more diversified earnings stream than we had before. We've got a more global earnings stream than we've had before. We've got strong operating leverage in the business. And so I would expect to continue to see this investing in the growth of our business, including our technology transformation. But then with the remaining cash, excess cash, being able to return it to our shareholders in this mix of a modest dividend and share repurchase.

David Katz, Analyst

Got it. And if I can, as my follow-up, just ask about really the top tier corporate business. I know there was some of this in your prepared remarks. But as we talk through the industry or industry-related people, we get a sense that there is a Fortune 100 that's been slower to come back versus the SME that was much, much faster. An update there would be really helpful if there is some movement at the top as well?

Tony Capuano, President and CEO

Sure. So your characterization is accurate. The SMEs, which represent about 60% of our business transient segment, they were first fully recovered a quarter ago and their demand continues to be quite robust. The large corporate room nights continue to be recovering a bit more slowly. In Q1, we saw slow and steady recovery, and that continues to be the pace. What we hear from them anecdotally on, from one perspective, they continue to meet a great deal as they hire new staff, as they immerse them in their culture and do training meetings. And we think that's one of the drivers of the strength we're seeing in the group segment. Their international travel has been probably the slowest component of their travel to recover. And so it's a segment that we're monitoring closely, but it is certainly recovering more slowly than the SMEs.

Leeny Oberg, CFO

I would like to add that regarding the special corporate rate, it’s important to note that we've experienced nearly double-digit increases in our negotiated rates this year. As we look ahead to next year, we are beginning discussions and are anticipating another significant increase. While it's true that the major firms in the big four and tech sectors are still substantially down in night stays compared to 2019, overall business transient travel has improved compared to that year, and we are witnessing ongoing recovery. Eventually, we believe it will return to the levels we experienced in 2019 for the special corporate segment. In summary, the overall business transient revenue is performing well.

Tony Capuano, President and CEO

Yeah. And Dave, maybe just one clarification and additional comment. On the recovery of the SMEs, we saw them fully recover in Q1 of 2022, not 2023, just to make sure I'm precise. The other thing I will tell you is while the recovery of the large corporates has been not as rapid as what we've seen with the SMEs, we do see strong enough demand even with the large corporates that it is giving us pretty good pricing power. As we talked about a couple of quarters ago, and one of the underpinnings of the rate growth we saw in the quarter was our ability to negotiate high single-digit special corporate rates for 2023. And as we start in earnest to go into corporate rate negotiations for 2024, we have every expectation that we will be emerging from that rate negotiation season, having achieved high single-digit rate negotiated rates for the second straight year.

David Katz, Analyst

Got it. Thank you very much.

Tony Capuano, President and CEO

You’re welcome.

Operator, Operator

Thank you. We'll take our next question from Smedes Rose with Citi. Please go ahead.

Smedes Rose, Analyst

Hi. Thank you. I just wanted to ask you a little bit about the loyalty program. And I'm sorry if you've shared this already, but what percent of occupancy came through loyalty members in the quarter? And could you just touch on maybe what you're seeing on direct bookings versus the percentage of bookings coming through OTAs?

Leeny Oberg, CFO

Sure. Overall, Bonvoy penetration is in the mid-50s, while it's low 60s in the U.S. and Canada. We're maintaining a mid-70s contribution from our direct channel for bookings, with OTA contributing 11% to 12%. This has been fairly stable. The key takeaway is that digital channels have significantly increased their market share compared to OTAs over the last few years and have grown quite well. Additionally, redemptions as a percentage of our total room nights stand at 6%, and digital redemptions are in the mid-30s.

Smedes Rose, Analyst

Thank you. Can you share more about your perspective on the growth of credit card fees? You mentioned it was up in the double digits. Is this increase primarily due to more spending at existing locations or is it more related to the distribution of additional cards? Also, how do you see the long-term growth rate for this fee stream?

Leeny Oberg, CFO

Sure. All of the above. You've got great news in terms of adding cardholders. That is obviously a critical component to this, is adding additional cardholders. And we're very pleased with adding additional cardholders. And then obviously, it's the average spend on those existing cardholders. So as you see growth in those two, you get the growth in credit card, but just as importantly, is adding new countries. So when we add South Korea, Japan or China, it really opens up a new market that goes from zero to thousands of cards with growth potential that goes off many years into the future. And we are continuing to add additional countries. So we'll talk more in September about kind of how to think about that in a three-year model. But as I said, for this year, I think you can be looking at them for overall total credit card branding fees to be in about the roughly 10% range.

Smedes Rose, Analyst

Well, I can attest that my kids are helping on the fee growth for you. Thanks.

Leeny Oberg, CFO

Well, thanks. We appreciate the support.

Operator, Operator

Thank you. We'll take our next question from Dori Kesten with Wells Fargo. Please go ahead.

Dori Kesten, Analyst

Thanks, good morning. Where do you feel that your gap by region or brand type exists today?

Leeny Oberg, CFO

So I'll begin, Tony, and then you can chime in. We've been discussing our entry into the affordable mid-scale market since acquiring City Express in CALA and our talks about MidX Studios, which is an exciting mid-scale extended stay product in the US where we're having great conversations with owners. We see this as a significant opportunity globally, along with the growth of all our other brands. It's worth noting that we believe there is substantial potential for growth across all segments worldwide and within our existing brands. For instance, we are optimistic about the prospects for a conversion mid-scale brand in EMEA and look forward to making some announcements later this year about that. We will continue to focus on meeting our customers' needs and expanding our distribution in a way that enhances Bonvoy.

Dori Kesten, Analyst

Okay. Thank you.

Operator, Operator

Thank you. We'll take our next question from Bill Crow with Raymond James. Please go ahead.

Bill Crow, Analyst

Hey, good morning. Tony, you talked about normalization in the US. We talked about it as well. And the last, I don't know, six weeks or so, we've seen RevPAR in the US plus or minus 1%, maybe up to 2%. Just curious what it is that you can look at and say, the real normalized rate might return more to 3% to 4%? What are the drivers out there to get us off this sub-inflationary growth rate?

Tony Capuano, President and CEO

Yes, that's a great question, Bill. I want to highlight a few key points and address your question by breaking it down by segment. In my earlier comments, I mentioned that the leisure segment increased by 10% this quarter. One encouraging aspect is that this improvement was nearly evenly split between occupancy and rate increases. We observed a 5% growth in average daily rate, which I found quite positive. Turning to the US, as you mentioned, in the US and Canada, we discussed the group segment. We're seeing some pricing power in this area, reflected in our revenue growth; for the second half of 2023, we're on track to increase revenue by 11%, and for 2024, we're pacing up 14%, which is a 5-point increase in just three months since we last updated you on group pace. Additionally, as Leeny noted in a previous question regarding business transient, there's been a 6% growth in average daily rate in this segment in the US and Canada. When we consider all these elements together, they provide us with confidence that there are opportunities ahead. However, as Leeny pointed out, we do anticipate that year-over-year average daily rate growth will moderate somewhat due to certain comparisons, especially as we move into Q3 and Q4, but we still expect average daily rates to continue rising in the latter half of the year.

Bill Crow, Analyst

Yeah. That's was it for me. Thank you.

Operator, Operator

Thank you. We'll take our next question from Duane Pfennigwerth with Evercore ISI. Please go ahead.

Duane Pfennigwerth, Analyst

Hey, good morning and congrats on these results. If we just play back your guidance revisions since the start of the year on international, we know Europe is strong. But how would you rank other international regions in terms of the contribution to that guidance revision? And if you would, it might be early here, but any early thoughts on domestic versus international growth rates into 2024?

Tony Capuano, President and CEO

Sure. So let me talk maybe a little bit about China, and then I'll let Leeny do the balance of the tour around the world. I talked in my prepared remarks about how encouraged we are about the recovery in China and the fact that Greater China as a market surpassed pre-pandemic RevPAR in the quarter. And it was able to achieve those results principally on the shoulders of domestic demand given some of the stats that I shared on the relatively modest recovery of international airline capacity. One of the stats that was really encouraging to me, if you look at Q2 RevPAR in Greater China, we were up almost 125% compared to last year. I think that speaks to the strength and pace of recovery in that market, but it also speaks to the quality of our distribution particularly in the major markets like Beijing and Shanghai. Leeny, you want to maybe talk a little about APAC and EMEA?

Leeny Oberg, CFO

Sure. And I think a lot of this is just about acceleration of recovery. So if you think about it, it's a little bit hard to predict exactly how airlift is going to go and how cross-border travel and how a country is going to emerge from the pandemic. And so I think the reality is that the recovery in China has come faster than we expected. And cross-border, while it is still meaningfully lower in China than it was pre-COVID, we've got international airlift only at 40% of pre-COVID levels. So there's clearly more room to go. There's no doubt that as that country has rebounded. And as the rest of Asia Pacific has also really opened its borders completely, we've seen that all of the travel there has picked up very fast. So when I kind of go back to where at the beginning of the year, where you might have imagined Greater China and Asia Pacific outside of China, they are both up the most. I think the only other comment I would make is that, obviously, Europe this summer has dramatically outperformed expectations. And we continue to see really strong demand in the Caribbean and Latin America and Middle East Africa. So international really benefiting from all the cross-border travel. And frankly, from a global economy that has probably been a bit stronger than everyone anticipated at the beginning of the year.

Duane Pfennigwerth, Analyst

Appreciate the detailed response. And maybe just a quick follow-up on MGM, does that effectively franchise agreement cover all of their revenue, or just revenue generated through your channels, through marriott.com, through Bonvoy, et cetera? Thanks for taking the questions.

Leeny Oberg, CFO

Sure. So...

Tony Capuano, President and CEO

Go ahead, Leeny.

Leeny Oberg, CFO

As you say, we're not going to get into the details of the calculation, but it is based on hotel revenues. So it is not an à la carte sort of deal.

Duane Pfennigwerth, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you. We'll take our next question from Robin Farley with UBS. Please go ahead.

Robin Farley, Analyst

Thank you. Regarding the MGM deal, I understand it's a strong partnership, but I thought MGM wouldn't be paying the typical franchise fees associated with rooms in your pipeline, which are usually between 4% and 6%. Could you clarify whether they will be paying franchise fees in the usual manner? Additionally, the way the release is phrased makes it seem like you're including the MGM rooms in your rooms under construction. Can you explain why you classified them as new construction instead of a conversion? If I'm reading this correctly, your rooms under construction, excluding the MGM rooms, represent about 30-something percent of your pipeline, while historically, this has been in the high 40% to nearly 50% range. Considering that rooms currently under construction are lower than usual, it could have implications for 2024 openings, assuming this interpretation of how you're accounting for MGM is accurate. Thank you.

Tony Capuano, President and CEO

Sure. So I think there's three questions in there, I'll try to hit all three, Robin. On the first one, as Leeny mentioned, while we're not going to disclose the specific deal terms, this is structured very similar to a franchise agreement where we are receiving a royalty fee on rooms revenue. This is not as Leeny termed it, an à la carte, where we're only getting paid on fees generated just through our proprietary channels. So I do think you should think about it through the lens of a more traditional franchise fee structure. On your second question, we typically do conversions, pending opening in our system are typically included as rooms under construction because they typically have some measure of property improvement plan, improvements, and construction before they come into our system. Even in the case of MGM with extraordinary quality assets, there are, for instance, some life safety improvements and some other physical improvements that are required to those assets before they will be plugged into the system. And that's why they're characterized in that way. And on your third question, I'm doing the math just in my brain so we can do it more precisely for you. But if you take the quarter-end pipeline and you back out those numbers or back out the MGM, we would have been a little over 500,000 rooms in the pipeline. And if you back the MGM numbers out of the under construction, we would have been a little over 200,000. So, it would have been 40%-ish under construction versus the 30% that you referenced. And so in terms of implications going forward, I'd reference a response I gave you maybe a quarter ago, which is for, I don't recall the precise number, but 20-some-odd quarters despite really strong openings we've continued consistently to have plus or minus 20,000 rooms under construction globally, which I don't think bodes quite well for our continued recovery to mid-single-digit net unit growth.

Robin Farley, Analyst

Okay, thanks. And just one quick clarification then. I wasn't counting when you gave rooms in your pipeline at quarter end, just since the MGM deal was announced in July. Are you including MGM in that number? It sounds like you are from the math you just walked us through. I just wanted to clarify.

Tony Capuano, President and CEO

In the pipeline, we are at 547,000. To be more precise, this figure includes approximately 37,000 additional rooms that will be coming in, not the full 40,000 because the Cosmopolitan is already open and functioning in the system as an Autograph as we speak.

Robin Farley, Analyst

It's included in your June 30 pipeline, even the incremental rooms that will come in.

Leeny Oberg, CFO

Yes. The deal was signed before June 30, so it's appropriate that it was not announced until a few weeks ago, but it was signed.

Robin Farley, Analyst

Okay, great. Thank you.

Operator, Operator

Thank you. We'll take our next question from Brandt Montour with Barclays. Please go ahead.

Brandt Montour, Analyst

Great. Thanks for squeezing me in here. Just one for me, maybe for Tony. Maybe you could just give us a view into the development backdrop in China as it stands today, just sort of the latest lay of the land in terms of starts and construction progress and any sort of acceleration and sort of how things look on the ground, that would be helpful?

Tony Capuano, President and CEO

Sure. Of course. So, maybe I'll sort of go in sequence. We are seeing a very encouraging uptick in the pace of development inquiries, a parallel uptick in the number of signed MOUs and then parallel committee submissions and approvals. As you'll recall from some of our previous conversations, oftentimes, unlike many other markets around the world, new construction hotels often come into our development process when those structures are well under construction as opposed to a US deal where it might come to us as a greenfield site. Many of those under construction buildings had been paused during the pandemic. We have seen a parallel encouraging restart of many of those construction projects. So when we think about each of the milestones in the development of a hotel project or the life cycle of a hotel project, we're seeing encouraging uptick at every one of those milestones across Greater China.

Brandt Montour, Analyst

Perfect. Thanks so much.

Tony Capuano, President and CEO

You're welcome.

Operator, Operator

Thank you. We'll take our next question from Ari Klein with BMO Markets. Please go ahead.

Ari Klein, Analyst

Thank you. Tony, you mentioned the strength of U.S. travel to overseas markets. Maybe can you update us on what you're seeing as far as international visitation into the U.S. and your outlook there and maybe what drives the resurgence?

Tony Capuano, President and CEO

Sure. I'm going to ask Leeny to remind me of the exact percentage. Historically, the percentage of inbound international travel into the U.S. has been relatively modest, probably under 5%. As borders open, we're starting to see some recovery, but it isn't nearly as significant as outbound U.S. travel to international destinations. An exception is seen in a few individual cities. For instance, in New York, the share of transient room nights from international travelers was 12% in 2019, and this year in the second quarter, it rose to 13%. New York really stands out, and there are only a few other major U.S. cities at double digits. Miami was at 12% this quarter, down from about 15% in 2019. San Francisco had 11% in 2019 but dropped to 10% in the second quarter. Hawaii's share was 12% in 2019 and fell to 10% in the second quarter. Hopefully, that gives you a better understanding.

Ari Klein, Analyst

Yes, I appreciate it. And then in the U.S. specifically, on the development pipeline, are you seeing any differences in the ability for owners to finance higher-end or bigger project hotels versus the smaller ones that are maybe more selective?

Leeny Oberg, CFO

So I'll start, and Tony, jump in. So the old saying continues to be true that proven markets, proven brands, proven developers, proven owners always win out. And that is still the case. So it really depends on the project. I will say that we've seen such great impact from renovated hotels that I think there is the reality that an existing hotel that is not a new development project, that's not kind of not earning money for quite a while, that those are easier to do, especially when they're turning it into a fantastic representation of a particular brand. And I think those are getting done. But I think the reality is that both with the level of interest rates and the loan-to-values that are being required is that it's tougher to make these deals pencil. So they are happening. They're getting done. They're just not getting done at the same pace that they were before.

Ari Klein, Analyst

Thanks for the color.

Operator, Operator

Thank you. We'll take our next question from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario, Analyst

Thank you. Good morning, everyone. Just wanted to follow up on the MGM deal but focus on group. A couple of parts there. Maybe what's your view on the upside in Vegas for group business at these hotels? Maybe more broadly, how are your sales teams incentivized to put groups into certain hotels? And then presumably, Vegas is going to gain share. Maybe what's your view on the markets that lose share as group rotates into Vegas? Thanks.

Tony Capuano, President and CEO

Sure. So maybe I'll try at a high level, and then Leeny, you might want to be a little more granular. Obviously, we think it's a huge win for our group customers. As you know, Michael, the way we sell group as we look at their multiyear rotational needs and for many of these particularly large groups, Las Vegas is always in their multiyear plan. While we had the ability to offer them the Cosmopolitan, the breadth of offerings we can now make available to them, particularly the largest of those groups that need very significant meeting space, we think we've got a terrific opportunity to keep them within the Marriott Group ecosystem much more effectively. Our sales teams will be collaborating closely, the Marriott and the MGM sales teams, to ensure we capture as much of that demand as possible. In terms of markets that might be impacted by that, most of those groups are rotating through Las Vegas as a destination anyway. And so I don't think we're deeply concerned that groups going there will be at the expense of those destinations. We just think we have a better probability of capturing that Las Vegas rotation within the Marriott ecosystem.

Operator, Operator

And at this time, this will conclude our Q&A as we are at the allotted time. I will turn the call back over to Tony Capuano for closing remarks.

Tony Capuano, President and CEO

Great. Well, thank you all for your interest this morning. I wish you safe travels, and we look forward to seeing all of you in Miami this September. Thank you.

Operator, Operator

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