Why trend in fee income is an important source of revenue

Trend in fee income

In the last part of the series, we discussed that 96% of Marriott’s (MAR) hotel properties are either managed or franchised. The fee income—including the base fee, management fee, and incentive fee—from these properties accounts for ~62% of Marriott’s total revenue. This is excluding cost reimbursements.

Components of Marriott’s revenue include:

• Base management fee – The fee is calculated as a percentage of hotel revenue for managing hotel properties owned by third parties.

• Incentive fees – This is based on the percentage of net house profit adjusted for a specified owner return. Net house profit is calculated as gross operating profit—house profit—less non-controllable expenses like insurance, real estate taxes, and capital spending reserves.

• Franchise fees – The fees include initial application fees and continuing royalties for the use of Marriott’s brand names. It also includes licensing fees, from Marriott Vacation Worldwide (or MVW), for developing and operating its timeshare segment. The timeshare segment was spun off in 2011.

• Owned, leased, corporate housing, and other revenue – This includes revenue from room sales and guest services. The revenue is provided for Marriott’s owned and leased properties when they’re occupied. Other revenue includes third party licensing fees, branding fees for third party residential sales, credit card licensing, and land rental income.

Growth in franchising

Over the past ten years, there has been an increased focus on capital light segments—like managed and franchised properties. Marriott increased its fee income at a ten-year compound annual growth rate (or CAGR) of 7.6% to $1,543 million in 2013—from $742 million in 2003. It was driven by growth in the base management fee at 4.8%, the incentive fee at 7.6%, and franchise fees at 10.5%. The franchise fee had the highest growth. The share of franchising fees as a percent of total fees also increased from 33% in 2003 to 43% in 2013.

In 2013, Marriott’s revenue from the management and franchising fee was 62% of the total revenue—excluding cost reimbursement. It was the highest among its peers—including Hilton’s (HLT) 19%, Starwood’s (or HOT) 28%, Wyndham’s (WYN) 59%, and Hyatt’s (H) 13%.

Most of these companies are also part of many exchange-traded funds (or ETFs)  including the Consumer Discretionary Select Sector SPDR Fund (XLY) and the PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ).