Marriott International Inc (NASDAQ:MAR) Q3 2022 Earnings Call dated Nov. 03, 2022.
Corporate Participants:
Jackie McConagha — Senior Vice President of Investor Relations
Anthony Capuano — Chief Executive Officer
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Analysts:
Shaun Kelley — Bank of America Merrill Lynch — Analyst
Joseph Greff — JPMorgan Chase & Co. — Analyst
Robin Farley — UBS — Analyst
Smedes Rose — Citigroup — Analyst
Charles Scholes — Truist Securities — Analyst
David Katz — Jefferies — Analyst
William Crow — Raymond James & Associates — Analyst
Brandt Montour — Barclays Bank — Analyst
Duane Pfennigwerth — Evercore ISI — Analyst
Presentation:
Operator
Good day, everyone and welcome to today’s Marriott International’s Third Quarter 2022 earnings. [Operator Instructions] Please note, this call may be recorded.
It is now my pleasure to turn today’s program over to Jackie Burka, Senior Vice President of Investor Relations. Please go ahead.
Jackie McConagha — Senior Vice President of Investor Relations
Thank you. Good morning, everyone and welcome to Marriott’s third quarter 2022 earnings call. On the call with me today are Tony Capuano, our Chief Executive Officer; Leeny Oberg, our Chief Financial Officer; and Executive Vice President, Business Operations; 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 average daily rate comments reflect system-wide constant currency results for comparable hotels and include hotels temporary closed due to COVID-19.
RevPAR occupancy and ADR comparisons between 2022 and 2019 reflect properties that are defined as comparable as of September 30, 2022, 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. Additionally, unless otherwise stated, all comparisons to prepandemic for 2019 are comparing the same time period in each year. 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.
Anthony Capuano — Chief Executive Officer
Thanks, Jackie and thank you all for joining us this morning. We had an outstanding third quarter. Quarter rose above 2019 levels for the first time since the pandemic began, up nearly 2%. RevPAR compared to 2019 improved sequentially from the second quarter in every region around the world. Global occupancy rose to 69% while ADR outpaced by 2019, excuse me, by a remarkable 10%. Compared to prepandemic levels, worldwide RevPAR in September reached a new monthly high watermark, increasing more than 4% or nearly 7%, excluding Greater China.
During the quarter, leisure demand remained strong, well above 2019 levels. In the U.S. and Canada, Full-Service group revenue for the quarter showed continued growth, ending up 3% over the same quarter in 2019. Fourth quarter Full-Service group revenue is currently pacing up 4% but is likely to improve further given the strong last-minute group bookings that we’ve seen all year. The trend towards last-minute bookings has led to meaningful compression in pricing power, helping group ADR for new bookings rise each quarter this year.
At our managed hotels in the U.S., ADR for in-the-year, for-the-year group bookings made in the third quarter rose 17% compared to same year bookings made in the 2019, 3rd quarter. A significant jump from the 6% increase we saw in the first quarter. ADR for group bookings made in the third quarter for 2023 outpaced 2019, 3rd quarter bookings for events in 2000 by 24%. Business transient demand also continued to improve during the quarter, although it still lags 2019 levels. Third quarter business transient room nights in the U.S. and Canada were 11% below 2019. We are currently in the midst of our special corporate negotiations for 2023 and are very pleased with how they’re progressing. After 2 years of holding rates steady, the early results look positive for at least high single-digit year-over-year rate growth.
Third quarter day-of-the-week trends continue to suggest that travelers are combining leisure and business trips. In fact, the average length of a transient business trip has increased meaningfully and year-to-date is up more than 15% compared to 2019. With borders reopened in most countries around the world, rising cross-border travel helped spur demand during the quarter, especially in Europe and in the Caribbean and Latin America or CALA region. Cross-border guests accounted for 15% of our global room nights in the third quarter, an uptick from 12% in the first quarter of this year. In 2019, 18% of travel to our properties was from cross-border guests. So we anticipate additional upside from international travel especially from Greater China once stringent travel restrictions are relaxed.
Given rapidly rising interest rates and growing concerns about a possible global recession, we are closely monitoring consumer and macroeconomic trends. There is no doubt that the hospitality industry is impacted by economic cycles. And with transient booking windows averaging only about 3 weeks, trends could change relatively quickly. However, we have yet to see signs of a slowdown in global lodging demand. In fact, we’ve seen just the opposite. Booking trends remain very healthy. Given sustained high levels of employment, consumer trends prioritizing experiences versus goods, pent-up travel demand and a high level of consumer savings, travel spending has been incredibly resilient.
In October, demand remained strong across our regions, with the exception of Greater China, where trends are still low. Our powerful Marriott Bonvoy program grew to 173 million members at the end of the third quarter. The program achieved record penetration levels in the quarter reaching 60% in the U.S. and Canada and 53% globally. Members also continued to engage with our co-brand credit cards which had another solid quarter. After recently making significant enhancements by adding new benefits to many of our U.S. cards, sign-ups have well exceeded expectations. This led to record new cardholder acquisitions as well as record spending for the first 9 months of this year.
We also introduced 2 mid-tier cards at the end of September which should help drive strong growth going forward. While much smaller fee contributors that are U.S. co-brand cards, we have similarly seen record growth internationally this year in new card members and total card spend. This has been particularly driven by China, where we’ve had great traction after launching our first cards there in July. Our Bonvoy members have been increasingly interacting with the platform through our direct digital channels which helps boost owner and franchisee profitability. Since 2019, our share of room nights booked through direct digital channels has increased more than 5 percentage points to 38% while our distribution through OTAs has risen by less than 1 percentage point to 12%.
The power of Bonvoy in our direct channels has also been evident in our latest offering, the Ritz-Carlton Yacht which made its inaugural voyage from Barcelona last month. Remarkably, around 2/3 of all bookings for this incredible brand extension have been through direct channels which is many times above the rates most cruise companies experience. Additionally, Bonvoy members account for more than half of the Yacht bookings. We look forward to more ships joining the portfolio in the future.
Shifting to the development front, our pipeline grew for the fourth quarter in a row, totaling more than 502,000 rooms by the end of the third quarter. Signing activity in the quarter remained healthy in most regions of the world. Our development team continues to be laser focused on conversions, a particularly bright spot in the development story. Conversions represented 21% of room signings and 27% of room openings in the quarter. We are very enthusiastic about the level of conversations on conversions, including for multiunit conversion opportunities.
Outside the Greater China, we were pleased to see new construction starts pick up nicely in the third quarter. While not yet back to 2019 levels, new construction starts in the U.S. reached the highest quarterly level since the pandemic began. For full year 2022, we now expect gross rooms growth of approximately 4.5% compared to our prior expectation of closer to 5%. The change is primarily a result of fewer expected openings in Greater China as the lockdowns there have extended construction time lines. The good news is that we have not seen deals in Greater China or in any of our regions falling out of the pipeline at a higher than usual rate. With just 2 months left in the year, we now expect deletions at the bottom end of our prior guidance. Deletions could be about 1.5% for 2022 or 1%, excluding the 50 basis point impact from our exit from Russia.
So our net rooms growth for 2022 is likely to be around 3% or 3.5% before factoring in the deletions in Russia. We’re always looking at opportunities that help broaden the offering for our guests as well as our owners and franchisees. Last month, we announced our agreement to acquire the City Express brand portfolio. which is currently comprised of 152 hotels with over 17,000 rooms in the CALA region. We are quite bullish on the moderately priced mid-scale space which has meaningful growth potential. Upon closing this transaction, we will immediately gain a significant foothold in this high-growth segment in CALA, while also becoming the largest hotel company in the region.
We are incredibly excited about the opportunity to expand in this segment in CALA as well as other locations around the world. If the transaction closes before year-end, our 2022 gross rooms growth could be around 5.5% and our net rooms growth could be approximately 4%. We really look forward to working with the City Express team. We expect solid rooms growth going forward, given the attractiveness of our portfolio of global brands, our powerful loyalty program, our momentum around conversions and our industry-leading pipeline. While the exact timing will depend on how new construction starts trend from here, we remain confident that over the next several years, we will return to our pre-pandemic mid-single-digit net rooms growth.
Now before I turn it over to Leeny, I just want to recognize and thank our associates around the world for their continued commitment, passion and resilience. Leeny?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Thank you, Tony. We had excellent financial performance again this quarter, driven by continued momentum in global RevPAR growth. In the U.S. and Canada, third quarter RevPAR was 3.5%, above pre-pandemic levels with ADR surpassing 2019 by more than 10%. RevPAR for all market types; primary, secondary and tertiary and all brand types from luxury through extended stay was more fully recovered for the first time. With the exception of Asia Pacific, our international regions posted incredibly strong RevPAR growth as restrictions across most countries fully lifted. Europe, in particular, benefited from a large increase in U.S. leisure demand, thanks to the strong dollar.
Compared to 2019, third quarter RevPAR rose 6% in Europe, nearly 19% in the Middle East and Africa and nearly 18% in CALA. RevPAR is still lagging behind 2019 levels in Greater China and in our Asia Pacific, excluding China or APAC region. Greater China improved the most in the quarter with RevPAR 23% below 2019, 30 percentage points better than a quarter ago. However, the recovery there remains uneven given China’s renewed commitment to its strict 0 COVID policy. The good news is that we continue to see that when a market reopens for domestic travel after a lockdown, lodging demand rebounds very quickly.
In APAC, South Korea joined India and Australia in crossing the full recovery mark but this was offset by Japan’s borders remaining closed until the end of the quarter. Third quarter RevPAR in APAC was 14% below pre-pandemic levels, an 8 percentage point improvement from a quarter ago. As we move through the fourth quarter, APAC is benefiting from a recovery in airlift in Japan’s now open orders. Three quarter — third quarter total gross fees of $1.1 billion rose 11% compared to 2019, exceeding the top end of our guidance.
Growth was driven by RevPAR improvement and room additions as well as another quarter of strong non-RevPAR related fees. Those fees totaled $192 million in the third quarter, largely aided by ongoing growth in our co-brand credit card fees which rose 22% year-over-year. The strength of our industry-leading luxury portfolio also contributed significantly to fee growth in the quarter. Gross fees from our luxury properties were up 13% versus the same quarter in 2019, even with Greater China’s weaker performance. While our luxury properties account for 21% of our managed rooms, they contributed 34% of our total incentive management fees in the third quarter.
Third quarter adjusted EBITDA also exceeded the high end of our guidance, outpacing the same quarter in 2019 by 9%. With the strong U.S. dollar, foreign exchange net of hedging, negatively impacted adjusted EBITDA by $22 million in the quarter, some of which was included in our guidance a quarter ago. This negative currency translation was more than made up for by the positive impact from increased U.S. leisure travel abroad. We estimate net of our hedges, a 100 basis point change in the U.S. dollar could affect full year 2022 adjusted EBITDA by less than $10 million.
G&A and other expenses totaled $216 million in the third quarter, better than our guidance, largely reflecting lower-than-expected administrative costs and bad debt. At the hotel level, we remain focused on containing operating costs for our owners and franchisees while also delivering superior service to our guests. With ADR of 15% above 2019 and our significant productivity enhancements, third quarter profit margins at our U.S. and Canada managed hotels were 2 full percentage points above 2019 levels despite meaningful wage and benefit inflation. Wage and benefit growth while still high, continued to moderate in the third quarter.
Let me now turn to our fourth quarter and full year 2022 guidance, the details of which are in our press release. As we headed into the end of the year, we’re very pleased with the strong continued momentum in our business. Group’s transient bookings are showing further gains against 2019. In both the U.S. and Canada and internationally, we expect fourth quarter RevPAR compared to pre-pandemic levels to accelerate from the third quarter, even with anticipated weaker demand in Greater China. Compared to 2019, fourth quarter RevPAR could increase 4% to 6% in the U.S. and Canada, be down 2% to flat internationally and increase 2% to 4% globally.
Worldwide fourth quarter RevPAR could increase 27% to 29% over fourth quarter 2021. We’re still working through our 2023 budgets and recognize that there is heightened macro uncertainty. That said, we currently think 2023 global RevPAR could increase nicely year-over-year, driven by gains in both the U.S. and Canada and internationally. Each quarter could see growth compared to this year and particularly strong growth in the first quarter due to the easier comparison given the impact of the Omicron variant in early 2022.
For full year 2022, we’re now anticipating G&A expenses of $880 million to $890 million, slightly better than our prior guidance, primarily due to lower bad debt expense. We’re also raising our full year adjusted EBITDA guidance and now expect adjusted EBITDA of around $3.79 billion at the midpoint of the range which is 6% higher than our prior full peak year in 2019. Due to the timing of some capital expenditures for owned, leased hotels and corporate systems as well as key money payments, we now expect full year investment spending of closer to $500 million, assuming the City Express transaction does not close in 2022. Strong spending on our credit cards is expected to result in loyalty being a slight source of cash for the full year before factoring in the reduced payments received from the credit card companies.
Year-to-date, our net cash provided by operating activities was $1.9 billion, a significant increase of nearly $1.2 billion compared to the first 3 quarters of last year, a strong reminder of the power of our asset-light business model. At the end of the quarter, our leverage ratio was excellent at the low end of investment grade targets. With our solid financial results and cash flow generations, we have already returned $1.9 billion to shareholders through buybacks and dividends through October 31 and we now expect to return more than $2.7 billion to shareholders this year.
In closing, we’re incredibly proud of how well our business is performing and how resilient our business has proven to be. Tony and I are now happy to take your questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] And we’ll take our first question from Shaun Kelley with Bank of America.
Shaun Kelley — Bank of America Merrill Lynch — Analyst
Tony, probably wanted to start with you, if we could. One thing that’s been a bit of a theme and you hit on it as well through your commentary was just how strong the development environment has held up and I’m wondering if you could unpack that for us a little bit, just given we continue to hear about rising financing costs, a little bit more stress in some of the commercial real estate markets and that contrasts pretty greatly with what you kind of implied in your comments about just how well your signings are going and your activities going, so can you help us square that up a little bit and just talk about what you’re seeing on the ground?
Anthony Capuano — Chief Executive Officer
Of course. So on the signing side, we continue to see strong development committee volume. We continue to see strong franchise application volume in most markets around the world. The construction we’re seeing in the debt markets for new construction, particularly here in the U.S. is lengthening the cycle even a bit longer in terms of getting shovels in the ground but we’re quite encouraged about the consistency we’ve seen in the volume of under-construction projects in our pipeline. In fact, we were looking at it over the last few days. As you saw in our release, we continue to have a little over 200,000 rooms under construction. It’s actually the 20th straight quarter where we had more than 200,000 rooms under construction globally. The market in China is most certainly — where we’re seeing the most challenges.
The disproportionate share of our projects in the pipeline in China, in fact, about 60% are in the luxury and upper — upscale tier, principally in primary markets which are — well, the combination of those quality tiers in those markets caused those projects to be the most significant fee generators but they are more complex development projects and it takes a little longer for them to get open in a market like China. But broadly, we continue to see really powerful interest in our portfolio of brands. And we’re maybe most encouraged by the volume both on signings and openings in the conversion tier.
Shaun Kelley — Bank of America Merrill Lynch — Analyst
That’s great. And then maybe as my follow-up, Leeny, you mentioned, I believe, as you’re looking out to 2023 RevPAR that it could increase nicely and you said each quarter, positive versus this year. Could you just talk a little bit about again very high-level assumptions behind that. I know no one’s got a crystal ball here but just how did you kind of — how do you consider the macro when you think about that outlook and maybe some of the pluses or minuses that could factor into that?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Yes, sure. Thanks, Shaun. As you say, there obviously continues to be a fair amount of uncertainty about the possible recession given the Fed’s continued rise in rates and economic headwinds that do continue to grow. But I think we’ve got some things in our business that really do lead us to confidence about 2023, although we are not predicting per se a recession. We clearly believe there does continue to be pent-up travel demand, particularly in parts of the world where the borders are just opening. We’re also seeing just generally a desire for travel and services as compared to goods which we do see strongly in leisure. Also see, as we think about kind of the overall macro environment that there is pent-up savings for the consumer.
So we’ll have to see. But again, from where we sit right now and as we look into the booking trends moving into 2023, we continue to see strength across all the business segments, Shaun. And then the last thing I would say is the reality is our booking window is still short. So at roughly 3 weeks for transient bookings, things could change relatively quickly. But for the signs that we see right now, we feel good about 2023. Obviously, Q1 is a particularly hopeful item given we had Omicron in the first quarter of 2022.
Operator
Our next question will come from Joe Greff with JPMorgan.
Joseph Greff — JPMorgan Chase & Co. — Analyst
I was hoping you could talk about 2023 group business on the books for next year? And maybe talk about it maybe a little bit differently than maybe how you’ve talked about it in the past. I was just wondering how much of group for 2023 is on the books for sure as a percentage of what you anticipate the total to be? And then maybe you can just talk about in segments in terms of when that was booked, so to get a sense of pricing, how much of ’23 group was booked in ’22? How much of it was booked in ’21? How much it was booked prior to ’21? And obviously, how much would you anticipate in the year, for the year, just given the relative strength of group of late?
Anthony Capuano — Chief Executive Officer
Yes, of course. So let me start macro and then I’ll try to get a little more precise in reference to your specific question. 2023 group revenue on the book is currently pacing down about 11% relative to ’19, although candidly, you heard Leeny’s comments about the short booking window on transient, a similarly short booking window on group. And so I don’t know that looking at that down 11% is particularly relevant. Even for Q4 this year, we’re up 4% and we think that will likely improve through the quarter, given the strength of short-term bookings and the trade that many of our customers are making for flexibility and they’re willing to pay a higher rate.
When I look deeper into what’s on the books for 2023, room nights are down in the high teens. ADR is actually up close to about 10%. And then I think your second question was really about when that business is being booked? I guess I’ll try to give you some 2022 data that is hopefully indicative of the trends we’re seeing. About 50% of the group business we’ve seen year-to-date in 2022 was booked in the year, for the year. That’s about double what we saw pre-pandemic, where typically, we’d see about 25% of our total group volume being booked in the year, for the year.
Joseph Greff — JPMorgan Chase & Co. — Analyst
Great. And then, Leeny, we heard your comments, obviously, about broad expectations for 2023 RevPAR growth. How do you think non-RevPAR-related fees performed relative to that RevPAR growth expectation? Would you expect it to be similar? Would you expect it to be plus or minus? How do you think about that?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
So we’re in the middle of our budget process, Joe. So we obviously aren’t getting to where we’re talking about specifics on RevPAR growth of ’23 over ’22. I think what we’ve seen this year is credit card fees frankly being up over 20% year-to-date this year. And I think for the full year, obviously, our guidance implies the same. So I think you’ll continue to see growth in the cardholders and then growth in spend. But whether it matches exactly RevPAR, we’re not in a position to say specifically. Obviously, when you look at compared to ’19, those credit card fees have grown meaningfully more than hotel-related fees because of COVID and the steady growth in cardholders and credit card spend each and every year as we’ve moved through 2019.
But I — again, broadly speaking, we are looking at growth of non-RevPAR fees in 2023, both from credit cardholders as well as spend. But the relative array of growth compared to RevPAR, we will get closer to as we move through the budget process but we’re looking for healthy growth in both.
Operator
And our next question will come from Robin Farley with UBS.
Robin Farley — UBS — Analyst
I was curious about the acquisition that you made in October and you talked about expanding in the mid-scale segment in the CALA region with that brand. Do you have thoughts about the mid-scale segment in the U.S., not necessarily with that brand but in some other brands that maybe we don’t know about yet.
Anthony Capuano — Chief Executive Officer
Yes. Of course. So as we mentioned in the release on the acquisition and I think, I at least touched on this in my prepared remarks, the acquisition initially is focused on the CALA region. We are equally excited about the growth prospects for mid-scale across CALA and what this transaction does for us in terms of further strengthening our footprint across this really important region. As with many acquisitions that we’ve done over the years, once we close, once we start rolling in CALA, we will, of course, evaluate the applicability of this platform as to whether it makes sense to roll out some or all of the sub-brands under the City Express banner into other markets around the world. But right now, we’re focused on getting the transaction closed.
Robin Farley — UBS — Analyst
But in general, is the mid-scale segment in the U.S., something whether it’s that brand or not, that you kind of have your sight set on?
Anthony Capuano — Chief Executive Officer
Well, as you know, we are not in the mid-scale segment in the U.S. Certainly, this acquisition gives us the opportunity to evaluate whether it makes sense to enter mid-scale in any other market inclusive of the U.S.
Robin Farley — UBS — Analyst
And then just 1 follow-up on the — your comments about the pipeline growth in rooms under construction. And you mentioned that it’s been a very steady sort of rooms under construction in the last few quarters, you’re steadily above that 200,000 unit rate. Is there — can you give us a little bit of insight into sort of new construction starts in the U.S. only because sort of the broader U.S. market seems to be a slowing number of new construction starts in the hotel space. So just wondering how that — the sort of incremental hotel starts looks?
Anthony Capuano — Chief Executive Officer
Of course. So again, outside of Greater China which is quite a volatile environment, we’re pretty encouraged about what we’re seeing around the world in terms of new construction starts. We are certainly not back to the peak of 2019 but as I mentioned earlier, new construction starts in the U.S. and Canada reached the highest quarterly level we’ve seen since the start of the pandemic.
Operator
And our next question will come from Smedes Rose with Citi.
Smedes Rose — Citigroup — Analyst
I wanted to ask a little bit about net unit growth as well going forward, just probably remains difficult for developers to kind of access capital. And I’m just wondering, do you see Marriott providing more of a backstop to developers either through loan guarantees or just direct financing?
Anthony Capuano — Chief Executive Officer
Sure, of course. So as both Leeny and I referenced, the availability of debt, particularly for new construction here in our biggest market is a bit challenging. The good news is the pipeline continues to be strong. We continue to see fallout from the pipeline below our historical averages. As has always been the case in constricted debt markets, brand affiliation, track record of the developer, strength of the sponsorship are what — are the factors that capture the construction debt that is, in fact, available. And so we see signs that the strength of our brands continue to capture a disproportionate share of what’s out there.
A quarter or so ago, we announced closing on the financing for a $1.2 billion Gaylord Pacific Hotel in Chula Vista, California. This quarter, we announced the closing on financing for a new Ritz-Carlton Reserve in Papagayo, in Costa Rica. So we do feel like we are grabbing meaningful share of the dollars that are out there. And I’m sorry, Smedes, what was the second part of your question? Oh, on key money?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Well, yes.
Anthony Capuano — Chief Executive Officer
Yes. Maybe I’ll take a high-level shot at this and Leeny can jump in with some more color. I don’t see our tried-and-true philosophical approach to investment in projects changing even in this environment. Certainly, the competitive environment gets more competitive by the day but we will use the say — or apply the same disciplined lens that we’ve applied in the past. And among the long list of reasons, we’ll continue to take that approach over the years when you look at the projects where we’ve leveraged the company’s balance sheet to get to accelerate growth, those are projects that tend to generate outsized fee volumes.
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
The only thing I’d add is that we are not seeing that we are increasing our financing support or investment support in a meaningful way for deals. I think at the end of the day, the first mortgage loans that projects are looking for do not typically come from Marriott and that has not changed. In terms of debt service guarantees, operating profit guarantees and key money, I would say we continue to see them in the same kind of frequency and proportion as we’ve seen in the past.
Operator
And our next question comes from Patrick Scholes with Truist Securities.
Charles Scholes — Truist Securities — Analyst
I know you sort of touched on this and made some implications for next year. When we think about the right net unit growth to model for next year, a number of considerations. Number one, you did see your pipeline tick up a bit from 2Q but then again, the trajectory of year-over-year quarterly growth has been going down. Is it a fair assumption when we think about the organic number to use that similar to this year’s 3% for next year at this point?
Anthony Capuano — Chief Executive Officer
Thank you, Patrick. Again, the — some of the murkiness that’s out there causes us to be reluctant to give you a hard number. What I will tell you is we are encouraged by deal volume. We are encouraged by the volume of under-construction projects. And maybe most notably in a debt constricted environment, we are particularly enthusiastic about the volume of conversion deals we’re approving and signing, the volume of conversion deals that we’re opening and the volume of conversion discussions we’re having, both on individual projects and multiunit opportunities.
Operator
And our next question will come from David Katz with Jefferies.
David Katz — Jefferies — Analyst
I wanted to ask about IMFs, the release says 2/3 of them were international. Can you just add a little color on what percentage of North American hotels are earning them today? And any qualitative commentary about how that curve might roll out into the future would be helpful.
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Yes, sure. So let’s talk about a couple of things. First of all, just from the dollar size, David, we were at $35 million of IMFs or about 1/3 from the U.S. and Canada and that is pretty similar to what it was in Q3 ’19. It was 39%. Now it was 26% of overall hotels in the U.S. and Canada earning incentive fees in Q3 and 56% in ’19. But it’s important to break out full service from limited service because the reality is that we had a large portfolio back in ’19 of managed limited service hotels which, as you know, left our system over a year ago.
So if you actually look at full service, we’re actually at a slightly higher percentage of hotels earning IMFs in full service than we were in ’19. And again, as we talked about before, in my comments that you saw house profit margins at our full-service hotels, up 200 basis points compared to ’19 with our strong RevPAR performance and really strong efforts on the cost containment side. So I — we feel good about what’s going on. We’ve talked about — hoped for expected growth in RevPAR in 2023, both U.S. and internationally which should bode well for continued progress on incentive fees.
Obviously, wage and benefit growth is something we’re keeping an eye on which has moderated a bit, although it still reflects the fact that we’re in an inflationary environment. And then the last thing I’ll say is we’ve continued to see improvement in the large urban markets where we’ve got a number of managed Full-Service hotels in the U.S. And we’ve seen nice progress as we moved into Q3 in some of those urban markets and we expect them to continue on as we move into 2023 with that recovery.
David Katz — Jefferies — Analyst
Understood. And as my follow-up, the discussions happened during COVID, early on about the fee structures and the interactions between owners and yourselves, around contracts and service delivery, et cetera. And interestingly, it came up with — in a couple of places from investors recently about what’s changed. Now that at least for most of us, COVID is kind of in the rearview mirror. Can you just talk about how that’s different and how that’s manifesting itself in the numbers?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
So fundamentally, the fee structures have not changed. So I would say, while we did things that on a temporary basis like helped on the reducing reimbursable costs and helping with extensions on accounts receivable, they were all really overwhelmingly temporary things. And then also, if you remember, 85% of the things that we charge are based on top line revenues of the hotel. So they flex as the revenues go up and down which is helpful to the hotel owners.
I think you see things like what we’ve talked about on our direct digital bookings, things like that which do help the hotel margins by coming through that channel rather than coming through the OTAs as an example, all the productivity efforts that we’ve done to help improve our productivity per room. We’ve obviously worked very hard to make sure that we can make the most out of every revenue dollar that comes through the hotels. But as far as structural changes in the contracts, there’s nothing really to look for there.
Anthony Capuano — Chief Executive Officer
And maybe the only thing I would add, we obviously have brought back all of our quality metrics, so our QA audits, our RAN standards, you might think that the owners would baulk at that, I think, quite the contrary. They care deeply about their neighbors within the portfolio and continue to encourage us to bring back and enforce those standards. And then similarly, we obviously gave our owners and franchisees a measure of relief on renovation cycle at the very bottom of the trough of the pandemic.
We’re bringing those requirements back but with some pragmatic perspective on hotels that are doing a terrific job on service as evidenced by those quality metrics and giving them the ability to selectively extend some of those renovation cycles.
Operator
Our next question will come from Bill Crow with Raymond James.
William Crow — Raymond James & Associates — Analyst
Tony, we view hotel demand as kind of a lagging economic indicator, maybe 3 or 6 months. I’m curious whether you agree with that? And if so, what is the best, whether it’s a consumer view or other economic data points to try and judge the macro change that, that may be a…?
Anthony Capuano — Chief Executive Officer
Yes, it’s a good question. I would revert — maybe refer back to some comments that both Leeny and I have made this morning about this extraordinarily short booking window, so probably not as much of a lagging indicator as we might have experienced pre-pandemic. While we are encouraged and optimistic by the forward booking data we see, I think Leeny said it best. We also recognize that we work in an industry that is cyclical and subject to economic cycles.
And because of that short booking window, trends can change quickly. However, even if, in fact, we are in a recession or we fall into a recession, I think the company and travel more broadly are positioned a bit differently. Leeny, maybe you want to talk about that?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Yes. I think we definitely see that we could perform relatively better than we had in prior recessions. You’ve definitely got unemployment rates right now that are truly at historic lows. And while certainly what is happening with interest rates would be expected over time to influence that. We are a far cry from the 9.5% that we were in the great recession.
And similarly, when you think about pent-up savings and the desire for people to take and do travel to not assume that they can put it off that they really don’t want to postpone it and that there is still both business and leisure trips that families and consumers want to make. And while consumer health is something that we will be watching extremely closely, for the moment, there does look to be some extra room there that could help as we go into a potential recession.
William Crow — Raymond James & Associates — Analyst
That’s helpful. If I could just ask my follow-up question. We understand that owners’ meetings recently, the topic of consistency of brand has kind of come up. Is there some complaints about not removing enough rooms from the system, you talked about net unit growth, a low number of removals. Should we expect that to go up over the next couple of years as you get back to kind of enforcing capital spending?
Anthony Capuano — Chief Executive Officer
So maybe I’ll take the first part and Leeny can take the second. As I mentioned earlier, the vast majority of our owners are quite pleased that we’ve brought back our quality metrics and quality requirements they care, as you point out, meaningfully about the quality of the overall portfolio.
While there may be some pockets of frustration, I think there’s also a broad understanding that it was appropriate to suspend those processes during the depths of the pandemic and that it will take us a bit now that they are reinstated to get back to having enough empirical data to be a little firmer on enforcement.
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
The only part that I would add is that for the owners who did do some renovations during COVID, I think the results that they’re seeing are powerful. And I think our good incentive for other owners to do the same. We did — as Tony mentioned, we did give owners a bit of a pass in the heart of COVID to help everybody manage through the pandemic. But I think as we are coming out of it, I think the entire industry recognizes the importance of having both product and service up to where our consumers, our guests expect them to be given the prices that people are paying.
So we do expect there to be additional renovations and frankly, probably a pickup in renovations now that we’re largely through that impact and believe that the returns on those renovations will be strong. For the time being, we certainly continue to see that our — we expect our deletion rate to stay in this 1% to 1.5% rate that we’ve talked about for several years. We will, as we get into the new year, refine that a bit as we go through the entire budget process. But I think that sort of range should be your expectation.
Operator
And our next question will come from Brandt Montour with Barclays.
Brandt Montour — Barclays Bank — Analyst
So maybe — so when you think about corporate transient recovery and specifically focusing on your largest accounts, the larger corporates in the U.S., what is the tone that you kind of get back from them when you talk to them about how they’re planning for the future. Obviously, we know that near term, you’re seeing good trends but we hear and see headlines regarding — especially in tech some larger companies pulling back on expenses and things like that. I’m just curious how you feel about some of those things?
Anthony Capuano — Chief Executive Officer
Sure. So at a macro level, we are, again, encouraged by the sequential quarter-over-quarter improvement in business transient. You’ll recall that in the U.S. and Canada, BT was down almost 25% in the first quarter. That dropped to 13% in Q2 and just down 11% in Q3. As we’ve discussed in the past, small- and medium-sized companies which are about 60% of those BT room nights are fully recovered. And in fact, in Q3, their room nights were up about 10%.
When you pivot to the larger companies, your comments are right. Special corporate which tends to be a lot of those big companies, their room nights were down about 17% in the quarter. And when you start to look at the specific tiers within special corporate, you brought up tech as an example. They were down about 23% in the quarter. Trying to respond more qualitatively in terms of what we’re hearing from them. I think it’s really embedded in the short booking window. They absolutely talk about the value of face-to-face interaction with each other, with their customers, with their clients.
But they are also, again, much like our group customers willing to trade a bit of pricing for flexibility. And then the last thing I would say to try to address your question, we are relatively early in the special corporate rate negotiations. But what we’re seeing in terms of the pricing and our growing confidence that we’re going to end up at least with high single-digit year-over-year rates is pretty encouraging as well.
Brandt Montour — Barclays Bank — Analyst
Great. I appreciate it. And then on conversion activity which you guys did talk about and hoping to ask it in a slightly different way. But just given the sort of counter cyclicality of that activity in past cycles and sort of one would think maybe that we’re sort of at the tail end of conversion activity that was elevated because of COVID but maybe that there’s some — a pickup — there could be a pickup of conversion activity if we went into another — if we went into a recession. Is that how you think about it at this point?
Anthony Capuano — Chief Executive Officer
It’s not. It’s not. I think the reality is a couple of factors are in play here that give us even more confidence about the runway we have for conversions. I think number 1 for Marriott, we’ve never had a better stack of conversion-friendly brands and across multiple quality tiers which is really encouraging for us. Number two, we talked a bit about the constriction in the debt markets. There is meaningfully, not meaningfully — relatively more debt available for existing assets than there is new construction but the same lenses from the lender’s perspective apply, brand affiliation, track record.
And so in order to source the debt that is available for existing assets, I think you see existing owners and buyers of assets thinking longer and harder about brand affiliation. And then I think third, I mentioned this in response to 1 of the earlier questions, the uptick we’ve seen in multiunit conversion discussions is a little different than what we’ve seen at the tail end of other cycles.
Operator
And our final question will come from Duane Pfennigwerth with Evercore ISI.
Duane Pfennigwerth — Evercore ISI — Analyst
Nice to speak with you. On the business transient commentary which I think you said down 11%, I wondered if you could provide some regional color. Where would you mark that recovery across the geographies that you touch? And then just as we think about the shape of that recovery curve, we’ve seen some nice sequential improvement here but should we be thinking about a plateau through early next year when we have new sort of budget cycles? Or are there regions where you still think sort of sequential improvement into 4Q on BT is on the table?
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Sure. So let’s talk — I’m going to reference back to Tony’s comments about where roughly 60% of our BT in Q3 was from small- and medium-sized companies. And that, frankly, is sprinkled all over the country. So that’s going to be everywhere from New York to Tulsa to smaller markets that are — at limited-service hotels rather than — the larger special corporate accounts obviously are more headquartered in the urban large cities.
The thing I will say is we’ve continued to see progress as we move too along. When you think of, for example, you think of New York City which has moved quite nicely during the year, with the improvement in BT, where they were down 29% in Q1. Today New York City was actually 3% higher in Q3 than 2019. So I think you will continue to see the progress, the trends in BT are similar, both internationally as well as in the U.S. I do think as we move into 2023, a lot of this world depend on the state of the economy. So kind of having a prediction about exactly where BT will go, it is tough to pinpoint.
We do look for continued improvement and think it will ultimately get back to where it was but the exact timing of that hard to say. And then the last thing I’ll point out is just the reality that we have seen it moderate in terms of its rate of improvement as we’ve moved into Q3 and I would expect to see that moderation continue.
Operator
And it appears we have no further questions at this time. I’ll turn the program back to Tony Capuano for any closing remarks.
Anthony Capuano — Chief Executive Officer
Great. Well, thank you all again for joining us this morning. Thanks for your continued interest in Marriott. Get back on the road, we look forward to seeing you in our hotels in the coming weeks and months. Have a great day.
Kathleen Oberg — Chief Financial Officer & Executive Vice President of Business Operations
Thank you.
Operator
[Operator Closing Remarks]