• Marriott rides the cycle

The economic cycle has not been recalled but there are as yet no signs of an inflexion point, according to Arne Sorenson, CFO at Marriott International.

The current state of the credit markets was the elephant in the room but as yet there had been only limited impact on Marriott’s growth.

“There is still significant growth left in the current cycle, albeit at a slower pace,” said Sorenson. “The last lodging cycle lasted a decade and we are only four years of so into this one.”

Marriott currently has 115,000 rooms either approved or under construction and as yet had not seen significant fall-off in new additions.

Sorenson, speaking during the company’s third quarter results conference call to analysts, said that it would take several months before any credit tightening conditions impacted on select service hotels. Such properties were typically smaller and funded by local banks often many months in advance.

For the larger, full-service hotels that required bigger lumps of financing there had been little slippage so far. Spreads on financing the development of full-service hotels had widened by 50 to 75 basis points from June to September, however.

During the call, Sorenson said that Marriott had acquired 16 acres in Las Vegas that would be turned into a 3,500 room hotel, casino and conference centre with 500,000 sq ft of convention space.

Marriott had so far put about $230m of its own money into the project but did not plan on using its balance sheet to fund the $2.5bn it would cost to complete the project. Opening is scheduled for late 2011.

The growth that Sorenson wanted to emphasise was that outside of the US. Half of the full-service hotels currently in development were international.

The bulk of international development is in Asia. At the end of the second quarter, Asia accounted for 34% of the 45,000 room full-service pipeline while North America was only just ahead at 37%.The Middle East and Africa was the third most important region with an 11% share, ahead of both Europe (including the UK) with 9% and the Caribbean / Latin America also with 11%.

The 65,000 rooms in the limited service pipeline were all in North America (Courtyard internationally is included in the full-service figures).

At the end of September, Marriott made clear its ambitions in Asia by declaring it was to grow to 48 hotels in China alone by 2010, up from the current 25. And within five to six years the company wants to break through the 100 barrier in that country. Across Asia, it wants to have 125 hotels by 2010, including tripling its presence in India.

There is certainly room for growth: Marriott says its market share is less than 1% outside of the US and in 2006 international hotels accounted for just 19% of the $1.224bn in total fees the chain generated.

In the meantime, the credit crunch may help to avert any further slowdown in revpar. The company slightly adjusted its guidance for revpar at North American hotels in the final quarter to be between 6% and 8% rather than between 7% and 8%. The guidance for 2008 was 5% to 7%.

This fractional revision to guidance along with warnings that earnings may not rise as much as expected due to softness in timeshare was enough to see the company’s share price slide by almost 5%, its biggest drop since April. Since hitting a 13-year high on April 18, Marriott’s shares are down more than 15%.

The reported net profit for the third quarter showed a drop of 7.1% to $131m which was better than expected. The Wall Street mood was that while the guidance was slightly below expectations, there are still robust fundamentals in the business.
HA Perspective: Marriott is the first of the big companies to report following the credit crunch and it appears that so far, things remain on course.

The company made the case that tightened credit conditions will help slow development which in turn will help keep revpar numbers stronger for longer as supply is choked off.

The other side of this argument is, however, that it makes delivering on its own pipeline that much harder.

Add in the difficulties that Marriott faces with timeshare given the turmoil in the US residential market, the engine of timeshare sales, then the years ahead will not be as comfortable as the past few.

Meanwhile, there are signs that credit markets are finally opening again for business and deals are being done, albeit on less generous terms than three months ago.

There was a $177m timeshare securitisation by Bluegreen completed in the US last week and, separately, Fairmont has this week announced the sale of three hotels in a mini-portfolio transaction with private real estate investment company Goodman Hospitality Investments.

According to broker Jones Lang LaSalle Hotels who arranged the deal, the three hotels – two in Mexico and one in Bermuda – were a significant investment in the resort segment for Goodman.

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