• Marriott began rate increases in May

Marriott International's second quarter results raised hopes of a nascent recovery in the US lodging sector, with the group reporting net income up by 42% on the year to $119m (£79m), up from $37m in Q2 2009.

The previous year's adjusted results excluded $57m pre-tax in restructuring costs and other charges. Operating income rose by 46% to $226m, with Ebitda up by 26% to $278m.

Revenue climbed 8.2% to $2.77bn, on growth in rates and fees. Base management fees increased by 8% to $136m, with franchise fees up 13% to $105m and incentive management fees increasing 31% to $46m.

Timeshare sales and services revenues fell 21% to $167m. At the beginning of the third quarter the group launched a points-based timeshare programme – Marriott Vacation Club Destinations – which is intended to increase flexibility.

J.W. Marriott Jr, chairman and CEO, said: "Business and leisure stays at our hotels are trending up. Revpar increased more than expected in the second quarter and room rates at company-operated hotels in North America rose for the first time in nearly two years."

Worldwide company-operated comparable revpar rose 9.9%, ahead of the group's previous predictions of 5% to 7% growth. Average daily rate rose 1.6%. Internationally, revpar was up by 14.1%, including a 2.0% rate increase. In North America revpar grew 7.9% with rate up 1.2%.

In a conference call, Arne Sorenson, president and COO, said that the company had been able to increase room rates "much faster than we anticipated". He attributed growth in the domestic market in part "to the mix shift coming from strong corporate demand in the second quarter for the Marriott Hotels & Resorts brand".

He said: "While rates are still modestly lower, the resurgence of corporate command will likely yield higher room rates by the end of 2010." He added that leisure, though performing well year-on-year, was not performing as well as business travel.

For the third quarter, revpar was forecast to increase by 5% to 7% in North America, 7% to 9% outside North America and 6% to 8% worldwide. EPS was put at $0.18-$0.22.

The company was confident that the fourth quarter would support growth and raised its 2010 earnings forecast to a range of $1.05 to $1.13 a share, compared with 95 cents to $1.05 predicted in April.

It also raised the bottom end of its full-year revpar projection by 1 percentage point, now predicting 4% to 6% growth worldwide, split between 4% to 6% in the domestic market and 6% to 8% internationally.

Ebitda for 2010 was expected to rise by between 7% and 11% on the year to between $1.05bn and $1.09bn.

Sorenson said: "Business in Europe and the UK remains strong despite rumblings of economic concern. Our European hotels are benefiting from strong American tourism attracted to destinations that are on sale due to the weak currencies."

CFO Carl Berquist added that, the while booking windows remained "very short", the group had seen little evidence of weakness in its business in either Europe or the US. He said that, in the second quarter, corporate group room nights rose "nearly" 10% in the quarter.

Much of this business was booked last minute; with around 25% of group room nights booked within the three months prior to arrival. He said: "Pricing for group business remains challenging as the significant lead times tend to make moving rate more difficult."

Sorenson said: "Group business booked in the second quarter for a stay in the second quarter paid 5% higher rates than similar business in the prior year. All in all we are pleased with the strength in group demand in the second quarter. For group business booked in the second quarter for the next 12 months, revenue is up 10% to 15%."

He added: "We will begin special corporate pricing negotiations later this summer, and are already preparing customers for rate increases including in significant increases in many cases.

"While it's a bit early to quantify the likely increase in 2011 with strengthening demand, our customers know that today's prices are not sustainable. By and large, they recognise that to provide the best quality service, availability, amenities and facilities, hotels need to be able to charge a fair price."

He said that the group had "dramatically reduced" promotional pricing year-on-year, which had enabled it to report 3% higher weekend room rates in the second quarter.

The company's worldwide pipeline of hotels under construction, awaiting conversion or approved for development totaled nearly 95,000 rooms, including over 36,000 rooms, or 39% the pipeline, outside North America, as were two-thirds of its rooms under construction.

The group plans to add at least 21 hotels in China in the next three years and to double its rooms in Europe to 80,000 by 2015.

Marriott added 46 new properties (6,568 rooms) to its worldwide portfolio in the second quarter, with 14 properties (2,311 rooms) leaving the system, taking it to a total of 3,489 properties and timeshare resorts – a total of over 607,000 rooms.

Worldwide, 20% of the new rooms opened during the quarter were conversions from competitor brands and nearly three quarters of those conversions were now flagged under the new brand, the Autograph Collection.

The company expects to open over 30,000 rooms in 2010. It said it was "pretty confident" of a similar range of 25,000 to 30,000 hotels in 2011.

At the end of the second quarter, total debt was $2.91bn, with cash balances of $100m, compared with $2.30bn in debt and $115m of cash at year-end 2009.

Marriott did not repurchase any shares in second quarter 2010 and has no plans to this year.

The group said that it would look at investments that would enhance the terms of its management agreements or enable it to enter strategic markets, such as property acquisitions, capital spending, loans and equities.

Sorenson concluded: "Of course, we are not oblivious to the recent concerns about the broader economy. But we have not seen those concerns impact our business and we continue to be optimistic."

The results came the day after STR reported a total drop of 16.7% in revpar for the US last year, the worst decline since the group started tracking the industry in 1987. Mark Lomanno, the company's president, described the year as "devastating … for the hotel industry".

 

HA Perspective:

Sorenson describes himself as "wildly optimistic" about the future of the hotel industry. He places his faith not in short-term recovery but in the longer term prospects for the industry.

But as he admits, the near term prospects have been much healthier than forecast just a few months ago.

Marriott increased US room rates in its period five, roughly equivalent to May, and although just 1% this was the first increase in nearly two years.

In the next period, a third of Marriott branded hotels in North America lifted rates by 10% or more, some "significantly" more than 10%. Overall, corporate and premium rates at Marriotts were up 10% in period 6.

About 15% of Marriott brand room nights are previously negotiated corporate rates and these went down 3%. But these deals are being renegotiated in late summer and the company expects to be able to make significant increases.

 

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