• Marriott cuts revpar guidance

Marriott International has slashed its guidance for revpar growth in 2008 by two points at the top and bottom of the range.

During its fourth quarter and full-year results presentation the company said that hitting the lower end of the new range would leave profits at the individual hotel level flat.

The new guidance is for revpar growth of 3% to 5%, rather than 5% to 7%. In North America, it expects revpar in the first quarter to grow in the range 2% to 4%.

On the conference call discussing the results, CFO Arne Sorenson stressed how Marriott's business model was "proven and effective in both good and bad economic times". Aggressive global growth would deflect some of the possible impact from a slower US economy, he added. "Over the long haul we are quite bullish about our prospects."

During the year the company added two new brands to its portfolio, the joint venture with Ian Schrager called Edition and a resorts concept with children's television brand Nickelodeon.

This brings the total number of brands to 19, the widest portfolio of any major hotelier, boasted Sorenson.

Editions are already planned for Paris, Madrid, Costa Rica, Miami, Washington, Chicago, Scottsdale, and Los Angeles. The ramp up has been quicker than expected – six months ago it was expected that just five projects would be announced by the end of 2007 but instead there are signed deals for nine with 20 likely to have been signed by the end of this year.

Schrager is leading the effort on concept, design, marketing, branding and f&b while Marriott is overseeing the development process and will operate the hotels. It is expected that there will be 100 Editions within 10 years.

The growth of Marriott has been driven without heavy capital commitment in the long-term but the amount of cash required to deliver new hotels is still substantial. Last year, $1.5bn of capital was recycled from previous investments through the sale of 13 hotels and the interests in five joint ventures. Even with further reinvestment, Marriott still threw off enough cash to buy back $1.8bn worth of shares. In the last four years the company has repurchased $6bn worth of stock.

A key attraction of the business model is the high return on invested capital. The pre-tax return in 2007 topped 25%, more than double where it was four years ago.

The proportion of managed hotels generating incentive fees in 2007 rose to 67%, up from 62% in 2006. The profit margin at individual hotels in North America was up 160 basis points in 2007 on 2006, reaching an almost record level.

This helped drive EBITDA up 11% for the year to reach $1.6bn. Fee income was 17% up to hit $1.4bn. Incentive fees reached an all-time record high of $369m of which 36% came from outside of North America.

Revpar in constant dollar terms was up 6.5% or up 7.6% allowing for currency impact. During the year, 31,000 rooms were opened, including 7,800 outside of the US.

Outside of North America, revpar in the year was up 15.5% or 8.5% in constant dollars. In North America, the increase was 6.2% for the same company operated comparable hotels.

While the historic numbers are good, it is the outlook that is preoccupying Wall Street. "As bullish as we are in the medium and long term, we are looking at the immediate future with some caution," said Sorenson.

Business outside of North America was put forward as a key bolster. International revpar in January was up 10% and everywhere outside North America, with the exception of the UK, had positive occupancy and rate growth.

Group bookings are currently "very comforting" and are up 9.5%. Sorenson said that 70% of group business was already on the books and cancellations were currently lower than in 2006. However, transient demand was weak in December and January.

"We are prepared if the environment turns less friendly," said Sorenson. He said that each point of revpar impacts profit at Marriott by about $25m. Overall, he hinted that tougher market conditions would prove beneficial to Marriott in the longer term.: "Smoother seas do not make skilful sailors."

Once revpar falls to between 3.5% and 3.0% then it was difficult to improve profit at the individual hotel level. But the growth in the total number of hotels in Marriott's system would counterweight this.

Sorenson said that between 4% and 5% unit growth for Marriott was "in the bag" for 2008. This total fee revenue growth meant Marriott's margins could continue to improve even with revpar below 3%.

The credit crunch had so far had little impact on the pipeline. Out of the 800 hotels and roughly 125,000 rooms signed, about 60% were limited service hotels in the US, 20% in Asia and the Middle East and just 20% full service hotels in the US, Europe and Latin America where there might be an impact from tighter conditions. Even of the full service hotels, some 80% were already financed and under construction.

"We don't see an impact in 2008 and early 2009," said Sorenson. The debt markets will constrain US openings for the US in late 2009 and beyond, he admitted, but said this might be offset by the opportunity to convert hotels to Marriott brands. "Some of the debt needs are being met by balance sheet lenders," he said. "But we expect to see some drop-off."

For Marriott, the credit crunch was an opportunity to step up its service level to owners and franchisees, providing high value for high fees. "We want to accelerate our lead in this space," said Sorenson.

In terms of opportunities to acquire assets, Sorenson was cautious although he said that the debt markets were less relevant to Marriott in the short-term in terms of its decision to buy.

The company does, however, need prices at which it could turn around assets and obtain multi-year contracts. The key to any deal was this likelihood of extracting all of Marriott's capital.

Sorenson commented that although there had been a massive lurch [downwards] on public valuations of real estate, individual hotel properties had so far not seen yields increase much.

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