• Marriott gives nuanced outlook

Marriott International tried to remain cautiously optimistic last week despite announcing that while revpar may turn positive at some point next year, it was unlikely to be soon enough or strong enough to bolster full year rates.

The third quarter brought total Marriott revenues to $2.5bn, compared to $3bn for the same period a year ago. However the group suffered losses of $466m over the period compared to the $94m income from continuing operations the year before.

In a conference call with analysts, chief operating officer Arne Sorenson and chief financial officer Carl Berquist said there were signs of economic recovery, and occupancy rates were forecast to continue to increase, but downward pressure on leisure and corporate rates was likely to continue to make a negative impact across the industry.

As in the second quarter reporting, Sorenson said because of the uncertain economic climate Marriott wasn't offering a formal outlook for 2010, but the group was assuming worldwide, system-wide revpar would be flat to down 5% compared with the current year.

Marriott, with more than 3000 hotels worldwide and nearly 600,000 rooms, saw revpar for its world-wide comparable, company-operated properties decline 21.4% on a constant dollar basis and revpar for its system-wide global properties down 19.9%.

Markets outside of North America were hit by the difficult economic climate and other factors including Swine Flu and holiday timings. The international comparable, company-operated revpar declined 22.3% with a 15.5% decline in the average daily rate.

In North America comparable, company-operated revpar declined 20.6%, with system-wide revpar down 19.3% to $80.16 compared to the same period last year. Occupancy rates dropped 5.6% to 68.5% and the average daily room rate by 12.7% to $117.09. 

This weak revpar drove down profit margins at company-operated hotels by 5.2% in North America and 4.3% internationally.

Examining the trading, Berquist told analysts that despite the pressures in the domestic market, revpar was still better than the 20%-23% decline they had expected. "Our profits were about $0.04 than the midpoint of our outlook – largely due to better than expected revpar, solid cost controls that drove house profit margins, base fees, franchise fees and incentive fees and some delay G&A (general and administrative) spending," he said

Corporate demand was hit hard by the poor world economy. "In the third quarter corporate room nights, year-on-year, were down 11%." But he added that this was still an improvement compared to the second quarter when they were down 18% on 2008 levels. And the two year room night comparison also improved. This quarter it had declined 17% on 2007 levels compared to a 23% decline in the second quarter.

However, the trend on room rates is still a cause for concern. Aggressive negotiation by travel departments in the third quarter meant room rates declined by 19% from 2008 levels. Berquist said Marriott expected the situation to continue as long as occupancy rates were down.

The leisure market was one area of pleasant surprise during the quarter, when room nights increased by 7% – albeit on the back of heavy promotional discounts which brought room rates down by 13%.

Berquist told analysts that Marriott was continuing to aggressively drive down overheads, with operating costs for the quarter at $143m down 14% on the same period last year.

The quarter saw Marriott open 10,000 rooms and close 500 – a net 6.7% like-for-like growth on last year. The group added 8,000 rooms to the pipeline, while cancelling 5,000 – bringing the total now in the pipeline to 105,000. Roughly half those are under construction and another 7% are waiting for conversion.

Berquist added that room openings were running ahead of expectations – with more than 33,000 opening by the end of this year and between 25,000 and 30,000 opening in 2010.

Sorenson said that with every new hotel opening, the group's remaining hotel pipeline was becoming more concentrated with valuable full-service hotels in international locations.

"Private developers of new US full-service hotels are having trouble financing even some of the strongest deals and as for limited-service hotels, applications from our existing franchisees have slowed as financing difficulties are reining in development," he added.

Outside the US, full-service development is generally easier, with new constructions proceeding in many growth markets in Asia. In fact, as of the end of the third quarter, Asia represented nearly 40% of our full-service hotel pipeline and virtually the entire Asian pipeline is already under construction."

Sorenson was also keen to point out to analysts that historically, hotel owners looking to shelter from tough economic times, had looked to strong brands such as Marriott. He added that while they hadn't yet seen a significant increase in conversions to Marriott brands because of the difficult financial environment restricting the capital needed for renovations and repositionings, developers were working on many opportunities. "We expect conversions to accelerate in 2010 as lending opens up a bit more and lenders begin to recognise and deal with problem loans. Many equity investors are already in a position to buy hotels from troubled owners or lenders."

Marriott International's timeshare business is also suffering from the effects of global recession. To help bolster business the group has reviewed pricing and put a series of promotions in place to stimulate the market. However, it's still predicting that contract sales in 2010 will be roughly at 2009 levels.

Looking to quarter four, Marriott is anticipating revpar declines in North American comparable, system-wide hotels of between 13% and 16% and between 16% and 18% internationally.

Commenting on the third quarter results, Morgan Stanley analysts said estimates across the sector could drop following Marriott's 2010 revpar estimates, which were on the lower side of expectations and investors should steer clear of the group until earnings growth improved.

HA Perspective: The Marriott estimates produced gloom on Wall Street but there has been a general failure to understand how Marriott has nuanced its outlook. This is not guidance as we know it.

Rather, what Marriott is calling it is a set of "assumptions" about where the business is headed, not estimates. Sorenson added: "We don't have leading indicators in our business so there's not much we can look at and say we've got a particular insight into the direction of the economy."

Marriott said during the Q&A session that its revpar numbers might be too pessimistic – it simply didn't know at this point.

One positive comment the company did make was that consumer deleveraging is not expected to dramatically impact the company. Firstly, like most branded hotel chains, the main business comes from business travellers. Secondly, as this summer proved, consumers will still spend on travel even as they are rebuilding their savings.

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