Analysts had many questions for Marriott International executives about the company’s removal of hotel rooms from the development pipeline and critical comments made by other hotel CEOs about the integration of Marriott and Starwood’s sales teams.
BETHESDA, Maryland—Marriott International executives were delighted to talk about the company’s strong performance during the second quarter of 2018 on an earnings conference call, beating guidance for gross fee revenue, certain expenses, estimated gains and estimated adjusted earnings before taxes, interest, taxes, depreciation and amortization.
Analysts on the call, however, wanted to focus on the company’s higher-than-normal deletion of rooms from its development pipeline and issues owners have shared regarding the sales integration of Marriott and Starwood Hotels & Resorts Worldwide.
The deletions pace has been running close to 2% in 2018, EVP and CFO Leeny Oberg said, which is a bit higher than typical.
The new deletion pace is not going to continue for years to come, Sorenson said. It’s a mix to some extent of unresolved issues to be worked out within the legacy Starwood portfolio that already existed when Marriott closed on the transaction. The company will return to its normal 1% to 1.5% deletion range in 2019, he said.
As for the removal of existing properties from the system, Oberg said there are different stories for every hotel and the company is completing workouts of legacy Starwood properties and is being more aggressive in addressing product quality issues.
Sorenson said it’s important to understand what’s driving this, and the place to start is development. Looking at the development side shows the more powerful indication of the strength of Marriott’s brands and owners’ appetite to grow with the company, he said.
Marriott added 40,000 new rooms to its pipeline in newly approved deals or signed deals that weren’t included previously, he said, representing 241 hotels at a pace equivalent to about one new hotel approximately every nine hours.
“That shows you that around the world our owners are saying these are brands that we want to affiliate with and we’re prepared to put substantial capital behind that desire,” he said.
The removal of existing hotel rooms in the second quarter amounts to about 18 hotels, Sorenson said. About 20% of these “by definition older assets” are contract expirations, he said, and while contracts can be renewed, the core issue is whether it makes sense to put additional capital into the properties to bring them up to standard.
Another 30% came out because of hurricanes or earthquakes, Sorenson said. While they might re-enter the system at some point in time, it could be years before they are back online, he said, so it made sense to take them out rather than keep them in the unit count.
The remaining deleted hotel rooms were a mix of product quality issues, he said.
“It’s driven by the economics of each individual hotel,” he said. “While we would like to keep hotels in the system if they can be brought up to standards, if they can’t get the capital that’s necessary in order for them to stay in the system, we’d just as soon that they left.”
Analysts asked Marriott’s executives about comments made during the Pebblebrook Hotel Trust, DiamondRock Hospitality Company and Ashford Hospitality Trust second-quarter earnings calls in which executives spoke of revenue declines as a result of the integration of Marriott’s and Starwood’s sales teams.
The best indication about how hotels are performing is revenue-per-available-room index, Sorenson said. Marriott has increased its index by about 120 basis points over the past 12 months, which he said is a “fabulously strong” result for a company of its size and efforts to integrate two departments.
“You can look at a little less precise data, but you can look at RevPAR growth for the legacy Marriott hotels and the legacy Starwood hotels, because it’s interesting to note that the legacy Starwood hotels are posting RevPAR growth numbers that are comparable, if not even a little bit higher, than the legacy Marriott hotels,” he said.
The company has about 70 hotels in its convention resort network, which tend to be big hotels and are the most reliant on group business and sales teams, Sorenson said. Looking at the performance of these hotels, both the legacy Marriott and Starwood hotels in this network have their RevPAR index up a full point over the past three months and up more than a full point in the last 12 months, he said.
“So all of that would say, there is nothing systemically that we see that would suggest the integration is sort of negatively impacting the system,” he said.
While he wouldn’t go through each comment made during other calls, Sorenson said he thought it was interesting that one company spoke of a specific hotel and its “relatively soft performance in Q2.”
“We know by looking backward that that hotel had weak group bookings on the books well before Marriott acquired Starwood for these periods in 2018,” he said. “And in fact, in the second quarter of 2018, that hotel had an increase in bookings for future periods of 38% compared to prior times. And that's the first quarter, when they had the new integrated sales force working for it.”
Marriott isn’t saying there couldn’t be circumstances in which there were staffing implications to the integration that were done, distractions or other issues, he said, but the company sees generally across the system that the integration hasn’t had a negative effect.
By many accounts, Marriott had a solid second quarter. The company achieved comparable systemwide constant-dollar RevPAR growth of 3.8% worldwide, according to the company’s earnings release, and 5.7% growth outside of North America and 3.1% in North America.
The company reported its net income totaled $610 million during the quarter, a 25% year-over-year increase. Adjusted EBITDA came to $939 million, a 15% increase over Q2 2017.
Marriott sold two hotels in Fiji and two in North America for a total of $67 million. The sale of the company’s equity interest in joint ventures in multiple regions brought in an additional $42 million.
Looking ahead, the company expects comparable systemwide RevPAR on a constant dollar basis in North America will increase by 1.5% to 2% due in part to tougher comps from last year’s hurricane relief efforts. The company foresees growth of 5% to 6% outside of North America and 2.5% to 3% worldwide.
For full-year 2018, the company projects comparable systemwide RevPAR on a constant dollar basis will grow by 2% to 3% in North America, 5% to 6% outside of North America and 3% to 4% worldwide.
Marriott’s stock closed Tuesday trading at $124.43, down 8.3% year to date. The Baird/STR Hotel Stock Index was down 0.6% for the same time period.
Clarification, 9 August 2018: The story has been updated to clarify comments regarding hotel pipeline deletions.