During Marriott International’s first-quarter earnings call, President and CEO Arne Sorenson addressed the company’s weaker-than-expected performance, its new home-sharing platform, its deal with Expedia and its development pipeline numbers.
BETHESDA, Maryland—Though Marriott International’s first-quarter performance wasn’t as strong as the company or investors hoped, Marriott’s CEO shared during the company’s recent earnings call that he expects to see solid results in the remaining quarters of 2019.
Before going over the results of the first quarter, Marriott President and CEO Arne Sorenson spoke briefly about his recently announced diagnosis of stage 2 pancreatic cancer.
“Thankfully, the medical team at Johns Hopkins has seen this many times before; they believe we have caught it early, that it is operable, and that the course of treatment is proven,” he said. “I’m grateful for all the messages of support from the investment community, as well as from Marriott’s community of associates and business partners around the world. With the support of an extraordinary strong team of Marriott executives, we are going to soldier on.”
For the first quarter, Marriott’s systemwide revenue per available room growth and adjusted earnings before interest, taxes, depreciation and amortization fell within the company’s previous guidance, but both were at the low end of guidance at 1.1% and $821 million, respectively, according to the company’s earnings release. The company cited the tail end of the government shutdown, tougher hurricane comparisons, unfavorable foreign exchange and a weaker-than-expected March.
While March was a disappointing month in many respects, it’s not a harbinger of a predictably different environment than what the industry has seen over the last few quarters, Sorenson said.
“Thematically today, we would say it’s steady as she goes for the next few quarters,” he said. “We continue to see that when adjusted for hurricanes and strikes and holidays and the like that we are poking along broadly around 1.5% sort of RevPAR growth.”
Gross fee revenue is expected to range between $990 million and more than $1 billion, a 4% to 6% year-over-year increase, in the second quarter, EVP and CFO Leeny Oberg said. That is based on assumed higher credit card branding fees but modestly lower incentive fees because of property renovations and unfavorable foreign exchange, she said. Owned, leased and other revenue net of direct expenses should come to about $80 million in the second quarter while general and administrative expenses should range from $225 to $230 million, she said. Adjusted EBITDA in the second quarter should range between $940 million and $965 million, which would be flat to an increase of 3% compared to Q1 2018, he said.
Gross fee revenue should increase 6% to 8% for full-year 2019 with about $15 million over previous guidance because of stronger-than-expected incentive fees, she said.
As of press time, Marriott’s stock was trading at $131.71, up 21.3% year to date. The Baird/STR Hotel Stock Index was up 16% for the same time period.
Villas and loyalty
Marriott launched its Homes & Villas by Marriott International home-sharing initiative last month. After a pilot study in four European cities, the company decided there was enough support to expand it, Sorenson said. Nearly 90% of the guests who stayed at a home in the pilot program were Marriott Bonvoy members, and more than 80% of them were traveling for leisure, he said. The average length of stay was more than three times that of a typical hotel guest, he said.
The company chose markets that would complement its core hotel offerings, and 40% of those markets are new to Marriott, he said.
“We believe our highly curated home-rental product, fully integrated into our loyalty program for earning and redeeming points, will enhance Marriott Bonvoy member travel experiences and increase the value of our loyalty program,” he said. “Home rentals should enable our loyalty members to stay with Marriott throughout any travel experience, allow us to leverage our strong brands and expertise in an evolving competitive landscape, and ultimately drive a greater share of wallet for our portfolio.”
Hotel owners are interested in where Marriott is going with the program, especially since the expansion to 2,000 homes and villas is a substantial increase from the number included in the pilot study, Sorenson said. However, that number isn’t significant compared to the number of hotels Marriott has today, he said.
“As we go forward, we're going to make sure we’re communicating with them and taking on board their interest,” he said.
Many owners acknowledge Homes & Villas is a rational step for Marriott to take, he said. They appreciate the value of the loyalty program and know Homes & Villas can enhance it, he said.
Marriott has signed a new multi-year agreement with Expedia, which should enhance Marriott’s leisure packaging platform vacations and leverage Expedia’s technology for a new business opportunity to be launched in the fourth quarter of 2019, Sorenson said.
“With the changes in the agreement, we expect our owners and franchisees will see improved overall economics from the relationship,” he said.
In response to an analyst’s question about the new deal, Sorenson said Marriott has renegotiated contracts with Expedia for nearly 20 years. The company continues to look for cost effectiveness, for data transfer ability and for the ability of the system to understand who the customer is, he said. It also looks at inventory control to make sure it’s pricing on its own platform in a way that doesn’t necessarily have to be offered up in every other platform, he said.
“Those things were on the table here too, and, of course, you would expect Expedia or another OTA to one-off in the opposite of what we want, certainly as it relates to the level of the commission,” he said. “That’s probably the clearest to see, but I think we are grateful for where we got with Expedia. We do think it will deliver economic benefits to our owners.”
Development by the numbers
In April, Marriott opened its 7,000th property, the 27-story St. Regis Hong Kong, which brought its development pipeline by the end of the quarter to about 475,000 guestrooms, an increase from the 463,000 rooms it had in the pipeline in Q1 2018. The company opened nearly 19,000 rooms this past quarter compared to 15,000 rooms in the first quarter of last year. Almost 216,000 rooms in its pipeline are under construction.
At its current pace of openings, the company’s under-construction pipeline represents the equivalent of two-and-a-half years of embedded gross rooms growth, Sorenson said. The remainder of the pipeline is another two-and-a-half years of growth. The legacy Starwood Hotels & Resorts Worldwide brands account for about 30% of the development pipeline, he said. In terms of its luxury and upper-upscale brands, Sheraton is second only to the Marriott brand, he said. More than a quarter of Sheraton's existing portfolio is under or has committed to renovation, he added.
Marriott’s limited-service brands are growing rapidly, and its pipeline of mostly upscale brands has more than 285,000 rooms, Sorenson said. Outside of North America, the limited-service pipeline is now nearly three-and-a-half times the size it was in 2014, he said.
“We are growing these brands in markets around the world with a variety of approaches from modular construction to urban high rises to multi-brand hotel complexes,” he said. “We are developing new prototype designs for Fairfield Inn and TownePlace Suites to better suit smaller markets, and we continue to add development top talent to make these deals happen, because the growth opportunity is meaningful.”
Citing data from STR (parent company of Hotel News Now), Sorenson said more than one in three rooms under construction in the United States will fly one of Marriott’s flags. On a global scale, that’s one out of every five hotels under construction. The company expects to see net room growth of approximately 5.5% this year, with a 1% to 1.5% increase in rooms deletions, he said.