Marriott International saw a solid first quarter, but company officials see a brighter future in 2016’s upcoming quarters, especially with the pending acquisition of Starwood Hotels & Resorts Worldwide.
BETHESDA, Maryland—Like many hotel companies, Marriott International had a relatively weak first quarter of 2016, but officials for the company believe the rest of the year holds great promise.
During Marriott’s Q1 earnings call on Wednesday, CEO and President Arne Sorenson cited STR pipeline data showing one in four hotels under construction in the U.S. today will fly a Marriott flag. That number is one in seven worldwide. The company signed more than 100,000 hotels in both 2014 and 2015, he said, and those signings give Marriott great confidence in the openings in the years that lie ahead.
Contributing to that will be the addition of Starwood Hotels & Resorts Worldwide’s portfolio following the closing of the merger, which is expected to happen after 30 June. Marriott is waiting regulatory approval from China, the European Union, Mexico and Saudi Arabia, he said.
“With our Starwood acquisition, we’ll become a more global company and able to better leverage global trends and seize opportunities,” he said. “Following the acquisition, we estimate more than one-third of rooms and fees come from outside of the U.S. … With a broader brand portfolio, we will be able to offer the right brand for each asset and market. This means we can play in more sandboxes than many of our competitors, winning the highest value opportunities.”
Worldwide revenue per available room for Marriott’s legacy units is projected to increase between 3% and 5% for the full year, said Leeny Oberg, EVP and CFO, with an expected net room growth of 7%. Fee revenue should be roughly $2 billion, she said, which is consistent with the forecast from February. Marriott’s projections for standalone adjusted earnings before inflation, taxes, depreciation and amortization is $1.9 billion to $1.965 billion, which is about $15 million more than the February forecast.
Marriott is eagerly awaiting Starwood’s first quarter earnings report, she said. Starwood will release its first quarter earnings report on 3 May. Because of the pending merger, the company will not hold an earnings call.
As of press time, Marriott’s stocks were up 3.28% year to date. The Baird/STR Hotel Stock Index was up 3.33% for the same time period.
Guest types and the economy
Sorenson said group business should see an increase in the second and third quarters, with strong numbers in April and June in particular. The fourth quarter of 2016 will be good as well, he said, but not as much as the prior two quarters.
He said group demand should be a steady force throughout the year, but the company is still reliant on a larger economic bounceback.
“The biggest question at the moment obviously is not so much about group but is about the strength of transient demand,” he said. “Transient demand correlates most closely with GDP growth.”
The latest U.S. GDP number released the morning of the call showed only 0.5% growth, which Sorenson called anemic even within the context of the fairly moderate U.S. recovery from the recent recession.
“The question for all of us, including for you, is do we expect the U.S. economy to perform at higher growth rates in the quarters ahead,” he said. “We do.”
There was profoundly negative sentiment in the early part of 2016, he said, but that has improved significantly. Statistics for employment and growth suggest the economy is poised to perform better than that 0.5% in the first quarter, he said.
Sorenson described hotel performance within the U.S. as a series of short stories about individual markets. Houston, Texas, was weak because of the oil and gas sector. New York City is hurting because of supply growth and the strength of U.S. dollar’s impact on international arrivals. San Francisco was strong because of the healthy U.S. digital economy.
“When we roll all these anecdotes together, the view about these markets, what we see is a collection of short stories, but not a common theme, let alone the same author,” he said. “So our view as reflected in our continued 3% to 5% RevPAR growth guidance, is we expect the U.S. economy to bump along with moderate GDP growth, and therefore moderate occupancy growth which, when combined with ADR growth, should deliver 3% to 5% RevPAR growth for the year.”
Starwood details still developing
Marriott officials aim to have in place by 1 January 2017 a run rate that would allow them to achieve $250 million in synergies for the year through the merger with Starwood, Oberg said. But she also noted there will be some transition costs for the technical systems as the companies will use parallel systems until they merge. Oberg expects systems to be almost fully integrated by the end of 2017.
Marriott officials are excited about the growth opportunities for the overall hotel portfolio after adding the brands together, she said.
“From a unit growth perspective, that first and foremost, we see opportunities there,” she said. “We also see some opportunities through a variety of our partnerships as we think about being a much larger company and ways that as we become stronger and bigger that we’ll be able to capitalize on those. Last but not least, as we look at what we believe we can do on the hotel margin side that we would benefit through our fees through being able to deliver better profits to hotel owners.”
The Marriott and Starwood loyalty programs continue to be a work in progress, Sorenson said. The two will likely run separately for the next two years as company officials work to integrate systems and figure out how to best combine Marriott Rewards and Starwood Preferred Guest in a way that would keep guests excited about the joint program.
Sorenson said timeshare and credit card companies have shown significant interest in how the merged loyalty program comes together.
“We’ll be working to get as much functionality between those programs as we can and eventually, hopefully a full merger, but we’ll see how that goes,” he said.