Article Summary:

Marriott International had hoped to project higher unit growth in the coming years, but economic uncertainty and growing costs are tempering their numbers.

Primary Category: Earnings Recaps

Secondary Categories: Americas, Brands, Development, News, OTAs, Transactions

BETHESDA, Maryland—Marriott International continually posts consistently high pipeline numbers each quarter, with Q3 2019 being no different, but President and CEO Arne Sorenson said a number of factors are holding the company back from reaching the pace it wants.

Marriott opened nearly 18,000 rooms in the third quarter, topping all of its competitors, Sorenson said during the company’s third-quarter earnings call. The development pipeline grew to a record 495,000 rooms, a 5% year-over-year increase, with 214,000 of those rooms under construction. Almost 40% of the rooms in the pipeline are in the upper-upscale and luxury segments in high revenue-per-available-room markets.

For full-year 2019, the company expects its room count will increase 5% to 5.25% net, which reflects increasing construction delays offset by lower-than-expected room deletions, and the company expects similar numbers in 2020, Sorenson said. There are continued construction delays in North America, particularly in the top 25 markets, as well as in the Middle East and Europe. Signings for 2019 remain strong and are nearing record 2018 levels, he said.

“We’ve been signing high-quality deals every year, and every year is not a record,” Sorenson said. “We have been, in many respects, surprised to the upside about how the new projects are coming into the pipeline, and that continues well into 2019, even with the sort of apprehension in the market.”

That led Marriott to believe it would see unit growth increase in 2020 and in years to come from where the pipeline is today, Sorenson said. Instead, the latest numbers show net unit growth to be roughly comparable year to year. Still, the number of deals Marriott has seen canceled isn’t growing, so projects are not being abandoned, which would be the worst-case scenario, he said.

“Instead, what we're seeing is a sort of all-of-the-above for delays,” he said.

That means a longer permitting process in the pipeline’s greater urban mix, higher construction costs in many markets around the world, Sorenson said. That’s offset somewhat by the continued availability of debt financing with attractive terms, he said. Still, there is some apprehension about the economy generally, which has some owners being more deliberate about the speed in which they progress with projects.

Financial performance
Marriott reported comparable systemwide constant dollar RevPAR grew by 1.5% year over year in Q3 2019, including1.3% in North America and 1.9% in every other global region, according to the company’s earnings release.

The company’s net income totaled $387 million, a 23% year-over-year decrease. Adjusted net income amounted to $488 million, an 18% year-over-year decrease. Adjusted earnings before interest, taxes, depreciation and amortization totaled $901 million, which was flat compared to Q3 2018.

Base management and franchise fees totaled $821 million, a 5% increase compared to Q3 2018. Incentive management fees totaled $134 million, an 11% year-over-year decrease.

Owned, leased, and other revenue, net of direct expenses, came to $67 million compared to $82 million in Q3 2018.

Marriott reported $6 million in expenses and recognized $9 million of insurance recoveries related to the data breach from November 2018.

As of press time, Marriott’s stock was trading at $133.69, up 23.8% year to date. The Baird/STR Hotel Stock Index was up 13.3% for the same time period.

Expanding all-inclusive footprint
Marriott expanded its budding presence in the all-inclusive space with its planned acquisition of Elegant Hotels Group, which owns and operates seven hotels in Barbados, Sorenson said. The deal should close by the end of the year. Marriott had launched its all-inclusive platform just months before.

The all-inclusive space has grown steadily over the last several decades, Sorenson said. It has developed as a largely leisure space, with some group business exceptions. Sorenson said the addition of all-inclusive resorts will strength the offering of Marriott’s Bonvoy loyalty program.

The decision to open up its existing brands to the all-inclusive space gave Marriott a new type of presence in the Dominican Republic and Mexico. The Elegant Hotels Group’s portfolio is entirely in Barbados, but Sorenson said the deal isn’t as concentrated in one market is it might seem as it comprises only seven properties with about 700 rooms in total.

“We're not in any way concerned about our ability to continue, both to market that in the U.K., which has been the strongest source market for those hotels, and increasingly open this market up to American travelers, who will find the paradise of Barbados, I think, as attractive as many of the other markets in the region.”

Marriott will continue to grow in this space following the theory that a loyalty program should be able to deliver a good, cost-effective value for all-inclusive hotels, he said.

The OTAs
The most significant thing Marriott has done with online travel agencies has been taking a newer approach in recent years, Sorenson said.

“We’ve been more aggressive and essentially dialing back the business we will take from OTAs when we project we will be in high occupancy,” he said. “We’ve had that right for a few years; we didn’t use it as aggressively as we’re using it now.”

One area that Marriott found alignment with Expedia is in the wholesale space, Sorenson said. Wholesale is under its own type of third-party system, and it can make pricing integrity a challenge because it’s passed from one intermediary to another and the company often doesn’t know where a room is sold, he said.

In talking through the situation with Expedia, the OTA thought it could use its technological prowess to help put some discipline in the wholesale market and make it easier to manage from both an integrity perspective as well as reduce the cost of business that comes through that system, Sorenson said.

“The teams are working aggressively, and we think there will be some good outcomes,” he said.

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Headline: Marriott’s unit growth slowed by construction delays

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