BETHESDA, Maryland—Talks of a potential business slowdown in North America are not fazing Arne Sorenson. The president and CEO of Marriott International said during the company’s earnings call Thursday that corporate revenue and group bookings drove revenue per available room during the second quarter and that the second half of the year should be even stronger. RevPAR growth in North America for full-year 2012 is expected to fall between 6% and 8%.
In fact, many Marriott hotels in the U.S. had to turn away high-rated business between April and June because they were full.
“As our hotels reach capacity, we have less room to grow occupancy. This is good news,” Sorenson said. “As occupancy builds further, room-rate improvement should follow.”
Outside North America, however, is a different story. Marriott’s international RevPAR is expected to end 2012 with 5% to 7% year-over-year growth, down from the 6% to 8% range the company forecasted at the end of Q1.
“In Europe, Q3 RevPAR will be helped by the Olympics,” Sorenson said. “At (the) same time, a weak economy is creating headwinds.”
Sorenson outlined specific opportunities and challenges both domestic and international:
System growth
Marriott’s future growth vehicles differ depending on the region.
In the U.S., Marriott has 10% of the open rooms under its brand portfolio but 20% of the number of rooms under construction. The company has 15 full-service hotels in its U.S. pipeline.
However, “financing remains very tight,” so there is no concern with overbuilding, Sorenson said.
Because of where the industry falls in this cycle, Sorenson said Marriott’s primary growth vehicle in the U.S. is franchise sales, which is coming disproportionately from the Autograph Collection brand.
He said Marriott is “still optimistic about the close of the Gaylord deal,” referring to the company’s bid of $210 million in late May to acquire the branding and management of four hotels and about 7,800 rooms.
Outside the U.S., however, Marriott reported lagging growth.
“We continue to see conversion opportunities around the world, but they’re taking longer and requiring more renovations,” Sorenson said.
For this reason, Marriott decreased its international pipeline projection. The company expects to open 95,000 to 105,000 rooms between now and 2014. The slowdown also forced Marriott to tweak its projected fee revenue down approximately $20 million dollars.
Market specific
The biggest cause of delay in Marriott’s international pipeline comes in China, where Sorenson said a “government-encouraged slowdown” is taking place.
About a dozen projects previously under development in China have halted construction. However, Sorenson said developers are optimistic they will be restarted “once the political transition takes place” and China returns its focus on growing secondary and tertiary markets.
“I can’t tell you for certain the 12 openings will open in 2013 or whether some will shift to 2014,” he said. “We’re not seeing projects get abandoned.”
Sorenson said no one should be worried about oversupply in China and that “we’re not talking about a recessionary environment.”
Back in the U.S., Marriott experienced double-digit RevPAR increases in the second quarter in Miami, Philadelphia, New Orleans, San Diego and Los Angeles. RevPAR rose 10% across Marriott’s entire portfolio in California.
The second quarter “includes a couple of months which are high occupancy months seasonally,” Sorenson said. The success we’ve had with group business has driven a higher mix in hotels from those streams of business.”
However, filling hotels with group business has handcuffed Marriott’s ability to drive transient rate, and Sorenson sees an “overwhelming opportunity to convert this demand stream into better-priced business.”
Capital city
Washington, D.C., remained a challenging market for Marriott in Q2. Weak RevPAR growth in the city affected Marriott’s overall U.S. RevPAR growth nearly a point, Sorenson said. But interest in the upcoming election should drive political business, he said, and Marriott expects D.C. to improve in the second half with more group business already on the books.
“(2013) should be a good year overall in this market,” Sorenson said.
One potential setback in D.C. could be a freeze or decrease in annual per-diem rates, which the government will announce in August. “We’ll be watching this carefully,” Sorenson said.
He said the percentage of Marriott’s U.S. demand that comes from government or contractor business is in the mid-single digits, but that a per-diem decrease could have detrimental consequences.
“Depending on how aggressive (the General Service Administration is), they may well be pricing employees where they won’t be able to stay in full-service hotels, certainly (not) in center cities,” Sorenson said. “They’ll be priced out of the market and pushed to limited-service hotels in the suburbs, and depending on how hard they push, it’s quite possible they could push too hard and then hear from their folks that it doesn’t work. Then they will revisit that.”
Sorenson said Marriott is already looking at yielding away from government business as higher-rated demand returns.
