Issue 3: Friday February 19th 2010

Marriott expects upturn to start this year

Marriott International said last week that the recession will reach its inflexion point this year and that it expects revpar, and perhaps even rate growth, to turn positive at some point in the second half of 2010.

And it has earmarked at least $300m to make opportunistic investments, probably in the second half.

The two big issues in the hotel industry are when will revpar recover and when will hotels trade at bargain prices? Arne Sorenson, president and chief operating officer, admitted he did not know for sure but pointed out that even if he did, it would not change Marriott's business strategy.

"Nor would the answers change our fundamental confidence in the strength of this industry and of Marriott," he added, during a conference call discussing the company's final quarter results.

The figures for the quarter came in at the favourable end of expectations for North America and were "quite a bit better" than expectations for hotels outside of North America.

December and January saw meaningful improvement in occupancy. Revpar in North America will turn positive in the second half of 2010 and in the rest of the world Sorenson said revpar will turn positive faster, end higher in 2010 than it finished in 2009.

Sorenson extolled the virtues of the Marriott fee model, pointing out that last year the company made $1.1bn, including $930m from base and franchise fees. But he also admitted that in North America even a 20% increase in property level profit will trigger incentive fees from only a few additional hotels.

Outside of North America the opportunity to earn incentive fees is more immediate. During 2009, $103m was earned internationally in incentive fees, split 15% in the Caribbean and Latin America; 20% in Europe; nearly 30% in the Middle East and Africa; and about 35% in Asia including $15m in China alone.

Marriott's development teams are keenly focused on international markets, said Sorenson. There are 130 hotels in the pipeline of which 90 are under construction.

During the fourth quarter, Marriott opened 10,000 rooms with openings exceeding forecasts thanks to faster build rates. The pipeline shrank slightly to now stand at close to 100,000. The quarter saw 10,000 rooms added but 5,000 rooms cancelled. With the openings the net effect was 5,000 negative. During 2010, Marriott expects to open 25,000 to 35,000 rooms.

Revpar in the final quarter was down 11.9% in North America, a result made a percentage point worse by the fact that the fiscal final quarter in 2009 had a week less than in 2008 (Marriott does not follow calendar quarters).

In international markets the fourth quarter saw occupancy increase slightly and in December were up four percentage points year-on-year. For the full year, occupancy was down five percentage points for company managed hotels.

Looking ahead, it is also international markets where results will be strongest. Perhaps surprisingly, Europe is expected to perform strongly with occupancies in London and Paris expected to increase by double digits during the first quarter.

In China occupancies increased by over five percentage points during the final quarter although oversupply in Beijing and Shanghai slowed revpar growth.

Overall, outside North America, systemwide revpar is expected to fall by between 2% and 5% in the first quarter. In North America the drop is anticipated to be between 7% and 8% in revpar.

For the full year, Marriott said it was anticipating revpar growth in Asia, Europe and the Caribbean - Latin America region. Each point of revpar adds about $10m to $15m in fee revenues.

Sorenson said that the expected improvement is driven in part because the darkest period of post-financial meltdown is now past. This has ended the paralysis that gripped business and consumers. It means there is an improvement even without much of an economic recovery.

The first phase of the recovery is about building occupancy, said Sorenson, and then shifting the mix of business towards higher rate rather than increasing rate itself. Rate growth lags occupancy by a couple of quarters and Sorenson said it will probably be 2011 before Marriott again has some true pricing power.

System growth will continue to be a key driver of overall revenue and Marriott has about $300m to spend on opportunities which might be mezzanine loans or sliver equity. This $300m is on top of a cap ex budget of between $150m and $200m. Owners are expected to spend around $1.5bn on renovations and brand initiatives.

The pace of conversions will increase, believes Sorenson, as lenders and owners accept the need to recognise losses and make way for the capitalised hotel investors currently waiting to pounce. He estimated there was nearly $40bn of hotel mortgage backed securities coming due in the next two years and he thinks this will encourage more properties to change hands.

During 2009 there were just 19 hotels converted to Marriott brands, including seven hotels that joined the new Autograph brand. This latter brand delivers a fee equivalent to a full-service franchise product, said Sorenson.

An area of Marriott's business that is not likely to recover to pre-crisis levels in terms of its share of total profits is timeshare. This reached around 30% of total company profits at its peak which was 2004 or 2005. It has dropped back to 15% and Sorenson said the chances of its regaining its previous share were "very, very slight".

The adjusted EPS figure for the fourth quarter was 32 cents, well ahead of average Wall Street estimates of 26 cents. Although the company made a loss in the fourth quarter a year ago, stripping out one-offs yielded an EPS of 33 cents. Reported profit for the latest quarter was $106m with revenue down 10% to $3.4bn.

HA Perspective: Marriott has a lot riding on the opportunities to convert existing hotels as they change hands. The problem so far is that they have not changed hands. Some will but it looks increasingly unlikely that we will see the kind of radical sell-offs that took place during the 1990s recession.

This poses a difficult problem for Marriott. Its pipeline is currently shrinking and is likely to keep shrinking for the next few years in the absence of a flood of conversions.

With a revpar revival unlikely to deliver significant incentive fees in the near-term, at least in North America, Marriott seems set for a lack lustre recovery.

Acquisitions, particularly of appropriate chains, could fix this. Marriott is probably the bluest of the blue chip companies in the global hotel sector. It is depressing if at this stage of the cycle it feels it cannot convince the capital markets that it can buy hotel assets and recycle the capital appropriately.