Three years ago, Marriott International and Starwood Hotels & Resorts Worldwide were two different companies with different loyalty programs and different business models. Today, as the three-year anniversary of their merger announcement approaches (and just after the two-year anniversary of its completion), Marriott is still working out the various challenges of combining two massive businesses into the industry’s biggest powerhouse, a key point in the megachain's just reported third-quarter results.
In light of weaker-than-expected worldwide RevPAR growth of 1.9 percent during Q3, primarily due to challenges in North America (where RevPAR growth was 0.6 percent compared to the expected 1.5 percent to 2 percent), Marriott had to adjust its full-year 2018 expectations, with RevPAR growth in North America now projected to be 1 percent.
Integration Winding Down
“We are in the home stretch on integrating the companies and are pleased with the results,” Marriott CEO Arne Sorenson said ahead of a quarterly earnings call with investors. In August, Marriott integrated the loyalty programs from both Starwood and Ritz-Carlton into a unified program with 120 million members—and the company is already seeing results, Sorenson said during the call, with accelerated bookings, higher redemptions and increased reservations through direct digital channels.
The merger, he said in response to a question from David Kent of Jefferies Group, means Marriott will have access to granular data that allows the company to look at spending patterns of former Starwood Preferred Guest members for signs of changes in the wake of the merger. “We are seeing eyeballs looking at hotels in the combined set,” he said. “The preliminary data gives us comfort that what is logically obvious will turn out to be reality. What is obvious is that by offering customers more choices, and having more customers going to one site to see all of the portfolio, we will increase our share of wallet.”
Beyond the Merger
Even with all the moving pieces involved in the Starwood integration, Marriott has not stood still, Sorenson said during the call, citing the company’s nascent JV with Alibaba, the expansion of its Tribute Portfolio Homes platform in Europe and the upcoming inaugural season of The Ritz-Carlton Yacht Collection, set to launch (literally) in February 2020. Behind the scenes, the company is rolling out a new fee structure that will help manage costs for services, and Sorenson said it “expect[s] three-quarters of hotels to see costs for services and programs decline.”
During the call, Sorenson made a point of acknowledging the ongoing labor strikes in six North American cities, and praised the deals reached with Unite Here Local 2850 in Oakland and Local 24 in Detroit to end the walkouts. (Details surrounding the deal, which involve the Oakland Marriott City Center and Detroit's Westin Book Cadillac, were not made public.) “We negotiated in good faith and we are making progress,” Sorenson said, predicting more associates would be returning to work soon. “The strikes won't have a material impact on earnings,” he predicted, and noted the affected hotels have continued to operate with full occupancy.
Marriott’s Q3 comparable systemwide constant dollar RevPAR rose 1.9 percent worldwide, 5.4 percent outside North America and 0.6 percent within North America. Third-quarter reported net income totaled $483 million, flat compared to prior-year results. Third quarter adjusted net income totaled $598 million, a 51-percent increase over prior-year adjusted results.
“Our results in the third quarter highlight the resiliency of our asset-light model and our ability to generate cash,” said Sorenson. “Year-to-date through November 5, we have already returned more than $3.1 billion to shareholders through dividends and share repurchases and now believe we could return roughly $3.7 billion in 2018.”
Base management and franchise fees totaled $781 million in Q3, a 14-percent increase over he year-ago quarter. The year-over-year increase in these fees is primarily attributable to higher RevPAR, unit growth, and higher credit card and residential branding fees.
Third quarter incentive management fees totaled $151 million, a 9 percent increase compared to $138 million in the year-ago quarter. The year-over-year increase is largely due to higher net house profit at properties in Europe and the Asia-Pacific region, according to the company.
The company added 106 new properties with 18,121 rooms to its worldwide lodging portfolio during the quarter, including The Barcelona Edition, the W Kuala Lumpur and the JW Marriott Panama and 10,000 rooms in international markets. The portfolio growth included more than 1,500 rooms converted from competitor brands and approximately 10,000 rooms in international markets.
At the same time, Marriott deleted 40 properties with 6,520 rooms from its portfolio during the quarter, including a collection of second-generation Fairfield Inns that Sorenson said the company had worked with the owner to exit the system. “That was the right answer because the hotels did not justify the capital to remain competitive." Similarly, after working with an owner in Dubai on a franchise contract, the two businesses decided to part ways on an 1,800-room project, similar to another development in Las Vegas. Jared Shojaian, a director and senior analyst at Wolfe Research, noted net room guidance implied that exits may have stabilized, and asked if the recent increase in exits was a one-off. “We are quite satisfied with the way all of those discussions came out,” Sorenson told Shojaian. “The challenge is when you have big [deletions], whether a portfolio or individual properties, they impact the quarter.”
At quarter's end, Marriott’s system had 6,782 properties and timeshare resorts with nearly 1,299,000 rooms in its portfolio, while the company’s worldwide development pipeline had 2,790 properties with roughly 471,000 rooms, including 1,139 properties (with more than 212,000 rooms) under construction and 293 properties (with nearly 50,000 rooms) approved for development, but not yet subject to signed contracts.
“At the time of the acquisition, we stated our goal [was] to recycle assets totaling more than $1.5 billion by the end of 2018,” Sorenson said. “We have already exceeded that goal, recycling more than $1.8 billion since the deal closed.”
Sorenson said that the company’s Q4 2018 comparable systemwide RevPAR will increase approximately 2 percent worldwide on a constant dollar basis, roughly 1 percent in North America, and 5 percent to 6 percent outside North America. “Our forecast for RevPAR in North America reflects an estimated 110-basis-point headwind due to the 2017 hurricane relief efforts in Texas and Florida and it also reflects the slightly weaker than expected transient demand the industry experienced during September,” he said. “Trends in most international markets are expected to remain strong.”
For the full-year 2018, Sorenson said that the number of rooms in Marriott’s portfolio is likely increase nearly 7 percent gross, while room deletions should total nearly 2 percent, resulting in net rooms growth of roughly 5 percent. “For the full year 2019, we anticipate gross room additions will increase at a rate similar to 2018, but deletions should moderate to 1 percent to 1.5 percent for the year, resulting in net rooms growth acceleration to roughly 5.5 percent,” he said.
“For full-year 2019, based on our early budgeting analysis, we expect comparable systemwide RevPAR on a constant dollar basis will increase 2 percent to 3 percent worldwide, 1 percent to 3 percent in North America, and 3 percent to 5 percent outside North America.”