After middling Q1, Marriott shifts attention to Starwood

(Marriott Q1 Earnings)

It's choppy out there.

Marriott International reported its first-quarter numbers a day after Hilton Worldwide, and while the company beat expectations, year-over-year percentage gains flagged. Still, Marriott International CEO Arne Sorenson showed little concern over contraction within the overall hospitality industry.

"Downturn? I don’t see that," he said. "In the last 25 years, there has never been a supply-induced downturn. What causes [a downturn] is change in the demand environment and that's not going to occur unless there is a meaningful change in GDP growth. If you are a person that is more pessimistic about GDP then you will be more more pessimistic about the industry."

Meanwhile, GDP growth in the first quarter expanded at its slowest rate in two years. GDP in the quarter grew a slight .5 percent. 

Q1 Highlights

  • Net income totaled $226 million, a 9-percent increase over the same period last year;
  • North American RevPAR rose 2.4 percent;
  • The company's adjusted operating income margin increased to 52 percent compared to 48 percent in the year-ago quarter;
  • The company's worldwide development pipeline increased to more than 275,000 rooms, including approximately 29,000 rooms approved;
  • More than 10,000 rooms were added during the first quarter, including 1,500 rooms converted from competitor brands and over 3,300 rooms globally;
  • Acquisition of Starwood Hotels & Resorts Worldwide is on track to close mid-2016.

Asia-Pacific was a bright spot for Marriott in the quarter. RevPAR was up 7.4 percent and occupancy was up 4.1 percent over the same time last year. This helped offset a dismal quarter for Middle East and Africa, where RevPAR dropped 2.3 percent over the same time last year and ADR was down 3.3 percent.

Meanwhile, Marriott's luxury business had a propitious quarter. In North America, RevPAR at Ritz-Carlton increased 6.2 percent over the same time a year ago, and rates rose 3.6 percent.

On the limited-service side, Fairfield fared the worst with only 0.5-percent growth in RevPAR and a dip in occupancy, down 1 percentage point. Overall, occupancy at Marriott's full-service and limited-service hotels in North America dropped 0.1 percentage points.

In regard to destinations, Sorenson lauded Atlanta, Los Angeles and the California desert for RevPAR gains, while adding that RevPAR was down in Chicago and Philadelphia.

Group business has also been a bright spot. Marriott said group booked revenue is up 7 percent for the remainder of year, with strength in Q2 and Q3, and in Q2, April and June better than May, similar to what Hilton reported yesterday.

Starwood Speak

The acquisition of Starwood has now become clearer after Anbang bowed out, but Sorenson was remiss to add too much more color to what has already been reported.

In prepared remarks, he said: "Our planned acquisition of Starwood Hotels & Resorts is on track. Shareholders of both companies overwhelmingly approved proposals relating to the merger and we continue to look forward to a mid-2016 closing. Toward that end, integration teams from both companies have been working over the last several months to ensure a smooth transition. We look forward to creating the largest lodging company in the world."

During the Q1 call, Sorenson further explained the benefits of the Starwood merger. "The acquisition makes us more global and we will leverage trends and seize opportunities," he said. With the integration of Starwood, a third of Marriott's rooms and fees will come from outside the U.S.

Further to integration, one analyst asked about how Starwood structured its management contracts and if this would be cause for concern. No, Sorenson said. "Our structure is generally the same in regards to rights and obligations," he said, adding that Starwood skews more full service and more toward managed hotels compared to Marriott, which does more on the franchise side. He added that, he believed, REIT Host was both Marriott's and Starwood's biggest owner.

Direct, Loyalty & Other Notes

Marriott, similar to Hilton, has undertaken an initiative to drive direct bookings through what it calls Marriott Rewards Member Rates. Sorenson admitted that the company has not put as many dollars in marketing those rates yet. "They are visible online," he said, "and the early response has been positive. We optimistic about this approach in driving more direct bookings and awareness."

Much attention has also been centered on the integration of Marriott Rewards and Starwood Preferred Guest—the two loyalty programs administered by each company. "It's a work in progress," Sorenson said, adding that there are many vendors and interested parties, including credit card companies. "A number of partners are keenly interested," he said. "We want to make sure we work with them successfully. We want a program that allows customers to have benefits of the full portfolio of hotels."

In regard to new development, Sorenson sounded wary. "Financing in the last six months for construction is higher. Loan pricing and recourse levels have increased, and construction costs are higher due to labor. Longer term, it will discourage marginal projects."