Ahead of Starwood merger, Marriott sees positive second quarter

(Renaissance Paris)

As Marriott International enters the home stretch of its merger with Starwood, the company released its results for the second quarter of the year.

Marriott’s net income for the quarter totaled $247 million, compared to $240 million in the same quarter last year. Reported diluted earnings per share were 96 cents in the second quarter of 2016, a 10-percent increase over the second quarter of 2015.

Arne Sorenson, president and CEO of Marriott International, shared three major observations at the start of Thursday morning’s earnings call. “You will not be surprised that U.S. economic growth has been slow,” he said. As such, room sales from Marriott’s 300 largest corporate customers have weakened—but, he added, group business is still strong. For the second half of the year, Marriott is assuming that economic growth will remain on the same slow pace. 

Secondly, the stronger dollar has meant fewer international guests. As such, international roomnights in major gateway cities like New York and Miami have declined 10 percent to 15 percent. For the country as a whole, international nights declined 3 percent. 

And thirdly, regional issues have had an effect on performance in certain areas. For example, terrorist attacks in Paris, Brussels and Istanbul have affected Europe’s revenue per available room numbers, while the Zika virus has had an impact on South American/Caribbean results and declining oil prices have affected numbers in cities dependent on that industry.  

Of course, one of the biggest issues facing Marriott is the finalization of the Starwood acquisition, which could be completed within weeks. “We have received all necessary clearances except for China,” Sorenson said. That country’s government is in the second phase of reviewing the plan for approvals, and the phase is scheduled to end on Aug 9. Still, Sorenson did mention that the Chinese government can, in theory, take deals to a third phase. “We can't speak for the Chinese government and we do regard that they have to run their process in a way that meets their needs,” Sorenson said. “We are in communication and we believe that they have the information they need in hand.” The Marriott team is “optimistic”  that the deal should be finalized in the coming weeks.  

By the Numbers

Marriott revenues totaled $3.9 billion in the quarter compared to revenues of approximately $3.7 billion for the second quarter of 2015. Base management and franchise fees totaled $421 million compared to $412 million in the year-ago quarter. The year-over-year increase largely reflects higher RevPAR and unit growth, partially offset by $9 million of lower deferred fee recognition, $6 million of unfavorable foreign exchange and $3 million of lower relicensing fees.

Second-quarter 2016 adjusted net income totaled $265 million, a 10-percent increase over 2015 second quarter net income. Adjusted diluted EPS in the second quarter totaled $1.03, an 18-percent increase from diluted EPS in the year-ago quarter. Adjusted net income and adjusted diluted EPS for the second quarter of 2016 exclude $25 million ($18 million after-tax and 7 cents per diluted share) of transition and transaction costs related to the Starwood acquisition. On April 27, the company forecasted second quarter diluted EPS of 96 cents to $1, which did not include transition and transaction costs related to the acquisition.

For the 2016 second quarter, RevPAR for worldwide comparable systemwide properties increased 2.9 percent (a 2.3-percent increase using actual dollars). 

In North America, Marriott’s comparable systemwide RevPAR increased 3.2 percent (a 3.1-percent increase using actual dollars) in the quarter, including a 2.2-percent increase (a 2.1-percent increase in actual dollars) in average daily rate. 

RevPAR for comparable systemwide North American full-service hotels (Marriott Hotels, Renaissance Hotels, Autograph Collection Hotels, Gaylord Hotels, The Ritz-Carlton and Edition) increased 3.7 percent (a 3.5-percent increase in actual dollars) with a 1.8-percent increase (a 1.6-percent increase in actual dollars) in average daily rate. 

RevPAR for comparable systemwide North American limited-service hotels (Residence Inn, Courtyard, Fairfield Inn & Suites, TownePlace Suites, SpringHill Suites and AC Hotels by Marriott) increased 2.8 percent (a 2.7-percent increase in actual dollars) in the second quarter of 2016 with a 2.3-percent increase (a 2.2-percent increase in actual dollars) in average daily rate.

International comparable systemwide RevPAR rose 1.9 percent (a 0.8 percent decline using actual dollars) in the second quarter of 2016.

Analysts at Baird Equity Research called Marriott's 2Q16 earnings report "disappointing" given that adjusted earnings before interest, taxes, depreciation and amortization came in "slightly below the low end of the guidance range" (and missed consensus as well as Baird's estimate) and net unit growth is now expected to be 6.5 percent, a decline credited to delayed hotel openings primarily in North America, the Middle East and Africa. 

Rooms and the Pipeline

“Leading brands and a focus on bottom-line results delivered strong results in the second quarter," Sorenson said in a statement before the earnings call. "While hotel performance reflected generally slower economic growth, leisure travel demand remained robust and group business performed well. Attendance at group meetings was on track during the quarter, group cancellations remain low and we continue to see strong future group bookings. We increased property-level house profit margins at our company-operated hotels, improving efficiency while delivering outstanding service to our guests."

Sorenson also commented on the company's growth: "We added nearly 11,000 rooms to our lodging portfolio during the quarter, with one-third of those rooms in markets outside North America.” The development pipeline had more than 285,000 rooms at the end of the quarter.

Sorenson also praised the company’s “asset-light” strategy, which he said minimizes Marriott’s exposure to economic cycles—“even as our brands grow their distribution,” he said. “We anticipate growing our worldwide rooms distribution by 6.5 percent, net, in 2016 from Marriott’s 19 legacy brands alone.”

Marriott added 80 new properties (10,701 rooms) to its worldwide lodging portfolio in the 2016 second quarter, including the Skopje Marriott in Macedonia, the Minsk Marriott in Belarus and the Hotel Nassau Breda, an Autograph Collection hotel in the Netherlands. Six properties (549 rooms) exited the system during the quarter. At quarter-end, Marriott’s lodging system encompassed 4,554 properties and timeshare resorts for a total of more than 777,000 rooms.

Marriott’s worldwide development pipeline totaled 1,762 properties with more than 285,000 rooms at quarter-end, comprising 608 properties with roughly 106,000 rooms under construction and 219 properties with approximately 33,000 rooms approved for development, but not yet subject to signed contracts.

Looking Ahead

For the 2016 third quarter, Marriott expects standalone comparable systemwide RevPAR on a constant dollar basis will increase 3 percent to 4 percent worldwide.

For full-year 2016, Marriott expects standalone comparable systemwide RevPAR on a constant dollar basis will increase roughly 3 percent worldwide. Adjusted EBITDA is expected to increase 10 percent for the full-year 2016. 

The company anticipates gross room additions of roughly 7.5 percent, or 6.5 percent, net, worldwide for Marriott standalone for full-year 2016. These estimates are 50 basis points lower than anticipated a quarter ago due to delayed openings for some hotels in North America, as well as the Middle East and Africa.

Ultimately, Sorenson said that Marriott’s forecasts were based on the current pace of gross domestic product growth. “Is it possible that the U.S. economy will perform worse?” he asked rhetorically. “Of course. But look at the data.” A range of reports, he said, indicate that the overall economy will grow— “if anemically.”