Starwood integration dampens Marriott's Q3 numbers

Costs related to the acquisition of Starwood Hotels & Resorts Worldwide were a drag on Marriott International's third-quarter profits, but CEO Arne Sorenson was buoyant during the company's earnings call, touting the long-term benefits of the merged companies.

Marriott said that merger-related costs and charges totaled $228 million in the quarter compared to none at the same time last year. Included in these costs and charges were $186 million of severance and retention costs, $24 million of integration costs and $18 million of transaction costs.

Q3 2016 marked the first quarter after Marriott's completion of the acquisition of Starwood. When the deal did close back in September, Marriott said it was "confident the company [could] achieve $250 million in annual corporate cost synergies."

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While the call was long, Marriott was short on any compelling information related to the merger that wasn't already made public. What remains clear is Marriott's strict attention to its now combined loyalty program—a platform that serves as the basis for guest engagement and conversion.

"Had we not merged, would we build brands from scratch? Probably not," said Sorenson (the Starwood acquisition added 10 new brands). "Our biggest expense from a brand perspective is marketing. We now go to market through our loyalty platform, our website and app—they allow us to market the portfolio. It drives conversion and makes the economics of each brand better. It's why we’ll keep all the brands."

One of the benefits of the loyalty program is member access to member-only rates, which drives direct bookings, the cheapest and most effective way to procure business. While Marriott doesn't yet have much data on the combined impact from the merger on direct bookings, Sorenson showed encouragement. "We are still assessing the impact, but there have been a high level of sign ups since the merger," he said.

Since member-only rates debuted, Sorenson said there was between some 800,000 and 900,000 new signs ups on the loyalty program. "The perception was that rates existed that were cheaper on other channels. We wanted to break through that noise," he said. "That you get competitive rates booking with us and even a discount if you do. We've seen good pick up of that."

Toward that, Sorenson said that by acquiring Starwood, and growing the scale of the company, it would result in savings with the online travel agencies. "It should save on commissions," Sorenson said.

"We've already had a big win on the integration front," Sorenson said. "The day the acquisition closed, we offered status match to our more than 85 million combined loyalty members, along with the ability to transfer and redeem points between Marriott Rewards, which includes The Ritz-Carlton Rewards, and Starwood Preferred Guest. In mid-October, we also announced an industry-first benefit for members of our co-brand credit cards, letting members earn bonus points for stays at hotels across all 30 brands. In just a few short weeks after closing, our most loyal guests are already reaping the most important benefits of the merger and they are telling us they love it."

Marriott reported net income totaled $70 million, a 67-percent decrease over prior year results. On a pro forma basis reflecting the performance for both companies for the quarter, North American comparable system-wide constant dollar RevPAR rose 2.6 percent, while worldwide comparable system-wide constant dollar RevPAR rose 2.2 percent. Marriott said it expected RevPAR for the combined portfolio to be flat to up 2 percent in North America, outside North America and worldwide, in 2017.

Marriott's RevPAR numbers were a bit higher than what Hilton Worldwide reported.

At the end of the third quarter, Marriott's worldwide development pipeline increased to nearly 420,000 rooms, including more than 46,000 rooms approved, but not yet subject to signed contracts. The development pipeline for legacy-Starwood brands totaled nearly 130,000 rooms, including roughly 12,000 rooms approved, but not yet subject to signed contracts.

During the third quarter, Marriott and Starwood together added more than 17,600 rooms, including approximately 1,600 rooms converted from competitor brands and nearly 8,600 rooms in international markets.

The combined company now has 1.6 million rooms open or in the development pipeline.

In regard to new development, Sorenson said that leverage levels have moderated on construction loans.

Sorenson added that its asset-light strategy would continue, a strategy that was also a focus for Starwood pre-merger. "We are working toward generating more than $1.5 billion from asset sales over the next two years, in transactions where we expect to retain long-term operating agreements," he said.

One thing Sorenson made clear was that Marriott never flagged in its support of the acquisition—calling out New York tabloids for spurious reporting. "Over the summer, with all the news on the approval, there were suggestions by NYC tabloids that we had buyer remorse. There was zero factual support for that. We are as enthusiastic as ever," Sorenson said.

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