Marriott's Q1 a mixed bag

The St. Regis Hong Kong is Marriott's 7,000th hotel. Photo credit: Marriott International

While Marriott International's results were somewhat mixed for first-quarter, President/CEO Arne Sorenson described the numbers as "solid."

Worldwide systemwide RevPAR for comparable hotels increased 1.1 percent, net rooms grew 5.3 percent, and gross fee revenue rose 6 percent. "Despite modest RevPAR growth and higher labor costs, we increased North American house profit margins by 30 basis points and held worldwide house profit margins flat at our company-operated hotels through cost synergies, leading to strong incentive management fee performance in the quarter," Sorenson said. "Worldwide systemwide RevPAR index increased 100 basis points with index gains in the U.S. at nearly the same level."

During Q1, Marriott opened its 7,000th property, the St. Regis Hong Kong. "Year-over-year gross room openings accelerated to nearly 19,000 rooms, a first quarter record," said Sorenson. "Our development pipeline totaled approximately 475,000 rooms at quarter-end, nearly 3 percent higher than a year ago." 

The quarter also saw the launch of the consolidated Marriott Bonvoy loyalty program, uniting the erstwhile Marriott Rewards, Ritz-Carlton Rewards and Starwood Rewards platforms. Membership rose by 5 million to reach nearly 130 million members from January to March.

“Year-to date through May 8, we have returned nearly $1.2 billion to our shareholders through share repurchases and dividends, and we continue to expect to return at least $3 billion for full year 2019,” said Sorenson.

By the Numbers

Net income dropped to $375 million in Q1 from $420 million in the year-ago period. Similarly,  Q1 adjusted net income decreased to $482 million from $487 million in Q1 2018.

At the same time, the company incurred $44 million of expenses and recognized $46 million of insurance recoveries related to the data security incident it disclosed on November 30. The expenses and insurance proceeds were excluded from adjusted net income, adjusted EPS and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA).

For the first quarter, adjusted EBITDA totaled $821 million, a 7-percent increase over Q1 2018 adjusted EBITDA of $770 million. 

Worldwide comparable systemwide constant dollar RevPAR increased 1.1 percent (a 0.3-percent decrease using actual dollars). In North America, it increased 0.8 percent (a 0.6-percent increase using actual dollars) and internationally increased 1.9 percent (a 2.5 percent decrease using actual dollars) for the same period.

Worldwide comparable company-operated house profit margins were flat in Q1, reflecting cost controls and synergies from the Starwood Hotels & Resorts Worldwide acquisition, offset by the impact of modest RevPAR growth and higher wages, Marriott reported. House profit margins for comparable company-operated properties outside North America decreased 30 basis points and North American comparable company-operated house profit margins increased 30 basis points in Q1.

Analyst's View

In an email, financial services company Baird Equity Research noted the results were "softer than forecasted and below consensus," which could weaken shares. 

"Marriott's 1Q19 Adjusted EBITDA came in essentially at the low end of the guidance range and below Baird/Street expectations," Senior Research Analyst Michael J. Bellisario wrote to investors. "We have to go back to mid-2016 to find the last operationally driven earnings shortfall versus expectations; as such, we expect shares to be weaker. The main drivers of the relative 1Q19 earnings shortfall appear to be softer-than-expected RevPAR growth as well as a much greater-than-expected FX headwind (at least versus our model). We believe analysts and investors will be keenly focused on comparative trends versus Hilton and Hyatt (probably too much so, in our view) and digging into relative market share performance during the quarter."

Market share concerns would likely remain in focus, Bellisario added. "While Marriott noted that its worldwide systemwide RevPAR index increased 100 [basis points] during the quarter with a nearly similar index gain in the U.S., we believe investors will be focused (likely too focused) on Marriott’s headline RevPAR growth being below Hilton’s growth for the quarter. Marriott’s North American RevPAR growth of 0.8 percent (likely disproportionately impacted by the government shutdown) was below Hilton’s 1.8 percent U.S. growth but above Hyatt’s -0.3 percent U.S. growth; Hilton noted that its systemwide RevPAR index increased 230 [basis points] during 1Q19."

Rooms Growth 

Marriott added 114 new properties (18,842 rooms) to its worldwide lodging portfolio during first quarter, including The Times Square Edition, W Dubai-The Palm and Hotel Banke, Autograph Collection in Paris.

In addition, 15 properties with 2,693 rooms exited the system during the quarter, leaving Marriott’s lodging system at quarter's end with 7,003 properties and timeshare resorts with nearly 1,333,000 rooms.

The company’s worldwide development pipeline totaled 2,853 properties with approximately 475,000 rooms, including 1,166 properties with nearly 216,000 rooms under construction and 146 properties with roughly 25,000 rooms approved for development, but not yet subject to signed contracts.

Q2 and Beyond

For Q2, Marriott expects comparable systemwide RevPAR on a constant dollar basis will increase 1 percent to 2 percent in North America, 2 percent to 4 percent outside North America, and 1 percent to 3 percent worldwide.

Marriott anticipates second-quarter adjusted EBITDA could total $940 million to $965 million, flat to up to 3 percent over Q2 2018 adjusted EBITDA of $939 million. This estimate does not reflect any asset sales that may occur in the second quarter, according to Marriott, which also expects net room additions of roughly 5.5 percent for full-year 2019, with expected room deletions of 1 percent to 1.5 percent.

For the full year, Marriott expects only a slight difference from Q2 comparable systemwide RevPAR on a constant dollar basis, specifically in North America, with increases of 1 percent to 3 percent. Expectations call forii ncreases of 2 percent to 4 percent outside North America and 1 percent to 3 percent worldwide. Marriott expects full-year adjusted EBITDA could total $3.6 billion to $3.7 billion, a 4 percent to 7 percent increase over 2018 adjusted EBITDA of $3.4 billion.  

The company expects investment spending in 2019 will total approximately $600 million to $800 million, including approximately $225 million for maintenance capital.  Investment spending also includes other capital expenditures (including property acquisitions), new mezzanine financing and mortgage notes, contract acquisition costs and equity and other investments. Assuming this level of investment spending and no additional asset sales, at least $3 billion could be returned to shareholders through share repurchases and dividends in 2019, according to Marriott.