Marriott is not seeing a
slowdown in North America. In
North America year-to-date, the Marriott brand special corporate
revenue increased over 8% and group revenue increased 7%. Group
bookings for the second half are even stronger than the first half of
the year.
In Q2, strong seasonal demand
and a continuing recovery produced an increase in sellout nights. The
company-owned U.S. Marriott hotels had a 6% increase in revenue per
available room (REVPAR), but they turned away some higher-rated
business because the hotels were full. As the hotels reached
capacity, Marriott had less room to grow occupancy than the market as
a whole. As occupancies increase going forward, room rate
improvement should follow. Room rates are up about 4 percent for
2013. Marriott plans to increase prices for special corporate
business at high single-digit rates.
Marriott expects strong group and corporate business in the second half of the year, with 6 to 8 percent REVPAR growth for 2012. Group business in Q2 increased by 8 percent at company-operated hotels. Catering revenue increased by 7 percent. Group booking for the second half of the year is up 10 percent and 8 percent for 2013. A year ago, the 2013 group booking pace was up only 1 percent. Corporate rates, however, are still meaningfully lower than 2007 rates.
Part of Marriott's performance is coming from the supply environment. Supply is growing at less than 1 percent in 2012. There are 60,000 rooms under construction in 2012, compared to 200,000 rooms under construction in 2007.
In Q2, there was double-digit REVPAR growth at the company-operated hotels in Miami, Philadelphia, New Orleans, San Diego and Los Angeles. Washington, D.C. was weak, which reduced the company-wide REVPAR by one point in Q2. However, the election is starting to drive political business to the city. Government business is approximately in the mid single digits in terms of the percentage of Marriott's business. Marriott is hearing the government is going to try to reduce the per diem and may reduce it to a level that employees cannot stay in full service hotels in center cities and will be required to stay in limited service hotels in the suburbs.
Internationally, REVPAR grew 7 percent on a constant dollar basis, or 5 percent using local currencies. Growth in China was 8 percent, although the growth is moderating. Growth was constrained for India, Europe and Hong Kong due to weak economic conditions. The Middle East numbers were improved as compared to last year's Arab Spring numbers, but wholesalers are still not back in the market. Marriott expects REVPAR to be 5 to 7 percent in 2012, revised down from 6 to 8 percent. This does not represent a total slowdown, but instead is a result of a few markets, mostly in Asia and the Middle East.
In Europe, Marriott expects
constant currency REVPAR to increase by 5 to 7 percent for the rest
of the year (although it later said 3 percent). In Europe, it will
be helped by the Olympics and the Euro Cup Championships, although
the weak economy will create headwinds. Europe is still the weakest
large region in the world.
In Asia and the Middle East, REVPAR will likely moderate. China will likely move from 10 percent to the high single digits. There is not an oversupply risk in China as demand is growing along with supply. China has around 1 million rooms across the country as a whole, while the U.S. has 5 million rooms. China is seeing a government-encouraged slowdown, where construction on some of its projects have paused. Marriott's people in China are optimistic the projects will resume but Marriott cannot predict when the projects will be complete.
Marriott expects to open 20,000
to 25,000 new rooms in 2012, which is less than expected. In Q2,
there was some slippage in opening dates from 2012 to 2013 in Asia,
the Middle East and Mexico. In addition, some conversions have taken
longer than normal because they required more renovation than
expected. Because the reduction of new rooms in 2012 is a timing
issue, Marriott expects to open 90,000 to 105,000 rooms in 2012 to
2014. Half of those will be in North America and half will be
international. The rooms in North America will be franchised, while
the international ones will be managed by Marriott.
As to franchises, Marriott's worldwide pipeline is 115,000 rooms, excluding the 8,000 Gaylord rooms. In terms of market share, Marriott has 10 percent of open rooms, but 20 percent of the rooms under construction. In North America, Marriott has added 100 hotels to its development pipeline in the first half compared to 57 a year ago.
There is not a lot of managed room growth currently in the United States because there are not a lot of new build full service hotels, which is where managed room growth is likely to take place. When the Gaylord transaction closes, Marriott will add 8,000 rooms to the managed growth portfolio. Overseas, by contrast, is overwhelmingly managed growth. For instance, Marriott manages every hotel in China.
The trend of Marriott's hiring is improving. It will obviously hire people with new openings and in 2013, hiring will be based more on unit growth than on occupancy growth. Compared with 2007, hotel staff is about 5 percent less. Most of the reduction in force was in management.
Financials.
Worldwide, REVPAR increased 7
percent in constant currency. For 2012, Marriott expects
worldwide system-wide REVPAR to increase 6 to 8 percent, although the
lower end of that range is more likely. It expects high occupancies
during the two political conventions.
Fees in Q2, increased by 7 percent and incentive fees increased by 12 percent. Fees were $.02 below guidance due to lower REVPAR in some areas and the timing of franchise license fees. Incentive fees in North America increased by 15 percent. North American fees are 75 percent of all of Marriott's fees.
Marriott is reducing its fee revenue estimate for 2012 down by about $20 million. Of that reduction, $15 million is associated with REVPAR, unit openings and the stronger dollar. The remaining $5 million is associated with the sale of its corporate housing business. Most of the deals this year are limited service deals. The pace of new signings are still only half of 2007 and financing is very tight.
Worldwide house profit margins
increased 110 basis points during Q2, and house profit per available
room increased 9%.
Pretax margins was nearly 35 percent, an increase of 160 basis points. EBITDA increased 13 percent. EBITDA margins were 48 percent. Marriott expects EBITDA for the full year to increase by 12 to 17 percent.
The strength of the dollar impacted Marriott's financial results more this year than last. Marriott hedges 70 percent of its exposure to the euro, pound sterling, Canadian dollar and yen for one year at a time. Currency issues will reduce Marriott's guidance for fiscal year 2012 by $9 million.
Earnings per share in Q2 were $.42, an increase of 24 percent. Marriott expects EPS for the full year 2012 to increase by 26 to 34 percent.
Marriott expects to spend $1
billion in share repurchases and dividends in 2012. It repurchased
10.5 million shares in Q2 for $400 million. Share repurchases can
vary if Marriott finds other opportunities, such as Gaylord, to
invest in its business. Marriott will continue to maintain its
leverage to 3x to 3.25x debt-to-EBITDA.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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