Skift Take

Reading between the lines, Marriott International executives suggested that their company has so many strong fundamentals that it could shrug off choppy economic waters for the rest of the year.

Hoteliers have recently sounded relaxed about any impact of inflation and a possible recession on their industry, and Marriott International executives were no exception when the company reported second-quarter results it called “outstanding” on Tuesday.

Marriott generated $678 million in net income — a measure of profit — off of $5.3 billion in revenue.

“We have yet to see signs of a slowdown in global lodging demand,” said CEO Anthony Capuano. “We continue to see double-digit increases in the average daily rate for the Labor Day [September 5] holiday weekend relative to where we were pre-pandemic.”

Investors are seeking recession indicators after an apparent second-quarter of contraction in the U.S. economy and stuttering economies in the European Union.

Yet the operator of brands ranging from Ritz Carlton to Courtyard said it hadn’t yet encountered pockets of traveler resistance. Forward leisure bookings for holidays, such as Thanksgiving and Christmas, through the rest of the year, are “strong” and the “pace of those bookings is very encouraging.”

“The pent-up demand for all types of travel, the shift of spending towards experiences versus goods, sustained high levels of employment, and the lifting of travel restrictions and opening borders in most markets around the world are fueling travel,” Capuano said. “Small- and medium-sized businesses are back above 2019 levels [for business transient travel].”

Looking at Inflation, Pricing, and Labor

“At the end of the second quarter, group revenue per available room for the rest of the year was pacing just a few percentage points down from 2019 levels,” Capuano said. “We expect additional short-term bookings will further bolster group revenues, which could lead to second-half group revenues being even with or slightly above 2019 levels.”

Investors have also been eying the toll inflation might take on hoteliers. But the company has coped with rising prices so far by hiking its room rates at a pace faster than general inflation. In the U.S. and Canada, its rates were 8 percent higher in the second quarter than in 2019, even though its occupancy was down 5 percent from the pre-pandemic level.

The company reported its U.S. and Canadian revenue per available room — or RevPar, a key industry metric — was $131.53 in the quarter, up 1.3 percent from the same quarter in 2019.

In Europe, its revenue per available room was $99, which was still 18.4 percent below the comparable quarter in 2019.

The company said that the recovery in Europe’s rates and occupancy has sped up faster than the company had anticipated as recently as May.

“We expect to see a recovery in revenue per available room through the rest of the year,” Capuano said.

The company continues to face labor challenges, but these are moderating.

In the U.S. and Canada, the company continued to see hourly wages go up but only slightly higher than inflation, and that the pace of labor wage hikes has slowed.

The company is at 93 percent of the staffing it had in 2019, so that has enabled its wage increases to slow. Outside of the U.S., Europe has seen some more similarities to the U.S., while in Asia Pacific there have been far fewer labor wage hikes.

Could Marriott Brave a Recession?

Looking ahead to the fall, Capuano cited a recovery in group bookings, which have classically been an important driver for the company. A group recovery might neutralize any potential leveling off of leisure demand or pricing power in a possible recession.

Not everyone is as optimistic as Marriott’s management about how bulletproof it might be in a downturn.

“Our recent leisure survey suggests that room rates are nearing the top as 52 percent of respondents have reduced their expected travel days due to current room rates,” wrote Jeffries Research analysts in a report last month. “Our recent labor study suggests that while staffing levels should settle lower than pre-pandemic, wage inflation should stick, and total labor costs could exceed 2019 levels in some cases.”

Economists are divided on forecasts. A Bloomberg survey of economists found that about half of economists last month expected a downturn within the next year.

But what about the bearish case, where a U.S. recession starts later this year and lasts through much of next year?

It’s possible that Marriott International’s performance will be less tied to the overall business cycle than some observers expect. It only owns about 7 percent of its real estate and is otherwise asset-light, thanks to a mix of leases and franchising. That means a large chunk of its revenues depends mainly on top-line growth rather than the profitability of operations.

About 60 percent of its rooms are franchised, meaning it mainly generates income from fees for each room it manages off the top of what guests pay. If the pace of growth in room revenue went to zero — a possible scenario if one takes a bearish view that U.S. gross domestic product would be negative 1 percent next year — then Marriott might, in theory, have a relatively stable performance during the early part of the storm, some analysts believe.

Pipeline at Near-Record Levels

Given that management fees are critical, Marriott’s development pipeline is also critical. The company wants to add more rooms as quickly as possible. In the quarter, the company added 16,917 rooms, including approximately 9,200 rooms internationally. 

Marriott said its signing activity set a record for a second quarter, as it signed 23,000 rooms worldwide — nearly 30 percent of which were conversions from rival brands. Conversions were disproportionately for full-service hotels.

“I was quite thrilled with our conversion volume both on signings and openings in the second quarter,” Capuano said. “It is a competitive market for conversions. I’m quite pleased that we had more conversion openings than any of our peers in the quarter.”

The company has had two record quarters for hotel signings this year, but they didn’t involve a greater-than-usual element of giving capital incentives to win the business for those signings, the company said.

Hotel Construction Is Critical

The company had seen a slowing in construction starts, though in recent months, things have picked up a bit, executives said.

“While construction timelines have lengthened a bit this year in most markets due to supply chain disruptions and labor shortages, we still expect the number of room additions to ramp in the second half of the year,” Capuano said.

New construction starts have trailed well below 2019 levels during the pandemic. But they’ve begun to recover in the U.S. at least, where construction timelines are currently just over two years for limited-service hotels and longer for full-service properties, executives said.

Deutsche Bank analysts recently forecast net unit growth for 2022 at least 3.5 percent and for 2023 at 3.2 percent.

In the quarter, de-branding and shutting down accounted for 3,661 rooms, a below-average loss. Separately, Marriott in July pulled out of Russia, losing about 6,500 rooms. But that was a rounding error in the company’s pipeline.

A Recession Might Differ in 2023 From 2009

Marriott won’t be the same company in 2023 if it does, in fact, face a recession compared to the last major cyclical downturn of 2009.

Marriott’s incentive management fees in 2009 were two-thirds from U.S. properties while today the fees are derived two-thirds from outside the U.S., and the international management contracts are more favorable to Marriott because it pays fewer incentives overseas, wrote UBS analyst Robin Farley in a recent report.

The company reported that incentive management fees totaled $135 million in the quarter.    

Marriott also now has more revenue from credit card fees and residential licensing deals, such as Four Season condominiums — both of which may be relatively resilient during downturns, Farley noted.

In the second quarter, these categories contributed $204 million, aided by $40 million of higher credit card branding fees thanks to new sign-ups.

Rising interest rates might create capital constraints that somewhat slow hotel development, though rates still remain below long historical averages in the U.S. and Europe.

Those points aside, not every analyst is as optimistic.

“Our recent leisure survey suggests that room rates are nearing the top as 52 percent of respondents have reduced their expected travel days due to current room rates,” wrote Jeffries Research analysts in a report last month. “Our recent labor study suggests that while staffing levels should settle lower than pre-pandemic, wage inflation should stick, and total labor costs could exceed 2019 levels in some cases.”

Recent Wins on Hotel Conversions

More optimistically, analysts at JP Morgan said in a recent report that they had stayed “very impressed with Marriott’s attractive business model of strong brands generating above-peer third-party network growth with its brands possessing durable and sustainable competitive advantages.”

In the quarter, Marriott had 1.5 million rooms available worldwide and a worldwide pipeline of more than 495,000 rooms. In the comparable quarter in 2019, the company had 1.3 million rooms available to customers, and a worldwide pipeline of 487,000 rooms.

Marriott’s management is bullish on the conversion trend. During the pandemic, there wasn’t a flood of distressed assets changing hands in the market, thanks partly to investor creativity.

“As demand and performance have recovered, there is the potential that there may be more assets in play,” Capuano said.

He also said Marriott had more “conversion-friendly brands”, especially its soft brands such as its Tribute, Autograph, and Luxury collections, because they require less structural work to switch. That may help.

Business and Group Travel Update

Back in 2019, business travelers accounted for approximately two-thirds of nights stayed at Marriott International. Individuals and groups have begun to rebound.

For what’s on the books for group bookings in 2023, Marriott is down about 2 percent in revenue versus where it would have been for the bookings in 2019, but notably, the average daily rate is up 16 percent. The booking pattern is more short-term than previously, so there is more opportunity for more group bookings, executives said.

Looking into 2023, Marriott sees group bookings down 15 percent in volume compared with 2019 based on what is on the books today.

Customer Satisfaction Worth Watching

Marriott has scaled-back breakfast offerings and reduced housekeeping across many of its brands during the pandemic. Some of its franchisees haven’t kept up with capital expenditure on repairs or they have struggled on hiring. Yet Marriott’s management isn’t worried about long-term damage to its brands.

“I would say it’s very much a work in progress, but we are really encouraged by the metrics that we monitor through guest satisfaction surveys and particularly the intent-to-return numbers,” Capuano said. “We’re not quite back to where we were pre-pandemic, but we have made meaningful and steady progress on those metrics.”

Record Credit Card Performance

Marriott has co-branded credit cards, and the fees it generated in the second quarter rose nearly 40 percent compared with the previous quarter, thanks partly to record sign-ups for new cards.

Direct Bookings Stay Strong

In the years between 2016 and 2019, Marriott had seen a steady reduction in the percentage of total room night bookings that came through the online travel agencies.

“During the first two years of the pandemic, as you might expect, we saw OTA [online travel agency] volume rise, but direct bookings rose more rapidly,” Capuano said. “I think it’s reasonable to expect in the coming quarters that we would start to get back to the trend line we saw pre-pandemic of the total volume of OTA contribution moderating.”

A Message on Resilience

The group’s economy, mid-scale, and extended-stay properties may prove resilient in rates in a downturn, executives said. Reasons include the ramping up of construction work on federally funded projects and the U.S. housing crisis’s spillover into extended stay properties.

“Looking ahead, I’m very optimistic about our future,” Capuano said.

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Tags: earnings, hotel earnings, marriott

Photo credit: In July, The Ritz-Carlton New York, NoMad debuted in Manhattan 50 stories above the North of Madison Square Park district. Source: Marriott International.