Marriott waits on China’s OK, stronger economic growth
 
Marriott waits on China’s OK, stronger economic growth
29 JULY 2016 8:33 AM

The second quarter didn’t play out as Marriott International officials previously hoped, as slower U.S. economic growth hurt revenue, and executives are still waiting on full international regulatory approval to acquire Starwood Hotels & Resorts Worldwide.

BETHESDA, Maryland—The wait continues for Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide to close.

The company has received all the necessary regulatory clearances throughout the world with the exception of China, said Arne Sorenson, president and CEO of Marriott, during the company’s Q2 earnings call Thursday. The acquisition is currently in the second phase of China’s review process, he said, and the company is cooperating with the regulatory authorities.

“Phase 2 of the review ends on 9 August,” he said. “We remain optimistic that we will receive clearance from China and will complete the transaction in the coming weeks.”

However, the Chinese government is able to take deals into a third phase, Sorenson said, adding he wasn’t able to speak about how China officials run the process. Marriott executives are in communication with the regulatory authorities and they have provided China with “very, very significant” amounts of information over the past six to eight months, so those authorities should have what they need, he said.

When asked about the lengthy approval process and whether it’s a yes-or-no vote or if there are negotiations involved, Sorenson said there wasn’t much more he could add beyond his previous comments.

“I don’t think it’s political,” he said. “I don’t think it is extraordinary. I think it is the wheels of government working, and as you can tell from our comments, we expect—we at least hope that we will be done here real shortly and be able to close the transaction.”

At press time, Marriott’s stock was up 6.7% year to date. The Baird/STR Hotel Stock Index was up 6.3% for the year.

Tougher conditions
U.S. economic growth was slower than anticipated earlier in the year, Sorenson said. Room sales from Marriott’s nearly 300 largest corporate customers weakened from 4% growth year over year in Q4 2015 to 2% last quarter down to 1% in the second quarter.

However, group business remains strong, Sorenson said, and discounted leisure business has picked up the slack. Halfway through 2016, North American revenue-per-available-room guidance assumes that economic growth will remain on the same slow pace as seen so far, he said.

A stronger U.S. dollar has led to fewer international guests staying at Marriott’s U.S. hotels, he said, and the impact has been the most pronounced in some of its key gateway markets.

“We estimate the number of roomnights occupied by international guests at comparable hotels in New York and Miami declined by 10% to 15% in the second quarter,” he said. “For the U.S. as a whole, the number of roomnights from international guests in our hotels declined by roughly 3%.”

Regional issues have also had “a meaningful” impact on RevPAR growth, Sorenson said, listing terrorism in Europe, the Zika virus in the Caribbean and Latin America, oil prices in Houston and unrest and oil prices in the Middle East.

“Combining the headwinds from the economy, foreign exchange and regional issues, Marriott’s worldwide, systemwide comparable hotel RevPAR increased 2.9% in the second quarter, just below our guidance,” he said. “We were pleased with this performance, because despite the environment, RevPAR index data shows we are taking share.

“Our already high systemwide, worldwide RevPAR index increased 90 basis points year to date as we extended our lead over our competitive set.”

For the full year, the company expects standalone comparable systemwide RevPAR to increase 3% worldwide, which is at the bottom end of the 3%-5% guidance it gave at the end of the first quarter.

Continued growth
Marriott’s global system has brought the company to nearly 780,000 rooms by the end of Q2, Sorenson said, with a worldwide pipeline increase to more than 285,000 rooms, which represents a year-over-year increase of 15%.

Not including the addition of Starwood, Sorenson said he expects worldwide distribution to increase by about 7.5% gross or 6.5% net.

The company’s large pipeline is impressive given today’s financing environment, Sorenson said. New rules that require banks to carry higher capital reserves have constrained lending, which causes lenders to be more selective on refinancing and new hotel projects.

“This selectivity includes more conservative loan-to-value ratios, a bias towards smaller transactions and caution about concentrated exposures in individual markets,” he said. “To our benefit, lenders continue to favor the strongest brand.”

Marriott has added five brands in as many years, he said, and the Starwood acquisition will add another 11 brands.

Sales after closing
Given that Marriott and Starwood are still separate companies, EVP and CFO Leeny Oberg said she and Sorenson couldn’t comment on the pace of Starwood’s asset sales this year. Once the acquisition is complete, she said, Marriott will focus on getting back to its targeted leverage level as quickly as possible. In general, the company expects to do about $1.5 billion to $2 billion in asset sales over the next few years.

On its own, Starwood has done a great job moving through its asset sales program and made some good deals, she said. It has been in talks with a number of parties for some decently sized transactions, she said, and once the acquisition is complete, Marriott can come to the table to learn more about these sales firsthand.

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