“Marriott now controls a much larger portion of available rooms in this market. That’s good for Marriott, tough for the competition, and perhaps tough for tourists trying to find the most competitive rate,” said Michael Farr, president of the investment management firm Farr, Miller & Washington in the District.
Whereas Marriott grew from a handful of small lodgings in the Washington area, Gaylord barreled into the market by opening a mega-hotel on the shores of the Potomac River. The Gaylord National is now a self-sustaining destination, with seven on-site restaurants and 470,000 square feet of meeting space.
Having a concentration of convention properties could give Marriott the upper hand in setting group and business rates in the region. This comes at a time when government agencies are reducing travel spending under the threat of federal budget cutbacks, a trend plaguing hotels across the region.
“We’re strong in the Washington market, and this will make us a bit stronger in what is still a competitive market,” said Richard Hoffman, Marriott’s executive vice president of mergers and acquisitions.
Bjorn Hanson, a professor at New York University’s Tisch Center for Hospitality, Tourism and Sports Management, said the deal could allow Marriott to create a two-tier model in which Marriott might recommend Gaylord National to budget-conscious meeting planners, while the Marquis is offered up as the higher-end luxury product. Hanson anticipates that Marriott will increase revenue by erasing redundancies in marketing, accounting and sales operations.
“Marriott’s revenue management models will allow it to raise prices, but that is in response to demand, not just an aggressive pricing policy,” he said.
Nashville-based Gaylord was won over by Marriott’s capacity to reduce costs through its economies of scale, central reservations and procurement services, said Colin V. Reed, Gaylord’s chairman and chief executive.
“If we merge our operations into the Marriott operations, we’re going to see huge cost synergy,” he said. “These hotels will be operated predominantly by our management team that’s in place, but give Marriott the opportunity to extend this brand up.”
Gaylord expects to save between $33 million and $40 million a year in operations expenses. Much of that savings will be derived from staff reductions in such divisions as sales and accounting, although Gaylord has yet to reach a definitive number of employees it will let go.
The company began considering a sale in November, and issued a call for bids in January. Marriott beat out three other undisclosed hotel operators for the rights to Gaylord National, Gaylord Opryland in Nashville, Gaylord Palms in Kissimmee, Fla., and Gaylord Texan in Grapevine, Tex. The properties, representing 7,800 rooms, will keep their names.
Gaylord will retain ownership of the assets, folding them into a newly created real estate investment trust, a move aimed at lowering its tax bill. Gaylord shareholders, scheduled to meet in August, must approve the company’s conversion into an REIT for the Marriott deal to go ahead.
Changing its business model was not an easy decision for Gaylord, but one Reed said the company felt it had to make. Prior to the downturn, he said, developing, operating and owning hotels helped the company command $57 a share in 2007.
Once the economy soured, Gaylord’s stock plummeted to $6 a share in 2009, and Dallas investor TRT Holdings, owner of Omni Hotels, purchased 13 percent of the company. That stake has since increased to 22 percent, putting pressure on the company to shift its strategy.
“If we can make it clear to the shareholders that there’s a lot of value in this company and the shareholders push our stock up, it makes it very hard for a competitor to take control of the company on the cheap,” Reed said.
Roughly 75 percent of Gaylord’s hotel business is derived from group travel and business meetings, leading drivers of the hospitality industry. Marriott has long expressed interest in expanding its group business, which Hoffman said made the Gaylord deal rather attractive.
“The meetings business is a strong part of the [hotel] business, and it’s rebounding well,” he said. “The ability to get into these specialized hotels and enhance our competitiveness in the meeting space was a strong positive in the deal.”
Under the agreement, Marriott will manage the hotels for an initial term of 35 years, collecting a base fee of 2 percent of gross revenue. Each property currently takes in roughly $1 billion in gross revenue, meaning Marriott will earn $20 million per asset in the first year of the contract.
Hoffman said that figure is a little lower than the fees Marriott typically collects.
About 5 percent of the 502,300 rooms Marriott operates in the United States are in the Washington area — in the District alone, the company lays claim to 19 hotels. All told, Marriott has more than 3,700 properties in 73 countries under 17 brands, including The Ritz-Carlton, Courtyard and Fairfield Inn & Suites.
Staff writer Thomas Heath contributed to this story.