Hotels | Less-Flashy Returns, Yet Beating Inflation

At the beginning of 2007, Marriott International was dazzling Wall Street, with the firm's shares hitting all-time highs in February after beating analysts' expectations -- yet again -- for quarterly earnings.

Chief Financial Officer Arne Sorenson made his first live appearance on CNBC, declaring that the results were so good that, like a favorite movie, you would want to own a copy at home "so you could watch it over and over again."

And then the descent began.

Between Sorenson's TV appearance on Feb. 8 and the end of this year, the Bethesda company's share price fell 31 percent. What happened in between? Marriott lowered key revenue projections, prompting fears that the hotel sector's boom days were ending. Concerns over a possible recession made matters worse.

Marriott, which mostly manages hotels for owners, is a bellwether company in the lodging sector, so its sinking Wall Street performance has raised concerns about what 2008 holds for it and other local hotel companies -- Host Hotels and Resorts, which is the country's largest owner of hotels; Choice Hotels International, the franchiser of Econo Lodges and Comfort Inns; and several real estate investment trusts that own hotels around the country.

Bear Stearns analyst Joseph Greff and hotel industry executives, including those at Marriott, stressed that hotel companies will still see growth in revenue per available room, a key measure of hotel performance that factors in room rates and demand. But the increases will be below the boom years of 2004 through 2006, when companies such as Marriott had quarterly increases in revenue per available room of 9 percent or more, prompted by robust demand and little growth in new rooms, particularly in major city centers.

Asked to describe what stage the lodging cycle is in, Greff said, "I would say that in a nine-inning game we are in the seventh inning."

Now revenue per available room at Marriott and Host will probably grow 5 to 7 percent, according to the companies and analysts, as a weakening economy cools spending and growth. Marriott officials stress such gains would still beat inflation.

Executives at Choice, a Silver Spring company that caters to middle- and lower-spending customers, said revenue per available room will grow less than 4 percent after gaining 6 percent in 2006.

"You will have an abatement of the really large increases, but you are still going to have increases, so that's good," said Fred Malek, the co-chairman of Thayer Lodging, which owns several Marriott hotels, including one in Annapolis.

Should a recession occur, Marriott executives said, the company would be able to manage the damage. For one thing, the company is growing dramatically overseas, particularly in Asia and Europe, where its managed hotels are contributing significant portions of the incentive fees that Marriott receives when hotel owners hit certain levels of profitability.

Also, previous economic downturns coincided with a glut of new rooms hitting the market. Current supply growth is only expected to be about 2 percent, a rate kept low by continuing high construction costs and little room for new property in big cities.

"God forbid if there is a recession, you don't have that overhang supply issue," said Laura Paugh, Marriott's director of investor relations.

Choice executives also like their chances in the event of a recession.

Tough economic times make the company an attractive conversion option for independent hotels looking to weather slowing demand by signing on with a big chain, thus providing a stronger network for reservations and advertising. Choice then receives hefty conversion fees, along with more rooms in its stable, which translates into more franchise fees.

"Choice is a great niche franchise player at the lower end," said Bear Stearns' Greff.