Slide by Marriott Signals Distress For Hotel Industry
Friday, July 11, 2008
Let there be no mistaking it now: The hotel boom is kaput.
Marriott International, one of the world's largest hotel operators, released a stream of unsettling news for the industry yesterday: Its second quarter profit fell 24 percent, to $157 million; it lowered yearly profit estimates again; and most importantly, it said revenue per available room, a key measure of hotel strength, could decrease this year in the United States by 1 percent.
"There's no doubt we are in a very turbulent period," said Thomas Baltimore, the president of Bethesda's RLJ Development, one of the largest owners of Marriott hotels. "Clearly we are seeing softening demand -- there's no doubt about that."
In the boom years starting in 2004, revenue per available room, or RevPar, jumped as much as 10 percent. But the hotel business is extremely cyclical and can take a beating during economic downturns. Marriott, based in Bethesda, has been tamping down its performance expectations for months, but yesterday marked the first time in years that the company forecasted the potential for negative revenue per available room growth.
With oil prices soaring, getting from point A to point B -- either by car or plane -- has become more expensive for leisure and business travelers, who are now looking to cut back on trips. Throw in weaker corporate results, which cause companies to further tighten their belts, and airlines cutting flights and capacity, which makes it more difficult and expensive to travel, and Marriott executives are faced with an unappealing environment.
Demand for hotel rooms falls, then so do rate increases -- even as costs rise. It's basically as simple as that. In a call with analysts, Marriott chief financial officer Arne Sorenson said, "No one listening today will be surprised to hear that the slowdown in the U.S. economy has impacted our business."
Baltimore said Marriott's forecast of potentially negative revenue per available room growth "is a reasonable assumption based on what we know." He added, "We've got rising oil prices, declining home prices, and little or no job growth. Those things are eroding consumer confidence and clearly impacting our industry." He said that RLJ was committed to the sector in the long run.
Others aren't as optimistic. Investors have been fleeing Marriott stock, helping slash the company's value by about half in a year, to $8.5 billion. Marriott shares fell $1.87 yesterday, or 7 percent, to $24.07. The trading frustrated company officials, including Sorenson, who said "the most aggravating thing about a day like today is to see the market react as if it were cataclysmic. It's not."
The company's problems are also not unique. The tough economic environment has helped sour investor sentiment toward other local hotel companies, ranging from Silver Spring's Choice Hotels International, whose brands include Comfort Inn, to Host Hotels and Resorts, which is based in Bethesda and owns many upscale properties.
Choice's shares have traded as high as $41.20 in the past 52 weeks, but closed yesterday down nearly 5 percent at $24.31. Host shares closed at $12.20, down from a 52-week high of $24.82. Nationally, Starwood Hotels and Resorts, which has brands such as Sheraton and the boutique W, closed yesterday at $35.55 after trading at a yearly high of $75.09. InterContinental Hotels Group, whose stable includes Holiday Inn, saw its shares close yesterday at $12.66. At one point during the past year, they traded at $26.59.
As difficult as the situation may seem, Robert LaFleur, an analyst with Susquehanna Financial Group, said: "Let's keep everything in perspective. They are calling for RevPar growth in North America to be down 1 percent. That's not exactly the Great Depression. But yes, certainly the industry is struggling right now."
For the quarter, Marriott reported revenue of $3.18 billion and earnings per share of 42 cents, down from 51 cents in the same period last year. North American RevPar grew by 1.4 percent. Marriott forecasted 2008 profit of $1.77 to $1.88 per share, below expectations of $1.93 per share.
The one bright spot: its international hotels, which had RevPar growth of 15 percent. But no matter how much Marriott emphasizes its international ambitions, the company's success overseas cannot yet offset troubles at home.
Chief executive Bill Marriott said in a statement that "while our hotels outside the U.S. continue to benefit from solid global demand, business conditions have deteriorated in the U.S. . . . We expect weak economic growth and soft U.S. lodging demand to persist into 2009."