Another successful quarter for Marriott International and an expected “soft landing” for the U.S. economy, according to company CFO and EVP of Development Leeny Oberg, has the Bethesda, Md.-based operator and franchisor bullish on the future, one it hopes will include further performance improvement internationally.
Global RevPAR increased 13.5% in the second quarter versus the same time a year ago, with a 39.1% increase in international
markets. The RevPAR bounce helped grow net income to $726 million in the quarter, a 7% bump over Q2 2022.
On the development front, Marriott added approximately 33,100 rooms globally during the quarter, including 17,300 rooms associated with the City Express transaction and roughly 11,200 other rooms in international markets. Marriott also added more than 2,800 conversion rooms, which, according to Oberg and President and CEO Tony Capuano will likely be the mode of growth over the foreseeable future or until there is more clarity vis-Ă -vis lending for new hotel construction.
A DEVELOPING SITUATION
In the first half of 2023, 21% of Marriott rooms additions came via conversion, according to Capuano. “Conversions are big,” Oberg said. “We are not seeing free-flowing debt like we saw a few quarters ago.”
A new survey from the Federal Reserve showed that lending conditions at U.S. banks are tight and likely to get even tighter and that in the $2.76-trillion commercial and industrial lending segment, a large share of banks said they have put more limitations on lending standards and have also seen lower demand for loans.
“Proven markets, proven brands and proven owners always win out,” Oberg said, adding that the higher loan-to-values required is making it harder for new projects to pencil out.
For a company the scale of Marriott, multiunit conversions are attractive and expectations are, as Oberg pointed out, that the company will continue to chase these types of deals, which, in turn, gives Marriott the confidence that its net unit growth will be in the high single digits for quarters to come.
Marriott now expects its full-year net rooms growth to be between 6.4% and 6.7%, aided by the long-term strategic licensing deal it struck with MGM Resorts International and the creation of MGM Collection with Marriott Bonvoy, which brings 17 properties and some 37,000 rooms into the Marriott fold and a heavier footing in Las Vegas. Capuano said to think of the partnership less as a licensing agreement and more as a franchise agreement. “The structure is akin to a traditional franchise deal,” he said, where Marriott will be paid on room revenue across the 17 properties.
At the end of the quarter, Marriott’s worldwide development pipeline totaled more than 3,100 properties and nearly 547,000 rooms. More than 240,000 rooms in the pipeline were under construction as of the end of the second quarter. Pipeline attrition rates, even in the face of a rockier debt environment, are low, according to Oberg, at around 1.3%, which is below the historical 2% fallout level. “The pipeline is moving,” she said.
TRAVELER TYPES
Marriott’s higher exposure now in Las Vegas due to the MGM deal should allow it to grow its group and convention business incrementally. Small and midsize enterprises (SMEs), which was the first business cohort to recover, account for some 60% of Marriott’s group business. Meanwhile, large corporates, the Fortune 100 types, are recovering more slowly. “A slow and steady recovery—that’s the pace,” Capuano said. “What we hear is that they continue to meet a great deal as they hire and train and that’s a driver for group business.”
If rate is any indication, group and corporate business will be more lucrative as a portion of Marriott’s overall business. Oberg said that corporate negotiated rates were up nearly double digits and that “we are looking for meaningful increases again.” She added that the classic big four tech firms—Amazon, Apple, Meta and Google—are down in room nights versus 2019.
Where Marriott’s—and its peers’—greater opportunity lies is in inbound international travel, particularly into Greater China, where RevPAR there has now surpassed 2019 levels, bolstered primarily through domestic travel. Things are changing, however, as restrictions into Asia Pacific and Europe now cease. Still, there are challenges; some of them out of hoteliers’ hands. “In Greater China, there is only a 40% recovery of airline capacity,” Capuano said.
In response to an analyst question regarding brand absences in certain segments, Oberg cited its recent entry into the midscale space via its City Express acquisition in the Caribbean and Latin America market and its newly announced midscale extended-stay brand, known in the interim as Project MidX Studios. She went a tad further, then, teasing a forthcoming conversion midscale brand for EMEA, with a formal announcement in the back half of this year.
Outside the lower chain segments, Marriott touted its strong performance at the luxury level, where room rates have outpaced inflation and compared to 2019, while other segments have come more in line with inflation adjusted rates. “There is a normalization going on with seasonal patterns and a nice, sturdy mix of leisure, business and group,” Oberg said.
Though major metro areas were decimated during the heyday of the pandemic, Capuano heralded their return. “Inbound international travel to the U.S. has always been modest,” he said, “and not as impactful as outbound U.S. The exception to that is individual cities.” He went on to cite New York, where transient room nights occupied by international travelers was 12% in 2019 and as of Q2 2023 had exceeded that percentage, with 13% of transient room nights filled by international travelers. In Miami, it’s now at 15%, 3 percentage points higher than in 2019. San Francisco and Hawaii also saw upticks.
Meanwhile, artificial intelligence continues to stretch out inside the operations of many businesses and at Marriott, Capuano said, “It’s incorporated into how we think about running our business and removing friction for our guests and creating capacity for associates—but we do it mindfully.” He didn’t offer any concrete examples of AI’s current use at Marriott.
Oberg said the use of generative AI was to enhance but not take away from the baseline fundamentals of hospitality. “We do believe it’s the person-to-person experience that makes our business unique,” she said.
