Marriott highlights strong positions in midscale, group

BETHESDA, Maryland – Growing its position in the midscale and being a strong group house was a big focus on Marriott International’s 4Q23 earnings call on Tuesday, where it announced a beat that included a 7.2% year over year increase in RevPAR, highlighted by a 7% increase in group revenue compared to 4Q22.

With securing debt still challenging for developers, Marriott CEO Anthony Capuano said they remain enthusiastic about their growth opportunities in midscale, and even teased a midscale transient brand in the U.S. for both new builds and conversions under development. “When we talk to our franchise partners on the midscale side, they feel like the size of those commitments is something that they’re going to have a decent measure of success in procuring debt,” he said.

When we talk to our franchise partners on the midscale side, they feel like the size of those commitments is something that they’re going to have a decent measure of success in procuring debt.

Anthony Capuano

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He also pointed to the first midscale StudioRes groundbreaking a few weeks ago in Fort Meyers, Florida, where the development partners talked about opening the hotel inside 13 months, which Capuano said reflects an improved environment for more quickly moving a deal from signing, to financing, construction and opening.

Evidently, the Street didn't think Marriott's forecast was strong enough as its stock – at an all-time high and a 23x P/E multiple on 2025 estimates – was punished on Tuesday, closing down -5.6%. R.W. Baird analyst Michael Bellisario pointed to an EPS guidance shortfall and high expectations for net unit growth acceleration not being met/exceeded. He added that the Adjusted EPS shortfall was >3% versus consensus and is being driven primarily by a one point higher GAAP income tax rate. Marriott's "organic" unit growth guidance of 3.2% to 3.7% compares to the 3.6% achieved in 2023 and the industry giant said it still expects to attain a three-year growth target of 5% to 5.5%.

Bellisario added that broader net unit growth and development expectations had been on the rise since the September analyst meeting and as a result of the recent pullback in interest rates, which boosted sentiment and growth outlooks. "Investors are likely to readjust their intermediate-term expectations a bit," he said.

More broadly speaking, Capuano added that in terms of deal volume through the first month of the year, “it’s really encouraging. We’re seeing strong momentum both on submissions for new-build projects around the world as well as continued, really encouraging momentum on the conversion side.”

Marriott signed a record 891 organic management, franchise and license agreements in 2023, representing approximately 164,000 rooms. Additionally, it ended the year with a new high of roughly 573,000 rooms (3,400 hotels) in the pipeline. “We expect another year of strong global signings in 2024 and are already off to an incredible start,” Capuano added.

Also on the positive side of the ledger, Capuano said there is a sense that there will be continued relief from higher interest rates, particular in the back half of 2024. “There is an expectation maybe in parallel that the hotel transaction market will start to be a bit more active in the back half of the year, as well,” he added. “While there is still admittedly some gap in the bid-ask, it feels like that gap is continuing to narrow, which will likely lead to a little more active transaction environment, which has always historically been good news for us on the conversion front.”

Marriott’s development signed a record 164,000 organic rooms globally in 2023, including 37,000 rooms from their deal with MGM Resorts International. The development pipeline also reached a new high with roughly 573,000 rooms (3,400 properties) at year end.

During the year, Marriott added nearly 81,300 rooms, including approximately 17,500 rooms associated with the City Express transaction and more than 43,000 other rooms in international markets. More than 232,000 rooms in the pipeline were under construction as of the end of 2023.

Capuano also highlighted Marriott's position in the luxury space, stating distribution is currently over 50% larger than its next closest competitor. He said Marriott had record luxury signings with 15 new deals and added 29 new luxury hotels to their portfolio in 2023.

One in four organic rooms from conversions and net rooms grew 4.7% from year-end 2022. Conversions also accounted for 40% of organic rooms signings in 2023. Among the conversions coming online in 2024 are the 37,000 rooms from MGM Resorts with rooms at New York New York in Las Vegas just now available on Marriott channels and the remaining properties expected to be available by the middle of March. “It is very early days, we're incredibly pleased with the initial booking pace,” Capuano said.

Outside the U.S., China is rebounding on the development side with projects restarting after COVID, according to Capuano.

Marriott CFO and EVP of Development Leeny Oberg added that when Marriott looks at our growth in rooms in Asia Pacific, it stands in the high single digits – both in 2023 and into 2025, including inside China and across the region. “There’s just really strong demand for our brands across the various scales” she said.

Normalizing RevPAR growth

On the performance side, in the U.S. & Canada, fourth quarter RevPAR rose over 3%, while group revenue increased 7% compared to the 4Q22, driven by solid rate increases. Leisure revenue continued to increase, up 2% with business transient revenue up 3% from the year-ago quarter.

Capuano said the company expects another year of solid growth and significant shareholder returns. With normalizing RevPAR growth around the world, he said the company anticipate a worldwide full year RevPAR increase of 3% to 5% and net rooms growth of 5.5% to 6%. “We expect this should yield adjusted EBITDA of approximately $4.9 billion to $5 billion for the year and enable us to return $4.1 billion to $4.3 billion to shareholders after factoring in $500 million to purchase the Sheraton Grand Chicago,” he said.

While large corporate business is still lagging, they continue to post volume increases. Solid gains and ADR improved business transient revenues 7% globally, and 3% in the U.S. and Canada.

Leeny Oberg

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Group business, which comprised 23% of room nights was again standout customer segment. Compared to the year ago quarter, group revenues rose 9% globally and 7% in the U.S. and Canada with 2024 shaping up as another solid year. So far, 2024 group revenues were pacing up nearly 13% globally and 11% in the U.S. and Canada on a year over year basis, driven by robust increases in both room nights and ADR.

Leisure transient accounted for 44% of global nights in 4Q23 with revenues nearly 50% above the same quarter in 2019. Demand for leisure has remained resilient with 4Q23 room nights still up 5% over the year ago quarter, leading to a 6% leisure transient revenue growth worldwide (+2% in the U.S. and Canada).

Lagging business transient contributed 33% of global room nights for Marriott in 4Q23 and they said demand from small- and medium-sized corporate business remains robust. “While large corporate business is still lagging, they continue to post volume increases,” Oberg said. “Solid gains and ADR improved business transient revenues 7% globally, and 3% in the U.S. and Canada,” she said.

Breaking out performance by geography, Asia Pacific again experienced the largest year over year RevPAR increase with China RevPAR up 81% in 4Q23 due to an easy COVID comparison. Excluding China, RevPAR was up 13% in Asia Pacific.

Looking ahead, Marriott said its full year outlook assumes a steady albeit slower growing global economy and also reflects normalized lodging demand in most regions around the world. Asia Pacific is expected to see higher growth than other regions as it continues to have some benefit from COVID recovery as well as additional international airlift.

RevPAR growth is expected to be driven by another meaningful increase in group revenue and continued improvement in business transient demand. “We’re off to a strong start with January RevPAR up 7%, reflecting continued strong demand around the world, particularly in international markets,” Oberg said.

International RevPAR rose 14% and U.S. and Canada RevPAR increased 4% In the month with year over year comparisons easiest in January and with Easter shifting from April to March this year. “Global RevPAR for the first quarter could increase 4% to 5%,” Oberg said. “For the full year, we anticipate a 3% to 5% rise in global RevPAR. Growth is expected to remain higher in international markets than in the U.S. and Canada, with particular strength in Asia Pacific.”