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Marriott Will Get Past the Coronavirus

By Lawrence Rothman, CFA - Mar 20, 2020 at 8:21AM

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The international hotel chain structures its business so it's resilient, which will help it through tough economic times.

Marriott International (MAR -2.81%) has taken it on the chin over the last month, with shares down some 40% in that time. That's not surprising, with the novel coronavirus pandemic leading to warnings about large group gatherings and many individuals and companies halting travel. The Centers for Disease Control recommended that sponsors cancel events with 250 or more people and issued a list of things for people to consider before embarking on a trip.

Obviously, more people staying home translates into fewer bookings at Marriott's properties for the foreseeable future. I know the uncertainty makes it difficult for investors, but Marriott's business should be able to withstand the economic pressure better than its peers.

A man with a suitcase checks in at the front desk of a hotel.

Image source: Getty Images.

What to watch

Arne Sorenson, the company's CEO, stated on late-February's fourth-quarter earnings call that, "Given the uncertainty surrounding the length and severity of the coronavirus situation, we cannot fully estimate the financial impact to our business at this time."

There are some clues investors can use to see how bad it might get, though. At the time of the call, the illness was primarily affecting China. Sorenson stated that February's revenue per available room (RevPAR) was down 90% year over year in Greater China.

More recently, occupancy has dropped precipitously across the United States and Europe. Roughly two-thirds of Marriott's fees are generated in North America. While this is significant, obviously, it likely won't be devastating. Marriott's business is set up to withstand economic downturns.

Business model buffets Marriott

Many people assume Marriott owns the properties that use its brand names and logos. That is generally not the case. Rather, it has an "asset-light" approach. That means the company manages or franchises the hotels, but does not own them.

There are about 1.4 million hotel rooms, and 99% are under either a management or franchise agreement.

For those under a management agreement, Marriott receives a base management fee, which is a percentage of the revenue, and an incentive fee based on the hotel's overall profitability. Depending on the agreement, the company may instead receive fixed rental payments plus additional amounts based on a percentage of revenue. It also gets reimbursed for the costs it incurs to run the property.

These arrangements aren't going anywhere anytime soon, either. These initially run 20-30 years, with Marriott having the option to renew for another 50 years.

When Marriott enters a franchise agreement, other companies use its brand names (e.g. Marriott, W Hotels, and Westin) and provide it with a percentage of room and food/beverage revenue.

These arrangements don't mean the company is impervious to economic slowdowns. Since the properties' revenue is certainly going to take a hit with the coronavirus, this translates into a lower top line for Marriott. But, since it doesn't have large fixed expenses like a mortgage or other operating expenses, it shouldn't result in devastation for the company. This makes it easier for management to cut back on spending when times get tough.

In fact, it acted quickly in the face of mounting cancellations and occupancy in North America and Europe dropping below 25%. The company announced it would furlough a number of workers to reduce this year's general and administrative (G&A) expenses by at least $140 million, and it expects a larger number as additional measures to be implemented as well. Reportedly, this would result in not paying "tens of thousands" of its employees (there were 174,000 at year-end), although they would continue to receive benefits. Last year's G&A was $938 million, so this is an immediate 15% savings.

On the conference call with investors, it was announced that the company would suspend CEO Arne Sorenson's salary ($1.3 million last year) as well as that of Executive Chairman Bill Marriott ($3.2 million total compensation, most of which was salary). The other senior executives will forgo 50% of their salaries. At the same time these actions were taken, management also took the prudent step of withdrawing its 2020 guidance.  

Healthy balance sheet

Marriott's asset-light way of doing business means the brand can grow, adding properties through these agreements, while keeping its leverage reasonable.

This is particularly good for a cyclical industry since it lowers financial risk. Its debt was $10.9 billion, which translated into a debt-to-EBITDA ratio of about 3, at the low end of management's target. This is a leverage metric comparing a company's burden to a cash flow proxy.

In an effort to preserve cash, management is slashing its $700 million to $800 million capital expenditures budget by at least one-third, and it is suspending its dividend.

No one said the coronavirus would be easy for Marriott. After all, the company relies on discretionary and business spending. However, the company is not stuck with large fixed expenses, and its investment-grade balance sheet should allow it to withstand any economic pain it experiences, particularly with the decisive action recently taken. With the stock plummeting so quickly, long-term investors may find these shares compelling.

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