On Wednesday, Marriott International Inc. (MAR) said it would incur $760 million in impairment charges during the third quarter for its timeshare segment. The division saw soft demand for its luxury residential products in 2008 that weakened further in the current year. The company now plans to increase cash flow by lowering prices and development at luxury fractional and residential resorts.
Besides reducing housing prices, Marriott intends to convert certain proposed projects for other uses and sell some undeveloped land. While the company will maintain promotional pricing and marketing incentives in Europe due to weak demand, it has stopped pursuing additional development in the continent.
Marriott will record impairment charges of $295 million associated with five luxury residential projects, $300 million for nine North American luxury fractional projects and $95 million for one North American timeshare project. The company will also incur charges of $55 million for four projects in its European timeshare and fractional business and $15 million associated with two Asia-Pacific timeshare resorts.
The $760 million charge will be non cash (except for $25 million expected to be funded in 2009 and another $20 million likely to be funded in 2010 or 2011) and was already included in the company’s spending forecasts.
Marriott has implemented several strategic initiatives in the recent past to boost earnings. While it plans to continue licensing and managing luxury residential projects developed by others as part of its lodging business, the company does not intend to pursue new Marriott-funded residential development projects.
Marriott will release its results for the third quarter ended Sept. 11 on Oct. 8. However, it preannounced that its North American revenue per available room (RevPAR) fell 19% in the third quarter which was better than its previous outlook of a decline of 20% to 23%.
The operating environment in the lodging sector continued to deteriorate the past two quarters due to the economic turmoil, thus hurting earnings of hotel operators like Marriott and Starwood Hotels & Resorts Worldwide Inc. (HOT) significantly.
Although we expect RevPAR to continue to fall in the near term, we believe that Marriott’s strategic initiatives will provide some relief and somewhat offset the anticipated declines in RevPAR. Also, with some early signs of economic recovery, we believe that Marriott is better positioned to command a premium room rate relative to the overall lodging industry. Hence we have a Neutral recommendation on its shares.
Read the full analyst report on “HOT”
Read the full analyst report on “MAR”
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