New York--Marriott Corp. has long been comfortable telling its history in terms of the American Dream. Faith and hard work turned a root beer stand into an empire in little more than half a century.
In recent years, that faith has been shared by the financial community. To finance an aggressive construction program that has made it among the largest hotel chains in the world, the Washington, D.C.-based company became a veritable vacuum cleaner for money. A recent investment report by Smith Barney calculates that between 1985 and 1989, Marriott raised $5.15 billion from insurance companies, banks, thrifts and overseas lenders.
Debt on the company's balance sheet went from about $1.2 billion to $3.3 billion, but equity shrank, from about $850 million to $470 million, according to company and security firm reports.
That's tremendous leverage, since all that debt means lots of rigid interest payments and little flexible dividends payouts. But for a company as well respected as Marriott, the financial markets have been sanguine. As recently as Sept. 14, a Marriott senior debt issue maturing in 1995 yielded just 96 basis points (about one percentage point) more U.S. Treasury notes.
Simply put, the company's credit wasn't much worse than the country's.
One bad earnings report in September (earnings per share down 51 percent, including loads of one-time items), and attitudes changed abruptly. The two major credit agencies, Moody's and Standard & Poor's, downgraded Marriott's senior debt from an A ("strong capacity to pay interest and repay principal," according to Standard & Poor's) to BBB ("adequate capacity to pay interest and repay principal").
The change from "strong" to "adequate" hardly sounds dramatic, and usually it's not. Ordinarily, that type of shift could force up the yield investors demand by about one-quarter to one-half of a percentage point, said Patricia Zlotin, senior vice president at Massachusetts Financial Services. But these are hardly normal times.
The spread between Marriott's bonds and the equivalent government securities widened to almost 6 percentage points, a result of a rise in the price for government securities of 3 percent and a decline in the price for Marriott's bonds of a vast (by bond market standards) 12 percent.
Marriott is hardly the only company to emerge suddenly into a hostile market. "That's been the case for any company reporting problems that associated with a tainted industry," said Ms. Zlotin. "As soon as there's bad news, credits are being taken out and shot."
Banks, for instance, have been hit even harder. Many of the New England regionals, though like Marriott still rated investment grade, yield almost 20 percent. Marriott's bond's yield a comparatively insignificant 13 3/8 percent. But some junk-rated securities in recession-resistant industries, (for instance the supermarket chain Kroger Co.) yield just 12 percent, and Treasury notes are now yielding about 8 percent.
Dealing with the hostile market may be an unalterable fact of life for Marriott during the next few years. Marriott's debt would have been even higher if it hadn't balanced an aggressive expansion program by selling off new hotels and retaining only the management contract. Selling anything at all related to real estate today, however, is problematic. Smith Barney analyst Joseph Doyle reckons the company has a $1 billion inventory of assets it is now holding for sale and another $1 billion from new construction.
Substantial skepticism exists concerning whether it can be done. One deal, to sell a San Francisco hotel for $300 million, had appeared to be on track, and the only recent transaction completed is a relatively small $57 million sale lease-back of the Amsterdam Marriott. A couple of big announcements would calm a lot of nerves.
The alternative is to hold on to the properties, but that could be costly in the short run. Even sound hotels often lose money in the early years, when depreciation is largest.
And current hotel economics won't provide much coverage. New rooms keep coming onto the market despite a soft economy that's undermining growth in business and leisure travel. Salomon Brothers projects that in 1991 demand for rooms will be flat but supply will increase by 3.3 percent, pushing industry-wide occupancy down from 67 percent to 65 percent. Further compounding the problem, the surplus rooms will mean hotels that hotels not only will operate less efficiently, they will be able to charge less for space. After accounting for the affects of inflation, room rates, which rose almost 8 percent as recently as 1986, will decline 2 percent next year, Salomon forecasts.
Predictably, earnings projections for Marriott have shrunk. In August, Wall Street analysts were predicting Marriott would earn $1.79 a share this year and $2.14 a share next year, according to I/B/E/S, a service of the brokerage firm Lynch, Jones and Ryan. Currently the consensus is $1.56 a share this year and $1.55 next year.