Starwood Reports Fourth Quarter 2010 Results

Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 10.1% (10.9% in constant dollars) compared to 2009. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 9.1% (8.1% in constant dollars).

Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) today reported fourth quarter 2010 financial results.

Fourth Quarter 2010 Highlights 

• Excluding special items, EPS from continuing operations was $0.52. Including special items, EPS from continuing operations was $1.08.
• Adjusted EBITDA was $269 million.
• Excluding special items, income from continuing operations was $99 million. Including special items, income from continuing operations was $206 million.
• Worldwide System-wide REVPAR for Same-Store Hotels increased 10.1% (10.3% in constant dollars) compared to 2009. System-wide REVPAR for Same-Store Hotels in North America increased 10.2% (9.7% in constant dollars).
• Management fees, franchise fees and other income increased 13.0% compared to 2009.
• Worldwide Same-Store company-operated gross operating profit margins increased approximately 100 basis points compared to 2009.
• Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 10.1% (10.9% in constant dollars) compared to 2009. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 9.1% (8.1% in constant dollars).
• Margins at Starwood branded Same-Store Owned Hotels Worldwide increased 30 basis points compared to 2009. Adjusted for a non-recurring item recorded in 2009, margins increased approximately 170 basis points.
• Operating income from vacation ownership and residential increased $13 million compared to 2009.
• During the quarter, the Company signed 37 hotel management and franchise contracts representing approximately 8,000 rooms and opened 23 hotels and resorts with approximately 5,700 rooms.
• During the quarter, the Company received a refund from the IRS of approximately $245 million primarily for previously paid taxes and related interest relating to the settlement of a dispute regarding the 1998 disposition of World Directories, Inc. 

Fourth Quarter 2010 Earnings Summary

Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the fourth quarter of 2010 of $1.08 per share compared to a loss of $1.03 in the fourth quarter of 2009. Excluding special items, EPS from continuing operations was $0.52 for the fourth quarter of 2010 compared to $0.51 in the fourth quarter of 2009. Excluding special items, the effective income tax rate in the fourth quarter of 2010 was 24.9%, compared to 4.1% in the fourth quarter of 2009. 

Special items in the fourth quarter of 2010 included an after-tax benefit of $107 million or $0.56 per share and were primarily related to the settlement with the IRS regarding the 1998 disposition of World Directories, Inc. and the favorable settlement of a lawsuit. Special items in the fourth quarter of 2009 included a $281 million after-tax charge or $1.54 per share primarily related to the impairment of vacation ownership projects, goodwill and owned hotels.

Income from continuing operations was $206 million in the fourth quarter of 2010 compared to a loss of $186 million in the fourth quarter of 2009. Excluding special items, income from continuing operations was $99 million in the fourth quarter of 2010 compared to $95 million in the fourth quarter of 2009. 

Net income was $339 million and $1.78 per share in the fourth quarter of 2010 compared to a net loss of $107 million and $0.59 per share in the fourth quarter of 2009.

Frits van Paasschen, CEO said, “We ended 2010 with a strong fourth quarter, and momentum has continued into 2011. Our robust REVPAR growth is fueled by strong global brands along with sales and marketing initiatives. By containing costs we are translating these higher revenues into higher profits.”

“Starwood is well-positioned to capitalize on the rapid growth in emerging markets. In developed markets, tight supply should support rate increases. Our balance sheet is in great shape, with year-end net debt of just over $2 billion. We are making solid progress towards our investment grade objective.” 

Fourth Quarter 2010 Operating Results

Management and Franchise Revenues 

Worldwide System-wide REVPAR for Same-Store Hotels increased 10.1% (10.3% in constant dollars) compared to the fourth quarter of 2009. International System-wide REVPAR for Same-Store Hotels increased 10.1% (11.0% in constant dollars).

Worldwide System-wide REVPAR for Same-Store changes by region: 

Increases in REVPAR for Worldwide System-wide Same-Store hotels by brand:

Worldwide Same-Store company-operated gross operating profit margins increased approximately 100 basis points in the fourth quarter driven by REVPAR increases and cost controls. International gross operating profit margins for Same-Store company-operated properties increased approximately 20 basis points, and North American Same-Store company-operated gross operating profit margins increased approximately 200 basis points.

Management fees, franchise fees and other income were $209 million, up $24 million, or 13.0%, from the fourth quarter of 2009. Management fees increased 23.1% to $128 million and franchise fees increased 20.0% to $42 million.

During the fourth quarter of 2010, the Company signed 37 hotel management and franchise contracts, representing approximately 8,000 rooms, of which 29 are new builds and eight are conversions from other brands. At December 31, 2010, the Company had approximately 350 hotels in the active pipeline representing approximately 85,000 rooms.

During the fourth quarter of 2010, 23 new hotels and resorts (representing approximately 5,700 rooms) entered the system, including the St. Regis Osaka (Japan, 160 rooms), Sheraton Malpensa Airport (Italy, 433 rooms), Sheraton Tianjin Binhai (China, 325 rooms), Westin Gurgaon (India, 311 rooms), Sheraton Tribeca New York Hotel (New York, 369 rooms), Element New York Times Square (New York, 411 rooms), and Aloft Harlem (New York, 124 rooms). Seven properties (representing approximately 1,400 rooms) were removed from the system during the quarter.

Owned, Leased and Consolidated Joint Venture Hotels

Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 10.1% (10.9% in constant dollars) in the fourth quarter of 2010 when compared to 2009. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 9.1% (8.1% in constant dollars). Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 11.6% (15.0% in constant dollars). 

Revenues at Starwood branded Same-Store Owned Hotels in North America increased 7.7% (6.7% in constant dollars) while costs and expenses increased 4.8% when compared to 2009. Margins at these hotels increased 220 basis points.

Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 5.9% (6.6% in constant dollars) while costs and expenses increased 5.5% when compared to 2009. Margins at these hotels increased 30 basis points. Adjusted for a non-recurring item recorded in 2009, margins increased approximately 170 basis points. 

Revenues at owned, leased and consolidated joint venture hotels were $459 million, compared to $430 million in 2009.

Vacation Ownership

Total vacation ownership revenues of $135 million were flat compared to 2009. Originated contract sales of vacation ownership intervals decreased 1.2% primarily due to lower average prices. The number of contracts signed increased 7.6% when compared to 2009 and the average price per vacation ownership unit sold decreased 7.0% to approximately $14,000, driven by price reductions and inventory mix. 

Selling, General, Administrative and Other 

Selling, general, administrative and other expenses increased 8.9% to $86 million compared to 2009, due to higher incentive compensation, partially offset by the reimbursement of previously expensed legal fees following the favorable settlement of a lawsuit. 

Capital

Gross capital spending during the quarter included approximately $79 million of maintenance capital and $31 million of development capital. Investment spending on net vacation ownership interest (“VOI”) and residential inventory was $24 million, primarily related to the St. Regis Bal Harbour project.

Dividends 

In November 2010, the Company’s Board of Directors declared its annual dividend of $0.30 per share. The dividend was paid by the Company on December 30, 2010 to holders of record on December 16, 2010.

Balance Sheet

At December 31, 2010, the Company had gross debt of $2.857 billion, excluding $494 million of debt associated with securitized vacation ownership notes receivable that are required to be consolidated under ASU 2009-17. Additionally, the Company had cash and cash equivalents of $797 million (including $44 million of restricted cash), and net debt of $2.060 billion, compared to net debt of $2.455 billion as of September 30, 2010. Net debt at December 31, 2010 including debt and restricted cash ($19 million) associated with securitized vacation ownership notes receivables was $2.535 billion.

At December 31, 2010, debt was approximately 81% fixed rate and 19% floating rate and its weighted average maturity was 4.2 years with a weighted average interest rate of 6.86% excluding the securitized debt. The Company had cash (including current restricted cash) and availability under the domestic and international revolving credit facility of approximately $2.148 billion. 

IRS Tax Settlement 

In December 2010, the Company received a refund of approximately $245 million for previously paid taxes and related interest from the IRS relating to the 1998 disposition of World Directories, Inc.

Legal Settlement 

In December 2010, the Company received $75 million in connection with a favorable settlement of a lawsuit. The cash payment to the Company included the reimbursement of legal fees in connection with the matter.

Outlook 

For the Full Year 2011:

Macro-economic and geo-political environments remain uncertain. Booking windows, while improving, are short. We believe that several scenarios are possible. With low supply growth in developed markets and high demand growth in emerging markets, rate improvement will be the key driver of 2011 results. Based on trends to date, our outlook assumes a normal lodging recovery in 2011: 

• Adjusted EBITDA is expected to be approximately $975 million to $1 billion, assuming:

◦                     REVPAR increases at Same-Store Company Operated Hotels Worldwide of 7% to 9% in constant dollars (approximately 100 basis points higher in dollars at current exchange rates).

◦                     REVPAR increases at Branded Same-Store Owned Hotels Worldwide of 7% to 9% in constant dollars (approximately 100 basis points higher in dollars at current exchange rates).

◦                     Margin increases at Branded Same-Store Owned Hotels Worldwide of 150 to 200 basis points.

◦                     Management fees, franchise fees and other income increase of approximately 10% to 12%.

◦                     Operating income from our vacation ownership and residential business of approximately $125 million to $135 million.

◦                     Selling, General and Administrative expenses increase 2% to 3%. 

• Depreciation and amortization is expected to be approximately $325 million.
• Interest Expense is expected to be approximately $245 million.
• Full year effective tax rate is expected to be approximately 25%.
• Assuming all of the above, EPS is expected to be approximately $1.55 to $1.65.
• Full year capital expenditure (excluding vacation ownership and residential inventory) is expected to be approximately $300 million for maintenance, renovation and technology. In addition, in-flight investment projects and prior commitments for joint ventures and other investments are expected to total approximately $150 million. Vacation ownership (excluding Bal Harbour) is expected to generate approximately $165 million in positive cash flow

• The Company currently expects closings on Bal Harbour residential units to commence in late Q4 2011. The Company’s current outlook does not include any revenue recognition or cash flows associated with these potential closings. The Company does, however, expect there to be revenue recognition and cash flows from closings in Q4 2011 and the Company will provide updates as the year progresses. Bal Harbour capital expenditure for 2011 is expected to be approximately $150 million. 

For the three months ended March 31, 2011:

• Adjusted EBITDA is expected to be approximately $195 million to $205 million, assuming:

◦                     REVPAR increases at Same-Store Company Operated Hotels Worldwide of 8% to 10% in constant dollars (approximately 100 basis points higher in dollars at current exchange rates).

◦                     REVPAR increases at Branded Same-Store Owned Hotels Worldwide of 8% to 10% in constant dollars (approximately 100 basis points higher in dollars at current exchange rates).

◦                     Management fees, franchise fees and other income increase of approximately 12% to 14%.

◦                     Operating income from our vacation ownership and residential business of approximately $30 million to $35 million.

• Depreciation and amortization is expected to be approximately $78 million.
• Interest Expense is expected to be approximately $60 million.
• Income from continuing operations is expected to be approximately $43 million to $51 million, reflecting an effective tax rate of approximately 25%.

Assuming all of the above, EPS is expected to be approximately $0.22 to $0.26.