Starwood Reports First Quarter 2009 Results
- Excluding special items, EPS from continuing operations was $0.14. Including special items, EPS from continuing operations was $0.04.
- Adjusted EBITDA was $167 million.
- Excluding special items, income from continuing operations was $25 million. Including special items, income from continuing operations was $7 million.
- Worldwide System-wide REVPAR for Same-Store Hotels decreased 23.5% (down 19.2% in constant dollars) compared to the first quarter of 2008. System-wide REVPAR for Same-Store Hotels in North America decreased 22.8% (down 21.0% in constant dollars).
- Management and franchise revenues decreased 15.4% compared to 2008.
- Worldwide REVPAR for Starwood branded Same-Store Owned Hotels decreased 31.6% (down 26.4% in constant dollars) compared to the first quarter of 2008. REVPAR for Starwood branded Same-Store Owned Hotels in North America decreased 31.2% (down 28.3% in constant dollars).
- Revenues from vacation ownership and residential sales decreased 30.1% compared to 2008.
- The Company signed 18 hotel management and franchise contracts in the quarter representing approximately 4,900 rooms.
- On April 27, 2009, the Company entered into an amendment to its bank revolver and bank term loans, increasing the permitted leverage ratio from 4.5x to 5.5x (as defined in the agreements).
First Quarter 2009 Earnings Summary
Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the first quarter of 2009 of $0.04 per share compared to $0.42 in the first quarter of 2008. Excluding special items, which net to charges of $18 million in 2009 and $4 million in 2008, EPS from continuing operations was $0.14 for the first quarter of 2009 compared to $0.44 in the first quarter of 2008. Excluding special items, the effective income tax rate in the first quarter of 2009 was 16.4% compared to 28.7% in the same period of 2008, primarily due to lower pretax income from high tax jurisdictions in 2009.
Income from continuing operations was $7 million in the first quarter of 2009 compared to $79 million in 2008. Excluding special items, income from continuing operations was $25 million for the first quarter of 2009 compared to $83 million in 2008.
Net income was $6 million and EPS was $0.03 in the first quarter of 2009 compared to $32 million and EPS of $0.17 in the first quarter of 2008.
Frits van Paasschen, CEO said, “For the second quarter in a row, our pre-emptive cost cutting enabled us to beat expectations, even in the face of substantial declines in REVPAR. Our cost containment exercises are driving operational efficiencies for our owners while our sales organization and SPG loyalty program stimulate revenue at their hotels. The current environment has pushed us to be aggressive in cutting costs and judicious in our capital allocation. Looking past this economic crisis, we remain committed to our long-term growth strategy to create substantial value for our shareholders. By the end of this year, our system of hotels will cross the 1,000th hotel milestone, including 250 new openings and 350 renovated hotels since 2007, making us well-positioned to own the upswing as the global economy stabilizes.”
First Quarter 2009 Operating Results
Management and Franchise Revenues
Worldwide System-wide REVPAR for Same-Store Hotels decreased 23.5% (down 19.2% in constant dollars) compared to the first quarter of 2008. International System-wide REVPAR for Same-Store Hotels decreased 24.4% (down 17.1% in constant dollars). Worldwide System-wide REVPAR decreases by region were: 13.9% in Africa and the Middle East, 20.5% in Latin America, 22.8% in North America, 26.9% in Asia Pacific, and 29.0% in Europe. Worldwide System-wide REVPAR decreases by brand were: Four Points by Sheraton 20.6%, Sheraton 21.0%, Westin 21.4%, Le Méridien 28.5%, W Hotels 34.0%, and St. Regis/Luxury Collection 34.1%.
Management fees, franchise fees and other income were $165 million, down $41 million, or 19.9%, from the first quarter of 2008. Management fees decreased 24.0% to $79 million and franchise fees decreased 17.9% to $32 million. The Company worked closely with its owner/partners to aggressively reduce costs, helping to minimize impact from the weak REVPAR environment.
Approximately 57% of the Company’s management and franchise fees are generated in markets outside the United States.
During the first quarter of 2009, the Company signed 18 hotel management and franchise contracts representing approximately 4,900 rooms of which 17 are new builds and one is a conversion from another brand. At March 31, 2009, the Company had approximately 400 hotels in the active pipeline representing approximately 95,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, 68% are in the upper upscale and luxury segments and 65% are in international locations.
During the first quarter of 2009, 16 new hotels and resorts (representing approximately 3,500 rooms) entered the system, including the Sheraton Prague Charles Square (Prague, Czech Republic, 160 rooms), W Doha (Doha, Qatar, 445 rooms), The Westin Jersey City (Jersey City, New Jersey, 429 rooms) and four Aloft hotels in Charlotte, North Carolina; Tempe, Arizona; San Antonio, Texas; and National Harbor, Maryland. Eleven properties (representing approximately 1,800 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 decreased 31.6%. REVPAR at Starwood branded Same-Store Owned Hotels in North America decreased 31.2% (down 28.3% in constant dollars). Internationally, Starwood branded Same-Store Owned Hotel REVPAR decreased 32.2% (down 23.0% in constant dollars).
The Company’s rigorous cost cutting programs, including lean operations, normative modeling, and procurement helped mitigate the impact of sharp revenue declines during the quarter.
Revenues at Starwood branded Same-Store Owned Hotels in North America decreased 29.9% while costs and expenses decreased 18.8% when compared to 2008. Margins at these hotels decreased 11.7%.
Revenues at Starwood branded Same-Store Owned Hotels Worldwide decreased 30.7% (down 25.4% in constant dollars) while costs and expenses decreased 21.9% when compared to 2008. Margins at these hotels decreased 9.5%.
Approximately 47% of Starwood’s Owned Hotel earnings (before depreciation) are generated from outside the United States.
Revenues at owned, leased and consolidated joint venture hotels were $386 million when compared to $560 million in 2008.
Total vacation ownership reported revenues decreased 29.8% to $134 million when compared to 2008. Originated contract sales of vacation ownership intervals decreased 50.3% primarily due to an overall decline in demand due to the current economic climate. The average price per vacation ownership unit sold decreased 24.6% to approximately $18,000, driven by a higher sales mix of lower-priced inventory, including a higher percentage of lower-priced biennial inventory in Hawaii. The number of contracts signed decreased 34.6% when compared to 2008.
During the quarter, the Company continued to scale back its sales centers and overhead, which helped drive the strong margin performance despite a significant decline in revenues. The Company has reset capital plans for the business which will permit the division to generate increasing levels of cash flow as we work through in-flight capital projects.
The Company did not sell any vacation ownership receivables during the first quarter. The Company is currently in the process of completing sales of vacation ownership receivables and expects to complete these sales in the second quarter of 2009.
Selling, General, Administrative and Other
Selling, general, administrative and other expenses decreased 28.5% to $93 million compared to the first quarter of 2008. The decrease was primarily due to the Company's continued focus on reducing its cost structure. A majority of the Company’s cost containment initiatives were completed and implemented during the quarter, including identifying additional reductions across its corporate departments and divisional headquarters. The Company plans to complete the final phase of its cost reduction program in the second quarter of 2009. These actions are expected to yield an annual run rate savings of approximately $100 million.
Restructuring Charges and Other Special Charges, Net
During the first quarter of 2009, the Company recorded a $17 million charge in connection with its ongoing initiative of rationalizing its cost structure in light of the current economic climate and the decline in activity in its business units. The charge primarily related to costs associated with the closure of a vacation ownership call center as well as severance costs associated with the reduction in force at the Company’s owned hotels.
During the first quarter of 2009, the Company sold one hotel in Brussels, Belgium in exchange for a long term agreement to manage the hotel. The Company recorded a $5 million loss on the sale.
Gross capital spending during the quarter included approximately $31 million of maintenance capital and $37 million of development capital. Investment spending on gross vacation ownership interest (“VOI”) and residential inventory was $76 million, primarily in Bal Harbour, Rancho Mirage, Orlando and Cancun. The run rate of capital spending on development and investment capital will decline throughout the year as in-flight projects are completed.
The Company paid a dividend of $0.90 per share on January 9, 2009 to holders of record on December 31, 2008.
IRS Tax Settlement
In January 2009, the Company and the IRS reached an agreement in principle to settle the litigation pertaining to the tax treatment of the Company’s 1998 disposition of World Directories, Inc. Under the proposed settlement, the Company expects to receive a refund of over $200 million as a result of tax payments previously made. The Company expects to finalize the details of the agreement and obtain the refund during the summer of 2009.
At March 31, 2009, the Company had total debt of $3.958 billion and cash and cash equivalents of $164 million (including $88 million of restricted cash), or net debt of $3.794 billion, compared to net debt of $3.517 billion at the end of 2008.
At March 31, 2009, debt was approximately 60% fixed rate and 40% floating rate and its weighted average maturity was 3.7 years with a weighted average interest rate of 4.85%. The Company had cash (including current restricted cash) and availability under the domestic and international revolving credit facility of approximately $1.722 billion.
On April 27th, the Company entered into an amendment to its bank revolver due February 10, 2011 and bank term loans due June 29, 2009, June 29, 2010 and February 10, 2011. The amendment increased the leverage ratio from 4.5x to 5.5x (as defined in the agreements) in return for fees, higher interest rates and some additional modifications to the covenants. In addition, the Company pre-paid the $500 million bank term loan due June 29, 2009 by simultaneously drawing down on its revolver thereby reducing availability under the revolving credit facility to $1.2 billion (including current restricted cash). The Company plans to pay down portions of the revolver over the next three to six months with excess cashflow, timeshare loan securitizations, the IRS refund, asset sales, capital markets transactions and other cash generating activities.
For the three months ended June 30, 2009:
Adjusted EBITDA is expected to be approximately $180 million to $195 million assuming:
- REVPAR decline at Same-Store Company Operated Hotels Worldwide of 24% to 26% (18% to 20% in constant dollars).
- REVPAR decline at Branded Same-Store Owned Hotels in North America of 30% to 32%.
- Management and franchise revenues will be down approximately 13% to 15%.
- Operating income from our vacation ownership and residential businesses will be down $5 million to $10 million.
Income from continuing operations, before special items, is expected to be approximately $25 million to $36 million, reflecting an effective tax rate of approximately 28%.
EPS before special items is expected to be approximately $0.14 to $0.20.2009 Baseline Update:
At the current time, given significant uncertainty in the global economy, it is very difficult to provide any definitive guidance for the second half of 2009.
Based on our first quarter results and our expectations for the second quarter, full year REVPAR is now tracking down 600 bps from the baseline scenario discussed during the Company’s fourth quarter call. The following are some broad parameters that the Company is using for 2009 planning purposes.
REVPAR at Same-Store Company Operated Hotels Worldwide will decline 18% and REVPAR at Branded Same-Store Owned Hotels Worldwide will decline 21%.Owned hotel level cost reductions will generate $20 million more in savings than previously anticipated.
Selling, General and Administrative savings will be $20 million higher than previously anticipated (down $70 million from 2008).
Operating income from our vacation ownership and residential business will be $10 million lower than previously anticipated (down $60 million from 2008).
Full year depreciation and amortization will be approximately $350 million.
Full year interest expense will be approximately $240 million and cash taxes will be approximately $50 million.
Full year effective tax rate will be approximately 28%.
Full year capital expenditures (excluding vacation ownership and residential inventory) remain unchanged from prior baseline and would be approximately $150 million for maintenance, renovation and technology. In addition, in-flight investment projects, including Bal Harbour, and prior commitments for joint ventures and other investments will total approximately $175 million. Vacation ownership and Residential, excluding the Bal Harbour project, is expected to generate approximately $25 million in positive cash flow, not inclusive of any sales of timeshare receivables.
Vice President, Investor Relations