Starwood First Quarter 2007 Profit Rises, Beats Estimates
1st Quarter Profit Jumps to $122M
Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) today reported strong first quarter 2007 financial results.
First Quarter 2007 Highlights
• Excluding special items, EPS from continuing operations was $0.48 compared to $0.41 for the first quarter of 2006. Including special items, EPS from continuing operations was $0.56 compared to $0.34 in the first quarter of 2006.
• Worldwide System-wide REVPAR for Same-Store Hotels increased 10.2% compared to the first quarter of 2006. System-wide REVPAR for Same-Store Hotels in North America increased 6.1% compared to the first quarter of 2006.
• Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 9.3% compared to the first quarter of 2006. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 8.0% compared to the first quarter of 2006.
• Margins at Starwood branded Same-Store Owned Hotels Worldwide and in North America improved 130 and 103 basis points, respectively, as compared to the first quarter of 2006.
• Management and franchise revenues increased 44.1% when compared to 2006, including revenues from the hotels sold to Host Hotels & Resorts Inc. ("Host").
• The Company signed 65 hotel management and franchise contracts in the quarter representing approximately 18,100 rooms.
• Reported revenues from vacation ownership and residential sales increased 19.6% when compared to 2006. Strong increases in revenues from vacation ownership sales were partially offset by a decline in residential sales due to the sellout of the St. Regis San Francisco Museum tower project in 2006.
• Excluding special items, income from continuing operations was $104 million compared to $91 million in the same period of 2006. Net income, including special items, was $122 million compared to $5 million in the first quarter of 2006.
• Total Company Adjusted EBITDA was $285 million when compared to $266 million in 2006. The year over year increase is primarily due to an increase in the Company's Management and Franchise fees and improved vacation ownership results partially offset by results from hotels sold since the first quarter of 2006. The results for 2007 include $18.3 million of income from the Company's carried interest in the Westin Boston Waterfront Hotel, which was earned when the hotel was sold by its owners in January 2007.
• During the first quarter, the Company repurchased approximately 3.2 million shares at a cost of $208.9 million. In April of 2007, the Board of Directors authorized an additional $1 billion in share repurchases.
Starwood Hotels & Resorts Worldwide, Inc. ("Starwood" or the "Company") today reported EPS from continuing operations for the first quarter of 2007 of $0.56 compared to $0.34 in the first quarter of 2006. Excluding special items, EPS from continuing operations was $0.48 for the first quarter of 2007 compared to $0.41 in the first quarter of 2006. Excluding special items, the effective income tax rate in the first quarter of 2007 was 35.7%.
Income from continuing operations was $123 million in the first quarter of 2007 compared to $77 million in 2006. Excluding special items, which net to a $19 million benefit in 2007, income from continuing operations was $104 million for the first quarter of 2007 compared to $91 million in 2006.
Net income was $122 million and EPS was $0.56 in the first quarter of 2007 compared to net income of $5 million and EPS of $0.02 in the first quarter of 2006 (after a one-time expense of $72 million (after tax) related to the implementation of a new time-share accounting rule).
Bruce W. Duncan, CEO, said, "This quarter's excellent results underscore the strength of Starwood's brand strategy, operational capabilities, and owner relationships, as well as the talent and dedication of our management team and our 145,000 associates around the world. We remain focused on continuing to grow our managed and franchised business, and according to Smith Travel data, our pipeline continues to lead the upper upscale and luxury segments. Lodging business fundamentals remain sound and our vacation ownership platform is well-positioned for future growth. Starwood is a well balanced, globally diversified company that should continue to create shareholder value for many years to come."
Operating Results
First Quarter Ended March 31, 2007
Management and Franchise Revenues
Worldwide System-wide REVPAR for Same-Store Hotels increased 10.2% compared to the first quarter of 2006 including 17.9% in Africa & the Middle East, 17.6% in Europe, 15.9% in Asia Pacific, 6.1% in North America and 5.9% in Latin America. Worldwide System-wide REVPAR for Same-Store Hotels by brand was: Le Meridien 21.1%, St. Regis/Luxury Collection 10.6%, Sheraton 9.5%, W Hotels 8.3%, Westin 8.1%, and Four Points 7.2%.
Management fees, franchise fees and other income were $192 million, up $60 million, or 45.5%, from the first quarter of 2006. Management fees grew 35.8% to $91 million and franchise fees grew 32.0% to $33 million. The increase in fees are related to the addition of new hotels (including hotels sold to third parties, including Host), and growth in REVPAR of existing hotels under management, offset in part by fees associated with hotels that left the system.
The hotels sold to Host contributed $26 million of management revenues during the first quarter of 2007. Excluding the hotels sold to Host, management and franchise revenues increased 18.6% in the first quarter of 2007 when compared to 2006. Other income increased approximately $15 million and included $18.3 million earned from the sale of the Westin Boston Waterfront Hotel.
During the first quarter of 2007, the Company signed 65 hotel management and franchise contracts (representing approximately 18,100 rooms: 20 alofts, 15 Sheratons, 8 Elements, 6 Four Points by Sheraton, 6 Westins, 6 W Hotels, 3 St. Regis hotels and 1 Luxury Collection hotel). Of the hotels signed in the quarter, 57 were new builds and 8 were conversions from other brands. At March 31, 2007 the Company had approximately 420 hotels in the active pipeline representing over 100,000 rooms, driven by strong interest in all Starwood brands.
During the first quarter of 2007, 11 new hotels and resorts (representing approximately 3,400 rooms) entered the system, including the Sheraton Baltimore City Center Hotel (Baltimore, Maryland, 707 rooms), The Westin Chicago Northwest (Itasca, Illinois, 408 rooms) and the Sheraton Changsha Hotel (Changsha, China, 385 rooms). Thirteen properties (representing approximately 3,500 rooms) were removed from the system during the quarter. The Company expects to open more than 80 hotels (representing approximately 20,000 rooms) in 2007 and is targeting signing approximately 200 hotel management and franchise contracts in 2007.
Owned, Leased and Consolidated Joint Venture Hotels
Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 9.3%. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 8.0%. REVPAR growth was particularly strong at the Company's owned hotels in Toronto, Kauai, Philadelphia, and San Francisco. Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 6.5% excluding the impact of foreign exchange, and as reported, in US dollars, branded Same-Store Owned Hotel REVPAR increased 11.8%.
Revenues at Starwood branded Same-Store Owned Hotels in North America increased 8.4% while costs and expenses increased 6.9% when compared to 2006. Margins at these hotels increased 103 basis points.
Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 8.7% while costs and expenses increased 6.9% when compared to 2006. Margins at these hotels increased 130 basis points.
Revenues at owned, leased and consolidated joint venture hotels were $559 million when compared to $822 million in 2006. Revenues and operating income were impacted by the sale of 46 hotels since the beginning of the first quarter of 2006. These hotels had $5 million of revenues and $2 million of expenses (before depreciation) in 2007 as compared to $301 million of revenues and $231 million of expenses (before depreciation) in the same quarter of 2006.
Vacation Ownership
Total vacation ownership reported revenues increased 47.1% to $228 million when compared to 2006 due primarily to the timing of the recognition of deferred revenues under percentage of completion accounting for pre-sales at projects under construction. Originated contract sales of vacation ownership intervals were down 8.9% primarily due to a significant decline in fractional sales. Fractional sales in 2006 included sales at the St. Regis Residence Club in both Aspen and New York; fractional sales in 2007 only included sales in New York, since the St. Regis Residence Club in Aspen is now sold out. In the timeshare business, contract sales were moderately lower due to the sellout of some projects in late 2006. Closing rates and timeshare pricing remained strong during the quarter and additional timeshare and fractional inventory is becoming available for sale at several new locations over the course of this year. Vacation ownership trends remain solid and our full year expectations for strong growth in contract sales, revenues and earnings remain unchanged.
The recognition of deferred earnings under the percentage of completion method exceeded expectations by roughly $8 million during the quarter due to accelerated construction timelines at the Westin Ka'anapali Ocean Resort Villas North project in Maui and the Westin Princeville Resort in Kauai. As such, earnings to be recognized in the second and third quarters of 2007 are expected to be lower by this amount.
During the first quarter of 2007, the Company was actively selling vacation ownership interests at 15 resorts and is also in the predevelopment phase of new fractional or vacation ownership resorts in Arizona, California, Colorado, Hawaii, Los Cabos, Mexico and Aruba.
Residential
During the first quarter of 2007, the Company recognized residential revenues of approximately $4 million primarily from sales at the St. Regis in New York. To date, the Company has recognized approximately $44 million in revenues from the sale of condominiums at the St. Regis in New York. In the first quarter of 2006, the Company recognized residential revenues of $39 million primarily associated with sales at the St. Regis Museum Tower in San Francisco which sold out in the first half of 2006.
Selling, General, Administrative and Other
Selling, general, administrative and other expenses increased 9.4% to $116 million compared to the first quarter of 2006. The increase is due to investments in our global development capability, and costs associated with the launch of the Company's new brands, aloft and Element, as well as the addition of the Le Meridien business.
Asset Sales
During the first quarter of 2007, the Company sold one wholly-owned hotel for cash proceeds of approximately $41 million.
Capital
Gross capital spending during the quarter included approximately $30 million in renovations of hotel assets including construction capital at the Sheraton Manhattan Hotel in New York, New York, the W Los Angeles in Westwood, California, and the Phoenician in Scottsdale, Arizona. Investment spending on gross vacation ownership interest ("VOI") inventory was $85 million, which was offset by cost of sales of $54 million associated with VOI sales during the quarter. The inventory spend included VOI construction at the Westin Ka'anapali Ocean Resort Villas North in Maui, the Westin Princeville Resort in Kauai, the Westin Lagunamar Resort in Cancun, the Westin Riverfront Resort in Avon, Colorado, and the Westin St. John Resort and Villas in the Virgin Islands.
Share Repurchase
During the first quarter of 2007, the Company repurchased approximately 3.2 million shares at a total cost of approximately $208.9 million. At March 31, 2007, approximately $171 million remained available under the Company's previously approved share repurchase authorization. On April 17, 2007, the Board of Directors authorized an additional $1 billion in share repurchases. Starwood had approximately 215 million shares outstanding (including partnership units) at March 31, 2007.
Dividend
The Company paid a dividend of $0.42 per share on January 19, 2007 to holders of record on December 31, 2006.
Balance Sheet
At March 31, 2007, the Company had total debt of $2.606 billion and cash and cash equivalents (including $289 million of restricted cash) of $472 million, or net debt of $2.134 billion, compared to net debt of $2.113 billion at the end of 2006.
At March 31, 2007, debt was approximately 68% fixed rate and 32% floating rate and its weighted average maturity was 4.3 years with a weighted average interest rate of 6.92%. The Company had cash (including total restricted cash) and availability under domestic and international revolving credit facilities of approximately $1.850 billion. Availability under domestic and international revolving credit facilities, not including cash and cash equivalents, was $1.378 billion.
On January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes" - an Interpretation of SFAS No. 109, "Accounting for Income Taxes." The interpretation prescribes recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The impact of adopting FIN 48, which is reported as a change in accounting principle, was a $35 million direct increase to the beginning balance of the Company's retained earnings on its balance sheet.
Outlook
For the full year 2007:
• Adjusting for the asset sales included in previous guidance, Adjusted EBITDA is expected to be approximately $1.357 billion, assuming:
• REVPAR growth at Same-Store Company Operated Hotels worldwide of 8% to 10%
• REVPAR growth at branded Same-Store Owned Hotels in North America of 7% to 9% and EBITDA growth of 12% to 14% with margin improvement of 100 to 150 basis points
• Growth from management and franchise revenues of approximately 18% to 20% including revenues earned from the hotels sold to Host, and 14% to 16% excluding the hotels sold to Host
• An increase in operating income from our vacation ownership and residential business of $45 to $55 million (including gains on sale of vacation ownership notes receivable)
• Income from continuing operations, before special items, is expected to be approximately $558 million reflecting an effective tax rate of approximately 33%.
• EPS before special items is expected to be approximately $2.57
• Full year capital expenditures (excluding timeshare inventory) would be approximately $650 million, including $300 million for maintenance, renovation and technology and $350 million for other growth initiatives, including the Bal Harbour project. Additionally, net capital expenditures for timeshare inventory would be approximately $150 million.
• Full year depreciation and amortization expense would be approximately $339 million
• Full year cash interest expense would be approximately $181 million and cash taxes of approximately $240 million.
For the three months ended June 30, 2007:
• Adjusted EBITDA is expected to be $330 million assuming:
• REVPAR growth at Same-Store Company Operated Hotels worldwide of 8% to 10%
• REVPAR growth at branded Same-Store Owned Hotels in North America of 6% to 8% and EBITDA growth of 9% to 11% with margin improvement of 75 to 125 basis points. As expected, Same-Store Owned Hotels in North America are impacted by renovations at major hotels.
• Growth from management and franchise revenues of approximately 13% to 15%
• An increase in operating income from our vacation ownership and residential business of $18 to $22 million
• Income from continuing operations, before special items, is expected to be approximately $135 million reflecting an effective tax rate of approximately 33%.
• EPS before special items is expected to be approximately $0.62.
Special Items
The Company recorded net credits of $19 million (after-tax) for special items in the first quarter of 2007 compared to $14 million of net charges (after-tax) in the same period of 2006.
Special items in the first quarter of 2007 primarily relate to the gain realized on the sale of a hotel and restructuring and other special credits.
The following represents a reconciliation of income from continuing operations before special items to income from continuing operations after special items (in millions, except per share data):
Three Months Ended
March 31,
------------------------
2007 2006
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Income from continuing operations before
special items $104 $91
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EPS before special items $0.48 $0.41
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Special Items
Restructuring and other special credits
(charges), net (a) 2 (9)
Debt defeasance costs (b) -- (37)
Gain on asset dispositions and impairments,
net (c) 11 25
----------- -----------
Total special items - pre-tax 13 (21)
Income tax benefit for special items (d) 2 8
Reserves and credits associated with tax
matters (e) 4 (1)
----------- -----------
Total special items - after-tax 19 (14)
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Income from continuing operations $123 $77
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EPS including special items $0.56 $0.34
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