Fourth Quarter 2007 Highlights
• Excluding special items, EPS from continuing operations was $0.79. Including special items, EPS from continuing operations was $0.74.
• Excluding special items, income from continuing operations was $157 million. Net income, including special items, was $146 million.
• Total Company Adjusted EBITDA was $361 million.
• During the fourth quarter, the Company repurchased approximately 10.4 million shares at a cost of $563 million.
• Worldwide System-wide REVPAR for Same-Store Hotels increased 13.3% compared to the fourth quarter of 2006. System-wide REVPAR for Same-Store Hotels in North America increased 7.8%.
• Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 14.7% compared to the fourth quarter of 2006. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 12.0%.
• Margins at Starwood branded Same-Store Owned Hotels Worldwide and in North America improved 154 and 234 basis points, respectively, as compared to the fourth quarter of 2006.
• Management and franchise revenues increased 19.9% when compared to 2006.
• Reported revenues from vacation ownership and residential sales decreased 17.7% when compared to 2006.
• The Company signed 61 hotel management and franchise contracts in the quarter, representing approximately 13,000 rooms. For the full year, the Company signed 197 hotel management and franchise contracts, representing approximately 47,000 rooms.
Starwood Hotels & Resorts Worldwide, Inc. today reported EPS from continuing operations for the fourth quarter of 2007 of $0.74 compared to $0.94 in the fourth quarter of 2006. Excluding special items, EPS from continuing operations was $0.79 for the fourth quarter of 2007 compared to $0.92 in the fourth quarter of 2006. Strong hotel results in the fourth quarter of 2007 were offset by declines in the Company's vacation ownership and residential business, loss of earnings from hotels sold during the past year, and a higher tax rate. Excluding special items, the effective income tax rate in the fourth quarter of 2007 was 28.5%, compared to 21.4% in the same period of 2006 primarily related to the recognition in 2006 of certain tax credits generated in 2005.
Income from continuing operations was $146 million in the fourth quarter of 2007 compared to $203 million in 2006. Excluding special items, which net to a $11 million charge in 2007, income from continuing operations was $157 million for the fourth quarter of 2007 compared to $199 million in 2006.
Net income was $146 million and EPS was $0.74 in the fourth quarter of 2007 compared to net income of $203 million and EPS of $0.93 in the fourth quarter of 2006.
Frits van Paasschen, CEO, said, 'Starwood reported another terrific quarter, beating guidance on strength in our core lodging business. Performance was broad-based, but particularly strong in our international divisions, where system-wide RevPAR increased 20.2%. Our globally diversified pipeline grew to 120,000 rooms, and is skewed towards high quality rooms in the upper upscale and luxury segments where our brands have a commanding presence. Reflecting our commitment to return cash to our shareholders, we bought back 10.4 million shares, or over 5% of our diluted share count in the quarter.'
Operating Results
Fourth Quarter Ended December 31, 2007
Management and Franchise Revenues
Worldwide System-wide (owned, managed and franchised) REVPAR for Same-Store Hotels increased 13.3% compared to the fourth quarter of 2006, including 24.5% in Europe, 20.0% in Africa & the Middle East, 17.5% in Asia Pacific, 11.0% in Latin America and 7.8% in North America. Worldwide System-wide REVPAR increases for Same-Store Hotels by brand were: Le Méridien 23.4%, St. Regis/Luxury Collection 17.0%, Four Points by Sheraton 14.9%, W Hotels 13.4%, Sheraton 12.3% and Westin 8.4%.
Management fees, franchise fees and other income were $237 million, up $28 million, or 13.4%, from the fourth quarter of 2006. Management fees grew 17.8% to $126 million and franchise fees grew 35.5% to $42 million. Approximately 55% of the Company's management and franchise fees are generated in markets outside the United States.
During the fourth quarter of 2007, the Company signed 61 hotel management and franchise contracts, representing approximately 13,000 rooms, of which 54 were new builds and 7 were conversions from other brands. For the full year, the Company signed 197 hotel management and franchise contracts, representing approximately 47,000 rooms.
At December 31, 2007, the Company had approximately 500 hotels in the active pipeline, representing 120,000 rooms, driven by strong interest in all Starwood brands. Of these rooms, almost 70% are in the upper upscale/luxury segment and over half are outside North America.
During the fourth quarter of 2007, 16 new hotels and resorts (representing approximately 3,800 rooms) entered the system, including the St. Regis Singapore (Singapore, 299 rooms), the Le Méridien Cambridge (Boston, Massachusetts, 210 rooms) and the Sheraton Kansas City (Kansas City, Missouri, 372 rooms). Fifteen properties (representing approximately 3,400 rooms) were removed from the system during the quarter. For the full year in 2007, the Company opened 66 hotels with approximately 19,000 rooms.
Owned, Leased and Consolidated Joint Venture Hotels
Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 14.7%. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 12.0%. Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 8.4% excluding the impact of foreign exchange, and as reported, in US dollars, branded Same-Store Owned Hotel REVPAR increased 19.3%.
Revenues at Starwood branded Same-Store Owned Hotels in North America increased 10.0% while costs and expenses increased 6.5% when compared to 2006. Margins at these hotels increased 234 basis points.
Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 13.0% while costs and expenses increased 10.7% when compared to 2006. Margins at these hotels increased 154 basis points.
Approximately 45% of Starwood's Owned Hotel earnings (before depreciation) is generated from outside the United States.
Revenues at owned, leased and consolidated joint venture hotels were $631 million when compared to $602 million in 2006. Reported revenues and operating income were impacted by the sale and closing of 13 hotels since the beginning of the fourth quarter of 2006. These hotels had $10 million of revenues and $9 million of expenses (before depreciation) in 2007 as compared to $50 million of revenues and $39 million of expenses (before depreciation) in the same quarter of 2006.
Vacation Ownership
Total vacation ownership reported revenues decreased 16.5% to $259 million when compared to 2006. Reported revenues are significantly impacted by the timing of the recognition of deferred revenues under percentage of completion accounting for projects currently under construction. During the fourth quarter of 2007, the Company was actively selling vacation ownership interests at 16 resorts. Starwood Vacation Ownership is also in the predevelopment phase of several other new vacation ownership resorts in Arizona, California, Colorado, Hawaii, and Mexico.
Originated contract sales of vacation ownership intervals decreased 8.0% primarily due to lower close rates in Hawaii as the Company's Westin Ka'anapali Ocean Resort North in Maui nears sell out. The average price per vacation ownership unit sold decreased 9.5% to approximately $24,000, driven by a reduction in the percentage of total sales coming from higher priced Hawaii and St. Regis New York inventory, while the number of contracts signed increased 1.7% when compared to 2006.
As previously reported, there were no gains on the sale of notes receivable in the fourth quarter of 2007 compared to gains of $17 million in the fourth quarter of 2006.
Residential
During the fourth quarter of 2007, the Company's residential revenues were $6 million, compared to $12 million in the prior year as our residential inventory at the St. Regis New York is substantially sold out.
Selling, General, Administrative and Other
Selling, general, administrative and other expenses increased 18.0% to $151 million compared to the fourth quarter of 2006. The increase was primarily due to certain non-recurring costs totaling approximately $11 million, investments in our global development capability and costs associated with the launch of the Company's new brands, aloft and Element.
Asset Sales
During the fourth quarter of 2007, the Company completed the sale of four wholly-owned hotels for cash proceeds of approximately $55 million.
Capital
Gross capital spending during the quarter included approximately $74 million in renovations of hotel assets including construction capital at the Sheraton Centre Toronto Hotel, the W Los Angeles, the Phoenician, and the Westin Maui Resort. Investment spending on gross vacation ownership interest ('VOI') inventory was $93 million, which was offset by cost of sales of $61 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 Kierland Resort in Arizona, Sheraton's Vistana Villages in Orlando, and the Westin Lagunamar Resort in Cancun.
Share Repurchase
During the fourth quarter of 2007, the Company repurchased 10.4 million shares at a total cost of approximately $563 million. In the twelve months ended December 31, 2007, the Company repurchased approximately 29.6 million shares at a total cost of approximately $1.787 billion. At December 31, 2007, approximately $593 million remained available under the Company's share repurchase authorization. Starwood had approximately 191 million shares outstanding (including partnership units) at December 31, 2007.
Dividend
The Company's 2007 dividend of $0.90 per share was declared by the Board of Directors in November 2007 and paid by the Company on January 11, 2008.
Balance Sheet
At December 31, 2007, the Company had total debt of $3.595 billion and cash and cash equivalents (including $204 million of restricted cash) of $366 million, or net debt of $3.229 billion, compared to net debt of $2.754 billion at the end of the third quarter of 2007.
At December 31, 2007, debt was approximately 41% fixed rate and 59% floating rate and its weighted average maturity was 4.2 years with a weighted average interest rate of 6.52%. The Company had cash (including total restricted cash) and availability under domestic and international revolving credit facilities of approximately $1.733 billion.
Results for the Twelve Months Ended December 31, 2007
EPS from continuing operations decreased to $2.57 compared to $5.01 in 2006. Excluding special items, EPS from continuing operations was $2.76, compared to $2.73 in 2006. Excluding special items, income from continuing operations was $582 million compared to $607 million in 2006. Net income was $542 million and EPS was $2.57 compared to $1.043 billion and $4.69, respectively, in 2006. Total Company Adjusted EBITDA, which was significantly impacted by the sale of 56 hotels since the beginning of 2006, was $1.356 billion compared to $1.309 billion in 2006.
Outlook
While overall lodging trends are currently strong, uncertainty surrounding the U.S. economic environment and its impact on travel patterns makes it difficult to predict future results with precision. As a result, the Company has adjusted its 2008 outlook to reflect this uncertainty and the possibility of a slowdown in U.S. lodging demand.
For the full year 2008:
Assuming a REVPAR growth range at Same-Store Company Operated Hotels worldwide of 4% to 7% and a REVPAR growth range at Branded Same-Store Company Owned Hotels in North America of 3% to 6%:
-- Adjusted EBITDA would be between $1.230 billion and $1.300 billion
-- EPS before special items would be between $2.32 and $2.57
-- North America Same-Store Branded Owned Hotel EBITDA growth of 0% to 7% versus 2007 with margin changes between negative 50 basis points and positive 50 basis points.
-- Management and franchise revenue growth between 10% and 13%
-- Operating income from our vacation ownership and residential business will decline $40 million to $60 million versus 2007 (including potential gains on sale of vacation ownership notes receivable of $40 million to $45 million in the fourth quarter of 2008)
-- Income from continuing operations before special items would be between $442 million and $489 million reflecting an effective tax rate of 33%
-- Full year capital expenditures (excluding vacation ownership and residential inventory) would be approximately $500 million, including $300 million for maintenance, renovation and technology and $200 million for other growth initiatives. Additionally, net capital expenditures for vacation ownership and residential inventory, including Bal Harbour, would be approximately $275 million.
-- Full year depreciation and amortization would be approximately $355 million
-- Full year interest expense would be approximately $215 million and cash taxes of approximately $230 million.
-- Full year weighted average diluted shares outstanding of 190 million.
-- The Company expects to open approximately 80 to 100 hotels (representing approximately 20,000 rooms) in 2008 and is targeting signing over 200 hotel management and franchise contracts in 2008.
For the three months ended March 31, 2008:
Adjusted EBITDA is expected to be $200 million to $210 million assuming:
-- REVPAR growth at Same-Store Company Operated Hotels worldwide of 7% to 9%
-- REVPAR growth at Branded Same-Store Owned Hotels in North America of 4% to 6%
-- North America Branded Same Store Owned Hotel EBITDA growth of 0% to 5% with margin changes of approximately 0 to negative 50 basis points
-- Growth from management and franchise revenues of 9% to 11%
-- Operating income from our vacation ownership and residential business will be down $35 million to $45 million. Due to percentage of completion dynamics, and the planned fourth quarter sale of receivables, SVO profits will be down approximately $80 million to $90 million in the first half of the year, and up $30 million to $40 million in the second half of the year versus the prior year
-- Income from continuing operations, before special items, is expected to be approximately $42 million to $49 million, reflecting an effective tax rate of 30%
-- EPS before special items is expected to be approximately $0.22 to $0.26
Special Items
The Company recorded net charges of $11 million (after-tax) for special items in the fourth quarter of 2007 compared to $4 million of net credits (after-tax) in the same period of 2006.
Special items in the fourth quarter of 2007 relate to losses on the sale of four hotels and restructuring and other special charges, primarily associated with the demolition of the Sheraton Bal Harbour.
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