Starwood Q2 EPS up 43%

WHITE PLAINS, New York – Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) today reported second quarter 2011 financial results.

Read Starwood's full Q2 earnings release as a PDF.

Second Quarter 2011 Highlights

• Excluding special items, EPS from continuing operations was $0.50, an increase of 43% compared to 2010. Including special items, EPS from continuing operations was $0.77.
• Adjusted EBITDA was $262 million.
• Excluding special items, income from continuing operations was $97 million. Including special items, income from continuing operations was $150 million.
• Worldwide System-wide REVPAR for Same-Store Hotels increased 11.8% (8.2% in constant dollars) compared to 2010. System-wide REVPAR for Same-Store Hotels in North America increased 9.5% (8.7% in constant dollars).
• Management fees, franchise fees and other income increased 13.6% compared to 2010.
• Worldwide Same-Store company-operated gross operating profit margins increased approximately 90 basis points compared to 2010. Gross operating profits were
• negatively impacted by events in the Middle East, North Africa and Japan.
• Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 18.5% (12.5% in constant dollars) compared to 2010. REVPAR for Starwood branded Same-Store Owned Hotels in North America increased 10.8% (8.7% in constant dollars).
• Margins at Starwood branded Same-Store Owned Hotels Worldwide increased approximately 225 basis points compared to 2010.
• Earnings from our vacation ownership and residential business were flat compared to 2010.
• During the quarter, the Company completed the sales of two wholly-owned hotels and one consolidated joint venture hotel for cash proceeds of approximately $281 million and the assumption of approximately $57 million of debt by the buyer.
• During the quarter, the Company signed 22 hotel management and franchise contracts representing approximately 5,900 rooms and opened 13 hotels and resorts with approximately 2,900 rooms.

Second Quarter 2011 Earnings Summary
Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the second quarter of 2011 of $0.77 per share compared to $0.42 in the second quarter of 2010. Excluding special items, EPS from continuing operations was $0.50 for the second quarter of 2011 compared to $0.35 in the second quarter of 2010. Special items in the second quarter of 2011, which totaled $53 million (after-tax), primarily relate to a tax benefit associated with the sale of two wholly owned hotels. Excluding special items, the effective income tax rate in the second quarter of 2011 was 25.4%, compared to 16.1% in the second quarter of 2010.

Income from continuing operations was $150 million in the second quarter of 2011 compared to $79 million in the second quarter of 2010. Excluding special items, income from continuing operations was $97 million in the second quarter of 2011 compared to $67 million in the second quarter of 2010.

Net income was $131 million and $0.68 per share in the second quarter of 2011 compared to $114 million and $0.61 per share in the second quarter of 2010. Net income in the second quarter of 2011 includes an $18 million after-tax loss in discontinued operations from the sale of a consolidated joint venture hotel and net income in the second quarter of 2010 included a $36 million after-tax gain in discontinued operations from the sale of a wholly-owned hotel.

Frits van Paasschen, CEO said, “We continue to see strong demand across both business and leisure travelers. This demand fueled growth across each of our nine distinct and compelling brands. Our efforts to hold the line on costs enabled us to beat EBITDA and EPS expectations in the quarter."

“Our senior leadership team relocated to China for the month of June as part of an effort to get closer to this growing market. Being there has reinforced our view that China and other rapidly growing markets represent a once-in-a-lifetime growth opportunity for us. Our asset light business model and global brands are well-positioned to benefit from this
phenomenon."

Six Months Ended June 30, 2011 Earnings Summary
Income from continuing operations was $179 million in the six months ended June 30, 2011 compared to $109 million in the same period in 2010. Excluding special items, income from continuing operations was $155 million in the six months ended June 30, 2011 compared to $91 million in the same period in 2010.

Net income was $159 million and $0.82 per share in the six months ended June 30, 2011 compared to $144 million and $0.77 per share in the same period in 2010.

Adjusted EBITDA was $470 million in the six months ended June 30, 2011 compared to $405 million in the same period in 2010.

Second Quarter 2011 Operating Results

Management and Franchise Revenues
Worldwide System-wide REVPAR for Same-Store Hotels increased 11.8% (8.2% in constant dollars) compared to the second quarter of 2010. International System-wide REVPAR for Same-Store Hotels increased 14.8% (7.4% in constant dollars).

Excluding North Africa and Japan, REVPAR increases in constant dollars were 7.5% for Sheraton and 9.4% for Le Méridien.

Worldwide Same-Store company-operated gross operating profit margins increased approximately 90 basis points compared to 2010. International gross operating profit margins for Same-Store company-operated properties were flat, negatively impacted by political unrest in the Middle East and North Africa, as well as the earthquake in Japan. North American Same-Store company-operated gross operating profit margins increased approximately 170 basis points, driven by REVPAR increases and cost controls.

Management fees, franchise fees and other income were $201 million, up $24 million, or 13.6% from the second quarter of 2010. Management fees increased 11.0% to $111 million and franchise fees increased 19.5% to $49 million. Excluding North Africa and Japan, management fees increased 16.1%.

During the second quarter of 2011, the Company signed 22 hotel management and franchise contracts, representing approximately 5,900 rooms, of which 20 are new builds and two are conversions from other brands. At June 30, 2011, the Company had over 350 hotels in the active pipeline representing almost 90,000 rooms.

During the second quarter of 2011, 13 new hotels and resorts (representing approximately 2,900 rooms) entered the system, including the W St. Petersburg (Russia, 137 rooms), St. Regis Bangkok (Thailand, 116 rooms), Sheraton Bangalore (India, 230 rooms), The Westin Playa Conchal (Costa Rica, 406 rooms) and The Chatwal, a Luxury Collection Hotel (New York, 83 rooms). Six properties (representing approximately 1,700 rooms) were removed from the system during the quarter, including the 941 room Boston Park Plaza, where we sold our interest in the quarter.

Owned, Leased and Consolidated Joint Venture Hotels
Worldwide REVPAR for Starwood branded Same-Store Owned Hotels increased 18.5% (12.5% in constant dollars) in the second quarter of 2011 when compared to 2010. REVPAR at Starwood branded Same-Store Owned Hotels in North America increased 10.8% (8.7% in constant dollars). Internationally, Starwood branded Same-Store Owned Hotel REVPAR increased 27.9% (17.2% in constant dollars).

Revenues at Starwood branded Same-Store Owned Hotels in North America increased 9.3% while costs and expenses increased 5.9% when compared to 2010. Margins at these hotels increased approximately 255 basis points.

Revenues at Starwood branded Same-Store Owned Hotels Worldwide increased 15.0% (9.3% in constant dollars) while costs and expenses increased 11.7% (6.5% in constant dollars) when compared to 2010. Margins at these hotels increased approximately 225 basis points.

Revenues at owned, leased and consolidated joint venture hotels were $478 million, compared to $437 million in 2010. Expenses at owned, leased and consolidated joint venture hotels were $381 million compared to $347 million in 2010. Second quarter results were impacted by the effect of the earthquake at the new leased St. Regis Osaka, five renovations and three asset sales.

Vacation Ownership
Total vacation ownership revenues increased 9.9% to $144 million compared to 2010. Originated contract sales of vacation ownership intervals increased 8.1% primarily due to improved sales performance from existing owner channels and increased tour flow from
new buyer preview packages. The number of contracts signed increased 5.3% when compared to 2010 and the average price per vacation ownership unit sold increased 2.0% to approximately $14,800, driven by inventory mix.

Selling, General, Administrative and Other
Selling, general, administrative and other expenses decreased 4.3% to $88 million compared to $92 million in 2010. Selling, general, administrative and other expenses declined relative to 2010 due to lower accruals for incentive compensation and lower legal expenses, offset by a weaker dollar.

Capital
Gross capital spending during the quarter included approximately $51 million of maintenance capital and $32 million of development capital. Net investment spending on vacation ownership interest (“VOI”) and residential inventory was $31 million, primarily related to the St. Regis Bal Harbour project.

Asset Sales
During the quarter, the Company completed the sales of two wholly-owned hotels, the Westin Gaslamp (San Diego) and W City Center (Chicago), for cash proceeds of approximately $237 million. These hotels were sold subject to long-term management contracts. Additionally during the quarter, the Company sold a consolidated joint venture hotel, the Boston Park Plaza, for cash proceeds of approximately $44 million and the buyer assumed $57 million of debt that was previously on our balance sheet. The Company recognized an after-tax loss in discontinued operations of $18 million as a result of the sale.

Balance Sheet
At June 30, 2011, the Company had gross debt of $2.800 billion, excluding $422 million of debt associated with securitized vacation ownership notes receivable. Additionally, the Company had cash and cash equivalents of $1.060 billion (including $61 million of
restricted cash), and net debt of $1.740 billion, compared to net debt of $2.121 billion as of March 31, 2011. Net debt at June 30, 2011 including debt and restricted cash ($18 million) associated with securitized vacation ownership notes receivables was $2.144
billion.

At June 30, 2011, debt was approximately 77% fixed rate and 23% floating rate and its weighted average maturity was 3.74 years with a weighted average interest rate of 6.79% excluding the securitized debt. The Company had cash (including current restricted cash) and availability under the domestic and international revolving credit facility of approximately $2.546 billion.

Outlook
For the three months ended September 30, 2011:

• Adjusted EBITDA is expected to be approximately $225 million to $235 million, including asset sales completed to date, which reduce EBITDA by approximately $8 million, and assuming:
• REVPAR increases at Same-Store Company Operated Hotels Worldwide of 7% to 9% in constant dollars (approximately 500 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 700 basis points higher in dollars at current exchange rates).
• Management fees, franchise fees and other income increase of approximately 13% to 15%.
• Earnings from our vacation ownership and residential business are flat.
• Depreciation and amortization is expected to be approximately $76 million.
• Interest expense is expected to be approximately $55 million.
• Income from continuing operations is expected to be approximately $70 million to $78 million, reflecting an effective tax rate of approximately 25%.
• Assuming all of the above, EPS before special items is expected to be approximately $0.36 to $0.40.

For the Full Year 2011:
Macro-economic and geo-political environments remain uncertain. 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, negatively impacted by Japan, North Africa and Mexico; and asset sales completed year to date:

• 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 300 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 400 basis points higher in dollars at current exchange rates).
• Asset sales completed to date reduce EBITDA for the year by approximately $20 million.
• 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 11% to 13% and were negatively impacted by approximately 200 basis points by Japan and North Africa.
• Earnings from our vacation ownership and residential business of approximately $130 million to $140 million.
• Selling, general and administrative expenses increase 4% to 5%.
• Depreciation and amortization is expected to be approximately $310 million.
• Interest expense is expected to be approximately $230 million and cash taxes will be approximately $80 million.
• Full year effective tax rate is expected to be approximately 25%.
• Assuming all of the above, EPS before special items is expected to be approximately $1.67 to $1.77.
• 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 fourth quarter 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 the fourth quarter of 2011 and the Company will provide updates as the year progresses. Bal Harbour capital expenditure for 2011 is expected to be approximately $150 million.