Starwood Reports Second Quarter 2014 Results

Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) today reported second quarter 2014 financial results.

Second Quarter 2014 Highlights

• Excluding special items, EPS from continuing operations was $0.77. Including special items, EPS from continuing operations was $0.80.
• Adjusted EBITDA was $324 million.
• Excluding special items, income from continuing operations was $147 million. Including special items, income from continuing operations was $153 million.
• Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.3% in constant dollars (5.1% in actual dollars) compared to 2013. Systemwide REVPAR for Same-Store Hotels in North America increased 6.3% in constant dollars (5.7% in actual dollars).
• Management fees, franchise fees and other income increased 10.2% compared to 2013.
• Worldwide Same-Store Company-Operated gross operating profit margins increased approximately 87 basis points compared to 2013.
• Worldwide REVPAR for Starwood Same-Store Owned Hotels increased 6.0% in constant dollars (6.5% in actual dollars) compared to 2013.
• Margins at Starwood Same-Store Owned Hotels Worldwide increased approximately 160 basis points compared to 2013.
• Earnings from Starwood’s vacation ownership and residential business decreased approximately $30 million compared to 2013, including a $29 million decrease in earnings from the St. Regis Bal Harbour residential project which is sold out.
• During the quarter, the Company signed 45 hotel management and franchise contracts, representing approximately 8,500 rooms, and opened 19 hotels and resorts with approximately 3,800 rooms.
• During the quarter, the Company paid a quarterly dividend of $0.35 per share and a special dividend of $0.65 per share, and repurchased 2.2 million shares at a total cost of $170 million and an average price of $78.67 per share. Year to date through July 22, the company has repurchased 2.5 million shares at a total cost of $198 million and an average price of $79.19.

Second Quarter 2014 Earnings Summary

Starwood Hotels & Resorts Worldwide, Inc. (“Starwood” or the “Company”) today reported EPS from continuing operations for the second quarter of 2014 of $0.80 compared to $0.71 in the second quarter of 2013. Excluding special items, EPS from continuing operations was $0.77 for the second quarter of 2014 compared to $0.79 in the second quarter of 2013. Special items in the second quarter of 2014, which totaled a benefit of $6 million (after-tax), include a $3 million pre-tax benefit associated with the reversal of a note receivable reserve from a previous disposition and a $3 million pre-tax benefit primarily due to the conversion of a leased hotel to a managed hotel. Special items in the second quarter of 2013, which totaled a charge of $16 million (after tax), primarily related to certain non-recurring income tax charges associated with an asset disposition, interest on deferred income from sales of vacation ownership units, and the resolution of certain tax positions. Excluding special items, the effective income tax rate in the second quarter of 2014 was 33.3% compared to 33.8% in the second quarter of 2013.

Income from continuing operations was $153 million in the second quarter of 2014, compared to $137 million in the second quarter of 2013. Excluding special items, income from continuing operations was $147 million in the second quarter of 2014 compared to $153 million in the second quarter of 2013.

Net income was $153 million and $0.80 per share in the second quarter of 2014, compared to $137 million and $0.71 per share in the second quarter of 2013.

Frits van Paasschen, CEO, said, “We exceeded our expectations for both adjusted EBITDA and EPS in the second quarter. Rising REVPAR drove strong growth in our management and franchise fees. This continued growth in our fee business, along with the trends we are seeing across our hotels and vacation ownership, points to a global recovery that is steadily moving into its fifth year.

“As we look ahead to the balance of the year, we expect that global trend lines will fuel demand for high-end travel. In our view, rising wealth, urbanization, digital connectivity and expansion of global businesses will drive demand for our brands.”

Six Months Ended June 30, 2014 Earnings Summary

Income from continuing operations was $289 million in the six months ended June 30, 2014 compared to $280 million in the same period in 2013. Excluding special items, income from continuing operations was $269 million in the six months ended June 30, 2014 compared to $301 million in the same period in 2013.

Net income was $290 million and $1.52 per share in the six months ended June 30, 2014 compared to $350 million and $1.80 per share in the same period in 2013.

Adjusted EBITDA was $605 million in the six months ended June 30, 2014 compared to $648 million in the same period in 2013.

Second Quarter 2014 Operating Results

Management and Franchise Revenues

Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.3% in constant dollars (5.1% in actual dollars) compared to the second quarter of 2013. International Systemwide REVPAR for Same-Store Hotels increased 4.1% in constant dollars (4.4% in actual dollars).

Worldwide Same-Store Company-Operated gross operating profit margins increased approximately 87 basis points compared to 2013. International gross operating profit margins for Same-Store Company-Operated properties increased approximately 100 basis points. North American Same-Store Company-Operated gross operating profit margins increased approximately 72 basis points.

Management fees, franchise fees and other income were $260 million, up $24 million, or 10.2% compared to the second quarter of 2013. Management fees increased 6.6% to $146 million and franchise fees increased 10.7% to $62 million compared to the second quarter of 2013. Other management and franchise revenue was up 29.7% compared to the second quarter of 2013 primarily due to fees associated with the termination of certain franchise contracts during the quarter.

Development

During the second quarter of 2014, the Company signed 45 hotel management and franchise contracts, representing approximately 8,500 rooms, of which 37 are new builds and eight are conversions from other brands. At June 30, 2014, the Company had approximately 450 hotels in the active pipeline representing approximately 105,000 rooms.

During the second quarter of 2014, 19 new hotels and resorts (representing approximately 3,800 rooms) entered the system, including La Posada de Santa Fe, a Luxury Collection Resort & Spa (New Mexico, 157 rooms), The Westin Cleveland Downtown (Ohio, 484 rooms), The Westin Chongqing Liberation Square (China, 336 rooms), Sheraton Reserva do Paiva Hotel & Convention Center (Brazil, 298 rooms), and Aloft Atlanta Downtown (Georgia, 248 rooms). During the quarter, six properties (representing approximately 1,200 rooms) were removed from the system.

Owned Hotels

Worldwide REVPAR at Starwood Same-Store Owned Hotels increased 6.0% in constant dollars (6.5% in actual dollars) when compared to 2013. REVPAR at Starwood Same-Store Owned Hotels in North America increased 4.1% in constant dollars (1.5% actual dollars). Internationally, Starwood Same-Store Owned Hotel REVPAR increased 7.4% in constant dollars (10.0% in actual dollars).

Revenues at Starwood Same-Store Owned Hotels Worldwide increased 4.6% in constant dollars (4.8% in actual dollars) while costs and expenses increased 2.4% in constant dollars (2.7% in actual dollars) when compared to 2013. Margins at these hotels increased approximately 160 basis points compared to 2013.

Revenues at Starwood Same-Store Owned Hotels in North America increased 3.3% in constant dollars (0.8% in actual dollars) while costs and expenses increased 2.3% in constant dollars (flat in actual dollars) when compared to 2013. Margins at these hotels increased approximately 50 basis points compared to 2013.

Internationally, revenues at Starwood Same-Store Owned Hotels increased 5.6% in constant dollars (7.8% in actual dollars) while costs and expenses increased 2.4% in constant dollars (4.8% in actual dollars) when compared to 2013. Margins at these hotels increased approximately 200 basis points compared to 2013.

Revenues at Owned Hotels were $414 million, compared to $419 million in 2013. Expenses at Owned Hotels were $314 million compared to $328 million in 2013. Second quarter revenues were negatively impacted by asset sales since the second quarter of 2013.

Vacation Ownership

Vacation ownership revenues for the three months ended June 30, 2014 increased $1 million, or 0.6%, to $160 million, compared to the corresponding period in 2013. Originated contract sales of vacation ownership intervals remained flat for the three months ended June 30, 2014, compared to the corresponding period in 2013, as the average price per vacation ownership unit sold increased 1.8% to approximately $15,100, offset by a 1.6% decrease in the number of contracts signed.

Residential

During the second quarter of 2014, the Company’s residential revenues were $11 million compared to $80 million in 2013. The Company realized residential revenues from Bal Harbour of $7 million and generated earnings of $1 million, compared to revenues of $74 million and earnings of $30 million in the second quarter of 2013, due to the sellout of the St. Regis Bal Harbour residential project.

Selling, General, Administrative and Other

During the second quarter of 2014, selling, general, administrative and other expenses increased 15.9% to $102 million compared to $88 million in 2013, primarily due to $7 million of favorable benefits from certain government incentives received in the second quarter of 2013 in connection with the relocation of our corporate headquarters, the increase in costs commensurate with our growth, and the timing of expenses within the year. The Company continues to target a 3% to 5% increase for the full year.

Capital

Gross capital spending during the quarter included approximately $46 million of maintenance capital and $41 million of development capital.

Asset Sales

During the second quarter of 2014, the Company completed the sale of the Aloft Tucson University in Tucson, AZ for gross cash proceeds of approximately $19 million, subject to a long-term franchise contract. Also in the second quarter of 2014, the Company converted The Park Lane Hotel in London, United Kingdom from a leased hotel to a managed hotel.

Dividend

In the second quarter of 2014, the Company declared a regular quarterly dividend of $0.35 per share, which was paid on June 27, 2014. In accordance with the Company’s intention to return approximately $500 million in cash realized from the completion of the St. Regis Bal Harbour residential project and sale of the hotel in the first quarter of 2014, the Company paid a special dividend of $0.65 per share on June 27, 2014 and expects to pay additional special dividends of $0.65 per share over each of the next two quarters. The total dividends paid in the second quarter of 2014 were approximately $190 million.

Share Repurchase

In the second quarter of 2014, the Company repurchased 2.2 million shares at a total cost of approximately $170 million and an average price of $78.67 per share. As of June 30, 2014, approximately $444 million remained available under the Company’s share repurchase authorization. Year to date through July 22, 2014, the Company has repurchased 2.5 million shares at a total cost of $198 million and an average price of $79.19.

Balance Sheet

At June 30, 2014, the Company had gross debt of $1.4 billion, cash and cash equivalents of $641 million (including $44 million of restricted cash) and net debt of $785 million, compared to net debt of $528 million as of December 31, 2013, in each case excluding debt and restricted cash associated with securitized vacation ownership notes receivable. The increase in net debt is primarily due to the addition of a $153 million capital lease obligation as a result of the Company entering into a master lease of its headquarters building in the second quarter of 2014. Net debt at June 30, 2014, including $300 million of debt and $13 million of restricted cash associated with securitized vacation ownership notes receivable, was $1.1 billion.

Outlook

For the full year 2014:

• Adjusted EBITDA is expected to be approximately $1.215 billion to $1.235 billion (based on the assumptions below).
  • REVPAR increases at Same-Store Company-Operated Hotels Worldwide of 5% to 7% in constant dollars (approximately 25 basis points lower in actual dollars at current exchange rates).
  • REVPAR increases at Same-Store Owned Hotels Worldwide of 4% to 6% in constant and actual dollars.
  • Margins at Same-Store Owned Hotels Worldwide increase 75 to 125 basis points.
  • Management fees, franchise fees and other income increase approximately 8% to 10%.
  • Earnings from the Company’s vacation ownership and residential business of approximately $160 million to $170 million.
  • Selling, general and administrative expenses increase approximately 3% to 5%.
  • Full year owned earnings are negatively impacted by approximately $30 million due to 2013 and year-to-date 2014 asset sales, and a leased hotel that was converted to a managed hotel in 2014.

• Depreciation and amortization is expected to be approximately $315 million.
• Interest expense is expected to be approximately $115 million.
• Full year effective tax rate is expected to be approximately 32.5%, and cash taxes from operating earnings are expected to be approximately $160 million (based on the assumptions above).
• EPS before special items is expected to be approximately $2.78 to $2.85 (based on the assumptions above).
• Full year capital expenditures (excluding vacation ownership and residential inventory) are expected to be approximately $200 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 $200 million.
• Vacation ownership is expected to generate approximately $300 million in positive cash flow, assuming the completion of a securitization of receivables in the second half of 2014.

For the three months ended September 30, 2014:

• Adjusted EBITDA is expected to be approximately $285 million to $295 million (based on the assumptions below).
  • REVPAR increases at Same-Store Company-Operated Hotels Worldwide of 5% to 7% in constant dollars (approximately 50 basis points higher in actual dollars at current exchange rates).
  • REVPAR increases at Same-Store Company Owned Hotels Worldwide of 5% to 7% in constant dollars (approximately 150 basis points higher in actual dollars at current exchange rates).
  • Management fees, franchise fees and other income increase approximately 2% to 4%. The growth rate is impacted by a termination fee in 2013.
  • Earnings from the Company’s vacation ownership and residential business of approximately $35 million to $40 million.
• Depreciation and amortization is expected to be approximately $80 million.
• Interest expense is expected to be approximately $30 million.
• The effective tax rate for the quarter is expected to be approximately 33% (based on the assumptions above).
• EPS is expected to be approximately $0.62 to $0.65 (based on the assumptions above).

Special Items

The Company’s special items included a pre-tax and after-tax benefit of $6 million in the second quarter of 2014 compared to a pre-tax benefit of $1 million ($16 million charge after-tax) in the same period of 2013.

The following represents a reconciliation of income from continuing operations before special items to income from continuing operations including special items (in millions, except per share data):

The Company has included the above supplemental information concerning special items to assist investors in analyzing Starwood’s financial position and results of operations. The Company has chosen to provide this information to investors to enable them to perform meaningful comparisons of past, present and future operating results and as a means to emphasize the results of core ongoing operations.

Starwood will be conducting a conference call to discuss the second quarter financial results at 10:30 a.m. Eastern Time today, available via webcast on the Company’s website at http://www.starwoodhotels.com/corporate/about/investor/earnings.html. A webcast replay will be available on the corporate website a few hours after the live event on Thursday, July 24 and will run for one year. Alternatively, participants may dial into the live call at (866) 921-0636 with conference ID 61542222. Outside the U.S., participants may dial into the live call at (706) 758-8764. Please dial in fifteen minutes early to ensure a timely start. A call replay will be available a few hours after the live event on Thursday, July 24 and will run for one week; the call replay can be accessed by dialing (855) 859-2056 with conference ID 61542222. Outside the U.S., the call replay can be accessed at (404) 537-3406.

Definitions

All references to EPS, unless otherwise noted, reflect earnings per diluted share from continuing operations attributable to Starwood’s common stockholders. All references to continuing operations, discontinued operations and net income reflect amounts attributable to Starwood’s common stockholders (i.e., excluding amounts attributable to noncontrolling interests). All references to “net capital expenditures” mean gross capital expenditures for timeshare and fractional inventory net of cost of sales. EBITDA represents net income before interest expense, taxes, depreciation and amortization. The Company believes that EBITDA is a useful measure of the Company’s operating performance due to the significance of the Company’s long-lived assets and level of indebtedness. EBITDA is a commonly used measure of performance in its industry which, when considered with GAAP measures, the Company believes gives a more complete understanding of the Company’s operating performance. It also facilitates comparisons between the Company and its competitors. The Company’s management has historically adjusted EBITDA (i.e., “Adjusted EBITDA”) when evaluating operating performance for the Company, as well as for individual properties or groups of properties, because the Company believes that the inclusion or exclusion of certain recurring and non-recurring items, such as restructuring and other special charges (credits), and gains and losses on asset dispositions and impairments, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results. The Company’s management also uses Adjusted EBITDA as a measure in determining the value of acquisitions and dispositions and it is used in the annual budget process. The Company has historically reported this measure to its investors and believes that the continued inclusion of Adjusted EBITDA provides consistency in its financial reporting and enables investors to perform more meaningful comparisons of past, present and future operating results and provides a means to evaluate the results of its core ongoing operations. EBITDA and Adjusted EBITDA are not intended to represent cash flow from operations as defined by GAAP and such metrics should not be considered as an alternative to net income, cash flow from operations or any other performance measure prescribed by GAAP. The Company’s calculation of EBITDA and Adjusted EBITDA may be different from the calculations used by other companies and, therefore, comparability may be limited.

All references to Owned or Owned Hotels reflect the Company’s owned, leased, and consolidated joint venture hotels. All references to Same-Store Owned Hotels reflect the Company’s owned, leased and consolidated joint venture hotels, excluding condo hotels, hotels sold to date and hotels undergoing significant repositionings or for which comparable results are not available (i.e., hotels not owned during the entire periods presented or closed due to seasonality or natural disasters). References to Company-Operated Hotel metrics (e.g., REVPAR) reflect metrics for the Company’s Owned and managed hotels. References to Systemwide metrics (e.g., REVPAR) reflect metrics for the Company’s Owned, managed and franchised hotels. REVPAR is defined as revenue per available room. ADR is defined as average daily rate.

All references to revenues in constant dollars represent revenues excluding the impact of the movement of foreign exchange rates. The Company calculates revenues in constant dollars by calculating revenues for the current year using the prior year’s exchange rates. The Company uses this revenue measure to better understand the underlying results and trends of the business, excluding the impact of movements in foreign exchange rates.

All references to contract sales or originated sales reflect vacation ownership sales before revenue adjustments for percentage of completion accounting methodology. All references to earnings from vacation ownership and residential represents operating income before depreciation expense. All references to management and franchise revenues represent base and incentive fees, franchise fees, amortization of deferred gains resulting from the sales of hotels subject to long-term management contracts and termination fees.

Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with nearly 1,200 properties in 100 countries and 181,400 employees at its owned and managed properties. Starwood is a fully integrated owner, operator and franchisor of hotels, resorts and residences with the following internationally renowned brands: St. Regis®, The Luxury Collection®, W®, Westin®, Le Méridien®, Sheraton®, Four Points® by Sheraton, Aloft®, and Element®. The Company boasts one of the industry’s leading loyalty programs, Starwood Preferred Guest (SPG®), allowing members to earn and redeem points for room stays, room upgrades and flights, with no blackout dates. Starwood also owns Starwood Vacation Ownership, Inc., a premier provider of world-class vacation experiences through villa-style resorts and privileged access to Starwood brands. For more information, including reconciliations of non-GAAP financial measures to GAAP financial measures, please visit www.starwoodhotels.com or contact Investor Relations at (203) 351-3500.

Note: This press release contains forward-looking statements within the meaning of federal securities regulations. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties and other factors that may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made. Further results, performance and achievements may be affected by general economic conditions including the impact of war and terrorist activity, natural disasters, business and financing conditions (including the condition of credit markets in the U.S. and internationally), foreign exchange fluctuations, cyclicality of the real estate (including residential) and the hotel and vacation ownership businesses, operating risks associated with the hotel, vacation ownership and residential businesses, relationships with associates and labor unions, customers and property owners, the impact of the internet reservation channels, our reliance on technology, domestic and international political and geopolitical conditions, competition, governmental and regulatory actions (including the impact of changes in U.S. and foreign tax laws and their interpretation), travelers’ fears of exposure to contagious diseases, risk associated with the level of our indebtedness, risk associated with potential acquisitions and dispositions and the introduction of new brand concepts and other risks and uncertainties. These risks and uncertainties are presented in detail in our filings with the Securities and Exchange Commission. There can be no assurance as to the development of future hotels in the Company’s pipeline or additional vacation ownership units. Although we believe the expectations reflected in forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that results will not materially differ. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.