• Starwood raises estimates as rates grow

Starwood Hotels & Resorts has raised its full-year estimates after delivering second quarter results ahead of expectations, with the group seeing an increase in business travel.

The company reported its first increases in ADR since Q3 2008, up 1.6% to $158.54, with occupancy increasing by seven percentage points to 68.8%. In Europe rates were down 3% to $208.65, with occupancy up six percentage points to 68.7%.

Going into the traditionally weaker third quarter, Vasant Prabhu, CFO, said: "We're not expecting big rate increases in the second half."

CEO Frits van Paasschen said: "Average daily rates are back into positive territory as occupancy levels continue their steady ascent towards pre-crisis levels.

"Rate for the quarter was still negative in most geographies and brands, as is typical of the early stages of recoveries. Importantly though, ADRs did improve month-by-month through the quarter and are nearing positive territory in many markets. At today's occupancy levels, we're confident that rates will sustain their rise through the year."

The company reported net income of $114m (£74m), down 15% from $134m in the same period last year, when the group saw a $112m gain from an Italian tax-incentive programme. Net income from continuing operations was up by 67% to $67m.

Revenue for the quarter rose 10% to $1.29bn, with management and franchise revenues up 14.0%.

Revpar increased by 13.1% worldwide to $109.07, led by 31.7% growth in Asia Pacific. Europe saw a 6.3% rise, with North America up by 12.0%. The rise was driven by better than expected occupancy, on the back of strong transient demand and group bookings.

Starwood's luxury brands led the recovery. The strongest results came from urban markets such as New York, London and Paris and in the foreign five-star categories. Leading the growth was the W brand, which saw revpar increase by 33% over the quarter when compared to last year.

Adjusted Ebitda was up 13% on the year from $200m to $226m, with the group forecasting approximately $815m to $845m for the full year.

Van Paasschen said: "While global lodging demand is solid, the economic outlook around the world remains unpredictable. We will continue to plan for a range of potential scenarios, but each entails a focus on driving top-line growth with strong discipline in our cost base. We remain cautiously confident in our near-term outlook and are bullish over the long-term given our growth prospects."

Based on the current recovery continuing, the group increased its estimates for the full year, seeing revpar up between 7% and 9%, up from the previous range of 5% to 8%. EPS is forecast to be between 93 cents and $1.05 per share, up from the previous estimate of 88 cents.

Van Paasschen said in a conference call: "Looking at occupancy, we are confident rates will sustain their rise through the year. A rebound in business travel bodes well for corporate rate negotiations going forward.

"The pent-up demand that we hoped for is materialising. And as the economy picks up steam, more businesses are shifting their focus from cost cutting to growing the top line, which means resetting travel and expense budgets and shifting gears to get back on the road after 18 months of dormancy."

The group said that it would continue to cut costs, with van Paaschen adding: "thanks to lower costs at equivalent revpar levels, our Ebitda would be at least $100m higher than before 2009".

Van Paaschen said that, while the company would continue to pursue its asset-light strategy, now was "not the right time to embark on a major asset sale programme", with the value of the group's current owned hotels "significantly higher than their depressed cash flows today would imply".

Commenting on the wider market, he added: "With the amount of money piling up on the sidelines, buyers need to realise that the great distress sale of 2010 is unlikely to materialise.

"As we look at our own portfolio, we feel the right course with most assets is to wait for the market to recover further. I think that bid-ask spread is narrowing. There are certainly transactions starting to happen.

"We expect it may take a while yet for fundamentals of properties to improve and the availability of financing on the buying side to improve further, to get values that look a lot more like they did before the downturn than they did during the downturn."

The group is currently re-launching Sheraton brand and said that, on top of the $6bn already invested in the brand, it was looking forward to another $5bn to be spent opening 60 new Sheratons. Worldwide, it said it was seeing Sheraton grow 150 basis points faster in top line than its competitive set, faster in North America.

During the quarter, the company signed 25 hotel management and franchise contracts representing approximately 6,400 rooms and opened 18 hotels and resorts with approximately 4,100 rooms.

The active pipeline consists of approximately 350 hotels, representing approximately 85,000 rooms.

Van Paaschen added: "Despite all the good news and the better than expected revpar, we still see reasons to consider less sanguine scenarios. To borrow a phrase from Warren Buffett, we should be fearful when others are greedy."


HA Perspective: Starwood argues that it outperformed its competitors for three reasons: firstly, it has high-end hotels which suffered badly in the recession but make up more ground in recoveries; secondly, more than half of its hotels are outside the US and therefore likely to grow faster; and thirdly two-thirds of its hotels are new, or as good as new, thanks to adding 320 hotels and renovating 350.

The first and third reasons are pretty convincing, albeit that other groups have also worked hard at renovating their portfolios (notably IHG with Holiday Inn). Starwood's international claims are less compelling given that many of the rooms outside the US are in Western Europe, a region likely to see even more sluggish growth than the US.

In any case, the growth in emerging economies is likely to be strongest outside of the luxury and upper upscale segments which Starwood dominates. So one of its strengths is also a potential weakness going forward. Not that there will not be growth in the luxury space, just that the prize is not as big in the longer term.

The other notably take away from Starwood's conference call was the update on its move to an asset light model. And it is now very much called asset light rather than asset right.

Starwood said it had adjusted its timing rather than pricing expectations on disposals and anticipates holding its assets for two to three more years, enjoying the uptick in performance.

The company owns 62 hotels with 21,000 rooms. It wholly owns 18,000 rooms and split these out into three categories: firstly, about 60%, which would be sold immediately at the right price such as the Phoenician or St Regis in San Francisco; secondly, a group that needs renovation which would be sold with a committed property improvement plan; and thirdly, hotels that would be sold to a partner prepared to undertake a repositioning. About 15% of the 18,000 fit this group including Westin Peachtree.

Starwood said a few transactions may happen towards the end of this year or early next year, but bigger deals are further out. A transaction such as that struck with Host might be considered or even spinning-off a separate REIT.

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