• Starwood raises estimates

Starwood surprised Wall Street last week when it raised the low end of its earnings estimates for the year.

The company said that it is now much less susceptible to the US market than it has ever been with almost half of its profits now being generated outside its home country.

The first quarter results significantly exceeded expectations and underlined how the Starwood of 2008 has little in common with the Starwood of 2001 during the last US downturn, according to CFO Vasant Prabhu.

"We have been transformed over the last two years by the sale of real estate and are now less exposed to the cycle," he added.

The early Easter wiped about 200 basis points from North American revpar growth but this was compensated for by foreign exchange gains at Starwood's Canadian hotels due to the falling US dollar.

Revpar for comparable owned hotels in North America came in 8.2% ahead, although up just 2.9% in North America on a system wide basis. On a worldwide basis it was 9.7% up for owned hotels and 8.4% up system wide across the world.

For the full year the expectation is for revpar between 4% and 6% for owned hotels in North America. This should deliver EBITDA of between $1.25bn and $1.3bn, with the low end of the range tweaked up.

Margins during the quarter were flat despite the revpar growth. This is thanks to food inflation running at 5%, energy costs up at 12% and wage rates up 4%. Prabhu warned there was not a read-through to the rest of the year in terms of margins as the first quarter was the weakest of the four and the small numbers led to misleading averages.

CEO Frits van Paasschen used the conference call about the results to outline Starwood's future strategic direction and the financial levers creating value.

The "Starwood Journey" was about five "essentials": brands; execution; global growth; talent; and market leading financial returns.

The company would continue its asset light policy. It has hired Simon Turner from Hotel Capital Advisers as global development chief to oversee both its disposals and acquisitions. Turner is a key to the growth essential.

Phil McAveety has been brought into the newly created post of chief brand officer, a switch in title from the previous chief marketing officer. McAveety's background is with advertising agency Leo Burnett, Nike and most recently the Spanish shoe company Camper. His role is critical to the brands essential.

Jeff Cava has moved across from the third biggest burger chain in the US, Wendy's, to head up human resources. Cava has previously been with Nike and Disney.

Cava is to oversee the talent essential.

The three appointments complete the "rounding out" of the management team, said van Paasschen. He stressed that the ability to work as team members was key, which, whether deliberately or not, alludes to the problems with previous CEO Steve Heyer.

The four financial levers identified by van Paasschen were: the creation of a superior revpar growth by strong brands; attracting owners to drive system growth; unlocking value in the real estate; and focusing on costs.

In terms of property, the company said that in the US it was hard to get financing for large deals but small deals, mostly for limited service hotels, were possible. There was still a demand for unique, one-of-a-kind assets and Starwood was selectively looking at which assets it might put on the market.

The credit crunch might impact on some full-service hotel development in Starwood's pipeline but the company had factored in a drop-off in its numbers, it said. From the 400 signed deals, 75% were due to open by 2010 with 50% under construction. Of the full-service hotels in North America in the pipeline, 75% were in good shape regarding their financing.

The focus on costs had led to the reorganisation of the North American operation into a true division like the other regions worldwide. Denise Coll has assumed the role of president for North America.

Income from continuing operations excluding special items in the quarter was $83m. Management fees were up 15.4% to $105m and franchise fees grew 18.2% to $39m. Revenues at owned hotels was flat at $560m.

Wall Street analysts broadly welcomed the results. Citigroup said that the company's business model and international presence should protect it against the US slowdown. At Raymond James there was further support for the global exposure, particularly given the foreign exchange advantages of selling in euros and then converting it to dollars.

The strong Starwood figures were echoed by franchiser Choice Hotels International and owner Host. Choice had EBITDA up 22% to $36.1m from revpar up 2.7% system wide in North America and US unit growth up 6.0%.

Host's numbers showed comparable EBITDA up 1.6% to $260m. Revpar was up 2.4% with international revpar up 23.4% or 6.9% in local currency terms.

Host is meanwhile playing a waiting gaming for yields on luxury hotels to move out. While there has been movement on upscale (four-star) hotels, the luxury segment was so far remaining strong. Host believes that next year there may be movement as the owners of highly leveraged assets have to renegotiate their debt.

Share →