• Starwood slashes forecasts

Starwood cut its forecasts for the second half of this year and said it expects the downturn to continue into 2009.

Despite a strong first half, the company is poised to implement a range of cost cutting measures, including "a hard look at corporate costs".

The US is the main area suffering a slowdown, hit by the credit crunch and consumer slowdown, according to CFO Vasant Prabhu, speaking during a conference call discussing the second quarter numbers.

Resorts in the US were weak and resorts overseas dependent on the US were also weak, including Mexico and Italy. Business travel demand had fallen from financial services, consumer durables and retail, and anything to do with residential property.

Transient business was slowing and could slow further as the airline cutbacks took hold in the fourth quarter, said Prabhu. Worldwide, cities like London, Paris and Tokyo had also been hit by the same issues as in the US. And countries such as Spain, the UK and Ireland have similar residential property bubble issues as the US.

But Prabhu said the slowdown was not yet across the board in the US and there were parts of the world which were growing very strongly, particularly natural resource dependent economies.

In Africa and the Middle East, where Starwood has about 100 hotels and derives 15% of its fees, growth rates were at 20%. In South East Asia growth was in the mid teens and although China had suffered this year due to the earthquake it was expected to resume growth after the Olympics.

Overall, however, Starwood was projecting flat revpar in the third quarter and a revpar decline of 3% to 5% in the fourth quarter. Margins are expected to drop by 300 to 400 basis points in Q3 and by the same amount sequentially in Q4.

These downgrades to the forecasts were expected to result in EBITDA dropping by $80m for the year, with the under performance split equally between timeshare and the hotel operations.

But Prabhu said at the end of his prepared remarks: "We remain as bullish as we ever have about our long-term growth potential."

During his comments, CEO Frits Van Paasschen said that business had slowed abruptly in May and he expected this to continue this year and into next year.

The company had taken action to cut costs, he said, including reducing operating hours of restaurants and similar facilities, imposing hiring freezes and menu changes.

Rather than impose a fixed target, van Paasschen said he was taking a look at the whole organisation and looking at how costs could be taken out, both at the corporate level and at unit level.

Some things already on the agenda are purchasing, including reducing the number of vendors and negotiating more favourable contracts. Other items include instituting wellness programmes for employees to reduce healthcare costs.

A key argument put forward by Starwood about its long-term resilience was that it now had 55% of its fees and 80% of its incentive fees generated from outside of the US. The emphasis on overseas activity was reflected by the conference call being conducted from Sao Paulo.

Starwood is also bullish about its growth prospects relative to its peers. It said it had a pipeline of comparable size to its main rivals (at 120,000 rooms) despite having, in some cases, a base of existing rooms that was half the size. In addition, two-thirds of the global pipeline had financing and was in construction and 60% of it was outside the US.

Asset sales remain on the agenda, said van Paasschen "when we can find the right balance between market realities and our desire to do them". Completing in the second half are $400m worth of deals including Turnberry in Scotland, three hotels around Venice and a couple of smaller hotels.

Opportunities to buy, either single assets or companies, will be considered, but van Paaschen sounded as if he were wedded to the fee business model, in particular its ability to deliver growth without the need for capital.

During the second quarter, income from continuing operations was $107m compared to $145m a year earlier. The main cause of the decline was slower timeshare sales. Revpar for worldwide system wide same-store hotels was up 9.6%. In North America, this figure was 3.0%.

There were 37 hotels with 9,000 rooms opened in the period. In the full-year, 80 to 100 hotels with 20,000 rooms are expected to be opened.

Separately, Choice Hotels International, the US franchiser, reduced its guidance this week. Revpar in the US is expected to be negative 1.5% for the full year against the previously advised growth of 2.0%.

During the second quarter of this year, Choice's US hotels had revpar growth of 0.7%.

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