• Starwood pipeline focuses East

Starwood Hotels & Resorts has forecast revpar growth of between 7% and 9% in 2011, with EBITDA between $950m to $980m, as rates recover globally.

The company said that it would look to the emerging markets to drive future growth. However, the economic environment meant that, for the group as a whole the estate was likely to see fewer hotels added next year, with president and CEO Frits van Paasschen commenting that the number would be "slightly lower" than the 80 anticipated by the end of this year.

Van Paasschen said that supply of new hotel rooms in developed markets was expected to stay "well below historic rates of growth", adding that supply growth in its upper upscale and luxury segments for North America was expected to drop below 0.5% next year, and was likely to "remain at these low levels for a few years to come".

He said: "The great recession was remarkable in both its harrowing drop on the way the down and on its reliance on emerging markets on the way up."

The company said that, in developed markets, the macroeconomic environment was "uncertain with high unemployment and high public/private debt". While there were concerns about slower demand growth, the lodging supply situation was described as "very favourable. In emerging markets, macroeconomic growth has been strong, driving high secular growth in both lodging demand and supply".

Van Paasschen said that, when talking about Europe, it was important to distinguish between Western and Eastern Europe, where the company continued to see development opportunities in countries such Poland, Russia, Georgia and Turkey. The group has 23 new hotels due to open in Eastern and Central Europe over the next three years.

Looking to the Asia-Pacific market, van Paasschen said that while the region currently generated 21% of fee revenues, it represented 62% of the company's pipeline for future hotel openings. He added: "In fact, markets outside the developed economies of Europe, Japan, the US and Canada account for 34% of our fees and 80% of our pipeline.

"Today, our US portfolio of 458 hotels is roughly seven times the size of the number of hotels we have in China. But it's not far-fetched to say that China will one day eclipse the US as Starwood's largest country, no more far-fetched than to imagine that both China's car market and China's number of internet users would exceed the US, which they already do."

The group said that it expected to sign its first W and St. Regis hotels soon in India, taking it towards its goal of having 100 open or pipeline hotels in India within five years.

During the quarter, Starwood signed 20 hotel management and franchise contracts with approximately 4,500 rooms, of which 15 were new builds and five conversions from other brands.

The group's estate has been well-suited to take advantage of the form the recovery has taken, with CFO Vasant Prabhu adding: "Our brands of hotels cater to the high end, primarily corporate traveller, and are more concentrated in these global cities. As a result, we have recovered faster and today, have been relatively immune to the malaise elsewhere."

Van Paasschen added: "Business travel is robust and has filled our hotels in the critical Monday through Thursday periods, driving compression and allowing us to begin to recover rate. Specifically, we expect corporate rates to be up high single digits."

The CEO said that the strength of gateway cities was spreading to secondary markets, allowing the group to beat the high end of its EBITDA guidance by $10m, with international company-operated revpar up by 13% compared with 10% in North America.

He added: "The lodging recovery continues, unabated by the Euro crisis or US economic jitters. With occupancy rising at or above 2007 levels, it's no surprise that rates are on positive territory across each of our regions."

For the full year, adjusted EBITDA was expected to be approximately $840m to $845m, assuming revpar at worldwide operated hotels up by between 8% and 9% and by between 9% and 10% at owned hotels.

The group continues to wait until the market has recovered further to continue to sell its owned hotels. The $6m net loss made in the third quarter was attributed in part to a sale made during the period, which saw it record a charge of $52m on its balance sheet. Although no further details were forthcoming in the company's earnings call, Starwood sold the St. Regis Aspen for $70m to 315 East Dean Associates in September. It will continue to manage the site.

Van Paasschen said: "What we're seeing, in contrast to absolute radio silence in 2009, is increased level of interest in buying assets. But I wouldn't say even though we're seeing a lot of money building up on the sidelines that we have a complete array of eager buyers.

"We have engaged in some transactions where we've been able to find an opportunity that makes a lot of sense for us, but we're probably some time away from being really into the mid-cycle correction with the full range of buyers and an opportunity to do a bigger transaction. Nonetheless that remains our priority and it's something we will go after when we think the timing is just right."

The group said that it would continue to focus on cutting its debt in the near-term, which was at $2.46bn on 30 September, compared to net debt of $2.83bn at the close of the previous quarter.


HA Perspective: The distinction made between East and West Europe by Starwood is critical to understanding where future growth is coming from. With 80% of its pipeline outside of mature markets, Starwood is clearly reorienting towards the East.

The bulk of Starwood's profits, however, come from the West. This is primarily because this is where all its owned assets are. As these are sold down, and as fee growth in emerging markets continues to gain momentum, Starwood is going to look a very different company in a few years.

The pivot point is going to be when the asset markets recover sufficiently to enable widespread disposals.

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