Starwood Hotels & Resorts has raised its full-year earnings estimate, despite forecasting “some lumpiness” in fees revenue for the third quarter.
The company also announced that it would accelerate its share buyback scheme, answering previous questions over plans for the cash raised through its increase in asset sales.
Prior to the group’s first quarter results, the group had seen a fall in share price which observers had attributed to a lack of enthusiasm for share buybacks or a special dividend. The latter was delivered with a return of approximately USD500m heralding from the Bal Harbour development and Frits van Paasschen, president & CEO, defended himself with the comment that the reason for the underperformance in the first quarter “had more to do with the emerging market selloff than lack of clarity around buybacks”.
The second quarter results were followed by the announcement that the group’s board had approved a new USD1.1bn buyback authorisation, which, including approximately USD400m remaining under the prior authorisation, takes the group to a possible USD1.5bn. During the second quarter the company spent USD170m on 2.2 million shares.
The CEO said that, over the past 10 years the group had returned on average USD1bn a year though dividends and share repurchases. In 2014 it intends to return about USD1.35bn. He said: “Starwood has a strong balance sheet and we are executing well on our asset-light strategy. Accordingly, our board has determined that we can substantially increase the pace of share repurchases and move quickly to reach and sustain our target leverage ratio of 2.5-3.0x.”
Van Paasschen described the current market as an “extraordinary time” to be in the high-end travel business adding that the group expected to see rising wealth and “an increasingly interconnected world” driving growth for the next “couple of decades”. However, he said that, “at the same time we need to ready for unpredictable disruptions in demand as with 9/11 or the financial crisis”.
In this light, van Paasschen said that the group intended to stay investment grade even in the wake of a major downturn, allowing it to take advantage of investment opportunities or to buyback stock, “neither of which we were able to do during the financial crisis”.
Fuelling the buybacks will be the company’s asset sales. Van Paasschen said that the transaction markets had continued to improve, but favoured single assets rather than portfolios “at strong prices and on acceptable terms”. He said he was optimistic that the group would be able to announce a “meaningful transaction” in the second half of the year and early next year.
Van Paasschen took a “never say never” approach to the idea of a Reit spinoff for the remaining unsold hotels, but commented: “It’s not clear that the world needs another hotel Reit”.
In terms of footprint growth during the quarter, the company opened 19 hotels and said that, with openings this year weighted towards the second half of the year, it remained on track to open more hotels than last year. The CEO said that hotel exits were slightly ahead of expectations, but described them as “largely lower performing, lower fee paying hotels”.
Most noteworthy, he added, was the pickup in Europe “sparked by conversions from other brands”. The pipeline was around 60% in luxury and upper upscale, about 80% managed and over 80% outside the US. Van Paasschen told analysts that the company had “many hundreds fewer” select service hotels than some of its competitors and saw the sector as a growth opportunity.
Starwood Hotels & Resorts continues to pursue its target of reaching 80% fee-driven Ebitda by 2016, a goal which was supported by its second-quarter results. It saw revenues from its owned and leased estate drop by 1.2% for the second quarter, to USD414m, while management fees, franchise fees and other income climbed 10.2% to USD260m.
Looking to the remainder of the year, the company said that, for the full year earnings per share before special items was now expected to be around USD2.78 to USD2.85, up from the earlier outlook of about USD2.76 to USD2.83 per share.
For the full year the group said that it expected fee growth of between 8% and 10%. However, for the third quarter this was forecast at 2% to 4%, as a result of a termination fee in 2013. Van Paasschen said that the outlook reflected “some lumpiness in revenues not a change in trend”.
HA Perspective [by Chris Bown]: Like Hilton, Starwood sees opportunities in the US select service sector. Like Wyndham, it wants to maintain investment grade might selectively bid to grow the business. And in common with its peers, it wants to sell down more assets to return cash to shareholders.
So far, so much the same. But what sets Starwood apart is its growth focus outside the US, where 80% of its pipeline lies, and its predominant interest in luxury and upper scale. As others are experiencing, growth in emerging markets can be a roller coaster ride, but can also deliver great returns. Let’s hope van Paasschen can make Starwood’s brands deliver in this “extraordinary time”.