• Starwood up on spin-off

Starwood Hotels & Resorts saw its share price rise by 8.7% after announcing plans to spin-off its vacation ownership business, as it moves towards an asset-light model.
The announcement came alongside strong earnings and news that it was planning to launch a collection brand as well as being “more aggressive” on growth, with possible acquisitions mooted.
SVO, the timeshare business, accounted for 11% of Starwood’s revenue in 2014. The decision comes nearly four years after Marriott International span off its own timeshare business. The new business will be publicly traded, with Matthew Avril, who retired as president of Starwood’s hotel group in 2012, as CEO.
The spin-off is expected to be completed by the end of the year and will include five hotels, which will be converted into timeshare products in phases.
Starwood Hotels & Resorts said that it expected to see a licence agreement with SVO, which would provide an annual fee consisting of a “meaningful” fixed base fee and a variable fee based on overall vacation ownership interest sales. The annual licence fee was expected to be in the range of USD30m to USD40m.
President & CEO Frits van Paasschen told analysts: “We are no more exiting the timeshare business than we are exiting the hotel business when we sell hotels with long term contracts. Just like selling hotels we’re converting Starwood’s participation in vacation ownership to an asset-light fee-based business model. The strength of our brands and the SPG platform will fuel growth and shareholder value for both companies.”
The CEO said that the decision had been taken now because the capital markets were currently providing “great valuations for spin offs in general and timeshare in particular”. The vacation ownership business has been strong for the company in terms of cash generation to the tune of over USD1bn over the past six years.
The move was expected to help fund growth for the timeshare business, at a time when the Starwood Hotels & Resorts was moving away from using its own cash to fund expansion.
In 2013 the company set itself a goal of earning 80% of revenues from its fee-based business by 2016. Completion of the vacation ownership spin off will mean that it reaches the goal earlier than anticipated. However, the target also forecast generating USD3bn in asset sales – it has currently only reached 40% of its goal.
The group said it would continue to dispose of hotels and anticipated sales in 2015 in line with last year, as the “asset sale market continues to look strong and demand for our hotels remains high”.
The CFO added that, “In the absence of a strategic asset to buy”, it expected to return USD550m to USD600m in cash to stockholders in the form of regular dividends, up 7% on the year.
For 2015, the company has forecast revpar growth of 5.7% in local currency (against 4.4% in constant dollars in Q4) against the forecast given last quarter in the range of 4% to 6%. Tom Mangas, CFO, said that expectation now included franchise properties and also reflected an improved outlook for the US and in parts of Asia Pacific.
The results followed a weak third-quarter in which the group had warned that the world had become “a more volatile place”. For the full year, net rooms growth was 2%, below the target of 4% to 5%, as development times lengthened and its pipeline swung towards smaller properties.
Van Paasschen said: “In the vein of getting feet on the street, we’ve added local deal executives to support growth markets and in the US to support growth segments. We streamlined our process for converting hotels to our brands and we’re selectively using our balance sheet to catalyse development as well as finding new ways to bring hotels into our system.”
In 2014 the group opened 15,000 rooms around the world, with over 60% of the rooms either luxury or upper upscale and more than 85% located outside of the US. The company signed deals last year for 175 new hotels representing about 35,000 rooms and about 10% of the current footprint.
Looking forward, the CEO said that the US was the strongest lodging market for branded growth, particularly in the Select Serve segment. He added: “Against the backdrop of low oil prices and low interest rates, we see potential for the North America recovery cycle to continue to for some time.”
Van Paasschen expected “modest growth” in Europe and maintained the company line that, in China, “there is more risk in staying on the sidelines in China than in pursuing that to grow”.
The CEO would not be drawn on the specifics for the new collection brand, other than to say that he had been in discussions with owners around it since the end of last year and was in negotiations with “a number of properties”. The brand would, he said, fit “the wide space that lies between luxury collection and design hotels”.
The CFO said that the company was looking to be “more aggressive” with growth and “a bit more intentional” when it came to possibly acquiring another business – having not bought in a new brand since Le Méridien back in 2005. The company looks determined to put the doldrums of the past year behind it.

HA Perspective [by Chris Bown]: Splitting off the timeshare business makes Starwood’s hotel activities easier to understand – hence the spur to the share price. It also enables the group to divest its hotels division of five properties that will yield better results as timeshare properties.
With the Starwood split being well received by the markets, can Wyndham now expect increasing presssure to split off its timeshare actvities?
Meanwhile, the move to asset light proceeds at a glacial pace, with few asset sales, despite market talk being of strong investor demand.
Guarded talk of a collection brand may suggest that Starwood is looking to leverage its 2014 purchase of Design Hotels, a German based affiliation brand that already has a collection of 271 hotels under its umbrella. However, the majority of these are in Europe with just five listed in the US – potentially presenting a good opportunity to sign up US independents into the platform. Until now, Design Hotels has remained an arms length acquisition, without any linkage to Starwood’s Preferred Guest programme.
Van Paasschen’s immediate focus now will be on packing his bags for a month-long decamp of the senior team to India. This move, which has become a regular way for the Starwood top team to experience the potential of new markets, is bound to open their eyes to the opportunities of another emerging region.
[Additional comment by Andrew Sangster]: Ryan Meliker of MLV & Co points out that Starwood trades at a multiple of 12.8 times forward EBITDA against 15.1 times for Marriott and 16.0 times for IHG.
The timeshare business is seen as an anchor dragging down the multiples given that Wyndham trades at 12 times and Marriott Vacations Worldwide, the timeshare business span out at the end of 2011 by Marriott, trades at 10 times.
Wyndham, of course, is a timeshare and exchange company with a minority of its revenues from the hotel business. It would be more a case of the timeshare division letting go of hotels than the other way around and there is probably more to be gained by keeping the parts together.
But getting back to Starwood, it seems investors are buying into the same-old story of selling down the real estate and handing back the cash. The announcement of USD609m of share repurchases and USD585m of asset sales in the fourth quarter helped push the share price up 6.6% on the day of the numbers coming out despite the company’s guidance for full year 2015 being below consensus estimates.
Still to come in terms of asset sales is USD2.4bn, reckons MLV. Four flagships – in Maui, Scottsdale, San Francisco and New York – are unlikely to go and are worth USD1.1bn. So having shed the St Regis in Rome for USD151m, Starwood has USD760m of owned European hotels on the block, mainly in Italy with a couple of Austrian properties too.
In addition, there are a number of European leased hotels, such as the Ws in London and Barcelona that may also come to market. These are worth a total of USD574m as freeholds but MLV declined to put a number on the value of the leases as it does not have enough information.
Last year Starwood handed back USD2.4bn of cash to shareholders. But the question arises, given that the hotelier flunked the targets it set itself in terms of room additions, of why more of this cash is not deployed adding to the network. It may mean that EBITDA from fees falls below the targeted 80% but it will surely enhance the longer term growth story.
While not committing to buying assets, Starwood is moving beyond its approach of just offering key money and is now looking to offer debt guarantees or operating guarantees as well. A vague “different forms of balance sheet participation” was also flagged.
While Starwood has historically made significant headway outside of its North American base in luxury and upscale, its focus in the near term is on limited service product in its domestic market where the development market has recovered.
On top of this growth push in the US, Starwood made clear it is now also back in the company acquisition business, stating that it is “a company that’s been built on acquisitions” and pointing out that Le Meridien was the last one in did back in 2006.
The final piece of the growth fix is of course the collection brands and this will be relatively capital light. The new addition to the collection roster is set to be something built-on the Design Hotels acquisition. The deal to buy this latter company was only finalised in May last year and the pain of the process was made apparent by remarks that said: “acquiring a company in Germany is arcane and time consuming”.
It remains to be seen how much of the new forms of balance sheet participation are offered outside of the US but little is the most likely answer. This means that the short to medium term growth is going to be heavily skewed towards its domestic market.
The spin-off of the timeshare business means more EBITDA will, in relative terms, be generated outside the US. But longer term Starwood will need to use its balance sheet more aggressively overseas.

Share →