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Executives

Jason Koval – Vice President, IR

Frits van Paasschen – President and CEO

Vasant Prabhu – EVP & CFO

Analysts

David Katz – Oppenheimer

Joseph Greff – JPMorgan

Celeste Brown – Morgan Stanley

Bill Crow – Raymond James

Patrick Scholes – Friedman, Billings, and Ramsey

Will Marks – JMP Securities

Smedes Rose – KBW

William Truelove – UBS

Steve Kent – Goldman Sachs

Chris Woronka – Deutsche Bank

Starwood Hotels & Resorts Worldwide, Inc. (HOT) Q3 2008 Earnings Call Transcript October 23, 2008 10:30 AM ET

Operator

Good day and welcome to the Starwood Hotels & Resorts third quarter 2008 earnings release conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Jason Koval. Please go ahead, sir.

Jason Koval

Thank you Tama and good morning everyone. Thanks for joining us this morning for Starwood's third quarter 2008 earnings call. Joining me today, I have Frits van Paasschen, our CEO; and Vasant Prabhu, our CFO. We will be making statements on this call related to company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Starwood or its management believes, expects, anticipates, foresees, forecasts, estimates, or other words or phrases of similar import. All such statements are based on our expectations as of today and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today.

I point you to our 10-K and other SEC filings available from the SEC or through our offices here and on our website at Starwoodhotels.com for some of the factors that could cause results to differ. With that I am pleased to turn the call over to Frits for his comments. Frits?

Frits van Paasschen

Thank you, Jay. And thanks all for joining us today for our third quarter call. In light of today’s rapidly changing economic picture I would like to shift the format from our previous calls and focus on Starwood’s position in the broader context. Specifically I will cover 6 topics including a brief take on the current economic situation and it implications for Starwood, some quick comments on our third quarter results, our liquidity position, our perspective on valuation, an update on our cost cutting activities and finally a brief review of our five essentials.

So, let us begin with some thoughts on the current environment. Much has been said about the financial crisis and the economic turmoil that is unfolding each day before us. From our vantage point of view, key points have emerged. First, what began as a US financial crisis has quickly and increasingly become a global economic slowdown. Second, while the situation changes by the day our view is that this slowdown will likely persist through 2009. Third, while we are in unprecedented territory the same could also have also been said during prior slowdowns. In retrospect, those slowdowns turned out to have been great times to invest. This was through the stagflation and recession in 1982, the stock market crash of ’87, the S&L crisis of 92, the emerging markets meltdown of 97, 98, not to mention the internet hangover in 09/11.

Fourth, the appropriate response for us is to plan for difficult times in the near term while strengthening the foundation for our long-term growth. We must keep our focus on what has made Starwood successful. Strong brands built on great guest experiences. In fact this focus is reflected in our solid third quarter earnings results. We delivered earnings per share of $0.71 and EBITDA of $330 million exceeding expectations. Later on Vasanth will go into much more detail but I would like to point out that these results are a testament to the strength of our teams of associates around the world.

Our regions are led by four division presidents who combine to have over 100 years of experience in the industry. Their experience has helped to maintain morale within the organization by focusing their teams on great execution. Our operating teams have seen difficult times before and I’ve acted to cut costs. In spite of these cost cutting efforts our guest satisfaction scores have improved year-on-year across each of our nine brands, which is truly a remarkable accomplishment.

Let me turn now to my third topic, Starwood’s liquidity. The point here is that we have taken a conservative approach to our liquidity. So ,we are well positioned to weather difficult times. If you include the $200m we drew down from our revolver after the quarter closed, we have well over $500 million in cash and cash equivalents. We expect another $325 million in proceeds next week as we close on the sales of Lido assets and Turnberry. And we will continue to explore the sale of other assets over the coming months. Any asset sales if they occur, would either bolster our cash position or free up the full capacity of our nearly $2 billion revolver. It is important to note that our revolver includes some of the strongest banks in the financial world, including BoA, JP Morgan, and Citigroup.

Starwood’s balance sheet planning has also involved turning out much of our debt from 2012 to 2018. The result is that we only have about $500 million in maturities coming due in each of the next 2 years. Under normal circumstances we would simply issue new unsecured debt. But failing that we should have ample capacity between our cash holdings and our revolver. This liquidity will enable us not only to withstand a downturn but to continue to invest in our growth priorities such as rolling out aloft and element, revitalizing Sheraton, and looking for acquisitions along the lines of Le Méridien.

Where do share buybacks fit into the equation .We stated consistently on prior calls that the pace of asset sales will determine the pace of our buyback. In this environment though we have taken the view that liquidity is critical. So, while our stock is a great value we are for now suspending our buyback program until we have greater visibility into the economy, lodging demand, and the ability to sell assets.

As a reminder over the last 3 years, we have returned significant value to our shareholders through our buyback program that reduced our share count by 20% and our dividend yield is a healthy 4.5%. For the next few minutes, I would like to walk you our view on Starwood as an investment proposition. To do that we will look at each of our 3 lines of business, owned hotels, vacation ownership, and the fee business.

In aggregate, this analysis could suggest a value for Starwood of roughly $16 billion or $67 a share based on $7.6 billion for owned hotels, $1.4 billion for vacation ownership, and $6.8 billion for our fee business. Our purpose in reviewing this is to give investors an idea of our potential to create value over the long-term. We recognize that these are difficult times in the equity markets with many companies trading at low values and there is a great deal of uncertainty around the global economy in 2009. Even so we see a huge difference between our current share price and our some of the parts analysis.

So, let us talk about owned hotels in more detail. After the recent sales of Lido and Turnberry, we have about 24,000 owned and leased rooms in our system and here are a few relevant facts, 50% are located outside the United States and 90% are in the upper upscale and luxury segments, and fully 90% are in high barrier to entry urban and resort destinations. So, one way to value this portfolio is to determine its asset value based on recent comparable transactions. For example, our own recent sales averaged over $500,000 per key [ph]. Two other deals closed last month, a portfolio of three monarch [ph] hotels in the US sold for $315,000 per key and host acquired 6 European hotels for $400,000 per key.

Now, obviously actual values depend on the specific hotels in the portfolio and the timing of sales. However, each of these 3 transactions occurred during difficult financing and economic conditions. So, if you apply the low end of these transactions to our portfolio or $315,000 per key you would get a value of $7.6 billion equal to our entire enterprise value at $19 a share. And this valuation doesn’t include our joint venture interests on another 10,000 rooms where our average stake is roughly 25%.

Let me emphasize that his global portfolio includes high value, one of a kind properties, including St. Regis hotels in New York, Rome, Aspen, and San Francisco; the Phoenician in Arizona; the Gritti Palace in Venice, and the Grand of Florence. Westin Resorts in St. John, Los Cabos, Puerto Vallarta, and Cancun and the Westin Excelsior Hotel in Rome and Florence. A collection of 9 Ws in North American gateway cities such as New York, Chicago, San Francisco, and Los Angeles and a portfolio of Sheratons in major cities around the world including New York, London, Toronto, Brussels, Milan, Paris, Mexico City, Sydney, Buenos Aires, and Rio.

So, now let’s turn to an analysis of our vacation ownership business. One straightforward approach is to look at this at its book value of $1.4 billion. We have $900 million in time share inventory on our balance sheet primarily in scarce beach front locations such as Hawaii, Mexico, and St. John. This inventory is valued at our cost which runs roughly 30% to 35% of revenues. Although the pace has slowed time share continues to sell in prices well in excess of our cost. So, at a minimum we believe that this book value is realizable over time. We also have about $500 million in receivables net of loan loss reserves on our books. Even if this paper were not saleable through a securitization we would be able to collect interest payments at an average annual rate of 12% and we have the sales and marketing infrastructure to sell any units back to our system by default, which are running at roughly 6%.

So, in aggregate our timeshare asset value could be worth about $1.4 billion or $8 per share. I also want to be clear that we are fundamentally resetting our expectations for this business. This is not only a result of the challenging economic times and rising construction costs but also a recognition that future securitizing is unlikely to provide attractive spreads. We plan therefore to focus on a few high return locations. As a result we are significantly downsizing our vacation ownership G&A as well as reducing the size of our sales force. Today we have removed about 25% of our G&A from 2007 levels and closed 3 sales centers. This resizing has important implications for our capital allocation also. In fact, we are cutting our net inventory investment in the timeshare business from $200 million in 2008 to modestly negative in 2009.

That said, we have several ongoing projects that we will work through the system over the coming years. The third component of our valuation is the management franchise fee business. With long-term contracts and minimal capital requirements this is a business that generates predicable sustainable income streams. For the purpose of this valuation exercise, we will look at the fees for existing hotels first followed by the implied value of our pipeline.

In 2008, our existing managed and franchised fees should generate revenues of approximately $730 million. This is over 3 times as large as it was in 2003 when it stood at just $230 million. You should note that three quarters of our fees are driven of the top line and 85% of our incentive fees are derived from international markets. So, our fee streams are significantly less volatile than US incentive fees or for that matter owned real estate. This stream should continue to grow driven by our pipeline, future REVPAR increases, and greater incentive fees.

Another contributor to our peer fee growth will be the future asset sales. The majority of these sales will include long-term management contracts as with our 40-year contracts with host. On a current owned revenue base of $2.5 billion and assuming a 4% to 5% management fee, we could generate over $100 million in incremental fees as we sell our real estate. This could bring us to total revenue of $830 million. If you then allocate our entire 2008 SG&A excluding for the managed and franchise business, you will be left with about $400 million in EBITDA. This part of the exercise is meant only to look at existing fees from existing hotels with growth driven by long-term REVPAR increases of 4%. So, you could apply a conservative 10 times multiple.

This approach yields about $4 billion in value or $22 a share again assuming no unit additions to the system. But the reality is that unit additions could add significant value beyond that $4 billion. Historically, US unit additions have averaged 2.5%. Our pipeline of future hotels should yield significantly higher unit growth rates. This is driven largely by the launch of new brands and sustained increases in prosperity in many regions around the world. Simply put if 3 billion people in countries like China, India, and Vietnam enter the world economy they need infrastructure including hotels. With our strong brands and global platform we are well positioned to take advantage of this massive secular trend.

To that point we opened a record 35 hotels in the quarter with over 7,500 rooms. That brings our year-to-date openings to 66 new hotels and 17,000 rooms. We are well on track to deliver our guidance of opening over 80 hotels this year.

Getting back to valuation, we need to look at the number of rooms in our pipeline and the expected NPV per room. To get to the number of rooms in our pipeline, we critically reviewed the status of each of our 500 hotels reported in the second quarter. This resulted in removing 30 projects. Our number of openings and signings during the quarter were also almost equal at 35 and 36 hotels respectively. Based on that arithmetic, our pipeline now stands at approximately 470 hotels and 110,000 rooms. On our existing base of 280,000 rooms this pipeline equates to a 40% of our system through 2012.

Today, for example we estimate that over 60% of the pipeline is already under construction or finance, which should result in just under 100 new hotels for 2009 and more than 100 for 2010 or about 25,000 gross room additions per year. After expected exits, this implies net room growth of about 7% per year.

Now that we have gone through the rooms in the pipeline, let us the cover the second variable, NPV per room. We estimate that a typical hotel contract in our pipeline is worth roughly $6 million or 25,000 per room. This includes a range of typically 36,000 per room for nonUS management contracts and 18,000 per room for US select serve [ph] franchises. So, in aggregate our pipeline of 470 hotels and 110,000 rooms would equate to $2.8 billion in net present value or $16 per share. So, if you add together the value of our existing fee business plus the NPV of our pipeline, you come up with another $38 per share.

So, to summarize our valuation exercise it is not difficult to get a stock price several times our current $19 a share. This analysis suggests a value comprised of an owned hotel portfolio of $21, vacation ownership assets of $8, plus a fee business worth another $38. In total, you would arrive at a stock price of $67, which is again why we believe the stock represents a great long-term opportunity.

Now I would like to turn to my fifth and final topic for the day. And update on the cost cutting programs we mentioned in our second quarter call. Of the key 4 financial levers that we have discussed in previous calls, in this current environment it seems most appropriate to discuss cost in more detail. We have taken a three-pronged approach to cost cutting focused at the property level, corporate SG&A, and procurement. We began to implement cost cutting efforts at the property level earlier this year. To that end we have rolled out short-term property level contingencies such as reduced operating hours and hiring fees. At the same time to achieve longer-term efficiencies we are working methodically hotel by hotel with our six sigma organization to implement tools, best practices, and other sustained savings.

We are also making significant progress towards reducing our corporate and divisional overhead costs. Our activity value analysis or AVA exercise has already run through human resources, legal and brand teams and will end to finish the next two ways by the end of the first quarter of 2009. This will result in better alignment, less overlap, and sustained efficiencies. For 2009, we anticipate showing year-over-year declines in our SG&A.

Procurement represents another area for us to reduce costs at our hotels and at the corporate level. This includes sourcing from a smaller group of vendors to maximize volume discounts and better terms. These savings will grow as the program expands across properties. We have also increased the scope of our offerings bringing in 8 new categories of corporate spend on the strategic sourcing and we are launching new F&B and OS&E distribution deals for Europe, Africa, and the Middle East beginning in 2009.

So, with that I would like to wrap up my comments by briefly revisiting the five essentials of the Starwood journey. As a reminder they include Starwood class brands, brilliant execution, global growth, great talent, and market leading returns. Even in these turbulent times we remain focused on these five essentials to position the company for growth over the long run. Specifically this growth will drive 4 financial levers, REVPAR premiums, pipeline growth, cost controls, and unlocking of real estate value. Our senior leadership team is aligned around this direction.

And I would like to close by emphasizing two points. First, Starwood is well positioned for this economic slowdown. We have the liquidity not just to survive the current slowdown but to move ahead with our growth priorities. Second, Starwood represents an attractive long-term value at today’s share price. And with that I like to turn the call over to Vasant for more details on our third quarter results and thoughts in 2009. Vasanth.

Vasant Prabhu

Thank you Frits and good morning everyone. As Frits described we have the balance sheet and the liquidity to deal with this credit crisis and we have moved aggressively to cut costs and capital to mitigate the impact of the demand contraction underway. As we look past the downturn, we remain very bullish about our growth potential and our intrinsic value built around our powerful brands, our global footprint, our pipeline, and our execution capabilities which Frits just outlined for you.

I am going to focus on the near-term outlook for the business, a quick review of third quarter results, current trends around the world, and how are approaching and planning for 2009 in a very uncertain and fast changing environment. As you have seen we significantly exceeded expectations in Q3 despite slower than anticipated global REVPAR growth, a sharper than expected strengthening in the dollar, and no gains from securitization. We were able to offset lower than expected revenues by moving aggressively to contain costs both at the hotel level and in overhead functions. We have been taking actions on all these fronts over the past several months, anticipating the downturn we are now experiencing .While the full benefit of these actins will be realized in 2009 our cost actions helped us deliver bottom line third quarter results from operations in line with expectation despite revenue shortfalls.

Market conditions post Labor Day did not permit a sale of receivables, however, our nonrefundable residential license fee helped us offset the loss of the anticipated gain from the securitization. Finally, the St. Regis residences in Singapore were ready for occupancy ahead of previous expectations. As such, we were paid our license fee in Q3 instead of Q4 brining third quarter EBITDA and EPS in well above expectations.

Post Labor Day as a latest chapter of the credit crisis unfolded with Fannie and Freddie followed by Lehman, AIG, (inaudible), et cetera, the impact on business confidence was evident. Group booking pace deteriorated for 2008 and 2009, cancellations are up, transient booking have dropped. The change in trend was global.

In Q3 North American Company Operated REVPAR was down 2%. Through the first 17 days of October REVPAR in North America at Company Operated hotels is down 12% a 10% swing, about 300 basis points of which is due to the holiday shift. In Europe, for the same periods REVPAR growth went down from 2% to down 14% in local currency a 12 point swing. In Asia, we saw healthy REVPAR growth in July and August, turned negative in September and October. In Latin America, the Middle East, and Africa mostly national resource economies the trend remains robust and stable but we anticipate some slowdown as commodity prices have collapsed.

The big unknown is whether the trend of the last few weeks will continue through the quarter. Will the decline ease as it becomes clearer that the depression is unlikely, credit conditions return to some normalcy, and the election removes uncertainty? It is very hard to say right now. So ,we have assumed that the most recent trends are likely to continue through the quarter. So, I just want to make it clear that we are assuming that the most recent trends we are seeing will continue through the quarter and this is what is implied in our guidance for the hotel business.

In the vacation ownership business as consumer confidence hit new lows we continue to experience an increasing rate of decline in originated sales. Close rates are dropping and more buyers are seeking lower price points by buying cheaper inventory or every other yield products. Our pricing is unchanged by our price realization has dropped due to a deteriorating mix and our pace of sales has slowed. Hardest hit is Hawaii, but we are seeing just now in all our markets including Orlando, which had held up reasonably well so far.

Here again it is hard to decide if the significant weakness of the past two weeks will continue but we have assumed it will in our guidance. We are also assuming that market conditions will not permit a sale of receivables and as such that is no gain on sales of receivables assumed this year.

As Frits indicated, we are moving aggressively to resize our vacation ownership business to reflect the new reality. We have already shut down 3 sales centers this year as we scale back our sales and marketing cost structure. Overhead costs have also been cut by 25% with more to come. Obviously all this leads us to a Q4 outlook which is worse than we might have expected in late July. We continue to focus on cost control and anticipate taking further actions in Q4 in our own hotels, our vacation ownership business, and our overhead. While this will help Q4 to some extent, the full benefit will be realized in 2009.

With all this uncertainly it is very difficult to have a definitive point of view on 2009. So, let me describe how we are approaching it for internal planning purposes. In the hotel business the big question of course if how much REVPAR will decline. In the US, where 40 years of data is available, we know that REVPAR never declined for any 4 quarters before the 1990 and 1991 recession. In the 1990, 1991 time frame for any 4 quarters the maximum REVPAR decline in upper upscale and luxury segments was around 3%. 1990, 1991 was impacted by significant excess supply in the late 80s, the S&L crisis, the recession, and the first Gulf war. If 2009 likely to be worse?

The supply situation is better but expectations are that the recession might be worse. We are therefore assuming that 2009 could be worse than 1991. In 2001and 2002 for any 4 quarters that include the September 11 quarter REVPAR declined over 12%. Once again we had significant excess supply leading into 2001, the economy was already in recession and 9/11 was an extraordinary event with a particular impact on travel.

Could 2009 be as bad as 2001, 2002? We think not. For planning purposes we are currently assuming a North American REVPAR decline of 5%. This would imply 8% to 10% negative REVPAR in Q1, a 6% to 8% decline in Q2, a 4% to 6% decline in Q3 and flat to positive in Q4 as we lap the negative 10, we expect in Q4 this year. Outside the US we expect sluggish growth in Europe and Asia and some slowdown in other geographies. At current exchange rates we are assuming international markets also decline around 5% or flattish in constant dollars helped by growth in Africa, the Middle East, Latin America, and parts of Asia.

On the cost front, we anticipate inflationary increases of 3 to 4% at owned hotels. We have a variety of initiatives underway to offset at least half if not more of this increase with productivity and streamlining programs. This would be on top of the variable cost reductions we would expect to get as occupancy and food and beverage business declines. Base management and franchise fees will decline with REVPAR, incentive fees as maybe expected will decline more than base fees. However, 85% of our incentive fees are derived from international hotels. Given the structure of international incentive fees with no owner’s priority the drop in international incentive fees will not be as much as US incentive fees in a downturn.

Offsetting the decline in incentive fees will be new fees from the 90 or so hotels that opened this year and another 100 or so we expect will open next year all of which are under construction. In aggregate, we would expect our fee business to decline somewhat less than the decline in worldwide REVPAR.

In addition, we are making deep cuts in our overhead structure as Frits outlined, offset by selective investments to sustain a long-term growth potential. Our SG&A will decline in 2009. In our vacation ownership business we expect another difficult year. We are forecasting current trends to continue, price realization and close rates will remain stressed, (inaudible) could also be challenging. We expect originated sales to decline some more. The impact of revenue declines will be mitigated by a significant resizing of the vacation ownership infrastructure, which is already underway. EBITDA could be lower in 2009. The market for securitization is hard to predict at this time. So, we are not assuming the sales will get done and do not anticipate a gain from the sale of receivables. It remains our intent though to sell receivables at the first available opportunity.

On the residential front our Bal Harbour project is progressing and is on track to be completed by the end of 2010. We have already sold a significant amount of the condo inventory at great prices and with 20% deposits. Based on the percentage of completion accounting rules we expect that some income from Bal Harbour could be recognized towards the end of 2009.

This all gets us to a baseline EBITDA of around $1 billion in 2009. If REVPAR globally is up or down 1% versus our assumption that would impact our EBITDA by around $25 million. If the dollar moves against all our major currencies by 1% higher or lower from current levels that would impact EBITDA by around $5 million. By way of background, 50% of our EBITDA is denominated in dollars, approximately 11% in Euros, and 7% in Canadian Dollars both of which we have partially hedged in 2009. 5% is in Mexican Pesos, the rest is a basket with the major components being the Chinese Renminbi, the Australian dollar, the British pound, and the Japanese Yen.

Finally, we are also substantially scaling back our capital spending. We have invested n our owned hotels base for the past several years and as such can afford to scale back hotel maintenance capital to $150 million. We will still have some major renovations underway next year like the W Chicago City Center and the Grand in Florence. By scaling back corporate and IT spending to $75 million we are significantly scaling back our capital commitment to the vacation ownership business. We are starting no new projects, essentially completing projects that are well underway and partially sold.

Net capital into the vacation ownership business will be negative next year. In other words we will be drawing down on inventory. We will continue on with the Bal Harbour project as planned, investing another $200 million in calendar year 2009.

As we enter what could be a difficult 12 months, we are acting aggressively to mitigate the impact of declining revenues by scaling back costs and capital while ensuring that we fund the future growth of our business, which we remain as bullish about today as we were before the credit crisis broke. On a global basis, this is a great secular growth business which happens to have cycles along the way. This too shall pass at some point and Starwood will rise to new heights in terms of system size, revenues, and profits. With that I will turn this back to Jay.

Jason Koval

Thanks Vasant. We’d now like to open up the call to your questions. So in the interest of time and fairness, please limit yourselves to one question at a time and then will take any follow-up questions you might have as time permits. Tama, we’re ready for the first question.

Question-and-Answer Session

Operator

(Operator instructions) We will go to David Katz with Oppenheimer.

David Katz - Oppenheimer

Hi good morning. I just wanted to go back Vasant on some of the capital spending issues and if you could -- should we be pretty much for the moment categorically ruling out you know sharewood repurchases for next year and what about the notion of you know the Sheraton repositioning, which I think there was some capital being allocated to that. Is there not some wisdom in you know proceeding with that and repositioning the brand for a rebound.

Vasant Prabhu

Yes, but I think you should go with what we told you in terms of share repurchases. We’re stopping our repurchase program until further notice as Frits said, you know, asset sales, which we have several assets on the market will determine some of that, greater visibility, and the possibility, we want flexibility with the possibility that there could be opportunities down the road in this market, like we did when Méridien last time of picking up great brands or other assets on the cheap. Your second question around Sheraton repositioning, I will start and I’m sure Frits will add to it. Two quick things, one absolutely no change in commitment to the Sheraton repositioning, a big chunk of the capital that was involved with that was of course coming from our owners who have enthusiastically supported the program and are seeing the benefits of it. We’re not going to pull back on anything we have to do at our end, but a lot of it was going to be through our owner base, and we’re also moving full scheme ahead on cleaning up the Sheraton system by exiting hotels that you know are either unwilling or will not benefit from any repositioning. So, Frits I’m sure you want to add something to that.

Frits van Paasschen

Yes. On both points. First of all, you know, over the long term we remain committed to the notion of repurchasing stock, but you know for now I wouldn’t model that into next year unless we can come back with significant asset sales, and that’s extremely difficult to predict in this environment. As to the Sheraton repositioning, so many of those renovations are underway as planned and therefore are highly likely to go forward. Obviously, the new openings we described and feel confident with and so the repositioning of Sheraton and the drive towards a greater level of consistency across the system in North America, something we still feel strongly we will achieve by the end of 2009.

Jason Koval

Next question please.

Operator

We’ll go next to Joseph Greff with JPMorgan.

Joseph Greff – JPMorgan

Good morning guys. I just had two good questions. The first one is on New York City. We’re hearing expectations for high-single digit REVPAR growth at least for the first half of next year in New York and I know you kind of gave up the quarterly progression as you see it. How do you see New York City performing relative to the industry, I mean, you think it underperforms and how are you seeing trends. My second question Vasant is as you look through and roll up your 2009 guidance and commentary and your capital allocation plan, where do you see net debt by the end of next year? Thanks.

Frits van Paasschen

I think in terms of New York, it’s been an interesting story, because up through the summer New York was performing quite strongly. Our view is that the economic and then financial turmoil that struck has hit the market, you know, more strongly in the last few weeks and therefore I’d be somewhat cautious in terms of projecting New York to outperform the industry. As it relates to the 2009 guidance, I’ll pass it back to Vasant.

Vasant Prabhu

Yes, in terms of net debt, as Frits indicated we are very much on track for the sales to flow through the end of October. So the net debt by the end of this year should be down from where it is right now. The net debt at the end of next year you know there are several variables there. There is sort of you know in a base case scenario the net debt should decline. Clearly it depends on a few other variables that could cause it to move more in the decline direction and that depends on asset sales. We clearly would be in the market to securitize. We really have no desire to keep receivables in our balance sheet from the vacation ownership business. It has been our policy to securitize on a regular basis, and if and when those markets are available, we would be back in to securitize receivables. So securitization of receivables is a major factor that would drive where the debt is. Asset sales is a major factor, so depending on that you know, things could move more in the decline direction for debt, offset by whatever we might choose to do in terms of taking advantage of opportunities that are out there.

Jason Koval

Next question please.

Operator

We will go next to Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi guys. Good morning. In regards to time-share it sounds like you’re scaling back for the long term significantly. One question, 1A, are you willing to lend -- are you willing to finance fewer purchases, I believe, the number in the past has been 70% and then what you see time-share as a percentage of EBITA 2 or 3 years from now versus prior expectations, is it 10% versus 20%? Thank you.

Frits van Paasschen

Yes Celeste. This is Frits. In terms of lending, we’re going to continue to review our practices for time-share, and I think you know our view is that the world has changed significantly with the change in the likelihood and economic attractiveness of securitization. Exactly how that unfolds I think is something we’re going to learn over the coming months. In terms of time-share as a percentage of total EBITA, I think we’re prepared at this moment to give you a percentage, I think you can safely model it though as being a lower percentage of total overall EBITA going forward.

Jason Koval

Next question please.

Operator

We will go next to Bill Crow from Raymond James.

Bill Crow - Raymond James

Good morning guys. Frits thanks for the some of the parts analysis that was helpful. My question really two parts, kind of looking out into the future a little bit. Let me first rephrase Celeste’s question. If we look out 5 years from now, are we going to be saying this was kind of the beginning of the end for your time-share involvement as far as any new projects go. Is it just your kind of intent at this point to get on the business eventually, and then second, where do you see your unit growth pipeline if we will go a couple of years from now, 110000 rooms, you open 25000 a year. How quickly are you filling that void in the pipeline. Is that pipeline is just going to shrink down to essentially nothing in the couple of years because of the financial environment. Thanks.

Frits van Paasschen

Yes, sure. As it relates to the time-share first I want to be very clear and this is something we said earlier in the call already, we’re resizing the business, which doesn’t mean exiting, and we’re going to continue to focus on a small number of high return locations, and we’ll have more details on that as time goes forward. In terms of unit growth, you know, one of the things I think that’s particularly attractive about this story is that there are opportunities to sustain that level of growth actually for sometime to come, whether you look at the growth in China today, we have over 60 hotels under construction as we speak, whether it’s the great expansion of a loft and element in North America and beyond and then you look at markets like India that the growth phase really has not yet begun. So that having been said, as we get into this slowdown and as the pace of our openings increases, you might see our pipeline as having peaked in the near term, but I think in the long term we remain pretty bullish on long-term growth prospects. So, I don’t know, Vasant if you want to add something to that.

Vasant Prabhu

No. I think the only other thing we could add is, you know, obviously we’ll change direction and look more at conversion opportunities in some of the more developed markets, knowing that it’s probably harder for new builds and we are seeing some of those as we speak. So you might see some change in mix in upper upscale and luxury, but as Frits said, I mean, you know our global footprint and the scale and size of our platforms in places like the Middle East, Africa, China, India, and most of Asia, including Latin America positions us very well on a long-term basis. We’re not just dependent on the U.S.

Jason Koval

Next question please.

Operator

We’ll go next to Patrick Scholes with Friedman, Billings, and Ramsey.

Patrick Scholes – Friedman, Billings, and Ramsey

Hi good morning. Just a follow-up on New York. Actually when I look out to forward data, actually looks like it’s one of the weakest markets for 2009. How is that shaping up when you look at group bookings versus transient, and of our hotels in New York what did you see as a percentage of the bookings over the last year from international visitors?

Vasant Prabhu

Well, as Fritz said earlier. New York held up fairly well, you know, for most of this year despite some of the financial turmoil helped of course by some of the international travel coming in. We’re assuming that that international travel is now going to fade away as the dollar has strengthened. So clearly that will hurt New York. In addition, we would expect that some of the financial industry business will be soft next year. So, you know, it’s very early to sort of make any specific predictions and it will differ based on you know the hotels, mixer group, and transient. You know, I would -- I think the safe bet is that New York clearly is showing signs of weakness today and it’s going to continue into next year.

Jason Koval

Next question please.

Operator

We’ll go next to Will Marks with JMP Securities.

Will Marks - JMP Securities

Thank you and good morning. I have a question on next year’s guidance as it relates to, can you give the approximate breakdown of ADR versus occupancy and doing that can you comment on your overall strategy of protecting rate if that is the case and really what you do that and I understand that it is harder to raise rates then it is lower it but maybe comment further if you can?

Frits van Paasschen

So, I don’t think we are going to break out ADR versus rate right now. In terms of philosophy on rate, we take a fairly analytical perspective on this and look market by market and try to optimize price relative to occupancy, recognizing that simply dropping price doesn’t by itself create demand or additional volume. And so we want to be fairly careful about where and how we discount because the implications on profitability of that for all the apparent reasons are things we want to avoid.

Jason Koval

Next question please.

Operator

We will go next to Smedes Rose with KBW.

Smedes Rose - KBW

Hi, good morning. Vasant you mentioned that the defaults on time share were running at 6%, could you just remind us on I guess sequentially how that has changed and where have you seen that historically, kind of the highs and the lows?

Vasant Prabhu

You know there has been modest increases in the last few months, nothing significant. I couldn’t give you a number in terms of where the highs and lows are. 6 is higher than where the lows were and it is below where the highs were and the highs were probably in the early 2000s. You know it is an interesting situation, you know without getting into a lot of detail it is not at all -- a default on the time share is not at all like a default on a mortgage where the rational decision when your house is worth less than your mortgage you walk away. Here you are walking away from quite a bit of equity given how these things work. You put in 20%, plus you keep paying every month. You are walking away from something’s that has real economic value which we have the ability if we take it back to you know, historically we have always sold it at a higher price than we sold it the first time around. So, it is an unusual kind of thing where it is a fairly irrational decision to walk away from a time share payment and which is why these default rates at least historically, you know, have not moved that much.

Jason Koval

Next question please.

Operator

We will go next to William Truelove from UBS.

William Truelove - UBS

Hi good morning. I hate to ask another time share question but on the 2009 outlook you gave sort of a REVPAR declining 5% and what would 1% change REVPAR do. You don’t really specific on what the exact decline might be that you are expecting in time share originations. So could you give us that and could you give us some sensitivity analysis around some changes in that factor around the EPS basis? Thanks so much.

Vasant Prabhu

And that is where I think you are going into more specificity and detail than we would like to do at this point. You know we have given you sort of a sense of a baseline with a variety of moving parts in it with some things that could be better than we might expect right now and some things that could be worse. You know we will try and give you more details in January when we normally provide somewhat more detail around our guidance. You know there are things moving fast in the time share business, you know, obviously we are monitoring close rates. There has been an element of sort of shock and awe in the last couple of weeks. We don’t know whether the last few weeks represent what the longer-term trend is. We are the shoulder period right now versus the peak periods in Hawaii. In addition, you know we are as Frits said taking significant cuts in our cost structure all of which is being worked through. So that is an offset. So, you know, while we have a general idea where we think we will end up but it is too premature to talk specifics.

Frits van Paasschen

Yes, I think though in qualitative terms we are not taking about an up tick next year and continue to take -- you know the $1 billion in EBITDA reflects a pretty conservative view of what time share would be relative the situation today and certainly compared to where it has been in the last few years.

Jason Koval

Next question please.

Operator

We will go next to Steve Kent with Goldman Sachs.

Steve Kent - Goldman Sachs

Hi, good morning. Could you just talk a little bit. You mentioned earlier quite a number of times that you would be willing to look at another brand like Méridien but in your own analysis you have to potential for a triple in buying in your own stock. So, I guess I am trying to understand would you buy a brand before you would buy your own shares?

Frits van Paasschen

You know, I think you can only answer that on a philosophical level because the answer depends so much on the specifies. Clearly based on the analysis that we articulated today, we have a lot of confidence in the long-term potential to create value with our stock and therefore we look extremely critical at the returns of adding other brands to the portfolio particularly given our view that with the 9 distinctive and compelling brands that we have it is not as through we have a gap somewhere that we need to fill. On the other hand if you look at Le Méridien and the returns that we have been able to create there. Should something like that come along again we would seriously consider it.

Jason Koval

Next question please.

Operator

We will go next to Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank

Hi, good morning guys. I think I heard you say that about 60% of your pipeline is financed. At this point, could you share with us what percentage is under construction and maybe go on with that. At any point, should the financing fall through for whatever reason, are you guys willing to use more of your balance sheet to stimulate (inaudible)?

Frits van Paasschen

Yes, you know I think just on the first part, my recollection and I am going to ask Jay to check on this for me but I think it is something like around 55% under construction and something over 60% in total finance. And in terms of would we use our own balance sheet? The answer is yes but on a selective basis. You know, our view and certainly what we have described today is that liquidity and capital are precious. On the other hand, there is significant long-term potential to create value through the pipeline and therefore if there is a way to capitalize and support our pipeline with an obvious and clear exit strategy for any of our balance sheet resources brought to bear, we would absolutely consider that.

Jason Koval

Next question please.

Operator

(Operator instructions) We will take a follow up from Patrick Scholes.

Patrick Scholes – Friedman, Billings, and Ramsey

Hi, on time share, I don’t know if you have mentioned what your expectations are for deferred income for 2009 and also I wonder if you can give us an update on the status of your Milwaukee [ph] project. I have been hearing for some time that that maybe -- construction maybe delayed due to economic conditions in Hawaii.

Vasant Prabhu

On the deferred income, we provide you a schedule in our data pack that accompanies the press release that you can look at each quarter and look at how much revenue was deferred and in this quarter there really wasn’t much. Many of the projects we are now selling are pretty far along. And as it relates to you know time share in general, I think we made it very clear that projects underway are moving ahead. We are starting no new projects. And we will take a hard look at all our projects and decide where the right phase is.

Jason Koval

Next question please.

Operator

And we will take a follow-up from Will Marks.

Will Marks - JMP Securities

Yes, regarding Lido, Turnberry and any other assets that are in the process of selling. Can you talk about financing? How the acquisitions are being financed?

Vasant Prabhu

In the case of Lido and Turnberry you know, there has been no real issue with financing. You know one of the buyers in the case of Turnberry is a Middle Eastern buyer and you know there is really to the best of our knowledge no real financing involved. And in the other case the money is already in escrow on our side. So, they have already raised the money. We were just waiting for the Venice authorities to have the rights for -- to come in which they haven’t. That is lapsed now. So, we are just moving ahead to a close at this point.

Jason Koval

Next question please.

Operator

And we have no further questions at this time. I would like to turn over to Mr. Koval for any additional or closing remarks.

Jason Koval

Thanks Tama. That wraps up our third quarter call. We appreciate your time and interest in Starwood Hotels & Resorts and please feel free to contact us to review any of this information or follow up with any additional questions. Goodbye.

Operator

Ladies and gentlemen that does conclude today’s conference. We do appreciate your participation. You may disconnect at this time.

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Source: Starwood Hotels & Resorts Worldwide, Inc. Q3 2008 Earnings Call Transcript
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