Welcome to the Starwood Hotels first quarter 2009 earnings conference call. Today's conference is being recorded. As this time I will turn the conference over to Mr. Koval, Vice President of Investor Relations, Jason Koval, for opening remarks.
Joining me today I have Frits van Paasschen, our CEO, and Vasant M 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 other 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 Web site at starwoodhotels.com for some of the factors that could cause results to differ.
With that I'm pleased to turn the call over to Frits for his comments.
Frits van Paasschen
It will be of no surprise to all of you who track the industry that the environment continues to be extremely challenging. Looking forward, our experience in 2008 has taught us that it is difficult, and at times, counterproductive to predict the future. What we can say now though is that the economy in general, and our business in particular, are no longer in a free fall.
We're nonetheless operating with the assumption that despite some talk of green shoots and the like, this recession shows no signs of ending just yet. RevPAR will continue to be challenged for the balance of the year as rates, if not occupancy, continue to be under pressure. In this context we remain focused on managing our business for cash, continuing to rein in costs and capital as a way of maintaining our financial flexibility and positioning ourselves to own the upswing when it finally does arrive.
Looking beyond this period of economic uncertainty, we continue to believe in our long-term strategy as the right way to drive shareholder value. So with that, I'd like to cover four topics on today's call. First, a recap of our first quarter results where, as in the fourth quarter, our cost reductions offset a dismal economic environment.
Second topic, the successful renegotiation of our credit agreement which bolsters our flexibility through 2011 with an amended leverage covenant at 5.5 times. Third, more details on our actions to stimulate demand in our hotels and drive revenue. Finally, an update on the journey and our long-term priorities.
So with that, let me turn to the first topic, our first quarter results. This quarter marks the second in a row in which we beat EBITDA and EPS expectations thanks to our associates continued focus on significantly cutting costs. Worldwide, system-wide RevPAR dropped 19% and worldwide owned hotels experienced a 26% decline in constant dollars.
For the first time in a while, our traditional strengths have, for now, become significant headwinds. For example, our global footprint left us vulnerable to a strengthening dollar. Our luxury properties and our strong presence in markets like New York and Hawaii have been disproportionately hit by today's environment. Allow me to give you an idea of the magnitude of these headwinds. If you excluded our luxury properties, North American company operated RevPAR would have been better by 220 basis points in the quarter.
New York and Hawaii alone dragged down our RevPAR by almost 260 basis points. And foreign exchange took 700 basis points from our international results. RevPAR declines in the quarter were increasingly driven by declining rates while occupancy appears to have found a plateau. It is too early to say that fundamentals are improving, but as mentioned earlier it seems we are no longer in a free fall.
We're encouraged that occupancies and future bookings have begun to level out which, if they continue, could bring stability. That said we still have several months of challenging comparisons and rate declines left in front of us. Our group business remains soft as planners hesitate to plan events, especially at luxury and resort properties.
New group production is running below last year's levels, room blocks are being revised downward, and cancellation activity remains high, all of which translates into 2009 pace down 23%. Now on to our fees. Our managed and franchised revenues dropped 15.4% in the quarter as our footprint growth offset declining RevPAR. We're earning new fees from the nearly 200 hotels that we opened between 2006 and 2008. We opened 16 new properties during the first quarter and expect to open 80 to 100 for the full year despite some delays.
At our vacation ownership business, we aggressively manage the P&L, including a 45% reduction in G&A and a 35% reduction in the sales force. So despite a 30% drop in revenue, our EBITDA declined by only 18%.
Close rates and tour flows were in line with our expectations, and for the first time in several quarters we actually saw some trends improve. Price realization was slightly lower than expected but this was entirely a result of product mix, not price reduction. About 52% of our sales were financed by Starwood and the average borrower put 24% down. Buyers in the quarter had average FICO scores of 740 and delinquencies are running at 4.4% versus 2.9% a year ago.
We mentioned on the last call that our vacation ownership business we had written off several projects and stopped new ones. This judicious approach to capital should position SVO to be cash positive for the year even before our planned securitizations. And looking ahead, we expect the business to continue to throw off cash increasingly in the years to come.
As a conclusion to my discussion of the first quarter, let me repeat that the severity of this current business environment has driven us to intensify our focus on managing our business for cash. We're still on track to achieve overhead savings of over $100 million. We also cut our company-wide capital spend by roughly 60% from 2008. Meanwhile we continue to evaluate options for Bal Harbor where we've already significantly reduced costs and slowed our capital spend.
My second topic today is a quick discussion of our balance sheet and our initiatives to maximize our liquidity position. Earlier this week we successfully amended our credit agreement, including an increase in our leverage covenant from 4.5 times to 5.5 times. Importantly, we did this without having to reduce the size of the facility. This amendment should allow us to access our largely undrawn $1.9 billion revolver under even the most severe RevPAR scenarios.
Vasant will give more color on this development and the increased flexibility we've achieved through working with our banks. We've not reported any large asset sales, but the transaction volume down at 80% to 90% mix is not surprising. The bid-ask spread remains wide for the broader market place. But we still believe we can continue to bring to market our unique and better-positioned assets and we're in ongoing discussions with potential buyers.
On the securitization front, we're finalizing talks with several parties on possible note sales. These are high quality receivables, but not assets we need to keep on our books. Given the uncertainty and volatility in the capital markets, we continue to explore a number of creative ways to reduce our reliance on bank debt market and to reduce our exposure to maturities over the next few years.
We will also take advantage of opportunities such as the recent improvement in debt markets leading to our bond issuance today. We will be unrelenting in our efforts to pull cash out of our business and improve our financial flexibility. Think of that as a solid defense. At the same time, long-term success will come from playing offense, getting guests and customers to return again and again to our hotels and resorts.
This is my third topic. Specifically, I want to cover promotions, revenue management, sales efforts, and attacking government rhetoric. So let's talk about promotions. We're being more active than ever with key travel participants including, for example, double savings with AAA and a 4% credit to the master account for meeting planners. We're also working closely with online travel agencies to drive business through limited time offerings.
This has proven to be an effective way of stimulating leisure demand. We are also leveraging the strength of our Starwood Preferred Guest program. SPG is consistently the leading loyalty program in the industry. In fact, we're proud to announce that SPG earned eight Freddie Awards this year. We're working on innovative offerings to drive business to our hotels, such as SPG flights which extends our 10-year old, no black-out offer to the airline space. Members can use points to book an airline ticket with the same convenience of a hotel room.
I'm most excited about our free weekends promotion which launches tomorrow, May 1. It's the biggest SPG promotion in almost a decade. For every two stays, our members will be rewarded with one free weekend night. This promotion drives immediate business at the hotels at a time when they have a great need for it. And for SPG members, it offers a fast payback.
So let's turn now to revenue management. Based on my experience in branded businesses, cutting price damages brand integrity. It also lowers the price base from which one has to build as business improves. So we're undertaking a cross-functional and cross-regional effort to look at how to maximize the trade-off between rate and occupancy. For example, we're adjusting room blocks to make sure that expected businesses are properly risk adjusted for higher cancellations making more rooms available for sale.
Continuing to upgrade revenue management resources and analytical capabilities can be a significant source of incremental profit. Another part of playing offense is getting the most out of our sales efforts.
For example, we redeployed some of our sales associates to focus on new accounts that are actively booking group events such as associations and smaller accounts. Our recent sales [inaudible] saw 3,000 Starwood sales and hotel executives hit the streets to call in over 20,000 customers in North America.
It's also important to mention stand-up for travel. Starwood has partnered with other industry leaders to fight the [villianization] of business travel. We're working closely with the U.S. Travel Association to meet with lawmakers including President Obama to change the tone of their comments about travel and to recognize the importance of our industry in creating jobs, generating tax revenues, and getting the economy back on its feet. Supported by letter writing from our associates, these efforts are already paying off.
I hope that these first three topics have given you more color and texture to our efforts in today's climate, whether it's protecting our financial flexibility or driving revenue. At the same time, we've not lost sight of the longer-term opportunity of building the premier global hospitality company.
I'm a competitive person and the team we have in place at Starwood is equally driven to succeed. Our strategy, which we've been calling the Starwood journey, will be our route to success. Which leads me to my fourth topic. We'll touch on the five essentials of the journey including Starwood class brands, great talent, brilliant execution, global growth, and market leading returns.
So let me start with our brands. The Sheraton reinvigoration is on track to its three-year goal. Ninety percent of rooms compliant with brand standards by the end of this year. Two-thirds of those 100 slated renovations are already complete with an additional 30 on-schedule to be finished by the end of the year.
About 75 new Sheratons will have entered the system in the three years ending 2009 and 24 properties below brand standards have already exited. The [inaudible] Sheraton will be in 90% of our Sheratons around the world.
So as we move past renovation disruption, these Sheratons should see continued gains in our guest satisfaction scores and RevPAR Index. We've already experienced a dramatic up-tick in some key survey metrics such as likelihood to return to the brand and meeting planner satisfaction.
Our two new brands, aloft and Element, are also doing well. GSI scores are off the charts, more in line with what you'd expect from an established luxury brand. And between these two brands, we have 24 open today and expect to have almost 50 open by year-end including Beijing, Montreal, and Abu Dhabi.
Our W brand is on track to grow by almost 40% this year with 10 openings. We opened three in the first quarter, including Doha, Hoboken, and Atlanta. Future openings range in places like Southeast to Santiago, Boston to Barcelona. This brand is becoming globally recognized as unique and differentiated and we remain on track to triple its footprint between 2008 and 2011.
Thanks to the great talent we have in place and their hard work, we continue to execute well. Our experienced team of associates have aggressively removed [caused] hotels without compromising guest experience. We've simultaneously driven record guest satisfaction scores and flow-through even better than our 50% target.
The hotels where our lean operations teams have been involved have seen a sustainable 5% to 10% improvement in their cost-space above and beyond contingency reductions. And this all bodes well for future growth.
We have 400 deals in the pipeline with almost 60% under construction or financed. This is after removing hotels that are on hold. Compared to our competitors, we have a smaller base of rooms, so this should lead to industry leading unit growth. Of the 18 deals we signed in the quarter, half were outside the U.S. and 3/4 were full-serve.
So with that, I'd like to close by focusing on four key takeaways. First, we've made meaningful changes in the way we operate our business which have resulted in real reductions in our cost space. These costs initiatives have driven our results over the near-term and they'll create value for years to come as we operate with a permanently reduced cost structure.
Second, we are relentlessly managing our business for cash. This includes a sharp focus on reducing our debt levels and maintaining maximum liquidity and flexibility over the coming years. Feedback from the banking community and our investors is that in a world of haves and have-nots, we are among the haves who will emerge from this downturn stronger than ever and well-positioned to take advantage of opportunities.
Third, challenging times like these show the strength and resilience of the fee business. Earnings are predictable, require little capital, and growth is sustainable over the long-term driven by RevPAR increases, incentive fees, and unit growth. Our brands resonate with consumers and are sought after by the development community. So when we see a return to growth and prosperity in many regions around the world, our strong brands and global platform will be positioned to take advantage of this massive secular growth trend.
And fourth, we're working diligently towards owning the upswing. To that end, we will open our 1,000th hotel by the end of this year. Of these 1,000 hotels, 250 will be less than three years old. And another 350 will be freshly renovated. Sixty off-brand hotels will have been removed from our system. Without a doubt, by the beginning of 2010, Starwood will have the largest, strongest, and youngest portfolio of hotels in its history.
So with that, I'd like to turn the call over to Vasant for more details on how our business trends could play out for the balance of the year.
Vasant M. Prabhu
I'm going to focus my comments over the next few minutes on all the actions we are taking to maximize liquidity and reduce our leverage. I'll also touch briefly on our outlook for the business.
As we had indicated on our last call, we finished the quarter with gross debt below $4 billion and slightly lower than last quarter. As you may recall, we had approximately $300 million of excess cash on our balance sheet, which we used to fund our first quarter cash needs.
The first quarter is our largest cash use quarter because of seasonality, our dividend payment, and the fact that our capital spending was front-end loaded as we finish in-flight capital projects. For the balance of our year, our operating cash flow will be positive, especially in the fourth quarter.
In order to insure that we have maximum and unimpeded access to liquidity, we preemptively chose to approach our bank group to amend the leverage covenant on our revolver and term loans. As announced a couple of days ago, we have completed this amendment.
The leverage covenant has been raised from 4.5 to 5.5. Also the definition of EBITDA use of determined covenants will not be adjusted for the cash cost of restructuring up a maximum allowed amount.
The size of the revolver and its maturity remains unchanged. In the terms for these amendments, we agreed to some restrictions on buy-backs and dividends as detailed in the agreement, paid an upfront fee and we'll have a higher spread on our borrowing costs.
We also drew on our revolver to pay down our June bank term loan maturity early. Based on the amended definition, our leverage at the end of Q1 was 3.9 and our coverage was 5.2. We've seen no issues with staying in compliance with out covenants through the remaining term of our revolver and bank loans.
While we drew on our revolver to pay the term loan, it has never been and is not now our intent to use the revolver as a chief source of financing. We have always used our revolver as a standby source of liquidity to give us maximum flexibility in our operational and financing decisions.
To that end, we have a whole range of actions underway to generate significant cash over the next three to six months, both to materially enhance our liquidity position and to reduce our leverage. Conditions in the credit market have improved considerably in the last few weeks. We believe this allows us an opportunity to refinance the maturing $500 million by issuing five-year debt.
This morning, we launched a bond offering which we hope many of you on the call will subscribe to. We will use the proceeds to pay down our revolver and substantially enhance our liquidity position. This will be in line with our general practice of turning out maturing debt as soon as market conditions permit.
You may recall we turned out $1 billion to five and ten years at attractive rates in late 2007, early 2008. In addition, market conditions have improved for sales of vacation ownership receivables. We have two transactions currently in process. One buyer is conducting that new diligence, and barring a significant change in market sentiment, this sale should be completed by late May or early June.
In terms of structure and parameters, it will be very similar to the transaction that Marriot completed a few weeks ago. Cash proceeds will be in the $110 million to $125 million range and higher if we complete both transactions. We expect to record a small loss on the sale.
As you know, we expect to receive a $200 million tax refund from our settlement with the IRS of the World Directories issue. While the amount is certain, timing is dependent on the internal process within the IRS. At this point, we still anticipate receiving the refund this summer. In the best case scenario, we hope we can get the cash in by the end of June.
Beyond the securitization cash the tax refund, which add up to over $300 million, we have a number of other initiatives underway to raise additional cash which we will announce as they are completed. Given where they all stand, we are confident we can raise another $500 million over and above our bond proceeds over the next three to six months.
Beyond the six-month time frame, we expect to complete asset sales that Frits referred to as long as we can get acceptable prices and contracts. An additional securitization, either later this year or early next year, is also a possibility. All these actions when completed will give us over a billion dollars of liquidity over and above the capacity on our revolver.
We've never been particularly concerned about our 2009 and 2010 maturities which we always believed were very manageable. All the actions outlined above are geared to ensure that we can handle maturities into 2012 and 2013. In [inaudible] maximizing our liquidity we are also focused on reducing our leverage. The bond issue of course enhances liquidity but not leverage.
The second $700 million we will raise not only enhances liquidity further but will also reduce leverage. On our last call we estimated our gross debt declining to $3.6 billion by year-end based on our expectations for operating cash flow for the balance of the year and the tax refund. With a high probably of at least one receivable sale, we now expect the gross debt will drop below $3.5 billion and even lower when we execute some of the other initiatives that are currently in the works.
In 2010 and '11 it is our intent to remain ruthless in our capital allocation as we have been this year, to run our vacation ownership business for cash, and to manage Bal Harbour space carefully and generate meaningful operating, positive operating cash flow. Positive operating cash flow as well as asset sales when market conditions stabilize will allow us to continue to delever beyond 2009.
To repeat, we see no issues whatsoever with complying with our amended covenants under a variety of future scenarios. In summary, as Frits indicated, we have strong brands, a great pipeline, a powerful global footprint. We expect to come out of this crisis much stronger. All the actions described above will ensure that we will not only survive, but also be able to take advantage of opportunities as they present themselves over the next few years.
Moving on to a quick review of our outlook., for the second quarter, our RevPAR expectation is a decline in line with what we experienced in the first quarter. While this is another steep decline, the second quarter would be the first time in six quarters that our RevPAR trend is not expected to worsen. The second derivative is, at worst, becoming less negative.
We are seeing signs everywhere that there is some stabilization. Occupancies worldwide appear to be stabilizing. However rate, which always lags, is still continuing to deteriorate. Transient trends feel firmer with more late-breaking business, while group business remains very soft, [inaudible] arrival is getting better, and sentiment appears to be improving. That said, all we are seeing is stabilization. There are no signs of any turnaround.
Our guidance does not include any impact from the recent concerns about swine flu. It is very hard to estimate impact. The situation is evolving fast and we are reacting as fast as we can to mitigate impact. If Mexico bears the brunt of this, we can give you some ballpark estimates of the impact on our business.
We track the impact of SARS. If the impact of swine flu on Mexico is comparable and occupancies at our hotels in Mexico drop to 20% levels in May and June, we would lose $4 million to $5 million in EBITDA in the second quarter.
There could be some offset, as we've had calls with our U.S. resorts from groups evaluating shifting from Mexico to the U.S. While it's hard to estimate the short-term impact, we know that events like this have no long-term impact on our business.
Also not included in our guidance is any loss we might incur from a securitization. We expect the loss to be small. We will announce the securitization when it is completed and let you know what the loss would be at that time. We remain, as Frits discussed, very focused on continuing to reduce costs across our SG&A, hotel level costs, as well as procurement initiatives. As we did in the first quarter, we expect our cost programs to mitigate the bottom line impact or RevPAR declines, which are greater than we might have anticipated earlier this year.
Looking out to the second half of the year, it is very difficult to provide any reliable focus. So as we did last quarter, all we are providing is an update to the baseline scenario. Based on how the first quarter ended and our expectations for the second quarter, we're now tracking approximately 600 basis points below our baseline RevPAR expectation for the year.
We expect to offset some of this additional decline by doing better on hotel level costs by $20 million and another $20 million more in SG&A cost reductions. Interest expense will be higher, depreciation and amortization will be lower, as will our tax rate for the year. Our capital plans remain unchanged and we still expect to open 80 to 100 hotels this year around the globe.
As you project our RevPAR for the back half, you have to consider three factors, the current RevPAR trend and how it is likely to change, the RevPAR trend last year and the impact of foreign exchange each quarter. Last year as you know, we had strong RevPAR growth in Q1 and Q2 and significantly negative RevPAR growth in Q4.
Also, the year-over-year comparison is very unfavorable for 4x in the first three quarters, but with the dollar at current levels the negative 4x impact disappears in Q4 this year. In short, our second half RevPAR numbers benefit from easier comparisons to last year and the disappearance of the 4x hit in Q4.
So to project the current negative RevPAR trend continuing into the second half, you have to believe that business conditions get materially worse than they have been so far this year. Let me try to simplify that with a couple of numbers. Last year in Q1, our RevPAR growth for company-operated hotels was a positive 8%. This year it was negative 24%. So on a two year basis, we were down 16%. 4x hurt us to the tune of almost 500 basis points in the first quarter. So the two-year run rate on a constant dollar basis was down around 11%.
Now let's look at the fourth quarter of 2009. Last year our RevPAR at company-operated hotels was down 12%. With the dollar where it is today, there is only a 200 basis point 4x impact. So a two-year run rate on a constant dollar basis of 11% in Q4 this year, i.e. an assumption that things on a two-year basis stay about as bad as they are right now, would imply relatively flat RevPAR in Q4.
We're not suggesting that that is what we are expecting. In fact, as you can see from our baseline adjustments, we're assuming RevPAR stays materially negative in Q4 which would imply a worsening two-year run rate into Q4.
So, are the adjustments to our baseline too conservative? Forecasting two quarters out is just not easy right now. We have given you out best judgment about the future and it is in line with what we are using to manage our cost structure. So with that, let me turn this back to Jay.
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 we'll take any follow-up questions you might have as time permits.
Paul, we're ready for the first question, please.
(Operator Instructions) Your first question comes from Joseph Greff – JP Morgan.
Joseph Greff – JP Morgan
Vasant, kind of going back to your 2009 outlook, I was hoping you could just revisit relative to your, I guess, new baseline '09 RevPAR outlook, what percentage point in RevPAR swing from that, what the yields in EBITDA netted at a FX assumptions in your new baseline guidance.
And then my second question is the second timeshare note sale, what sort of range are you thinking about in terms of proceeds there?
Vasant M Prabhu
Yes, I'll take your second question first. It's going to be small and it's most likely going to be early next year, but it's probably in the same range as the one we did right now, maybe a little smaller, but early next year.
In terms of your first question, in our prior baseline was about $875, and remember we said it's a baseline, and most of you formed your own judgments on that. So I'll just work off that baseline. If you take the RevPAR expectation down 600 basis points from where we were before, we said the range was 20 to 25. With all the costs reductions we are doing, we're trying to mitigate that impact as much as we can.
So 600 basis points is somewhere between $120 million to let's say $140 million down from that. We said we'd make up about $40 million of that from owned hotel cost savings as well as SG&A. And we beat the first quarter by about $15 million. So that's about a $55 million add-back. SVO we thought would be down another 10.
So take, I don't know, take $130 million minus let's say and add back about $45 million and you sort of get a sense of how we are thinking about it.
Your next question comes from David Katz – Oppenheimer.
David Katz – Oppenheimer
If you could talk a little bit about order of magnitude in terms of the bond offering that you're working on and give us any sense of where you think pricing on that should wind up in a range?
Vasant M. Prabhu
I don't think it would be appropriate for us to talk about pricing because it is in the process of being priced later today. In terms of size, we already indicated that the maximum would be $500 million which would be in line with the maturity that we just drew down on our revolver.
Your next question comes from Felicia Hendrix – Barclays Capital
Felicia Hendrix – Barclays Capital
Just a question on your cost cutting which has been rather impressive, I'm wondering what percentage of the cost is sustainable over the long-term? For example, like what part of those costs are savings on things that have decreasing prices like insurance costs, that sort of stuff, that would go away in an improving environment? And is there any low-hanging fruit left to pluck on your international side?
Vasant M. Prabhu
Well, Felicia, first of all, in terms of our cost cutting efforts, we're actually still going through the AVA process in a few areas that we have described on the previous couple of calls. So there are a few areas where we are still engaged fully in the process that we had started some months ago.
In terms of what percentage, I'm not sure I could give you that but my sense is that the majority, something like 3/4 I think, are sustainable long-term, maybe more than that. There are a few things I think that may be more short-term in nature, but along that line.
Your next question comes from [Jennifer Scheer] – Sanford Bernstein
[Jennifer Scheer] – Sanford Bernstein
A question about the vacation ownership business. What percent of total revenues and profits do you see this business seeing on a stabilized basis?
Frits van Paasschen
Jennifer, we talked about a couple of calls ago was that over time and in the long-term, we would like to have the fee business be about 80% of the company's EBITDA and between owned real estate and hotels and vacation ownership, that would be the remainder.
One of the things we were careful not to project then and still wouldn't today is exactly when we get to that point, because it's a function of changes in the market environment for selling assets and for moving forward on some other actions. But that would still be our long-term view.
Your next question comes from Bill Crow – Raymond James
Bill Crow – Raymond James
Just a couple of quick questions. First of all, Vasant, what is your view toward selling additional equity to take care of balance sheet questions out in '11 and '12? And then second of all, you talk about asset sales. Is there an appetite anywhere in the world for good quality assets today, or is the market just closed? If you could give us some perspective on that.
Vasant M. Prabhu
Yes, and Frits may answer this, but on equity, we have no plans to nor do we have any need to issue equity. It is our view that there's a whole host of things we are doing both for liquidity and leverage reduction that I outlined.
Liquidity-wise, clearly the bond offering today makes a big difference leverage-wise. There's a whole host of things we are doing which you will see us announce over the next weeks and months that will reduce our leverage. So it is our view that the issuance of equity will not be necessary.
The second question was on asset sales and Frits I'm sure can answer this. There is interest. There's foreign money for deals of certain sizes. And, our approach has been we'll only do these deals if they meet certain parameters. We know prices are not where they were a couple of years ago, but we need certain kinds of contracts and we need certain kinds of multiples, etc. and if we can hit those, you'll see us do asset sales. Frits, I don't know if you wanted to …
Frits van Paasschen
Yes, just a couple of comments on both topics, Bill. First, our view and Vasant I think articulated this real well, is that selling equity is probably the most expensive way of raising capital. And so it's lowest on our list of possible levers to pull and therefore we feel probably unlikely to be something we need or will want to do.
In terms of asset sales, clearly the market and transaction volume are way off. Nonetheless, our belief is that there are certain unique assets that are special and would be representing a once in a lifetime or a once in a very long time opportunity and we're exploring discussions with potential buyers on a few things like that.
As you can imagine, we're not going to say anything specific until we have some very specific things to say about having done something.
Your next question comes from David Loeb – Robert W. Baird & Co.
David Loeb – Robert W. Baird & Co.
In the last call, you suggested that your dividend might be lower. Now you've got restrictions in your credit agreement about that. Can you just give us an idea about how you're thinking about the annual dividend and also, is there some reason, some regulatory or other reason why you didn't provide EPS or EBITDA update in your baseline guidance outlook update?
Vasant M. Prabhu
No, there's no regulatory reason. All we did was to update the baseline. We gave you a baseline last time based on which you formed your own judgments. We've given you some updates on that so you can compare how your own judgments compare with sort of our revisions to some of the baseline.
As it relates to the dividend restrictions, clearly, as long as our ratios are below five times, which they are right now, we have the ability to pay our dividend. It's capped at $100 million. There's a definition of cash flow in there. So we clearly have the ability to pay our dividend. We already signaled that based on where our EPS is and where our general plans are in terms of payout ratios, our dividend was going to come down from where it was before.
In terms of where it ends up exactly, I think is really not something we can discuss today. It's a decision that our board makes in the fourth quarter of each year. We pay it only once a year in January. So to the extent that we have something to announce ahead of that, we will. In the meantime, I think all we have to say is what we said last time.
Your next question comes from Chris Woronka – Deutsche Bank
Chris Woronka – Deutsche Bank
You mentioned during the prepared comments you were looking at some options on the Bel Harbour development, but I don't think you're CapEx estimate has gone down. Can you just kind of share with us how you are thinking about that?
Frits van Paasschen
We continue to look at what we can do with Bel Harbour. We haven't update the numbers but we continue to try to find ways to save money and slow some of the capital spending down. And as we have more to say on that looking forward, we'll announce it.
Your next question comes from William Truelove – UBS
William Truelove – UBS
I have a timeshare question. What has been the change in the propensity for buyers to borrow money from you and have they changed their down payments from last year?
Vasant M Prabhu
You saw, I think in Frits's comments, you might have heard that. We've got very high FICO scores right now. Loans originated in the first quarter I believe had FICO scores of about 740. And about half was financed. So there's not a material change in that. We're certainly being very careful in this environment but there hasn't been let's say a material change in that. If anything, we've tried to improve credit quality.
Your next question comes from Patrick Scholes – Friedman, Billings, Ramsey & Co.
Patrick Scholes – Friedman, Billings, Ramsey & Co.
Just a quick question. You may have mentioned this. Do you have a ballpark estimate of what the amount of the timeshare note will be in the second quarter?
Frits van Paasschen
Yes, we said on the call that the note will be in sort of the $125 million range.
Your next question comes from Steve Kent – Goldman Sachs
Steve Kent – Goldman Sachs
So the RevPAR comparisons get easier, Frits, as you pointed out throughout the year, but also I would assume the pace of cost savings also gets more modest. So, can you just talk about how difficult those cost savings do get as you get further out into the balance of this year and even into 2010? Should we be assuming the same pace of reduction, or where does it start to moderate out?
Frits van Paasschen
It's an interesting question because while we've taken a lot of efforts in reducing costs, and you've certainly seen some of those results in Q4 of '08 and this past quarter, there are a number of cost saving efforts that take longer to implement. So the pace of savings should continue to be pretty strong here for another few quarters. And then, as we start to annualize savings from previous years and you get into 2010, I think that pace will slow down.
Your last question is a follow-up from David Loeb – Robert W. Baird & Co.
David Loeb – Robert W. Baird & Co.
Just can you give us a little bit of info on pricing trends for the asset sales that you've done in Brussels in particular?
Vasant M. Prabhu
Really, there's only one asset sale that was completed in the first quarter. It was a very unique asset. Terms are undisclosed. There's really nothing in terms of pricing trends we could comment on right now. As we do more asset sales, perhaps we could tell you a little bit more about pricing trends.
What we can tell you is that for certain kinds of assets there's definitely a buyer universe out there that our competitive bids, most of these have to be sizes below $100 million. In many cases, financing is not a consideration. People are either, have their own sources of financing or doing all equity deals. But in terms of pricing trends, I don't think we have enough data to be able to talk about it publicly.
At this time, we have no further questions. I'd like to turn the call back over to Mr. Koval for any closing remarks.
Well, that wraps up our first quarter call today. We appreciate your time and interest in Starwood Hotels and Resorts. Please feel free to contact us to review any of this information or if you have any follow-up questions. Thanks. Good bye.
That does conclude our conference for today. We thank you for your participation.
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