Starwood Hotels & Resorts Worldwide Inc. Q3 2009 Earnings Call Transcript

| About: Marriott International, (MAR)

Starwood Hotels & Resorts Worldwide Inc. (HOT) Q3 2009 Earnings Call October 22, 2009 10:30 AM ET

Executives

Frits Van Paasschen - Chief Executive Officer

Vasant Prabhu - Chief Financial Officer

Jason Koval - Investor Relations

Analysts

Joe Greff - JP Morgan

David Katz - Oppenheimer

Bill Crow - Raymond James

Andy Whitman - Robert W. Baird

Jeff Donnelly - Wells Fargo

Rachael Rothman - Wedbush

Josh Attie - Citigroup

Chris Woronka - Deutsche Bank

Will Marks- JMP Securities

Ryan Meliker - Morgan Stanley

William Truelove - UBS

Michael Bilerman - Citigroup

Janet Brashear - Sanford Bernstein

Operator

Good morning. My name is Tiyara and I will be your conference operator today. At this time I’d like to welcome everyone to the Starwood Hotels third quarter 2009 earnings conference call. All lines have been placed on mute to prevent background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to your host Mr. Jason Koval, Vice President of Investor Relations, sir you may begin.

Jason Koval

Thank you, Tiyara and good morning everyone. Thanks for joining us this morning for Starwood’s third quarter 2009 earnings call. Joining me today, I’ve 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 www.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.

Frits Van Paasschen

Thank you, Jay and thank you for joining us today for our third quarter call. On happy to report that we continue to see better results as we move to the third quarter to be sure RevPAR results were still down 20%, but trends are slowly improving by the weak. Lodging demands closely tracks see economy has a whole, so we believe we are seeing the start of a slow recovery after a deep drop-off.

In response to that drop, we dramatically cut both our corporate and property costs as well at the same time pulling back on our capital spending. The result today as much improved liquidity and leverage position. Looking forward we recognize that we can’t say way to prosperity. The real drivers of value will result from pursuing our long term strategy the journey and concentrating on the financial levels.

RevPAR growth and unit growth and the locking the value on our balance sheet, put simply will hold the line on cost will turning our attention to the top line. In fact we see signs that our corporate customers are also shifting there focus from cost to driving revenues, after hunkering down over the past year to cut travel cost and survive the economic downturn, they are signs of business travelers are starting to get back on the road.

These are travel also came back and occupancy were better than expected approaching pre-crisis levels in some markets. Take the St. Regis, New York, for example where we recently celebrated the 75 anniversary of the Bloody Mary. This event highlighted effect at this hotel may in fact be leading the charge on the up swing. The same region was sold out for half the nights in September and the hotel once again the great leader in New York.

Showing luxury is not dead and begins to show a promising recovery from the stigma. Industry sectors such as pharmaceuticals and financials are also showing signs of life one year after the collapse of Lehman Brothers, but as mentioned the company wide occupancies are starting to creep back. We still know rates will take longer to recover and typical recoveries rates come back one or two quarters after occupancies begin to rise.

To be clear though, we have yet to determine whether this is a typical recovery. So, with that as a lead in to add I would like to focus on three main areas. First, a review of our third quarter results in recent trends. Second discussions of how we planed own the up swing as we rebound from the current down cycle. Third, some details behind Sheraton’s re-launch.

So let’s start with the first topic, quick review of our third quarter results. In each the past four quarters as RevPAR dropped, we were able to beat EBITDA and EPS expectations thanks to cost cutting. Our corporate and lodgings teams across the world are now running leaner than ever while same time our guest satisfaction scores are at record levels. It seems that unlike previous recoveries, the U.S. consumer will not be the global economy out of this recession.

Other regions particularly China, but also India, Africa and overtime South America will play a larger role. In fact, this maybe a slow bumpy recovery for the U.S., it’s easy to forget that even today China and India representing 40% of the world’s population are growing at 9% and 6% respectively. So our global platform as the largest operator for high end hotels outside of the U.S., it means we are well positioned as these economies power ahead.

On prior earnings calls, we mentioned that our long term strengths skewed towards upper upscale and luxury hotels, international platform and exposure to a weakening dollar had become short term headwinds. This is born out by our results, but now more than a year into the crisis, we can see upon where these strengths could once again propel our results.

Looking ahead, luxury has dropped to such low absolute levels that the segment at some point will stage a strong rebound. Our owned hotels are also positioned to rebound from today’s depressed levels and for now, strong recoveries in markets outside the U.S. coupled with a falling dollar should provide a tailwind.

As the case in point, we recently visited several of our roughly 100 hotels in Africa and the Middle East. By way of background Sheraton and libertarian give us a dominate position in Africa with almost 40 hotels and another 20 underway. These regions are adding infrastructure with cash accumulated from the continued boom in commodities.

In luxury for example, we toured a 550,000 square foot convention center under construction complete with a new Le Meridien attached. They global travel patterns are also driving growth in emerging markets with less dependence on U.S. and European travelers. For example, the enormous investment in Africa by the Chinese should strengthen these non-traditional travel patterns.

On the subject of China business they’re got off to a very slow start within improved markedly during the quarter. Economic stimulus and burgling the low class translate into enormous habitat for our brands from both consumers and developers. RevPAR improved from minus 30% in Q2 to minus 20% in Q3 and this improvement has continued into the fourth quarter.

With almost 50 hotels in China today, our fees will grow not just from improvements in RevPAR, but also from robust unit growth as we had anther 50 hotels by the end of 2012. In China, Starwood preferred guest enrollment jumps 50% year-on-year and 50% and of our stays are generated by SPG members. The SPG program is leveraging its universal appeal with programs tail end to Chinese travelers, whether it is VIP access or instant redemptions.

By contrast India remains one of the weakest performing emerging markets for us with RevPAR down 37%, while these declines are unlikely to abate near term, we’re optimistic about long term growth in India. With 25 hotels today, not to mention four Westins slated to open in the coming months, India is destined to become an important driver of our fees. The broader Asia Pacific region also showed signs of life in the quarter with RevPAR declines narrowing to 20%.

Moving onto Latin America, RevPAR dropped 31%. Demand remained in unique, thanks to the effect of H1N1 in Mexico, Chile and Argentina. Our owned hotels driven by Mexico would hit even harder down 40%, but again the Latin American economies are geared towards commodities or commodities, markets such as Brazil can support substantial growth in our hotel count. So we’re cautiously optimistic about our long term prospects.

For those of you, who closely watched the Smith Travel data, you’ll know that North America showed steady improvement from the second quarter drop, as price sensitive leisure demand filled rooms. Our transient room rates were up 5%, the mix shift continues to weighs heavily unrealized rates. Corporate negotiated nights were down 13%, but at 24% increase in leisure, government and other discounted segments offset the weakness in business travel.

New York, a leading indicator for economy and for lodging saw occupancy levels similar to last year and while the mix of business has shifted towards leisure for the time being, we’re seeing early signs of improvement in business transient and group bookings.

Europe had been lagging the U.S. through much of 2008, but most markets appear to be running in tandem or even slightly ahead of what we’re seeing in the U.S. RevPAR declined 20% or closer to 14% in constant dollars. So to summarize, we’re seeing steady improvement in demand that point to a slow recovery in U.S. and Europe and the more robust one in emerging markets.

For now, given the continued pressure on rate, we’re preparing for anther challenging year in 2010, with company operated RevPAR to be flat to down 5%. In a few minutes Vasant will add some color behind these business trends and our thoughts on 2010.

Earlier on this call, I mentioned that future upside from our owned hotels. As we all know RevPAR declines were greatest where our own properties are concentrated namely the U.S., Europe and Latin America. Coupled at footprint with a SKU towards luxury and our owned hotels have been hit especially hard with year-to-date owned EBITDA down 55% from 2008, and down even further from peak levels.

With recent trends showing improving demand, a bounce back in earnings from our owned assets lies ahead. In other words, our own portfolio was dramatically under earnings its normalized potential. This is a large source of potential upside in our earnings as we move into the up cycle. The third quarter witnessed the sale of the W San Francisco. Capital markets continued to thaw a spread narrow and cash builds up in search of more deals.

In ways, we could only hope for it in depths of the crisis, so it’s not surprising that we’re seeing encouraging size, as we test the market with selected assets. A weaker dollar should also help spur investment from buyers outside the U.S. and with our financial house in order; we can afford to hold out for prices that reflect the value inherent to our own hotels. Our vacation ownership division also performed in line with expectations on our leaner G&A and sales and marketing platform.

Pricing dropped again as the mix continued to shift towards lower priced every other year sales. Close rates were roughly flat year-over-year. Tour flows were down as we moved away from less profitable channels. Finally, delinquencies appeared to be peaked in the first quarter of this year and have been slowly improving the current levels near 4%.

Now, I’d like to move on to another important topic. More color on how we cut costs well still investing in growth. Our cost cutting over the past year has been aggressive, but tactical. Full year SG&A will be on the order $400 million or roughly 25% below our run rate SG&A of $537 million in Q3 of ‘08, and we believe that most of these cost savings will be sustainable. The majority of our costs came at the corporate level and in our North American and European regions, leaving emerging markets largely untouched and poised for growth.

We worked hard during the past year to cut proper level costs for our owner partners while keeping a watchful eye and get satisfaction. In addition, we’ve also been focused on driving the top line. For example, we launched two global initiatives in the first quarter: revenue management and redeployment of our sales force. We’re expanding penetration across more properties of our revenue management system, enhancing systems capabilities and increasing the training of our property level revenue managers.

Our sales force initiative is expanding our account coverage further developing our prospecting efforts and ensuring that our structure is aligned with our global customers. We look forward to updating you on these initiatives over the coming quarters.

SPG is also driving our top line. The success of our free weekend’s promotion highlights how we can create value with smart investments in demand creation. We estimate that the program generated roughly $150 million in incremental sales in the system. This would imply at three to one payback on each dollar spent on awards, but the program did not just generated immediate returns, it also helped enroll over 60,000 new members drove a 10% increase in mid week arrivals by members and generated trial at new properties as 58% of the guests were visiting properties for the first time.

Now, onto my third and final topic, Sheraton’s brand relaunch. Looking back, 2009 has been a brutal year in the lodging business, but I can’t think of a better time to relaunch our biggest brand than into the next up cycle. Sheraton has a great global base, with brand recognition above 90%; Sheraton is the best known global brand in the lodging industry and generates roughly 50% of our profits. Sheraton also has the largest share of the pipeline.

Not surprising, considering Sheraton was off in the first major Western Hotel to enter many international markets and still today the Sheraton name is synonymous with leading Western Hotel. So let’s revisit some of the impressive numbers behind this three year Revitalization Program. A total of $6 billion has been spent on the brand since 2007, the majority in North America. Between 2007 and the end of this year, we will have opened 60 new Sheraton Hotels, renovated 100 more, and installed 100,000 new beds.

We’ve reinvented the hotel lobby, taking advantage of our brand equity and creating social spaces of Cyber Cafes called the link. By year end, 95% of Sheraton’s around the world will feature the link, or guest can work, surfed in that, have a drink, or watch the game.

Over 50% of our guests spend time in the link that is more than break fast use the gym or visit the bar and Sheraton guest are talking note. Our guest satisfaction scores are the highest in our history. Where the link is been put in place, we consistently see leaves and measures of likelihood to recommend and meeting planners satisfaction.

So, for Sheraton it is time to move forward with from property revaluation to brand re-launch. To that end over the past few weeks we’ve been hosting thousands of travel implements at our hotels and rollout that our consumer promotion, but gave away thousands of free rooms with over 100,000 registering for our check in on is promotion.

Seeing believing so, it’s important for our guest to take a fresh look at Sheraton. The Sheraton re-launch reflects the entire start with system of hotels is one of the freshest in the industry. By year end 60% of our hotels will be new or renovated within the past three years and next year we expect add roughly 80% more hotels with 75% of those in international markets.

We will soon open 1000 hotel and important milestone and for the first time in our history, we have more hotels outside the United States than inside and shortly, will debut in our 100 country. Depending on hotel opening dates they will either be in Slovakia, Mongolia or Libya. On our Q2 call we said we would discuss our plans for Bell Harbor. After valuating our options we remain committed to completing this project on time.

This was motivated by several factors. The project itself represents a unique product and an extraordinary location for high end US in the international buyers. Second, the strong book of exciting sales with over 20% deposits, third the high returns on incremental capital to complete project and four, to prospect of creating in iconic St. Regis Hotel. From a strategic standpoint an emphasis at this project is not consistent with our asset by direction.

As such, we will not be undertaking investments like this in the future. To that end it also work noting the future capital needs for Bell Harbor will be met by taking cash out of our vacation ownership business as we future reduce our exposure there. So, let me wrap up my comments with four key takeaways. First, over the past years, we drove substantial cost savings by realigning many functions within Starwood. We are better than ever to merchant this downturn as the pre-amendment operator lifestyle hospitality branch.

Next year will likely be another challenging year so we will continue to manage cost and delever the company. Second Starwood is well positioned for a significant bounce back as recovery unforced. This cyclical bounce back will benefit from depressed earnings and own hotels and the resurgence of luxury, the robust growth of markets outside the U.S. and in the short term a weaker dollar.

Third, as we transform our business to our stated goal of being more than 80% fee driven. We would generate significant cash as sale owned hotels and significantly rescale our vacation ownership business. We will not only move towards the business with great earnings profile and reduce capital needs, but we also generate significant cash along the way.

Fourth, while we manage aggressively our cost center capital over the past year we never lost focus on our growth. By continuing to execute against our five essentially strategies of our journey Starwood is well positioned to own the up swing, the successful brands re-launch of Sheraton or expanded focus on top line initiatives and revenue management in sales or ability to promote our nine brands were the build out of our hotels around the world.

As a final observation, it is becoming increasingly clear that scale, financial flexibility and great brands of the foundation of future success. Starwood has all three companies that can offer global scale their owners and customers will have an advance that is difficult. Companies with financial flexibility will be able to take advantage of opportunities and create value for shareholders and great brands take years to establish, but concrete significant value through pricing power and growth.

So, with that I will turn the call over to Vasant.

Vasant Prabhu

Thank you, Frits and good morning everyone. I will spend the next few minutes on two topics. Our actions to manage liquidity and leverage, and our outlook for the balance of this year and 2010, as we outline on a last call we have a broad range of initiatives on the way to substantially enhance our liquidity and leverage position.

In the third quarter we completed several initiatives reducing on debt by almost 400 million from $3.75 billion to $3.36 billion. Major actions executed include the receipt of the $250 million advance for American Express, almost $100 million from asset sales and remainder from operating cash flow. We use this cash to pay down all our 2010 maturities and $75 million of our 2011 bank term loan. Our $1.875 billion revolver is largely undrawn giving access to up to $1.7 billion in liquidity should we need it.

Our leverage ration at the end of Q3 was at 4.3 well below covenant levels. Our net debt is now at $3.2 billion and we have no major maturities until 2012. Other result, feel very good about where we stand liquidity and leverage standpoint, but we’re not done yet. We had several additional cash generating initiative in various stages of development. Securitization markets have improved substantially in the last six months. Interest rates and advance rates are much better as you may have seen from securitizations completed recently.

We will be in the market to execute a securitization in the fourth quarter. Assuming, we can get it done; this will generate $125 million to $150 million in cash. We also indicated on our last call that we would be looking at selling some non-core access. We have signed purchase and sale agreements and receive deposits on the $125 million in non-core asset sales, which we hope to, close in the fourth quarter, and additional discussions are also underway.

As has been our practice, we will announce sales if and when they’re completed. Assuming, we complete the securitization and close the sized asset sales, we will achieve our goal of $3 million in net debt by the end of the year. A large tax refund of over $200 million is now unlikely to be received this year. The internal prophecies within the IRS are taking longer than we anticipated.

We are doing what we can, but the refunds will now most likely be obtained sometime in 2010, with a refund in hand and potential additional asset sales, we expect our net to come down well below $3 million and also provide additional cash to continue to pay down future debt maturities ahead of time. It has been our goal from a liquidity and leverage standpoint to prepare for the worst while hoping for the best and we are well in our way to doing that.

Moving onto the outlook for our business, in the third quarter, we saw further evidence that the worst of this great recession is now behind us. Occupancies have stabled around the globe, rate is now the primary driver of the year-over-year decline. This is how it always is at the start of any cyclical upturn. This has been the deepest downturn our industry has experienced, since the great depression and the whole we have to climb out of is deep.

In the fourth quarter, our expectation of 10% decline global company-operated RevPAR is a meaningful improvement from the 20% decline in Q3 and 28% decline in Q2. Reported RevPAR is being held along by exchange rates, which go from a headwind of 200 basis points in Q3 to a tailwind of 200 basis points in Q4 and into 2010. The fact that business is recovering is undeniable. The pace of the recovery however is not as easy to focus beyond the quarter or two.

At this point, the rate of recovery is strongest in Asia, next India, after swine flu abated; we saw a sharp recovery in most Asian gateways cities. Business in secondary Chinese cities was particularly strong. The timing of Ramadan makes the Middle East and Africa it a little hard to read without a few more weeks of data, but indication out, this region will be recovering, perhaps at a slower pace than Asia, but faster than the rest of the world.

Among the emerging markets, only Latin America lags, hurt massively by swine flu, first in Mexico and then in the Southern hemisphere Argentina and Chile. As we always saw the recovery from these scares can be slow. Also the Mexican economy, with its dependence on the U.S. remains the weakest in the region. Among developed markets, the pick up in Europe seems to be tracking ahead of the U.S. The drop across the Europe was not as deep and the recovery appears to be somewhat faster so far.

Moving onto North America, leisure travel was good in the summer as we saw days and weeks when occupancy mesh were exceeded prelim levels from last year, with a substantial reductions in group business and low mid-week occupancies, rate was down sharply accounting for most of the RevPAR decline. In the four weeks post Labor Day, RevPAR at company-operated hotels in North America is down 16% in line with our expectations.

While we would like to see few more weeks of data given holiday shifts, etc, it appears that business travel is also coming back. Will occupancies claiming the hotel RevPAR improvement is now entirely dependent on our ability and on industries ability to improve rate realization and that is our focuses. Improving mid week occupancies Fleming Group business and return of business travel are all key to improve rate realization and the early trends so far since Labor Day are all pointing in the right direction.

In the vacation ownership business close rate are improving the price realization remains under pressure. Market conditions limiting we will execute a securitization in the fourth quarter. Any gains from the securitization are difficult to estimate just yet and are not included in our Q4 guidance. Looking ahead 2010 in a very difficult to forecast several quarter ahead in times like these.

As you know our business tracks to general economy and corporate profitability a V shape recovery in GDP and corporate profits will drive a strong recover in our business. If only other hand the recovery is sluggish and corporations also drive profits by cutting cost rather than growing revenue that would be bad for us. From our conversation of customers it is our view that cost reduction as run its course and most companies a back to focusing on growing revenues to grow profits.

In addition to the general economic uncertainty of few other factors make forecasting especially hard at times like these. Group business on the books for 2010 is below the already low numbers we posted in 2009. Customers at this point are more comfortable making commitments were 2011 and 2012 rather than 2010. In a difficult recovery year like 2004 which could be work 2010 is business book in the year for the year is a much larger component of the mix than it is in the difficult year.

How robust is this likely to be, its have to pin down easily perhaps will have a better idea of corporations finish their budgets and a better able to make 2010 commitments. The corporate rate negotiation season as just gotten underway, customer expectations are shipped based on a lag on stories they have read about empty hotel rooms etc., which is not quite to situation right now as you can see from recent occupancies.

Customers in some cases are seeking rate reductions were 2010. We will of course work with all our customers to tell a programs to meet their needs with an intent to all rates flat year-over-year, but we will not know how this all ends up for a few more weeks. On the t transient front two booking windows are much shorter in the last few weeks, late breaking transient business have been stronger than we might our forecast.

In fact in Q3 transient rooms were up year-over-year North America, which we did not expect going into the quarter. This is what you get in a recovery. A business is hardest to predict when the trend changes on the way up or the way down. With that background this is how review 2010 based on what we know today. For internal planning purposes were expecting global company operated RevPAR to range between flat and down 5% in local currency.

We expect Asia, next India to grow in the mid single digits. Africa in the Middle East could see as low single digit growth. Latin America despite the significant it took this year from swine flu will only recover slowly we anticipate flat to modest growth. Continental Europe is likely to continue to track somewhat ahead North America and decline in the low single digits. North America is likely to be a weakest market down closure to 5%.

Since the dollar has weekend RevPAR is reported in dollar will be 200 basis points better. Overall fee growth will track RevPAR growth as new hotels open in 2009 and 2010 offset same store declines. On the owned hotel front we expect to similar flat to down percent RevPAR trend. However most of owned hotel the concentrated in North America, Continental Europe, and Latin America, the regions how we expect the phase of recovery to be slowest.

As such owned hotel RevPAR growth is more likely to be at the low end of the range. We remain very focused on cost control it our owned hotels we are more initiatives underway in our lien operations program and our procurement efforts. Our goal is to offset as much of the 3% to 4% vision inflation and other commodity inflation as we can. Despite all these efforts if RevPAR declines 3% to 5% margins will be down in 2010. Once again foreign exchange should help dollar reported RevPAR by approximately 200 basis points, but as you know it is not help margins.

In our vacation ownership business will be working hard to drive phase of sales into recovering economy. Based on current trends we’re expecting originated sales to be flat year-over-year. We continue to look at ways to accelerate the sales space, since we have quite a bit of finished inventory available for sale. Even if originated sales are flat and despite keeping selling an overhead costs under control EBITDA will decline due to the loss of interest from the two securitizations, we expect to complete this year.

Year-over-year, we will loss $30 million in interest income offset by some new interest income from sales financed in 2010, but a net effect would be lower EBITDA prior to the impact of new accounting rules. FAS 166, 167 will act $25 million to $30 million to SPO, $10 million to $15 million in operating income. Our focus in this business remains a generation of cash. We generated significant cash this year from securitization and operations and this is our intent to do the same next year.

Capital deployed will be the minimum necessary to finish project that are in Sello. Cash flow from Vacation Ownership will largely fund Ball Harbor in 2010. On other item on the Vacation Ownership front, as we did in the fourth quarter last year, we will be undertaking a full review of all Vacation and Ownership projects to determine if there are any changes we want to make.

We made decide after this review to abundant specific project as we did last year, the two projects or to stop development on future phases on other projects or reset pricing in some locations. These decisions may result in asset write-offs as well as potential impairment of the good well associated with the Vacation Ownership business. We will complete this review and take the required actions in the fourth quarter this year.

Finally on the SG&A front, we intent to hold the line on fast growth even as business recovers. As you know we’ve made deep cuts starting in the fourth quarter of 2008. Our run rate of savings is around to $100 million. Actions taken, we believe our sustainable, any add backs will be very selective and in support of growth where we see it. While we will make every effort to hold SG&A flat in 2010, we anticipate a small increase as we make salary adjustments and more normal incentive payments to ensure we are competitive in the recovering economy.

With the declining EBITDA, a drop in net profits due to loss of interest income and a small increase in SG&A, we anticipate another year of low total EBITDA, but drop in the cycle. Any additional asset sales competed between now and early 2010, we’ll also have to be factored in. As a reminder, you should then add $25 million to $30 million in EBITDA back to the Vacation Ownership business to reflect the impact of FAS 166, 167.

Over the next couple of months, we will have more data on market trends, more clarity on how group and corporate rate negotiations are shaping up and of course bundles of views from each of our hotels as part of our budgeting process. We will have a more comprehensive perspective on 2010 let me talk to you again early next year.

With that, I’ll turn this back to Jason.

Jason Koval

Thanks, Vasant. We’d now like to open up the call to your questions. So an interested time and fairness, please limit yourselves to one question at a time and then we’ll take any follow-up questions you might have this time permits. Tiyara, we’re ready for the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joe Greff - JP Morgan.

Joe Greff - JP Morgan

Vasant, you comment on 2010 group pace and then you had a comment on 2010, 2011 group and I know this amplifies is probably very small, but we look at 2010, 2011 group. Can you just talk about pricing and pricing in a context of maybe how that compares to 2009, 2008 group pricing?

Vasant Prabhu

I mean, the pricing clearly is tracking down as you would expect. I mean people are look at where rates are today and trying to lock demand. As we said on the call, I think the challenge for us in the industry now, as I’ll keeping season recovered is to really focus on rate realization, it typical of this time in the cycle and that is our focus at this point.

Operator

Your next question comes from David Katz - Oppenheimer.

David Katz - Oppenheimer

I wanted to just go a little bit more about the CapEx issue and thinking about what you might be or how you’re think about spending for next year and certainly, inclusive of the timeshare business? We’re trying to figure out sort of what the new normal is and how to gauge that, particularly in the face of what looks like next year? It’s going to be an aggregate down year modestly. Also whatever you can share there would be helpful.

Frits Van Paasschen

As far as the thing to do is to break that down into three pieces, first of all on the hotel side, we were pretty low this year and will continue to keep CapEx in the hotel side in next year, but also recognize there were some important projects for us to go forward. For vacation ownership as Vasant alluded to earlier on this call, we’ll continue to be extremely selective and where we put our capital to work there and then largely to complete projects that are already underway.

Finally, with respect to Bell Harbor, over the next couple of year and into early 2011, in order to complete the project we’re looking at something north of, $330 million to complete the project. So some portion of that in 2010 would be part of the CapEx.

Operator

Your next question comes from Bill Crow - Raymond James.

Bill Crow - Raymond James

Could you talk about your thoughts on asset sales from a pricing perspective as well as your appetite to unload more assets both in the U.S. and outside the States?

Frits Van Paasschen

We’ve been pretty vocal about the fact that we want to pursue an asset like strategy at the same time, we’ve also reflected on the fact that and this wouldn’t surprise anybody on the call that is a pretty hard time to sell very much. So what we basically done is taken a hard look at assets that we believe are either a non-core, or that are so attractive, that we can still get a good multiple for those. What we’re definitely starting to see is more money available and more interest than even a few months ago.

If the capital markets continue to rally the way they have and as people develop more confidence, we think there will be even more money coming in and that should give us opportunities to sell. As Vasant alluded to early on the call as well, we will do this and announce sales when and if they happen.

Vasant Prabhu

I think we’ve emphasized that our preference as non-core assets and as we announce some of these, you’ll see what we mean precisely by non-core assets, perhaps some that you may not have focused on as things that were part of our portfolio. As we think about it, I mean our focus very much is not only looking at sort of what our trading multiple is and having accretive sales, but also looking at prices that is reflect decent and healthy multiples of EBITDAs. We’re not in a position, where we have to sell anything. So we’re only in a position of selling if we think the price was good.

Operator

Your next question comes from Andy Whitman - Robert W. Baird.

Andy Whitman - Robert W. Baird

You mentioned that you had a belief that your own assets were under earning their long term potential. Is that a recognition that there’s more opportunity on the margins compared maybe it appears, or is that just more commentary on where we are in the cycle?

.

Frits Van Paasschen

It’s primarily more a commentary and where we are in the cycle, recognizing that not only is this a tough time to own real estate assets including hotel as but also, given the location and the positioning of most of our owned hotels, this is tough time. We’re on the point of margin. We’re going to continue to look at ways to improve margin and reduce cost in our owned assets. We’ve taken some significant steps towards doing; we believe there is still more to go.

Operator

Your next question comes from Janet Brashear - Sanford Bernstein.

Janet Brashear - Sanford Bernstein

Frits, you talked a little bit about the share it and revitalization program. Can you tell us a little more about that specifically, what will you do to get U.S. travelers to reconsider Sheraton? What do you think that will result in terms of RevPAR premium? Finally, just a smaller point, next year will there be fewer deflaggings that the Sheraton program is largely complete.

Frits Van Paasschen

In terms of the brand relaunch, now that we’ve revitalized the properties. We’re going to continue to do promotions like we did in the third quarter, probably focus a bit more on using things like SPG as well as advertising to get the word out. Exactly what that impact on RevPAR will be, something we’re still working through. As far as deflagging, there were still a few assets out there that we would like to get out the system and it’s just a question of when we’re able to do that. The pace by the end of 2010 should really slowdown. Most of those are worked through.

Operator

Your next question comes from Jeff Donnelly - Wells Fargo.

Jeff Donnelly - Wells Fargo

Actually, question just on Ball Harbor. I was trying to understand the rational for proceeding with Ball Harbor and I guess why you think the ROI could be attractive? You mentioned the remaining investments to be significant, then I have believe the pricing on luxury residential, it might prompt to some of those people to walk away from their deposit. So can you talk a little bit about why those hasn’t pursue that today and maybe not before to later time?

Frits Van Paasschen

It’s a decision that we looked at pretty hard, because as I indicated earlier, this is end of project that’s on strategy for what we’re taking the company today, but as we looked at the project, we determined a few things. First of all, as the economy starts to rebound and as we reflect on the fact that more than half of our buyers today at Ball Harbor are international. We think they will be continued demand.

The reason for that is the second thing and that is, this projects really different from most of what you see in fact from anything else, you see in Florida today. So we’ve all read about the glade of condos and real estate in Florida, which different about this is the price point, which is between $3 million and $5 million. On the location right across the streets in Ball Harbor shops, the fact that it’s a St. Regis, really make this project is very different from the rest of that inventory that’s available.

Then finally, just a very simple to look at the incremental capital to completion versus a very modest rate of sales going into the close period, which still give you a very good return on that incremental capital. So this was an economic decision more than anything else.

Operator

Your next question comes from Rachael Rothman - Wedbush.

Rachael Rothman - Wedbush

If could just talk a little bit about, I know you gave some goalpost that you’re easing for internal sensitivity with respect to RevPAR next year flat to down 5%. Can you talk about what this goalpost would translate into in terms of owned margins and maybe owned EBITDA impact?

I guess as part of that question, I started it heard earlier referenced to the rebound in 2010 begin similar to 2004. Can you talk about why wouldn’t be more similar to 2003, when rate declines moderated and the recession is kind of long in the twos, but EBITDA margins, as they were no more cost to cut?

Vasant Prabhu

As Frits said, we remain very focused on owned hotel costs. So we’re not going into next year saying, we done with cost cutting at the owned hotels. Our intent to going in is to moderate or offset as much of the inflation in the cost structure. As you all know, there’s 3% to 4% increase in wage rates that is baked into the cost structure particular in union hotels and then to some degree non-union hotels. We’ll also have generation inflations, so we’re going and we have view that. We have to have initiatives in place whether its procurement or lien operations that offset, as much of that as we can.

Having said that, if you see our RevPAR decline of, let’s say 5%, you’re going to see a margin decline in the 250 or 300 basis points range as you heard from some of our peers. Clearly, it’s too early for us to give you anything definitive, which is why I don’t think we’ve given you anything specific in terms of margin declines or specific amounts of EBITDA, but I think you should expect that, EBITDA either flat to down 5%. There will be a margin decline and therefore on EBITDA decline in new owned hotels.

In terms of your other question about ‘04 versus ‘03, you can look at either one of those years. I mean certainly, ‘03 was the year that you had declines in the first half that some growth in the second half and that’s probably more likely outcome than one were RevPAR grows with all four quarters. One of those years are, years where you had more India for real business and everybody was focused on improving this realization.

Operator

Your next question comes from Josh Attie - Citigroup.

Josh Attie - Citigroup

Could you talk a little bit about what the economic assumptions are or whatever these are underpinning that you asked RevPAR guidance for year down close to 5%? I don’t know if it’s a GDP number or something like that?

Frits Van Paasschen

We didn’t key this all for the particular GDP number and candidly I think that might be on GDP forecasting as a whole based on our experience in 2008 is that calls into question, anybody’s ability to be very clear on that. So what we rather did was we looked at current trends in our business as well as across the industry and projected those forward. So, there isn’t an underpinning GDP number that drove that.

Operator

Your next question comes from Chris Woronka - Deutsche Bank.

Chris Woronka - Deutsche Bank

I was hoping you guys could explain the $9 million increase in the other franchise fee revenue, is that for the W out of the San Francisco?

Frits Van Paasschen

No, there’s a variety of things that flow through the line and forex we has an impact there to, we have some currency hedging of our fees you know a modest amount. So when that works in our favor that goes through that line too. So, it’s a variety of miscellaneous items and I’m not sure there’s much more we can say on that.

Operator

Your next question comes from Will Marks- JMP Securities.

Will Marks- JMP Securities

I just have a general question on your view on what brand of yours or just in general, what recovers first when you start to see the RevPAR growth? What do you expect to be the best performers in the first year?

Frits Van Paasschen

I think it’s less likely to be by brand than by geography. So we allude earlier to the fact that New York is a leading indicator and there are signs of a strong change in the trends in New York. I think we went from minus 40 in New York in the beginning of the summer to minus 30 to minus 20. So, minus 20 isn’t a great number, but it’s a whole lot better than minus 40 and builds well of that future direction?

So, I think you’ll see, more of a geographic split as alluded to in earlier in the call to by the side, if you look at China. If you took out Shanghai and Beijing and Hong Kong, actually the rest of the markets in China were up, even though the country was down significantly when you add in those marks.

I think geography is a much more important indicator as we get later into the cycle, because our luxury brands fell down so far as did luxury overall not just in the lodging sector, but certainly as you look across to goods into retail as well. That will bounce back and we’ll probably show more robust growth. When that happens I think is still a question that we can’t answer.

Vasant Prabhu

When you might have seen in the U.S. already, from the Smith Travel numbers, which has also reflected in our own numbers of that, upscale and luxury are the rate of decline is moderating faster than what you might be seeing in the lower priced segments. So you’re starting to as separation between the two now clearly as Frits said, upper of scale in luxury drop deeper and is beginning to lap some of those deeper declines, but the RevPAR declines are better now at the higher end than the lower end.

Operator

Your next question comes from Ryan Meliker - Morgan Stanley.

Ryan Meliker - Morgan Stanley

Just a quick question regarding the vacation ownership business, one of your competitors recently had a big breakdown in business and announced plans to substantially reduce the prices of their units for sale. I want to know, if you are seeing any type of ramifications from that other slower pace of salaries or more pressure on your pricing.

Frits Van Paasschen

We are monitoring it. Clearly, we are also looking at what our response should be. I wouldn’t say that, we are seeing anything that causes us to significantly change our point of view. As we indicated, we will review all our projects again both in terms of what our future plans are? As well as what pricing adjustments we might want to make and to the extend that we decide do something along those lines, we’ll certainly talk about it when we made those decisions.

Vasant Prabhu

The other thing not to get into specifics about other people’s write downs, but as you look at those, the vast majority was either in fractional or high end residential or in vacation ownership projects outside of North America. So the actual vacation ownership write down was relatively smaller compared to that total number.

Operator

Your next question comes from William Truelove - UBS.

William Truelove - UBS

I have a question about the St. Regis. I see here on your ownership breakdown, franchising a St. Regis in Europe. That seems little strange, because most of your competitors usually force management upon their high end brand. So what led you to do a franchise agreement for St. Regis and is this something we could see further amongst your high end brands.

Vasant Prabhu

We don’t do it as a practice. We don’t plan to St. Regis is not available for franchising. That is I believe one unique situation that shows up there, which is the St. Regis in Spain and that’s a unique particular situation and then that is not one that would be representative of what we choose to do. It was something we had to do to make some accommodations and that’s going to be a one-off.

Frits Van Paasschen

That policy not to franchise also applies to W as well.

Operator

Your next question comes from David Katz - Oppenheimer.

David Katz - Oppenheimer

I wanted to ask about timeshare pricing both in terms of the sales as well as securitization. We’ve seen, obviously, Marriott come out and talk about cutting price on units. As well had made recent announcements that were interesting in terms of the pricing of note sales, what are you seeing out there and what are your strategies with respect to that?

Frits Van Paasschen

Yes, as Vasant just mentioned, we are going to continue to look at our vacation ownership business and we’ll do that across locations, because again there at the site in our location and amount of inventory available in the competitive situation would drive the behavior in each of the markets. Yes, we haven’t seen a powerful impact from the change in pricing in the competitive set. In terms of note sales, I think the good news is, the securitization market, along with capital markets generally, are looking better and better. We do anticipate that we’ll be able to make a securitization looking forward and that if we were to do that at this moment, the conditions for doing it would be much better than what we’ve seen in a couple of years.

Vasant Prabhu

The advance rates, as you may have seen have gone up since six months ago. The interest achievable are better, we expect that there will be a gain on the securitization, it is very hard to estimate, right now precisely what the gain will be and so, it’s not part of our guidance at this point. Clearly, we are hoping conditions remain the way they are and if they do then, our goal is to get one done probably in early December. We’re optimistic about the terms we’ll get.

Operator

Your next question comes from Michael Bilerman - Citigroup.

Michael Bilerman - Citigroup

As one of you could spend some time talking about the pipeline and I know that in history a lot of the focus had been international. I’m just wondering, as you think about devoting maybe resources to the U.S. in terms of the distress, whether there be asset sale opportunities and in terms of buying assets, re-branding, conversion opportunities and whether it’s a focus and maybe spend sometime about what’s happening on the capital side and what you’re finding increased discussions from capital partners to grow the pipeline whether it be in U.S. or international?

Frits Van Paasschen

So in terms of the pipeline internationally, first we continue to see robust growth in signings as you look across some geographies, particularly China and other developing markets as well and we expect that will continue and we expect that given our presence with Le Meridien and Sheraton, that will continue to be a strength for us.

As you get to North America, even though capital markets as we’ve been saying have continue to improve the other financing environment for hotels is still pretty difficult and I think that’s largely a function of the fact that hotel assets today are trading at a discount to replacement cost. So financing a new project is a pretty challenging thing to do, overtime that will change.

So to the notion of conversions, again we don't see ourselves as real estate investors or wanting to be accumulating assets. However, given our position and given the fact that we have brands that we can bring to bear and help situations out. We are in discussions with various partners about working together to identify assets for sale from distressed owner that are operation or management and branding could bring value to. So that would be the approach we’d want to use there.

Operator

Your next question comes from Jeff Donnelly - Wells Fargo.

Jeff Donnelly - Wells Fargo

I have question on brand standards. I’m curious conceptually how you guys think about phasing backend brand standards as we roll forward to 2010, 2011. Do you guys tend to leave the cycle and risk putting additional pressures on the owners cash flow, or cautiously lag the cycle that help out owners?

Frits Van Paasschen

I think the more important thing for us right now is as we look at brand standards. How do we continue to create the right environment for our guests and at same time minimize cost and complexity in our system and one other things we are doing and starting to look at common platform of standards that are independent of our brands and then really look at those things about each brand that matter.

That we want to make sure we focus on, so I alluded earlier to the link on this call, as an example of something that we feel sets the shares in experience apart and therefore something we would be less likely to compromise on at the same time there maybe other areas where we discover that having pull back we don’t necessarily need to be as clear about enforcing across the system as we were before and will be very selective in doing that.

Jason Koval

Thanks, Frits. That wraps up our third quarter call today. We appreciate your time and interest in Starwood Hotels & Resorts and please feel free to contact us to review any of the information or follow up with any additional questions. Bye-bye.

Operator

Thank you for you participation in the Starwood Hotels third quarter 2009 earnings conference. You may now disconnect.

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