Stephen Pettibone – VP of IR
Stephen Ho – President, Asia Pacific
Jon Oh – CLSA
Starwood Hotel & Resorts Worldwide, Inc. (HOT) CLSA Investors' Forum September 24, 2013 9:30 PM ET
Jon Oh – CLSA
Good morning everyone. Welcome to the 9:30 presentation of Starwood. I am Jon Oh, CLSA lodging and gaming analyst and based out of New York. We're pleased to have the Starwood management team with us today, Stephen Pettibone, the Vice President of Investor Relations out of Connecticut, USA, and Stephen Ho, the Asia Pacific Chairman of the company, is based out of Hong Kong. This is the first appearance by Starwood to the CLSA Forum. We're pleased to have you here.
Just by way of a quick background on the company, it's roughly a $13 billion market cap. They have 1,134 properties by my last count, could be maybe one or two off; 336,000 rooms globally, of which roughly 100,000 in the pipeline, on top of that they manage nine brands including some of the more familiar ones like Sheraton, Westin, Le Meridien, the W and the St. Regis. This is perhaps the most international and one of the most widely-recognized brands in the world. We are pleased to have them here today.
I'm going to hand the microphone over to Stephen Pettibone.
Thank you, Jon. Thanks everyone for coming. Glad to see you here. I apologize for my voice, I'm a little hoarse from some of the conversation over the past day or so.
Before I begin, I'd like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements. And forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood's annual report on Form 10-K and our other SEC filings.
And so with that, I will begin. I'm going to begin with an overview of Starwood from more of a global basis and a review of what we call our Starwood investment proposition. I'll then hand it over to Stephen Ho who will walk you through Starwood in Asia Pacific and talk about our leading position here, how we got there and how we think we are going to continue to succeed.
So as Jon said, Starwood Hotels & Resorts, we are one of the world's largest hospitality companies. We have over 1,100 hotels in nearly 100 countries. We are a company -- if I go to this, over that- we're a company that's been in transformation for the past decade or so, around -- along three major lines. The first is from owning hotels to owning relationships, or migration to what we call asset-light strategy. So if you look back in 2000, you know, approximately 17% of our profits came from fees. We're more at about 62%. We're on our way to getting to a level where 80% of our profits will come from our fee business.
Since 2000, as a part of getting there, we've sold 124 hotels, generated about $8.3 billion from those sales. We set a target of getting to that 80% by 2016. We think we can do this. And we'll be selling approximately $3 billion worth of hotel assets as part of that process.
And why are we doing this? Well, the asset-light model makes a lot of sense for us, it has lower cyclicality than owning hotels, lower capital needs overall, higher returns on investment, and scalable business, it can be grown internationally.
Second point of transformation is from a U.S. centric to a global enterprise. If you look back in 2000, 37% of our profits came from outside the U.S. Through the work we've been doing to expand the footprint in places like Asia and in other parts of the world, we're now at about 56%, on our way to 80%. So we're on our way to achieving that goal. No set timeframe on that one because, honestly, as other parts of the world, more of the mature markets continue to improve performance, you know, it sort of offsets a little bit of the growth in the footprint elsewhere.
The third point of transformation is moving from price point segmentation to lifestyle segmentation. So Starwood was the pioneer in this movement away from looking at hotels in terms of a good, better, best kind of mentality where it was just based on the price that someone will pay that you could differentiate the different brands. You know, what we've done is taken our nine hotels and segmented them not along the price points, but along lifestyle, you know, appeal to traveler personas. So if you look in the luxury segment, we've got St. Regis, W, Luxury Collection, all very unique offerings, distinctive in and of themselves.
We've built this on a track record of innovation which began pretty much with the launch of W back in the '90s, the launch of our Heavenly program, and bringing that through our launch of Element and Aloft, our select serve brands, global expansion of W and recent moves, including Crossover Rewards, a program that we've done with Delta.
And what has this resulted in? Well, it's given us a higher growth trajectory, lower cyclicality, higher margins, higher capital efficiency, and the ability to generate significant cash. And if you look at just the 10-year return, you'll see that it's created great value for shareholders.
So as we look at the world around us, and we think we have an unprecedented market opportunity here. Right now there's a revolution in travel going underway. It's driving secular demand gains in high growth markets. We've got evolving travel patterns as a result of this. And, you know, compounded by that, we've got below-trend supply situation in the mature markets of the U.S. and Europe.
So if you look, and Stephen is going to go a little bit more into depth on what we're seeing with, you know, rising numbers of middle class and increasing amounts of wealth and the commerce that's coming along with it, that is driving travel from places that didn't have as much of it as it does now and is going to have going forward. So we're seeing regional travel patterns. When we talk about Dubai as an example of a crossroads that's represented above this. You know, it's no longer the transit [line of routes][ph], it's north, south, east, west, and it's just a completely different game than it was even a decade ago.
And if you look at where GDP is projected to grow versus where global travel is projected to originate, you'll see this is holding true. It's just a changed world. But it's not about the growth markets only. Even if you look in the mature markets, what we see is that hospitality is really – it exhibits growth both in nominal and real terms. So although it is an industry that has cycles, it's an industry that's also -- is underpinned by long-term growth.
And in the emerging and the mature markets, we've got a situation where following the economic crisis the construction of new hotels has -- I won't say virtually ceased -- but it's been incredibly low. So you've had a situation where a supply of new hotels has lagged the growth in demand. The interesting thing about a hotel is you can't import a hotel, you can't outsource a hotel, you got to dig a hole and build it. So we have a fair amount of visibility into, you know, that the supply situation should continue on, especially at the high end of the hotel market in a very similar situation to where it is now. And from our perspective, this is a good thing in that it allows greater increases in rate that we'll be able to drive. The same situation holds true in Europe as well where there's perhaps even less.
So this is a large -- so this is a large opportunity.
As a backdrop why we think that Starwood is a compelling investment proposition. So we offer up these six reasons here.
We are the leading global hotel company in high-growth markets. We've got the best global high-end lodging brands. Got a high-quality global pipeline. Got an unmatched global platform. And we've got extraordinary cash generation potential.
So looking at our position, we are the most global hotel company with over 1,150 properties, 344,000 rooms, nearly 100 countries. You see the distribution versus some of our major high-end competitors, you'll see that with 46% of our rooms inside of the United States and a fantastic distribution that's fairly even around the globe, we are fundamentally different from the way they approach the business
When we look at the high-growth markets in particular, you know, you'd see that by high growth I'm defining that as five-star and above, we are the leading hotel company in these markets. Outside of the U.S. we're roughly 50% larger than our peers. And as you can see, our leading position holds true in China, the rest of Asia, Middle East, Latin America.
So the second thing you're buying -- the second thing you're buying in is the collection of brands. So if you look here, I started to talk about it before, we've got the nine brands segmented across three luxury, three in upper-up scale, three in the select serve or upscale category. You know, this allows us to get honestly deeper into -- in given locations than we would without this kind of a segmentation. The travel persona that is the kind of person who would want to stay at a W tends to be a little bit different than the person who would prefer to stay at a St. Regis. So we can open (AUDIO GAP).
So if you look at our luxury brand portfolio, and we believe we have about the best luxury platform that you can buy. It's a segment of the industry that's been growing very strongly in the high-growth markets of Asia and the Middle East. If you look at what we've been able to do over the past five years, we've almost doubled our footprint of luxury rooms and compare that to what the major competitors have done, we feel it sets us apart and it's really in the core of our business.
It also extends to the five-star category where we are the largest operator of upper-upscale rooms globally. So if you look at our Sheraton, Westin, Meridien brands, that we really stand out. We're focused on continuing this leadership through our pipeline which we feel is a very, very high-quality one and matches very well to our strategy.
Eighty-six percent of the rooms in our pipeline are outside of the U.S. Sixty-seven percent of them are in the upper-upscale or luxury category. And so what we're talking about is a very high-quality pipeline. Upper upscale and luxury hotels tend to generate higher fees on a per room basis than properties down in the select serve. So, you know, every one of the properties, one of the rooms in our pipeline we believe is very valuable.
And so when you look at where the pipeline is located, you see that it matches up very nicely against where global growth is. So our pipeline happens to be concentrated very much, 60%, in Asia Pacific, including Greater China, 45% of our rooms in Greater China. But if you look across the world, you'll see that flowing along. So we're very much positioned to take advantage of the growth that is happening.
And if you look back over our history here, you'll see that we've increased our footprint at a 5% CAGR since 2004. And that's including the acquisition of the Meridien brand that happened in the 2005 period, but also great organic growth as we've been able to successfully, you know, convert pipeline to operating hotels. And Stephen will talk a little bit about that in the context of Asia Pacific.
Our footprint growth is focused on our managed-and-franchised business, our asset-light model. But keep in mind that we do own a portfolio of high-value owned-and-leased hotels. And while it's much smaller than it used to be, it remains one of the best you can buy among the public company. So we continue to own trophy assets hotels in high-value, high-barrier-to-entry markets, urban and resort locations, and as you can see, well-diversified globally.
And, you know, we have been, as part of the asset-light strategy, converting these effectively into cash as we sell them and then turn to, via management agreements, to keep them in our systems as we go forward. So it represents a fair amount of locked-up value.
And that brings me to the fifth reason to own Starwood, which is the unmatched global platform we have. We call it the Power of Starwood. It's a platform of loyalty, sales, marketing, technology, operations expertise. And it's really this infrastructure that underpins our success around the world.
When we think about success at the high end of the market, you know, it's really the infrastructure that sets us apart. Because to be successful at the high end, you need to have a loyalty program that matters. You need to have places around the world that people can earn and redeem points. You need a base of high-value customers that can deliver great revenues and profits to the hotels in the system.
You need to have a management -- you need to have marketing programs and brand management that will allow you to fill hotel rooms in soft patches [ph], and enhance brand equity on a global basis, brand recognition. You need to have scale to support the development implementation of the technology systems that drive the deliver that we're able to bring in to the hotels. You can't have that scale unless you have that platform of a large number of properties.
You need global sales force that can call on companies from Sydney to Shanghai to Mumbai to New York, to be able to deliver that high-value corporate customer to the properties. And you need to be able to provide your properties with advanced revenue management and other technologies that will let you have an edge over the competition.
And last but perhaps most importantly, you need the breadth of operations that will -- operations experience that allows you to share best practices and make your hotels operate more efficiently around the globe.
So part of this whole infrastructure that we have is to deliver superior returns to both the owners of the properties in our system as well as for our shareholders.
Which brings me to the sixth point of the value proposition, which is our extraordinary cash generation potential. We've got a long track record of generating cash and returning it to shareholders. If you look back, since 2008, we've reduced our debt -- net debt by $2.8 billion and returned $1.7 billion to shareholders through dividends and share repurchases. And looking forward, we're in excellent position to be able to continue that track record of cash generation.
So if you look over the next three years, we expect that through the growth of our fee business, as we continue to expand our footprint and expand share, the performance of our own hotel portfolio and cash we will be able to generate from our Vacation Ownership business, we'll be able to generate approximately $2 billion in cash, add to that additional balance sheet capacity as we grow our EBITDA, it could be in the area of $3 billion that we will use to either redeploy within the business to grow it further or return to shareholders. And that doesn't take into account the cash that we could generate from the asset sales. As I said before, we've got a target of selling $3 billion in assets by the end of 2016.
And so to recap Starwood investment proposition, why should you own Starwood? Leading global hotel company, high-growth markets, best global high-end lodging brands, high-quality global pipeline, high-value owned hotel portfolio, unmatched global platform, and an extraordinary cash generation potential.
And so with that, I will turn it over to Stephen Ho who's going to give you an overview of Starwood in Asia Pacific.
Thank you, Stephen. Good morning. I'm happy to be sharing in the next 20 minutes about our overview of business in Asia Pacific division. Next slide. Okay.
We are the largest, as Stephen said, we are the largest luxury and upper upscale hotel in Asia Pacific. We have about 252 hotels operating, with 180 hotels under construction. The division actually consists of six very diverse region, in 23 countries, with more than half the world's population residing in this region. We like to say we have a (inaudible) view in the most dynamic growth region as we have two of the largest nations in the world, China and India, both urbanizing at an unprecedented pace.
Our CEO Frits calls it the age of great change. These changes (inaudible) pervasive and accelerating at a much quicker pace than expected. If anything, we most probably underestimated the rate of change taking place. (inaudible) it took 100 years to reach 1 billion middle class and 20 years to reach 2 billion. In the next 20 years, the global middle class population will accelerate even faster and grow from 2 billion to 5 billion. So that means more new routes, airports, buildings and hotels will be built in the next 40 years than in the entire history of mankind.
In 1950, only 17% of the Indian population were living in cities compared to China's 13%. Sixty years later, China's urbanization rate has more than tripled, reaching 48%, and India at 30%. By 2025, India and China alone will account for more than 40% of global urban population. And China alone will add about 400 million to its urban population, which is more than the total population of the United States today. So imagine the scale.
And China will also be home to 1 billion urbanites by 2030, and by 2025, it will have 221 cities with more than 1 million residents. This means we have a long runway to go for footprint growth in this part of the world.
So compared to our three upper upscale competitors, we have the largest room count with 82,000 rooms, of 252 properties according to SCR [ph] in operation across Asia Pacific. We have achieved this leadership because of our great track record of converting pipeline to operating hotels with 34,000 rooms open from 2010 to June 2013. Again this is more than our three upper upscale competitors combined and includes the 3,863 rooms (inaudible) in Macau which is equivalent to 13.5 Sheraton hotels, you know, in one.
And to give you an idea just on staffing alone, the hotel has 2,019 associates from 25 different nationalities. And again (inaudible) where we operate is to provide career opportunities for the local communities, 40% of the associates are from Macau. And Sheraton Macau only opened 20 of September last year. And the hotel broke the record for hotel occupancy in Macau with 115,000 room nights sold in the month. This means the hotel achieved 96% occupancy or 3,710 rooms sold daily. And we did this through a lot of -- it was not just, as you all know, Macau is -- there's a lot of gaming business, but we only had about 35% to 40% gaming business and the rest (inaudible) meeting incentive and convention exhibition and also leisure business.
And this is not all. Less than a year after opening, on 8th of August, the hotel actually welcomed its one millionth guest. Again this is a record for hotels operating not just around the world but in Macau as well.
We have a well-balanced fee business across Asia with China, the world's second largest economy, constituting about 49% of our management and franchised fees generated in Asia Pacific. Our contracts are primarily management agreement. And on a same-store basis, over 90% of our hotels are earning incentive fees. They tend to be very profitable.
And we have been able to build a successful business in the region because of what we call our Asia Pacific advantage. Let me go through some of this.
The long history of the Sheraton brand in the region has given as a first-mover advantage. We entered Thailand in 1970 with Sheraton in Bangkok, and today we have 21 hotels in operation and three in the pipeline. In India, we opened our first Sheraton in 1973, and currently we have 37 hotels in operation and 32 in the pipeline.
And other than Sheraton in Luxury Collection we had also launched the Meridien, Westin, Aloft, Four Points by Sheraton successfully. And we will be opening W and St. Regis in the next two years. In fact, the W Goa, which is a very top resort in India, will open next year.
In Greater China, we have 122 hotels in operation and 112 pipeline. This is again our biggest region in Asia Pacific. And we started in Sheraton Hong Kong in 1974 and entered the Mainland China in 1985 with the Great Wall Sheraton Hotel in Beijing, and this again is the first international branded hotel in China.
In Indonesia, we started in 1988, and even though we started later than the other region, we're still one of the earliest operators to enter this market. Currently we have 14 hotels in operation and eight hotels in the pipeline. Most of the hotels are located in Bali and Jakarta, but we have now been penetrating a lot of the second and third-tier cities. And we actually put some development activities on the ground in Indonesia.
How did we do this? Obviously, you know, we have a lot of talent pipeline, but our strong and stable leadership is another point that differentiates us from the competition. The senior leadership, as you see in this account heads [ph], an average of 20 years. I've been with the company for 33 years. I started very young by the way.
So, and if you look at it, our leadership team are very diverse and understand the local culture and business sentiment in their respective region. For example, Qian Jin, our President of Greater China region, is a homegrown talent and is still the only local Chinese to head a global international hotel group in China. And we did this (inaudible) China into (inaudible) in Singapore in Malaysia before we brought them back to China. And this again, you know, shows that we are committed to developing local talent.
And it's not just in China. We also have very strong local leadership, talent bench in India, in Australia and in Japan. And the way we operate is that each region is headed by a regional vice president, and the divisional leadership team work closely with the regional vice president and the teams to support them on the day-to-day operation phase [ph].
Under this team, we have also built a very strong leadership for the future which again has about an average of ten years of service from Starwood. And with this dream team, I can confidently say that we have one of the best talent in the hospitality space in Asia Pacific. Although Asia Pacific generates 24% of Starwood fees, we had 60% of the active pipeline, making Asia Pacific the fastest-growing division.
If you look at China which represents about 40% of Starwood pipeline, we had again, you know, we are the leading luxury and upper upscale operator in this and continue to dominate in this space. Last June we celebrated our Double Happiness with 100 operating hotels and 100 hotels under construction in the pipeline. Since then we've grown to 122 hotels in operation, 112 hotels in the pipeline. And besides the gateway cities and resorts, we are focusing in growing our footprint in the second and third-tier cities. Remember early when I said that we're -- there will be about 221 cities in China, and currently we're only in about 57 cities, so we still have a long runway to go.
And most of the time we're the first -- always the first mover in this city. The advantage of having nine brands, we could always start with, you know, with the Sheraton or Four Points, Aloft, depending on the market. And eventually we will introduce the other brands. And we have done this very successfully in the second and third-tier cities where we normally start with one hotel and we ended up with five or six or even nine hotels. And this again, we've been able to work on the demand and also be able to induce demand into the city. And this has actually proven very successful and our track record has proven it itself.
Our owners, we have always had owners that are coming back to ask us to do their second or third hotel. This again to me is the best (inaudible) you can get because owners are our biggest customers.
And in China last month, we also achieved record active SPG members growth. And we launched Android Chinese app for our Chinese customers as well.
Currently, over 60% of our guests (inaudible) in China are Chinese and in some second and third-tier cities, it is over 80%. No doubt the austerity drive and other tough policies implemented by the new regime in China as well as the promise of (inaudible) this year have dampened demand in five-star hotels, but we are not deterred as we believe in the China story and we are there for the long term.
In our view, it will be a bigger mistake if we miss the China opportunity and stopped growing there. This is why we have invested so much in building on the infrastructure and people way before other competitors have entered this market. And we'll continue to do so.
Let's go to India. In India, we are the largest international high-end hotel company. We currently operate about 48 properties in 27 cities and 14 states, with 10 new cities in the pipeline. Like China, we have developed very strong local team who understand the market. And in India, again approximately 40% of the guests staying at the hotels are Indians. And we believe just like China and Japan, this number will grow further.
By the way, China and India, are our second and fourth largest market globally, just after the U.S. and Canada. And by 2015, with our India 100 target, we want to make India our third largest market globally. We are on track even though we are facing some external challenges beyond our control like the supply glut in some cities, high financing costs, weakening rupees, and uncertain political situation. But we had made firm commitment to invest in building the infrastructure to get our team ready for the India 100. Currently we have 50 associates in Southeast Asia regional office and last year we opened a new customer contact center in Delhi to serve both inbound and outbound reservations.
And to cater to the middle-income and demand from the leisure travelers as well as corporate travelers, we have grown our resort hotels to 72 hotels, which is more than our three high-end competitors combined. To give you an example, in Hainan, we opened our first Sheraton resort in 2003, and today we had nine hotels in operation and seven under construction, with four more hotels under negotiation.
Bali has also seen growth with six hotels in operation and four hotels under construction. Internally we always have a challenge between Hainan, Hawaii and Bali to see which island will have the most Starwood hotels.
And underpinning our success is our local infrastructure, the power of Starwood. Including China and India, we now have 23 Starwood sales office with 111 sales associates, handling over 4,000 accounts in Asia Pacific. There are 600 associates in the four customer contact center in Guangzhou, Singapore, Tokyo, Delhi. And soon we will have five with Jakarta opening next month. Again we were the first to open a big customer contact center in China in Guangzhou.
Of course we need, you know, one of the most innovative program we have is our SPG loyalty program. This program -- I mean this system has actually drives more than 50 of occupancy across the system globally. In some hotels SPG actually delivered over 80% of the hotel occupancy. And SPG is not just about earning points. As we listen to our customers, and Stephen has earlier on mentioned about whether [inaudible] and we also organized special SPG moments for elite SPG members. This again a memorable moment that we have created for them.
Our China SPG membership base has also increased by 64% in the last year. And SPG active membership have tripled since 2007.
In summary, we're in the midst of a revolution in global travel and long-term growth. We are witnessing China and India urbanizing at an unprecedented pace. And so that means again, as I said, more new roads, airports, building and hotel, will be built in the next 40 years than in the entire history of mankind. And as both countries urbanize and grow the middle-income population, it means more people can afford to travel domestically or overseas.
And according to WTO, international tourism was only 25 million in 1950. Last year it broke through the 1 billion mark. So other than growing our hotel footprint in India and China, the massive outbound travelers are also our key targets. In India, by 2020 it is expected to grow to 30 million according to WTO forecast. And just back to China in 2000, there were only 10 million outbound Chinese travelers. Last year the Chinese travelers hit 83 million, and they also became the biggest spender in the world, spending 102 billion on international tourism.
So with 100 million outbound travelers expected by 2015, which is earlier than the original forecast of 2020 by WTO, one of our key initiatives is to ensure that both Chinese and Indian guests are familiar with our nine brands and make it their first choice when they travel abroad. We strongly believe that Starwood is in the best position to capture this golden opportunity with our strong base and a very robust pipeline in each region.
Thank you very much and we'll spend a few minutes on Q&A. Thank you very much.
Jon Oh – CLSA
Thank you, Stephen. We'll open the floor for Q&A. Raise your hands up and there'll be a microphone circulating around.
We'll take a question from the front please.
Just confirm the asset-light strategy, is that pertaining to all of the hotels in the pipeline?
You know, we set a goal of being -- excuse me -- it's an 80-20 goal because we'll probably always own hotels. We also want to have the ability to, you know, support our balance sheet if we come across the right opportunity when it would make sense to acquire an asset, because it's strategic location, was the right opportunity. But, you know, we don't think we'll ever be 100% asset-light.
And just to follow on with that, I mean in Asia Pacific, we have, again we've been looking at what Stephen call a strategic deal, and where we can generate multiple growth, we will then deploy capital. Again we will be taking minority equity on that.
Thank you. You touched upon this a little bit in the presentation but obviously you are seeing a lot of weakness in currencies in South East Asia and India in particular. What is the impact you are seeing from that, and what are the ways that you are looking to offset that?
Again you know I mean we are going to be currency experts but we obviously, you know, all our earnings are reported in U.S. dollars. Sometimes it goes the other way. And this year in particular, we've been hit in regions like Japan, Australia and also India, and to a certain extent Indonesia. There's actually not much we can do in terms of the currency side, but what we have always done is obviously looking at how we can operate more efficiently in the countries that we are. And then I guess on the corporate side, we do some hedging.
We really only hedge about 50% of our euro exposure is our practice, just given the concentration we have, that single currency. If you look around the globe, we're really fairly diverse in terms of where the fees are coming from. So our hedging has been limited to the euro.
Yes. As I say, it can go either way.
Can you just talk about your opportunity in Latin America? Do you see Olympics and the World Cup kind of driving demand for future I guess properties in the region? Thanks.
Yes, Latin America is clearly an area of growth. We've got a lot of resources deployed against it. The Mexican economy in particular has been doing very well and we see great growth there. Brazil has always been a challenging market for the construction of new hotels. As you can see, there really has been very limited supply that's come online or obviously is expected to come online as we come up to these events. We are clearly in the mix trying to grow further. We've announced a few deals. But thanks to the cost of capital in that market in particular and return required -- returns required, it continues to become challenging.
But no, Latin America is clearly an area of growth and we're expanding our footprint there.
Stephen, you talked about the China business, Mr. Ho. You were talking about how the austerity measures have dampened demand there. Can you quantify, was it a short-term blip when the government took over or are you seeing a longer-term impact of the austerity measures?
Okay. Actually the -- a lot more impact in food and beverage, basically because a lot of the entertainment have not materialized which we have projected. But this again is not -- it's short-term thing because the government is very serious about it. And we, as an organization, we obviously redeploy our sales people to look at other segment of the business. And so far I must say that no, we have fared pretty well because we have basically been able to fill those lost business with other business, whether it's from SME, from the private sector, or through wedding business as well.
So, I say the impact is more on food and beverage but again I see this as more king of a not a short term thing because the government is very serious about doing it, but in the long term it’s actually good for China because you see people being more prudent and then it will become – create a bit more stable society.
Just to touch on China outbound tourism, where have you seen the most acceleration and deceleration let's say in the past three months?
Actually we have seen in Asia Pacific, right -- I'll let Stephen then cover the rest -- but we've seen a lot still the impact has not been, you know, even the outbound is still growing and we're seeing them also venturing into other destinations. Previously, yesterday, as we were, you know, meeting with some of you, we said, you know, they are now even going to Malvides and spending U.S. thousands a night on a room, so that market is huge, and in the short term even in Macau where you see we’ve had obviously always more impact is always Macau and Hong Kong but again we are seeing only a slight dip and the spending power is still there and I guess because with the volume of the outbound traveler we are going to see a lot more growth.-
Yeah, I mean outbound from China to our properties increased 20% last year and then we continue to see good growth there. I think we said that 95% of our properties around the world have welcomed the Chinese customer in the past years. So it's going to continue to be a growing factor and an area of importance. And we've positioned our hotels especially in gateway markets to be able to appeal to the -- and welcome the Chinese customer by providing materials in Mandarin, things that are more expected for the Chinese customer, whether it's tea in the room or slippers or other items that just make it a little bit more of a comfortable stay. So we're clearly focused on that opportunity, yes.
And we're also doing that for the Indian travelers as well.
We just launched the -- called the Indian Traveler Program where again we have (inaudible) that they're used to it. So we're doing that both for Chinese and the Indian market as well.
Can you talk a bit about your (inaudible)?
You know, I don't really go into much (inaudible) on specific return of capital targets. If you think about the fee business versus owning hotels, we -- it's very difficult to be a very good owner of a real estate in many jurisdictions around the world at once. Second, if you look at the, you know, the ability to grow and be success at the high end of the fee business, I mean that really is a global proposition because of the points that I laid out before.
So although I, just in an upcycle, the returns coming out of an owned hotel could be very, very healthy, the cyclicality in the fee business is much more manageable. In fact, in the crisis, our fees were down something on the order of 30% and our owned EBITDA was down about 50%. So it's just a sort of (inaudible) two basic differences, so.
But again, we're always in some hotels, but the focus is really on growing the fee business.
If I can sneak in a question here, when you look at the rate cycle in Asia today, and I guess I want to specifically zoom in on just China, and this question is for you Stephen Ho, what do you think is the outlook, or more specifically, where do you think we are right now in the rates cycle? Are we in the early innings? Are we in the mid cycle? Or are we coming towards the stage where perhaps the supply may have been a little overwhelming and that would have an impact to demand in the short term? Could you please outline for us what are your thoughts?
You know, in some cities we're obviously facing some supply gluts. But again it's a short-term thing. And we have been working very closely with the owners and kind of understand the market, that that's where we're going. And in terms of rate, there's definitely room to grow, because right now in some, you know, second and third-tier cities, we're seeing kind of -- we're kind of close to the $100 or slightly above. We see that there are rooms to grow there.
Obviously the key here is to build the base in terms of, you know, having a solid base before we bank [ph] and work on the increasing the ADR. But in the long term we are very bullish about China because demand will continue to grow, and early on in my presentation where I said (inaudible) we have covered 60% to 80% of the -- of our guests of Chinese travelers, and that demand will continue to grow because as more middle-income and as more people move into the city, you're going to see a lot of more people traveling domestically and also obviously outbound also. So we see that brings significant growth for ADR.
To give you an example, right, in -- when we first entered Hainan in 2003, the average rate there was about $70, $80, U.S., and the analysts, you know, even the guy who was doing the feasibility was telling us that we'll be lucky if we do $120, and we thought we could get to maybe $150 eventually. But today it's about US$350, for the St. Regis it's about US$400.
So again, you know, that is something that we believe in that because it is, you know, short-term basis supply glut, but in the long term we are bullish about China.
And on that point, there is a general understanding I guess that -- or more so suspicion, that the Asian market seems to be very much heavily geared towards luxury and upper upscale. Is there room for Asia to de-price, to move downwards towards select service? Will that ever take off like the way it has in the United States?
We, primarily in the upper upscale luxury segment, but having said that we have also now set up dedicated team to grow our midscale brand which is the Aloft, Four Points and Element brands. And we're seeing again both in China, in India and even the rest of Asia, where there's demand for midscale hotels.
The good thing about us is that the, for example, Aloft or Four Points is affiliated to the Sheraton brand and Aloft is kind of a division [ph] of W. And we've been able to come, again, you know, bring in those customer at that level, and eventually they can graduate to the higher brands, whether it's to a luxury or to an upper upscale brand.
The mid-tier market is definitely a market that we're going to be focusing on because it is again a very key growth target for us, especially in the second and third-tier cities both in China, India and in parts of Indonesia and even Malaysia.
Yes. Sorry, go ahead.
Just a follow-on question (inaudible) as you build out these midscale brands, is there going to be a pressure to margins from that? Is there going to be margin pressure as you build out that midscale brand in China?
No. I mean, as you say, the only thing is that when you do a midscale, obviously that's why we set up a dedicated midscale team. And then again, you know, your manning, everything will be kind of be lower. So your operating cost is actually lower. So in a sense, the only thing that you -- is, you know, room to actually get -- produce a higher margin. And in the midscale segment you tend to do more -- more geared toward room business. And then you have maybe one restaurant, but knowing that in Asia, you know, food is very important, so we might end up with two restaurants at both. But generally it will be below the bigger book that we are building.
As you continue to build out China and India, the specialty reward programs, are you doing anything different? You talked about slippers and stuff like that, but is there anything in the reward program that's different in those markets that you see how might that be driving business?
We've always done a lot to localize the programs, and so I think beverage is a good example.
Yes. I mean early on I'm mentioning, that's why we create the kind of special, you know, kind of SPG moment for the guests. And again we will -- the good thing is that SPG is a global program but we will again customize it locally to see whether what is, you know, what does the customer want? So I think sometime they might just want to exchange it for, whether it's airline tickets or other amenities, again I think our objective is to own the customer so that, you know, it's not about just adding points, it's creating that relationship. That's why we created it, and better the service. And, you know, people just want to be recognized. So I think we're doing a lot of that to kind of make it different. And Stephen also talked about it early on about having your 24, you know, you can check in anytime if you're an SPG member, so that you actually get your, you know, if you arrive 12:00 midnight, right, you still can check in and you get your 24 hours.
So again we're doing a lot of different initiatives to make sure that we remain attractive in our SPG program.
Yes. I mean in these certain markets in Asia and in the Middle East for example where there's a high volume of people that use hotels for the dining, sort of local residents who dine at the hotels, will consider converting SPG (inaudible) earn points from those kinds of activities as well. But at the end of the day it's about increasing loyalty and (inaudible) SPG gives us the ability to know our most valuable customers much better and to be able to make it more valuable for them when coming back to us.
Apologies if you've covered this already, but if you can just talk a little bit about online travel agency and the reach on your distribution channel and how is that sort of evolved over time, and do you see that as a threat to your business model?
We're predominantly a B2B company. So only a very small portion of our bookings on a global basis come through the OTAs, the online travel agencies. Our primary channel is, about a third of our business is group -- about a third of our business comes through more sort of corporate retail, direct bookings to us, and then there's a third that encompasses some of more call it discount or wholesale channels. But within that, the online travel agencies are there.
They're (inaudible) distribution, but we have taken a very strong line towards the OTAs and we don't allow people to earn SPG points unless they book through one of our more direct channels. So if you want to book through an OTA, you're more than welcome to, but you're not going to earn SPG points, we may be able to use (inaudible) offer on other things that are at the hotel if they book directly with us.
At the end of the day, it's a channel that for owners is perhaps a little bit more expensive that our traditional ones. But again they're a very important partner and in parts of the world there's a lot of growth in the OTAs. And we see them as being in the mix.
So what percentage is the OTA, I mean as a percentage of the distribution channel, is OTAs?
It's in the mid single digits, that what I'll say. It's not a really large portion.
And it varies from market to market, because again some OTAs are very strong in certain markets, some are not. So again it varies.
Could you talk a bit more about what's happening with the asset-light strategy, what's your asset disposal program this year so far, what plans for next year, what sort of percentage of total have you reached and planning for next year?
Well, you know, (inaudible) these are conversations that take time, and to be honest with you, the pace at which we'll be able to sell is going to be dependent on the environment of the acquisition market out there. We are not a distressed seller so we feel no need to sell things below decent values. I think we've been fairly reasonable on the values on which we've been selling properties if you look back in the past year that we've done. So it's I guess stay tuned, we'll tell you more as we have more news. But we're not sitting on our hands just waiting for people to come. We're out there marketing properties at various levels.
Yes. And also one of the key obviously, we're looking for a long-term partner. If someone is going to acquire an asset from us, we want a kind of a long-term management contract that goes with it, so.
Yes, for the most part, properties in our portfolio that we still own are ones that we would like to keep in the portfolio. Either they're assets that are real brand enhancers or they're valuable points of distribution in current markets. So we are looking to enter into long-term management or franchise agreements as we sell these. So it's very important both from our ordinary organic development of new properties as we enter the new agreements, you know, the right partner is very important to us. Because at the end of the day, you're going to be working with this third party for quite a long time under these contracts.
Stephen, while you're on that point, what about the other alternative of potentially doing a -- could you maybe just explain a little bit about the thought process behind that?
Yes. I mean never say never. We look at it all the time. To this point we've felt that doing a REIT which will obviously be a solution for properties that, mainly in the U.S. predominantly, you know, you have a REIT that would be relatively small. You have the overhead associated with being a public company on top of it. And so up until this point, we've been able to transact the prices that we think are more accretive to shareholders. So that has been the approach so far.
As you expand your footprint in Asia and other parts of the world, what are the biggest supply side challenges that you see? Is it the talent retention, is it hiring the right people? What are these challenges to your growth strategy?
Well, I mean, you know, talent is always a challenge, but we have, you know, we have been working on the talent development very early, and we -- that's why we have set up called Starwood Career Track for all -- even for the entry level right up to the department head, up to general managers, to make sure that we have enough talent to man those properties.
And the good thing, when you have a wide distribution, you can always tap in on getting task force in to help with the renewal opening. And so far I must say that every opening that we have done, we've done with what we call our internal resources or internal talent, and has been very successful. Because we, again, we create the opportunities for people to grow. And I think a lot of time when people join a company, they want to make sure that as long as you have a very clear career track for them to grow where they want to go, where they want -- or their aspiration, then it should not be an issue.
But of course we are facing challenges. I'm not saying no. But we -- I think we're able to handle that.
The managers as well though, with 120 properties in China as an example, that gives us a fantastic base to train and ultimately retain, because we have promotion opportunities and the ability to move people around. So I think scale helps get scale.
What are some of the metrics -- in terms of turnover ratios and how do you rank visa vie your peers on this front [ph]?
It's tough to tell because I don't think the information is shared necessarily widely. But our feeling is that -- I mean I'll have Stephen answer -- but I think we feel that we've got fairly low ratios in -- from our (inaudible). So we've done a great job of retaining. Just anecdotally to point to it, if you think back to that slide that Stephen showed with the average tenure of the people and the fact that we've been able to have people like Stephen who started with Sheraton and have stayed through the whole way, I think that speaks to the nature of our company and the way we approach associates.
I mean, I should say, the ratio again varies from market. I mean sometimes we get more turnover at the (inaudible) level, but again when -- that's why when we started recruiting then, we want to come, make sure that we take them to a career path. And that's important because if they know they're going to come in at a very low level and there's room to move up, people tend to stay with you. But again, there will be always offers. And again, we're not competing just within the hospitality space, we're also competing with other multinationals. And I would say hotel is a good hunting ground for companies, especially coming into China where they need English-speaking folks. So we will continue work on it. But the culture that we had developed is, you know, we have been able to retain a lot of our talent.
Jon Oh – CLSA
We have time for one final question.
Could you just elaborate a little bit more on your asset-light strategy and to what extent -- I mean you said -- you said you want to get to 80% asset-light? And what's the end-game there? Is it just to retain your trophy assets in the key cities and stop there? And if you can just elaborate a bit more on that.
No. It's never say never. We have a Vacation Ownership business that is part of it as well, so that's going to play into it. And then, you know, I don’t think there are any sacred cows. The thing that we talked about from time to time is perhaps the St. Regis New York would have to be, if we were to sell that, it would have to be the right partner for a very long-term agreement because it is sort of the flagship brand. But again if you look at a place like the St. Regis Bal Harbour in Miami, maybe that's the flagship now. It's a fabulous hotel. So St. Regis is evolving over time. And again, I don’t think there are any sacred cows when it comes to the owned assets. But it's more expressing the fact that we do have a Vacation Ownership business and we will always reserve the right to deploy the balance sheet with the idea of moving into the key markets.
Jon Oh – CLSA
Okay. We've come to the end of the presentation. On behalf of CLSA (inaudible) thank you for (inaudible).
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