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Starwood Hotels & Resorts Worldwide (NYSE:HOT)

Q1 2010 Earnings Call

April 29, 2010 10:30 am ET

Executives

Vasant Prabhu - Vice Chairman, Chief Financial Officer, Executive Vice President, Chief Financial Officer of Starwood Hotels & Resorts and Vice President of Starwood Hotels & Resorts

Frits van Paasschen - Chief Executive Officer, President and Director

Jason Koval - Vice President of Investor Relation

Analysts

David Loeb - Robert W. Baird & Co. Incorporated

Janet Brashear - Sanford C. Bernstein & Co., Inc.

Joseph Greff - JP Morgan Chase & Co

Felicia Hendrix - Barclays Capital

Chris Woronka - Deutsche Bank AG

Joshua Attie - Citigroup

Operator

Good morning, my name is Sylvia and I will be your conference operator today. At this time, I would like to welcome everyone to the Starwood Hotels First Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now turn the conference over to Mr. Jason Koval, Vice President of Investor Relations. Mr. Koval, you may begin your conference.

Jason Koval

Thank you, Sylvia, and good morning, everyone. Thanks for joining us for today’s First Quarter 2010 Earnings Call. Joining me today I have Frits van Paasschen, our CEO; and Vasant Prabhu, our CFO. We will be making statements on this call related to company plans, prospects and expectations that constitute forward-looking statements under the Safe Harbor provision of the Securities Reform Act of 1995. These forward-looking statements generally can be identified by phrases such as Starwood or its management, believes, expects, anticipates, foresees, forecasts, estimates or other words or phrases of similar import. All such statements are based on our expectations as of today, and should not be relied upon as representing our expectations as of any subsequent date. Actual results might differ from our discussion today. I point you to our 10-K and other SEC filings available from the SEC or through our offices here and on our website at starwoodhotels.com for some of the factors that could cause results to differ. With that, I’m pleased to turn the call over to Frits for his comments. Frits?

Frits van Paasschen

Thank you, Jay, and thanks, all, for joining us today for our first quarter call. Things certainly have changed since we last spoke in January. As you may recall, rather than make predictions, we were looking at a range of scenarios for 2010. Of the many scenarios we considered, what we see today is without a doubt the good case scenario. The pent-up demand that we hoped for is materializing. And as the economy picks up steam, more businesses are shifting their focus from cost cutting to growing the top line, which means resetting travel and expense budgets and shifting gears to get back on the road after 18 months of dormancy. This holds true as we look around the world. Emerging markets, or as we increasingly call them, rapidly growing markets are exhibiting a strong V-shaped recovery. And at the same time, the U.S. and Western Europe are proving robust. But let me repeat, we are not in the business of forecasting the global economy. Visibility in our business remains very limited making it challenging to forecast one quarter out, let alone the balance of the year. We call it as we see it in real time and we plan for an array of scenarios. This approach served us well in navigating through 2009.

So despite all the good news and the better than expected REVPAR, we still see reasons to consider less sanguine scenarios. To borrow a phrase from Warren Buffett, we should be fearful when others are greedy. We want to avoid the mistake of taking actions born out newfound optimism. After all, the global economy remains volatile. China risks overheating. Greece and the eurozone are grappling with major fiscal and philosophical issues, not to mention the mountain of U.S. government debt. Finally, volcanoes in Iceland, red shirts in Thailand and unrest in Mexico remind us that our industry is susceptible to sudden changes from many unforeseen corners.

In an uncertain world, we remain committed to financial discipline of flexibility. This means austerity in procurement, on-property costs and corporate SG&A. We simply refuse to give back the cost savings that we worked so hard to achieve. If good times continue, this will drive better flow-throughs than in prior cycles. In fact, thanks to lower costs at equivalent REVPAR levels, our EBITDA would be at least $100 million higher than before 2009.

Our financial discipline also applies to our balance sheet. We'll continue to de-risk and delever it, thanks to operating cash flow, securitizations, proceeds from asset sales, such as the W Court in Tuscany and the long-awaited IRS tax refund.

So with that as a backdrop, I'll cover four topics today: First, a quick review of our first quarter results and implications for the balance of the year; second, some thoughts from a recent 10-day trip to India; third, a few perspectives on the bounce back of luxury travel; and fourth, a review of the five essentials of the journey, the touchstone of Starwood’s direction.

So let me start with some highlights from the first quarter and a range of expectations for the balance of the year.

We were able to beat EBITDA expectations by roughly $30 million and EPS by $0.13, owing to strong REVPAR growth. REVPAR was powered by better than expected occupancy, thanks to strong transient demand and encouragingly, in the quarter for the quarter group bookings. By the way, this was consistent with our good case scenario, which anticipated that as business environment improved, companies would scramble to set up pending meetings and events. Our good case scenario also envisioned luxury leading the charge, and this is exactly what happened. Luxury occupancy was up by almost 20% in the quarter.

Rate for the quarter was still negative in most geographies and brands, as is typical of the early stages of recoveries. Importantly though, ADRs did improve month by month through the quarter and are nearing positive territory in many markets. Coupled with our continued focus on costs, these solid top line results drove good flow-throughs and margins, even despite the challenging mix of rising occupancy and falling rates. The favorable trends that we've experienced in Q1 continued into April and bode well for the balance of the year.

Leisure and transient demand remained firm more than offsetting group business that was canceled or not booked in 2009. Importantly, the strongest results came from our urban markets such as New York, London and Paris and in the foreign five-star categories, all Starwood sweet spots. Corporate transient revenue in London and Paris was up 43% in the quarter.

Group production was improving quickly off a low base. Remember that last year, we had a little new bookings and a high cancellation activity. Our gross production, i.e. new bookings, is up 30% for 2010, and importantly, cancellations, block adjustments and washed [ph] arrival are down from record level last year, and in fact, are now trending below normal levels. This translates into net production, which is projected net revenue for the year and end of year being up triple digits.

LEED volumes were also up double-digits, particularly for small or near-term bookings. And the recovery is broad-based with particular strength in pharma, technology and financial services. In aggregate, 2010 group pace for the total amount of book business is approaching flat, after bottoming out in the fall of last year at minus 23%. So lodging demand continues to improve from the low-level set in 2009. Based on everything we see today and barring disruptions, we can expect positive REVPAR for the full year from each of our regions. Our newly revised mid-range scenario shows worldwide company-operated REVPAR to be between plus 5% and 8% in 2010 and REVPAR at our worldwide-owned hotels to be plus 4% to 7%. Vasant will share greater detail on recent trends by region and a revised baseline scenario for 2010.

So with that as a backdrop, let me move on to my second topic and highlight some themes from our recent trip to India. Our 10-day whistle-stop tour included visits to 18 of our 41 hotels, 21 existing and 15 being built. In Mumbai, Pune, Hyderabad, Bangalore, Jaipur, and Delhi, we saw first-hand examples of what we've been saying for a while. Put simply, the transformation taking place there and in other rapidly growing markets around the world, implies a huge secular growth in demand for our high-end brands. To look for analogies to these long-term trends, think back to the rebuilding of Europe after the Second World War, only faster and with 10 times the population. In this environment, Starwood enjoys a strong position with some of the best-known brands, long-standing relationships with the development community and as we like to call them, local smart teams that are either native or spent their careers working in these markets. The key takeaway is that this crisis may have slowed, but it certainly did not derail the unstoppable forces of globalization and the emerging middle class.

So let's talk about the opportunity in India. And while India and China are vastly different in so many ways, lodging supply looks and feels like China five to 10 years ago. In hindsight, many corporations began investing in China in the 1970s and 80s in anticipation of growth, but only those companies who, like Starwood, stayed the course, hired local talent and forged relationships with local partners, saw their investments pay dividends in recent years. To say that India today is under-hotel-ed relative to future demand is a massive understatement. New York City alone has almost as many hotel rooms as the entire country. And today, we enjoy a larger and better footprint than our competitors. So we can grow our existing brands while introducing new brands, such as Four Points by Sheraton, Westin, and Aloft. And the travel market is still in its infancy. With roughly the same population as China, India generates just 1/4 the outbound travel. And even with the government’s incredible India campaign to promote tourism, India has only 5 million visitors versus 50 million for China.

So today, the dearth of infrastructure and choking transportation has created enormous pressure to develop new cities outside of old ones. As countries develop, people leave villages and head for opportunities in the city. A development named new Mindspace in Hyderabad highlights this pattern of organization. One developer we worked with, worked with the government to acquire land outside the city and built 7.5 million square feet of commercial space including retail, offices, and of course, two new hotel sites, one of which already boasts a brand new Westin. This phenomenon is playing out in Navi Mumbai, outside of Mumbai, and in Gurgaon outside of Delhi and in Whitefield, outside of Bangalore.

It wouldn't surprise anyone that Sheraton was the first Western brand to open in India in 1973, with Le Méridien soon after. Decades before many of our competitors had entered the market. Both Sheraton and Le Méridien are established brands and the backbone of our brand of portfolio. We see a great opportunity to work with our key partners to build new hotels under both France. Our global development mantra of the right places, the right properties and the right partners holds true in India as anywhere. And our local smart teams understand the market and how to get things done. This is an asset that simply can't be found ion the balance sheet.

Westin is a rising giant in India. We recently opened three new Westins in the country, Hyderabad, Mumbai and Pune and expect another to open later on in the coming months in Gurgaon. Developers in India understand and appreciate Starwood’s penchant for innovation and Westin’s focus on wellness, contemporary design, not to mention the Heavenly Bed our clear differentiators. The growth in the Westin is made possible by the credibility in relationships built by Sheraton and Le Méridien over several decades.

Today, we make most of our money in the upper upscale and luxury segments. But India also promises great select-service potential. Four Points by Sheraton benefits from the Sheraton halo and Aloft is a real game changer. The Aloft brand is sleek, modern and youthful and resonates with India’s tech savvy traveler. No surprise then that we already expect to open six Alofts over the coming years, with three in 2010 alone.

On a prior call, I mentioned the incremental travel that will result from our outsourcing IT efforts to Accenture. Add to that the new demand that results from having a team of 450 people in Bangalore, now employed by a U.S. company. We spent some time with his team and they’re young, ambitious and eager to get ahead. They’ll travel increasingly for business and for leisure. When we walked through the operation center, we saw American computers, American air conditioners and employees wearing American-branded clothes. Our hotel brands resonate with this emerging middle class. To sum it up, our travels through India left us with a raft of living examples of the kind of growth we can expect from the rapidly growing markets around the world.

So now to my third topic for today. Some thoughts on luxury. As we've said many times, Starwood is the largest global operator of luxury hotels, with no fewer than 118 properties among our St. Regis Luxury Collection and W brands. Last year, this meant many challenges and headwinds as we witnessed unparalleled demand contraction from a plummeting world economy, not to mention government rhetoric about the evils of luxury travel.

Now I wish I had a new hotel for every time I was asked whether luxury was dead. My answer was always the same. When people and business feel better about the world, they won't resist the allure of luxury. Today, the paranoia has subsided and our luxury properties are enjoying the strongest REVPAR gains of any segment. The business traveler is back and leisure travelers are rewarding themselves with vacations to our one-of-a-kind properties. Low levels of REVPAR today and slow supply growth tomorrow are setting the foundation for a multi-year recovery.

So let me share with you a few statistics to highlight the return of business to our luxury properties.

At the Phoenician Luxury Collection Resort occupancies were up over 30% in the first quarter. With group demand coming back and the need for additional space at this hotel, we restarted the ballroom project a few months ago. We expect it to be completed and fully occupied during the hotel's peak period in the fall. Our W Hotels were our strongest performing brand in the quarter, marking occupancy gains of 28% in the U.S. Gateway cities, such as New York are seeing occupancies at near pre-crisis levels. For now, rate continues to lag, the question is for how long.

Our St. Regis hotels are also experiencing a healthy rebound of travel and since the start of the year, we've even seen increased activity at our sales center for our Bal Harbour project. In fact, we sold over $20 million in residences year-to-date, with 35% refundable deposits. The global jet-setting crowd is starting to spend again and there are no other projects in South Florida like the St. Regis Bal Harbour. And to remind you, Starwood has the largest pipeline of upper upscale and luxury hotels in the industry. St. Regis will have 24 hotels in the system by January 2011, which doubles its footprint from 2008. And W will more than double its size between 2007 and 2011, going from 25 to over 50 hotels worldwide. I might add, we’re also pleased to see that some deals put on hold are now showing signs of life.

So with this discussion of luxury, I can't resist digressing briefly and commenting on our continued transformation to an asset-light structure. Our 21,000 owned and leased rooms lie mostly in high-barrier-to-entry urban and resort markets and are rated in the four- to five-star categories. Many of these hotels would be difficult, if not impossible, to replicate. Their asset values are therefore significantly higher than their depressed cash flows today would imply. So despite these high implied multiples, we don't feel that this is the right time to embark on a major asset sale program.

First of all, many real estate investors today may still be hoping to scoop up assets at bargain prices. But with the amount of money piling up on the sidelines, buyers need to realize that the great distress sale of 2010 is unlikely to materialize. Second, EBITDAs are well below historic highs and poised to bounce back as high-end hotels rebound. And third, hotel assets are trading at valuations well below replacement costs.

As a case in point, lodging REITS implied valuations on a per key basis are somewhat less than $250,000 a key. Whereas the cost to borrow funds, buy land and build today would be significantly higher. So as we look at our own portfolio, we feel the right course with most assets is to wait for the market to recover further. And when it does, we expect per key values to be well ahead even with the highest quality REITS.

I'd like to move on now to my fourth topic for today: A review of the five essentials of the Starwood journey that guide our actions and create shareholder value. I believe that companies prosper when they have a clear strategy that's well understood and that aligns management around measurable goals. By giving the strategy a name, we develop a shorthand way of describing our direction and explaining our goals to associates, partners and investors. And investor said something interesting to me just the other day. He noted that if you’d just woken up after a two-year slumber, you might not think that anything had changed. And in a sense, you'd be correct because at no point during the great lodging depression of 2009 did we stop executing on our five essentials. Some of our growth plans were slowed and our asset sales were put on hold. Other aspects of our strategy were accelerated, such as the focus on reducing costs, but the strategy remained intact. What has changed is the competitive environment and the global market. Strong companies emerged stronger.

Starwood as the scale to invest in brand building and demand creation. It has the financial flexibility to take advantage of transaction opportunities, as well as the global presence to grow wherever demand grows. The world is also a different place with emerging economies driving global growth. So with this as a backdrop, let me quickly run you through the five essentials starting with winning with talent.

Our 145,000 associates around the world did a terrific job managing through the crisis of 2009. Lodging is a great industry to work. In particular, when you work for a company that looks to open hundreds of new hotels for the coming years. After creating 12,000 jobs in 2009 at newly opened hotels, we expect to create an additional 12,000 jobs in 2010.

Our second essential is to execute brilliantly. When you have the right person in the right role with the right training, you can deliver great guest experiences and build brand loyalty. As we've mentioned before, our guest satisfaction scores have never been higher, even with our careful focus on costs. And at the same time, we have made substantial changes in how we drive the top line, such as our revenue management systems and the redeployment of our sales force.

Our third essential is to build great brands. We believe Starwood has the best portfolio of high-end brands in the industry. And we've kept the hammer down on innovation to keep our brands both distinctive and compelling. And while we may be in the early stages of the Sheraton relaunch, we're already beginning to see solid growth in market share for that brand.

Our fourth essential is to drive global growth. India highlighted the potential for our company in a country that's just beginning to develop infrastructure, including hotels. We believe that we're uniquely able to deliver on our growth promises, relying on local smart teams that have worked in these markets for decades. Our pipeline of 85,000 rooms remains robust, as the slowdown in new additions in developing markets is being offset by a strong pipeline of new leads in our emerging markets. This pipeline represents potential room growth of almost 30%, with over 80% of those rooms to be built in markets outside of the U.S.

Our fifth essential is to drive outstanding results for our shareholders. Throughout 2009, we were able to beat our financial targets through aggressive cost containment. As we look forward, we will continue to generate cash as we make a transition to an asset-light operating model. For example, our Vacation Ownership business is now a significant cash generator for the company. And the Bal Harbour project will absorb capital in the near term, but sales are returning and we remain on track to complete the residences and the hotel in early 2012. Overall, we can generate a lot of cash as we work towards a business that is at least 80% fee driven.

So let me wrap up my prepared remarks by saying that the recovery is playing out better than most people expected, including ourselves. While the economic recovery will probably not be a straight line, we're bullish about our growth prospects around the world. India is just one example of how Starwood is well positioned to capitalize on the infrastructure build-out as these economies develop. Luxury travel is alive and well, and has a long runway ahead of it after a deep drop off last year. And finally, Starwood’s leadership continues to execute on the five essentials that will be the key to the company's success. And so with that, I'll turn the call over to Vasant.

Vasant Prabhu

Thank you, Frits, and good morning, everyone. Clearly, the recovery we’re seeing has been stronger than we expected when we last talked to you. Over the next few minutes, I'll review the state of business around the globe and provide some more color on our Q2 and full year outlook.

We’ll start with Asia, which as you saw was our strongest region in Q1. All REVPAR numbers I give you are in constant dollars for company-operated hotels. When we talked in February, Asia was already off to a strong start, up 11% in January. This momentum accelerated as REVPAR grew 16% in the quarter and is up 20% in April. We have strong growth across the region, driven by robust economic recoveries. Growth was especially strong in China, up 27% in Q1. The only exceptions were Japan, the economic conditions remain sluggish and more recently, Thailand, which has seen significant political uncertainty.

The return of corporate travel is of course the primary driver. In Asia as elsewhere, there was significant unanticipated late-breaking corporate business, both transient and group. Occupancies in the quarter were up 10 points, rate was down 3%. The rate trend through the quarter improved, down 10% in January, flattish in March and now up 2% in April. Across Asia today, we operate 159 hotels, 52,000 rooms. We expect to open 30 to 35 hotels this year and have a pipeline of 50,000 rooms, which would double the size of our business over the next three to four years as these hotels open. In 2010, we expect Asia to contribute over 20% of our fees. With the largest share of our pipeline and robust REVPAR growth at existing hotels, Asia will be a major engine of our growth well into the future.

Moving on to North America, our largest region. This is the biggest upside surprise in the quarter. Company-operated REVPAR was down 3% in January, flat in February. We then saw a sharp uptick in March, up 9%, which has continued into April. As you have heard from others, the measure driver is late-breaking corporate business, both transient and group. The recovery is broad-based across sectors and across geographies. Leading indicator markets like New York, Boston and San Francisco were up in the high-single digits. Occupancy at New York hotels reached 75% in Q1, rate was down 7%. Across the U.S., the rate picture improved through the quarter from down 10% in January to down 3% in March. In April, we are seeing the first positive ADR change in North America since this downturn began.

In Q1, transient nights were up 14%, group nights were up 5%.

Group business booked for the rest of 2010 was up substantially compared to almost no activity last year. LEEDS are up 14%, group pace for the balance of the year is rapidly approaching flat to 2009, and this business should be less susceptible to cancellations than 2009 was. Clearly, easy comparisons are helping and will help through Q2. Then the comparisons get tougher as we lap a recovery in occupancies in the second half of 2009. For this growth to be sustained, great increases are critical. So far, so good.

In Continental Europe, a recovery is also underway. Although we did not see the sharp uptick we saw in March in the U.S., the first quarter in our European markets is a low season, and it is hard to read much into it. It is fair to say that Europe did not outperform as much as the U.S. did. In March, European REVPAR was up 5%. Business conditions are clearly recovering in major, northern and central European markets: the UK, France, Germany, Austria and the Benelux. As may be expected, things are more challenging in southern Europe. Italy is holding up okay so far. Once again, it is late-breaking corporate business that is the main driver. As travel is normalizing, we do not expect the volcanic ash disruptions to materially impact our European business in the second quarter.

We have a great footprint in Africa and the Middle East, with 86 hotels and 22,000 rooms currently operating. We expect this region to be a major source of long-term growth like Asia. Our brands, Le Méridien and Sheraton, have been long-established and are very well-regarded. This year, we will derive 13% of our fees from this region. In the first quarter, we did not see growth here primarily due to difficult conditions in the UAE where REVPAR declined 11%. Egypt and North Africa, on the other hand, grew 11% and sub-Saharan Africa was flat. With its many national resource-veiled economies and stabilizing politics, we're very bullish about our future in this region.

Finally in Latin America, Q1 REVPAR was down 3.6%. South America was very strong, up 10%, with Brazil up 36%, but Mexico where we have a large presence, was down 23%. Business travel to Mexico is slowly recovering in line with improving conditions in the U.S., but leisure travel to resorts on both coasts remains sluggish due to concerns about crime and perhaps cheaper rates available at comparable U.S. resorts. In Q2, Mexico will lap the huge H1N1 decline in 2009 so growth rates will turn positive. So far in April, Mexico is up 7%. Our five hotels in Chile have been impacted by the earthquake. Business is down significantly and the recovery will be slow.

In our Vacation Ownership business, conditions continue to stabilize. Price reductions helped both close rates and price realization in several markets. We are again on track in this business to generate more cash this year, more than enough to fund Bal Harbour. As Frits indicated, we have seen a meaningful uptick in contract signings, with high deposits and good prices for condos at Bal Harbour. We remain optimistic about this project and are on track to complete construction by late 2011, early 2012.

In summary, a global recovery is underway. It is most robust in Asia and has been sharper than expected in the U.S. over the past eight weeks. A few parts of the globe are not participating yet, Japan, Thailand, the UAE, Mexico and parts of Southern Europe. Clearly, the pace of recovery is stronger than we expected when we last talked. So what does all this mean for Q2 and the balance of the year? With April ending, it is clear that the trends are just described are continuing into the second quarter. We're also lapping the deepest declines from last year. As such, we're comfortable projecting global REVPAR growth at company-operated hotels in the double digits, up 9% to 11% in constant dollars. Exchange rates in Q2 remained a tailwind, adding 200 basis points to REVPAR as reported in dollars. At our global-owned hotels, we expect a similar REVPAR trend and forex in this case will add another 300 basis points. This gives us an EBITDA range in Q2 of $200 million to $210 million. We expect to have our first quarter of positive margin improvement since this downturn started. With owned-hotel margins, up 150 to 250 basis points in Q2. Even as the recovery takes off as Frits indicated, we remain very focused on cost control and productivity enhancements. Expected margin improvement in Q2 reflects the fact that REVPAR growth is driven primarily by occupancy, which does not flow through at the same level as ADR increases. Also 300 basis points of forex-driven top line growth does not drive margin gains, as you know.

We should point out some other items that impact year-over-year comparisons in Q2. Net asset sales through 2009, Bliss, the W San Francisco, the Fifth Avenue shops and now the Court Tuscany. These assets contributed approximately $5 million in EBITDA in Q2 last year. Also, in the fees and Other income line last year, we recognized Other income of $7 million from a non-refundable deposit, which is non-recurring.

While we feel good about projecting the current trend into Q2, giving you a definitive view of the back half is quite another matter. The engine of the recovery so far has been late-breaking corporate business, which is hard to see four to six months out. Even for Group business, the booking window is unusually short right now. REVPAR comparisons get tougher in the back half, and exchange rates go from being a tailwind to neutral and potentially even a modest headwind. Frits also enumerated all the other risks out there. As you know, we are heavily correlated to corporate profit growth and business confidence. Anything that dents business confidence, be it a sovereign debt crisis, a double-dip recession, geopolitical issues like Iran, a spike in interest rates or other currently unexpected events, could derail this recovery. The outlook range we are providing assumes none of the above will happen, and the recovery will continue apace through the year. As such, we are raising our full year REVPAR outlook to a range of 5% to 8% from 0% to 5% in constant dollars at company-operated hotels.

For owned hotels worldwide were going from a range of minus 2% to plus 2%, to 4% to 7%. Exchange rates will add another 100 basis points to REVPAR as reported in dollars. The midpoint of this new range is a full year company EBITDA of $810 million dollars, up from $750 million. The recovery is still nascent and visibility remains challenging. We've just come through the worst financial crisis in recent memory and all the damage from the crisis has not been repaired yet. We continue to look at the future in terms of scenarios. The outlook we have provided is our best guess based on what we know today. We will, of course, know more about the back half when we talk again in July.

Finally, a quick word on our balance sheet. We completed the last component of our liquidity and leverage enhancement program by extending our bank revolver through November 2013. This puts its expiry after our next two bond maturities in 2012 and 2013. Our liquidity position has never been stronger. We have a great bank group. Our leverage is well below covenant levels and our bond maturity profile is very manageable. Q1 is our highest cash use quarter so debt levels are up a bit. We still expect to close the year with debt down $100 million to $200 million from where we ended 2009. We close on the sale of the two Ws in New York. As planned, they will no longer operate it as Ws. At this point, further asset sales will depend on values realizable. While we remain committed to an asset-light strategy, we're only sellers today at values that reflect normalized EBITDAs or replacement costs. We will continue to evaluate opportunities to sell vacation ownership receivables on favorable terms. And we still expect to receive a much delayed $200 million plus tax refund later this year. With that, I'll turn this back to Jay.

Jason Koval

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

Question-and-Answer Session

Operator

Your first question comes from Joe Greff from JPMorgan.

Joseph Greff - JP Morgan Chase & Co

On the Sheraton brands, I guess this pertains more so on the third-party owned Sheraton brands. Do you think you have sufficiently pruned the underperforming Sheratons? Is there much more left? As I look at it, your succession of removing some of the Sheratons gives you some unit growth upside that I think maybe, as you look next couple of years is attractive. And then Vasant just to clarify things that you mentioned, to clarify comments on your views for the second half and taking into account the comparisons, the FX issues and your comment that rate increases are critical. Contemplated and embedded in your outlook for the second half, are you contemplating rate increases. Or is that baked into your guidance?

Frits van Paasschen

Joe, this is Frits. I'll handle the first part of your question with respect to the Sheraton brand. I would give you in rough numbers about 4/5s of the way through the pruning process so the vast majority of the eliminations from the Sheraton brand has taken place. And because of that, and because we've achieved now a much higher level of consistency here in North America and continue to have that high level of standard outside of North America, we felt that this is an important time for us to go back and promote the brand. And in fact, over the course of this quarter and the rest of this fiscal year, we'll be and are in the process of launching our largest promotion campaign in the history of Starwood around re-discover Sheraton. So with that, Vasant, you may want to comment on the back half of year there?

Vasant Prabhu

Yes, just to give you, Joe, some sort of additional points of view on the back half. I mean clearly, as you heard from our comments, and you heard from others, late-breaking business is the driver of growth so far. And so, our view was you really can't see a whole lot into Q3 and Q4 as a result of that. That's number one. And so our bias was towards not getting ahead of ourselves here. Second, comparisons, while it was still negative last year, comparisons do get tougher. So for example, in local currency terms, worldwide last year, approximately we were down 24% in Q2, down 18% in Q3, and down 9% in Q4. So there was a quarter-over-quarter 600 basis point improvement between Q2 and Q3, and then 900 basis points between Q3 and Q4. And that was as much as 10 whole points in the owned-hotel set worldwide, each quarter improvement in Q3 and Q4. So as you can see, while we're still lapping some weak numbers from last year. For the year-over-year comparisons, you'd have to see absolute increases to maintain current levels of REVPAR growth. And then finally, I mean if you look at prior recoveries, you often have this big bounce back. If you looked at, for example, March 2004 Smith Travel numbers for luxury and upper upscale, March is up 14%, April was up 11%, May was up 10%. This was in 2004. So you sort of had a double-digit second quarter and then it settled in at about 6% to 8% in the back half. We're not saying that's precisely what's going to happen. But it’ll give you a sent that, that’s sort of how these recoveries play out. So when you put it all together, no, we're not expecting big rate increases in the second half. Although as we said earlier, we did see rates turn positive in April. I think we've sort of given you our, we call it, our most-educated guess at this point.

Operator

Your next question comes from Janet Brashear from Sanford C. Bernstein.

Janet Brashear - Sanford C. Bernstein & Co., Inc.

Vasant, I wonder if you could give us a little clarity on two items. The first is the impact of cancellation fees on Q1 and full year comps. And the second is what your expectation might be around cost reimbursement this year, in particular. And on a normalized basis?

Vasant Prabhu

I don't have -- I don’t know, Jay, do you have the impact cancellation fees? I don’t have it in front of me. I don't think it was very meaningful.

Jason Koval

No, it’s a single-digit number, Janet. I can call you back after the call and give that to you.

Vasant Prabhu

And then cost reimbursement.

Jason Koval

Are you talking about the Other line on our income statement? Other revenues and Other expenses, Janet?

Janet Brashear - Sanford C. Bernstein & Co., Inc.

Yes.

Vasant Prabhu

That goes up when our footprint increases. So as the number of managed hotels we have in our system goes up, that goes up, number one. So we did open 80 or 90 hotels last year, so the expenses associated with those hotels go into those lines. And then the second item is since a lot of our managed footprint is non-U.S., forex can also affect that on a year-over-year basis.

Operator

Your next question comes from Felicia Hendrix from Barclays.

Felicia Hendrix - Barclays Capital

Frits, this is for you. Also on Sheraton, we’re hearing really good things from the franchisees who, particularly, who owned renovated hotels. I was just wondering, you mentioned again in this call and the last call, and you talk a lot about the investment made in that brand. I was just wondering if you could quantify the returns you expect to get from that investment. Clearly positive, but I was wondering if you could help us get our arms around the returns.

Frits van Paasschen

It's hard to give that number in aggregate, Felicia, because we're talking about 100 renovations, the installment of several hundred -- the link at Sheraton cyber cafes throughout the system and then the opening of a bunch of new properties. What I can tell you is that as we looked at the renovations and the improvements by property, when we sat down with the owners and felt like we couldn't get to the brand standard from where we were on a particular property and to make a good return from our owners, that's when we would agree to part ways and take the Sheraton flag off the properties. So the best way to think about this is each of the improvements met a threshold return for our owners. And that was obviously prospective not retrospective. What happened in the middle of this obviously is this tremendous downturn, and it's hard to recalibrate. What we're very encouraged by though and what we were mentioning is great topline growth, a real strong improvement in GSI scores, and some meaningful share gains, which we think are all very encouraging for getting the return on investment for both ourselves, as well as the owners who invested.

Operator

Your next question is from Chris Woronka from Deutsche Bank.

Chris Woronka - Deutsche Bank AG

Frits, wanted to kind of go back to something you said early on. You were talking about India and then I think you made reference to some concern in Asia. I mean should we interpret this as you're maybe doing a little bit less on growth in Asia going forward, even though you may be optimistic about the current trends and kind of favoring India as moving onto the next thing?

Frits van Paasschen

No. Look our view and the purpose of talking about India today was to reflect in a more granular way and to give more of a human face on the tremendous growth opportunity that we see in emerging markets around the world. And by that we mean markets in South America, Africa, parts of the Middle East, sub-continent and East Asia. And we’re still extraordinarily bullish on the long-term opportunity throughout those different markets. Clearly, the charge is being led by China today with over 50 hotels and another 80 being built. But we expect a market like India to look, from a growth perspective and from our own opportunities, like China in the coming years. And so, the point I was trying to emphasize is first of all, unlike the cyclical nature that we've come to see our industry, as we look at Western Europe and North America, what we see now is a real generational secular trend and change over an extended period of time. The comparison I made with Western Europe post-Second World War is just to give that sense that this isn't a five to seven year business cycle. This is a 25-year growth cycle and in many respects, we're still in the early phases of that. So, no, we remain extremely positive on the growth opportunity. That said, the other thing that I think is inevitable as economies grow rapidly is there will be fits and starts. There will be moments of oversupply. There will be periods of overheating in some markets. But over time, the trend line is so strong, and because we work with very sophisticated partners in each of those local markets, we're going to continue to make investments in our own organization and in our brands and in our ability to deliver growth for our business.

Vasant Prabhu

And Chris, as I mentioned in my comments, Asia is already over 20% of our fees. We have 159 hotels open with 50,000 rooms. And we have 50,000, almost exactly the same amount, in the pipeline. So we're on track to double the size of that footprint over the next three to four years.

Frits van Paasschen

The statistic that really grabs me is 70% of projected growth GDP growth in the next decade will come from the developing markets. And since our business so closely tracks GDP growth, I don't think it’s a big surprise that 80% of our pipeline is outside of the U.S. today.

Operator

Your next question comes from Ryan Meliker from Morgan Stanley.

Ryan Meliker

My question is really just something you said earlier in the call was about the fact that you're not really looking for substantial dispositions today because you think values are a little depressed given the low levels of profitability and NOI [ph]. I’m just trying to -- can you give us some color in terms of what it’s going to take you guys to start to maybe shift that strategy and maybe focus more dispositions? Is it anything like NOI coming back?

Frits van Paasschen

Ryan, I think the way to think about this is there is no change in our strategy. This is a question in timing and execution of the strategy. So when we announced our asset-light approach as we talked about the journey two, two and a half years ago, we certainly didn't anticipate the extraordinary downturn that we've all lived through in the last year and a half or so. And during that downturn, transaction volume in the hotel sector was up 80% or 90%, which candidly is what you'd expect. I mean I think buyers were saying: I'm only going to pick something up if it’s at a distressed price because this is likely to be an all- equity deal for me. And sellers were saying: If there’s any way I can hang on, there's going to be a better time to sell. So the bid-ask spread, if you will, was really quite wide. As we look at the market today, I think that bid-ask spread is narrowing. There are certainly transactions starting to happen. And opportunistically with things like the W Court in Tuscany, we’ve stepped into that. We expect it may take a while yet for fundamentals of properties to improve and the availability of financing on the buying side to improve further, to get values that look a lot more like they did before the downturn than they did during the downturn.

Vasant Prabhu

I think our strategy remains to sell assets. And at the right price, we would be sellers. The definition of the right price, in our view, is not a multiple that looks great off of depressed EBITDA. It is more: what does this look like as a cap rate or a multiple of more normalized EBITDAs. What does it look like relative to what may be replacement cost today. I mean we've been looking at those kinds of metrics. If someone walks in and offers us a price that on a variety of those metrics looks great, we would be sellers, but as Frits said, we don't think that's going to happen just yet.

Operator

Your next question is from Joshua Attie from Citi.

Joshua Attie - Citigroup

First, how is REVPAR tracking in April for the owned portfolio worldwide? And second, your REVPAR guidance for the second quarter is almost twice as high as Marriott and some of your peers, which maybe reflects your geography and price points. Is there any reason that you think that growth premium should go away in the back half of the year?

Vasant Prabhu

I mean when we're sitting here at the end of April, we certainly know April and we know a decent amount about May. So we gave you owned, worldwide REVPAR expectations of double digits, 9% to 11% in constant dollars, another 300 basis points with forex. We feel pretty good about that based on current trends. Why is it a lot higher than some of the others? Clearly, our owned hotels, as Frits has indicated, we think are in outstanding locations, high-barrier-to-entry markets, but clearly skewed towards the high end. Our footprint on the managed side is more non-U.S. and we are gaining share.

Frits van Paasschen

Yes. I just emphasized that. What we saw loud and clear in the first quarter was the enormous resurgence of luxury off of what were very depressed basis. So that gave us a great growth opportunity. As we've been saying, the GDP growth numbers and the corresponding growth in demand in many markets outside of the U.S. is higher. And with more than half of our hotels outside of the U.S., that make sense. And then as Vasant said, as we pick up share around some of our brands, that all helps. And that adds up to the kind of numbers you’re seeing for Q2.

Operator

Your question is from Bill Crow from Raymond James.

William Crow

Your 5% to 8% REVPAR outlook is based on what you called, I think, a middle case. Just for grins, what's your high-end case? That the first question. The second question is on the W brand. I think you’ve had maybe seven Ws that either have filed Chapter 11 or go into foreclosure or been de-flagged over the past year, year and a half. I’m just wondering if there’s been any sort of impairment between the brand and perspective developers, owners because of the track record over the past year and half.

Vasant Prabhu

I think you should view our 5% to 8% as our best shot at our outlook for the back half of the year. We'll go back to what we said earlier, we feel pretty good looking out three months. We think given where the world is, with the late-breaking business, looking out past three months is difficult. And we would like to be -- we don't want to get ahead of ourselves. We wouldn't suggest that you should either. This is our best outlook.

Frits van Paasschen

And Bill, with respect to the W brand. I'm going to argue paradoxically that the financial trials and tribulations around some of our W Hotels and their owners ultimately reflect the health and strength of the brand. Because if you bought a hotel for twice what it's worth today and borrowed 70% to 80% loan-to-value to do that, I think it's pretty easy to see how you’d be in a difficult situation. What's been interesting, as owners and as the financial community and as the Chapter 11 process has worked through each of these properties, at no point have we felt like there was any danger of losing the flag on a property to do that, which means anybody looking forward to gaining control of the property or anybody looking at ways of keeping control, has felt that W brand has considerable value to the real estate, which is absolutely the business we're in. In the case of the W Court in Tuscany, again, I think this is a picture of health because those were two of the very first W hotels. They're wonderful charming properties, but did not keep up with the growth and the performance of W as it went from a New York phenomenon, to a U.S. one, to a global one. And to come back to the birthplace of W and have properties like the W downtown opening and the W Hoboken there as a replacement, I think is a great example of brand health and the positive effect of what economists call creative destructions. Now would life be easier for us and our owners if the financial markets and everything and the world performance of the lodging industry had been better? Absolutely. But I think all of this reflects on, as I said, the strength of the W brand rather than anything else.

Vasant Prabhu

I think it's also worth adding one more item, which is that you got to separate the W, the hotel, versus things that may have linked into the financing like condos. In many cases, like the W Scottsdale, W Hollywood, which have now been open a little bit, the hotel itself is actually doing extremely well and performing ahead of expectations. The financing was linked into condo sales, which as you know, is a very depressed market right now. And because the financing in many cases was linked to condo sales, there were requirements for payments coming from condo proceeds. So they have to be worked through. I think in every case, if you ask those owners about the hotel itself, which you should, I think you'll find that the hotel is actually performing ahead of their expectations.

Operator

Your next question is from David Loeb from Baird.

David Loeb - Robert W. Baird & Co. Incorporated

Just back to the asset sale question. Could you just review the status of the capital gains tax shield and the tax loss carryforward of that? What's left? And when you can use it? And what implications that has as you analyze potential asset sales?

Vasant Prabhu

We do have the capital loss. It is quite substantial. It does expire at the end of next year. We have plans to utilize as much of it before it expires. Certainly, our asset sales program will be also guided by what we might generate profits on -- capital gains on that could be offset. So that's very much front and center. There are ways in which we could preserve it and benefit in future years by stepping up assets, et cetera. So there's a game plan underway to maximize its utilization.

Operator

Your next question comes from Patrick Chiles from FBR Capital Markets.

Unidentified Analyst

We've been hearing that some of the group blocks have been filling or selling out because they were made very small blocks to start with. Can you give me a little bit of color? Let’s say that if the group block is filled up and somebody wants to book in -- wants to get in that hotel and has to pay the transient rate. How much more right now are you seeing those last-minute transient rates above the group block pricing?

Vasant Prabhu

I think in general it’s the so-called, washes, it’s called, has been positive. I couldn't give you precise numbers, but the bottom line is one of the reasons Group business is looking better and especially in the quarter for the quarter is because more people are showing up. Attendance is high or higher than what people might even have planned earlier. But I couldn't give you a specific number around that.

Operator

[Operator Instructions] And your next question comes from Smedes Rose from Keefe, Bruyette.

Unidentified Analyst

I'm just wondering what caused the joint venture debt to decline $124 million sequentially. And then also do you have a sense of what the proceeds would be from a, I think you said you'd expected to do a timeshare securitization later in the year?

Vasant Prabhu

The timeshare securitization I believe we said would be somewhere in the $100 million range. It's not a large one. We’ll have to see how big it is depending on how much receivables are accumulated through the year. The reduction in joint venture debt, we’d have to get back to you on that. I can't think of something off the top of my head that would explain that.

Frits van Paasschen

I can give you a ring back afterwards. It did reduce by about $125 million. So I'll call you back.

Operator

Your final question comes from Janet Brashear from Sanford C. Bernstein.

Janet Brashear - Sanford C. Bernstein & Co., Inc.

As the trend improves, it certainly gives you more leverage in the yield management front. And I wondering if you could talk about how that might affect your posture around OTA inventory. And also on the last call, you mentioned a step up in the IT investment and I wonder if part of that is meant for managing the distribution channel?

Frits van Paasschen

The IT investment really covers a broad range of activities from our websites, and our own booking engines, to how we manage yield and revenue management, and how we look at enabling our sales force to be more effective. Our sense is that the efforts we put into improving our revenue management capabilities in the last six to nine months are really paying off now that we're getting to points where we can start to play with revenue versus projected occupancy, which means also increasing our ability to learn from that. And as you can imagine, what that enables us to do is to start to forecast ahead and determine how much we want to allocate inventory to different outlets, OTAs among them. So this for us, we think, is a really important time for us to take advantage of these new tools and gain more revenue and higher rates earlier on in the process based on having a better understanding of what we think projected occupancies look like.

Jason Koval

Thanks, Sylvia. As always, we appreciate your interest in Starwood Hotels & Resorts. Please feel free to contact us if you have any additional questions. Enjoy your day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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