Matthew Avril - President of Hotel Group
Frits van Paasschen - Chief Executive Officer, President and Director
Vasant Prabhu - Vice Chairman, Chief Financial Officer, Executive Vice President, Chief Financial Officer of Starwood Hotels & Resorts and Vice President of Starwood Hotels & Resorts
Roeland Vos - President of Europe, Africa & Middle East Division
Jason Koval - Vice President of Investor Relation
Miguel Ko - Chairman of Asia-Pacific and President of Asia Pacific Operations
Denise Coll - President of North America Division
Osvaldo Librizzi - President of Latin America Operations
Harry Curtis - J. P. Morgan
Shaun Kelley - BofA Merrill Lynch
David Katz - Jefferies & Company, Inc.
Alistair Scobie - Atlantic Equities LLP
Felicia Hendrix - Barclays Capital
Janet Brashear - Bernstein Research
Joseph Greff - JP Morgan Chase & Co
Joshua Attie - Citigroup Inc
Robin Farley - UBS Investment Bank
Starwood Hotels & Resorts Worldwide (HOT) Q3 2010 Earnings Call October 28, 2010 9:00 AM ET
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 & Resorts' Third Quarter 2010 Earnings Release Conference Call. [Operator Instructions] I would now turn the call over to Mr. Jason Koval, Vice President of Investor Relations. Sir, you may begin your conference.
Thank you, Sylvia, and thanks to all of you for dialing in to Starwood's third quarter 2010 earnings call. Joining me today are Frits van Paasschen, our CEO; Vasant Prabhu, our Vice Chairman and CFO; as well as Matt Avril, President of the Hotel Group; and our Four Division Presidents Miguel Ko, Denise Coll, Roeland Vos and Osvaldo Librizzi.
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, 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' first comments. Frits?
Frits van Paasschen
Thanks, Jay, and thank you, all, for joining us on our call today. Greetings from Beijing. We're here for a leadership meeting with our top 100 executives from around the world. A lot of companies are looking to Asia and other emerging markets for future growth. For us, that growth is a reality today. Asia-Pacific generates 21% of our fee revenues, and the region represents 62% of our pipeline for future hotel openings. In fact, markets outside the developed economies of Europe, Japan, the U.S. and Canada account for 34% of our fees and 80% of our pipeline. Today, our U.S. portfolio of 458 hotels is roughly seven times the size of the number of hotels we have in China. But it's not far-fetched to say that China will one day eclipse the U.S. as Starwood's largest country, no more far-fetched than to imagine that both China's car market and China's number of Internet users would exceed the U.S., which they already do. That means we have many more hotels to open here.
Across our companies, we witness on a daily basis how the economic balance of power is shifting from the developed world to rapidly growing economies. While China is the largest of these markets, the growth and prosperity is pervasive around the world as the crisis recedes. Tourism industry market has increased 100% over last year. Morocco has seen a fivefold increase in inbound visitors over the last decade, and Panama has become a financial center for South America. For sometime now, we've acted not as a U.S. company with outposts in a hundred countries but as a global company that happens to be based in the world city of New York. Now more than ever, we're reaping the rewards of our global footprint, our ability to be local around the world and our long-standing relationships with guests and owners. This is something you cannot buy. You can only earn it over decades.
With that in mind, I'm delighted to take advantage of our leaders being assembled here in the Westin Beijing Financial Street. I'll be introducing you to the four division presidents who lead our businesses around the world. Then Matt Avril, President of our Hotel Group, will share his global perspective on our efforts to bring each hotel back to and beyond pre-crisis profitability, something we're calling past the peak. I'll wrap up by sharing my thoughts on 2011 and then hand the call over to Vasant, who will give more color on our financial results and outlook. Vasant will also share some observations on our efforts to accelerate our growth in India. But first, I want to tell you about the third quarter. We said we would only upswing and we have. We gained share, growing faster than our competition and converted higher revenue into higher profits. The headline is that lodging recovery continues, unabated by the euro crisis, U.S. economic jitters on Malaysia and Japan. With occupancy rising at or above 2007 levels, it's no surprise that rates are on positive territory across each of our regions. Both business and leisure travel continued to show strength in the quarter. The great recession was remarkable in both its harrowing drop on the way the down and on its reliance on emerging markets on the way up. Nonetheless, the lodging recovery is following similar patterns to prior cycles. The strength of gateway cities are spreading to secondary markets. Luxury, thought to be dead by some, is alive and growing. These factors enabled us to beat the high end of our EBITDA guidance by $10 million and EPS by $0.06. International company operated REVPAR grew by 13% compared with 10% in North America. Worldwide owned hotels experienced a 12% increase in REVPAR, with hotels outside of North America again outperforming.
As you know, we're in the early stages of corporate renegotiations. But so far, we like what we see. Corporate buyers know that occupancy levels have already risen towards the prior peaks, especially in the gateway cities where their associates need to stay. Indeed, customers are hearing stories about not being able to find a room regardless of price. Great expectations, therefore, adjusting to this new reality. In light of how far rates have fallen since 2008, we have a long way to go up. In fact, we've been working to change the mix of our business all year. So even though a large percentage of our room rates in 2010 were locked in at tight decreases, we were able to drive our company operated rates up by almost 5% in the third quarter through aggressive yield management.
Trends in group business also remained robust, particularly in the quarter for the quarter bookings. In September, for example, bookings for 2010 were up 19%. As we've enter the back half of 2010, 2011 bookings are picking up nicely. Again, looking at September bookings, revenues for 2011 jumped almost 30%, driven by room night volumes up 22% and rates up 7%. 2011 group pace has improved by almost 15 points over the last six months and is now flat. For comparison's sake, 2010 group pace at the same time last year was down 20% and is now up mid single digits. This makes us all confident that group volumes for 2011 could match 2008 with solid rate increases. This, by the way, also lays to rest any fears that technology or the downturn itself would permanently change group demand. As part of our past-the-peak efforts, we'll continue to focus on cost containment to drive margin improvement for the coming years. Our associates around the world are delivering on this promise with company operated margins up 140 basis points in the quarter. At the same time, our business is all about building brands through great experiences. So despite our focus on cost and despite hotels that are once again full, we're proud to reported that guest satisfaction scores remain at record highs. This is translating into sustained increases in REVPAR index. We now expect full year worldwide share gains of roughly 100 basis points with Sheraton leading the charge.
Our Vacation Ownership business also performed well in the quarter. We managed two of our levels to focus on the most profitable channels. Correspondingly, close rates are steadily improving. We also completed a securitization that underscores the dramatic turnaround in capital markets since the dark days of 2009. We garnered advance rates of 93% and interest rates under 4%, our best ever. As a result, we would generate about $225 million in cash from the Vacation Ownership business this year, and we expect the business to generate similar amounts of cash over each of the next three years. We're also keeping a tight lid on corporate cost. Headcount is flat over 2009 and will remain flat through 2011. So despite adding new hotels, we expect SG&A spend in 2011 to be similar to 2010 levels. Let me underscore the importance of this cost discipline. We removed $100 million in costs in a sustainable way. This translates into corporate margins for our fee business that will be higher in 2011 and peak 2007 levels, despite much lower REVPAR.
Now I'd like to hand the call over to Matt Avril and our division presidents who run our four regions around the world. This team has deep market knowledge and experience. At the same time, they all have tremendous appetite to grow and improve our operations. So please let me begin by introducing you to our host here in China, Miguel Ko.
Thank you, Frits, and good morning. As the Chairman and President of Starwood Asia-Pacific division, I'm seeing enormous changes in China since I first joined Sheraton in 1979 in internal audit. I was born in a small Chinese city called Shantou, near Guangzhou in Southern China. Although many of you may not have heard of Shantou, this secondary city now has a population of 5 million people. That's more than inner city limits of Los Angeles or roughly equal to Chicago and Houston combined. Today, Shantou does not have one single international class hotel. This would change as we recently find a deal to build a beautiful new Sheraton there. In fact, Sheraton is often the first five-star international hotel brand to enter a secondary or tertiary city in China. With over 30 hotels now already opened and another 34 in the pipeline, the brand's growth is accelerating. Sheraton benefits from decades of great trend recognition amongst Chinese travelers. And Sheraton in Chinese is called [indiscernible], which is literal translation meaning happiness comes in. That resonates very well with the Chinese.
Our existing hotels are at the best level for future growth. They are a great way to inspire our current partners to start new projects and also to attract new partners. Our hotels are also the perfect training ground for a mix 86 hotels we expect to open over the coming years. Looking ahead, development in Asia-Pacific remains robust. This year, we already signed new contracts for more than 9,000 additional hotel rooms. Many investments focus on Shanghai, Beijing and Hong Kong when they think of China. But Starwood expects this growth will come from cities they have not heard off like Shantou. China has 171 cities with more than 1 million population. And we are working hard to enter these market as demand grows. In a rapidly transforming economy, supply and demand will bounce around. Take Beijing, for example, where we have six hotels today and two more under construction. In the month following the Summer Olympics in 2008, this city is suffering from oversupply, but year-to-date REVPAR in Beijing is now up 27%. So after almost two decades of double-digit economic growth, I'm very bullish about Starwood's future here.
Outside of U.S., China's already Starwood's largest country, with 60 hotels representing eight of our brands in our fastest growing SPG market as well. Looking ahead, we will open more hotels in China than anywhere else in the Starwood's system. In the third quarter, Asia-Pacific REVPAR grew 21% or 16% excluding the possible impact of appreciating Asian currencies. In China, I'm happy to report a healthy balance of rates and occupancy increases. REVPAR growth in China is up 33%, with Shanghai, driven by the World expo, leading the charge. Collectively, our year-to-date REVPAR index in China was 110, which speaks to the string of our hotel brands and experiences of our team operating the hotels. Most of our hotels are staffed with local Chinese managers. Chin Jing [ph] , Head of Operations, and Stephen [indiscernible] our development in China. I have worked with both of them for more than 20 years. With that, let me now turn the call over to Denise Coll, the President of our North American division.
Thanks, Miguel, and thanks for dialing in today to our call. The unit growth that Starwood's Asia-Pacific division is experiencing is truly amazing. But Starwood's other division, including North America, are well-positioned to capitalize in the outbound travel that will result from these rapidly growing economy and burdening middle classes. China is already one of the top 10 sources of inbound business to the U.S, and this is forecasted to double by 2014. Our global brand and heavy presence in key North American cities is driving even stronger growth to Starwood. For example, Chinese business at the Sheraton Toronto is up 50% year-on-year and some of our Hawaiian resorts, such as the Sheraton Waikiki and the Princess Kaiulani Hotel, saw an inbound Chinese travel growth by over 100%. Frits had said this before, but let me say it again. Think of the Japanese travel boom of 1980s and multiply by a factor of 10.
I started my career in operations with the Sheraton Boston in 1976 and has never forgotten the lessons that I've learned on the importance of delivering terrific guest experiences. After all, exceeding the expectations of guests, wherever they're from, is how Starwood delivers the REVPAR premiums that fuel our growth. Today, our guest satisfaction remains at record-high levels, just one of the reasons why our hotels are outperforming the competition. Occupancy levels have recovered nicely over the last year and are allowing us to push rates more aggressively as we actively manage the segmentation mix within our properties. As a result, REVPAR in our North America owned hotels jumped 11% despite tougher comparisons. ADR grew an impressive 8% and margins increased by 250 basis points. Company Operated REVPAR increased 10%, and we continue to gain share particularly with our incredibly successful Rediscover Sheraton campaign, the largest campaign in the brand's history.
Sheraton's momentum continues, enjoying year-to-date REVPAR index gain of almost 200 basis points over the competition. As we look forward, we have a unique opportunity to expand the breadth of our brands in North America. Our greatest opportunity maybe in the specialty select service space. Our Aloft, Element and Four Points of our Sheraton brand are some of the best in the industry. But with only 152 hotels in this segment today, our brands are under-penetrated relative to our competitors. From Upscale to Luxury, our distinctive and compelling brand portfolio, are equipped by a development team with an arsenal that can be used to fit the needs of our owners and partners. For example, my hometown, Boston, recently caught up to the Beijing hotel count, with the openings at the Le Méridien Cambridge and the W Boston. Both of these properties have brought authentic hotel experiences to the city that did not exist previously.
The real interesting story about North America, both now and over the next few years, will be rate growth. The decades between 2001 and 2010 saw the slowest growth in road inventory since the Second World War. Given the capital constraint of the last few years, new supplies will remain limited in 2011 through 2014. As a result, we expect to see strong pricing power in the industry, particularly in the gateway cities where we have substantial Owned presence with over 13,000 rooms. With our focus on driving top line and strong flow-throughs through cost containment, we expect significant earnings growth in our Owned portfolio over the coming years. I'd now like to introduce Roeland Vos, the President of our Europe, Africa and Middle East division.
Thanks, Denise. I'm torn as to where I should open, with good evening since it's 9:00 p.m. here Beijing, or good afternoon to our associates in [indiscernible] and our division or good morning to our U.S. investors. Regardless to all of you, thanks for listening. I began my career as a management trainee at the Sheraton Brussels in 1982 and since then have rotated through multiple positions within Europe as well as in Latin America. One place where I have not been stationed is actually in my home country, the Netherlands, although we do have hotels there. Hotels has rose [ph] in 57 other countries throughout our region. Our portfolio and businesses at this point, 164 hotels in Europe and then furthermore, 86 hotels which are spread across Africa and the Middle East. And you should note that at this point, this footprint makes us far and away the largest operator in these resource-rich economies.
So let me start with Europe. While it's true that similar to the U.S., new supply in Western Europe is limited, we did have some notable growth success, such as the launch of the W brand. In its very first year of operations, the W Barcelona is exceeding all of our expectations and decided that we will soon open the W Leicester Square in London as well as the W in Paris in the Opera area. Now talking about Europe, it's important to distinguish between Western and Eastern Europe, where we do continue to see development opportunities in countries like Poland, Russia, Georgia and Turkey. We will have 23 new hotel openings in the Eastern and Central Europe over the next three years alone. The existing European hotels grew their REVPAR by 11% on a constant-currency basis versus last year, and most of this was led by a very strong business demand in major gateway cities such as London, Paris and Frankfurt.
From there, turning to the Middle East. We, in fact, have a number of very, very diverse growing markets, and these are markets such Jordan, Saudi Arabia, United Arab Emirates, each of them with different dynamics but each with substantial growth potential. Think about it, for example, even with oil price at $80 a barrel, hundreds of billions of dollars are flowing into the Middle East. And we know what that means, that means more hotels. It did in the 1970s, when the first Sheraton expanded across the region and is happening today but on a much greater scale. We plan to open 20 hotels in the Middle East over the next three years. REVPAR in the Middle East declined over 3% as the UAE works through the supply that came on steam over the last few years, but here, the trends are also slowly improving. And we saw a rate turn positive in September. That was the first time since the fall in 2008.
Then similar to the Middle East, Africa has experienced substantial growth, and that's reflective of the massive investments and the economic transformations that are taking place in these countries. You may not know, but the Chinese investments in Africa in 2009 surpassed the African Development Bank and have increased tenfold over the past decade. So no wonder that 52 out of the 53 African countries are now projecting economical growth for the year 2011. We're starting to see some change in travel patterns with the Chinese inbound travel to some of the markets that have been doubling since 2007. And given the massive investment that they are making on the continent, we expect that this number will increase dramatically over time. Our African business is already quite profitable, and we look forward to have more or less 30% unit growth in the years to come. REVPAR in Africa increased 5% during the third quarter, as the rate increase was partially offset by some occupancy declines there. And with that, let me turn the call over to Osvaldo Librizzi, who is our President of Latin American division.
Thank you, Roeland. I joined this company 1975 as a controller at the Sheraton in my hometown of Buenos Aires. Over the last few decades, I've been working various locations throughout Latin America and have witnessed enormous changes and some of these emerging economies have matured. With over 500 million people and abundance of natural resources, Latin America represents yet another great source of growth for Starwood, with our strong presence in the Upper Upscale and Luxury segments, with 63 properties in the region. In Mexico, we have 22 properties and several more in the sideline. And in Brazil, we're actively looking to accelerate our growth with six hotels today and several others under discussion. As you can imagine, my region was hit hard by the H1N1 flu in 2009. Unfortunately, the continued fear of crime in Mexico is keeping tourists away, even though the vast majority of the violence is further moved from our resort locations in Punta Mita, Cancun, Cabo and Puerto Vallarta. Despite this situation, our Mexican properties saw REVPAR growth of 4% in the third quarter, with a result at our euro [ph] locations. Mexico City enjoy REVPAR gains of 14% in the quarter, driven by strong business demands. We're also keeping a tight lid on cost and making use of centralized corporate resources whenever possible. This drove a nearly two-point increase in margins in the quarter before including last year's business interaction proceeds.
In contrast to Mexico, South America results were very strong. With REVPAR gains of 46%, major cities such as Buenos Aires, Santiago, Rio and San Pablo, are enjoying occupancies at 2000 levels. And we are pushing rates by managing our business mix. These results of recent economy and are well-positioned to benefit from the demand for commodity from other rapidly growing regions such as Asia-Pacific. Now let me turn the call to our leader, Matt Avril, President of Hotel Operations. Matt will share some general comments on how our team is bringing the target cost and revenue initiatives together in a globally coordinated way.
Thank you, Osvaldo. By way of introduction, I've been in the hospitality industry with Starwood for over 20 years, with a heavy focus on operations after beginning my career in finance and accounting. But then my current role is President of the Hotel Groups since 2008. My responsibilities are to drive global initiatives across the system, work closely with our hotel owners and through our associates around the world, bring our brands to life for our guests. Over the last two years, we've been focused on a number of global initiatives to drive performance. The key has been to work together across functions and geographies to analyze rollout and measure our business with a relentless eye on making us more efficient operators for our owners and better host for our guests.
During the past few earnings calls, Frits has talked about our initiatives to drive top line growth and contain cost. As mentioned, we're referring to this focus as past-the-peak. Right now, we are proud of our Company Operated margin improvements, up 160 basis points in North America and 130 basis points across the balance for our global operations. But we won't rest until we reach, if not surpass, 2007 level. Past-the-peak is our organizing roadmap to get us there. As you heard from Miguel, Denise, Roeland and Osvaldo, the recovery is playing out in different ways around the globe. Our teams in each region are all laser-focused on achieving key profitability for the hotels in our system. As our hotel margins are driven by top line results as well as cost, we are focused on initiatives to benefit both. Examples of this include improvements in our revenue management systems, its capabilities and training. Also, we have worked with our regions to reallocate sales resources to better align our organization with the way our clients want to do business with us and to free up resources to prospects for new accounts. These top line initiatives, coupled with our brand positioning, are driving our ability to outperform the competition.
Furthermore, it's clear that we're in the early stages of how these initiatives will further enhance our industry-leading results. On the cost side, we continue to focus on lean hotel operations and our procurement practices. We also benefit from great relationships with our owners and franchisees to identify and migrate best practices. Our goal is to hold cost growth to half the rate of inflation. But our efforts don't end with these internal initiatives. Our operations leadership teams work closely with our brand leadership to ensure that we are innovating in ways that establish emotional connections with our guests. By way of example, this includes improving the meetings experienced through redesigning spaces and refining banquet and catering options for groups, providing a range of entertaining experiences that are cost effective for our corporate customers.
Looking back, hotel operating margins generally peaked in 2007, but remember, that cycle was interrupted by the credit crisis. So while the medium-term target is to get back to 2007 margins, over time, we believe we can exceed those levels. A big part of this, of course, will be determined by our ability to realize rate increases over the coming years as we continue to effectively manage our cost per occupied room. Let me now turn the call back over to Frits.
Frits van Paasschen
Thanks, Matt. And no doubt, you can see why I'm looking forward to our Investor Day on December 8. We want the investment community to spend more time hearing directly from our team. They are living evidence of just how difficult it is to replicate Starwood's current platform. We wholeheartedly believe that the growth and demand that comes from 3 billion people around the world reaching middle classes is nothing less than the most extraordinary opportunity in our lifetime. We didn't let the crisis of 2008 and 2009 go to waste, and we'll certainly not miss this incredible opportunity. I'd like to close with some preliminary thoughts on 2011. As I mentioned before, the positive trends in transient and group business continued. Business travel is robust and has filled our hotels in the critical Monday through Thursday periods, driving compression and allowing us to begin to recover rate. Specifically, we expect corporate rates to be up high single digits. Group business in 2011 is also trending well, with strong volumes and steadily improving rate. And the overall trajectory of business appears to have stabilized to current levels. Of course, visibility remains limited in the macroeconomic picture and the developed world remains uncertain. However, if current trends continue, we would expect to deliver worldwide REVPAR growth of 7% to 9% in 2011.
With our demonstrated ability to control costs, we expect that this REVPAR growth will result in an EBITDA within the range of $950 million to $980 million.
But before I hand over to Vasant, I want to make one final comment on our business in the United States. Like many of you, our base case expects America's economy to maul through for the next few years. Despite this, we're cautiously confident about our prospects. You've already heard about how supply's constrained and will grow slowly over the coming three to four years. That makes our industry very different from the economy as a whole, but has significant slight [ph] capacity. On the demand side, we're encouraged to see that profits of U.S. companies are at historic high. Balance sheets are also in good shape. So companies have the means to invest and are going after hard-earned growth. We know that means travel. As one industry executive put it, you don't grow revenues by sitting behind your desk. We stand a gain from this, given our high-end brand portfolio, and as we've said, our business is 75% b to b. As for leisure demand, it's true that consumers' balance sheets are not as robust as those companies. But for households that make more than $100,000 per year, there's a lot less leverage. And these households account for about half of our U.S. consumer spending. So higher-income consumers have the means to travel and are doing so. For the next few years, all of this points to occupancies and rates at high-end hotels well above what you'd expect given the tepid economic growth. In fact, that's what we're already seeing. Now let me turn the call over to Vasant.
Thank you, Frits. I'll start with a quick review of India then move on to our outlook and a few comments on balance sheet items. I grew up in Bombay, now known as Mumbai, and left India 30 years ago. India today is a different country than the one I grew up in. The widespread optimism, the boundless confidence, the determination of younger Indians to succeed and their willingness to take big risks is extraordinary. I've been back regularly over the years, and since the late 90s, I watched the pace of change accelerate and become irreversible. It's been exciting to be re-engaged with India in the business context of Starwood. For the past few years, I've been going to India once a quarter to help Miguel and our team in India grow our business, building on long-standing relationships and to be an advocate for our Indian effort at the center. Here's where we are in India today. There are 29 hotels opened and 18 under construction. We're already the largest in five-star system in India, larger than the international as well as the domestic hotel chains of the high-end. Sheraton has been established in India since the 70s. We have a great Le Méridien footprint, its iconic luxury collection hotels with our longtime partner IPC. We've just launched Westin with five spectacular hotels in the key cities, along with two Four Points and two Alofts.
We expect to sign our first W and St. Regis hotels soon, and we'll be on our way to achieving our goal of having 100 open or pipeline hotels in India within five years. We're well represented in the major cities and moving now as we have in China to the next few other cities. There is strong local team on the ground and high-quality owner base. Those of you who have been to India knows that infrastructure is a major bottleneck. The Indian government is making a big push to fix this problem over the next decade. This will help ramp up hotel construction activity. Miguel, who was been involved with both India and China for many years, will tell you that India today reminds them a look of China 10 to 15 years ago. We fully expect India to grow to be our third largest market after the U.S. and China.
With that, let me move on to our outlook starting with the balance of the year. As you heard, the global recovery continues. We remain on high alert for any signs that the trend is changing, and at this point, there are no indications that it is. I feel very comfortable that we will end the year with EBITDA of $840 million to $845 million, which is at the high end of our prior guidance range of $815 million to $845 million. We expect 27 global REVPAR growth at company operated hotels of 8% to 9% in constant dollars, also at the high-end of our prior range. All in all, a substantially better outcome in 2010 than we had anticipated at this time last year. This implies a Q4 EBITDA range of $230 million to $235 million. I want to point out that our year-over-year comparisons are [indiscernible] a variety of factors in Q4. In our Vacation Ownership business, we had a large gain from securitization last year, as well as the accounting change. In the Owned Hotel business, we have some asset sales, as you know, and some onetime items that helped our Latin American business last year. In the fees and other income line, we had a termination fee last year. In SG&A, we have higher incentive compensation this year. Also, we had some items moving between Q3 and Q4 this year, helping Q3 to some extent in reducing Q4. [indiscernible]to this noise, the underlying rate of growth remains strong as reflected in our outlook for 2011.
We expect global REVPAR growth at Company Operated Hotels in Q4 of 7% to 9% in constant dollars. This is a small sequential slowdown from Q3, primarily due to the fact that we are now locking a strong Q4 recovery last year. As an example, in North America, REVPAR growth recovered by 10 whole percentage points between Q3 and Q4 2009. As it has been all year, corporate transient business is the primary driver of growth. As you have seen, we had good ADR growth by inflicting lower rate to leisure business with higher rate to corporate business. And we expect that to continue into Q4. Group booking trends continue to improve. In North America, September was the strongest group booking month of the year, indicating that companies continue to be willing to make commitments to future years. And there's healthy growth in lead for group business around the world. The booking window, while longer than it was earlier in the year, is still shorter than normal. And we continue to have significant in the quarter, for the quarter business.
So what does all this suggest for 2011? As you have heard Frits say before, the global economy is dealing with a variety of unusual challenges. In developed markets, unemployment remains stubbornly high, and there are significant concerns with mounting public and private debt. There's a growing belief that the pace for recovery will be slow, the much discussed new normal scenario. On the other hand, product [ph] profits are strong and global companies are capitalizing on the rapid growth in emerging markets. The lodging supply outlook in developed market is the best it has been in decades, especially in the major metros. As a result of the characteristics of this recovery, REVPAR in the top 100 global cities, as defined by GDP and the rival[ph] , has been growing at twice the rate of national or regional cities.
Our brands of hotels cater to the high end, primarily corporate traveler, and are more concentrated in these global cities. As a result, we have recovered faster and today, have been relatively immune to the malaise elsewhere. Hopefully, this will remain the case. Based on what we see today and the forward-looking indicators we currently have, the most probable 2011 scenario in developed markets for our business is a normal cyclical recovery. Emerging markets have been the engines of the global recovery so far, led by China and India. We, as you know, have the best emerging markets platform and pipeline in our industry, and as such, are benefiting from the secular growth opportunity here. In these markets, while supply growth have been strong, demand growth has continued to be very robust, comfortably absorbing the additional room as Miguel described in China. While there's always the risk of overheating and boom and bust cycles as we have seen in Dubai, we do not think this is likely in 2011 in our key markets in Asia, Latin America and Africa. As you've seen in the numbers, Mexico and the Gulf continue to struggle and are not anticipating a big change in this geography next year. Most of our emerging markets will be lacking from hefty growth from 2010 and will not have events like the World Expo in Shanghai that helped China. As such, it would be reasonable to expect that the rate of growth will slow down sequentially year-over-year, and the growth, therefore, between emerging and developed markets will narrow. Again, based on what we know today, this would be our likely scenario for emerging markets. In aggregate, this gets us to our 2011 outlook of 7% to 9% REVPAR growth in constant dollars for Company Operated Hotels globally, which corresponds to an EBITDA range of $950 million to $980 million, up 13% to 16% and an EPS range of $1.44 to $1.55, up 32% to 40%. Exchange rates have been very volatile lately and very monetary. If current rates hold, reported dollar REVPAR growth could be about 100 basis points or so higher. We expect all margins to improve 150 to 200 basis points with a focus on revenue management and continued cost control. Our Vacation Ownership business will be flattish, with a continued focus on cash generation. Overhead will only grow 1% to 2% as we hold the line on headcount in developed markets while investing in emerging markets and incentive compensation normalizes.
Last year at this time, we have indicated that the make-or-break variable for 2010 was a strength of late-breaking corporate trends in business. As we all now know, corporate trends in business came back strong, stronger than many had anticipated. As we look forward to 2011, the team make-or-break variable is going to be rates, and so far, rates are on the right track. It's too early to know how our corporate rate negotiations with our major accounts end up. As we've indicated previously, we're targeting high single-digit increases. Our corporate customers are generally accepting that rates will be moving up. As always, there will be a [indiscernible] and we will let you know in February what the outcome is. Meanwhile, we will continue to aggressively management mix to our enhanced revenue management system. Mix management is what is moving rates up right now as we've split lower rate to leisure with higher rate to corporate business. In markets with good compression like New York, London and others, we can and are moving the entire rate structure up. As you heard from Frits, we expect good room growth in 2011. As always, greater locations will lag in the group segments since we have business on the books for 2011 that is booked in 2008 and 2009. While all the indications are that 2011 will be a normal recovery year for the hotel industry globally, there are always risks out there which we will need to closely monitor. Sharp moves in exchange rates will de-stabilize economies. The unknown side effects of qualitative [ph] in the U.S. and austerity in Europe will need to be closely watched. The efforts in emerging markets to keep inflation controlled and prevent acid levels could also have unintended consequences. Prudency requires that we acknowledge that alternate scenarios are possible and remain on high alert for early warning signs. Plus or minus one point of REVPAR globally impacts EBITDA plus or minus $15 million. Plus or minus one point change in REVPAR, solely due to exchange rate moves, impacts EBITDA by around $4 million. So you can run your own scenario. We would, of course, keep you updated on our quarterly calls. Moving on to a few balance sheet items. Excluding debt associated with securitized receivables, net debt at the end of Q3 was under $2.5 billion. Our leverage ratio as measured for our bank line is now under 3.5 [indiscernible], well below current levels. More importantly, we finished the quarter with over $250 million in excess cash, i.e. cash in excess of our normal working capital. We have no borrowings under our revolver, which remains fully available, and no bond maturities until May 2012. So our liquidity of leverage position get stronger every day. We still expect to receive a $200 million-plus tax refund before the end of the year. With the refund, we expect our excess cash balance to climb to $500 million by year-end and our net debt to be under $2.3 billion. With that, I'll turn this back to Jay.
Thanks, Vasant. We'd now like to open the call for questions. So in the interest of time and fairness, please limit yourselves to one question at a time, and then we'll take any follow-up questions you might have if time permits. Sylvia, we're ready for the first question.
And the first question comes from the line of Shaun Kelley with Bank of America.
Shaun Kelley - BofA Merrill Lynch
I just wanted to talk a little bit about maybe your mix assumptions for next year as you think about the 7% to 9% REVPAR scenario? Could you give us a sense of kind of rate versus occupancy built into that estimate? And then maybe a little bit of color since we have so many people on the line from the international side about what your outlook for China REVPAR specifically might look like for next year?
In terms of mix, we would expect globally to be 60-40, 2/3-1/3, rate, 2/3, occupancy, 1/3. China, we expect, would still be a double-digit increase, certainly a moderation from this year's level because this year, we've been running in the 20s and we've had the World Expo in Shanghai helping us. So there's a tough comparison, but we still see a good momentum, so we think in the double digits.
Your next question comes from Robin Farley from UBS.
Robin Farley - UBS Investment Bank
On your management fees, the management and franchise revenue came in kind of the lower half of your guidance range, despite the REVPAR being above the guidance range. I wonder if you could give us some color on that. And then as it relates to incentive fees, is there a thought about where the REVPAR increase needs to get back to peak incentive fee levels?
There's a couple of things on your question around the fees. First of all, you should know that the difference REVPAR and revenues is quite significant right now. It's about 300 basis points. It's because of where we are in the cycle. Group is not a bigger component of our business now as it would be later in the cycle. It's more driven by occupancy than rates, and so REVPAR increases tend to be significantly higher than revenue increases, and of course, our fees are more linked to revenue, especially managed hotels, which is the bulk of our business, than they are to purely REVPAR. That's one reason. The second is we've had, as you know, softness in the Middle East. So that held back some of the growth, some Forex impacts in some places. Those are the major reasons. The second part of your question was -- what was it Jay, the second part of the question?
The incentive fees.
Incentive fees, as you know, the bulk of our incentive -- about 1/4 of our fees come from incentive fees, and the bulk of those are non-U.S. international incentive fees. Our U.S. incentive fees are very small portion of that. The non-U.S. incentive fees are really the first dollar incentive. So we have incentive fees even today, and so they essentially grow in line with REVPAR, actually in line with GOP, so a little faster than REVPAR does. Our U.S. incentive fees are a small percentage, and we will expect them to grow faster than the international incentive fees. But they're small enough that it doesn't move the whole needle that much.
Joe Greff from JP Morgan.
Joseph Greff - JP Morgan Chase & Co
Vasant, what are your management franchise unit growth assumptions into 2011? I would've thought with the 7% to 9% REVPAR growth, that the management fee growth forecast would have been higher. I don't know if there are timing issues or the growth is second half weighted. And then that second question is if I look at your Same-Store Owned Hotel results on the international side, expenses grew at a faster pace than revenues in the third quarter. Was there anything onetime either in this quarter or last year's quarter? And is that something that is controllable going forward, where you would have a different relationship between expense growth and revenue growth?
I'll answer your second question first. You're right that on the international Owned Hotel side last year in Latin America, we received business interruption insurance from the impact of the big H1N1 issue in Mexico. We caught that in the third quarter. That does affect year-over-year comparisons for that business. In Europe, there's been a couple of issues. One, REVPAR growth in general was lower single digits that will make margin growth a little tougher. But also, just like we've had in our SG&A, the incentive comp adjustments at the hotel level, whereas last year, incentive comp was coming down, this year, it's going up. That does make some comparison adjustments. If we just adjust for those sort of on a run rate basis, the margins would actually have been up 100 basis points. The other question was the management franchise fees, that's really driven by the fact that our incentive fees are largely non-U.S. Our GOP levels are quite high outside the U.S., and these are first dollar incentives. So a little [indiscernible] sort of 1:1.5 ratio between revenue growth and incentive fee growth. And REVPAR growth, as you know, is going to be higher than revenue growth next year too. So if you apply that ratio, you get to the kind of fee growth levels we have. And then the other fee is related on the U.S. side. It's a small incentive fee, so it doesn't really move things that much next year.
Frits van Paasschen
Just one thing to add to that. In terms overall unit additions, we're still looking at a target of around 80 hotels opened for this year. Next year, that number will be slightly lower. So that may have been part of your question, Joe.
Harry Curtis from Nomura.
Harry Curtis - J. P. Morgan
My question was related to development in China. First, if you could talk about the relationships that you've got with your developers. My guess is that the new hotels in the pipeline are managed hotels. What's your relationship with developers and how competitive is it to build those relationships? And what kind of investment do you need to make to realize these contract signings?
Frits van Paasschen
As regards our relationships with developers here in China, the key here is -- what we've been pursuing is what we call an anchor/partner strategy. And that's finding key partners whether they're focused on certain regions of China or whether they're focused on certain segments of the market. And it's clear to me that if you were to compare the dynamic of owner relationships with here in North America, the relationships here matters even more. And what we've said consistently is our businesses is built on the fact that our owners and developers here, as well as other parts of the world, are profitable and they've gotten to know us, and they've worked with us for decades. And so as they look at new opportunities, a lot of the development that we're seeing is uncontested. It's based on developers and partners that we've worked with coming to us with opportunities, and us talking about which brand, which opportunity makes the most sense. And as I've said, these are virtually all managed hotels. So the other value that we bring in this market, especially is Italian [ph] pipeline and an ability to open hotels and make them profitable and well-managed from day one.
Janet Brashear from Sanford C. Bernstein.
Janet Brashear - Bernstein Research
This question is for Miguel in China. As you talk about long-term China growth, I wonder what you see in the short-term relative to two issues. The first is in those lesser-known 171 cities in China that have over 1 million in population. What is the rate feeling in those cities and can you get attractive rates there? And the second question is in the opposite, in the better-known primary cities. What likelihood do you see of oversupply in the coming years, that so many developers have flooded them with new units?
To answer your first question first on secondary city, usually, the land cost in the secondary city is still much lower than the first city. So the rates are about 1/3 lower, but the yield to the owner and to the GOP -- and also, labor cost is correspondingly lower -- is still quite attractive. And secondly, the food and beverage on secondary city -- because the outside restaurants in those cities are also very attractive. Many of our second city hotels are running with more with beverage revenue than room revenue. And the second question. In the major city, known towns and cities like Beijing, Shanghai and Southern China like Guangzhou and Tianjin, taking a lot of new development and there is certain short-term pressure in terms of rates and occupancy. However, these cities are also growing very fast, so we view that -- looking at the medium-term, we balance that altogether, but in the short-term, there are some short-term challenges in certain part of a city more than the entire city.
Frits van Paasschen
I think in Miguel's comments, he mentioned that the rates in the third quarter followed a loss [ph] and a big chunk of it was rate so it was about 50-50 I think, right?
Josh Attie from Citi.
Joshua Attie - Citigroup Inc
Could you talk a little bit about capital allocation for 2011, how much more de-leveraging you'd like to do, if any, and what the priorities are for excess cash, and specifically, where share repurchases might fit in?
As you know, we have the Investor Day coming. And we'll talk more about all those issues then. In general, we will step up some capital spending on our owned hotels. We will continue to run vacation ownership for cash, as we have so far. Clearly, leverage has come down quite substantially. Soon after next year, Bal Harbour won't need cash anymore. In fact, it will become a big generator of cash. So we'll pull that together and give you a point of view in the forward-looking capital allocation and where we see the cash going as we've been doing on the call right now.
Frits van Paasschen
Josh, you've mentioned de-leveraging, and what we've said consistently for a while now is we want to move towards being comfortably in the investment grade. So we'll continue to focus our priority in the near term on debt reduction, and as Vasant said, we'll talk a bit more about capital allocation as we get into late 2011 and 2012, where we're likely to end up with even more cash.
Felicia Hendrix from Barclays Capital.
Felicia Hendrix - Barclays Capital
Getting to your Luxury brands St. Regis and Le Méridien internationally, looks like the ADR lags the rest of your portfolio. I'm wondering if it's foreign exchange, if that was just foreign exchange or is it something else? And even if it is foreign exchange, it still looked like it was lagging, so I was wondering if you could elaborate what was going on there?
Frits van Paasschen
The question was on same issues outside the U.S. It's really hard to -- it's a small footprint for some of these hotels outside the U.S. Some of it is Forex. I don't have -- Do you have anything statistical?
Frits van Paasschen
Felicia, I can give you a ring after the call and give you some more details on the rate component of international comp[ph] .
Alistair Scobie from Atlantic Equities.
Alistair Scobie - Atlantic Equities LLP
I just wanted you to elaborate slightly on the comments you made, I'm talking about past-the-peak. One, discussing back to previous margin levels and nothing stated that it's possible to exceed them. I don't believe you added a little bit of color around the intended structurally [ph] from both our revenue and a cost perspective. Where do you go over the next few years to get back to these peak margins and how much above previous peak is possible around that, some of the components within it?
Frits van Paasschen
I'm going to answer it quickly on behalf of Matt. The past-the-peak effort is based on our observation and objective that many hotels within our system, whether we own them or manage them on behalf of our owners, are still at levels that they were in 2007, in some cases, back to pre-9/11. And if we have a sustained recovery around the world, even if it's low in the developed markets, given the constraint on supply, as well as the rapid economic growth in developing markets, we should be able to get to those levels. And what Matt's doing is reading a series of initiatives from revenue management to sales force allocation to lean operations at the hotel level to procurement, looking at, literally, all the levels as you go through a typical hotel P&L to get back to those peak levels. Exactly when we get there and the trajectory for that, as you can imagine, is largely driven by what happens to REVPAR growth because we can control expenses on the cost side. We've done that, we'll continue to do it, and we talked about a goal of being at roughly half of inflation. So the degree to which we can get to and exceed peak EBITDA margins and absolute EBITDA levels will be a function of how steep the REVPAR increase is. And that, obviously, looking past 2011, is anybody's guess. We've given you a range of what we think overall global REVPAR will be for system-wide. But beyond that, obviously, it's very hard to tell. So we'd be speculating at that point.
Just coming back to the other question you asked about our Luxury REVPAR growth. I just want to point out that if you go back to our press release, you'll see on Page 3 that in constant dollars, it was 11.5%. The reason is as low as it is internationally, the bulk of our Luxury collection footprint happens to be in Europe. And we do have quite few St. Regises also in Europe. And if you look at the impact of Forex on Europe, which you can see again on Page 3, it is almost 12 whole points in this quarter. So almost all of the reason why it looks low is Forex-related and where the geographic footprint is.
Frits van Paasschen
Just to be clear, it looks like the answer to question is primarily FX-driven, but Jay, you want to get into that a little more detail as we get into it.
Your next question is from David Katz from Jefferies.
David Katz - Jefferies & Company, Inc.
With respect to property market, I wonder if you can share any perspective about whether or not -- whether it's from financial sponsors or REITs, et cetera, whether you're starting to see more nibbles, bigger bites or parties looking to perhaps eat a little bigger meals which you've executed in the past, and when we might be getting to a place where you would consider selling some assets and recycling some capital?
Frits van Paasschen
This is Frits. What we're seeing is, in contrast to absolute radio silence in 2009, is increased level of interest in buying assets. But I wouldn't say even though we're seeing a lot of money building up on the sidelines that we have a complete array of eager buyers. What you're seeing today in terms of transactions in North America have largely been focused by large, well-capitalized REITs looking at hotels that are in great shape in gateway cities, and by the way, paying pretty substantial prices for those hotels. But the full range of buyers entering the market in the phenomenon that we've seen yet, nor we've seen the full range of the hotels being sold. So while certainly the environment for buying and selling hotels is considerably better than where it was, we think it will continue to get better. And we look to determine exactly when that needs will sell hotels along the way. As you've seen, we have engaged in some transactions where we've been able to find an opportunity that makes a lot of sense for us, but we'll probably -- I'm not going to give a timeframe. Well, probably some time away from being really into the mid-cycle correction with the full range of buyer, and therefore, an opportunity to do a bigger transaction. Nonetheless, just to be clear, as we said on previous calls, that remains our priority and it's something we will go after when we think the timing is just right.
Well, that wraps up our third quarter earnings call, but please feel free to contact us if you have any additional questions. We appreciate your interest in Starwood Hotels & Resorts and look forward to seeing you at our Investor Day on December. Goodbye.
Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may now disconnect.