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Starwood Hotels & Resorts Worldwide Inc. (NYSE:HOT)

Q2 2014 Earnings Conference Call

July 24, 2014 10:30 AM ET

Executives

Stephen Pettibone – VP, IR

Frits van Paasschen – President and CEO

Analysts

Ryan Meliker – MLV & Co LLC

Thomas Allen – Morgan Stanley

Shaun Kelley – Bank of America Merrill Lynch

Steven Kent – Goldman Sachs

Harry Curtis – Nomura Securities Co.

Smedes Rose – Evercore Partners Inc.

Patrick Scholes – SunTrust Robinson Humphrey

Nikhil Bhalla – FBR Capital Markets & Co.

Joseph Greff – JPMorgan

Jeff Donnelly – Wells Fargo Securities

Robin Farley – UBS

William Crow – Raymond James and Associates

Carlo Santarelli – Deutsche Bank

Operator

Good morning and welcome to Starwood Hotels & Resorts Second Quarter 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Mr. Stephen Pettibone, Vice President of Investor Relations. Sir, you may begin.

Stephen Pettibone

Thank you Sylvia, and thanks to all of you for dialing into Starwood’s Second Quarter 2014 Earnings Call. Joining me today is Frits van Paasschen, our CEO and President.

Before we begin I’d like to remind you that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements and forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in Starwood’s annual report on Form 10-K and in our other SEC filings. You can find a reconciliation of the non-GAAP measures discussed in today’s call on our website at www.starwoodhotels.com.

With that I’m pleased to turn the call over to Frits for his comments.

Frits van Paasschen

Thank you Stephen and welcome everybody to our Q2 earnings call. I’ll cover three topics today in my prepared remarks. First, a review of our business performance around the world. This includes a look at our results for the quarter and our outlook for both Q3 and the rest of 2014. My second topic will be to outline our philosophy and approach to capital allocation. And then third, I’ll close with some comments about our new Chief Information Officer, Martha Poulter and how his joining us reflects our ongoing efforts to use technology to give our guests better experiences and to give our hotel owners better returns.

So turning now to my first topic, the results in the quarter. We delivered EBITDA of $324 million and EPS of $0.77 per share, both above our expectations. Worldwide REVPAR grew 5.3%. Management fees were up nearly 7% and franchise fees up almost 11%. Margins at company operated hotels were up 87 basis points. These results, along with what we are seeing across our business today show recovery that’s continuing steadily into its fifth year. In fact, this is the first time in four years that we come into the summer months without the global economy showing even the signs of a wobble. Put in other way, we are seeing extension of the business trends that were in place at the end of the first quarter.

For the next few minutes I’ll give you a quick look around the world with some color on their business. Starting first with North America, REVPAR grew over 6% and occupancies were at a record 78%. That’s up over 170 basis points from last year and you might recall that last year in the second quarter we also reported record occupancy. Rates across North America at constant exchange rates increased nearly 4%. As you may know the quarter saw the U.S dollar gain against the Canadian dollar versus last year. In fact REVPAR in Canada was up 6% in local currency but down 1.2% in U.S. dollars. Our results are very much in line with the state of the U.S economy. Fundamentals remain solid with unemployment down to 6%. However as the Fed noted recently there is still a lot of slack in the job market and while the economy is good, growth isn’t robust which brings me to my point, the lodging sector is hitting record occupancy but the U.S. economy overall is showing no signs of overheating. This is very good news for us. It means that in this cycle we could enjoy full hotels and rising rates for some time before the rest of the economy catches up with lodging in terms of capital – capacity utilization. This challenge is what we are seeing right now.

Corporate profitability is high and consumer confidence is back where it was in early 2008, both of which bode well for increased demand for high end travel. Of course in any one quarter results will vary across a market as large as North America and as it happens REVPAR growth was slower, 4.4% in our North region where we have a relatively larger concentration of business. Chicago was flat and DC was up less than 3%. REVPAR in New York was up nearly 5% in the face of new supply. But even in the North we did see a few bright spots with double digit REVPAR growth in Boston and Baltimore. Hawaii was another region under some another pressure where REVPAR at our hotels was close to flat. Inbound tourism from Japan was slow as a result of the weaker yen and a rise in taxes there. We also saw higher air fares from the Mainland U.S. although in the past few weeks those fares have begun to drop which could lead to improved performance later in the year.

The real strength in this quarter was in the south and the west where REVPAR was up close to 9% with standout performance in markets like Dallas, Houston and South Florida. In total, our U.S. REVPAR growth was just below the STR national average for luxury and upper upscale. This is almost entirely a function of what I mentioned a moment ago namely a concentration of our footprint in markets which for this quarter at least were bit slower. A more granular look at our business tells us a better story. Year-to-date REVPAR index at our hotels in North America is up which means hotel by hotel on average our properties are outgrowing their direct competitors.

Group business at our owned and managed hotels also outgrew the market in each for the three months of the quarter. Our group revenue in North America was up in the mid-single digit and our sales team did a great job with bookings in the year for the year up double digits from last year. Earlier this year we saw higher cancellations and adjustments primarily in the association segment. Still even with that group pace for 2014 is up mid-single digits. On the transient side bookings from business travelers remained strong and with high occupancies we’ve been able to mix our lower rate of business.

Looking ahead to Q3 and the rest of the year we expect trends in North America to remain positive. Supply growth in both luxury and upper upscale remains low which means we should be able to drive rate increases as demand grows. In aggregate we expect REVPAR North America be towards the upper end of our guidance range of 5% to 7%.

Moving on and a look around the world, Latin America saw trends in Q1 extend into the second quarter with the REVPAR up nearly 5%. Momentum in Central America and Mexico was a highlight. The Mexican economy continues to expand and we saw particular strength at our resorts thanks to higher occupancy spilling over from the U.S. As a result REVPAR was up 13%. In Brazil, the World Cup of course was a real tailwind for our hotels pushing REVPAR up 25% and as an aside it’s always good to have the winning team staying in one of your hotels. And from what I heard the victory party at the Sheraton Rio was one for the record books. But on a more serious note the sluggish trends from Q1 were still with us.

World cup aside in Brazil as well as Argentina and Chile demand still struggles. Excluding Brazil for example we saw REVPAR decline across South America and in total across Latin America, REVPAR ex-Brazil was up 1%. As we move into Q3, we expect more of the same. Brazil will be helped by the final weeks of the World Cup but after that will revert to Q1 levels.

Strength in Mexico may taper a bit as we move into the summer months in out of the high season. Overall for Latin America we expect REVPAR to be towards the low end of our range if not somewhat lower. In Europe, overall sentiment continues to improve. Leading indicators suggest that the modest recovery will continue. This is good news on top of occupancies in Europe that remains strong, up 130 basis points to 73%. Our European REVPAR was up about 2% and highlights for the region include Italy and Spain. REVPAR in Greece was up over 28% but at the other end growth in the UK was slow, transient trends continue to be soft as they were in Q1 and Germany faced tough comps where we left some significant trade fair business. But the biggest dark cloud looming over Europe today is the situation in Ukraine. But despite conditions there and the impact of U.S. sanctions on business in Russia the quarter in Europe ended in line with our expectations. If the situation in Ukraine and tensions in Russia do not escalate we expect that REVPAR growth in Europe will improve for the second half of the year. And behind this outlook is a robust calendar of events in UK and France and some good backlog in Germany and Greece.

Before turning to Africa and the Middle East I should also add we were hopeful that the transaction market for hotels on the continent will continue to improve. Investor interest is building interest rates have been low for a while and there is signs of lending activities increasing. REVPAR was down 1% in Africa and Middle East. Once again behind this average is a wide range of performance across markets. In the Gulf States Abu Dhabi and Qatar saw REVPAR up over 17%. By contrast REVPAR in perennially strong Dubai was down slightly, thanks to some renovations and new supply, particularly on the [pod].

In Saudi Arabia REVPAR was flat held back by visa restrictions and concerns about the coronavirus, also business in Mecca was brought down by expansion works around the holy mosque. As that construction is completed likely next year business in the kingdom should improve. REVPAR to hotels in Egypt was down nearly 20% as we lapped a recovery that began in the first half of 2013 before being cut short in Q3. As we get into Q3 and Q4 we will start seeing easier comps there.

Bad news from Nigeria in the form of kidnappings and terrorist attacks pulled down REVPAR for hotels by over 20%. The headlines in Egypt and Nigeria should not draw your attention away from the trend line that we have been observing for some time across Africa. Growth is wide spread across countries and encouragingly is being reflected by entrepreneurship and expansion of SMEs, that small and medium enterprises. Our performance in South Africa for example is up 6% and maybe a better reflection of those trend lines. As we look across Africa and the Middle East we experience performance in Q3 and the remainder of the year to improve driven by momentum in Middle-East as well as those easier comps in Egypt.

Moving on to China, REVPAR growth was strong once again in the quarter, up 11%. Like in Q1 that growth was skewed by the ramp of the Sheraton Macau as it entered the same-store set. But even without Macau China REVPAR was up 6%. Across China, demand is not just holding up but growing as the occupancy at our hotels excluding Macau increased year-on-year by over 5.5 percentage points and it now stands at 60%.

Driving our performance is the strength of the Starwood system in China; our sales team, call centers, web channels, royalty program, brand recognition, not to mention strong hotel operation. So once again our hotels outpaced their competitors and despite a pullback in government business we are seeing overall business pick up strongly. The health of the Chinese travel markets is also evident in the strength of the outbound travel. China reported second quarter GBP growth of 7.5% backed by government stimulus, strong consumer demand and sustained urbanization. As we step back we see China as a complex picture one that includes stories of newly built ghost cities but with rising occupancies at our hotels nationally. In other words from what we are seeing in this picture, hotels are not experiencing the same over capacity as residential or office real estate.

China is not only complex but large with a range of performance across regions. Our hotels in the south and east did especially well. The Shanghai in particular seeing double-digit REVPAR growth, thanks to slightly easier comps following last year’s bird flu scare. The north was flat, while the west and central regions saw growth of nearly 4%.

Looking ahead to Q3 we expect business trends in China to stay at or above the high end of our range. You should keep in mind that the Sheraton Macau tailwind will taper during the second half of the year. In Asia, outside of China REVPAR was up nearly 3%. Bright spots include Indonesia which is booming with REVPAR up nearly 19%. Other strong markets are Malaysia and South Korea. Australia also did well and for us is showing strong footprint growth thanks largely to inflows of Chinese capital. By contrast business in Indo-China was off held back by unrest in Thailand. REVPAR there was down 12%. As of now there is a return to calm following the coup but travel restrictions are still in place and will take some time before business will rebound. Also in Indo-China Vietnam’s territorial dispute with China didn’t help business there with REVPAR down 4%.

India has also been soft for a while. REVPAR this quarter was down over 4%. Like many of you, we followed the elections that concluded in May. We hope that the enthusiasm around the Modi administration is justified and will bring about much needed economic change. So far we are encouraged by the government’s focus on promoting tourism as a part of the economic development plan. Overall as we look at Asia outside of China, trends in many markets are healthy especially on top of strong comps last year. Taking out Thailand and India, REVPAR in the region was up over 6%. Looking ahead we expect REVPAR in China, excuse me in Asia outside of China to continue growing in the low single digits. So that concludes our trip around the world.

Rolling it all up we are maintaining our worldwide annual REVPAR growth range at 5% to 7% and for our owned hotels we are holding our range at 4% to 6%. Against the backdrop of our REVPAR outlook I want to address our base line for fee growth. You should note that the outlook of 2% to 4% in Q3 reflects some lumpiness in revenues not a change in trend. In this case we are lapping a large termination payment from last year. If you exclude that payment fees would be up about 7% to 9%. Importantly for the full year we are staying with our guidance range for fee growth of 8% to 11%.

In terms of footprint growth during the quarter we opened 19 hotels adding 3,800 rooms to the system. You should note that our openings this year are weighted towards the second half of the year and we remain on track to open more hotels in 2014 than last year. Hotel exits have been slightly ahead of expectations but you can conclude from our fee discussion those are largely lower performing, lower fee paying hotels. Also significantly owner confidence is reflected in our signing 45 agreements for new hotels in the quarter. That brings our total for the first half of 2014 to 73 which is well ahead of last year.

(Inaudible) activity is good in most regions of the world. Most noteworthy is the pickup in Europe sparked by conversions from other brands. I should remind you that the quality of our pipeline remains strong about 60% in luxury and upper upscale, about 80% managed and over 80% outside the U.S. The quality of our signings in recent years is also reflected in the high percentage of deals that are coming to fruition. We keep close track of our hotels that are coming on stream and when I look at the deals we signed since 2010 a very high percentage of those are either open or on track to open.

Turning now to vacation ownership, I am happy to tell you that SVO performed well this quarter, offsetting slightly lower tour flows with better closing efficiency and higher pricing. Operating results at the resorts were also strong. Our vacation ownership team in our view is the best in the business. This shows not only in our pricing, in our margins but also in our repeat buys from our existing owners and in guest satisfaction. On the financing side of the business our careful screening and the improving economy has held defaults to all time lows.

SVO’s business model today is a health mix of earnings from sales of intervals and financing plus recurring fees and resort income they make up about 30% of EBITDA. Over the past few years we brought down inventory levels and focused on higher returns sources of future business, especially Orlando, Mexico and Hawaii. The work we did to convert The Westin St. John to vacation ownership is playing out well and we are seeing good sales volume for that new product.

This quarter brought us another milestone as well. As of June 6, we brought the St. Regis Bal Harbor residential project to a close with the sale of the final unit. It’s been a long adventure and we are happy to declare success and put it behind us. Looking ahead we expect Q3 EBITDA for SVO and residential to be about $35 million to $40 million and $160 million to $170 million for the full year.

So I will wrap up my first topic with a quick look at SG&A which for the quarter was up 16%. This is an example of how SG&A in any one quarter can bounce around. You might remember on our last call we said that in Q2 we will be lapping $7 million in state tax incentives thanks to the move of our headquarters to Stanford. This year in Q3 and in coming years we will see benefits of $3 million to $4 million related to tax incentives. This past quarter we also incurred a few other one-time items and timing differences. So to be sure we are keeping a tight focus on cost while investing in the growth areas of our business. We still see our full year SG&A growth in the range of 3% to 5%.

And that brings me to my second topic, in the wake of our previous calls and in subsequent meetings with many of you I want to layout our approach to capital allocation, including leverage, stock buybacks and dividends. In the words of one investor, Starwood has done the hard part winning in the marketplace. Now you need to do the easy part telling investors what you plan to do with our balance sheet. And we agreed that executing a plan for capital allocation is easier than leading an organization of couple of hundred 1,000 people spread across about 100 countries. But managing the capital structure of any company is one of management’s most important responsibilities and we recognize that it may be impossible to have a balance sheet that pleases all of our shareholders. The approach I’m about to describe represents our best view to the interest of our long term shareholders.

Let me start by reminding you that we have a long term track record of returning cash to shareholders. Over the past 10 years we have returned on average $1 billion a year though dividends and share repurchases. And as we said in 2014 we intend to return about $1.35 billion. This includes our regular and special dividends along with our current share repurchase authorization which we expect to utilize fully this year. Most importantly from the start of Q2 to July 22 we repurchased 2.5 million shares for a total of $198 million. Year-to-date we have returned $578 million to shareholders through regular dividend or special dividend and our share repurchases.

Our approach to capital allocation follows directly from our world view. We see this is an extraordinary time to be in the high-end travel business and we believe there will be secular growth in demand for our brands fueled by rising wealth and an increasingly interconnected world. And by secular we mean that in our view these growth drivers look set to be in place for the next couple of decades. But at the same time we need to ready for an unpredictable disruptions in demand as with 9/11 or the financial crisis. Our world view holds that both unprecedented growth and a volatile world can coexist. A point of fact during the last six years we have seen both a doubling of our luxury hotel base and the worst recession in our lifetimes.

Let me emphasize again that our approach to capital allocation aims to balance investing in our business, maintaining flexibility and returning cash to our shareholders. Our approach reflects that we believe that it is in the best interest of our business and our long term owners. Investing in our business includes building capabilities to support our fee business, working with our partners to expand our footprint of hotels, renovating owned hotels and looking at possible acquisitions. And it’s likely that these investments will not use all of our available cash.

Moreover we expect to have substantial cash proceeds from assets sales as we work towards our goal of having fees drive 80% of our EBITDA. Still in a volatile world, we want to retain financial flexibility and ensure that we have dry powder during tough times. As such our target leverage is based on staying investment grade even in the wake of a major downturn. This will enable us to take advantage of investment opportunities or to buyback our stock, neither of which we were able to do during the financial crisis. This thinking underlines how we determine our target leverage. We began by modeling by what would have happened to our business in along its three lines in the event of a major downturn. We then estimated the level of debt that would still allow us to retain an investment grade rating.

Bear in mind that the rating agencies make adjustments in calculating leverage, including operating leases and securitize receivables from vacation ownership. The agencies also exclude cash in our balance sheet. As we’ve reported our total cash of around $650 million includes about $500 million in offshore cash. With these adjustments rating agencies that cover us would put our leverage at about 1.8 times. Without these adjustments our book leverage is 0.6 times.

The next step is to estimate our rating agency leverage that we could reach today, while protecting our investment grade leverage in the event of a downturn. Based on current economic conditions and with our current mix of businesses we believe that ratio is in the range somewhere at or above 2.5 times but less than three times. This is the ratio that we continuously reassess for example as market conditions change and as the cycle move forward. Also as we approach of our goal of having 80% of our earnings driven by fees our target leverage could increase as our earnings become less susceptible to a downturn.

For now in any case we have about three quarters of return of EBITDA or about $750 million of capacity to add leverage just to get to the low end of this range. As I mentioned a few minutes ago we intend to return about $1.35 billion to shareholders in 2014 through our special and regular dividend as well as completing the $460 million remaining in our repurchase authorization. This will bring our leverage in to the mid twos by the end of the year and of course it excludes cash from our any further hotel sales later this year.

Looking ahead we intend to maintain our target leverage to a balanced approach. We plan to return available excess cash to shareholders in four ways. The first two are through regular quarterly dividend and systematic share repurchases. We see these as our evergreen year-in, year-out ways to return cash. As in the past, we intend to pay a regular dividend based on the target payout ratio. As you know we switched to a quarterly payout this year. Our payout ratio for 2014 will be nearly 50%. On a go forward basis we intend to maintain a target of between 30% and 50% which is a slight increase over the 25% to 40% range we last talked about in our first quarter 2012 earnings call. As we said than we wanted dividend to be predictable, sustainable, competitive and one that will grow overtime with earnings.

We’ve also started a systematic annual program to repurchase shares to offset at a minimum the annual dilution of stock based compensation. In 2014, that amounts to roughly $85 million and just to be clear the $85 million this year is baked into the $614 million in repurchase we intend to complete. Beyond regular dividends and systematic repurchases we also have two discretionary ways to return cash. First we can step up of the pace of share repurchases especially if we are below our target leverage and if we see a pullback in the markets or disparities in value relative to our peers. Second, annually we can consider special dividends. Special dividends would be most likely tied to assets sales as with our Bal Harbor proceeds.

So in summary, we believe our capital allocation strategy is in the best interest of our business and our long term shareholders. It reflects the cyclical nature of the lodging industry and gives us the flexibility to be more aggressive in investing to grow our business throughout the entire cycle. I hope this gives you a better understanding of how we expect to manage our balance sheet and we will happy to answer any of your questions on this important topic during the Q&A period.

Before turning to some additions we are seeing at leadership team, I want to spend just a moment to speak to the status of our assets sales. This topic goes hand in hand with capital allocation and I would like to give you an update on markets conditions and progress to-date. The transaction markets for hotels has continued to improve and we are seeing more interest in our properties. That interest however continues to be for single asset transactions at least as we see it today, the appetite for portfolio sales at strong prices and on acceptable terms is not there. So keeping with our asset like strategy we continue to look at selling individual hotels balancing price, long term agreements and commitments to invest in the property.

The good news is that we are finding buyers that meet our criteria and we are in advanced discussion on a number of deals. Although of course nothing is certain until it’s done, we feel optimistic that we will be able to announce a meaningful transaction in the second half of the year and early next year. Until then I can’t be more specific but you should not be misled by the fact that we did not announce any significant sales in this past quarter, we remain very focused on our asset light strategy.

So before wrapping up I would like to take a few minutes to talk about some changes in our senior leadership team. First I am happy to tell you that Martha Poulter has joined us as a Chief Information Officer in June, as you know, she is – we are transforming the way technology is – using technology to transform the way we meet guest expectations and build loyalty is a key foundation to our strategy and to build the strength of our fee business. Martha brings to us deep experience in leading and managing complex global IT organizations and her work at GE Capital, which had a broad span across areas like IT infrastructure, digital, mobile data security and other areas gives us the perfect background to drive Starwood technology strategy forward. And our innovative no-nonsense approach is exactly what we are looking for to lead our IT and digital efforts. We are delighted to welcome her to our team.

Lastly, I know you are all interested in an update on our CFO search. As you might expect we have seen a high level of interest from many qualified candidates. We are working with (Contrary) to move the search forward and we are making good progress and we will let you know as soon as we have some concrete news, but you should rest assured we are working as quickly as possible while making sure we have an exceptional person for the job and so with that, I will hand the call back to Steven

Stephen Pettibone

Thank you Frits, we would now like to open the call to your questions. In the interest of time and fairness please limit yourself to one question at a time and then we will take any follow-up questions you might have as time permits, Sophia can we have the first question please.

Question-and-Answer Session

Operator

Your first question comes from Ryan Meliker from MLV and Company

Ryan Meliker – MLV & Co LLC

Hey, good morning guys, I just wanted to kind follow-up on what Frits just mentioned with regards to portfolio sales and how we should expect things going forward with that, with this positions, we had heard that you guys had $1 billion portfolio in the market. Given that comments you made just now have you guys not received the offers, you are comfortable with on the portfolio, as you have looked at disposing, are you finding higher values in single assets and then, are you seeing the buyer pool particularly in Europe and Latin America expand from where it was six months ago?

Frits van Paasschen

Yeah, Ryan so I will take that. First of all, I think it’s pretty clear to most of you who look at our portfolio of hotels that just geographically and not – if not in terms of their location and their brands, they are not a consistent set of hotels that would optimally appeal to any one single buyer. And while we have explored the possibility in an geographic area like the Americas to sell a portfolio what we are finding and we believe is that it will get better prices with owners that we want to work renovations and so forth by pursuing individual sales and so while we might be able to get to markets more quickly if we did a single portfolio sale, we would rather do this right and take a little bit more time and sell hotels individually in the way that we think is best fit for our long term fee business and for our brands.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Thomas Allen from Morgan Stanley.

Thomas Allen – Morgan Stanley

Hey good morning guys. Just in terms of U.S. REVPAR seems like some of the higher tier segments specially the light three segments have been lagging the broader acceleration, U.S. REVPAR and kind of second quarter. Some thoughts that we have heard is that potentially that because of markets like New York being a larger percentage of the luxury mix and then other POYs just saying that’s kind of logical trend given that where we are in the kind of in the recovery. Do you have any thoughts I mean given your concentration in kind of the higher segments? Thanks.

Frits van Paasschen

Yeah Tom actually I think both the reasons that you cited are fairly complete in terms of making the distinction. So certainly earlier in this recovery we saw a much more significant bounce back and higher growth rate as you moved up markets to luxury and upper upscale and so forth and so clearly at some point in the cycle, some of the growth in REVPAR and occupancies is going to percolate down to other segments of the market and then I think as you also right pointed out, decent part of our business geographically is skewed to the North East or at least the North and Hawaii where growth was a bit slower and in particular in New York where more suppliers come on stream. So, I think those are the two explanations and as I said in the text, on balance as we look at our individual hotels in aggregate there are gaining in REVPAR index which would suggest that those hotels on a year-on-year basis are gaining share.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Shaun Kelley from Bank of America.

Shaun Kelley – Bank of America Merrill Lynch

Hey good morning guys, I just want to return the capital returns discussion so first of all just to crystal clear about what you said. So the 85 million kind of systematic buybacks would be the number that you definitely will do each and every year to kind of offset dilution but any buybacks above that number would be kind of opportunistic based on a stock price or how should we just to clarify that?

Frits van Paasschen

Yeah Shaun I will try to clarify that for you as much as I can, I think you got it mostly right but again just to state it. So what we have said is that on a programmatic basis which means independent of where we are trading, we would anticipate buying back shares to offset dilution for management compensation for this year that amounts to $85 million in rough numbers. In another year that number may move around. So I would fix as much on the $85 million as on the dilution offset, but I think the 85 gives you a good baseline for approximately how much that will be.

Clearly as we work towards getting to our asset light goal and selling the $2.5 billion or so in assets that we still have in order to be able to do that, we’ll generate more cash in that and then what we will do at that point is on a continuous basis assess the volume of share repurchases and then as we get to the end of the year, depending on asset sales and how much excess cash we may elect at that point to do a special dividend but we will be focusing on those two to continue to move ourselves into the range of our target leverage.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Steven Kent from Goldman Sachs.

Steven Kent – Goldman Sachs

Hi, Frits given what you just said about the REVPAR trends to Tom’s questions about how things are rolling out in the second quarter should we then assume that your REVPAR growth will be lower than the overall industry over the balance of this cycle, it almost implies that but how you responded to that last question?

Frits van Paasschen

I wished I had a crystal ball that could help me predict whether we are going to outgrow the industry overall out in the future years. I don’t imagine that New York and Hawaii for example are necessarily going to underperform the rest of the Americas geography first of all. Second of all, I think that we can continue to build rate among our hotels and if that means that we can accelerate a big stronger than we wouldn’t underperform the industry either. And then finally and I think most significantly because so many people who watch and write about our stock are based in New York, they tend to have a view of the world from the U.S. but as you look at the performance of our business around the rest of the world, our REVPAR continues to do quite well and routinely out performs our competitors. So, if you add all those things up, I think it’s hard to stay on balance one way or the other, whether we are going to outperform the industry on a look forward basis for the rest of the cycle.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Felicia Hendrix from Barclays Capital.

Unidentified Analyst

Hi it’s actually Anthony Paul here for Felicia, how are you?

Frits van Paasschen

Hi Anthony.

Unidentified Analyst

So see a lot of your passion for growth brand this quarter on both a REVPAR and unit growth standpoint, how big can the brand get eventually over time and do you see opportunity to add additional upscale brands or to grow your current brand even faster?

Frits van Paasschen

Yeah, great question. So clearly where we are the smaller player in our industry is in what the North America called Select Serve or the other three or four star segment around the world, depending on where you are. And we think particularly a lot has – many of the characteristics against that segment that we saw in W a decade or decade and half ago, which brings – which in another words means we bring a fresh way of experiencing our hotel design language, color schemes the way that our associates deal with our guest, a focus on easy use of technology and a casual way of assembling in the living room or the lobby of the hotel. So all that I think is by way of saying that we think we have a brand and a [loft] that could make real inroads into a segment where we are small players.

So and we have many hundreds fewer Select Serve hotels than some of our competitors and therefore we think it’s plenty of opportunity to grow. I would add to that there are couple of other things and I am going to relate to the other brands that we have in our segment. Four Points by Sheraton continues to be in many corridors our second biggest brands in terms of signings and new hotels and particularly given the strength of Sheraton in so many markets outside of North America drafts off the strength of Sheraton as well as the strength that we have by having a position and an establish base of operations in so many markets.

And then finally Element which today is a very small brand of ours, but one which we are seeing in terms of guest satisfaction ramp up and Performance is one that we think has tremendous growth potential as well. So as we get into a cycle where there is more new construction, more construction lending, we feel like this is an opportunity for us to accelerate growth in the segment. So we do see that as a trend that could continue.

Stephen Pettibone

I think the other part was would we add another upscale brand?

Frits van Paasschen

Yes and so in terms of the way we look at our portfolio of brands today, clearly with and I will go back to something that we talked about a few times in years past with the acquisition of Le Méridien we clearly can add brands to our portfolio and our platform and have very good results by doing that. The idea of launching and building brands de novo which I know is happening with some frequency across the industry is something that we see as a pretty challenging thing to do. And getting a brand from zero to critical mass requires a considerable amount of investment and our own belief is that given the fact that we have at least eight brands and by that I mean I am excluding Sheraton, we have at least eight brands that have significant growth just in reaching global scale, we should be investing in growing those brands and if you were an owner of a hotel carrying one of our brands you would probably want us to be focused on growing the brands that you have already invested in not in turning our attention somewhere else.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Harry Curtis from Nomura.

Harry Curtis – Nomura Securities Co.

Hi Frits I’ve just actually got a clarification and then a question, going back to your I guess detailed and maybe a bit convoluted discussion of the capital allocation, is the bottom line that you are – that unlike maybe the $2 billion to $3 billion of capacity that some folks have thought that you have on your balance sheet to be more aggressive with share repurchase that you really think that’s closer to $750 million. And then my question is if you could walk us through the Group outlook for the balance of this year and in to next year relative to the pacing and positioning that Starwood had in the U.S. in the first half of this year?

Frits van Paasschen

Yeah Harry thank you and it was certainly my intent to have a description of our capital allocation process, an approach which was hopefully not going to be characterizes as convoluted so I will attempt to do better next time, but just by way of clarification, yeah I think that the notion that there was $2 billion to $3 billion in available leverage on our balance sheet today without any other changes is rooted in the distinction between a book definition of leverage in ones that the rating agencies uses and the pretty significant adjustments the $2-3 billion number is over stated.

Just to get to low end of the range that we described would get to you about $750 million but the range went up in terms of the target from there a bit. So, I wouldn’t say that 750 is the maximum but I would certainly suggest to you that the $2 billion to $3 billion is probably not based on a thorough look at the balance sheet or at least an interpretation of our available leverage such as we see it. So I hope that’s a little less convoluted I am going to hand it Stephen now for a discussion of your group question.

Stephen Pettibone

Yes, so if we look at our pace we are in mid-single digits. In the quarter we saw very, very good in the year for the year bookings, little bit less for 2015, but we still see sort of low mid-single digits for 2015 as well. Yeah I think what happened was we saw higher volumes of cancellations and some loss associated with some of the associations business earlier on the year and so that accounts for sort of what I call the steady as she goes pace we have been seeing as we look ahead.

Frits van Paasschen

Yeah, the only thing I would add to that I think just from the productivity of our sales team is we have been investing in some sales tools to enable our associates from more locations and with greater flexibility not only access what inventory is available, at which prices but also start to be able to target more effectively customers based on what we know about their past history or their inquiries and other things and so, we have worked to be able to enable our associates to be more productive and some of that I think is borne out in India for the work that we have been able to achieve.

Stephen Pettibone

Next question please.

Operator

Your next question comes from Smedes Rose from Evercore.

Smedes Rose – Evercore Partners Inc.

Thanks I wanted to ask about group as well which you just kind of answered but specifically you mentioned the couple of times that you saw some elevated cancellations particularly from association meetings. Was that specific to one or two groups or some cities or maybe you can just give us some more color there, what was kind of behind that?

Frits van Paasschen

No, I think it was earlier on the year. They have subsided as we went forward and I can’t point to a specific hotel or a group but I think the trends at this point going forward seem a little bit more steady.

Stephen Pettibone

Next question please.

Operator

Your next question is from Patrick Scholes from SunTrust.

Patrick Scholes – SunTrust Robinson Humphrey

Hi, good morning just a bit of a conceptual question here. I have noticed recently number of your competitor have started adding back share based compensation in order to calculate adjusted EBITDA and I noticed that you were somewhat unique in that you don’t do it. I am wondering why you don’t because I noticed on the Street that most, in giving competitors price target valuations do include this as total EBITDA and I would imagine if you did you would probably get several dollars of bump up in share price target, just curious why you don’t do that?

Frits van Paasschen

Yeah Patrick I guess, in my point of view at least in how the marketplace see us, I think moves like that are pretty transparent. I mean we all know that EBITDA is not a GAAP number and therefore people who look at stocks and company valuations carefully take account of what’s in and what’s out and you know it struck us not a substantive change to make in terms of the strategic direction of the company or for that matter transparency to our investor base. So there is other things I think we want to spend our energy on in terms of making sure that our shareholders and investors are seeing how our business is performing Stephen I don’t know if you want to add something to that.

Stephen Pettibone

Yeah, we’ve always viewed this stock based compensation as an economic cost of business that we would reflect in EBITDA adjusted EBITDA. Next question please.

Operator

Your next question comes from Nikhil Bhalla from FBR.

Nikhil Bhalla – FBR Capital Markets & Co.

Hi good morning Frits. Just if you can update us on your booking pace for 2015 as it’s striking now and if there is a way to compare that to what that look like for 2014 at the same time last year.

Frits van Paasschen

Yeah so Nikhil, so I am going to pass you over to Stephen. I am not sure exactly what we usually give out on that but…

Stephen Pettibone

Yeah, I mean honestly for us in the past several years our pace has been sort of consistently in that mid-single digits range, hasn’t fluctuated all that much up or down, so I think that’s the best I can give you right now.

Frits van Paasschen

Yeah, as you know, the group business overall is a more significant percentage of our North American business and around the world typically what’s often called the mice business, meetings incentive, the conventions and exhibition is a bit lower and so it’s a leading indicator but it doesn’t give us as much insight into the future performance to the business as it even would in North America. So often times our best benchmark of the future health of demand and bookings for our hotels your direct conversations with our core customers recognizing that since we are 70% or 75% B2B depending on the month and our key customers are a big percentage of that and the feedback that we get consistently from professional services firms, tech companies, other global companies is that they are continuing to send their people out in search of growth in new markets and planning on travelling more as they look ahead.

So that’s probably the best leading indicator to our business although obviously not one that’s got direct number attached to it.

Stephen Pettibone

Next question please.

Operator

Your next question is from Joseph Greff from JPMorgan.

Joseph Greff – JPMorgan

Good morning everybody. Frits you mentioned earlier about the CFO search, maybe if you can talk about how your thoughts are evolving there in terms of exactly what you are looking for there and then if you can talk about the timing and then a follow-up looking at the 2Q if you were to look at U.S. only so within North America the U.S. only what’s owned REVPAR growth what’s system wide REVPAR growth? Thank you.

Frits van Paasschen

Yes, so I will shift to Stephen in a minute to get back to you on your REVPAR question but I talked a bit about our CFO search in the past and you know from my view I believe that this is a company and in my own leadership style a management team where having a strong CFO who has a seat at the table not just as the head of the financial function but as a great mind leading the strategy of the company and asking and answering in many cases the difficult questions you know the special things I think about our business are an understanding of a global business in the way that we interact with our partners, most of whom are local in the markets where we operate and understanding of brands and where to invest in those brands over time because clearly there are financial versus brand tradeoffs you can make in the short term but I believe in the long term investing in brands is the best financial return.

Clearly even though we are moving towards an asset light strategy and appreciation for real estate and asset sales is important although of course our real estate function is led by Simon Turner who leads development for us. Clearly someone can continue to move our agenda forward in capital allocation would be a strong benefit and I think in addition to all of those things, someone who is executive style and personality fits with the team and the culture that we built as I alluded to in the call, we have a number of very exciting candidates who are interested in this role and so we are hoping to bring this to a conclusion.

But we will announce that more specifically when we have the name and someone entering the company that we can celebrate.

Stephen Pettibone

Yeah, and in U.S. REVPAR growth was for the system wide was 6.3. If I look at owned it was let’s say in U.S. dollars you see North America I think was 1.5 it’s about 2.7 I believe it was for the owned set in the U.S. So next question please.

Operator

Your next question comes from Jeff Donnelly from Wells Fargo Securities.

Jeff Donnelly – Wells Fargo Securities

Good morning guys, Frits your capital allocation plan seems to get more weight than I would have expected as a repeat of an economic crisis that we probably going to experience twice in the past century, and the impact of such a downturn is probably less as real estate ownership declined in [seed] contribution growth. So, is it fair to say your plan is to look maybe from an additional rating upgrade from current levels and separately as the follow up can you talk about what’s specific figure of closed dollar volume of assets you currently have actively in the market for sale?

Frits van Paasschen

Yes, so the answer to your first question, you are right in one sense, you know those two events were once in a century occurrences the second matter they also happened within a decade of each other. So, I suppose in many respects your or our view of the world happens to be at least shaped by considering whether it just happens that those two events were unusual and happened in the last decade or whether the world itself is more vulnerable place and I think that from our perspective as I tried to outline in the call, we see at the same time an extraordinarily long term growth opportunity for our business and the potential for a great deal of volatility. And you know like I said I think about the notion that we were describing as conservative and in a sense it is but in another sense it’s also aggressive and what I mean by that is that if you expect that the world is going to be volatile and you have the capacity to invest throughout the cycle over time you will logically create more value for your shareholders then pushing yourself to the edge of having to struggle if the market turns down.

In terms of whether that implies for the rating upgrade the description of our capital allocation approach is largely one now of ourselves pushing towards higher leverage then where we are and I think based on the feedback as I alluded to in the script from many of you that’s something that is an interest and so in actual fact I think that you will see us increase our leverage based on the capital allocation approach that I was talking about and then as our business becomes more oriented towards these and therefore less vulnerable to a downturn, our ability to sustain more leverage should we choose do that, or to increase.

The second part of your question related to the dollar volume of assets for sale, I will touch on that and then hand off to Steven for some additional commentary. I should just say that’s not a number that we put out as such and you know partially because it may sound like an easy number to put out but the insight of view end to this that we are testing the market, in terms of selling assets on a continuous basis and there are hotels where we know there is a natural buyer or a natural segment of buyers and we are in private conversations to see whether for example, we can get a price that is as attractive as an open market sale, without the distraction potentially in the cost of a transaction like that.

So it’s very hard for us to give you a point estimate of how many assets we have for sale but what we said qualitatively last quarter and repeated this quarter is that we have more hotels on the market now than we had in a considerable length of time and while we didn’t announce any sales in the quarter we are in advanced discussions on a few and I think our behavior over the last 10 years where we sold 128 hotels in the last since 2012 we have sold about $1 billion in assets at about 15 times EBITDA multiple, in many cases with very attractive contracts and with renovations to those properties that were – they were very effective in terms of supporting our brands and driving even better performance to those properties.

So, the process of selling hotels is unfortunately the one you only see when there is a sale to announce, but I can assure you that we have been trying to do that in as many ways as we can be clear, it’s something we are working hard on doing, with that I am going to hand it over to Steven.

Stephen Pettibone

Yeah, I think I will just one thing that the target range that we are talking about 2.5 but no more than three I think allows us to maintain the ratings that we have now and but were we flex much about that, I think we would risk being taken down a little bit so. I think with that we will go to the next question.

Operator

Your next question comes from Robin Farley from UBS.

Robin Farley – UBS

Great thanks just two clarifications of comments that you made earlier, Frits you mentioned the second half in China would be softer than the first half, is that just the Macau property kind of anniversarying the ramp up or is that a comment about the market in China overall excluding Macau and then the other clarification Steven it sounded like you made a comment about group bookings for 2015 being a little less and I was just wasn’t sure what that meant in terms of little less in volume in the quarter versus what came in last quarter or just how you meant that? Thanks.

Frits van Paasschen

Yeah, Robin so this is Frits. I will address the China question since you directed it to me. The slowdown in REVPAR for what we call greater China would be at least as we see it now almost entirely a function of the Sheraton Macau now becoming fully part of the same-store set having ramped up. Aside from that business trends for the rest of the year in other markets looked to very similar to what we have seen so far. And with that Steven I will hand it.

Stephen Pettibone

Yeah Robin I was more referring to the fact that bookings that we saw in the quarter we are skewing much more to the in the year for the year. So it’s more of a skew than it was a comment on overall volumes. So with that next question please.

Operator

Your next question is from Michael Bilerman from Citi.

Unidentified Analyst

Hi this is Kevin (inaudible) with Michael. Just given the potential slowness of assets selling assets on individual basis, what are you slots on spinoff at this point in order to accelerate the asset light strategy and also make sure that you don’t miss selling an attractive point in the cycle.

Frits van Paasschen

Yeah Michael, so this is Frits, we have looked at REIT spinoffs and I think the answer to that question on a certain level is I would never say never because conditions may be different. But a few things to bear in mind. First of all, there are plenty of REITs in the U.S. market today and I would argue many of them are at scales that are smaller than their shoulders might benefit from. That’s just an outside person’s comment. But what I think it means more broadly is it’s not clear that the worlds needs another hotel REIT, first of all. Second of all if we were to spend a REIT we would have to have the SG&A structure that would go along with it, which would pull down some of the value. You would have whatever the IPO discount might be associated with the spin.

And then finally although these numbers are always a little bit hard to validate but at least it looks right now like most REITS in North America are trading at a discount to net asset value. And so if you add up all of those things to your point if our objective function here were to sell a lot of assets fast, then we could move quickly to do that and that might one vehicle. If our objective here is to place each hotel with the right owner that we want with a contract, with a renovation and many of the other things we will continue to proceed accordingly.

Stephen Pettibone

Next question please.

Operator

Your next question is from Bill Crow from Raymond James and Associates.

William Crow – Raymond James and Associates

Good morning guys. Kind of a two part question here. First of all, you talked about the asset sales likely to be in kind of one-off methodology as supposed to large portfolio. Does that still allow you to get to asset light by 2016 as you previously communicated? And then the second part of that is, I guess we are now quarter three where the Street has reacted sharply negative to capital return to shareholders et cetera and it went kind of in a free fall with the convoluted and I’ll use that term because that might be the nicest one discussion of the buybacks and so – do you think it’s just an issue where maybe over years and years the Street has for some reason been communicated that, that was the primary driver of this company was this asset light return of capital and so has that process kind of misrepresented the longer term goal that you Frits as a CEO?

Frits van Paasschen

Well yeah, I mean again I’m not sure quite how to react to convoluted, but if that’s the word, that’s the word, I think the more important thing is the substance of it. And I think it could not have been more clear in terms of our endeavor to add some leverage to the company from where we are today for reconciling some of the considerations in terms of how much available debt there is. I think we have also been crystal clear in terms of our focus on being asset light, getting the 80% fee driven by 2016, that over the time period from where we first made a projection around that, that would be about 3 billion in asset sales.

We are not on pace for that right now but we never said, we were going to be on pace on a year-on-year basis, and it was very hard to predict when we made that projection whether there would be a large portfolio sale or not. And I can’t still tell you with absolute certainty that between now and 2016 that there won’t be a larger asset sale. So as we sell hotels and as we get more cash on to the balance sheet in the absence of acquisitions or other places to invest in our business this is a capital return story and I think that that’s – that should be as clear now as it ever was.

Stephen Pettibone

We got time for one more question, Sophia.

Operator

Your final question comes from Carlo Santarelli from Deutsche.

Carlo Santarelli – Deutsche Bank

Hey guys thanks for taking my question. Just a quick two part question. First piece is if you guys could just summarize maybe with all the talk around capital allocation, how, from your 1Q call at the end of April to today would you define how your capital allocation thinking and/or strategy has changed?

Frits van Paasschen

That was part one, okay. So yeah well Carlo, look I think what was what we tried to describe in some detail over the course of the script here and what I said was that we had an approach to looking what our target debt would be. We had ability to lay out what that difference is with where we are today and a path towards getting to that target debt level. And my sense was that less clear a quarter ago so what we laid out here, I think is more clarity around what the capital allocation process and thinking is and our approach for getting there. So to the extent that helps from our last quarter all the better.

Stephen Pettibone

Thanks Frits. I want to thank you all for joining us today for our second quarter earnings call. We appreciate your interest in Starwood Hotels & Resorts. If you have any other questions, feel free to reach out to us. Take care.

Operator

Ladies and gentlemen, this concludes today’s Starwood Hotels & Resorts Second Quarter 2014 Earnings Conference Call. You may now disconnect.

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